UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013Commission file number 1-8787
American International Group, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015 | Commission file number 1-8787 |
American International Group, Inc. (Exact name of registrant as specified in its charter) |
Delaware
(State or other jurisdiction of
incorporation or organization) | | 13-2592361
(I.R.S. Employer
Identification No.) | | |
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175 Water Street, New York, New York
(Address of principal executive offices) |
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10038
(Zip Code) |
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Registrant'sRegistrant’s telephone number, including area code(212) 770-7000
Securities registered pursuant to Section 12(b) of the Act: See Exhibit 99.02
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesþ☑ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No þ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ☑ No o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ☑ | | Accelerated filer o☐ | | Non-accelerated filer o☐
| Smaller reporting company ☐ |
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| (Do not check if a
smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No þ☑
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant (based on the closing price of the registrant'sregistrant’s most recently completed second fiscal quarter) was approximately $65,993,000,000.$80,826,000,000.
As of February 14, 2014,11, 2016, there were outstanding 1,464,067,6411,149,448,256 shares of Common Stock, $2.50 par value per share, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
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Document of the Registrant | | Form 10-K Reference Locations | |
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Portions of the registrant'sregistrant’s definitive proxy statement for the
2014 2016 Annual Meeting of Shareholders | | Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 |
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AMERICAN INTERNATIONAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013
2015
TABLE OF CONTENTS
CONTENTS
Form 10-K
AIG 2013 Form 10-K
Table of Contents
PART I
ITEM 1 / BUSINESSPart I
American International Group, Inc. (AIG) is a leading global insurance company. Founded in 1919, today we provide a wide range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services to customers in more than 130 countries and jurisdictions. Our diverse offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange.
AIG's key strengths include:
World class insurance franchises that are leaders in their categories and are continuing to improve their operating performance;
A diverse mix of businesses with a presence in most international markets;
Effective capital management of the largest shareholders' equity of any insurance company in the world*, supported by enhanced risk management;
Execution of strategic objectives, such as our focus on growth of higher value lines of business to increase profitability and grow assets under management; and
Improved profitability, as demonstrated by growth in 2013 over 2012 of pre-tax operating income in each of our core insurance operations.
Item 1 / Business
American International Group, Inc. (AIG) is a leading global insurance organization. Founded in 1919, today we provide a wide range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services to customers in more than 100 countries and jurisdictions. Our diverse offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. |
AIG’s key strengths include: |
World class insurance franchisesthat are among the leaders in their categories and are focused on improving their operating performance; |
A diverse mix of businesseswith a presence in most international markets; |
Effective capital managementof the largest shareholders’ equity of any insurance company in the world*, supported by enhanced risk management; |
Breadth of customers,serving over 89 percent of companies included in the Fortune Global 500; and |
Balance sheet quality and strength, as demonstrated by over $89 billion in shareholders’ equity and AIG Parent liquidity of $13.7 billion. |
* At June 30, 2013,2015, the latest date for which information was available for certain foreign insurance companies.
AIG 2013 Form 10-K
Table of Contents
ITEM 1 / BUSINESS / AIG
In this Annual Report on Form 10-K, unless otherwise mentioned or unless the context indicates otherwise, we use the terms "AIG,"“AIG,” the "Company," "we," "us"“Company,” “we,” “us” and "our"“our” to refer to American International Group, Inc., a Delaware corporation, and its consolidated subsidiaries. We use the term "AIG Parent"“AIG Parent” to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries.
TABLE OF CONTENTS
AIG's Global Insurance OperationsItem 1 / BUSINESS / AIG
HOW WE GENERATE REVENUES AND PROFITABILITY
AIG’s Global Insurance Operations |
We report our results of operations through two reportable segments: Commercial Insurance and Consumer Insurance, as well as a Corporate and Other category. Commercial Insurance has three operating segments: Property Casualty, Mortgage Guaranty and Institutional Markets. Consumer Insurance also has three operating segments: Retirement, Life and Personal Insurance. The Corporate and Other category consists of businesses and items not allocated to our reportable segments. Certain of our management activities, such as investment management, enterprise risk management, liquidity management and capital management, and our balance sheet reporting, are conducted on a legal entity basis. We group our insurance-related legal entities into two categories: Non-Life Insurance Companies, and Life Insurance Companies. Non-Life Insurance Companies include the following major property casualty and mortgage guaranty companies: National Union Fire Insurance Company of Pittsburgh, Pa. (National Union); American Home Assurance Company (American Home); Lexington Insurance Company (Lexington); Fuji Fire and Marine Insurance Company Limited (Fuji Fire); American Home Assurance Company, Ltd. (American Home Japan); AIG Asia Pacific Insurance, Pte, Ltd.; AIG Europe Limited; United Guaranty Residential Insurance Company (UGRIC) Life Insurance Companies include the following major operating companies: American General Life Insurance Company (American General Life); The Variable Annuity Life Insurance Company (VALIC); The United States Life Insurance Company in the City of New York (U.S. Life); AIG Fuji Life Insurance Company Limited (Fuji Life). On January 26, 2016, we announced several actions designed to create a leaner, more profitable and focused insurer. These actions included a plan to reorganize our operating model into “modular”, more self-contained business units to enhance transparency and accountability. Additionally, we are introducing a new Legacy Portfolio that aims to maximize value and release capital of certain run-off non-strategic assets and highlight progress on improving the return on equity (ROE) of our Operating Portfolio. When the new operating structure is finalized, the presentation of our segment results may be modified and prior periods’ presentation may be revised to conform to the new structure. Based on this strategy, we have updated our priorities for 2016. |
| AIG Priorities for 2016 | |
| AIG is focused on the following priorities for 2016: ·Improving our ROE ·Creating a leaner, more profitable and focused insurer by reorganizing our operating model into “modular”, more self-contained business units to enhance transparency and accountability, including the introduction of a new Legacy Portfolio that aims to maximize value and release capital from run-off of non-strategic assets ·Reducing general operating expenses ·Improving the Commercial Insurance Property Casualty accident year loss ratio ·Returning excess capital to shareholders ·Growing book value per common share | |
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(a) Total consideration of approximately $7.6 billion, includes net cash proceeds of $2.4 billion and 97.6 million newly issued AerCap common shares. Based in part on AerCap's closing price per share of $47.01 on May 13, 2014, the date the sale of ILFC to AerCap was completed.
(b) Book value per common share excluding AOCI is a non-GAAP measure. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) —Use of Non-GAAP Measures for additional information.
How we Generate Revenues and Profitability
We earn revenues primarily from insurance premiums, policy fees from universal life insurance and investment products, and income from investments and advisory fees.
Our operating expenses consist of policyholder benefits and claimslosses incurred, interest credited to policyholders, commissions and other costs of selling and servicing our products, and general businessoperating expenses.
Our profitability is dependentdependent on our ability to properly price and manage risk on insurance and annuity products, to manage our portfolio of investments effectively, and to control costs through expense discipline.
INVESTMENT ACTIVITIES OF Our Insurance OPERATIONS
Our Non-Life Insurance Companies and Life Insurance Companies generally receive premiums and deposits well in advance of paying covered claims or benefits. In the intervening periods, we invest these premiums and deposits to generate net investment income that, along with the invested funds, is available to pay claims or benefits. As a result, we generate significant revenues from insurance investment activities. | We generate significant revenues in our insurance operations from investment activities. |
Our worldwide insurance investment policy places primary emphasis on investments in corporate bonds, municipal bonds and government bonds in all of our portfolios, and, to a lesser extent, investments in high yield bonds, common stock, real estate, hedge funds and other alternative investments. |
The majority of assets backing our insurance liabilities consist of intermediate and long duration fixed maturity securities.
Non-Life Insurance Companies — Fixed maturity securities held by the insurance companies included in the Non-Life Insurance Companies’ domestic operations have historically consisted primarily of corporate bonds, municipal bonds and government bonds. These investments provided attractive returns and limited credit risk. To meet our domestic operations’ current risk return and business objectives, our domestic Non-Life Insurance Companies have been shifting investment allocations to a broader array of investments, including structured securities, mortgage loans, equity related opportunities and other investments that offer attractive risk-adjusted returns. Our fixed maturity securities must meet our liquidity, duration and quality objectives as well as current capital, risk return and business objectives. Fixed maturity securities held by the Non-Life Insurance Companies’ international operations consist primarily of intermediate duration high-grade securities, primarily in the markets being served. In addition, the Non-Life Insurance Companies have redeployed cash in excess of operating needs into investments consistent with the asset classes described above.
Life Insurance Companies —The investment strategy for the portfolios of the Life Insurance Companies is largely to match our liabilities with assets of comparable duration, to the extent practicable. The Life Insurance Companies primarily invest in a diversified portfolio of fixed maturity securities, which include corporate bonds and structured securities. To further diversify the portfolio, investments are selectively made in alternative investments, including private equity funds, hedge funds and affordable housing partnerships. See Item 7. MD&A — Investments for additional discussion of investment strategies.
AIG Property Casualty is a leading provider of insurance products for commercial, institutional and individual customers through one of the world's most far-reaching property casualty networks. AIG Property Casualty offers one of the industry's most extensive ranges of products and services, through its diversified, multichannel distribution network, benefitting from its strong capital position.
AIG Life and Retirement is a premier provider of protection, investment and income solutions for financial and retirement security. It is among the largest life insurance, annuity and retirement services businesses in the United States. With one of the broadest distribution networks and most diverse product offerings in the industry, AIG Life and Retirement helps to ensure financial and retirement security for more than 18 million customers.
During the first quarter of 2013, AIG Life and Retirement implemented its previously announced changes reflecting its new structure and now presents its operating results in two operating segments — Retail and Institutional. All prior period amounts presented have been revised to reflect the new structure.
Other Operations
Mortgage Guaranty (United Guaranty Corporation or UGC), is a leading provider of private residential mortgage guaranty insurance (MI). MI covers mortgage lenders for the first loss from mortgage defaults on high loan-to-value conventional first-lien mortgages. By providing this coverage, UGC enables mortgage lenders to remain competitive and enables individuals to purchase a house with a lower down payment.
Other Operations also include Global Capital Markets, Direct Investment book, Corporate & Other and Aircraft Leasing.
AIG 2013 Form 10-K
Table of Contents
ITEMItem 1 / BUSINESS / AIG
BUSINESS MANAGEMENT
Commercial Insurance | Consumer Insurance |
Commercial Insurance is a leading provider of insurance products and services for commercial and institutional customers. It includes one of the world’s most far-reaching property casualty networks, a leading mortgage guaranty insurer and an institutional retirement and savings business. Commercial Insurance offers a broad range of products to customers through a diversified, multichannel distribution network. Customers value Commercial Insurance’s strong capital position, extensive risk management and claims experience, and its ability to be a market leader in critical lines of insurance business. | Consumer Insurance is a unique franchise that brings together a broad portfolio of retirement, life insurance and personal insurance products offered through multiple distribution networks. It holds long-standing, leading market positions in many of its U.S. product lines, and its global footprint provides the opportunity to leverage its multinational servicing capabilities and pursue select opportunities in attractive markets. With its strong capital position, customer-focused service, innovative product development capabilities and strong distribution relationships across multiple channels, Consumer Insurance is well positioned to provide clients with the products and services they desire, delivered through the channels they prefer. |
Corporate and Other |
Corporate and Other includes AIG Parent as well as certain legacy assets and run-off insurance businesses. |
On August 14, 2013, we announced a reorganization of our Consumer Insurance business and named a new management team. Under the new structure, AIG's global life insurance business will be managed as part of AIG Global Consumer Insurance — enabling our consumer network across the world to benefit from the sophistication, scale, and success of our U.S. life insurance platform.
During the fourth quarter of 2013, the newly appointed executive management team made a number of key appointments to its management team and certain key decisions regarding how its underlying operating segments will be organized. However, we continue to work on the final key elements of the new organization and operating structure. When the new structure is finalized, the presentation of AIG Property Casualty and AIG Life and Retirement results may be modified accordingly and prior periods' presentations may be revised to conform to the new reporting presentation.
TABLE OF CONTENTS
AIG 2013 Revenue Sources from Insurance Operations*
(dollars in millions)
* Revenues for AIG Property Casualty and Mortgage Guaranty include net premiums earned, net investment income and net realized capital gains. Revenues for AIG Life and Retirement include premiums, policy fees, net investment income, advisory fees, legal settlements and net realized capital gains.
For financial information concerning our reportable segments, including geographic areas of operation and changes made in 2013, see Note 3 to the Consolidated Financial Statements. Prior periods have been revised to conform to the current period presentation for segment changes and discontinued operations.
AIG 2013 Form 10-K
Table of Contents
ITEMItem 1 / BUSINESS / AIG
(a) Pre-tax operating income, accident year loss ratio, as adjusted, and book value per share excluding AOCI are non-GAAP measures. See "Use of Non-GAAP Measures" for additional information.
(b) Based on AerCap's pre-announcement closing price per share of $24.93 as of December 13, 2013.
(c) AIG did not receive any proceeds from the sale of AIG Common Stock by the Department of the Treasury. See Notes 4, 16, 17 and 24 to the Consolidated Financial Statements for further discussion of the government support provided to AIG and the Recapitalization.
AIG 2013 Form 10-K
Table of Contents
ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY
Business Strategy
Growth and Business Mix: Grow higher value business to increase profitability and expand in attractive growth economies.
Underwriting Excellence: Enhance risk selection and pricing to earn returns commensurate with the risk assumed.
Claims Best Practices: Improve claims practices, analytics and tools to improve customer service, increase efficiency and lower the loss ratio.
Operating Expense Discipline: Apply operating expense discipline and increase efficiencies by taking full advantage of our global footprint.
Capital Efficiency: Enhance capital management through initiatives to streamline our legal entity structure, optimize our reinsurance program and improve tax efficiency.
Investment Strategy: Execute our investment strategy, which includes increased asset diversification and yield-enhancement opportunities that meet our capital, liquidity, risk and return objectives.
AIG 2013 Form 10-K
Table of Contents
ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY
AIG Property Casualty Operating Segments
AIG Property Casualty operating segments are organized intoCommercial Insurance andConsumer Insurance. Run-off lines of business and operations not attributable to these operating segments are included in an Other category.
* The operations reported as part of Other do not have meaningful levels of Net premiums written.
Commercial Insurance
Percent of 2013 Net premiums written by product line
(dollars in millions)
Consumer Insurance
Percent of 2013 Net premiums written by product line
(dollars in millions)
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 Our Non-Life Insurance Companies net premiums written (NPW) of $33.1 billion in 2015 reflected our expansive global footprint. Based on NPW in 2014, we are the largest commercial insurer in the U.S., the largest U.S. based property casualty insurer in Europe, and the largest foreign property casualty insurer in Asia and the Far East. In addition, AIG was first to market in many emerging markets and is well positioned to enhance its businesses in countries such as Brazil, China through strategic relationships with People’s Insurance Company (Group) of China Limited (PICC Group), and India with the Tata Group. Our Life Insurance Companies premiums and deposits (P&D) of $32.0 billion in 2015 demonstrate a substantial presence in the U.S. and a meaningful share of the Japan market. P&D is a non-GAAP financial measure that includes direct and assumed amounts received on traditional life insurance policies, group benefit policies and deposits on life‑contingent payout annuities, as well as deposits received on universal life, investment‑type annuity contracts and mutual funds. See Item 7. MD&A — Results of Operations for Institutional Markets, Retirement and Life for a reconciliation of P&D to premiums. |
AIG 2013 Form 10-K
Table of Contents
ITEM 1 / BUSINESS / AIG PROPERTY CASUALTY
Commercial Insurance Product Lines
Consumer Insurance Product Lines
Casualty: Includes general liability, commercial automobile liability, workers' compensation, excess casualty and crisis management insurance. Casualty also includes risk management and other customized structured programs for large corporate customers and multinational companies.
Property: Includes industrial, energy-related and commercial property insurance products, which cover exposures to man-made and natural disasters, including business interruption.
Specialty: Includes aerospace, environmental, political risk, trade credit, surety and marine insurance, and various product offerings for small and medium sized enterprises.
Financial: Includes various forms of professional liability insurance, including directors and officers (D&O), fidelity, employment practices, fiduciary liability, cyber risk, kidnap and ransom, and errors and omissions insurance (E&O).
Accident & Health: Includes voluntary and sponsor-paid personal accidental and supplemental health products for individuals, employees, associations and other organizations. It also includes life products (outside of the U.S. market) as well as a broad range of travel insurance products and services for leisure and business travelers.
Personal: Includes automobile, homeowners and extended warranty insurance. It also includes insurance for high-net-worth individuals (offered through Private Client Group), including umbrella, yacht and fine art insurance, and consumer specialty products, such as identity theft and credit card protection.
Other: Consists primarily of: run-off lines of business, including excess workers' compensation, asbestos and legacy environmental (1986 and prior); certain environmental liability businesses written prior to 2004; operations and expenses not attributable to the Commercial Insurance or Consumer Insurance operating segments; unallocated net investment income; net realized capital gains and losses; other income and expense items; and adverse loss development, net of amortization of deferred gain, for a retroactive reinsurance arrangement.
A Look at AIG Property Casualty
AIG Property Casualty conducts its business primarily through the following major operating companies: National Union Fire Insurance Company of Pittsburgh, Pa.; American Home Assurance Company; Lexington Insurance Company; AIU Insurance Company Ltd.; Fuji Fire & Marine Insurance Company Limited (Fuji); AIG Asia Pacific Insurance, Pte, Ltd. and AIG Europe Limited.
Global Footprint
AIG Property Casualty hasWe have a significant international presence in both developed markets and growth economy nations. It distributes itsnations, specifically in Asia Pacific, Central Europe, the Middle East, Africa and South America. We distribute our products through three major geographic regions:
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- Americas: Includes the United States, Canada,
Central America,Mexico, South America, the Caribbean and Bermuda.
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•- Asia Pacific: Includes Japan, China, Korea, Singapore, Malaysia, Thailand, Australia, Indonesia and other Asia Pacific
nations, including China, Korea, Singapore, Vietnam, Thailand, Australia and Indonesia.nations.
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•- EMEA (Europe, Middle East and Africa): Includes the United Kingdom, Continental Europe,
Russia,the Russian Federation, India, the Middle East and Africa.
In 2013, 5.62015, 6.3 percent and 5.1 percent of AIG Property Casualtyour property casualty direct premiums were written in the states of California and New York, respectively, and 18.314.3 percent and 6.87.2 percent were written in Japan and the United Kingdom, respectively. No other state or foreign jurisdiction accounted for more than 5five percent of such premiums.
Diversified Mix of Businesses*
Based on(dollars in millions)
* Represents revenues from insurance operations. Revenues for Property Casualty, Mortgage Guaranty, and Personal Insurance include net premiums written in 2012, AIG Property Casualty is the largestearned and net investment income. Revenues for Institutional Markets, Retirement and Life include premiums, policy fees, net investment income and advisory fees.
TABLE OF CONTENTS
Item 1 / BUSINESS / commercial insurer in the U.S. and Canada. We are the largest U.S. based property casualty insurer in Europe, and the largest foreign property casualty insurer in China. In addition, AIG Property Casualty was first to market in many developing nations and is well positioned to enhance its businesses in countries such as Brazil, China through strategic relationships with PICC Life Insurance Company Limited (PICC Life) and India with the Tata Group.insurance
Commercial Insurance |
Business Strategy Customer: Strive to be our clients’ most valued insurer by offering innovative products, superior service and access to an extensive global network. |
Sharpen Commercial Focus:Achieve ROE in excess of target across our businesses primarily through improvements in our loss ratio.Improve our business portfolio through risk selection by using enhanced data, analytics and the application of science to deliver superior risk-adjusted returns. Exit or remediate targeted sub-segments of underperforming portfolios that do not meet our risk acceptance or profitability objectives. |
Drive Efficiency:Reorganize our operating model into “modular”, more self-contained business units to enhance decision making, transparency and accountability, driving performance improvement and strategic flexibility over time; increase capital fungibility and diversification, streamline our legal entity structure, optimize reinsurance, improve taxefficiency and reduce expenses. |
Invest to Grow: Grow our higher-value businesses while investing in transformative opportunities, continuing initiatives to modernize our technology and infrastructure, advancing our engineering capabilities, innovating new products and client risk services and delivering a better client experience. |
Commercial Insurance Competitive Strengths and Challenges |
Commercial Insurance is a global franchise committed to delivering value to our clients through innovative solutions, market-leading expertise and superior service. Our competitive strengths include: Global franchise – long global history, extensive multinational network and leading positions and infrastructures in North America, Europe and Asia Underwriting and claims expertise – industry-leading professionals with deep expertise handling large, complex and emerging risks Innovation – a culture of innovation driven by risk management expertise and a focus on customer needs Information and science capabilities – decades of unique proprietary data on wide range of client risks, underwriting results and analytical capabilities to generate valuable client insights Service – extensive client risk service teams to partner with clients to mitigate their most critical risks Financial strengthand market leadership – a well-capitalized, strong balance sheet highly valued by customers that allows us to be a market leader in many lines of business Scale – size and scope of business facilitates risk diversification to optimize returns on capital Diversification – breadth of customers served, products underwritten and distribution channels Our challenges include: Information technology infrastructure requires modernization, which puts pressure on our efforts to reduce operating expenses Long-tail exposures create an added challenge to pricing and risk management Over capacity in certain lines of business creates downward pressure on market pricing Tort environment volatility in certain jurisdictions and lines of business Volatility from natural and man-made catastrophes from a property casualty perspective |
AIG Property Casualty Distribution Network
ConsumerProperty Casualty conducts its business primarily through our Non-Life Insurance Companies.
Mortgage Guaranty conducts its business primarily through United Guaranty Residential Insurance Company.
Institutional Markets conducts its business primarily through our Life Insurance Companies.
Commercial Insurance products are primarily distributed through a networkOperating Segments
Commercial Insurance’s current operating segments consist of independent retailProperty Casualty, Mortgage Guaranty and wholesale brokers, and through an independent agency network.Institutional Markets.
Property Casualty Product Lines |
Casualty: Products include general liability, commercial automobile liability, workers’ compensation, excess casualty and crisis management insurance products. Casualty also includes risk-sharing and other customized structured programs for large corporate and multinational customers. Property: Products include commercial, industrial and energy-related property insurance products and services that cover exposures to man-made and natural disasters, including business interruption. Specialty: Products include aerospace, environmental, political risk, trade credit, surety and marine insurance, and various small and medium sized enterprises insurance lines. Financial: Products include professional liability insurance for a range of businesses and risks, including directors and officers liability (D&O), fidelity, employment practices, fiduciary liability, cybersecurity risk, kidnap and ransom, and errors and omissions insurance (E&O). Property Casualty products are primarily distributed through a network of independent retail and wholesale brokers, and through a newly acquired leading U.S. managing general agent and insurance program administrator. | |
Mortgage Guaranty Product Lines |
Mortgage insurance (MI) protects mortgage lenders and investors against the increased risk of borrower default related to high loan-to-value (LTV) mortgages. Mortgage Guaranty products and services are directly distributed to a comprehensive range of mortgage originators including national mortgage, community and money center banks, as well as through builder-owned, regional mortgage and internet-sourced lender and credit unions. | |
Institutional Markets Product Lines |
Products primarily include stable value wrap products, structured settlement and terminal funding annuities, high net worth products, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs). Institutional Markets products are primarily distributed through specialized marketing and consulting firms and structured settlement brokers. | |
Consumer Insurance products are distributed primarily through agents and brokers, as well as through direct marketing, partner organizations such as bancassurance, and the internet.
AIG 2013 Form 10-K
Commercial Insurance Competition
AIG Property Casualty
Operating in a highly competitive industry, AIG Property Casualty competes against approximately 4,000several hundred stock companies, specialty insurance organizations, mutual companies and other underwriting organizations in the U.S. In international markets, we competeProperty Casualty competes for business with the foreign insurance operations of large global insurance groups and local companies in specific market areas and product types. Mortgage Guaranty competes with several private providers of mortgage insurance, both well-established and new entrants to the industry, and the Federal Housing Administration, which is the largest provider of mortgage insurance in the United States. Institutional Markets competes with large domestic (both stock and mutual) life companies, as well as international life companies.
Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. AIG Property CasualtyCommercial Insurance distinguishes itself in the insurance industry primarily based on its well-established brand, global franchise, financial strength and large capital base,strength, innovative products, expertise in providing specialized coverages and customer service.
We serve our business and individual customers on a global basis — from the largest multinational corporations to local businesses and individuals. Our clients benefit from our substantial underwriting expertise and long-term commitment to the markets and clients we serve.
AIG Property Casualty Competitive Strengths and ChallengesTABLE OF CONTENTS
Our competitive strengths are:
Financial strength — well capitalized, strong balance sheet
Expertise — in-depth knowledge of risk, experienced employees complemented with new talent;
Global franchiseItem 1 / — operating in more than 95 countries and jurisdictions BUSINESS / consumer insurance
Consumer Insurance is focused on achieving improved returns by investing in markets where we can grow profitably and sustainably. Our strategic plan is aligned with our vision to be our clients’ most valued insurer. We intend to enhance our operational effectiveness and use of analytics to reduce expenses, increase profitability, and facilitate delivery of our target customer experience. Business Strategy Customer:Through our unique franchise, which brings together a broad portfolio of retirement, life insurance and personal insurance products offered through multiple distribution networks, Consumer Insurance aims to provide customers with the products and services they desire, delivered through the channels they prefer. |
Information-Driven Strategy:Utilize customer insight, analytics and the application of science to optimize customer acquisition, product profitability, product mix, channel performance and risk management capabilities. |
Sharpen Consumer Focus:Invest in areas where Consumer Insurance can grow profitably and sustainably. Target growth in select markets according to market size, growth potential, market maturity and customer demographics, and narrow our footprint in less profitable markets with insufficient scale. |
Operational Effectiveness:Simplify processes and enhance operating environments to increase competitiveness, improve service and product capabilities and facilitate delivery of our target customer experience. |
Investment Strategy:Maintain a diversified, high quality portfolio of fixed maturity securities that largely matches the duration characteristics of related insurance liabilities with assets of comparable duration, and pursue selective yield-enhancement opportunities that meet liquidity, risk and return objectives. |
Profitability and Capital Management:Deliver solid earnings through disciplined pricing, sustainable underwriting improvements, expense reductions and diversification of risk, and increase capital efficiency within insurance entities to enhance ROE. |
TABLE OF CONTENTS
Scale — facilitates risk diversification to optimize returns on capital
DiversificationItem 1 / — breadth of customers served, products underwritten BUSINESS / consumer insurance
Consumer Insurance Competitive Strengths and Challenges |
Our competitive strengths include: Unique franchise – broad portfolio of retirement, life insurance and personal insurance products offered through multiple distribution networks Market leader – long-standing, leading positions in many of our product lines and key distribution channels Global business – ability to leverage multinational servicing capabilities Strong distribution relationships across multiple channels – opportunity to expand on distribution relationships to effectively market diverse product offerings Information and science capabilities – used to build decision tools, transform processes and optimize performance Customer-focused service – investments in technology and operating platforms provide the foundation to deliver our target customer experience Risk diversification and scale – breadth of product offerings and scale advantage in keyproduct lines Capital strength – capacity to drive growth in attractive markets and product lines Our challenges include: Highly competitive environment where products are differentiated by pricing, terms, customer service and ease of doing business Regulatory requirements in recent years have created an increasingly complex environment that is affecting industry growth and profitability Low interest rate environment makes it more difficult to profitably price many of our products and puts margin pressure on existing products due to the challenge of investing in a low rate environment |
A Look at Consumer Insurance
The Retirement and Life operating segments conduct their business primarily through our Life Insurance Companies.
The Personal Insurance operating segment conducts its business primarily through our Non-Life Insurance Companies.
TABLE OF CONTENTS
Innovation — striving to provide superior, differentiated product solutions that meet consumer needs
ServiceItem 1 / — focused on customer needs, providing strong global claims, loss prevention BUSINESS / consumer insurance
Consumer Insurance Operating Segments
Consumer Insurance’s current operating segments consist of Retirement, Life, and mitigation, engineering, underwritingPersonal Insurance.
Retirement Product Lines |
Fixed Annuities: Products include single and flexible premium fixed annuities and single premium immediate and deferred income annuities. The Fixed Annuities product line maintains its industry-leading position in the U.S. bank distribution channel by designing products collaboratively with banks and offering an efficient and flexible administration platform. Retirement Income Solutions:Primary products include variable and fixed index annuities that provide both asset accumulation and lifetime income benefits, as well as investment-focused variable annuities. Variable annuities are distributed primarily through banks, wirehouses, and regional and independent broker‑dealers. Fixed index annuities are distributed primarily through banks, broker dealers, independent marketing organizations and independent insurance agents. Group Retirement: Products are marketed under the VALIC brand and include fixed and variable annuities, mutual funds, and plan administrative and compliance services. VALIC career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services. Retail Mutual Funds: Includes our mutual fund sales and related administration and servicing operations. | |
Life Product Lines |
Life products in the U.S. primarily include term life and universal life insurance. International products include term and whole life insurance, supplemental health, cancer and critical illness insurance. Life products are primarily distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing. The Life operating segment also offers group products distributed through employers (both employer-paid and voluntary) and sponsored organizations, with the key products being basic and supplemental term life, universal life and disability insurance. | |
Personal Insurance Product Lines |
Accident and Health: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations as well as a broad range of travel insurance products and services for leisure and business travelers. Accident and Health (A&H) products are distributed through various channels, including agents, brokers, affinity partners, airlines and travel agents. Personal Lines: Products include automobile and homeowners insurance, extended warranty, and consumer specialty products, such as identity theft and credit card protection. Products are distributed through various channels, including agents, brokers and direct marketing. Personal Insurance also provides insurance for high net worth individuals offered through AIG Private Client Group, including auto, homeowners, umbrella, yacht, fine art and collections insurance. | |
Consumer Insurance Competition
Consumer Insurance operates in the highly competitive insurance and financial services industry in the U.S. and select international markets and competes against various financial services companies, including mutual funds, banks and other related services
We face the following challenges:
Barriers to entry are high for certain markets
Regulatory changes in recent years created an increasingly complex environment thatlife and property casualty insurance companies. Competition is affecting industry growthprimarily based on product pricing and profitability
AIG 2013 Form 10-K
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ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT
Business Strategy
Product Diversity and Capacity for Growth: Continue to enhance our comprehensive portfolio with superior, differentiated product solutions that meet consumer needs fordesign, distribution, financial and retirement security, using our scale and capital strength, to pursue growth opportunities.
Integrated Distribution: Grow assets under management by leveraging our extensive distribution organization of over 300,000 financial professionals and expanding relationships with key distribution partners; to effectively market our diverse product offerings across multiple channels under a more unified branding strategy.
Investment Portfolio: Maintain a diversified, high quality portfolio of fixed maturity securities that largely match the duration characteristics of liabilities with assets of comparable duration, and pursue yield-enhancement opportunities that meet our liquidity, risk and return objectives.
Operational Initiatives: Continue to streamline our life insurance and annuity operations and systems into a lower-cost, more agile model that provides superiorcustomer service and ease of doing business for customers and producers.business.
Effective Risk and Capital Management: Deliver solid earnings through disciplined pricing and diversification of risk and increase capital efficiency within our insurance entities to enhance return on equity.
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ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT
AIG Life and Retirement Operating Segments
AIG Life and Retirement's organizational structure includes distinct product divisions, shared annuity and life operations platforms and a unified multi-channel distribution organization with access to all AIG Life and Retirement products. AIG Life and Retirement's operating segments are organized intoRetail andInstitutional. Retail products are generally marketed directly to individual consumers through independent and career insurance agents, retail banks, direct-to-consumer platforms, and national, regional and independent broker-dealers.Institutional products are generally marketed to groups or large institutions through affiliated financial advisors or intermediaries including benefit consultants, independent marketing organizations, structured settlement brokers and broker-dealers.
Percent of 2013 Premiums and deposits by operating segment
(dollars in millions)
Premiums represent amounts received on traditional life insurance policies, group benefit policies and deposits on life contingent payout annuities. Premiums and deposits is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance, investment-type annuity contracts, guaranteed investment contracts (GICs) and mutual funds.
See Item 7. MD&A — Results of Operations — AIG Life and Retirement Operations — AIG Life and Retirement Premiums, Deposits and Net Flows for a reconciliation of premiums and deposits to premiums.
Retail
Percent of 2013 Premiums and Deposits by product line
(dollars in millions)
Institutional
Percent of 2013 Premiums and Deposits by product line
(dollars in millions)
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Institutional Product Lines
LifeConsumer Insurance and A&H: Primary products include term life insurance, universal life insurance and A&H products. Life insurance and A&H products are primarily distributed through independent marketing organizations, independent insurance agents and career agents and financial advisors. AIG Direct is a proprietary direct-to-consumer distributor of term life insurance and A&H products. The Life Insurance and A&H product line will continue to focus on innovative product development and delivering differentiated life insurance solutions to producers and customers.
Fixed Annuities: Products include single and flexible premium deferred fixed annuities and single premium immediate and delayed-income annuities. The Fixed Annuities business line maintains its industry-leading position in the bank distribution channel by designing products collaboratively with banks and offering an efficient and flexible administration platform.
Retirement Income Solutions: Primary products include variable and fixed index annuities that provide asset accumulation and lifetime income benefits. Variable annuities are distributed through banks and national, regional and independent broker-dealer firms. Fixed index annuities are distributed through banks, broker dealers, independent marketing organizations and career and independent insurance agents.
Brokerage Services: Includes the operations of Advisor Group, which is one of the largest networks of independent financial advisors in the U.S. Brands include Royal Alliance, SagePoint Financial, FSC Securities and Woodbury Financial.
Retail Mutual Funds: Includes our mutual fund and related administration and servicing operations.
Group Retirement: Products are marketed under The Variable Annuity Life Insurance Company (VALIC) brand and include fixed and variable group annuities, group mutual funds, and group administrative and compliance services. VALIC career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services.
Group Benefits: AIG Benefit Solutions markets a wide range of insurance and other benefit products through employer offerings (both employer-paid and voluntary) and affinity groups. Primary product offerings include life insurance, accidental death, business travel accident, disability income, medical excess (stop loss) and worksite universal life and critical illness and accident coverage.
Institutional Markets: Products primarily include stable value wrap products, structured settlement and terminal funding annuities, high net worth products, corporate- and bank-owned life insurance and GICs. These products are marketed primarily through specialized marketing and consulting firms and structured settlement brokers. Institutional Markets has a disciplined and opportunistic approach to growth in these product lines.
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A Look at AIG Life and Retirement
AIG Life and Retirement conducts its business primarily through three major insurance operating companies: American General Life Insurance Company, The Variable Annuity Life Insurance Company and The United States Life Insurance Company in the City of New York.
AIG Life and Retirement 2013 Sales by Distribution Channel
Sales represent life and group A&H premiums from new policies expected to be collected over a one-year period plus 10 percent of life unscheduled deposits, single premiums and annuity deposits from new and existing customers.
AIG Life and Retirement's Diversified Distribution Network
VALIC career financial advisors Over 1,200 financial advisors serving the worksites of educational, not-for-profit and governmental organizations
AIG Financial Network Over 2,200 agents and financial advisors serving American families and small businesses
Advisor Group Over 6,000 independent financial advisors
AIG Direct A leading direct-to-consumer distributor of life and A&H products
Banks Long-standing market leader in distribution of fixed annuities through banks, with 800 banks and nearly 80,000 financial institution agents
Independent marketing organizations Relationships with over 1,200 independent marketing organizations and brokerage general agencies providing access to over 143,000 licensed independent agents
Broker dealers Access to over 135,000 licensed financial professionals through relationships with a wide network of broker dealers across the U.S.
Benefit brokers Include consultants, brokers, third party administrators and general agents
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ITEM 1 / BUSINESS / AIG LIFE AND RETIREMENT
AIG Life and Retirement Competition
AIG Life and Retirement is among the largest life insurance organizations in the United States and is a leader in today's financial services marketplace.
AIG Life and Retirement competes in the life insurance and retirement savings businesses against approximately 2,300 providers of life insurance and retirement savings products, primarily based on its long-standinglong‑standing market leading positions, innovative products, extensive distribution network, customerrelationships across multiple channels, customer-focused service and strong financial ratings. AIG Life
Corporate and Retirement helps ensure financial and retirement security for more than 18 million customers.
Other AIG Life and Retirement Competitive Strengths and Challenges
Our competitive strengths are:
Long-standing market leading positions in many of our product lines and key distribution channelsincludes:
Broad multi-channel distribution network of over 300,000 financial professionals with opportunities to expand on these relationships to effectively market our diverse product offerings across multiple channels
DiversifiedCorporate and comprehensive product portfolioOther of superior, differentiated solutions that meet consumer needs for financial and retirement security
Scale and risk diversification provided by the breadth of our product offerings and scale advantage in key product lines
Capital strength to fuel growth in assets under management and pursue opportunities that meet our return objectives
We also face the following challenges:
Highly competitive environment where products are differentiated by pricing, terms, service and ease of doing business
Regulatory requirements increasing in volume and complexity due to heightened regulatory scrutiny and supervision of the insurance and financial services industries in recent years
Low interest rate environment makes it more difficult to profitably price attractive guaranteed return products and puts margin pressure on existing products due to the challenge of investing premiums and deposits and portfolio cash flow in a low rate environment
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ITEM 1 / BUSINESS / OTHER OPERATIONS
Mortgage Guaranty Business Strategy
Risk Selection: Ensure high quality new business through continuous focus on risk selection and risk-based pricing using disciplined underwriting and a proprietary, multi-variant risk evaluation model.
Innovation: Continue to develop and enhance products, technology, and processes that address the needs of stakeholders in the mortgage system.
Ease of Use: Reduce complexity and enable stakeholders to easily utilize our services throughout the mortgage insurance process.
Expense Management: Streamline our processes through the use of technology and shared services.
Mortgage Guaranty
Mortgage Guaranty (United Guaranty Corporation or UGC) offers private residential mortgage guaranty insurance, which protects mortgage lenders and investors from loss due to borrower default and loan foreclosure. With over 1,000 employees, UGC currently insures over one million mortgage loans in the United States. In 2013, UGC generated more than $49 billion in new insurance written, which represents the original principal balance of the insured mortgages, making it a leading provider of private mortgage insurance in the United States.
Products and Services: UGC provides an array of products and services including first-lien mortgage guaranty insurance in a range of premium payment plans. UGC's primary product is private mortgage insurance. The coverage we provide — which is called mortgage guaranty insurance, mortgage insurance, or simply "MI", protects lenders against the increased risk of borrower default related to high loan-to-value (LTV) mortgages — those with less than 20 percent equity — enabling borrowers to purchase a house with a modest down payment.
Homeowner Support: UGC also works with homeowners who are behind on their mortgage payments to identify ways to retain their home. As a liaison between the borrower and the mortgage servicer, UGC provides the added support to qualified homeowners to help them avoid foreclosure.
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A Look at Mortgage Guaranty
Mortgage Guaranty Distribution Network
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National Mortgage Bankers
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Community Banks
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Money Center Banks
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Builder-owned Mortgage Lenders
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Regional Mortgage Lenders
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Internet-sourced Lenders
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•
Credit Unions
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Mortgage Guaranty Competition
United Guaranty competes with seven private providers of mortgage insurance, both well-established and new entrants to the industry, and The Federal Housing Administration, which is the largest provider of mortgage insurance in the United States.
Mortgage Guaranty Competitive Strengths and Challenges
Our competitive strengths are:
History — 50 years of service to the mortgage industry
Financial strength — strong capital position and highly rated mortgage insurer
Risk-based pricing strategy — provides products that are priced commensurate with underwriting risk using its proprietary multivariate risk evaluation model
Innovative products — develop and enhance products to address the changing needs of the mortgage industry
Rigorous approach to risk management
We face the following challenges:
Increasingly complex regulations relating to mortgage originations
Uncertain future regulatory environment in the residential housing finance system
Increasing competition in a limited private MI market
Volatility in the U.S. housing market
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ITEM 1 / BUSINESS / OTHER OPERATIONS
Other Operations also include:
Global Capital Markets (GCM) consists of the operations of AIG Markets, Inc. (AIG Markets) and the remaining derivatives portfolio of AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively AIGFP). AIG Markets acts as the derivatives intermediary between AIG and its subsidiaries and third parties to provide hedging services for AIG entities. The AIGFP portfolio continues to be wound down and is managed consistent with AIG's risk management objectives.
Direct Investment book (DIB) consists of a portfolio of assets and liabilitiesincome from assets held directly by AIG Parent in the Matched Investment Program (MIP) and certain non-derivative assets and liabilities of AIGFP. The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintains the liquidity we believe is necessary to meet all of its liabilities as they come due, even under stress scenarios, and to maximize returns consistent with our risk management objectives.
Retained Interests includes the fair value gains or losses, prior to their sale in 2012, of the AIA ordinary shares retained following the AIA initial public offering and the MetLife, Inc. (MetLife) securities that were received as consideration from the sale of American Life Insurance Company (ALICO) and the fair value gains or losses, prior to the Federal Reserve Bank of New York (FRBNY) liquidation of Maiden Lane III LLC (ML III) assets in 2012, on the retained interest in ML III.
Corporate & Other consists primarily of interest expense, consolidation and eliminations,other corporate subsidiaries, general operating expenses of corporate staff not attributable to specific reportable segments and interest expense. It also includes run-off lines of insurance business, including excess workers’ compensation, asbestos and environmental (1986 and prior), certain expenses related to internal controlsenvironmental liability businesses, certain healthcare coverage, certain casualty and specialty coverages reported in Eaglestone Reinsurance Company, and certain long-duration business, primarily in Japan and the financial and operating platforms, corporate initiatives, certain compensation plan expenses, corporate level net realized capital gains and losses, certain litigation-related charges and credits, the results of AIG's other non-core business operations, and net loss on sale of properties and divested businesses that did not meet the criteria for discontinued operations accounting treatment.U.S.
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Aircraft Leasing
Item 1 / consists of ILFC. ILFC is one of the world's leading aircraft lessors. ILFC acquires commercial jet aircraft from various manufacturers and other parties and leases those aircraft to airlines around the world. As of BUSINESS
OUR EMPLOYEES
At December 31, 2013, ILFC2015, we had a lease portfolio of approximately 1,000 aircraft, of which it owned 911 aircraft66,400 employees. We believe that our relations with a net book value of approximately $35.2 billion.our employees are satisfactory.
On December 16, 2013, AIG* Includes employees in Finance; Enterprise Risk Management; Legal, Regulatory and AIG Capital Corporation (Seller), a wholly-owned direct subsidiary of AIG, entered into a definitive agreement (the AerCap Share Purchase Agreement) with AerCap Holdings N.V. (AerCap)Compliance; Human Resources and AerCap Ireland Limited (Purchaser), a wholly-owned subsidiary of AerCap, for the sale of 100 percent of the common stock of ILFC by Seller to Purchaser (such transaction, the AerCap Transaction). Under the terms of the AerCap Share Purchase Agreement, consummation of the AerCap Transaction is subject to the satisfaction or waiver of a number of conditions precedent, such as certain customary conditionsAdministration; and other closing conditions, including the receipt of approvals or non-disapprovals from antitrust and other regulatory bodies. The AerCap Transaction was approved by AerCap shareholders on February 13, 2014. See Item 1A. Risk Factors — Business and Regulation and Note 4 to the Consolidated Financial Statements for more information on the AerCap Transaction.Internal Audit.
TABLE OF CONTENTS
A REVIEW OF LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
Item 1 / BUSINESS
A Review of Liability for Unpaid LOSSES and loss Adjustment Expenses
The liability for unpaid claimslosses and claimsloss adjustment expenseexpenses (also referred to as loss reserves) represents the accumulation of estimates for unpaid reported claimslosses (case reserves) and claimslosses that have been incurred but not reported (IBNR) for AIG Property Casualtythe Non-Life Insurance Companies and UGC. Unpaid claims and claims adjustmentEaglestone Reinsurance Company, including the related expenses are also referred to as unpaid loss and loss adjustment expenses, or just loss reserves.of settling those losses.
We recognize as assets the portion of this liability that willis expected to be recovered from reinsurers. ReservesLoss reserves are discounted, where permitted, in accordance with U.S. GAAP.
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The Loss Reserve Development Process
The process of establishing the liability for unpaid losses and loss adjustment expenseexpenses is complex and imprecise because it must take into consideration many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments about our ultimate exposure to losses are an integral component of our loss reserving process.
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We use a number of techniques to analyze the adequacy of the established net liability for unpaid claimslosses and claimsloss adjustment expenseexpenses (net loss reserves). Using these analytical techniques, we monitor the adequacy of AIG'sour established reserves and determine appropriate assumptions for inflation and other factors influencing loss costs. Our analysisanalyses also takestake into account emerging specific development patterns, such as case reserve redundancies or deficiencies and IBNR emergence. We also consider specific factors that may impact losses, such as changing trends in medical costs, unemployment levels and other economic indicators, as well as changes in legislation and social attitudes that may affect decisions to file claims or the magnitude of court awards. See Item 7. MD&A — Critical Accounting Estimates for a description of our loss reserving process.
A significant portion of AIG Property Casualty's business is in the U.S. commercial casualty class, including asbestos and environmental, which tends to involve longer periods of time for the reporting and settlement of claims and may increase the risk and uncertainty with respect to our loss reserve development. |
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Because reserve estimates are subject to the outcome of future events, changes in prior year estimates are unavoidable in the insurance industry. These changes in estimates are sometimes referred to as "loss development"“prior year loss development” or "reserve“reserve development."” |
A significant portion of the Non-Life Insurance Companies’ reserves are for the U.S. commercial casualty class, including excess casualty, asbestos and environmental, which tends to involve longer periods of time for the reporting and settlement of claims than other types of insurance and therefore may increase the inherent risk and uncertainty with respect to our loss reserve development.
Analysis of Consolidated Loss Reserve Development
The "Analysis“Analysis of Consolidated Loss Reserve Development"Development” table presents the development of prior year net loss reserves for calendar years 20032005 through 20132015 for each balance sheet in that period. The information in the table is presented in accordance with reporting requirements of the Securities and Exchange Commission (SEC). This table should be interpreted with care by those not familiar with its format or those who are familiar with other loss development analyses arranged in an accident year or underwriting year basis rather than the balance sheet, as shown below. See Note 12 to the Consolidated Financial Statements.
The top row of the table showsNet Reserves Held(the net liability for unpaid claimslosses and claimsloss adjustment expenses) at each balance sheet date, net of discount. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all years prior to the balance sheet date that were unpaid as of that balance sheet date, including estimates for IBNR claims.claims, net of estimated reinsurance recoverable and loss reserve discount. The estimated reinsurance recoverable is shown near the bottom of the table. The amount of loss reserve discount included in the net reserves at each date is shown immediately below the net reserves held. The undiscounted reserve at each date is equal to the sum of the discount and the net reserves held. For example,Net Reserves Held (Undiscounted) was $37.7$59.6 billion at December 31, 2003.2005.
The next section of the table shows the originalNet Undiscounted Reserves re-estimatedover 10 years. This re-estimation takes into consideration a number of factors, including changes in the estimated frequency of reported claims, effects of significant judgments, the emergence of latent exposures, and changes in medical cost trends.For example, the original undiscounted reserve of $37.7$59.6 billion at December 31, 2003,2005, was re-estimated to $62.1$71.7 billion at December 31, 2013.2015. The amount of the development related to losses settled or re-estimated in 2013,2015, but incurred in 2010,2012, is included in the cumulative development amount for years 2010, 20112012, 2013 and 2012.2014. Any increase or decrease in the estimate is reflected in operating results in the period in which the estimate is changed.
The middle of the table showsNet Redundancy (Deficiency).Deficiency.This is the aggregate change in estimates over the period of years covered by the table. For example, the net loss reserve deficiency of $24.4$12.1 billion for 20032005 is the difference between the original undiscounted reserve of $37.7$59.6 billion at December 31, 20032005 and the $62.1$71.7 billion of re-estimated reserves at December 31, 2013.2015. The net deficiency amounts are cumulative; in other words, the amount
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ITEM 1 / BUSINESS
shown in the 20122014 column includes the amount shown in the 20112013 column, and so on. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it generally is not appropriate to extrapolate future development based on this table.
The bottom portion of the table shows thePaid (Cumulative)amounts during successive years related to the undiscounted loss reserves. For example, as of December 31, 2013,2015, AIG had paid a total of $51.6$58.7 billion of the $62.1$71.7 billion in re-estimated reserves for 2003,2005, resulting in Remaining Reserves (Undiscounted) of $10.5$13.0 billion for 2003.2005. Also included in this section are theRemaining Reserves (Undiscounted) and theRemaining Discount for each year.
As discussed in footnotes (a) and (b) below, the calendar year distribution of these Paid (Cumulative) amounts are estimates that are affected by certain transactions, such as deconsolidations resulting from dispositions. These payment amounts may differ from the actual losses paid for a given accident year.
The following table presents loss reserves and the related loss development 2003for 2005 through 20132015 and consolidated gross liability (before discount), reinsurance recoverable and net liability recorded for each calendar year, and the re-estimationre‑estimation of these amounts as of December 31, 2013.2015.(a)
(in millions) | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 |
Net Reserves Held(b) | $ | 57,476 | $ | 62,630 | $ | 69,288 | $ | 72,455 | $ | 67,899 | $ | 71,507 | $ | 70,825 | $ | 68,782 | $ | 64,316 | $ | 61,612 | $ | 60,603 |
Discount (in Reserves Held) | | 2,110 | | 2,264 | | 2,429 | | 2,574 | | 2,655 | | 3,217 | | 3,183 | | 3,246 | | 3,555 | | 3,077 | | 3,148 |
Net Reserves Held (Undiscounted) | | 59,586 | | 64,894 | | 71,717 | | 75,029 | | 70,554 | | 74,724 | | 74,008 | | 72,028 | | 67,871 | | 64,689 | $ | 63,751 |
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Net undiscounted Reserve | | | | | | | | | | | | | | | | | | | | | | |
re-estimated as of: | | | | | | | | | | | | | | | | | | | | | | |
One year later | | 59,533 | | 64,238 | | 71,836 | | 77,800 | | 74,736 | | 74,919 | | 74,429 | | 72,585 | | 68,574 | | 68,808 | | |
Two years later | | 60,126 | | 64,764 | | 74,318 | | 82,043 | | 74,529 | | 75,502 | | 75,167 | | 73,571 | | 72,296 | | | | |
Three years later | | 61,242 | | 67,303 | | 78,275 | | 81,719 | | 75,187 | | 76,023 | | 76,212 | | 76,897 | | | | | | |
Four years later | | 63,872 | | 70,733 | | 78,245 | | 82,422 | | 76,058 | | 77,031 | | 79,050 | | | | | | | | |
Five years later | | 67,102 | | 70,876 | | 79,098 | | 83,135 | | 77,054 | | 79,573 | | | | | | | | | | |
Six years later | | 67,518 | | 71,572 | | 79,813 | | 84,100 | | 79,319 | | | | | | | | | | | | |
Seven years later | | 68,233 | | 72,286 | | 80,770 | | 86,177 | | | | | | | | | | | | | | |
Eight years later | | 69,023 | | 73,356 | | 82,616 | | | | | | | | | | | | | | | | |
Nine years later | | 70,029 | | 75,154 | | | | | | | | | | | | | | | | | | |
Ten years later | | 71,724 | | | | | | | | | | | | | | | | | | | | |
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Net Deficiency on net reserves held | | (12,138) | | (10,260) | | (10,899) | | (11,148) | | (8,765) | | (4,849) | | (5,042) | | (4,869) | | (4,425) | | (4,119) | | |
Net Deficiency related to asbestos | | | | | | | | | | | | | | | | | | | | | | |
and environmental (A&E) | | (2,798) | | (2,296) | | (2,278) | | (2,229) | | (2,076) | | (575) | | (545) | | (469) | | (401) | | (278) | | |
Net Deficiency excluding A&E | | (9,340) | | (7,964) | | (8,621) | | (8,919) | | (6,689) | | (4,274) | | (4,497) | | (4,400) | | (4,024) | | (3,841) | | |
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Paid (Cumulative) as of: | | | | | | | | | | | | | | | | | | | | | | |
One year later | | 15,326 | | 14,862 | | 16,531 | | 24,267 | | 15,919 | | 17,661 | | 19,235 | | 18,758 | | 17,745 | | 18,205 | | |
Two years later | | 25,152 | | 24,388 | | 31,791 | | 36,164 | | 28,428 | | 30,620 | | 31,766 | | 31,265 | | 30,658 | | | | |
Three years later | | 32,295 | | 34,647 | | 40,401 | | 46,856 | | 38,183 | | 40,091 | | 41,464 | | 41,368 | | | | | | |
Four years later | | 40,380 | | 40,447 | | 48,520 | | 53,616 | | 45,382 | | 47,379 | | 49,197 | | | | | | | | |
Five years later | | 44,473 | | 46,474 | | 53,593 | | 58,513 | | 51,104 | | 53,449 | | | | | | | | | | |
Six years later | | 49,552 | | 50,391 | | 57,686 | | 62,734 | | 56,030 | | | | | | | | | | | | |
Seven years later | | 52,243 | | 53,545 | | 61,221 | | 66,558 | | | | | | | | | | | | | | |
Eight years later | | 54,332 | | 56,424 | | 64,517 | | | | | | | | | | | | | | | | |
Nine years later | | 56,516 | | 59,208 | | | | | | | | | | | | | | | | | | |
Ten years later | | 58,703 | | | | | | | | | | | | | | | | | | | | |
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Remaining Reserves (Undiscounted) | | 13,021 | | 15,946 | | 18,099 | | 19,619 | | 23,289 | | 26,124 | | 29,853 | | 35,529 | | 41,638 | | 50,603 | | |
Remaining Discount | | 1,454 | | 1,610 | | 1,776 | | 1,942 | | 2,091 | | 2,257 | | 2,429 | | 2,594 | | 2,778 | | 2,966 | | |
Remaining Reserves | $ | 11,567 | $ | 14,336 | $ | 16,323 | $ | 17,677 | $ | 21,198 | $ | 23,867 | $ | 27,424 | $ | 32,935 | $ | 38,860 | $ | 47,637 | | |
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Net Liability, End of Year | $ | 59,586 | $ | 64,894 | $ | 71,717 | $ | 75,029 | $ | 70,554 | $ | 74,724 | $ | 74,008 | $ | 72,028 | $ | 67,871 | $ | 64,689 | $ | 63,751 |
Reinsurance Recoverable, End of Year | | 19,693 | | 17,369 | | 16,212 | | 16,803 | | 17,487 | | 19,644 | | 20,320 | | 19,209 | | 17,231 | | 15,648 | | 14,339 |
Gross Liability, End of Year | | 79,279 | | 82,263 | | 87,929 | | 91,832 | | 88,041 | | 94,368 | | 94,328 | | 91,237 | | 85,102 | | 80,337 | $ | 78,090 |
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Re-estimated Net Liability | | 71,724 | | 75,154 | | 82,616 | | 86,177 | | 79,319 | | 79,573 | | 79,050 | | 76,897 | | 72,296 | | 68,808 | | |
Re-estimated Reinsurance Recoverable | | 24,800 | | 20,981 | | 19,392 | | 18,850 | | 18,633 | | 16,758 | | 18,403 | | 18,894 | | 17,183 | | 14,289 | | |
Re-estimated Gross Liability | | 96,524 | | 96,135 | | 102,008 | | 105,027 | | 97,952 | | 96,331 | | 97,453 | | 95,791 | | 89,479 | | 83,097 | | |
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Cumulative Gross | | | | | | | | | | | | | | | | | | | | | | |
Redundancy (Deficiency) | $ | (17,245) | $ | (13,872) | $ | (14,079) | $ | (13,195) | $ | (9,911) | $ | (1,963) | $ | (3,125) | $ | (4,554) | $ | (4,377) | $ | (2,760) | | |
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(in millions)
| | 2003
| | 2004
| | 2005
| | 2006
| | 2007
| | 2008
| | 2009
| | 2010
| | 2011
| | 2012
| | 2013
| |
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| | |
Net Reserves Held(b) | | $ | 36,228 | | $ | 47,253 | | $ | 57,476 | | $ | 62,630 | | $ | 69,288 | | $ | 72,456 | | $ | 67,899 | | $ | 71,507 | | $ | 70,825 | | $ | 68,782 | | $ | 64,316 | |
Discount (in Reserves Held) | | | 1,516 | | | 1,553 | | | 2,110 | | | 2,264 | | | 2,429 | | | 2,574 | | | 2,655 | | | 3,217 | | | 3,183 | | | 3,246 | | | 3,555 | |
| | |
Net Reserves Held (Undiscounted) | | | 37,744 | | | 48,806 | | | 59,586 | | | 64,894 | | | 71,717 | | | 75,030 | | | 70,554 | | | 74,724 | | | 74,008 | | | 72,028 | | $ | 67,871 | |
Net undiscounted Reserve re-estimated as of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One year later | | | 40,931 | | | 53,486 | | | 59,533 | | | 64,238 | | | 71,836 | | | 77,800 | | | 74,736 | | | 74,919 | | | 74,429 | | | 72,585 | | | | |
Two years later | | | 49,463 | | | 55,009 | | | 60,126 | | | 64,764 | | | 74,318 | | | 82,043 | | | 74,529 | | | 75,502 | | | 75,167 | | | | | | | |
Three years later | | | 51,497 | | | 56,047 | | | 61,242 | | | 67,303 | | | 78,275 | | | 81,719 | | | 75,187 | | | 76,023 | | | | | | | | | | |
Four years later | | | 52,964 | | | 57,618 | | | 63,872 | | | 70,733 | | | 78,245 | | | 82,422 | | | 76,058 | | | | | | | | | | | | | |
Five years later | | | 54,870 | | | 60,231 | | | 67,102 | | | 70,876 | | | 79,098 | | | 83,135 | | | | | | | | | | | | | | | | |
Six years later | | | 57,300 | | | 63,348 | | | 67,518 | | | 71,572 | | | 79,813 | | | | | | | | | | | | | | | | | | | |
Seven years later | | | 60,283 | | | 63,928 | | | 68,233 | | | 72,286 | | | | | | | | | | | | | | | | | | | | | | |
Eight years later | | | 60,879 | | | 64,532 | | | 69,023 | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine years later | | | 61,449 | | | 65,261 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ten years later | | | 62,116 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Deficiency on net reserves held | | | (24,372 | ) | | (16,455 | ) | | (9,437 | ) | | (7,392 | ) | | (8,096 | ) | | (8,105 | ) | | (5,504 | ) | | (1,299 | ) | | (1,159 | ) | | (557 | ) | | | |
Net Deficiency related to asbestos and environmental (A&E) | | | (4,038 | ) | | (3,033 | ) | | (2,104 | ) | | (1,895 | ) | | (1,877 | ) | | (1,827 | ) | | (1,675 | ) | | (174 | ) | | (144 | ) | | (68 | ) | | | |
Net Deficiency excluding A&E | | | (20,334 | ) | | (13,422 | ) | | (7,333 | ) | | (5,497 | ) | | (6,219 | ) | | (6,278 | ) | | (3,829 | ) | | (1,125 | ) | | (1,015 | ) | | (489 | ) | | | |
Paid (Cumulative) as of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One year later | | | 12,163 | | | 14,910 | | | 15,326 | | | 14,862 | | | 16,531 | | | 24,267 | | | 15,919 | | | 17,661 | | | 19,235 | | | 18,758 | | | | |
Two years later | | | 21,773 | | | 24,377 | | | 25,152 | | | 24,388 | | | 31,791 | | | 36,164 | | | 28,428 | | | 30,620 | | | 31,766 | | | | | | | |
Three years later | | | 28,763 | | | 31,296 | | | 32,295 | | | 34,647 | | | 40,401 | | | 46,856 | | | 38,183 | | | 40,091 | | | | | | | | | | |
Four years later | | | 33,825 | | | 36,804 | | | 40,380 | | | 40,447 | | | 48,520 | | | 53,616 | | | 45,382 | | | | | | | | | | | | | |
Five years later | | | 38,087 | | | 43,162 | | | 44,473 | | | 46,474 | | | 53,593 | | | 58,513 | | | | | | | | | | | | | | | | |
Six years later | | | 42,924 | | | 46,330 | | | 49,552 | | | 50,391 | | | 57,686 | | | | | | | | | | | | | | | | | | | |
Seven years later | | | 45,215 | | | 50,462 | | | 52,243 | | | 53,545 | | | | | | | | | | | | | | | | | | | | | | |
Eight years later | | | 48,866 | | | 52,214 | | | 54,332 | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine years later | | | 50,292 | | | 53,693 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ten years later | | | 51,578 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Remaining Reserves (Undiscounted) | | | 10,538 | | | 11,568 | | | 14,691 | | | 18,741 | | | 22,127 | | | 24,622 | | | 30,676 | | | 35,932 | | | 43,401 | | | 53,827 | | | | |
Remaining Discount | | | 1,624 | | | 1,723 | | | 1,861 | | | 2,038 | | | 2,251 | | | 2,487 | | | 2,722 | | | 2,955 | | | 3,186 | | | 3,375 | | | | |
| | |
Remaining Reserves | | $ | 8,914 | | $ | 9,845 | | $ | 12,830 | | $ | 16,703 | | $ | 19,876 | | $ | 22,135 | | $ | 27,954 | | $ | 32,977 | | $ | 40,215 | | $ | 50,452 | | | | |
| | |
Net Liability, End of Year | | $ | 37,744 | | $ | 48,806 | | $ | 59,586 | | $ | 64,894 | | $ | 71,717 | | $ | 75,030 | | $ | 70,554 | | $ | 74,724 | | $ | 74,008 | | $ | 72,028 | | $ | 67,871 | |
Reinsurance Recoverable, End of Year | | | 15,644 | | | 14,624 | | | 19,693 | | | 17,369 | | | 16,212 | | | 16,803 | | | 17,487 | | | 19,644 | | | 20,320 | | | 19,209 | | | 17,231 | |
| | |
Gross Liability, End of Year | | | 53,388 | | | 63,430 | | | 79,279 | | | 82,263 | | | 87,929 | | | 91,833 | | | 88,041 | | | 94,368 | | | 94,328 | | | 91,237 | | $ | 85,102 | |
Re-estimated Net Liability | | | 62,116 | | | 65,261 | | | 69,023 | | | 72,286 | | | 79,813 | | | 83,135 | | | 76,058 | | | 76,023 | | | 75,167 | | | 72,585 | | | | |
Re-estimated Reinsurance Recoverable | | | 23,728 | | | 21,851 | | | 24,710 | | | 20,998 | | | 19,494 | | | 18,905 | | | 18,509 | | | 16,488 | | | 18,423 | | | 19,408 | | | | |
| | |
Re-estimated Gross Liability | | | 85,844 | | | 87,112 | | | 93,733 | | | 93,284 | | | 99,307 | | | 102,040 | | | 94,567 | | | 92,511 | | | 93,590 | | | 91,993 | | | | |
Cumulative Gross
Redundancy (Deficiency) | | $ | (32,456 | ) | $ | (23,682 | ) | $ | (14,454 | ) | $ | (11,021 | ) | $ | (11,378 | ) | $ | (10,207 | ) | $ | (6,526 | ) | $ | 1,857 | | $ | 738 | | $ | (756 | ) | | | |
| | |
(a) During 2009, we deconsolidated Transatlantic Holdings, Inc. and sold 21st Century Insurance Group and HSB Group, Inc. The sales and deconsolidation are reflected in the table above as a reduction in December 31, 2009 net reserves of $9.7 billion and as an $8.6 billion increase in paid losses for the years 2000 through 2008 to remove the reserves for these divested entities from the ending balance.
(b) The increase in Net Reserves Held from 2009 to 2010 is partially due to the $1.7 billion in Net Reserves Held by Fuji Fire, which was acquired in 2010. The decrease in 2011 is due to the cession of asbestos reserves described in Item 7. MD&A — Results of Operations — Segment Results — AIG Property Casualty Operations — Liability for Unpaid Claims and Claims Adjustment Expense —Insurance Reserves – Non-Life Insurance Companies— Asbestos and Environmental Reserves.(1986 and prior).
The Liability for unpaid claimslosses and claimsloss adjustment expenseexpenses as reported in AIG'sour Consolidated Balance Sheet at December 31, 20132015 differs from the total reservereserves reported in the annual statements filed with state insurance departments and, wherewhen applicable, with foreign regulatory authorities primarily for the following reasons:
•
- Reserves for certain foreign operations are not required or permitted to be reported in the United States for statutory reporting purposes, including contingency reserves for catastrophic events;
AIG 2013 Form 10-K
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ITEM 1 / BUSINESS•
•- Statutory practices in the United States require reserves to be shown net of applicable reinsurance recoverable; and
•
•- Unlike statutory financial statements,
AIG'sour consolidated Liabilityliability for unpaid claimslosses and claimsloss adjustment expenseexpenses excludes the effect of intercompany transactions.
Gross loss reserves are calculated without reduction for reinsurance recoverablesrecoverable and represent the accumulation of estimates for reported losses and IBNR, net of estimated salvage and subrogation. We review the adequacy of established gross loss reserves in the manner previously described for net loss reserves. A reconciliation of activity in the Liability for unpaid claimslosses and claimsloss adjustment expenseexpenses is included in Note 12 to the Consolidated Financial Statements.
For further discussion of asbestos and environmental reserves, see Item 7. MD&A — Results of Operations — Segment Results — AIG Property Casualty Operations — Liability for Unpaid Claims and Claims Adjustment Expense —Insurance Reserves – Non-Life Insurance Companies— Asbestos and Environmental Reserves.(1986 and prior).
Reinsurance Activities
REINSURANCE ACTIVITIES
Reinsurance is used primarily to manage overall capital adequacy and mitigate the insurance loss exposure related to certain events such as natural and man-made catastrophes.
AIGOur subsidiaries operate worldwide primarily by underwriting and accepting risks for their direct account on a gross basis and reinsuring a portion of the exposure on either an individual risk or an aggregate basis to the extent those risks exceed the desired retention level.In addition, as a condition of certain direct underwriting transactions, we are required by clients, agents or regulation to cede all or a portion of risks to specified reinsurance entities, such as captives, other insurers, local reinsurers and compulsory pools.
Over the last several years, AIG Property Casualtythe Non-Life Insurance Companies revised itsthe ceded reinsurance framework and strategy to improve capital management and support our global product line risk and profitability objectives. As a result of adopting the revised framework and strategy, many individual reinsurance contracts were consolidated into more efficient global programs and therefore, reinsurance ceded to third parties in support of risk and capital management objectives has decreased for the full year 2013remained stable in 2015 compared to the prior year. There are many different forms of reinsurance agreements and different markets that may be used to achieve our risk and profitability objectives.2014. We continually evaluate the relative attractiveness of variousdifferent forms of reinsurance marketscontracts and arrangementsdifferent markets that may be used to achieve our risk and profitability objectives.
Reinsurance markets include:
•
- Traditional local and global reinsurance markets including those in the United States, Bermuda, London and Europe, accessed directly and through reinsurance intermediaries;
•
•- Capital markets through
investors in insurance-linked securities and collateralized reinsurance transactions, such as catastrophe bonds, "sidecars" (special purpose entities that allow investors to take on the risk of a book of business from an insurance company in exchange for a premium)sidecars and similar vehicles; and
•
•- Other insurers that engage in both direct and assumed
reinsurance and/or engage in swaps.
reinsurance.The form of reinsurance that we may choose from time to time will generally depend on whether we are seeking (i) seeking:
•proportional reinsurance, whereby we cede a specified percentage of premiumpremiums and losses to reinsurers, or reinsurers;
•non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis and (ii) treatiesbasis; or
•facultative contracts that cover a defined book of policies, or facultative placements that cover anreinsure individual policy. The vast majority of our reinsurance is non-proportional.policies.
Reinsurance arrangementscontracts do not relieve AIGour subsidiaries from their direct obligations to insureds. However, an effective reinsurance program substantially mitigates our exposure to potentially significant losses.
In certain markets, we are required to participate on a proportional basis in reinsurance pools based on our relative share of direct writings in those markets. Such mandatory reinsurance generally covers higher-risk consumer exposures such as assigned-risk automobile and earthquake, as well as certain commercial exposures such as workers'workers’ compensation.
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ITEM 1 / BUSINESS
We continued our strategy to take advantage of the pricing differential between traditional reinsurance markets and capital markets. On July 9, 2013, we entered into a five-year catastrophe bond transaction with Tradewynd Re Ltd., which will provide $125 million of indemnity protection against U.S., Caribbean and Gulf of Mexico named storms, and U.S. and Canadian earthquakes. The transaction provides us with fully collateralized coverage against losses from the events described above on a per-occurrence basis through June 2018.
In addition, we entered into a five-year capital markets reinsurance transaction, effective as of January 1, 2014 with Tradewynd Re Ltd., which will provide $400 million of indemnity reinsurance protection against U.S., Caribbean and Gulf of Mexico named storms, and U.S. and Canadian earthquakes. To fund its potential obligations to AIG, Tradewynd Re Ltd. issued three tranches of notes, one with a one-year term and two with three-year terms. The transaction closed December 18, 2013 and provides AIG with fully collateralized coverage against losses from the events described above on a per-occurrence basis through December 2018.
See Item 7. MD&A —– Enterprise Risk Management —– Insurance Operations Risks — AIG Property Casualty– Non-Life Insurance Companies Key Insurance Risks —– Reinsurance Recoverable for a summary of significant reinsurers.
GENERATING REVENUES: INVESTMENT ACTIVITIES OF OUR INSURANCE OPERATIONSREGULATion
| | |
AIG Property Casualty and AIG Life and Retirement generally receive premiums and deposits well in advance of paying covered claims or benefits. In the intervening periods, we invest these premiums and deposits to generate net investment income that is available to pay claims or benefits. As a result, we generate significant revenues from insurance investment activities.
AIG's worldwide insurance investment policy places primary emphasis on investments in fixed maturity securities of corporations, municipal bonds and government issuances in all of its portfolios, and, to a lesser extent, investments in high-yield bonds, common stock, real estate, hedge funds and other alternative investments. | | We generate significant revenues in our AIG Property Casualty and AIG Life and Retirement operations from investment activities. |
The majority of assets backing our insurance liabilities at AIG consist of intermediate and long duration fixed maturity securities.
AIG Property Casualty — Fixed maturity securities held by the insurance companies included in AIG Property Casualty domestic operations have historically consisted primarily of laddered holdings of corporate bonds, municipal bonds and government bonds. These investments provided attractive returns and limited credit risk. To meet our domestic operations' current risk return and business objectives, our domestic property and casualty companies have been shifting investment allocations to a broader array of debt, including structured securities and equity sectors. Our fixed maturity securities must meet our liquidity, duration and quality objectives as well as current capital, risk return and business objectives. Fixed maturity securities held by AIG Property Casualty international operations consist primarily of intermediate duration high-grade securities, primarily in the markets being served. In addition, AIG Property Casualty has redeployed cash in excess of operating needs and short-term investments into longer-term, higher-yielding securities.
AIG Life and Retirement — Our investment strategy is to largely match the duration of our liabilities with assets of comparable duration, to the extent practicable. AIG Life and Retirement primarily invests in a diversified portfolio of fixed maturity securities, including corporate bonds, RMBS, CMBS and CDO/ABS. To further diversify the portfolio, investments are made in private equity funds, hedge funds and affordable housing partnerships. Although these alternative investments are subject to periodic earnings fluctuations, for the three years ended December 31, 2013, they have achieved total returns in excess of AIG Life and Retirement's fixed maturity security returns. AIG Life and Retirement expects that these alternative investments will continue to outperform the fixed maturity security portfolio over the long term.
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ITEM 1 / BUSINESS
The following table summarizes the investment results of AIG's insurance operations.
| | | | | | | | | | |
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Years Ended December 31,
(in millions)
| | Annual Average
Investments(a)
| | Net Investment
Income
| | Pre-tax Return on
Average Investments(b)
| |
|---|
| | |
AIG Property Casualty: | | | | | | | | | | |
2013 | | $ | 119,307 | | $ | 5,267 | | | 4.4 | % |
2012 | | | 120,425 | | | 4,780 | | | 4.0 | |
2011 | | | 112,310 | | | 4,253 | | | 3.8 | |
AIG Life and Retirement: | | | | | | | | | | |
2013 | | $ | 192,895 | | $ | 10,854 | | | 5.6 | % |
2012 | | | 190,983 | | | 10,718 | | | 5.6 | |
2011 | | | 172,846 | | | 9,882 | | | 5.7 | |
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(a) Excludes cash and short-term investments and includes unrealized appreciation of investments.
(b) Net investment income divided by the annual average investments. The increase in AIG Property Casualty pre-tax return on average investments for the year ended December 31, 2013 compared to 2012 primarily relates to alternative investments and fair value option assets. See Item 7. MD&A — Results of Operations — AIG Property Casualty — AIG Property Casualty Net Investment Income and Net Realized Capital Gains (Losses).
REGULATION
Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance, securities, derivatives, investment advisory banking and thrift regulators in the United States and abroad.
Our insurance subsidiaries are subject to regulation and supervision by the states and jurisdictions in which they do business. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years.
The following tablesummary provides a general overview of our primary regulators and related bodies and a brief description of their oversight with respect to us and our subsidiaries, including key regulations or initiatives that we are currently, or may in the future be, subject to. Such regulations and initiatives, both in the United States and abroad, are discussed in more detail following the table.summary.
U.S. Federal Regulation
Board of Governors of the Federal Reserve System (FRB): Oversees and regulates financial institutions, including non-bank systemically important financial institutions (SIFIs), bank holding companies and savings and loan holding companies (SLHCs)U.S. Federal Regulation |
Board of Governors of the Federal Reserve System (FRB): Oversees and regulates financial institutions, including nonbank systemically important financial institutions (nonbank SIFIs). We are currently subject to the FRB’s examination, supervision and enforcement authority, and certain reporting requirements, as a nonbank SIFI. Office of the Comptroller of the Currency (OCC): Charters, regulates and supervises all national banks and federal savings associations. The OCC supervises and regulates AIG Federal Savings Bank, our trust-only federal thrift subsidiary. Securities and Exchange Commission (SEC): Oversees and regulates the U.S. securities and security-based swap markets, U.S. mutual funds, U.S. broker-dealers and U.S. investment advisors. Principal regulator of the mutual funds offered by our broker-dealer subsidiaries. The SEC is in the process of implementing rules and regulations governing reporting, clearing, execution and margin requirements for security-based swaps entered into within the U.S or by U.S. persons. Our security-basedswap activities are likely to be subject to certain of these rules and regulations. Commodities Futures Trading Commission (CFTC): Oversees and regulates the U.S. swap, commodities and futures markets. The CFTC has begun implementing and is continuing to implement rules and regulations governing reporting, clearing, execution, margin and other requirements for swaps entered into within the U.S. or involving U.S. persons. Our swap activities are subject to certain of these rules and regulations. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank): Dodd-Frank has effected comprehensive changes to financial services regulation and subjects us, or may subject us, as applicable, to additional federal regulation, including: •enhanced prudential standards for nonbank SIFIs (including minimum leverage and risk-based capital requirements, capital planning, stress tests, liquidity requirements, corporate governance requirements, contingent capital requirements, counterparty credit limits, an early remediation regime process and resolution planning); •limitations on proprietary trading or covered fund activities, if the FRB decides to impose certain elements of Section 619 of Dodd-Frank (referred to as the “Volcker Rule”) on nonbank SIFIs; •financial sector concentration limits; and •increased regulation and restrictions on derivatives markets and transactions. |
U.S. State Regulation |
State Insurance Regulators: Our insurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which they do business. Regulation is generally derived from statutes that delegate supervisory and regulatory powers to a state insurance regulator, and primarily relates to the insurer’s financial condition, corporate conduct and market conduct activities. NAIC Standards: The National Association of Insurance Commissioners (NAIC) is a standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. The NAIC itself is not a regulator, but through the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate regulatory oversight. |
Foreign Regulation |
Financial Stability Board (FSB): Consists of representatives of national financial authorities of the G20 nations. The FSB itself is not a regulator, but is focused primarily on promoting international financial stability. It does so by coordinating the work of national financial authorities and international standard-setting bodies as well as developing and promoting the implementation of regulatory, supervisory and other financial policies. International Association of Insurance Supervisors (IAIS): Represents insurance regulators and supervisors of more than 200 jurisdictions in nearly 140 countries and seeks to promote globally consistent insurance industry supervision. The IAIS itself is not a regulator, but one of its activities is to develop insurance regulatory standards for use by local authorities across the globe, such as the IAIS’ Insurance Core Principles (ICPs). The FSB has directed the IAIS to develop additional standards in areas such as financial group supervision, capital and solvency standards, systemic financial risk and corporate governance in order to reinforce international financial stability. The FSB also charged the IAIS with developing a framework for measuring systemic risks posed by insurance groups. Based on the IAIS’ assessment methodology for identifying global systemically important insurers (G-SIIs), the FSB has identified nine G-SIIs, including AIG, which may subject us to a policy framework for G-SIIs that includes recovery and resolution planning, enhanced group-wide supervision, enhanced liquidity and systemic risk management planning, and group-wide capital standards, including higher loss absorbency (HLA) capital. The IAIS is also developing ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs). ComFrame sets out qualitative and quantitative standards in order to assist supervisors in collectively addressing an IAIG’s activities and risks, identifying and avoiding regulatory gaps and coordinating supervisory activities. In connection with ComFrame, the IAIS is in the process of developing a risk-based global insurance capital standard (ICS) applicable to IAIGs. AIG currently meets the parameters set forth to define an IAIG. Standards issued by the FSB and/or IAIS are not binding on the United States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations. European Union (EU): Financial companies that operate in the EU are subject to regulation by the national regulator of each member state in which that firm operates. Groups that are categorized as financial conglomerates are also subject to supplementary supervision. This seeks to enable supervisors to perform consolidated insurance group supervision at the level of the ultimate parent entity. The objective of supplementary supervision is to detect, monitor, manage and control group risks and ensure that capital is not accounted for twice or more within the conglomerate. The Prudential Regulatory Authority (PRA), the United Kingdom’s prudential regulator, is AIG’s EU lead supervisor. The Financial Conduct Authority has oversight of AIG’s European operations for consumer protection and competition matters within the UK. The EU has also established a set of regulatory requirements under the European Market Infrastructure Regulation (EMIR) that include, among other things, risk mitigation, risk management, regulatory reporting and clearing requirements. |
The European Parliament issues Directives which member states have to implement into legislation. Once implemented into country legislation, financial companies operating in Europe must adhere to these. Examples include: 1.The Insurance Distribution Directive (IDD), which updates the Insurance Mediation Directive, extending its scope to all sellers of insurance products, including direct selling to customers, any person involved in administrating policies and ancillary insurance intermediaries. The main provisions include remuneration disclosure, cross-selling limitations and professional training requirements. The IDD is expected to be finalized in February 2016 and require implementation by 2018. 2.The Solvency II Directive (2009/138/EEC) (Solvency II), which became effective on January 1, 2016, includes minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. Regulation of Foreign Insurance Company Subsidiaries: Generally, our subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements. Our foreign operations are also regulated in various jurisdictions with respect to currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves, amount and type of capital to be held, amount and type of local investment and the share of profits to be returned to policyholders on participating policies. Some foreign countries also regulate rates on various types of policies. |
Federal Reserve Supervision
Due to the determination of the Financial Stability Oversight Council (Council) that we should be regulated by the FRB as a nonbank SIFI pursuant to Section 113 of Dodd-Frank, we have been since July 2013 subject to the FRB'sFRB’s examination, supervision and enforcement authority, and reporting requirements, as an SLHC and as a SIFI.
Office of the Comptroller of the Currency (OCC): Charters, regulates and supervises all national banks and federal savings associations. The OCC supervises and regulates AIG Federal Savings Bank, our federal savings association subsidiary.
Securities and Exchange Commission (SEC): Oversees and regulates the U.S. securities and security-based swap markets, U.S. mutual funds, U.S. broker-dealers and U.S. investment advisors. Principal regulator of the mutual funds offered by our broker-dealer subsidiaries owned by AIG Life and Retirement. The SEC is in the process of implementing rules and regulations governing reporting, execution and margin requirements for security-based swaps entered into within the U.S. Our security-based swap activities conducted by Global Capital Markets are subject to these rules and regulations.
Commodities Futures Trading Commission (CFTC): Oversees and regulates the U.S. swap, commodities and futures markets. The CFTC has implemented, and is in the process of implementing, rules and regulations governing reporting, execution and margin requirements for swaps entered into within the U.S. or by U.S. persons. Our swap activities conducted by Global Capital Markets are subject to these rules and regulations.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank): Dodd-Frank has effected comprehensive changes to financial services regulation and subjects us, or will subject us, as applicable, to additional federal regulation, including:
•minimum capital requirements for SLHCs and insured depository institutions;
•enhanced prudential standards for SIFIs (including minimum leverage and risk-based capital requirements, stress tests and an early remediation regime process);
•prohibitions on proprietary trading; and
•increased regulation and restrictions on derivatives markets and transactions.
AIG 2013 Form 10-K
Table of Contents
ITEM 1 / BUSINESS
U.S. State Regulation
State Insurance Regulators: Our insurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which they do business. Regulation is generally derived from statutes that delegate supervisory and regulatory powers to a state insurance regulator, and primarily relates to the insurer's financial condition, corporate conduct and market conduct activities.
NAIC Standards: The National Association of Insurance Commissioners (NAIC) is a standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. The NAIC itself is not a regulator, but through the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate regulatory oversight.
Foreign Regulation
Financial Stability Board (FSB): Consists of representatives of national financial authorities of the G20 nations. The FSB itself is not a regulator, but it coordinates the work of national financial authorities and international standard-setting bodies and develops and promotes implementation of regulatory, supervisory and other financial policies.
International Association of Insurance Supervisors (IAIS): Represents insurance regulators and supervisors of more than 200 jurisdictions in nearly 140 countries and seeks to promote globally consistent insurance industry supervision. The IAIS itself is not a regulator, but the FSB has directed the IAIS to create standards on issues such as financial group supervision, capital and solvency standards, systemic economic risk and corporate governance and incorporate them into IAIS' Insurance Core Principles (ICPs). The FSB also charged IAIS with developing a template for measuring systemic risks posed by insurer groups. Based on IAIS' assessment template, the FSB identified AIG as a global systemically important insurer (G-SII), which may subject us to a policy framework that includes recovery and resolution planning requirements, enhanced group-wide supervision, basic capital requirements and higher loss absorbency capital requirements. The IAIS is also developing ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs), which includes additional supervisory oversight based on its ICPs but also adds requirements and supervisory processes pertaining to the international business activities of IAIGs. AIG currently meets the parameters set forth to define an IAIG.
European Union (EU): Certain financial services firms with regulated entities in the EU, such as us, are subject to supplementary supervision, which seeks to enable supervisors to perform consolidated banking supervision and insurance group supervision at the level of the ultimate parent entity. The objective of supplementary supervision is to detect, monitor, manage and control group risks. The UK Prudential Regulatory Authority, the United Kingdom's prudential regulator, is our EU supervisory coordinator. The EU has also established a set of regulatory requirements for EU derivatives activities under the European Market Infrastructure Regulation (EMIR) that include, among other things, risk mitigation, risk management and regulatory reporting, which are effective, and clearing requirements expected to become effective in 2014.
The EU's Solvency II Directive (2009/138/EEC) (Solvency II), which is expected to become effective in 2016, includes minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. The impact on us will depend on whether the U.S. insurance regulatory regime is deemed "equivalent" to Solvency II; if the U.S. insurance regulatory regime is not equivalent, then we could be subjected to Solvency II standards.
Regulation of Foreign Insurance Company Subsidiaries: Generally, our subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements. Our foreign operations are also regulated in various jurisdictions with respect to currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves, amount and type of capital to be held, amount and type of local investment and the share of profits to be returned to policyholders on participating policies. Some foreign countries also regulate rates on various types of policies.
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Federal Reserve Supervision
We are regulated by the FRB and subject to its examination, supervision and enforcement authority andcertain reporting requirements as a SLHCnonbank SIFI. Dodd-Frank requires that the Council reevaluate its determination annually; however, the Council’s 2014 and as2015 annual reevaluations did not result in a SIFI.
We are a SLHC withinchange to our nonbank SIFI status, and we remain regulated by the meaning of the Home Owners' Loan Act (HOLA). Because we were grandfathered as a unitary SLHC within the meaning of HOLA when we organized AIG Federal Savings Bank and became a SLHC in 1999, we generally are not restricted under existing laws as to the types of business activities in which we may engage, as long as AIG Federal Savings Bank continues to be a qualified thrift lender.FRB.
Dodd-Frank has effected comprehensive changes to the regulation of financial services in the United States and subjects us to substantial additional federal regulation. The FRB supervises and regulates SLHCs, and the OCC supervises and regulates federal savings associations, such as AIG Federal Savings Bank. Dodd-Frank directs existing and newly-creatednewly created government agencies and oversight bodies to promulgate regulations implementing the law, an ongoing process that has begunis under way and is anticipated to continue over the next few years.
Changes mandated by Dodd-Frank include directing the FRB to promulgate minimum capital requirements for SLHCs. The FRB, the OCC and the Federal Deposit Insurance Corporation (FDIC) have established revised minimum leverage and risk-based capital requirements, which are based on accords established by the Basel Committee on Banking Supervision, that apply to bank holding companies and SLHCs, as well as to insured depository institutions, such as AIG Federal Savings Bank. The requirements, however, do not apply to SLHCs that are substantially engaged in insurance underwriting activities. The FRB expects to implement a capital framework for SLHCs that are substantially engaged in insurance underwriting activities by the time covered SLHCs must comply with the requirements in 2015.
As required by Dodd-Frank, the FRB has also proposedadopted enhanced prudential standards (including minimum leverage and risk-based capital requirements, requirements to submit annual capital plans to the FRB demonstrating the ability to satisfy the required capital ratios under baseline and stressed conditions, and stress-testing requirements) for bank holding companies with $50 billion (and in some cases, $10 billion) or more in total consolidated assets and certain foreign banking organizations. The FRB has also adopted liquidity coverage ratio and supplemental leverage ratio requirements for a subset of large banking organizations. These requirements do not apply to nonbank SIFIs and has statedthat are predominantly insurers, such as AIG. Dodd-Frank authorizes the FRB to tailor its intention to proposeapplication of enhanced prudential standards to different companies on an individual basis or by category, and the FRB has indicated that it intends to assess the business model, capital structure and risk profile of nonbank SIFIs to determine how enhanced prudential standards should apply to them, and, if appropriate, to tailor the application of these standards for SLHCs pursuant to HOLA.nonbank SIFIs by order or regulation. We cannot predict whether the capital regulations will be adopted as proposed or what enhanced prudential standards the FRB will promulgate for SLHCs,nonbank SIFIs, either generally or as applicable to insurance businesses. Further, weThe FRB has exercised general examination, supervision and enforcement authority over us as a nonbank SIFI since July 2013. We cannot predict how the FRB willFRB’s continuing exercise of its general supervisory authority over us as a nonbank SIFI will develop, although the FRB could, as a prudential matter, for example, limit our ability to pay dividends, repurchase shares of AIG Common Stock or acquire or enter into other businesses. We cannot predict with certainty the requirements of the regulations ultimately adopted or how or whether Dodd-Frank and such regulations will affect the financial markets generally, impact our businesses, results of operations, cash flows or financial condition, or require us to raise additional capital or result in a downgrade of our credit ratings.
On July 8, 2013, AIG received notice from the U.S. Treasury Congress also clarified that the Financial Stability Oversight Council (Council)FRB has made a final determination that AIG should be supervised bythe flexibility to tailor capital rules specifically for certain insurance activities
and is not bound to impose capital standards and quantitative requirements generally applicable to insured depository institutions and bank holding companies. We cannot predict with certainty, however, what capital rules the FRB may impose on insurers designated as a SIFI pursuant to Dodd-Frank. As a SIFI, we are regulated by the FRB both in that capacity and, for as long as AIG continues to control an insured depository institution, in our capacity as a SLHC. The regulations applicable to SIFIs and to SLHCs, when all have been adopted as final rules, may differ materially from each other. AIG is working to restructure AIG Federal Savings Bank into a trust-only thrift and deregister AIG as a SLHC.nonbank SIFIs.
As a nonbank SIFI, we anticipate we will be subject to:
•
- stress tests to determine whether, on a consolidated basis, we have the capital necessary to absorb losses due to adverse economic conditions;
•
•stricterenhanced prudential standards, including stricternew group-wide requirements and limitations relating to risk-based capital, leverage, liquidity and credit exposure, as well as overall risk management requirements, requirements;•management interlock prohibitions and a requirement to maintain a plan for rapid and orderly resolution in the event of severe financial distress;distress (requirements that we are already subject to); and
•
•- an early remediation regime process to be administered by the FRB.
Furthermore, if the Council were to make an additional separate determination that AIG poses a "grave threat"“grave threat” to U.S. financial stability, we would be required to maintain a debt-to-equity ratio of no more than 15:1 and the FRB may:
•limit our ability to merge with, acquire, consolidate with, or become affiliated with another company;
•restrict our ability to offer specified financial products;
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•require us to terminate specified activities;
•- may impose
conditions on how we conduct our activities; and
•with approval of the Council, and a determination that the foregoing actions are inadequate to mitigate a threat to U.S. financial stability, require us to sell or otherwise transfer assets or off-balance-sheet items to unaffiliated entities.
additional restrictions.As part of its general prudential supervisory powers, the FRB has the authority to limit our ability to conduct activities that would otherwise be permissible for us to engage in if we do not satisfy certain requirements.
Volcker Rule
On December 10, 2013, In addition, if we were to seek to acquire a stake in certain financial companies, Dodd-Frank would require us to obtain the FRB, OCC, FDIC, SEC and CFTC adopted the final rule implementing Section 619 of Dodd-Frank, referred to as the "Volcker Rule." For as long as AIG Federal Savings Bank continues to be a qualified thrift lender, we and our affiliates are considered banking entities for purposesprior authorization of the rule and, after the end of the rule's conformance period in July 2015 (subject to extension by the FRB until 2017), would be prohibited from "proprietary trading" and sponsoring or investing in "covered funds," subject to the rule's exceptions. The term "covered funds" includes hedge, private equity or similar funds and, in certain cases, issuers of asset-backed securities if such securities have equity-like characteristics. The Volcker Rule, as adopted, contains an exemption for proprietary trading and "covered fund" sponsorship or investment by a regulated insurance company or its affiliate for the general account of the regulated insurance company or a separate account established by the regulated insurance company. Even if we no longer control an insured depository institution, however, Dodd-Frank authorizes the FRB to subject SIFIs to additional capital requirements and quantitative limitations if they engage in activities prohibited for banking entities under the Volcker Rule.FRB.
Other Effects of Dodd-Frank
In addition, Dodd-Frank may also have the following effects on us:
•
- As a nonbank SIFI, we
will beare currently required to provide to regulatorson an annual basis (or more frequently, if required) to the FRB and FDIC a plan for our rapid and orderly resolution in the event of material financial distress or failure, which must, among other things, ensure that AIG Federal Savings Bank is adequately protected from risks arising from our other entities and meet several specific standards, including requiringprovide a detailed resolution strategy and analyses of our material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements.systems. Our original resolution plan was submitted to regulators on July 1, 2014, and our second resolution plan on December 31, 2015. We continue to refine and update our resolution plan, which is next required to be submitted to regulators on December 31, 2016. If the FRB and FDIC jointly determine, based on their review of the plan, that it is not credible or would not facilitate our orderly resolution under Title 11 of the United States Code (the Bankruptcy Code), they may require us to re-submit an amended plan. If the re-submitted plan also fails to meet regulatory expectations, the FRB and FDIC may exercise their authority under Dodd-Frank to impose more stringent capital, leverage, or liquidity requirements, restrict our growth, activities, or operations, require us to divest assets and operations, or otherwise increase their level of supervision of us.
•
•- The Council may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices that we and other insurers or other financial services companies engage in.
•
•- Title II of Dodd-Frank provides that a financial company whose largest United States subsidiary is an insurer (such as us) may be subject to a special
liquidationresolution process outside the federal bankruptcy code.Bankruptcy Code. That process is to be administered by the FDIC upon a coordinated determination byof the Secretary of the Treasury (the Secretary), in consultation with the President, and upon the written recommendation of the director of the Federal Insurance Office and the FRB, in consultation with the FDIC, that, such a financial companyamong other things, it is in default or in danger of default, that the insurer is not likely to attract private sector alternatives to default, and presents a systemic risk to U.S. financial stability.is not suitable for resolution under the Bankruptcy Code.
•
•- Title VII of Dodd-Frank provides for significantly increased regulation of and restrictions on derivatives markets and transactions that could affect various activities of AIG and its insurance and financial services subsidiaries, including (i) regulatory reporting for swaps (which are regulated by the CFTC) and security-based swaps (which are regulated by the SEC), (ii) mandated clearing through central counterparties and execution through regulated
exchanges or electronicswap execution facilities for certain swaps and security-based swaps and (iii) margin and collateral requirements. Although theThe CFTC has not yet finalized certain many of its
requirements, many other requirements have taken effect, such asincluding swap reporting, the mandatory clearing of certain interest rate swaps and credit default swaps, margin requirements for uncleared swaps, and the mandatory trading of certain swaps on swap execution facilities or exchanges starting in February 2014.facilities. The SEC has proposed but not yet finalized,certain rules with respect to certain of the regulations and restrictions noted above.above governing security-based swaps but has yet to finalize the majority of rules comprising its security-based swap regulatory regime. These regulations have affected and may further affect various activities of AIG and its insurance and financial services subsidiaries as further rules are finalized to implement additional elements of the regulatory regime.AIG 2013 Form 10-K
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Similar regulations have been proposed or adopted outside the United States. For instance, the EU has also established a set of new regulatory requirements for EU derivatives activities under EMIR. These requirements include, among other things, various risk mitigation, risk management and regulatory reporting requirements that have already become effective and clearing requirements that were outlined in EU delegated legislation at the end of 2015, and are expected to become effectivephased in 2014.over three years. These requirements could result in increased administrative costs with respect to our EU derivatives activities and overlapping or inconsistent regulation depending on the ultimate application of cross-border regulatory requirements between and among U.S. and non-U.S. jurisdictions.
•
Dodd-Frank mandated a study to determine whether stable value contracts should be included in the definition of "swap." If that study concludes that stable value contracts are swaps, Dodd-Frank authorizes certain federal regulators to determine whether an exemption from the definition of a swap for stable value contracts is appropriate and in the public interest. Certain of our affiliates participate in the stable value contract business. We cannot predict what regulations might emanate from the aforementioned study or be promulgated applicable to this business in the future.
•
•Dodd-Frank established a Federal Insurance Office (FIO) within the United States Department of the Treasury (Department of the Treasury) headed by a director appointed by the Secretary of the Treasury. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office performs various functions with respect to insurance (other than health insurance), including serving as a non-voting member of the Council .Council. On December 12, 2013, the FIO released a Dodd-Frank mandated study on how to modernize and improve the system of insurance regulation in the United States. The report concludedlisted several actions that states could take to improve the uniformity and efficiency of the current state based regulatory system could be improved and highlighted certain areas in which Federal involvement is recommended. In the near-term, theThe FIO recommended that the states undertake reforms regarding capital adequacy, reform of insurer resolution practices, and marketplace regulation. On November 20, 2015, the Department of Treasury and the United States Trade Representative announced their intention to negotiate an agreement between the U.S. and the EU regarding prudential measures with respect to insurance and reinsurance.
•
•Dodd-Frank established the Consumer Financial Protection Bureau (CFPB) as an independent agencybureau within the FRB to regulate consumer financial products and services offered primarily for personal, family or household purposes. Insurance products and services are not within the CFPB's general jurisdiction, although the U.S. Department of Housing and Urban Development has since transferred authority to the CFPB to investigate mortgage insurance practices. Broker-dealers and investment advisers are not subject to the CFPB's jurisdiction when acting in their registered capacity.
•
•Title XIV of Dodd-Frank also restricts certain terms for mortgage loans, such as loan fees, prepayment fees and other charges, and imposes certain duties on a lender to ensure that a borrower can afford to repay the loan.Dodd-Frank imposes various assessments on financial companies, including, as applicable to us, ex-postfees for our supervision by the FRB and assessments to provide funds necessary to repay any borrowing and to cover the costs of any special resolution of a financial company conducted under Title II (although the regulatory authority would have to take account of the amounts paid by us into state guaranty funds).
We cannot predict whether these actions will become effective or the effect they may have on the financial markets or on our business, results of operations, cash flows, financial condition and credit ratings. However, it is possible that such effect could be materially adverse. See Item 1A. Risk Factors — Regulation for additional information.
Other Regulatory Developments
As described below, AIG has been designated as a Global Systemically Important Insurer (G-SII).
In addition to the adoption of Dodd-Frank in the United States, regulators and lawmakers around the world are actively reviewingcontinuing to review the causes of the financial crisis and taking steps to avoid similar problems in the future. The FSB, consisting of representatives of national financial authorities of the G20 nations, has issued a series of frameworks and recommendations intended to produce significant changes in how financial companies, particularly global systemically important financial institutions, should be regulated. These frameworks and recommendations address such issues as financial group supervision, capital and solvency standards, systemic economicfinancial risk, corporate governance including compensation, and a number of related issues associated with responses to the financial crisis. The FSB has directed the International Association of Insurance Supervisors (the IAIS headquartered in Basel, Switzerland) to create standards relative to many of these areas and incorporate them within that body's Insurance Core Principlesareas. These new measures go beyond IAIS’ existing set of insurance core principles (ICPs). IAIS'sThe ICPs form the baseline threshold against which countries'countries’ financial services regulatory efforts inregimes specific to the insurance sector are measured. That measurement is made by periodic Financial Sector Assessment Program
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(FSAP) reviews conducted by the World BankInternational Monetary Fund and the International Monetary FundWorld Bank and the reports thereon spur the development of country-specific additional or amended regulatory changes. Lawmakers and regulatory authorities in a number of jurisdictions in which our subsidiaries conduct business have, already begun implementingin the past few years, implemented legislative and regulatory changes consistent with these recommendations, including, proposals governingfor example, updated Insurance Company Ordinances in Hong Kong and consolidated regulation of insurance holding companies by the Financial Services Agency in Japan, financial and banking regulation adopted in France and compensation regulations proposed or adopted by the financial regulators in Germany and the United Kingdom Prudential Regulation Authority.Japan.
The FSB has also charged the IAIS with developing a templateframework for measuring systemic risks posed by insurer groups. The IAIS has requested data from selected insurers around the world to determine which elements of the insurance sector, if any, could materially and adversely impact other parts of the global financial services sector (e.g., commercial and investment banking, securities trading, etc.). The IAIS has provided its assessment template to the FSB. Based on thisthe IAIS’s assessment template,methodology for identifying G-SIIs, on July 18, 2013, the FSB, in consultation with the IAIS and national authorities, identified an initial list of nine G-SIIs, which includesincluded AIG. G-SIIs are designated on an annual basis, and AIG was re-designated as a G-SII by the FSB on November 6, 2014, and again on November 3, 2015. The IAIS released a public consultation document in November 2015, outlining proposed revisions to the 2013 methodology for identifying G-SIIs. The IAIS intends G-SIIs to be subject to a policy framework that includes recovery and resolution planning, requirements, enhanced group-wide supervision, basicenhanced liquidity and systemic risk management planning; and group-wide capital requirements and higher loss absorbency (HLA) capital requirements.standards, including HLA capital. The IAIS is currently developing aIAIS’ basic capital requirement (BCR), which it expects to finalizefinalized in October 2014, was endorsed by the end ofFSB in October 2014 and by the G20 nations in November 2014. The BCR is expected to covercovers all group activities, and could be implemented bywith AIG reporting its BCR ratios to national authorities as soon ason a confidential basis beginning in 2015. The BCR will also serveserves as athe initial foundation for the application of HLA capital requirements, whichHLA. In October 2015, the IAIS intendsannounced that it had concluded initial development of the HLA requirements for G-SIIs, which will be reported on a confidential basis to focus on non-traditionalgroup-wide supervisors beginning in 2016. HLA was endorsed by the FSB in September 2015 and by the G20 nations in November 2015. Both the BCR and HLA are calculated for insurance and non-insurance activities. It is expected thatIn particular, the IAIS will develop HLA capital requirements byreleased another public consultation in November 2015 on “Non-traditional Non-insurance Activities and Products.” The notion of non-traditional non-insurance activities and products plays a significant role in the endassessment methodology for designating G-SIIs and in the determination of 2015the BCR and the HLA. Ultimately, the G-SII policy framework willis expected to be fully implemented by the IAIS by 2019.
The IAIS is also developing a ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs), which includes additionalsets out qualitative and quantitative standards designed to assist supervisors in collectively addressing an IAIG’s activities and risks, identifying and avoiding regulatory gaps and coordinating supervisory oversight based on its ICPs but also adds requirements and supervisory processes pertainingactivities. In connection with ComFrame, the IAIS is in the process of developing a risk-based global ICS applicable to the international business activities of IAIGs. As currently delineateddefined under the ComFrame, AIG meets the parameters set forth to define an IAIG. While we currently do not know when any ComFrame requirements willstandards are expected to be finalized in 2019, and become effective, the IAIS will undertake ais conducting field testing of the ComFrame, including the possibilityICS, ahead of additional capital requirements for IAIGs, which is expected to commence in the beginning of 2014.that deadline. It is expected that implementation of ComFrame and the ComFrameICS would begin in 2019.2020.
The standards discussed above, issued by the FSB and/or the IAIS, are not binding on the United States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations. At this time it is not known how the IAIS’s frameworks and/or standards might be implemented in the United States and other jurisdictions around the world, or how they might apply to AIG.
Legislation in the European Union could also affect our international insurance operations. The Solvency II, Directive (2009/138/EEC) (Solvency II), which was adoptedbecame effective on November 25, 2009 and is expected to become effective inJanuary 1, 2016, reforms the insurance industry'sindustry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. In accordance with Solvency II, is expected to be accompaniedin the absence of decision by Omnibus II, an EU proposal for a directive that also contains provisions for the capital treatment of products with long-term guarantees. Additionally, the European Insurance and Occupational Pensions Authority recently introduced interim guidelines effective JanuaryCommission on whether a supervisory regime outside of the EU is equivalent,
Member States with a frameworkmay decide either to ensure that insurers make demonstrable progress towards meetingapply relevant Solvency II requirements to a worldwide insurance group operating in 2016. Thethe EU as if it were based in the European Economic Area, or to use “other methods”. Firms have to apply for a waiver to the appropriate EU regulator in order for the regulator to use “other methods.” AIG’s UK subsidiary, AIG Europe Limited, has applied to the PRA and been granted a waiver to allow the PRA to use “other methods.” Over the long-term, the impact on us will depend on whether the U.S. insurance regulatory regime is deemed "equivalent"“equivalent” to Solvency II; if the U.S. insurance regulatory regime is not equivalent thenand no other agreement addressing these differences is reached with the EU, we, along with other U.S.-based insurance companies, could be required to be supervised under Solvency II standards. On November 20, 2015, the Department of the Treasury and the United States Trade Representative announced their intention to negotiate an agreement between the U.S. and the EU, and that in these negotiations they would seek to obtain, among other things, treatment of the U.S. insurance regulatory system as “equivalent” for purposes of Solvency II. The European Commission has granted “provisional equivalence” with respect to the “solvency calculation” area of Solvency II to the insurance regulation regime of several countries, including the United States. The provisional equivalence, granted for a period of 10 years, will allow EU insurers with subsidiaries operating in these countries to use local rules, rather than Solvency II rules, to carry out their EU prudential reporting for these subsidiaries, and as such is not applicable to U.S. insurers such as AIG. This decision will take effect following the review by the European Parliament and the European Council. Whether the U.S. insurance regulatory regime will be deemed "equivalent"“equivalent” as relating to U.S. insurers such as AIG is still under consideration by European authorities and remains uncertain, so we are not currently able to predict the impact of Solvency II.
ERISA Considerations
We provide products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA) or the Internal Revenue Code of 1986, as amended (the Internal Revenue Code). Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans. As a result, our activities are subject to the restrictions imposed by ERISA and the Internal Revenue Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that fiduciaries may not cause a covered plan to engage in certain prohibited transactions. The prohibited transaction rules of ERISA and the Internal Revenue Code generally restrict the provision of investment advice to ERISA plans and participants and Individual Retirement Account (IRA) holders if the investment recommendation results in fees paid to the individual advisor, his or her firm or their affiliates that vary according to the investment recommendation chosen. ERISA also provides for civil and criminal penalties and enforcement.
The U.S. Department of Labor (DOL) proposed a new regulation in April 2015 that would, if enacted, substantially expand the definition of "investment advice," which would substantially expand the range of activities considered to be fiduciary investment advice under ERISA and the Internal Revenue Code. In connection with the proposed regulation, the DOL also proposed amendments to its prohibited transaction exemption under ERISA that would, among other things, apply more extensive disclosure and contract requirements, and increased fiduciary requirements, for transactions involving ERISA plans, plan participants and IRA holders. On January 28, 2016, the DOL submitted its final version of the proposed regulation to the Office of Management and Budget for review. The proposed regulation is subject to potential modification before the final rule, if any, is issued. It is unknown at this time whether or how any final regulation may be different from that proposed, and what the timing for implementation of compliance requirements would be, if adopted. For additional information, see Item 7. MD&A — Executive Overview - Consumer Insurance Strategic Initiatives and Outlook.
We expect that the regulations applicable to us and our regulated entities will continue to evolve for the foreseeable future.
Regulation of Insurance Subsidiaries
Certain states and other jurisdictions require registration and periodic reporting by insurance companies that are licensed in such jurisdictions and are controlled by other corporations.entities. Applicable legislation typically requires periodic disclosure concerning the corporationentity that controls the registered insurer and the other companies in the holding company system and prior approval of intercompany services and transfers of assets, including in some instances payment of dividends by the insurance subsidiary, within the holding company system. Our subsidiaries are registered under such legislation in those jurisdictions that have such requirements.
Our insurance subsidiaries are subject to regulation and supervision by the states and by other jurisdictions in which they do business. Within the United States, the method of such regulation varies but generally has its source in
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statutes that delegate regulatory and supervisory powers to an insurance official. The regulation and supervision relate primarily to the financial condition of the insurers and their corporate conduct and market conduct activities. This includes approval of policy forms and rates, the standards of solvency that must be met and maintained, including with respect to risk-based capital, the standards on transactions between insurance company subsidiaries and their affiliates, including restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks that may be insured under a single policy, deposits of securities for the benefit of policyholders, requirements for acceptability of reinsurers, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses and other purposes.purposes and enterprise risk management and corporate governance requirements. In general, such regulation is for the protection of policyholders rather than the equity owners of these companies.
In the U.S., the Risk-Based Capital (RBC) formula is designed to measure the adequacy of an insurer's statutory surplus in relation to the risks inherent in its business. Virtually every state has adopted, in substantial part, the RBC Model Law promulgated by the NAIC, which allows states to act upon the results of RBC calculations, and provides for four incremental levels of regulatory action regarding insurers whose RBC calculations fall below specific thresholds. Those levels of action range from the requirement to submit a plan describing how an insurer would regain a calculatedspecified RBC ratio above the respective threshold throughto a mandatory regulatory takeover of the company. The action thresholds are based on RBC levels that are calculated so that a company subject to such actions is solvent but its future solvency is in doubt without some type of corrective action. The RBC formula computes a risk-adjusted surplus level by applying discrete factors to various asset, premium and reserve items. These factors are developed to be risk-sensitive so that higher factors are applied to items exposed to greater risk. The statutory surplus of each of our U.S.-based life and property and casualtyU.S. based insurance subsidiariescompanies exceeded RBC minimum required levels as of December 31, 2013.2015.
If any of our insurance entities fell below prescribed levels of statutory surplus, it would be our intention to provide appropriate capital or other types of support to that entity, under formal support agreements or capital maintenance agreements (CMAs) or otherwise.entity. For additional details regarding CMAs that we have entered into with our insurance subsidiaries,information, see Item 7. MD&A — Liquidity and Capital Resources — Liquidity and Capital Resources of AIG Parent and Subsidiaries — AIG Property Casualty — AIG Life and RetirementNon-Life Insurance Companies and — Other Operations — Mortgage Guaranty.Life Insurance Companies.
The NAIC'sNAIC’s Model Regulation "Valuation“Valuation of Life Insurance Policies"Policies” (Regulation XXX) requires insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs. See Item 1A —– Risk Factors and Note 1918 to the Consolidated Financial Statements for risks and additional information related to these statutory reserving requirements. Additionally, the NAIC has adopted a Principle-Based Reserving (PBR) approach for life insurance products, which will become operational once adopted in 42 U.S. jurisdictions accounting for at least 75 percent of U.S. insurance premiums combined. Once it becomes operational, PBR would replace Regulation XXX and Guidelines AXXX with respect to new life insurance business issued. Two of our domiciliary states (Missouri and Texas) have adopted regulations necessary to implement PBR once the required number of jurisdictions and insurance premiums threshold have been satisfied.
The NAIC has undertaken the Solvency Modernization Initiative (SMI) which focuses on a review of insurance solvency regulations throughout the U.S. financial regulatory system and is expected to lead to a set of long-term solvency modernization goals. SMI is broad in scope, but the NAIC has stated that its focus will include the U.S. solvency framework, group solvency issues, capital requirements, international accounting and regulatory standards, reinsurance and corporate governance.
The NAIC has adopted revisions to the NAIC Insurance Holding Company System Regulatory Act (the Model Holding Company Act) and the Insurance Holding Company System Model Regulation. The revised models include provisions authorizing NAIC commissioners to act as global group-wide supervisors for internationally active insurance groups, and the requirement that the ultimate controlling person of a U.S. insurer file an annual enterprise risk report with the lead state of the insurer identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. To date, a majority of the states where AIG has domestic insurers have enacted a version of the revised Model Holding Company Act, including the enterprise risk reporting requirement.
A substantial portion of AIG Property Casualty'sour business is conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies. Generally, our subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements, licenses issued by foreign authorities to our subsidiaries are subject to modification or revocation by such authorities, and therefore these subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate.
In addition to licensing requirements, our foreign operations are also regulated in various jurisdictions with respect to currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves, amount and type of capital to be held, amount and type of local investment and the share of profits to be returned to policyholders on participating policies. Some foreign countries regulate rates on various types of policies. Certain countries have established reinsurance institutions, wholly or partially owned by the local government, to which admitted insurers are obligated to cede a portion of their business on terms that may not always allow foreign insurers, including our subsidiaries, full compensation. In some countries, regulations governing constitution of technical reserves and remittance balances may hinder remittance of profits and repatriation of assets.
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See Item 7. MD&A — Liquidity and Capital Resources — Regulation and Supervision and Note 1918 to the Consolidated Financial Statements.
OUR COMPETITIVE ENVIRONMENT
Our businesses operate in a highly competitive global environment. Principal sources of competition are insurance companies, banks, and other non-bank financial institutions. We consider our principal competitors to be other large multinational insurance organizations. We describe our competitive strengths, our strategies to retain existing customers and attract new customers within each of our operating business segment descriptions.
OUR EMPLOYEES
At December 31, 2013, we had approximately 64,000 employees. We believe that our relations with our employees are satisfactory.
* Includes approximately 600 employees of ILFC, which was held for sale at December 31, 2013.
AIG 2013 Form 10-K
Table of Contents
ITEM 1 / BUSINESS
DIRECTORS AND EXECUTIVE OFFICERS OF AIG
Information concerning the directors and executive officers of AIG as of February 20, 2014 is set forth below.
| | | | | | |
| |
Name
| | Title
| | Age
| | Served as
Director or
Officer Since
| |
|---|
| | |
Robert H. Benmosche | | Director, President and Chief Executive Officer | | 69 | | 2009 | |
W. Don Cornwell | | Director | | 66 | | 2011 | |
John H. Fitzpatrick | | Director | | 57 | | 2011 | |
William G. Jurgensen | | Director | | 62 | | 2013 | |
Christopher S. Lynch | | Director | | 56 | | 2009 | |
Arthur C. Martinez | | Director | | 74 | | 2009 | |
George L. Miles, Jr. | | Director | | 72 | | 2005 | |
Henry S. Miller | | Director | | 68 | | 2010 | |
Robert S. Miller | | Chairman | | 72 | | 2009 | |
Suzanne Nora Johnson | | Director | | 56 | | 2008 | |
Ronald A. Rittenmeyer | | Director | | 66 | | 2010 | |
Douglas M. Steenland | | Director | | 62 | | 2009 | |
Theresa M. Stone | | Director | | 69 | | 2013 | |
Michael R. Cowan | | Executive Vice President and Chief Administrative Officer | | 60 | | 2011 | |
William N. Dooley | | Executive Vice President – Investments | | 60 | | 1992 | |
John Q. Doyle | | Executive Vice President – Commercial Property and Casualty Insurance | | 50 | | 2013 | |
Peter D. Hancock | | Executive Vice President – Property and Casualty Insurance | | 55 | | 2010 | |
David L. Herzog | | Executive Vice President and Chief Financial Officer | | 54 | | 2005 | |
Kevin T. Hogan | | Executive Vice President – Consumer Insurance | | 51 | | 2013 | |
Jeffrey J. Hurd | | Executive Vice President – Human Resources and Communications | | 47 | | 2010 | |
Thomas A. Russo | | Executive Vice President and General Counsel | | 70 | | 2010 | |
Siddhartha Sankaran | | Executive Vice President and Chief Risk Officer | | 36 | | 2010 | |
Brian T. Schreiber | | Executive Vice President and Deputy AIG Chief Investment Officer | | 48 | | 2002 | |
Jay S. Wintrob | | Executive Vice President – Life and Retirement | | 56 | | 1999 | |
Charles S. Shamieh | | Senior Vice President and Chief Corporate Actuary | | 47 | | 2011 | |
| |
All directors of AIG are elected for one-year terms at the annual meeting of shareholders.
All executive officers are elected to one-year terms, but serve at the pleasure of the Board of Directors. Except for the following individuals below, each of the executive officers has, for more than five years, occupied an executive position with AIG or companies that are now its subsidiaries. There are no arrangements or understandings between any executive officer and any other person pursuant to which the executive officer was elected to such position.
Robert Benmosche joined AIG as Chief Executive Officer in August 2009. Previously, he served as Chairman and Chief Executive Officer of MetLife, Inc. from September 1998 to February 2006 (Chairman until April 2006). He served as President of MetLife, Inc. from September 1999 to June 2004, President and Chief Operating Officer from November 1997 to June 1998, and Executive Vice President from September 1995 to October 1997. He has been a director of ILFC, our wholly-owned subsidiary, since June 2010. Mr. Benmosche served as a member of the Board of Directors of Credit Suisse Group from 2002 to April 2013.
Michael R. Cowan joined AIG as Senior Vice President and Chief Administrative Officer in January 2010. Prior to joining AIG, he was at Merrill Lynch where he had served as Senior Vice President, Global Corporate Services, since 1998. Mr. Cowan began his career at Merrill Lynch in 1986 as a Financial Manager and later served as Chief Administrative Officer for Europe, the Middle East and Africa. He was also Chief Financial Officer and a member of the Executive Management Committee for the Global Private Client business, including Merrill Lynch Asset Management.
Thomas Russo joined AIG as Executive Vice President — Legal, Compliance, Regulatory Affairs and Government Affairs and General Counsel in February 2010. Prior to joining AIG, Mr. Russo was with the law firm of Patton Boggs, LLP, where he served as Senior Counsel. Prior to that, he was Chief Legal Officer of Lehman Brothers Holdings, Inc. Before joining Lehman Brothers in 1993, he was a partner at the law firm of Cadwalader, Wickersham & Taft and a member of its Management Committee.
AIG 2013 Form 10-K
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ITEM 1 / BUSINESS
Peter Hancock joined AIG in February 2010 as Executive Vice President of Finance and Risk. Prior to joining AIG, Mr. Hancock served as Vice Chairman of KeyCorp, responsible for Key National Banking. Prior to KeyCorp, he served as Managing Director of Trinsum Group, Inc. Prior to that position, Mr. Hancock was at JP Morgan for 20 years, eventually serving as head of its fixed income division and ultimately Chief Financial Officer.
Siddartha Sankaran joined AIG in December 2010 as Senior Vice President and Chief Risk Officer. Prior to that, he was a partner in the Finance and Risk practice of Oliver Wyman Financial Services and served as Canadian Market Manager since 2006.
Kevin T. Hogan joined AIG as Chief Executive Officer of AIG Global Consumer Insurance in October 2013. Mr. Hogan joined Zurich Insurance Group in December 2008, serving as Chief Executive Officer of Global Life Americas until June 2010 and as Chief Executive Officer of Global Life from July 2010 to August 2013. From 1984 to 2008, Mr. Hogan held various positions with AIG, including Chief Operating Officer of American International Underwriters, AIG's Senior Life Division Executive for China and Taiwan and Chief Distribution Officer, Foreign Life and Retirement Services.
AVAILABLE INFORMATION ABOUT AIG
Our corporate website iswww.aig.comwww.aig.com.. We make available free of charge, through the Investor Information section of our corporate website, the following reports (and related amendments as filed with the SEC) as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC:
•
- Annual Reports on Form 10-K
•
•- Quarterly Reports on Form 10-Q
•
•- Current Reports on Form 8-K
•
•- Proxy Statements on Schedule 14A, as well as other filings with the SEC
Also available on our corporate website:
•
- Charters for Board Committees:Audit, Nominating and Corporate Governance, Compensation and Management Resources,
FinanceRisk and Risk Management,Capital, Regulatory, Compliance and Public Policy, and Technology Committees
•
•- Corporate Governance Guidelines(which include Director Independence Standards)
•
•- Director, Executive Officer and Senior Financial Officer Code of Business Conduct and Ethics (we will post on our website any amendment or waiver to this Code within the time period required by the SEC)
•
•- Employee Code of Conduct
•
•Related-PartyRelated‑Party Transactions Approval Policy
Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K. Reference to our website is made as an inactive textual reference.
AIG 2013 Form 10-K
ITEM 1A / RISK FACTORSFACTORs
Investing in AIG involves risk. In deciding whether to invest in AIG, you should carefully consider the following risk factors. Any of these risk factors could have a significant or material adverse effect on our businesses, results of operations, financial condition or liquidity. They could also cause significant fluctuations and volatility in the trading price of our securities. Readers should not consider any descriptions of these factors to be a complete set of all potential risks that could affect AIG. These factors should be considered carefully together with the other information contained in this report and the other reports and materials filed by us with the Securities and Exchange Commission (SEC). Further, many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a combination could materially increase the severity of the impact of these risks on our businesses, results of operations, financial condition and liquidity.
MARKET CONDITIONS
Difficult conditions in the global capital markets and the economy may materially and adversely affect our businesses, results of operations, financial condition and liquidity.Our businesses are highly dependent on the economic environment, both in the U.S. and around the world. Extreme market events, such as the global financial crisis during 2008 and 2009, have at times led, and could in the future lead, to a lack of liquidity, highly volatile markets, a steep depreciation in asset values across all classes, an erosion of investor and public confidence, and a widening of credit spreads. Concerns and events beyond our control, such as uncertainty as to the U.S. debt ceiling, the continued funding of the U.S. government, U.S. fiscal and monetary policy, the U.S. housing market, oil prices, slowing growth in China and the Euro-Zone economies, concerns about European sovereign debt risk and the European banking industry and declines in prices in the high yield market and the resultant impact on certain funds have in the past, and may in the future, adversely affect liquidity, increase volatility, decrease asset prices, erode confidence and lead to wider credit spreads. Difficult economic conditions could also result in increased unemployment and a severe decline in business across a wide range of industries and regions. These market and economic factors could have a material adverse effect on our businesses, results of operations, financial condition and liquidity.
Under difficult economic or market conditions, we could experience reduced demand for our products and an elevated incidence of claims, increased policy cancellations and lapses or surrenders of policies. Contract holders may choose to defer or cease paying insurance premiums. Other ways in which we could be negatively affected by economic conditions include, but are not limited to:
•
declines in the valuation and performance of our investment portfolio, including declines attributable to rapid increases in interest rates;
•
•increased credit losses;
•
•declines in the value of other assets;
•
•impairments of goodwill and other long-lived assets;
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•additional statutory capital requirements;
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•limitations on our ability to recover deferred tax assets;
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•a decline in new business levels and renewals;
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•a decline in insured values caused by a decrease in activity at client organizations;
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•an increase in liability for future policy benefits due to loss recognition on certain long-duration insurance contracts;
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•higher borrowing costs and more limited availability of credit;
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•an increase in policy surrenders and cancellations; and
•
•a write-off of deferred policy acquisition costs (DAC).Sustained low interest rates may materially and adversely affect our profitability.Recent periods have been characterized by low interest rates relative to historical levels.Sustained low interest rates can negatively affect the
performance of our investment securities and reduce the level of investment income earned on our investment
AIG 2013 Form 10-K
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ITEM 1A / RISK FACTORS
portfolios. If a low interest rate environment persists, we may experience slowerlower investment income growth. Due to practical and capital markets limitations, we may not be able to fully mitigate our interest rate risk by matching exposure of our assets relative to our liabilities. Continued low interest rates could also impair our ability to earn the returns assumed in the pricing and the reserving for our products at the time they were sold and issued.
INVESTMENT PORTFOLIO, CONCENTRATION OF INVESTMENTS, INSURANCE AND OTHER EXPOSURES Changes in interest rates may be correlated with inflation trends, which would impact our loss trends.
Investment Portfolio, Concentration of Investments, Insurance and other Exposures
The performance and value of our investment portfolio are subject to a number of risks and uncertainties, including changes in interest rates.rates. Our investment securities are subject to market risks and uncertainties. In particular, interest rates are highly sensitive to many factors, including monetary policies,policy, domestic and international economic and political issues and other factors beyond our control. Changes in monetary policy or other factors may cause interest rates to rise, which would adversely affect the value of the fixed income securities that we hold and could adversely affect our ability to sell these securities. In addition, the evaluation of available-for-sale securities for other-than-temporary impairments, which may occur if interest rates rise, is a quantitative and qualitative process that is subject to significant management judgment. For a sensitivity analysis of our exposure to certain market risk factors, see Item 7. MD&A —– Enterprise Risk Management —– Market Risk Management. Furthermore, our alternative investment portfolio includes investments for which changes in fair value are reported through operating income and are therefore subject to significant volatility. In an economic downturn or declining market, the reduction in our investment income due to decreases in the fair value of alternative investments could have a material adverse effect on operating income.
Our investment portfolio is concentrated in certain segments of the economy. Our results of operations and financial condition have in the past been, and may in the future be, adversely affected by the degree of concentration in our investment portfolio. We have concentrations in real estate and real estate-related securities, including residential mortgage-backed, commercial mortgage-backed and other asset-backed securities and commercial mortgage loans. We also have significant exposures to financial institutions and, in particular, to money center and global banks; certain industries, such as energy and utilities; U.S. state and local government issuers and authorities; PICC Group and PICC P&C, as a result of our strategic investments; and Euro Zone financial institutions, governments and corporations. Events or developments that have a negative effect on any particular industry, asset class, group of related industries or geographic region may adversely affect our investments to the extent they are concentrated in such segments. Our ability to sell assets concentrated in such areas may be limited.
Concentration of our insurance and other risk exposures may have adverse effects. We may be exposed to risks as a result of concentrations in our insurance policies, derivatives and other obligations that we undertake for customers and counterparties. We manage these concentration risks by monitoring the accumulation of our exposures byto factors such as exposure type, industry, geographic region, counterparty and other factors. We also seek to use reinsurance, hedging and other arrangements to limit or offset exposures that exceed the limits we wish to retain. In certain circumstances, however, these risk management arrangements may not be available on acceptable terms or may prove to be ineffective for certain exposures. Also, our exposure for certain single risk coverages and other coverages may be so large that even a slightly adverse experience compared to our expectations may have a material adverse effect on our consolidated results of operations or financial condition, or result in additional statutory capital requirements for our subsidiaries. Also see Item 7. MD&A – Executive Overview – Commercial Insurance Outlook and Strategic Initiatives.
Our valuation of fixed maturity and equityinvestment securities may include methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations, financial condition and liquidity.During periods of market disruption, it may be difficult to value certain of our investment securities if trading becomes less frequent and/or market data becomes less observable. There may be cases where certain assets in normally active markets with significant observable data become inactive with insufficient observable data due to the financial environment or market conditions in effect at that time. As a result, valuations may include inputs and assumptions that are less observable or require greater estimation and judgment as well as valuation methods that are more complex. These values may not be realized in a market transaction, may not reflect the loan value of the asset and may
change very rapidly as market conditions change and valuation assumptions are modified. Decreases in value and/or an inability to realize that value in a market transaction or secured lending transaction may have a material adverse effect on our results of operations, financial condition and liquidity.
AIG 2013 Form 10-KReserves and Exposures
TableInsurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses. We regularly review the adequacy of Contents
the established liability for unpaid losses and loss adjustment expenses and conduct extensive analyses of our reserves during the year. Our loss reserves, however, may develop adversely. Estimation of ultimate net losses, loss expenses and loss reserves is a complex process, particularly for long-tail casualty lines of business. These lines include, but are not limited to, general liability, commercial automobile liability, environmental, workers' compensation, excess casualty and crisis management coverages, insurance and risk management programs for large corporate customers and other customized structured insurance products, as well as excess and umbrella liability, Directors and Officers and products liability.
While we use a number of analytical reserve development techniques to project future loss development, reserves may be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves. For example, in the fourth quarter of 2015, we recorded a net charge of $3.6 billion to strengthen our Non-Life Insurance Companies' loss reserves, reflecting adverse development in classes of business with long reporting tails, primarily in U.S. & Canada casualty, U.S. & Canada financial lines and run-off lines. These changes in loss cost trends or loss development factors could be due to difficulties in predicting changes, such as changes in inflation, unemployment duration, or other social or economic factors affecting claims, including the judicial environment. Any deviation in loss cost trends or in loss development factors might not be identified for an extended period of time after we record the initial loss reserve estimates for any accident year or number of years. For a further discussion of our loss reserves, see Item 7. MD&A — Insurance Reserves —Non-Life Insurance Companies and Critical Accounting Estimates — Insurance Liabilities — Liability for Unpaid Losses and Loss Adjustment Expenses (Non-Life Insurance Companies).
ITEM 1A / RISK FACTORS
RESERVES AND EXPOSURES
Our consolidated results of operations, liquidity, financial condition and ratings are subject to the effects of natural and man-made catastrophic events. Events such as hurricanes, windstorms, flooding, earthquakes, acts of terrorism, explosions and fires, cyber crimes,cyber-crimes, product defects, pandemic and other highly contagious diseases, mass torts and other catastrophes have adversely affected our business in the past and could do so in the future. In addition, we recognize the scientific consensus that climate change is a reality of increasing concern, indicated by higher concentrations of greenhouse gases, a warming atmosphere and ocean, diminished snow and ice, and sea level rise. We understand that climate change potentially poses a serious financial threat to society as a whole, with implications for the insurance industry in areas such as catastrophe risk perception, pricing and modeling assumptions. Because there is significant variability associated with the impacts of climate change, we cannot predict how physical, legal, regulatory and social responses may impact our business.
Such catastrophic events, and any relevant regulations, could expose us to:
•
- widespread claim costs associated with property,
workers'workers’ compensation, A&H, business interruption and mortality and morbidity claims;
•
•- loss resulting from a decline in the value of our invested assets;
•
•- limitations on our ability to recover deferred tax assets;
•
•- loss resulting from actual policy experience that is adverse compared to the assumptions made in product pricing;
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•- declines in value and/or losses with respect to companies and other entities whose securities we hold and counterparties we transact business with and have credit exposure to, including reinsurers, and declines in the value of investments; and
•
•- significant interruptions to our systems and operations.
Catastrophic events are generally unpredictable. Our exposure to catastrophes depends on various factors, including the frequency and severity of the catastrophes, the rate of inflation and the value and geographic concentration of insured property
and people. Vendor models and proprietary assumptions and processes that we use to manage catastrophe exposure may prove to be ineffective due to incorrect assumptions or estimates.
In addition, legislative and regulatory initiatives and court decisions following major catastrophes could require us to pay the insured beyond the provisions of the original insurance policy and may prohibit the application of a deductible, resulting in inflated catastrophe claims.
For further details on potential catastrophic events, including a sensitivity analysis of our exposure to certain catastrophes, see Item 7. MD&A — Enterprise Risk Management — Insurance—Insurance Operations Risks — AIG Property Casualty Key Insurance Risks.
Insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses. We regularly review the adequacy of the established Liability for unpaid claims and claims adjustment expense and conduct extensive analyses of our reserves during the year. Our loss reserves, however, may develop adversely. Estimation of ultimate net losses, loss expenses and loss reserves is a complex process, particularly for long-tail casualty lines of business. These include, but are not limited to, general liability, commercial automobile liability, environmental, workers' compensation, excess casualty and crisis management coverages, insurance and risk management programs for large corporate customers and other customized structured insurance products, as well as excess and umbrella liability, D&O and products liability.
While we use a number of analytical reserve development techniques to project future loss development, reserves may be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves. These changes in loss cost trends or loss development factors could be due to difficulties in predicting changes, such as changes in inflation, the judicial environment, or other social or economic factors affecting claims. Any deviation in loss cost trends or in loss development factors might not be identified for an extended period of time after we record the initial loss reserve estimates for any accident year or number of years. For a further discussion of our loss reserves, see Item 7. MD&A — Results of Operations — Segment Results — AIG Property Casualty Operations — Liability for Unpaid Claims and Claims Adjustment Expense and Critical
AIG 2013 Form 10-K
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ITEM 1A / RISK FACTORS
Accounting Estimates — Liability for Unpaid Claims and Claims Adjustment Expense (AIG Property Casualty and Mortgage Guaranty).
Reinsurance may not be available or affordable and may not be adequate to protect us against losses. Our subsidiaries are major purchasers of reinsurance and we use reinsurance as part of our overall risk management strategy, and have continued our strategy, adopted in 2010, to improve the allocation of our reinsurance between traditional reinsurance markets and the capital markets, such as through the utilization of catastrophe bonds, to manage risks more efficiently.strategy. While reinsurance does not discharge our subsidiaries from their obligation to pay claims for losses insured under our policies, it does make the reinsurer liable to them for the reinsured portion of the risk. For this reason, reinsurance is an important risk management tool to manage transaction and insurance line risk retention and to mitigate losses from catastrophes. Market conditions beyond our control determine the availability and cost of reinsurance. For example, reinsurance may be more difficult or costly to obtain after a year with a large number of major catastrophes. As a result, we may, at certain times, be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms. In that case, we would have to accept an increase in exposure risk, reduce the amount of business written by our subsidiaries or seek alternatives.alternatives in line with our risk limits. Additionally, we are exposed to credit risk with respect to our subsidiaries'subsidiaries’ reinsurers to the extent the reinsurance receivable is not secured by collateral or does not benefit from other credit enhancements. We also bear the risk that a reinsurer may be unwilling to pay amounts we have recorded as reinsurance recoverable for any reason, including that (i) the terms of the reinsurance contract do not reflect the intent of the parties of the contract or there is a disagreement between the parties as to their intent, (ii) the terms of the contract cannot be legally enforced, (iii) the terms of the contract are interpreted by a court or arbitration panel differently than intended, (iv) the reinsurance transaction performs differently than we anticipated due to a flawed design of the reinsurance structure, terms or conditions, or (v) a change in laws and regulations, or in the interpretation of the laws and regulations, materially impacts a reinsurance transaction. The insolvency of one or more of our reinsurers, or inability or unwillingness to make timely payments under the terms of our agreements,contracts, could have a material adverse effect on our results of operations and liquidity. Additionally, the use of reinsurance placed in the capital markets, such as through catastrophe bonds, may not provide the same levels of protection as traditional reinsurance transactions and any disruption, volatility and uncertainty in the catastrophe bond market, such as following a major catastrophe event, may limit our ability to access such market on terms favorable to us or at all. Also, someto the extent that we intend to utilize catastrophe bond transactions may be based on an industry loss index or other non-indemnity trigger rather than on actual losses incurred by us, which would result inwe could be subject to residual risk. Our inability to obtain adequate reinsurance or other protectioncould have a material adverse effect on our business, results of operations and financial condition.
We currently have limited reinsurance coverage for terrorist attacks. Further, the availability of private sector reinsurance for terrorism is limited. As a result, we rely heavily on the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA), which provides U.S. government risk assistance to the insurance industry to manage the exposure to terrorism incidents in the United States. TRIPRA was reauthorized in January 2015 and is scheduled to expire on December 31, 2020. Under TRIPRA, once our losses for certain acts of terrorism exceed a deductible equal to 20 percent of our commercial property and casualty insurance premiums for covered lines for the prior calendar year, the federal government will reimburse us for 85 percent of losses in excess of our deductible, starting at 85 percent of losses in 2015, and reducing by one percentage point each year, ending at 80 percent in 2020, up to a total industry program limit of $100 billion. However, TRIPRA is scheduled to expiredoes not cover losses in December 2014,certain lines of business such as consumer property and there is no assurance that TRIPRA will be renewed in its current form or at all. To the extent that TRIPRA is renewed on less favorable terms or is not renewed at all, we may not hold adequate terrorism reinsurance coverage or reserves in the event of one or more insured terrorist incidents in the United States, which could result in a material adverse effect on our business, results of operations, financial condition and liquidity.consumer casualty.
For additional information on our reinsurance recoverable, see Item 7. MD&A — Enterprise Risk Management — Insurance Operations Risks — AIG Property Casualty Key Insurance Risks — Reinsurance Recoverable.
LIQUIDITY, CAPITAL AND CREDIT
AIG Parent’s ability to access funds from our subsidiaries is limited. As a holding company, AIG Parent depends on dividends, distributions and other payments from its subsidiaries to fund dividends on AIG Common Stock and to make payments due on its obligations, including its outstanding debt. The majority of our investments are held by our regulated subsidiaries. Our subsidiaries may be limited in their ability to make dividend payments or advance funds to AIG Parent in the future because of the need to support their own capital levels or because of regulatory limits or rating agency requirements. The inability of our subsidiaries to make payments, dividends or distributions in an amount sufficient to enable AIG Parent to meet its cash requirements could have an adverse effect on our operations, our ability to pay dividends or our ability to meet our debt service obligations.
Our internal sources of liquidity may be insufficient to meet our needs. We need liquidity to pay our operating expenses, interest on our debt, maturing debt obligations and to meet any statutory capital requirements of our subsidiaries. If our liquidity is insufficient to meet our needs, we may at the time need to have recourse to third-party financing, external capital markets or other sources of liquidity, which may not be available or could be prohibitively expensive. The availability and cost of any additional financing at any given time depends on a variety of factors, including general market conditions, the volume of trading activities, the overall availability of credit, regulatory actions and our credit ratings and credit capacity. It is also possible that, as a result of such recourse to external financing, customers, lenders or investors could develop a negative perception of our long-orlong- or short-term financial
AIG 2013 Form 10-K
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ITEM 1A / RISK FACTORS
prospects. Disruptions, volatility and uncertainty in the financial markets, and downgrades in our credit ratings, may limit our ability to access external capital markets at times and on terms favorable to us to meet our capital and liquidity needs or prevent our accessing the external capital markets or other financing sources. For a further discussion of our liquidity, see Item 7. MD&A — Liquidity and Capital Resources.
AIG Parent’s ability to support our subsidiaries is limited.AIG Parent has in the past and expects to continue to provide capital to our subsidiaries as necessary to maintain regulatory capital ratios, comply with rating agency requirements and meet unexpected cash flow obligations. If AIG Parent is unable to satisfy a capital need of a subsidiary, the credit rating agencies could downgrade the subsidiary insurer’s financial strength ratings or the subsidiary could become insolvent or, in certain cases, could be seized by its regulator.
Our subsidiaries may not be able to generate cash to meet their needs due to the illiquidity of some of their investments. Our subsidiaries have investments in certain securities that may be illiquid, including certain fixed income securities and certain structured securities, private company securities, investments in private equity funds and hedge funds, mortgage loans, finance receivables and real estate. Collectively, investments in these assets had a fair value of $59 billion at December 31, 2015. Adverse real estate and capital markets, and wider credit spreads, have in the past, and may in the future, materially adversely affect the liquidity of our other securities portfolios, including our residential and commercial mortgage‑related securities portfolios. In the event additional liquidity is required by one or more of our subsidiaries and AIG Parent is unable to provide it, it may be difficult for these subsidiaries to generate additional liquidity by selling, pledging or otherwise monetizing these less liquid investments.
A downgrade in the Insurer Financial Strength ratings of our insurance companies could limit their ability to write or prevent them from writing new business and retaining customers and business. Insurer Financial Strength (IFS) ratings are an important factor in establishing the competitive position of insurance companies. IFS ratings measure an insurance company’s ability to meet its obligations to contract holders and policyholders. High ratings help maintain public confidence in a company’s products, facilitate marketing of products and enhance its competitive position. Downgrades of the IFS ratings of our insurance companies could prevent these companies from selling, or make it more difficult for them to succeed in selling, products and services, or result in increased policy cancellations, lapses and surrenders, termination of assumed reinsurance contracts, or return of premiums. Under credit rating agency policies concerning the relationship between parent and subsidiary ratings, a downgrade in AIG Parent’s credit ratings could result in a downgrade of the IFS ratings of our insurance subsidiaries. Certain rating agencies recently revised our IFS ratings and ratings outlooks, primarily as a result of our reserve strengthening in the fourth quarter of 2015 and related concerns regarding our profitability outlook. We cannot predict what actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business.
A downgrade in our credit ratings could require us to post additional collateral and result in the termination of derivative transactions. Credit ratings estimate a company'scompany’s ability to meet its obligations and may directly affect the cost and availability of financing. A downgrade of our long-term debt ratings by the major rating agencies would require us to post additional collateral payments related to derivative transactions to which we are a party, and could permit the termination of these derivative transactions. This could adversely affect our business, our consolidated results of operations in a reporting period or our liquidity. In the event of further downgrades of two notches to our long-term senior debt ratings, AIG would be required to post additional collateral of $111$95 million, and certain of our counterparties would be permitted to elect early termination of contracts.
AIG Parent's ability to access funds from Certain rating agencies recently revised the outlook for our subsidiaries is limited. Ascredit ratings, primarily as a holding company, AIG Parent depends on dividends, distributions and other payments from its subsidiaries to fund dividends on AIG Common Stock and to make payments due on its obligations, including its outstanding debt. The majorityresult of our investments are held by our regulated subsidiaries. Our subsidiaries may be limited in their ability to make dividend payments or advance funds to AIG Parentreserve strengthening in the future becausefourth quarter of the need to support their own capital levels2015 and related concerns regarding our profitability outlook. We cannot predict what actions rating agencies may take, or because of regulatory limits. The inability of our subsidiaries to make payments, dividends or distributionswhat actions we may take in an amount sufficient to enable AIG Parent to meet its cash requirements could have an adverse effect on our operations, our ability to pay dividends or our ability to meet our debt service obligations.
AIG Parent's ability to support our subsidiaries is limited. AIG Parent has in the past and expects to continue to provide capital to our subsidiaries as necessary to maintain regulatory capital ratios, comply with rating agency requirements and meet unexpected cash flow obligations. If AIG Parent is unable to satisfy a capital need of a subsidiary, the subsidiary could become insolvent or, in certain cases, could be seized by its regulator.
Our subsidiaries may not be able to generate cash to meet their needs dueresponse to the illiquidityactions of some of their investments. Our subsidiaries have investments in certain securities that may be illiquid, including certain fixed income securities and certain structured securities, private company securities, private equity funds and hedge funds, mortgage loans, finance receivables and real estate. Collectively, investments in these assets had a fair value of $49 billion at December 31, 2013. Adverse real estate and capital markets, and tighter credit spreads, have in the past, and may in the future, materiallyrating agencies, which could adversely affect the liquidity of our other securities portfolios, including our residential and commercial mortgage-related securities portfolios. In the event additional liquidity is required by one or more of our subsidiaries and AIG Parent is unable to provide it, it may be difficult for these subsidiaries to generate additional liquidity by selling, pledging or otherwise monetizing these less liquid investments.business.
A downgrade in the Insurer Financial Strength ratings of our insurance companies could prevent them from writing new businessBusiness and retaining customers and business.operations Insurer Financial Strength (IFS) ratings are an important factor in establishing the competitive position of insurance companies. IFS ratings measure an insurance company's ability to meet its obligations to contract holders and policyholders. High ratings help maintain public confidence in a company's products, facilitate marketing of products and enhance its competitive position. Downgrades of the IFS ratings of our insurance companies could prevent these companies from selling, or make it more difficult for them to succeed in selling, products and services, or result in increased policy cancellations, termination of assumed reinsurance contracts, or return of premiums. Under credit rating agency policies concerning the relationship between parent and subsidiary ratings, a downgrade in AIG Parent's credit ratings could result in a downgrade of the IFS ratings of our insurance subsidiaries.
BUSINESS AND OPERATIONS
Interest rate fluctuations, increased lapses and surrenders, declining investment returns and other events may require our subsidiaries to accelerate the amortization of DAC and record additional liabilities for future policy benefits. We incur significant costs in connection with acquiring new and renewal insurance business. DAC represents deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business. The recovery of DAC is generally dependent upon the future profitability of the related business, but DAC amortization varies based on the type of contract. For long-duration traditional business, DAC is
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generally amortized in proportion to premium revenue and varies with lapse experience. Actual lapses in excess of expectations can result in an acceleration of DAC amortization.
DAC for investment-oriented products is generally amortized in proportion to estimated gross profits. Estimated gross profits are affected by a number of assumptions, including current and expected interest rates, net investment income and spreads, net realized gains and losses, fees, surrender rates, mortality experience and equity market returns and volatility. If actual and/or future estimated gross profits are less than originally expected, then the amortization of DAC would be accelerated in the period the actual experience is known and would result in a charge to income. For example, if interest rates rise rapidly and significantly, customers with policies that have interest crediting rates below the current market may seek competing products with higher returns and we may experience an increase in surrenders and withdrawals of life and annuity contracts, resulting in a decrease in future profitability and an acceleration of the amortization of DAC.
We also periodically review products for potential loss recognition events, principally insurance-oriented products. This review involves estimating the future profitability of in-force business and requires significant management judgment about assumptions including mortality, morbidity, persistency, maintenance expenses, and investment returns, including net realized capital gains (losses). If actual experience or estimates result in projected future losses, we may be required to amortize any remaining DAC and record additional liabilities through a charge to policyholder benefit expense, which could negatively affect our results of operations. For example, realized gains on investment sales in 2012 and 2013 have reduced future investment margins and required the recognition of additional liabilities for certain payout annuities. For further discussion of DAC and future policy benefits, see Item 7. MD&A — Critical Accounting Estimates and Notes 98 and 12 to the Consolidated Financial Statements.
Our restructuring initiatives may not yield our expected reductions in expenses and improvements in operational and organizational efficiency. We may not be able to fully realize the anticipated expense reductions and operational and organizational efficiency improvements we expect to result from our restructuring initiatives. Actual costs to implement these initiatives may exceed our estimates or we may be unable to fully implement these initiatives, and the implementation of these initiatives may harm our relationships with customers or employees or our competitive position. The successful implementation of these initiatives has required us and will continue to require us to effect workforce reductions, business rationalizations, systems enhancements, business process outsourcing, business and asset dispositions and other actions, which depend on a number of factors, some of which are beyond our control. If we are unable to realize these anticipated expense reductions and efficiency improvements or if implementing these initiatives harms our relationships with customers or employees or our competitive position, our businesses and results of operations may be adversely affected.
Certain of our products offerhave guarantees that may increase the volatility of our results.We offer variable annuity and life insurance products with features that guarantee a certain level of benefits, such asincluding guaranteed minimum death benefits (GMDB), guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB) and, guaranteed minimum account valueaccumulation benefits (GMAV). For GMDB,(GMAB), and products with guaranteed interest crediting rates tied to an index. In addition to risk-mitigating features in our most widely offered guaranteed benefit feature, the liabilities includedvariable annuity product design, we have an economic hedging program designed to manage market risk from GMWB and GMAB, including exposures to changes in Future policyholder benefits at December 31, 2013 were $355 million. Our economicequity prices, interest rates, credit spreads and volatilities. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts, and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election. See Enterprise Risk Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and is designed so that changes in valueHedging Program for additional discussion of the derivative instruments move in the opposite direction of changes in the GMWB and GMAV embedded derivative liabilities. Differencesmarket risk management related to these product features. Nevertheless, differences between the change in fair value of GMWB and GMAVGMAB embedded derivative liabilitiesderivatives and the related hedging instrumentsportfolio can be caused by extreme and unanticipated movements in the equity markets, interest rates and market volatility, policyholder behavior and our inability to purchase hedging instruments at prices consistent with the desired risk and return trade-off. While we believe that our actions have reduced the risks related to guaranteed benefits and guaranteed interest crediting, our exposure ismay not be fully hedged, and we remainmay be liable if counterparties are unable or unwilling to pay. In addition, wepay, although the majority of our hedging derivative instruments are exchange-traded, exchange-cleared and/or highly collateralized. We also remain exposed to the risk that policyholder behavior and mortality may differ from our assumptions. Finally, while we believe the impact of downturns in equity markets, increased equity volatility or reduced interest rates would be mitigated by our economic hedging program, the occurrence of one or more of these events could result in an increase in the liabilities associated with the guaranteed benefits that is not fully offset by the hedging program, reducing our net income and shareholders'shareholders’ equity. See NoteNotes 4 and 13 to the Consolidated Financial Statements, Item 1 – Business – Regulation, and Item 7. MD&A —– Critical Accounting Estimates for more information regarding these products.
Indemnity claims could be made against us in connection with divested businesses. We have provided financial guarantees and indemnities in connection with the businesses we have sold, including ALICO, as described in greater detail in Note 15 to the Consolidated Financial Statements. While we do not currently believe the claims under these indemnities will be material, it is possible that significant indemnity claims could be made against us. If such a claim or claims were successful, it could have a material adverse effect on our results of operations, cash flows and liquidity. See Note 15 to the Consolidated Financial Statements for more information on these financial guarantees and indemnities.
Our foreign operations expose us to risks that may affect our operations. We provide insurance, investment and other financial products and services to both businesses and individuals in more than 130 countries.100 countries and jurisdictions. A substantial portion of our AIG Property Casualty business is conducted outside the United States, and we intend to continue to grow this business. Operations outside the United States particularly in developing nations, may be affected by regional economic downturns, changes in foreign currency exchange rates, political upheaval, nationalization and other restrictive government actions, which could also affect our other operations.
The degree of regulation and supervision in foreign jurisdictions varies. AIG subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements and it is possible that local licenses may require AIG Parent to
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meet certain conditions. Licenses issued by foreign authorities to our subsidiaries are subject to modification and revocation. Consequently, our insurance subsidiaries could be prevented from conducting future business in some of the jurisdictions where they currently operate. Adverse actions from any single country could adversely affect our results of operations, depending on the magnitude of the event and our financial exposure at that time in that country.
We may experience difficulty in marketing and distributing products through our current and future distribution channels. Although we distribute our products through a wide variety of distribution channels, we maintain relationships with certain key distributors. Distributors have in the past, and may in the future, elect to renegotiate the terms of existing relationships, or reduce or terminate their distribution relationships with us, including for such reasons as industry consolidation of distributors or other industry changes that increase the competition for access to distributors, developments in legislation or regulation that affect our business, adverse developments in our business, adverse rating agency actions or concerns about market-related risks. An interruption in certain key relationships could materially affect our ability to market our products and could have a material adverse effect on our businesses, operating results and financial condition.
In addition, when our products are distributed through unaffiliated firms, we may not be able to monitor or control the manner of their distribution, despite our training and compliance programs. If our products are distributed to customers for whom they are unsuitable or distributed in any other inappropriate manner, we may suffer reputational and other harm to our business.
Significant conditions precedent must be satisfied to complete the sale of the common stock of ILFC on the agreed terms. On December 16, 2013, AIG and AIG Capital Corporation (Seller), a wholly-owned direct subsidiary of AIG, entered into a definitive agreement (the AerCap Share Purchase Agreement) with AerCap Holdings N.V. (AerCap) and AerCap Ireland Limited (Purchaser), a wholly-owned subsidiary of AerCap, for the sale of 100% of the common stock of ILFC by Seller to Purchaser (such transaction, the AerCap Transaction). Under the terms of the AerCap Share Purchase Agreement, consummation of the AerCap Transaction is subject to the satisfaction or waiver of a number of conditions precedent, such as certain customary conditions and other closing conditions, including the receipt of approvals or non-disapprovals from antitrust and other regulatory bodies. The AerCap Transaction was approved by AerCap shareholders on February 13, 2014.
Any relevant regulatory body may refuse its approval or may seek to make its approval subject to compliance by ILFC or the Purchaser with unanticipated or onerous conditions. Even if approval is not required, the regulator may impose requirements on ILFC subsequent to consummation of the AerCap Transaction. We or the Purchaser might not agree to such conditions or requirements and may have a contractual right to terminate the AerCap Share Purchase Agreement.
In addition to other customary termination events, the Share Purchase Agreement allows termination by (i) AIG, Seller or Purchaser if the closing of the AerCap Transaction has not occurred on or before September 16, 2014 (the Long-Stop Date), subject to an extension to December 16, 2014 for the receipt of certain approvals, (ii) AIG, Seller or Purchaser in the event that approvals or non-disapprovals from certain regulatory bodies have not been obtained by the Long-Stop Date (as extended), (iii) AIG or Seller, if the AerCap board of directors withdraws or adversely modifies its approval of the AerCap Transaction or (iv) AIG or Seller if all conditions are satisfied, AIG and Seller are prepared to close but Purchaser fails to close the AerCap Transaction as required.
Because of the closing conditions and termination rights applicable to the AerCap Transaction, completion of the AerCap Transaction is not assured or may be delayed or, even if the transaction is completed, the terms of the sale may need to be significantly restructured.
The completion of the AerCap Transaction as contemplated could expose us to additional risks related to AerCap's stock and credit. Upon completion of the AerCap Transaction, we will hold approximately 46 percent of the common stock of AerCap. As a result, declines in the value of AerCap's common stock, and the other effects of our accounting for this investment under the equity method of accounting, could have a material adverse effect on our results of operations in a reporting period.
In addition, in connection with the AerCap Transaction, AIG, AerCap, Purchaser, AerCap Ireland Capital Limited (AerCap Ireland) and certain subsidiaries of AerCap, as guarantors, entered into a credit agreement for a senior unsecured revolving credit facility between AerCap Ireland, as borrower, and AIG, as lender and administrative agent (the Revolving Credit Facility). The Revolving Credit Facility provides for an aggregate commitment of $1 billion and
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permits loans for general corporate purposes. An event of default under the Revolving Credit Facility could have a material adverse effect on our results of operations and financial condition.
Failure to complete the AerCap Transaction could negatively affect our businesses and financial results. If the AerCap Transaction is not completed, the ongoing businesses of ILFC and AIG may be adversely affected and we will be subject to several risks, including the following:
•alternative plans to dispose of ILFC, such as through a sale or initial public offering, may be difficult to structure and may take extended periods of time to implement, depending on, among other things, the global economic and regulatory environments and general market conditions;
•we may not be able to realize equivalent or greater value for ILFC under an alternative asset monetization plan which could impact the carrying values of ILFC's assets and liabilities;
•we will have incurred certain significant costs relating to the disposition of ILFC without receiving the benefits of the AerCap Transaction, and may incur further significant costs if an alternative monetization plan is undertaken;
•negative customer perception could adversely affect ILFC's ability to compete for, maintain or win new and existing business in the marketplace; and
•potential further diversion of our management's time and attention.
Significant legal proceedings may adversely affect our results of operations or financial condition. We are party to numerous legal proceedings, including securities class actions and regulatory and governmental investigations. Due to the nature of these proceedings, the lack of precise damage claims and the type of claims we are subject to, we cannot currently quantify our ultimate or maximum liability for these actions. Developments in these unresolved matters could have a material adverse effect on our consolidated financial condition or consolidated results of operations for an individual reporting period. Starr International Company, Inc. (SICO) has brought suitssuit against the United States (including the Federal Reserve Bank of New York) challenging the government'sgovernment’s assistance of AIG, pursuant to which (i) AIG entered into a credit facility with the Federal Reserve Bank of New York;York and (ii) the United States received an approximately 80 percent ownership interest in AIG; and (iii) AIG entered into transactions involving Maiden Lane III LLC.AIG. The United States has alleged that AIG is obligated to indemnify the United States for any recoveries in these lawsuits. A determination that the United States is liable for damages in such suits, together with a determination that AIG is obligated to indemnify the United States for any such damages, could have a material adverse effect on our business, consolidated financial condition and results of operations.For a discussion of the SICO litigation and other unresolved matters, see Note 15 to the Consolidated Financial Statements.
If we are unable to maintain the availability of our electronic data systems and safeguard the security of our data, our ability to conduct business may be compromised, which could adversely affect our consolidated financial condition or results of operations.operations. We use computer systems to store, retrieve, evaluate and utilize customer, employee, and company data and information. Some of these systems in turn, rely upon third-party systems. Our business is highly dependent on our ability to access these systems to perform necessary business functions, including providing insurance quotes, processing premium payments, making changes to existing policies, filing and paying claims, administering variable annuity products and mutual funds, providing customer support and managing our investment portfolios. Systems failures or outages could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our business partners and customers. In the event of a natural disaster, a computer virus, unauthorized access, a terrorist attack or other disruption inside or outside the U.S., our systems may be inaccessible to our employees, customers or business partners for an extended period of time, and our employees may be unable to perform their duties for an extended period of time if our data or systems are disabled or destroyed. Our systems have in the past been, and may in the future be, subject to unauthorized access, such as physical or electronic break-ins or unauthorized tampering. Like other global companies, we have, from time to time, experienced threats to our data and systems, including malware and computer virus attacks, unauthorized access, systems failures and disruptions. There is no assurance that our security measures will provide fully effective protection from such events. AIG maintains cyber risk insurance, but this insurance may not cover all costs associated with the consequences of personal, confidential or proprietary information being compromised. In some cases, such unauthorized access may not be immediately detected. This may impede or interrupt our business operations and could adversely affect our consolidated financial condition or results of operations.
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In addition, we routinely transmit, receive and store personal, confidential and proprietary information by email and other electronic means. Although we attempt to keep such information confidential, we may be unable to do so in all events, especially with clients, vendors, service providers, counterparties and other third parties who may not have or use appropriate controls to protect personal, confidential or proprietary information. Furthermore, certain of our businesses are subject to compliance with laws and regulations enacted by U.S. federal and state governments, the European Union or other jurisdictions or enacted by various regulatory organizations or exchanges relating to the privacy and security of the information of clients, employees or others. The compromise of personal, confidential or proprietary information could result in remediation costs, legal liability, regulatory action and reputational harm.
The integration of companies we acquire from time to time may not be as successful as we anticipate. Acquisitions involve a number of risks, including operational, strategic, financial, accounting, legal and tax risks. Difficulties in integrating an acquired company may result in the acquired company performing differently than we expected or in our failure to realize anticipated expense-related efficiencies. Our existing businesses could also be negatively impacted by acquisitions. Risks resulting from future acquisitions may have a material adverse effect on our results of operations and financial condition.
REGULATION
Our businesses are heavily regulated and changes in regulation may affect our operations, increase our insurance subsidiary capital requirements or reduce our profitability. Our operations generally, and our insurance subsidiaries, in particular, are subject to extensive and potentially conflicting supervision and regulation by national authorities and by the various jurisdictions in which we do business. Supervision and regulation relate to numerous aspects of our business and financial condition. State and foreign regulators also periodically review and investigate our insurance businesses, including AIG-specific and industry-wide practices. The primary purpose of insurance regulation is the protection of our insurance contract holders, and not our investors. The extent of domestic regulation varies, but generally is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments.
We strive to maintain all required licenses and approvals. However, our businesses may not fully comply with the wide variety of applicable laws and regulations. The relevant authority'sauthority’s interpretation of the laws and regulations also may change from time to time. Regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the required licenses and approvals or do not comply with applicable regulatory requirements, these authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. Further, insurance regulatory authorities have relatively broad discretion to issue orders of supervision, which permit them to supervise the business and operations of an insurance company.
In the U.S., the RBC formula is designed to measure the adequacy of an insurer'sinsurer’s statutory surplus in relation to the risks inherent in its business. Virtually every state has adopted, in substantial part, the RBC Model Law promulgated by the NAIC, which specifies the regulatory actions the insurance regulator may take if an insurer'sinsurer’s RBC calculations fall below specific thresholds. Those actions range from requiring an insurer to submit a plan describing how it would regain a specified RBC ratio to a mandatory regulatory takeover of the company. Regulators at the federal and international levels are also considering the imposition of additional group-wide capital requirements on certain insurance companies which may include us,designated as systemically important, that may augment or even displace state-law RBC standards that apply at the legal entity level, and such capital calculations may be made on bases other than the statutory statements of our insurance subsidiaries. See "Our“Our status as a savings and loan holding company and anonbank systemically important financial institution, as well as the enactment of Dodd-Frank, will subject us to substantial additional federal regulation, which may materially and adversely affect our businesses, results of operations and cash flows"flows” and "Actions“Actions by foreign governments and regulators could subject us to substantial additional regulation"regulation” below for additional information on increased capital requirements that may be imposed on us. We cannot predict the effect these initiatives may have on our business, results of operations, cash flows and financial condition.
We provide products and services to certain employee benefit plans that are subject to restrictions imposed by ERISA and the Internal Revenue Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that fiduciaries may not cause a covered plan to engage in certain prohibited transactions. The DOL has proposed a new regulation that could, if enacted as originally proposed, materially affect our ability to sell and service certain types of annuities and other investment products. If the new DOL proposals are finalized as originally proposed, the investment-related information and support that our advisors and employees could provide to ERISA-covered plan sponsors, participants and IRA holders on a non-fiduciary basis could be substantially limited compared to what is allowed under current law, and these changes could have a material impact on the types and levels of and compensation structures associated with the investment products and services we provide. For additional information, see Item 1 – Business – Regulation and Item 7 – MD&A – Executive Overview – Consumer Insurance Strategic Initiatives and Outlook.
The degree of regulation and supervision in foreign jurisdictions varies. AIG subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements and it is possible that local licenses may require AIG Parent to meet certain conditions. Licenses issued by foreign authorities to our subsidiaries are subject to modification and revocation. Thus,Accordingly, our insurance subsidiaries could be prevented from conducting future business in certain of the jurisdictions where they currently operate. Adverse actions from any single country could adversely affect our results of operations, liquidity and financial condition, depending on the magnitude of the event and our financial exposure at that time in that country.
See Item 1. Business —– Regulation for further discussion of our regulatory environment.
Our status as a savings and loan holding company and anonbank systemically important financial institution, as well as the enactment of Dodd-Frank, , will subject us to substantial additional federal regulation, which may materially and adversely affect our businesses, results of operations and cash flows.On July 21, 2010, Dodd-Frank, which effects comprehensive changes to the regulation of financial services in the United States, was
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signed into law. Dodd-Frank directs existing and newly created government agencies and bodies to promulgate regulations implementing the law, an ongoing process anticipated to continue over the next few years.
We cannot predict the requirements of the regulations ultimately adopted, the level and magnitude of supervision we may become subject to, or how Dodd-Frank and such regulations will affect the financial markets generally or our businesses, results of operations or cash flows. It is possible that the regulations adopted under Dodd-Frank and our regulation by the FRB as an SLHC or as a nonbank SIFI could significantly alter our business practices, limit our ability to engage in capital or liability management, require us to raise additional capital, and impose burdensome and costly requirements and additional costs. Some of the regulations may also affect the perceptions of regulators, customers, counterparties, creditors or investors about our financial strength and could potentially affect our financing costs.
See Item 1. Business —– Regulation for further discussion of the details of the aforementioned regulations to which AIG and its businesses are subject.
Actions by foreign governments and regulators could subject us to substantial additional regulation.We cannot predict the impact laws and regulations adopted in foreign jurisdictions may have on the financial markets generally or our businesses, results of operations or cash flows. It is possible such laws and regulations, and the impact of our designation as a global systemically important insurer (G-SII), our status as an Internationally Active Insurance Group (IAIG) and certain initiatives by the FSB and the IAIS, including, but not limited to, the application of HLA capital and the ongoing development of an ICS, and implementation of Solvency II in the European Union, may significantly alter our business practices, limit our ability to engage in capital or liability management, require us to raise additional capital, and impose burdensome requirements and additional costs. It is possible that the laws and regulations adopted in foreign jurisdictions will differ from one another, and that they could be inconsistent with the laws and regulations of other jurisdictions including the United States.
In addition to the adoption of Dodd-Frank in the United States, regulators and lawmakers around the world are actively reviewing the causes of the financial crisis and taking steps to avoid similar problems in the future. The FSB, consisting of representatives of national financial authorities of the G20 nations, has issued a series of frameworks and recommendations intended to produce significant changes in how financial companies, particularly global systemically important financial institutions, should be regulated. These frameworks and recommendations address such issues as financial group supervision, capital and solvency standards, corporate governance including compensation, and a number of related issues associated with responses to the financial crisis. The FSB has directed the IAIS to create standards relative to these areas and incorporate them within that body's ICPs. Lawmakers and regulatory authorities in a number of jurisdictions in which our subsidiaries conduct business have already begun implementing legislative and regulatory changes consistent with these recommendations.
The FSB has also charged the IAIS with developing a template for measuring systemic risks posed by insurer groups. The IAIS has requested data from selected insurers around the world to determine which elements of the insurance sector, if any, could materially and adversely impact other parts of the global financial services sector (e.g., commercial and investment banking, securities trading, etc.). The IAIS has provided its assessment template to the FSB. Based on this assessment template, on July 18, 2013, the FSB, in consultation with the IAIS and national authorities, identified an initial list of global systemically important insurers (G-SIIs), which includes AIG. The IAIS intends G-SIIs to be subject to a policy framework that includes recovery and resolution planning requirements, enhanced group-wide supervision, basic capital requirements (BCR) and higher loss absorbency (HLA) capital requirements.
The IAIS is also developing a ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs), which includes additional supervisory oversight based on its ICPs but also adds requirements and supervisory processes pertaining to the international business activities of IAIGs. As currently delineated under the ComFrame, we meet the parameters set forth to define an IAIG. While we currently do not know when any ComFrame requirements will be finalized and become effective, the IAIS will undertake a field testing of the ComFrame, including the possibility of additional capital requirements for IAIGs, which is expected to commence in the beginning of 2014. It is expected that implementation of the ComFrame would begin in 2019.
Solvency II Legislation in the European Union could also affect our international insurance operations by reforming minimum capital and solvency requirements, governance requirements, risk management and public reporting standards.
For further details on these international regulations and their potential impact on AIG and its businesses, see Item 1. Business — Regulation — – Regulation—Other Regulatory Developments.
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The USA PATRIOT Act, the Office of Foreign Assets Control and similar laws that apply to us may expose us to significant penalties. The operations of our subsidiaries are subject to laws and regulations, including, in some cases, the USA PATRIOT Act of 2001, which require companies to know certain information about their clients and to monitor their transactions for suspicious activities. Also, the Department of the Treasury'sTreasury’s Office of Foreign Assets Control administers regulations requiring U.S. persons to refrain from doing business, or allowing their clients to do business through them, with certain organizations or individuals on a prohibited list maintained by the U.S. government or with certain countries. The United Kingdom, the European Union and other jurisdictions maintain similar laws and regulations. Although we have instituted compliance programs to address these requirements, there are inherent risks in global transactions.
Attempts to efficiently manage the impact of Regulation XXX and Actuarial Guideline AXXX may fail in whole or in part resulting in an adverse effect on our financial condition and results of operations.The NAIC Model Regulation "Valuation“Valuation of Life Insurance Policies"Policies” (Regulation XXX) requires insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees. In addition, NAIC Actuarial Guideline 38 (AXXX) (Guideline(AG 38, also referred to as Guideline AXXX) clarifies the application of Regulation XXX as to certain universal life insurance policies with secondary guarantees.
AIGOur domestic Life and Retirement managesInsurance Companies manage the capital impact on its life insurers of statutory reserve requirements under Regulation XXX and Guideline AXXX through affiliated reinsurance transactions, to maintain ourtheir ability to offer competitive pricing and successfully market such products. See Note 1918 to the Consolidated Financial Statements for additional information on statutory reserving requirements under Regulation XXX and Guideline AXXX and our use of affiliated reinsurance. The NAIC the New York State Department of Financial Services and other state and federal regulators have increased theircontinue to focus on life insurers'insurers’ affiliated reinsurance transactions used to satisfy certain reserve requirements or to manage the capital impact of certain statutory reserve requirements, particularly transactions using captive insurance companies or special purpose vehicles. While AIGour domestic Life and Retirement does Insurance Companies do
not use captive or special purpose vehicle structures for this purpose, we cannot predict whether any applicable insurance laws or regulations will be changed in a way that prohibits or adversely impacts the use of affiliated reinsurance. If regulations change, our statutory reserve requirements could increase, and we could be required to increase statutory reserves, increase prices on our products or incur higher expenses to obtain reinsurance, which could adversely affect our competitive position, financial condition or results of operations. If our actions to efficiently manage the impact of Regulation XXX or Guideline AXXX on future sales of term and universal life insurance products are not successful, we may reduce the sales of these products or incur higher operating costs or it may impact our sales of these products.products may be affected.
New regulations promulgated from time to time may affect our businesses, results of operations, financial condition and ability to compete effectively. Legislators and regulators may periodically consider various proposals that may affect the profitability of certain of our businesses. New regulations may even affect our ability to conduct certain businesses at all, including proposals relating to restrictions on the type of activities in which financial institutions are permitted to engage and the size of financial institutions. These proposals could also impose additional taxes on a limited subset of financial institutions and insurance companies (either based on size, activities, geography, government support or other criteria). It is uncertain whether and how these and other such proposals would apply to us or our competitors or how they could impact our consolidated results of operations, financial condition and ability to compete effectively.
An "ownership change"“ownership change” could limit our ability to utilize tax lossesloss and creditscredit carryforwards to offset future taxable income. As of December 31, 2013,2015, we had a U.S. federal net operating loss carryforward of approximately $34.2$34.9 billion $ 1.1 billion in capital loss carryforwards and $5.8$6.9 billion in foreign tax credits (tax lossesloss and creditscredit carryforwards). Our ability to use such tax attributes to offset future taxable income may be significantly limited if we experience an "ownership change"“ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the Code). In general, an ownership change will occur when the percentage of AIG Parent's ownership (by value) of one or more "5-percent shareholders"“5-percent shareholders” (as defined in the Code) has increased by more than 50 percent over the lowest percentage owned by such shareholders at any time during the prior three years (calculated on a rolling basis). An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax lossesloss and creditscredit carryforwards equal to the equity value of the corporation immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the IRS (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. The limitation on our ability to utilize tax lossesloss and creditscredit carryforwards arising from an ownership change under Section 382 would depend on the value of our equity at the time of any ownership change.
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If we were to experience an "ownership change"“ownership change”, it is possible that a significant portion of our tax lossesloss and creditscredit carryforwards could expire before we would be able to use them to offset future taxable income.
On March 9, 2011, our Board adopted our Tax Asset Protection Plan (the Plan) to help protect these tax lossesloss and creditscredit carryforwards, and on January 8, 2014, the Board adopted an amendment to the Plan, extending its expiration date to January 8, 2017. The Board intends to submit the amendment of the Plan towas ratified by our shareholders for ratification at our 2014 Annual Meeting of Shareholders. At our 2011 Annual Meeting of Shareholders, shareholders adopted a protective amendment to our Restated Certificate of Incorporation (Protective Amendment), which is designed to prevent certain transfers of AIG Common Stock that could result in an "ownership change" and currently expires on May 11, 2014. The Board intends to submit to our shareholders for approval at“ownership change.” At our 2014 Annual Meeting of Shareholders, our shareholders approved an amendment to our Restated Certificate of Incorporation to adopt a successor to the Protective Amendment that contains substantially the same terms as the Protective Amendment but would expireand that expires on May 12, 2017, the third anniversary of the date of our 2014 Annual Meeting of Shareholders.
The Plan is designed to reduce the likelihood of an "ownership change"“ownership change” by (i) discouraging any person or group from becoming a 4.99 percent shareholder and (ii) discouraging any existing 4.99 percent shareholder from acquiring additional shares of AIG Common Stock. The Protective Amendment generally restricts any transfer of AIG Common Stock that would (i) increase the ownership by any person to 4.99 percent or more of AIG stock then outstanding or (ii) increase the percentage of AIG stock owned by a Five Percent Stockholder (as defined in the Plan). Despite the intentions of the Plan and the Protective Amendment to deter and prevent an "ownership change"“ownership change”, such an event may still occur. In addition, the Plan and the Protective Amendment may make it more difficult and more expensive to acquire us, and may discourage open market purchases of AIG Common Stock or a non-negotiated tender or exchange offer for AIG Common Stock. Accordingly, the Plan and the Protective Amendment may limit a shareholder'sshareholder’s ability to realize a premium over the market price of AIG Common Stock in connection with any stock transaction.
Changes in tax laws could increase our corporate taxes, reduce our deferred tax assets or make some of our products less attractive to consumers.Changes in tax laws or their interpretation could negatively impact our business or results. Some proposed changes could have the effect of increasing our effective tax rate by reducing deductions or increasing income inclusions, such as by limiting rules that allow forallowing deferral of tax on certain foreign insurance income. Conversely, other changes, such as lowering the U.S. federal corporate tax rate discussed recently in the context of tax reform, could reduce the value of our deferred tax assets. In addition, changes in the way foreign taxes can be credited against U.S. taxes, methods for allocating interest expense, the ways insurance companies calculate and deduct reserves for tax purposes, and impositions of new or changed premium, value added and other indirect taxes could increase our tax expense, thereby reducing earnings.
In addition to proposing to change the taxation of corporations in general and insurance companies in particular, the Executive Branch of the U.S. Government and Congress have considered proposals that could increase taxes on owners of insurance products. For example, there arehave been proposals that would limithave limited the deferral of tax on income from life and annuity contracts relative to other investment products. These changes could reduce demand in the U.S. for life insurance and annuity contracts, or cause consumers to shift from these contracts to other investments, which would reduce our income due to lower sales of these products or potential increased surrenders of in-force business.
Governments'The need for governments to seek additional revenue makes it likely that there will be continued proposals to change tax rules in ways that would reduce our earnings. However, it remains difficult to predict whether or when there will be any tax law changes having a material adverse effect on our financial condition or results of operations.
BUSINESS AND OPERATIONS OF ILFC PRIOR TO COMPLETION OF THE AERCAP TRANSACTION
We will be subject to the following risks until we complete the AerCap Transaction:
Our aircraft leasing business depends on lease revenuesCOMPETITION and exposes us to the risk of lessee nonperformance.employees A decrease in ILFC's customers' ability to meet their obligations to ILFC under their leases may negatively affect our business, results of operations and cash flows.
Customer demand for certain aircraft may be lower than anticipated, which could negatively impact ILFC's business. Aircraft are long-lived assets and demand for a particular model and type can decline over time. Demand may fall for a variety of reasons, including obsolescence following the introduction of newer technologies, market saturation due to increased production rates, technical problems associated with a particular model, new
AIG 2013 Form 10-K
Table of Contents
ITEM 1A / RISK FACTORS
manufacturers entering the marketplace, additional governmental regulation, or the overall health of the airline industry. This may result in declining lease rates, losses on sales, impairment charges or fair value adjustments and may adversely affect ILFC's business and our consolidated financial condition, results of operations and cash flows.
COMPETITION AND EMPLOYEES
We face intense competition in each of our businesses. Our businesses operate in highly competitive environments, both domestically and overseas. Our principal competitors are other large multinational insurance organizations, as well as banks, investment banks and other non-banknonbank financial institutions. The insurance industry in particular is highly competitive. Within the U.S., AIG Property Casualty subsidiariesour Non-Life Insurance Companies compete with approximately 4,000 other stock companies, specialty insurance organizations, mutual insurance companies and other underwriting organizations. AIGOur Life and Retirement subsidiariesInsurance Companies compete in the U.S. with approximately 2,300 life insurance companies and other participants in related financial services fields. Overseas, our subsidiaries compete for business with the foreign insurance operations of large U.S. insurers and with global insurance groups and local companies.
The past reduction of our credit ratings and past negative publicity have made, and may continue to make, it more difficult to compete to retain existing customers and to maintain our historical levels of business with existing customers and counterparties. General insurance and life insurance companies compete through a combination of risk acceptance criteria, product pricing, and terms and conditions. Retirement services companies compete through crediting rates and the issuance of guaranteed benefits. A decline in our position as to any one or more of these factors could adversely affect our profitability.
Competition for employees in our industry is intense, and we may not be able to attract and retain the highly skilled people we need to support our business. Our success depends, in large part, on our ability to attract and retain key people. Due to the intense competition in our industry for key employees with demonstrated ability, we may be unable to hire or retain such employees. In addition, we may experience higher than expected employee turnover and difficulty attracting new employees as a result of uncertainty from strategic actions and organizational and operational changes. Losing any of our key people also could have a material adverse effect on our operations given their skills, knowledge of our business, years of industry experience and the potential difficulty of promptly finding qualified replacement employees. Our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining key employees.
Mr. Benmosche may be unable to continue to provide services to AIG due to his health. Robert Benmosche, our President and Chief Executive Officer, was diagnosed with cancer and has been undergoing treatment for his disease. He continues to fulfill all of his responsibilities and has stated his desire to continue in such roles until the first quarter of 2015. However, his condition may change and prevent him from continuing to perform these roles.
Managing key employee succession and retention is critical to our success. We would be adversely affected if we fail to adequately plan for the succession of our senior management and other key employees. While we have succession plans and long-term compensation plans designed to retain our employees, our succession plans may not operate effectively and our compensation plans cannot guarantee that the services of these employees will continue to be available to us.
Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. There have been a number of cases involving fraud or other misconduct by employees in the financial services industry in recent years and we run the risk that employee misconduct could occur. Instances of fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, misuse of customer or proprietary information, or failure to comply with regulatory requirements or our internal policies may result in losses.losses and/or reputational damage. It is not always possible to deter or prevent employee misconduct, and the controls that we have in place to prevent and detect this activity may not be effective in all cases.
ESTIMATES AND ASSUMPTIONS
Actual experience may differ from management's estimatesEstimates used in the preparation of financial statements.statements and modeled results used in various areas of our business may differ materially from actual experience. Our financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP), which requires the application of accounting policies that often involve a significant degree of judgment. The accounting policies that we consider most dependent on the application of estimates and assumptions, and therefore may be viewed as critical accounting estimates, are described in Item 7. MD&A — Critical Accounting Estimates. These accounting estimates require the use of assumptions, some of which are highly uncertain at the time of estimation. These estimates are based on judgment, current facts and circumstances, and, when applicable,
AIG 2013 Form 10-K
Table of Contents
ITEM 1A / RISK FACTORS
internally developed models. Therefore, actual results could differ from these estimates, possibly in the near term, and could have a material effect on our consolidated financial statements.
In addition, we employ models to price products, calculate reserves and value assets, as well as evaluate risk and determine capital requirements, among other uses. These models rely on estimates and projections that are inherently uncertain, may use incomplete, outdated or incorrect data or assumptions and may not operate properly. As our businesses continue to expand and evolve, the number and complexity of models we employ has grown, increasing our exposure to error in the design, implementation or use of models, including the associated input data, controls and assumptions and the controls we have in place to mitigate their risk may not be effective in all cases.
Changes in accounting principles and financial reporting requirements could impact our reported results of operations and our reported financial position.Our financial statements are subject to the application of U.S. GAAP, which is periodically revised. Accordingly, from time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board (FASB). The impact of accounting pronouncements that have been issued but are not yet required to be implemented is disclosed in our reports filed with the SEC. See Note 2 of the Notes to the Consolidated Financial Statements.
The FASB and International Accounting Standards Board (IASB) have ongoing projects to revise accounting standards for insurance contracts. The FASB has focused on disclosures for short-duration insurance contracts, which primarily relate to our property casualty products, and on targeted improvements to accounting measurements and disclosures for long-duration insurance contracts, which primarily relate to our life and annuity products. The IASB continues to contemplate significant changes to accounting measurements for both short and long-duration insurance contracts. While the final resolution of changes to U.S. GAAP and International Financial Reporting Standards pursuant to these projects isremains unclear, changes to the manner in which we account for insurance products could have a significant impact on our future financial reports, operations, capital management and business. Further, the adoption of a new insurance contracts standard as well as other future accounting standards could have a material effect on our reported results of operations and reported financial condition.
Changes in our assumptions regarding the discount rate, expected rate of return, and expected compensation for our pension and other postretirement benefit plans may result in increased expenses and reduce our profitability. We determine our pension and other postretirement benefit plan costs based on assumed discount rates, expected rates of return on plan assets, expected increases in compensation levels and trends in health care costs. Changes in these assumptions, including from the impact of a sustained low interest rate environment, may result in increased expenses and reduce our profitability. See Note 2120 to the Consolidated Financial Statements for further details on our pension and postretirement benefit plans.
AIG 2013 Form 10-K
ITEM 1B / UNRESOLVED STAFF COMMENTS
ITEM 1B / UNRESOLVED STAFF COMMENTS |
There are no material unresolved written comments that were received from the SEC staff 180 days or more before the end of AIG'sour fiscal year relating to AIG's periodic or current reports under the Securities Exchange Act.Act of 1934.
ITEM 2 / PROPERTIES
AIG and its subsidiariesWe operate from over 400approximately 350 offices in the United States and approximately 600500 offices in over 75 foreign countries. The following offices are located in buildings in the United States owned by AIG and its subsidiaries:us:
Non-Life Insurance Companies: •Wilmington, Delaware •Stevens Point, Wisconsin •Greensboro and Winston-Salem, North Carolina | | |
AIG Property Casualty:
| | AIG Life Insurance Companies:•Amarillo and Retirement:Houston, Texas |
•Corporate and Other:
•175 Water Street in New York, New York | | •
Amarillo, Ft. Worth and Houston, Texas•
|
•
Wilmington, Delaware
| | •
Nashville, Tennessee
|
•
Stevens Point, Wisconsin
| | |
•
San Juan, Puerto Rico
| | |
Other Operations: |
|
|
•
Greensboro and Winston-Salem, North Carolina
| | |
•
Livingston, New Jersey | | |
• Stowe, Vermont •Ft. Worth, Texas | | |
In addition, AIG Property Casualty ownsNon-Life Insurance Companies own offices in approximately 20 foreign countries and jurisdictions including Argentina, Bermuda, Colombia, Ecuador, Japan, Mexico, the U.K., Taiwan, and Venezuela. The remainder of the office space utilized by AIG and its subsidiarieswe utilize is leased. AIG believesWe believe that itsour leases and properties are sufficient for itsour current purposes.
LOCATIONS OF CERTAIN ASSETS
As of December 31, 2013,2015, approximately 910 percent of theour consolidated assets of AIG were located outside the U.S. and Canada, including $295$659 million of cash and securities on deposit with regulatory authorities in those locations. See Note 3 to the Consolidated Financial Statements for additional geographic information. See Note 65 to the Consolidated Financial Statements for total carrying valuesamounts of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities.
Operations outside the U.S. and Canada and assets held abroad may be adversely affected by political developments in foreign countries, including tax changes, nationalization and changes in regulatory policy, as well as by consequence of hostilities and unrest. The risks of such occurrences and their overall effect upon AIGus vary from country to country and cannot be predicted. If expropriation or nationalization does occur, AIG'sour policy is to take all appropriate measures to seek recovery of any affected assets. Certain of the countries in which AIG'sour business is conducted have currency restrictions that generally cause a delay in a company'scompany’s ability to repatriate assets and profits. See also Item 1A. Risk Factors — Business and Operations for additional information.
ITEM 3 / LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 15 — Contingencies, Commitments and Guarantees to the Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 4 / MINE SAFETY DISCLOSURES
Not applicable.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
Item 5 / market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities
Part II
ITEM 5 / MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
ITEM 5 / MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
AIG'sAIG’s common stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG), as well as on the Tokyo Stock Exchange. There were approximately 36,31929,245 stockholders of record of AIG Common Stock as of January 31, 2014.February 11, 2016.
The following table presents high and low closing sale prices of AIG Common Stock on the New York Stock Exchange Composite Tape for each quarter of 20132015 and 2012:2014, and the dividends declared per share during those periods:
| 2015 | | 2014 |
| | High | | Low | | Dividends | | High | | | Low | | Dividends |
First quarter | $ | 56.42 | $ | 48.87 | $ | 0.125 | $ | 52.22 | | $ | 46.88 | $ | 0.125 |
Second quarter | | 63.32 | | 54.81 | | 0.125 | | 55.72 | | | 49.40 | | 0.125 |
Third quarter | | 64.54 | | 55.66 | | 0.280 | | 56.33 | | | 51.98 | | 0.125 |
Fourth quarter | | 64.12 | | 56.92 | | 0.280 | | 56.51 | | | 49.40 | | 0.125 |
Dividends
| | | | | | | | | | | | | |
| | |
| | 2013 | | 2012 | |
|---|
| | High
| | Low
| | High
| | Low
| |
|---|
| | |
First quarter | | $ | 39.58 | | $ | 34.84 | | $ | 30.83 | | $ | 23.54 | |
Second quarter | | | 46.21 | | | 37.69 | | | 34.76 | | | 27.21 | |
Third quarter | | | 50.57 | | | 44.22 | | | 35.02 | | | 30.15 | |
Fourth quarter | | | 52.30 | | | 47.30 | | | 37.21 | | | 30.68 | |
| | |
DIVIDENDS
On August 1, 2013,February 11, 2016, our Board of Directors declared a cash dividend on AIG Common Stock of $0.10 per share, which was paid on September 26, 2013 to shareholders of record on September 12, 2013.
On October 31, 2013, our Board of Directors declared a cash dividend on AIG Common Stock of $0.10 per share, which was paid on December 19, 2013 to shareholders of record on December 5, 2013.
On February 13, 2014, our Board of Directors declared a cash dividend on AIG Common Stock of $0.125$0.32 per share, payable on March 25, 201428, 2016 to shareholders of record on March 11, 2014.14, 2016.
Any payment of dividends must be approved by AIG'sAIG’s Board of Directors. In determining whether to pay any dividend, our Board of Directors may consider AIG'sAIG’s financial position, the performance of our businesses, our consolidated financial condition, results of operations and liquidity, available capital, the existence of investment opportunities, and other factors. AIG ismay become subject to restrictions on the payment of dividends and purchases of AIG Common Stock as a result of being regulated as a SLHC, and AIG may become subject to other restrictions on the payment of dividends and repurchases of AIG Common Stock as anonbank SIFI and a G-SII. See Item 1. Business — Regulation and Item 1A. Risk Factors — Regulation for further discussion.
For a discussion of certain restrictions on the payment of dividends to AIG by some of its insurance subsidiaries, see Item 1A. Risk Factors — Liquidity, Capital and Credit — AIG Parent'sParent’s ability to access funds from our subsidiaries is limited, and Note 1918 to the Consolidated Financial Statements.
EQUITY COMPENSATION PLANS
Our table of equity compensation plans will be included in the definitive proxy statement for AIG's 2014AIG’s 2016 Annual Meeting of Shareholders. The definitive proxy statement will be filed with the SEC no later than 120 days after the end of AIG'sAIG’s fiscal year pursuant to Regulation 14A.
TableTABLE OF CONTENTS
Item 5 / market for registrant’s common equity, related stockholder matters and issuer purchases of Contents
equity securities
ITEM 5 / MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PURCHASES OF EQUITY SECURITIES
The following table provides the information with respect to purchases made by or on behalf of AIG or any "affiliated purchaser"“affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934)1934 (the Exchange Act)) of AIG Common Stock during the three months ended December 31, 2013:2015:
| | | | | | | | | | | | | |
| | |
Period
| | Total Number
of Shares
Repurchased
| | Average
Price Paid
per Share
| | Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
| | Approximate Dollar Value of Shares
that May Yet Be Purchased Under the
Plans or Programs (in millions)
| |
|---|
| | |
October 1 – 31 | | | – | | $ | – | | | – | | $ | 808 | |
November 1 – 30 | | | 7,565,549 | | | 49 | | | 7,565,549 | | | 440 | |
December 1 – 31 | | | 727,904 | | | 50 | | | 727,904 | | | 403 | |
| | |
Total | | | 8,293,453 | | $ | 49 | | | 8,293,453 | | $ | 403 | |
| | |
| Total Number | | Average | Total Number of Shares | | Approximate Dollar Value of Shares |
| of Shares | | Price Paid | Purchased as Part of Publicly | | that May Yet Be Purchased Under the |
Period | Repurchased | | per Share | Announced Plans or Programs | | Plans or Programs (in millions) |
October 1 - 31 | 10,363,200 | $ | 58.06 | 10,363,200 | $ | 2,926 |
November 1 - 30 | 10,964,737 | | 61.45 | 10,964,737 | | 2,252 |
December 1 - 31 | 31,566,100 | | 61.53 | 31,566,100 | | 3,310 |
Total | 52,894,037 | $ | 60.83 | 52,894,037 | $ | 3,310 |
On August 1, 2013, ourOur Board of Directors has authorized the repurchase of shares of AIG Common Stock withthrough a series of actions. On December 16, 2015, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of $3.0 billion.
During the three-month period ended December 31, 2015, we repurchased approximately 53 million shares of AIG Common Stock under this authorization for an aggregate purchase price of upapproximately $3.2 billion. Pursuant to $1.0an Exchange Act Rule 10b5-1 plan, from January 1 to February 11, 2016, we have repurchased approximately 44 million shares of AIG Common Stock for an approximate purchase price of $2.5 billion.
On February 11, 2016, our Board of Directors authorized an additional increase to the repurchase authorization of AIG Common Stock of $5.0 billion, resulting in a remaining authorization on such date of approximately $5.8 billion. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise.otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The authorization has no set expiration or termination date. AIG purchased approximately 12 million sharestiming of AIG Common Stock pursuant to the authorization in 2013 for an aggregate purchase priceany future share repurchases will depend on market conditions, our financial condition, results of approximately $597 million. On February 13, 2014, our Board of Directors increased the August 1, 2013 authorization to repurchase shares of AIG Common Stock by $1.0 billion, resulting in an aggregate remaining authorization of approximately $1.4 billion.operations, liquidity and other factors.
See Note 16 to the Consolidated Financial Statements for additional information on AIGour share purchases.
TABLE OF CONTENTS
COMMON STOCK
Item 5 / market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities
common Stock PERFORMANCE GRAPH
The following Performance Graph compares the cumulative total shareholder return on AIG Common Stock for a five-year period (December 31, 20082010 to December 31, 2013)2015) with the cumulative total return of the S&P's&P’s 500 stock index (which includes AIG) and a peer group of companies consisting of 15 insurance companies to which we compare our business and operations:
| | |
• ACE LimitedLimited* | | • Lincoln National Corporation |
• AEGON, N.V. | | • MetLife, Inc. |
• Aflac Incorporated | | • Principal Financial Group, Inc. |
• Allianz Group | | • Prudential Financial, Inc. |
• AXA Group | | • The Travelers Companies, Inc. |
• The Chubb CorporationCorporation* | | • XL Capital Ltd. |
• CNA Financial Corporation | | • Zurich Insurance Group |
• The Hartford Financial Services Group, Inc. | |
* In January 2016, ACE Limited acquired The Chubb Corporation. The combined organization now operates as Chubb Limited.
TableTABLE OF CONTENTS
Item 5 / market for registrant’s common equity, related stockholder matters and issuer purchases of Contents
equity securities
ITEM 5 / MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Five-Year Cumulative Total Shareholder Returns
Value of $100 Invested on December 31, 20082010
Dividend reinvestment has been assumed and returns have been weighted to reflect relative stock market capitalization.
| As of December 31, |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 |
AIG | $ | 100.00 | | $ | 49.05 | | $ | 74.64 | | $ | 108.38 | | $ | 120.02 | | $ | 134.63 |
S&P 500 | | 100.00 | | | 102.11 | | | 118.45 | | | 156.82 | | | 178.29 | | | 180.75 |
Peer Group | | 100.00 | | | 86.72 | | | 111.36 | | | 165.52 | | | 167.48 | | | 175.50 |
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
|---|
| | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | |
|---|
AIG | | $ | 100.00 | | $ | 95.48 | | $ | 183.50 | | $ | 90.02 | | $ | 136.97 | | $ | 198.87 | |
S&P 500 | | | 100.00 | | | 126.46 | | | 145.51 | | | 148.59 | | | 172.37 | | | 228.19 | |
Peer Group | | | 100.00 | | | 116.50 | | | 125.85 | | | 109.14 | | | 140.15 | | | 208.31 | |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
Item 6 / Selected financial data
ITEM 6 / SELECTED FINANCIAL DATA
ITEM 6 / SELECTED FINANCIAL DATA
The Selected Consolidated Financial Data should be read in conjunction with Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.
| Years Ended December 31, |
(in millions, except per share data) | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Revenues: | | | | | | | | | | | | | | | |
Premiums | $ | 36,655 | | $ | 37,254 | | $ | 37,499 | | $ | 38,189 | | $ | 39,026 | |
Policy fees | | 2,755 | | | 2,615 | | | 2,340 | | | 2,192 | | | 2,197 | |
Net investment income | | 14,053 | | | 16,079 | | | 15,810 | | | 20,343 | | | 14,755 | |
Net realized capital gains | | 776 | | | 739 | | | 1,939 | | | 1,087 | | | 803 | |
Aircraft leasing revenue | | - | | | 1,602 | | | 4,420 | | | 4,504 | | | 4,508 | |
Other income | | 4,088 | | | 6,117 | | | 6,866 | | | 4,899 | | | 3,861 | |
Total revenues | | 58,327 | | | 64,406 | | | 68,874 | | | 71,214 | | | 65,150 | |
Benefits, losses and expenses: | | | | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 31,345 | | | 28,281 | | | 29,503 | | | 32,036 | | | 33,523 | |
Interest credited to policyholder account balances | | 3,731 | | | 3,768 | | | 3,892 | | | 4,340 | | | 4,432 | |
Amortization of deferred policy acquisition costs | | 5,236 | | | 5,330 | | | 5,157 | | | 5,709 | | | 5,486 | |
General operating and other expenses | | 12,686 | | | 13,138 | | | 13,564 | | | 13,013 | | | 11,783 | |
Interest expense | | 1,281 | | | 1,718 | | | 2,142 | | | 2,319 | | | 2,444 | |
Net loss on extinguishment of debt | | 756 | | | 2,282 | | | 651 | | | 32 | | | 2,908 | |
Aircraft leasing expenses | | - | | | 1,585 | | | 4,549 | | | 4,138 | | | 5,401 | |
Net (gain) loss on sale of properties and divested businesses | | 11 | | | (2,197) | | | 48 | | | 6,736 | | | 74 | |
Total benefits, losses and expenses | | 55,046 | | | 53,905 | | | 59,506 | | | 68,323 | | | 66,051 | |
Income (loss) from continuing operations before income taxes | | 3,281 | | | 10,501 | | | 9,368 | | | 2,891 | | | (901) | |
Income tax expense (benefit) | | 1,059 | | | 2,927 | | | 360 | | | (808) | | | (19,764) | |
Income from continuing operations | | 2,222 | | | 7,574 | | | 9,008 | | | 3,699 | | | 18,863 | |
Income (loss) from discontinued operations, net of taxes | | - | | | (50) | | | 84 | | | 1 | | | 2,467 | |
Net income | | 2,222 | | | 7,524 | | | 9,092 | | | 3,700 | | | 21,330 | |
Net income (loss) from continuing operations attributable | | | | | | | | | | | | | | | |
to noncontrolling interests: | | 26 | | | (5) | | | 7 | | | 262 | | | 708 | |
Net income attributable to AIG | | 2,196 | | | 7,529 | | | 9,085 | | | 3,438 | | | 20,622 | |
Income per common share attributable to AIG | | | | | | | | | | | | | | | |
common shareholders | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | |
Income from continuing operations | | 1.69 | | | 5.31 | | | 6.11 | | | 2.04 | | | 9.65 | |
Income (loss) from discontinued operations | | - | | | (0.04) | | | 0.05 | | | - | | | 1.36 | |
Net income attributable to AIG | | 1.69 | | | 5.27 | | | 6.16 | | | 2.04 | | | 11.01 | |
Diluted | | | | | | | | | | | | | | | |
Income from continuing operations | | 1.65 | | | 5.24 | | | 6.08 | | | 2.04 | | | 9.65 | |
Income (loss) from discontinued operations | | - | | | (0.04) | | | 0.05 | | | - | | | 1.36 | |
Net income attributable to AIG | | 1.65 | | | 5.20 | | | 6.13 | | | 2.04 | | | 11.01 | |
Dividends declared per common share | | 0.81 | | | 0.50 | | | 0.20 | | | - | | | - | |
Year-end balance sheet data: | | | | | | | | | | | | | | | |
Total investments | | 338,354 | | | 355,766 | | | 356,428 | | | 375,824 | | | 410,438 | |
Total assets | | 496,943 | | | 515,581 | | | 541,329 | | | 548,633 | | | 553,054 | |
Long-term debt | | 29,350 | | | 31,217 | | | 41,693 | | | 48,500 | | | 75,253 | |
Total liabilities | | 406,733 | | | 408,309 | | | 440,218 | | | 449,630 | | | 442,138 | |
Total AIG shareholders' equity | | 89,658 | | | 106,898 | | | 100,470 | | | 98,002 | | | 101,538 | |
Total equity | | 90,210 | | | 107,272 | | | 101,081 | | | 98,669 | | | 102,393 | |
| | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
|---|
| | |
| | Years Ended December 31, | |
|---|
(in millions, except per share data)
| | 2013
| | 2012
| | 2011
| | 2010(a)
| | 2009(a)
| |
|---|
| | |
Revenues: | | | | | | | | | | | | | | | | |
Premiums | | $ | 37,350 | | $ | 38,047 | | $ | 39,026 | | $ | 45,352 | | $ | 48,613 | |
Policy fees | | | 2,535 | | | 2,349 | | | 2,309 | | | 2,418 | | | 2,329 | |
Net investment income | | | 15,810 | | | 20,343 | | | 14,755 | | | 20,934 | | | 18,992 | |
Net realized capital gains (losses) | | | 1,744 | | | 930 | | | 691 | | | (847 | ) | | (3,706 | ) |
Aircraft leasing revenue | | | 4,420 | | | 4,504 | | | 4,508 | | | 4,749 | | | 4,967 | |
Other income | | | 6,819 | | | 4,848 | | | 3,816 | | | 5,680 | | | 4,986 | |
| | |
Total revenues | | | 68,678 | | | 71,021 | | | 65,105 | | | 78,286 | | | 76,181 | |
| | |
Benefits, claims and expenses: | | | | | | | | | | | | | | | | |
Policyholder benefits and claims incurred | | | 29,503 | | | 32,036 | | | 33,523 | | | 41,429 | | | 45,381 | |
Interest credited to policyholder account balances | | | 3,892 | | | 4,340 | | | 4,432 | | | 4,483 | | | 4,574 | |
Amortization of deferred policy acquisition costs | | | 5,157 | | | 5,709 | | | 5,486 | | | 5,821 | | | 6,670 | |
Other acquisition and insurance expenses | | | 9,166 | | | 9,235 | | | 8,458 | | | 10,163 | | | 9,815 | |
Interest expense | | | 2,142 | | | 2,319 | | | 2,444 | | | 6,742 | | | 13,237 | |
Aircraft leasing expenses | | | 4,549 | | | 4,138 | | | 5,401 | | | 5,289 | | | 3,506 | |
Net loss on extinguishment of debt | | | 651 | | | 32 | | | 2,908 | | | 104 | | | – | |
Net (gain) loss on sale of properties and divested businesses | | | 48 | | | 6,736 | | | 74 | | | (19,566 | ) | | 1,271 | |
Other expenses | | | 4,202 | | | 3,585 | | | 3,280 | | | 4,155 | | | 6,169 | |
| | |
Total benefits, claims and expenses | | | 59,310 | | | 68,130 | | | 66,006 | | | 58,620 | | | 90,623 | |
| | |
Income (loss) from continuing operations before income taxes(b) | | | 9,368 | | | 2,891 | | | (901 | ) | | 19,666 | | | (14,442 | ) |
Income tax expense (benefit) | | | 360 | | | (808 | ) | | (19,764 | ) | | 6,736 | | | (2,055 | ) |
| | |
Income (loss) from continuing operations | | | 9,008 | | | 3,699 | | | 18,863 | | | 12,930 | | | (12,387 | ) |
Income (loss) from discontinued operations, net of taxes | | | 84 | | | 1 | | | 2,467 | | | (645 | ) | | 2,661 | |
| | |
Net income (loss) | | | 9,092 | | | 3,700 | | | 21,330 | | | 12,285 | | | (9,726 | ) |
Net income (loss) attributable to AIG | | | 9,085 | | | 3,438 | | | 20,622 | | | 10,058 | | | (8,362 | ) |
| | |
Income (loss) per common share attributable to AIG common shareholders | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 6.11 | | | 2.04 | | | 9.65 | | | 16.02 | | | (90.50 | ) |
Income (loss) from discontinued operations | | | 0.05 | | | – | | | 1.36 | | | (1.04 | ) | | 19.13 | |
Net income (loss) attributable to AIG | | | 6.16 | | | 2.04 | | | 11.01 | | | 14.98 | | | (71.37 | ) |
Diluted | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 6.08 | | | 2.04 | | | 9.65 | | | 16.02 | | | (90.50 | ) |
Income (loss) from discontinued operations | | | 0.05 | | | – | | | 1.36 | | | (1.04 | ) | | 19.13 | |
Net income (loss) attributable to AIG | | | 6.13 | | | 2.04 | | | 11.01 | | | 14.98 | | | (71.37 | ) |
Dividends declared per common share | | | 0.20 | | | – | | | – | | | – | | | – | |
| | |
Year-end balance sheet data: | | | | | | | | | | | | | | | | |
Total investments | | | 356,428 | | | 375,824 | | | 410,438 | | | 410,412 | | | 601,165 | |
Total assets | | | 541,329 | | | 548,633 | | | 553,054 | | | 675,573 | | | 838,346 | |
Long-term debt | | | 41,693 | | | 48,500 | | | 75,253 | | | 106,461 | | | 136,733 | |
Total liabilities | | | 440,218 | | | 449,630 | | | 442,138 | | | 568,363 | | | 748,550 | |
Total AIG shareholders' equity | | | 100,470 | | | 98,002 | | | 101,538 | | | 78,856 | | | 60,585 | |
Total equity | | | 101,081 | | | 98,669 | | | 102,393 | | | 106,776 | | | 88,837 | |
| | |
Book value per share(a) | | | 68.62 | | | 66.38 | | | 53.53 | | | 561.40 | | | 448.54 | |
Book value per share, excluding Accumulated other comprehensive income (loss)(a) | | | 64.28 | | | 57.87 | | | 50.11 | | | 498.25 | | | 400.90 | |
AIG Property Casualty combined ratio | | | 101.3 | | | 108.5 | | | 108.7 | | | 116.8 | | | 108.4 | |
| | |
Other data (from continuing operations): | | | | | | | | | | | | | | | | |
Other-than-temporary impairments | | | 327 | | | 1,167 | | | 1,280 | | | 3,039 | | | 6,696 | |
Adjustment to federal deferred tax valuation allowance | | | (3,165 | ) | | (1,907 | ) | | (18,307 | ) | | 1,361 | | | 2,986 | |
Amortization of prepaid commitment fee asset | | | – | | | – | | | 49 | | | 3,471 | | | 8,359 | |
Catastrophe-related losses(c) | | $ | 787 | | $ | 2,652 | | $ | 3,307 | | $ | 1,076 | | $ | 53 | |
| | |
Book value per common share | | 75.10 | | | 77.69 | | | 68.62 | | | 66.38 | | | 53.53 | |
Book value per common share, excluding Accumulated other | | | | | | | | | | | | | | | |
comprehensive income (loss)(a) | | 72.97 | | | 69.98 | | | 64.28 | | | 57.87 | | | 50.11 | |
Book value per common share, excluding Accumulated other | | | | | | | | | | | | | | | |
comprehensive income (loss) and Deferred tax assets(a) | $ | 58.94 | | $ | 58.23 | | $ | 52.12 | | $ | 45.30 | | $ | 39.57 | |
ROE | | 2.2 | % | | 7.1 | % | | 9.2 | % | | 3.4 | % | | 24.1 | % |
ROE - after-tax operating income, excluding AOCI(a) | | 3.1 | | | 6.9 | | | 7.4 | | | 7.1 | | | 2.6 | |
ROE - after-tax operating income, excluding AOCI and DTA(a) | | 3.7 | | | 8.4 | | | 9.3 | | | 9.0 | | | 2.7 | |
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| | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in millions, except per share data) | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Other data (from continuing operations): | | | | | | | | | | | | | | | |
Other-than-temporary impairments | $ | 671 | | $ | 247 | | $ | 232 | | $ | 1,050 | | $ | 1,142 | |
Adjustment to federal deferred tax valuation allowance | | 110 | | | (181) | | | (3,165) | | | (1,907) | | | (18,307) | |
Catastrophe-related losses(b) | $ | 731 | | $ | 728 | | $ | 787 | | $ | 2,652 | | $ | 3,307 | |
(a) Comparability between 2010 and 2009 data is affected by the deconsolidation of AIA in the fourth quarter of 2010. Book value per common share excluding Accumulated other comprehensive income (loss) is a, Book value per common share excluding AOCI and Deferred Tax Assets (DTA), return on equity – after-tax operating income excluding AOCI and return on equity – after-tax operating income excluding AOCI and DTA are non-GAAP measure.measures and the reconciliations are below. See Item 7. MD&A — Use of Non-GAAPNon‑GAAP Measures for additional information. Comparability of 2010 and 2009 is affected by a one for twenty reverse stock split.
(b) Reduced by fourth quarter reserve strengthening charges of $4.2 billion and $2.2 billion in 2010 and 2009, respectively, related to the annual review of AIG Property Casualty loss and loss adjustment reserves.
(c) Catastrophe-related losses are generally weather or seismic events having a net impact on AIG Property Casualtyour property casualty businesses in excess of $10 million each.
AIG 2013 Form 10-K
ITEM 6 / SELECTED FINANCIAL DATA
Items Affecting Comparability Between Periods
The following are significant developments that affected multiple periods and financial statement captions. Other items that affected comparability are included in the footnotes to the table presented immediately above.
Adjustments to Federal Deferred Tax Valuation Allowance
AIGWe concluded that $18.4 billion of the deferred tax asset valuation allowance for the U.S. consolidated income tax group should be released through the Consolidated Statements of Income in 2011. The valuation allowance resulted primarily from losses subject to U.S. income taxes recorded from 2008 through 2010. See Note 2322 to the Consolidated Financial Statements for further discussion.
Aircraft Leasing
We determined ILFC no longer met the criteria at December 31, 2013 to be presented in discontinued operations. ILFC operating results, which were previously presented as discontinued operations, have been reclassified as continuing operations in all periods. ILFC's results are reflected in Aircraft leasing revenue and Aircraft leasing expense, and the loss associated with the 2012 classification of ILFC as held for sale is included in Net loss on sale of properties and divested businesses in the Consolidated Statements of Income. The assets and liabilities of ILFC are classified as held for sale at December 31, 2013 and 2012. See Notes 1 and 4 to the Consolidated Financial Statements for a further discussion.
Capitalization and Book Value Per Common Share
On January 14, 2011, we completed a series of integrated transactions to recapitalize AIG (the Recapitalization) with the Department of the Treasury, the Federal Reserve Bank of New York (FRBNY) and AIG Credit Facility Trust, including the repayment of all amounts owed under the Credit Facility with the FRBNY (the FRBNY Credit Facility). As a result of the closing of the Recapitalization on January 14, 2011, the remaining preferred interests (the SPV Preferred InterestsInterests) in the special purpose vehicles that held remaining AIA Group Limited (AIA) shares and the proceeds of the AIA initial public offering and the American Life Insurance Company (ALICO) sale (the AIA SPV and ALICO SPV, respectively) held by the FRBNY of approximately $26.4 billion were purchased by AIG and transferred to the Department of the Treasury. The SPV Preferred Interests were no longer considered permanent equity on AIG'sAIG’s Consolidated Balance Sheets, and were classified as redeemable noncontrolling interests. See
Asset Dispositions in 2011, 2014 and 2015
We completed the sale of ILFC on May 14, 2014, and in 2015 we sold all of our ordinary shares of AerCap Holdings N.V. (AerCap) received as part of the consideration for the sale of ILFC, as further discussed in Note 171 to the Consolidated Financial Statements for further discussion.Statements. We also executed multiple asset dispositions in 2011.
Reconciliation of Non-GAAP measures included in Selected Financial Data
The following table presents pro forma ratios as if the Recapitalization had been consummated in 2009 and a reconciliation of bookBook value per common share to bookBook value per common share, excluding Accumulated other comprehensive
AIG 2013 Form 10-K
ITEM 6 / SELECTED FINANCIAL DATA
income (loss),AOCI, and Book value per common share, excluding AOCI and DTA, which is aare non-GAAP measure.measures. See Item 7. MD&A — Use of Non-GAAPNon‑GAAP Measures for additional information.*
| At December 31, |
(in millions, except per share data) | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Total AIG shareholders' equity | $ | 89,658 | $ | 106,898 | $ | 100,470 | $ | 98,002 | $ | 101,538 |
Accumulated other comprehensive income | | 2,537 | | 10,617 | | 6,360 | | 12,574 | | 6,481 |
Total AIG shareholders' equity, excluding AOCI | | 87,121 | | 96,281 | | 94,110 | | 85,428 | | 95,057 |
| | | | | | | | | | |
Deferred tax assets | | 16,751 | | 16,158 | | 17,797 | | 18,549 | | 20,007 |
Total AIG shareholders' equity, excluding AOCI and DTA | $ | 70,370 | $ | 80,123 | $ | 76,313 | $ | 66,879 | $ | 75,050 |
| | | | | | | | | | |
Total common shares outstanding | | 1,193,916,617 | | 1,375,926,971 | | 1,464,063,323 | | 1,476,321,935 | | 1,896,821,482 |
Book value per common share | $ | 75.10 | $ | 77.69 | $ | 68.62 | $ | 66.38 | $ | 53.53 |
Book value per common share, excluding AOCI | | 72.97 | | 69.98 | | 64.28 | | 57.87 | | 50.11 |
Book value per common share, excluding AOCI and DTA | $ | 58.94 | $ | 58.23 | $ | 52.12 | $ | 45.30 | $ | 39.57 |
The following table presents a reconciliation of Return on equity to Return on equity, after-tax operating income, excluding AOCI, and Return on equity, after-tax operating income, excluding AOCI and DTA, which are non-GAAP measures. See Item 7. MD&A — Use of Non‑GAAP Measures for additional information.
Years Ended December 31, | | | | | | | | | | | | | | | |
(dollars in millions) | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Net income (loss) attributable to AIG | $ | 2,196 | | $ | 7,529 | | $ | 9,085 | | $ | 3,438 | | $ | 20,622 | |
After-tax operating income attributable to AIG | | 2,927 | | | 6,630 | | | 6,650 | | | 6,542 | | | 2,021 | |
Average AIG Shareholders' equity | | 101,558 | | | 105,589 | | | 98,850 | | | 101,873 | | | 85,639 | |
Average AOCI | | 7,598 | | | 9,781 | | | 8,865 | | | 9,718 | | | 8,234 | |
Average AIG Shareholders' equity, excluding average AOCI | | 93,960 | | | 95,808 | | | 89,985 | | | 92,155 | | | 77,405 | |
Average DTA | | 15,803 | | | 16,611 | | | 18,150 | | | 19,250 | | | 2,500 | |
Average AIG Shareholders' equity, excluding average AOCI and DTA | $ | 78,157 | | $ | 79,197 | | $ | 71,835 | | $ | 72,905 | | $ | 74,905 | |
ROE | | 2.2 | % | | 7.1 | % | | 9.2 | % | | 3.4 | % | | 24.1 | % |
ROE - after-tax operating income, excluding AOCI | | 3.1 | | | 6.9 | | | 7.4 | | | 7.1 | | | 2.6 | |
ROE - after-tax operating income, excluding AOCI and DTA | | 3.7 | | | 8.4 | | | 9.3 | | | 9.0 | | | 2.7 | |
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| |
| |
| |
| |
| |
| |
|---|
| | |
| | At December 31, | |
|---|
(in millions, except per share data)
| |
|---|
| | 2013
| | 2012
| | 2011
| | 2010
| | 2009
| |
|---|
| | |
Total AIG shareholders' equity | | $ | 100,470 | | $ | 98,002 | | $ | 101,538 | | $ | 78,856 | | $ | 60,585 | |
Recapitalization | | | – | | | – | | | – | | | (3,328 | ) | | – | |
Value on conversion of equity units | | | – | | | – | | | – | | | 2,169 | | | 5,880 | |
| | |
Pro forma shareholders' equity | | | 100,470 | | | 98,002 | | | 101,538 | | | 77,697 | | | 66,465 | |
Accumulated other comprehensive income | | | 6,360 | | | 12,574 | | | 6,481 | | | 8,871 | | | 6,435 | |
| | |
Total AIG shareholders' equity, excluding accumulated other comprehensive income | | $ | 94,110 | | $ | 85,428 | | $ | 95,057 | | $ | 69,985 | | $ | 54,150 | |
| | |
Total common shares outstanding | | | 1,464,063,323 | | | 1,476,321,935 | | | 1,896,821,482 | | | 140,463,159 | | | 135,070,907 | |
Issuable for equity units | | | – | | | – | | | – | | | 2,854,069 | | | 7,736,904 | |
Shares assumed converted | | | – | | | – | | | – | | | 1,655,037,962 | | | 1,655,037,962 | |
| | |
Pro forma common shares outstanding | | | 1,464,063,323 | | | 1,476,321,935 | | | 1,896,821,482 | | | 1,798,355,190 | | | 1,797,845,773 | |
| | |
Book value per common share | | $ | 68.62 | | $ | 66.38 | | $ | 53.53 | | $ | 561.40 | | $ | 448.54 | |
Book value per common share, excluding accumulated other comprehensive income | | $ | 64.28 | | $ | 57.87 | | $ | 50.11 | | $ | 498.25 | | $ | 400.90 | |
Pro forma book value per share | | | N/A | | | N/A | | | N/A | | $ | 43.20 | | $ | 36.97 | |
Pro forma book value per share, excluding accumulated other comprehensive income | | | N/A | | | N/A | | | N/A | | $ | 38.27 | | $ | 33.39 | |
| | |
* Amounts for periods after December 31, 2009 have been revised to reflect reclassification of income taxes from AOCI to additional paid in capital to correct the presentation of components of AIG shareholders' equity. These income tax items related to the creation in 2009 of special purpose vehicles that held our interests in AIA Group Limited (AIA) and American Life Insurance Company (ALICO). There was no effect on Total AIG shareholders' equity or on Total equity as a result of this reclassification.
TABLE OF CONTENTS
FRBNY Activity and Effect on Interest Expense in 2010
The decline in interest expense in 2010 was due primarily to a reduced weighted-average interest rate on borrowings, a lower average outstanding balance and a decline in amortization of the prepaid commitment fee asset related to the partial repayment of the credit facility provided by the FRBNY (the FRBNY Credit Facility). On January 14, 2011, AIG repaid the remaining $20.7 billion and terminated this facility, resulting in a net $3.3 billion pretax charge in the first quarter of 2011, representing primarily the accelerated amortization of the remaining prepaid commitment fee asset included in Net loss on extinguishment of debt. See Note 24 to the Consolidated Financial Statements for further discussion of the Recapitalization.
As a result of the closing of the Recapitalization on January 14, 2011, the preferred interests (the SPV Preferred Interests) in the special purpose vehicles that held remaining AIA shares and the proceeds of the AIA initial public offering and the ALICO sale (the SPVs) were transferred to the Department of the Treasury. After such closing, the SPV Preferred Interests were not considered permanent equity on AIG's Consolidated Balance Sheets and were classified as redeemable noncontrolling interests.
Asset Dispositions in 2011 and 2013
We entered into an agreement to sell ILFC on December 16, 2013 and executed multiple asset dispositions in 2011, as further discussed in Note 4 to the Consolidated Financial Statements.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K and other publicly available documents may include, and officers and representatives of American International Group, Inc. (AIG) may from time to time make, projections, goals, assumptions and statements that may constitute "forward-looking statements"“forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only AIG'sour belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG'sour control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as "believe,"will," "anticipate," "expect," "intend," "plan," "view," "target"“believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” "goal" or "estimate."“estimate.” These projections, goals, assumptions and statements may address, among other things:things, our:
| | |
•
the monetization of AIG's interests in International Lease Finance Corporation (ILFC), including whether AIG's proposed sale of ILFC will be completed and if completed, the timing and final terms of such sale;•
•
AIG's exposures to subprime mortgages, monoline insurers, the residential and commercial real estate markets, state and municipal bond issuers, and sovereign bond issuers;issuers, the energy sector and currency exchange rates;
• AIG's exposure to European governments and European financial institutions;
| | •
AIG's •strategy for risk management;
•sales of businesses; AIG's •restructuring of business operations;
•generation of deployable capital; • AIG'sstrategies to increase return on equity and earnings per share;
•
| AIG's •strategies to grow net investment income, efficiently manage capital, grow book value per common share, and reduce expenses;
•anticipated restructuring charges and annual cost savings; AIG's •anticipated business or asset divestitures or monetizations;
•anticipated organizational and business changes; •strategies for customer retention, growth, product development, market position, financial results and reserves; and • thesubsidiaries' revenues and combined ratios of AIG's subsidiaries.ratios.
|
It is possible that AIG'sour actual results and financial condition will differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements. Factors that could cause AIG'sour actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:
| | |
• changes in market conditions; •negative impacts on customers, business partners and other stakeholders; •the occurrence of catastrophic events, both natural and man-made; • significant legal proceedings; • the timing and applicable requirements of any new regulatory framework to which AIG iswe are subject as a savings and loan holding company (SLHC), as anonbank systemically important financial institution (SIFI) and as a global systemically important insurer (G-SII)(G‑SII); • concentrations in AIG'sour investment portfolios; • actions by credit rating agencies; | | • judgments concerning casualty insurance underwriting and insurance liabilities; •our ability to successfully manage run-off insurance portfolios; | •our ability to successfully reduce costs and expenses and make business and organizational changes without negatively impacting client relationships or our competitive position; •our ability to successfully dispose of, or monetize, businesses or assets; •judgments concerning the recognition of deferred tax assets; •judgments concerning estimated restructuring charges and estimated cost savings; and • such other factors discussed in: • Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K;10‑K; and • this Part II, Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) of this Annual Report on Form 10-K. |
AIG isWe are not under any obligation (and expressly disclaimsdisclaim any obligation) to update or alter any projections, goals, assumptions or other statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.
The MD&A is organized as follows:
INDEX TO ITEM 7
Throughout the MD&A, we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.
AIG hasWe have incorporated into this discussion a number of cross-references to additional information included throughout this Annual Report on Form 10-K to assist readers seeking additional information related to a particular subject.
AIG 2013 Form 10-K
Table of ContentsTABLE OF CONTENTS
ITEMItem 7 / USE OF NON-GAAP MEASURES use of non-gaap measures
USE OF NON-GAAP MEASURES
In Item 6. Selected Financial Data and throughout this MD&A, we present our financial condition and results of operations in the way we believe will be most meaningful and representative and most transparent.of our business results. Some of the measurements we use are "non-GAAP“non‑GAAP financial measures"measures” under SEC rules and regulations. GAAP is the acronym for "accounting“accounting principles generally accepted in the United States."” The non-GAAPnon‑GAAP financial measures we present may not be comparable to similarly-namedsimilarly‑named measures reported by other companies.
Book Value Per Common Share Excluding Accumulated Other Comprehensive Income (Loss) (AOCI) and Book Value Per Common Share Excluding AOCI and Deferred Tax Assets (DTA) isare used to show the amount of our net worth on a per-share basis. We believe Book Value Per Common Share Excluding AOCI isthese measures are useful to investors because it eliminatesthey eliminate the effect of non-cash items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, and foreign currency translation adjustments.adjustments and U.S. tax attribute deferred tax assets. Deferred tax assets represent U.S. tax attributes related to net operating loss carryforwards and foreign tax credits. Amounts for interim periods are estimates based on projections of full-year attribute utilization. Book Value Per Common Share Excluding AOCI is derived by dividing Total AIG shareholders'shareholders’ equity, excluding AOCI, by Total common shares outstanding. Book Value Per Common Share Excluding AOCI and DTA is derived by dividing Total AIG shareholders’ equity, excluding AOCI and DTA, by Total common shares outstanding. The reconciliation to book value per common share, the most comparable GAAP measure, is presented in Item 6. Selected Financial Data.
Return on Equity – After-tax Operating Income Excluding AOCI and Return on Equity – After-tax Operating Income Excluding AOCI and DTA are used to show the rate of return on shareholders’ equity. We believe these measures are useful to investors because they eliminate the effect of non-cash items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency translation adjustments and U.S. tax attribute deferred tax assets. Deferred tax assets represent U.S. tax attributes related to net operating loss carryforwards and foreign tax credits. Amounts for interim periods are estimates based on projections of full-year attribute utilization. Return on Equity – After-tax Operating Income Excluding AOCI is derived by dividing actual or annualized after-tax operating income attributable to AIG by average AIG shareholders’ equity, excluding average AOCI. Return on Equity – After-tax Operating Income Excluding AOCI and DTA is derived by dividing actual or annualized after-tax operating income attributable to AIG by average AIG shareholders’ equity, excluding average AOCI and DTA. The reconciliation to return on equity, the most comparable GAAP measure, is presented in Item 6. Selected Financial Data.
We use the following operating performance measures because we believe they enhance the understanding of the underlying profitability of continuing operations and trends of AIG and our business segments. We believe they also allow for more meaningful comparisons with our insurance competitors. When we use these measures, reconciliations to the most comparable GAAP measure are provided in the Results of Operations section of this MD&A.&A on a consolidated basis.
•
TABLE OF CONTENTS
Item 7 / use of non-gaap measures
AIG — After-tax operating income (loss) attributable to AIGis derived by excluding the following items from net income (loss) attributable to AIG: income (loss)
•deferred income tax valuation allowance releases and charges; •changes in fair value of securities used to hedge guaranteed living benefits; •changes in benefit reserves and deferred policy acquisition costs (DAC), value of business acquired (VOBA), and sales inducement assets (SIA) related to net realized capital gains and losses; •other income and expense — net, related to Corporate and Other run-off insurance lines; •loss on extinguishment of debt; •net realized capital gains and losses; •non‑qualifying derivative hedging activities, excluding net realized capital gains and losses; | ·income or loss from discontinued operations; ·income and loss from discontinued operations, net loss (gain) on sale of divested businesses, including: ·gain on the sale of International Lease Finance Corporation (ILFC); and ·certain post-acquisition transaction expenses incurred by AerCap Holdings N.V. (AerCap) in connection with its acquisition of ILFC and the difference between expensing AerCap’s maintenance rights assets over the remaining lease term as compared to the remaining economic life of the related aircraft and related tax effects; ·legacy tax adjustments primarily related to certain changes in uncertain tax positions and other tax adjustments; •non-operating litigation reserves and settlements; •reserve development related to non-operating run-off insurance business; and •restructuring and other costs related to initiatives designed to reduce operating expenses, improve efficiency and simplify our organization. |
We use the following operating performance measures within our Commercial Insurance and properties, income from divested businesses, legacy tax adjustments primarily related to certain changes in uncertain tax positionsConsumer Insurance reportable segments as well as Corporate and other tax adjustments, legal reserves (settlements) related to "legacy crisis matters," deferred income tax valuation allowance (releases) charges, changes in fair value of AIG Life and Retirement fixed maturity securities designated to hedge living benefit liabilities (net of interest expense), changes in benefit reserves and deferred policy acquisition costs (DAC), value of business acquired (VOBA), and sales inducement assets (SIA) related to net realized capital (gains) losses, AIGOther.
•Commercial Insurance: Property Casualty other (income) expense — net, (gain) loss on extinguishment of debt, net realized capital (gains) losses, non-qualifying derivative hedging activities, excluding net realized capital (gains) losses, and bargain purchase gain. "Legacy crisis matters" include favorable and unfavorable settlements related to events leading up to and resulting from our September 2008 liquidity crisis and legal fees incurred by AIG as the plaintiff in connection with such legal matters.Mortgage Guaranty; Consumer Insurance: Personal Insurance
•AIG Property Casualty
•
•Pre-taxPre‑tax operating income (loss):income:
includes both underwriting income (loss)and loss and net investment income, but excludes net realized capital (gains)gains and losses, other (income)income and expense — net, legal settlements related to legacy crisis matters described above, and bargain purchase gain.non-operating litigation reserves and settlements. Underwriting income (loss)and loss is derived by reducing net premiums earned by claimslosses and claimsloss adjustment expenses incurred, acquisition expenses and general operating expenses.
•
•Ratios: AIG Property Casualty,We, along with most property and casualty insurance companies, usesuse the loss ratio, the expense ratio and the combined ratio as measures of underwriting performance. These ratios are relative measurements that describe, for every $100 of net premiums earned, the amount of claimslosses and claimsloss adjustment expense,expenses, and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100 indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. The underwriting environment varies across countries and products, as does the degree of litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and associated ratios.
•
•- Accident year loss and combined ratios, as adjusted:both the accident year loss and combined ratios, as adjusted, exclude catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Catastrophe losses are generally weather or seismic events having a net impact
on AIG Property Casualty in excess of $10 million each.
AIG 2013 Form 10-K
Table of Contents
TABLE OF CONTENTS
ITEMItem 7 / USE OF NON-GAAP MEASURES
•AIG Life and Retirement
use of non-gaap measures
·Commercial Insurance: Institutional Markets; Consumer Insurance: Retirement and Life
•Pre-taxPre‑tax operating income (loss):is derived by excluding the following items from pre-tax income (loss): legal settlements related to legacy crisis matters described above, changes in fair values of fixed maturity securities designated to hedge living benefit liabilities (net of interest expense), net realized capital (gains) losses, and changes in benefit reserves and DAC, VOBA, and SIA related to net realized capital (gains) losses.pre‑tax income:
·changes in fair value of securities used to hedge guaranteed living benefits; | ·changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains and losses; and |
·net realized capital gains and losses; | ·non-operating litigation reserves and settlements. |
•
•Premiums and deposits: includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and deposits on life-contingentlife‑contingent payout annuities, as well as deposits received on universal life, investment-typeinvestment‑type annuity contracts guaranteed investment contracts (GICs) and mutual funds.
·
•Corporate and Other Operations — Pre-tax Pre‑tax operating income (loss): pre-taxand loss is derived by excluding the following items from pre‑tax income (loss) excluding certain legal reserves (settlements) related to legacy crisis matters described above, (gain) loss on extinguishment of debt, net realized capital (gains) losses, net loss (gain) on sale of divested businesses and properties, change in benefit reserves and DAC, VOBA, and SIA related to net realized capital (gains) losses and income from divested businesses, including Aircraft Leasing.loss:·loss on extinguishment of debt; ·net realized capital gains and losses; ·changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains and losses; ·income and loss from divested businesses, including Aircraft Leasing; | ·net gain or loss on sale of divested businesses, including: •gain on the sale of ILFC; and •certain post-acquisition transaction expenses incurred by AerCap in connection with its acquisition of ILFC and the difference between expensing AerCap’s maintenance rights assets over the remaining lease term as compared to the remaining economic life of the related aircraft and our share of AerCap’s income taxes; ·non-operating litigation reserves and settlements; ·reserve development related to non-operating run-off insurance business; and ·restructuring and other costs related to initiatives designed to reduce operating expenses, improve efficiency and simplify our organization. |
Results from discontinued operations are excluded from all of these measures.
TABLE OF CONTENTSTable of Contents
ITEM 7 / EXECUTIVE SUMMARY
Item 7 / EXECUTIVE OVERVIEW
Executive Overview This overview of management's discussion and analysis highlights selected information and may not contain all of the information that is important to current or potential investors in AIG's securities. You should read this Annual Report on Form 10-K in its entirety for a complete description of events, trends, uncertainties, risks and critical accounting estimates affecting AIG and its subsidiaries.
Executive Summary
|
This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in AIG’s securities. You should read this Annual Report on Form 10‑K in its entirety for a complete description of events, trends, uncertainties, risks and critical accounting estimates affecting us.
As a result of the progress of the wind down and de-risking activities of the Direct Investment book (DIB) and the derivative portfolio of AIG Financial Products Corp. and related subsidiaries (collectively, AIGFP) included within Global Capital Markets (GCM), AIG has discontinued separate reporting of the DIB and GCM. Their results are reported within Income from other assets, net, beginning in 2015. This reporting aligns with the manner in which AIG manages its financial resources. Prior periods are presented in the historical format for informational purposes. AIG borrowings supported by assets continue to be managed as such with assets allocated to support the timely repayment of those liabilities. Assets previously held in the DIB and GCM that are otherwise not required to meet the obligations and capital requirements of the DIB and GCM have been made available to AIG Parent.
As part of our broad and on-going efforts to transform AIG for long-term competitiveness, in the third quarter of 2015 we finalized a series of initiatives focused on organizational simplification, operational efficiency, and business rationalization, which are expected to result in pre-tax restructuring and other costs of approximately $0.7 billion, as well as generate pre-tax annualized savings of approximately $0.7 billion to $0.8 billion when fully implemented. Results for 2015 include approximately $0.5 billion of pre-tax restructuring and other costs, composed of $0.3 billion of employee severance and one-time termination benefits, approximately $0.1 billion associated with the modernization of information technology platforms, and the balance relating to costs associated with consolidation of legal entities and exiting lower return lines of business. We expect the remaining $0.2 billion to be recognized through 2017, as well as approximately $0.3 billion of the aggregate pre-tax costs to result in cash expenditures.
On January 26, 2016, we announced several actions designed to create a leaner, more profitable and focused insurer. These actions include a plan to reorganize our operating model into “modular”, more self-contained business units to enhance transparency and accountability. Additionally, we are introducing a new Legacy Portfolio that aims to maximize value and release capital of certain run-off non-strategic assets and highlight progress on improving the ROE of our Operating Portfolio. When the new operating structure is finalized, the presentation of our segment results may be modified and prior periods’ presentation may be revised to conform to the new structure.
Executive Summary
Financial Performance
Commercial Insurance pre‑tax operating income decreased in 2015, compared to 2014 primarily due to a higher underwriting loss in Property Casualty due to an increase in net adverse prior year loss reserve development. In addition net investment income in Property Casualty and Institutional Markets decreased in 2015 compared to 2014.
Consumer Insurancepre-tax operating income decreased in 2015, compared to 2014, reflecting lower net investment income, less favorable adjustments related to the update of actuarial assumptions, less favorable mortality experience in Life, and an underwriting loss in Personal Insurance in 2015. These decreases were partially offset by higher policy and advisory fees in 2015 compared to 2014, driven by growth in separate account assets under management in Retirement.
Our investment portfolio performance declined in 2015, compared to 2014 due to lower income on alternative investments, primarily related to hedge fund performance, lower income on investments for which the fair value option was elected, and lower reinvestment yields.
Net realized capital gainsincreased slightly in 2015, compared to 2014, due to higher net realized capital gains from sales of equity securities and fair value gains on embedded derivatives related to variable annuity guarantee features, net of hedges, compared to fair value losses in the prior year, mostly offset by an increase in other-than-temporary impairment charges and impairments on investments in life settlements.
Our Performance – Selected Indicators
Years Ended December 31, | | | | | | | | | | | | | | | | | |
(in millions, except per share data and ratios) | | | | | | | | | | 2015 | | | 2014 | | | 2013 | |
Results of operations data: | | | | | | | | | | | | | | | | | |
Total revenues | | | | | | | | | $ | 58,327 | | $ | 64,406 | | $ | 68,874 | |
Income from continuing operations | | | | | | | | | | 2,222 | | | 7,574 | | | 9,008 | |
Net income attributable to AIG | | | | | | | | | | 2,196 | | | 7,529 | | | 9,085 | |
Net income per common share attributable to AIG | | | | | | | | | | | | | | | | | |
(diluted) | | | | | | | | | | 1.65 | | | 5.20 | | | 6.13 | |
After-tax operating income attributable to AIG | | | | | | | | | $ | 2,927 | | $ | 6,630 | | $ | 6,650 | |
After-tax operating income per common share | | | | | | | | | | | | | | | | | |
attributable to AIG (diluted) | | | | | | | | | | 2.19 | | | 4.58 | | | 4.49 | |
Key metrics: | | | | | | | | | | | | | | | | | |
Commercial Insurance | | | | | | | | | | | | | | | | | |
Pre-tax operating income | | | | | | | | | $ | 1,652 | | $ | 5,510 | | $ | 4,980 | |
Property Casualty combined ratio | | | | | | | | | | 115.0 | | | 100.2 | | | 101.6 | |
Property Casualty accident year combined ratio, as | | | | | | | | | | | | | | | | | |
adjusted | | | | | | | | | | 95.0 | | | 94.2 | | | 95.1 | |
Property Casualty net premiums written | | | | | | | | | $ | 20,436 | | $ | 21,020 | | $ | 20,880 | |
Mortgage Guaranty domestic first-lien new insurance | | | | | | | | | | | | | | | | | |
written | | | | | | | | | | 50,842 | | | 42,038 | | | 49,356 | |
Institutional Markets premiums and deposits | | | | | | | | | | 1,782 | | | 3,797 | | | 991 | |
Consumer Insurance | | | | | | | | | | | | | | | | | |
Pre-tax operating income | | | | | | | | | $ | 3,378 | | $ | 4,474 | | $ | 4,564 | |
Personal Insurance combined ratio | | | | | | | | | | 101.3 | | | 99.9 | | | 101.5 | |
Personal Insurance accident year combined ratio, as | | | | | | | | | | | | | | | | | |
adjusted | | | | | | | | | | 100.2 | | | 99.5 | | | 102.1 | |
Personal Insurance net premiums written | | | | | | | | | $ | 11,580 | | $ | 12,412 | | $ | 12,700 | |
Retirement premiums and deposits | | | | | | | | | | 25,241 | | | 24,023 | | | 23,729 | |
Life premiums and deposits | | | | | | | | | | 4,974 | | | 4,806 | | | 4,862 | |
Life Insurance Companies assets under management | | | | | | | | | 338,032 | | | 332,847 | | | 317,977 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | December 31, | | | December 31, | |
(in millions, except per share data) | | | | | | | | | | | | | 2015 | | | 2014 | |
Balance sheet data: | | | | | | | | | | | | | | | | | |
Total assets | | | | | | | | | | | | $ | 496,943 | | $ | 515,581 | |
Long-term debt | | | | | | | | | | | | | 29,350 | | | 31,217 | |
Total AIG shareholders’ equity | | | | | | | | | | | | | 89,658 | | | 106,898 | |
Book value per common share | | | | | | | | | | | | | 75.10 | | | 77.69 | |
Book value per common share, excluding AOCI | | | | | | | | | | | | | 72.97 | | | 69.98 | |
Book value per common share, excluding AOCI and DTA | | | | | | | | | | | | | 58.94 | | | 58.23 | |
Years Ended December 31, | | | | | | | | | | 2015 | | | 2014 | | | 2013 | |
Return on equity | | | | | | | | | | 2.2 | % | | 7.1 | % | | 9.2 | % |
Return on equity - after-tax operating income, excluding AOCI | | 3.1 | | | 6.9 | | | 7.4 | |
Return on equity - after-tax operating income, excluding AOCI and DTA | | 3.7 | | | 8.4 | | | 9.3 | |
Total revenues (in millions)
| | Income from continuing operations (in millions) 
|
| | |
Net income ATTRIBUTABLE TO AIG (in millions)
| | Net INCOME PER COMMON SHARE ATTRIBUTABLE TO AIG Property Casualty(DILUTED) 
|
| | |
pre-taxAfter-tax operating income improved in 2013 comparedattributable to 2012. Underwriting performance improved in 2013, as evidenced by the accident year combined ratio, as adjusted, which declined compared to the prior year. The improvement in pre-tax operating income also reflected lower catastrophe losses,aig (excludes net realized capital gains and an increase in reserve discount compared to the prior year, partially offset by adverse prior year development. Net investment income increased in 2013 compared to 2012 due to an increase in alternative investment income and income associated with PICC P&C shares, which are accounted for under the fair value option.certain other items)
AIG Life and Retirement reported growth (in premiums and deposits primarily due to strong sales of annuities in our Retirement Income Solutions and Fixed Annuities product lines and increased Retail Mutual Fund sales. millions)
| | Pre-tax operating income improved (loss) by segment (in 2013 compared to 2012 primarily from active spread management and growth in fee income, as well as adjustments to update certain estimated gross profit assumptions used to amortize DAC and related items in our investment-oriented product lines.millions) Mortgage Guaranty pre-tax operating income improved in 2013 compared to 2012 due to an increase in net premiums earned, a decline in delinquency rates and improving cure rates, which drove lower incurred losses. New insurance written increased in 2013 compared to 2012 due to elevated levels of mortgage refinancing activity during 2013 and the market acceptance of UGC's risk-based pricing model by approximately 300 new lenders.
Our investment portfolio performance, excluding gains recognized in 2012 from our previous investments in Maiden Lane II LLC (ML II), Maiden Lane III LLC (ML III) and AIA Group Limited (AIA), improved in 2013 compared to 2012 primarily due to an increase in alternative investment income largely as a result of favorable equity market performance, partially offset by the effect of our reinvestment of the proceeds from investment activities in a low interest rate environment.
Net realized capital gains improved in 2013 compared to 2012 due to lower levels of other-than-temporary impairments on investments, partially offset by impairments on investments in life settlements.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / EXECUTIVE SUMMARY
Our Performance — Selected Indicators
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| | |
* Includes a gain of $1.4 billion associated with the completion of the sale of ILFC.
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Years Ended December 31,
(in millions, except per share data and ratios)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Results of operations data: | | | | | | | | | | |
Total revenues | | $ | 68,678 | | $ | 71,021 | | $ | 65,105 | |
Income from continuing operations | | | 9,008 | | | 3,699 | | | 18,863 | |
Net income attributable to AIG | | | 9,085 | | | 3,438 | | | 20,622 | |
Net income per common share attributable to AIG (diluted) | | | 6.13 | | | 2.04 | | | 11.01 | |
After-tax operating income attributable to AIG | | | 6,762 | | | 6,635 | | | 2,086 | |
| | |
Key metrics: | | | | | | | | | | |
AIG Property Casualty combined ratio | | | 101.3 | | | 108.5 | | | 108.7 | |
AIG Property Casualty accident year combined ratio, as adjusted | | | 98.4 | | | 99.8 | | | 99.1 | |
AIG Life and Retirement premiums and deposits | | $ | 28,809 | | $ | 20,994 | | $ | 24,392 | |
AIG Life and Retirement assets under management | | | 317,977 | | | 290,387 | | | 256,924 | |
Mortgage Guaranty new insurance written | | | 49,933 | | | 37,509 | | | 18,792 | |
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(in millions, except per share data)
| | December 31,
2013
| | December 31,
2012
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Balance sheet data: | | | | | | | |
Total assets | | $ | 541,329 | | $ | 548,633 | |
Long-term debt | | | 41,693 | | | 48,500 | |
Total AIG shareholders' equity | | | 100,470 | | | 98,002 | |
Book value per common share | | | 68.62 | | | 66.38 | |
Book value per common share, excluding AOCI | | | 64.28 | | | 57.87 | |
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AIG 2013 Form 10-K
Table of Contents
ITEM 7 / EXECUTIVE SUMMARY
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / EXECUTIVE SUMMARY
* Includes operating borrowings of other subsidiaries and consolidated investments and hybrid debt securities.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / EXECUTIVE SUMMARY
Liquidity and Capital Resources Highlights
We reduced ourTOTAL ASSETS
(in millions)
| | Long-term debt (in 2013 as a result of maturities, repayments and repurchases of $9.7 billion. Partially offsetting this decrease were the issuances of $1.0 billion aggregate principal amount of 3.375% senior notes due 2020 and $1.0 billion aggregate principal amount of 4.125% senior notes due 2024.millions) We maintained financial flexibility at AIG Parent in 2013 through $4.1 billion in cash dividends from AIG Property Casualty subsidiaries and $4.4 billion in cash dividends and loan repayments from AIG Life and Retirement subsidiaries.
Our Board of Directors authorized the repurchase of shares of AIG Common Stock on August 1, 2013, with an aggregate purchase price of up to $1.0 billion, from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise. During 2013, we repurchased approximately 12 million shares of AIG Common Stock, par value $2.50 per share (AIG Common Stock) under this authorization at a total cost of approximately $597 million.
Our Board of Directors increased our AIG Common Stock share repurchase authorization by $1.0 billion on February 13, 2014, resulting in an aggregate remaining repurchase authorization of approximately $1.4 billion.
We paid a cash dividend on AIG Common Stock of $0.10 per share on each of September 26, 2013 and December 19, 2013.
On February 13, 2014, our Board of Directors declared a cash dividend on AIG Common Stock of $0.125 per share, payable on March 25, 2014 to shareholders of record on March 11, 2014.
We announced an agreement to sell ILFC, which will support our capital management initiatives, sharpen our business focus, and enable us to redeploy assets in a more productive manner.
Additional discussion and other liquidity and capital resources developments are included in Note 16 to the Consolidated Financial Statements and Liquidity and Capital Resources herein.
Investment Highlights
|
| | |
Net investment income decreased 22 percent to $15.8 billion Total AIG shareholders’ equity
(in 2013 compared to 2012, primarily due to gains recognized in 2012 from our previous investments in ML II, ML III and AIA.millions) Net investment income for our insurance operations increased by approximately $645 million in 2013 compared to 2012, due to higher alternative investment income in 2013, driven primarily by favorable equity market performance, which was partially offset by gains recognized in 2012 from our previous investment in ML II. While corporate debt securities represented the core of new investment allocations, we continued to make investments in structured securities and fixed income securities with favorable risk versus return characteristics to improve yields and increase net investment income.
Net unrealized gains in our available for sale portfolio declined to approximately $12 billion as of December 31, 2013 from approximately $25 billion as of December 31, 2012 due to rising interest rates over the period and the realization of approximately $2.5 billion in gains from sales of securities.
Other-than-temporary impairments were significantly lower relative to the prior year period partly driven by strong performance in our structured products portfolios due to favorable developments in the housing sector.
The overall credit rating of our fixed maturity portfolio was largely unchanged from last year. Impairments on investments in life settlements increased in 2013 compared to 2012 as a result of updated longevity assumptions in the valuation tables used to estimate future expected cash flows.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / EXECUTIVE SUMMARY
Risk Management Highlights
| | Our Risk Management ProcessBook value per common share and book value per common share excluding aoci
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| | |
* Includes operating borrowings of other subsidiaries and consolidated investments and hybrid debt securities.
TABLE OF CONTENTS
Item 7 / EXECUTIVE OVERVIEW
| | |
Risk management is an integral part of managing our businesses. It is a key element of our approach to corporate governance. We have an integrated process for managing risks throughout the organization. The framework of our Enterprise Risk Management (ERM) system provides senior management with a consolidated view of our major risk positions.
Our risk management process includes:
An enhanced risk governance structure that supports consistent and transparent decision making. We have revised our corporate policies to ensure that accountability for the implementation and oversight of each policy is better aligned with individual corporate executives while specialized risk governance committees already in operation receive regular reporting regarding policy compliance.
Risk committees at our corporate level as well as in each business unit that manage the development and maintenance of a risk and control culture encompassing all significant risk categories. Our Board of Directors oversees the management of risk through the complementary functioning of the Finance and Risk Management Committee (the FRMC) and the Audit Committee, as well as through its regular interaction with other committees of the Board.
| | Risk Management
•
We remain committed to adhering to the highest standards of risk management and corporate governance.
•
We continue to promote awareness and accountability for key risk, business decisions, and performance.
•
We manage risks better by applying performance metrics that enable us to assess risk more clearly and address evolving market conditions.
|
A capital and liquidity stress testing framework to assess our aggregate exposure to our most significant risks. We conduct enterprise-wide stress tests under a range of scenarios to better understand the resources needed to support our subsidiaries and AIG Parent.
Presentation Changes
Prior period revenues and expenses were conformed to the current period presentation. These changes did not affect Net income attributable to AIG. The results of the investments in life settlements, including investment income and impairment losses, were reclassified from AIG Property Casualty operations to AIG's Other Operations. Also, as a result of the interest in AerCap to be acquired by AIG in connection with the announced agreement to sell ILFC to AerCap, ILFC operating results, which were previously presented as discontinued operations, have been classified as continuing operations in all periods. The associated assets and liabilities of ILFC continue to be classified as held-for-sale at December 31, 2013 and 2012. For further discussion, see Notes 1, 3 and 4 to the Consolidated Financial Statements.
Strategic Outlook
Industry Trends
Investment Highlights
Our business is affected by industry and economic factors such as interest rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in 2013, characterized by factors such as historically low interest rates, instability in the global markets due to the negotiations over the U.S. debt ceiling, the U.S. Government shutdown and slow growth in the U.S. economy.
Although there was a rise in interest rates in the U.S. fixed income market during the second half of 2013, interest rates remain low relative to historical levels, which has affected our industry by reducing investment returns. In
AIG 2013 Form 10-K
|
Net investment income decreased to $14.1 billion in 2015 compared to $16.1 billion in 2014 due to lower income on alternative investments, primarily related to hedge fund performance, lower income on assets for which the fair value option was elected, and lower reinvestment yields.While corporate debt securities represented the core of new investment allocations, we continued to make investments in structured securities, mortgage loans and other fixed income investments with favorable risk versus return characteristics to improve yields and increase net investment income.
Net unrealized gains in our available for sale portfolio decreased to approximately $8.8 billion as of December 31, 2015, from approximately $19.0 billion as of December 31, 2014, primarily due to a rise in rates, widening of credit spreads and sale of equity securities.
The overall credit rating of our fixed maturity securities portfolio remains largely unchanged from December 31, 2014.
Liquidity and Capital Resources Highlights
We reduced our debt by $1.9 billion in 2015, primarily as a result of maturities, repayments and repurchases of $10.0 billion, offset in part by new debt issuances of $6.9 billion. We reduced the average cost of our financial debt from 5.34 percent per annum in 2014 to 4.92 percent per annum in 2015 and extended the maturity profile of our debt in 2015.
ITEM 7 / EXECUTIVE SUMMARY
addition, current market conditions may not necessarily permit insurance companies to increase pricing across all our product lines.
We maintained financial flexibility at AIG Parent in 2015 through $3.2 billion in dividends in the form of cash and fixed maturity securities from our Non-Life Insurance Companies and $4.6 billion in dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies. The dividends that AIG Parent received in 2015 included $2.8 billion of dividends that were declared during the fourth quarter of 2014.
Our Board of Directors increased our previous share repurchase authorization of AIG Common Stock, par value $2.50 per share (AIG Common Stock), by an additional $5.0 billion on February 11, 2016, resulting in a remaining authorization on such date of approximately $5.8 billion.During 2015, we repurchased approximately 182 million shares of AIG Common Stock for an aggregate purchase price of approximately $10.7 billion. The total number of shares of AIG Common Stock repurchased in 2015 includes (but the aggregate purchase price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an ASR agreement executed in the fourth quarter of 2014. Pursuant to a Securities and Exchange Act of 1934 (Exchange Act) Rule 10b5-1 plan, from January 1 to February 11, 2016, we have repurchased approximately $2.5 billion of additional shares of AIG Common Stock.
We paid a cash dividend on AIG Common Stock of $0.125 per share on each of March 26, 2015 and June 25, 2015, and $0.28 per share on each of September 28, 2015 and December 21, 2015.
Our Board of Directors declared a cash dividend on AIG Common Stock on February 11, 2016 of $0.32 per share, payable on March 28, 2016 to shareholders of record on March 14, 2016.
We received net cash proceeds of approximately $4.2 billion in the aggregate from the sale of approximately 97.6 million ordinary shares of AerCap in June and September 2015.
We received gross cash proceeds of approximately $1.3 billion from our sale of 617 million ordinary H shares of PICC P&C by means of a placement to certain institutional investors.
Additional discussion and other liquidity and capital resources developments are included in Note 16 to the Consolidated Financial Statements and Liquidity and Capital Resources herein.
Strategic Outlook
Industry Trends
Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in 2015, characterized by factors such as historically low interest rates, instability in the global equity markets, volatile energy markets and slowing growth in emerging markets, China and Euro-Zone economies.
Interest rates remain low relative to historical levels, which has affected our industry by reducing investment returns and unfavorably affecting loss reserve discounting, primarily related to our workers’ compensation reserves. In addition, current market conditions may not necessarily permit insurance companies to increase pricing across all our product lines.
Currency volatility in 2015 was particularly acute compared to recent years, as the three major foreign currencies (Japanese yen, euro, and British pound) that we transact in weakened considerably against the U.S. dollar. Such volatility affected line item components of income for those businesses with substantial international operations. In particular, growth trends in net premiums written reported in U.S. dollars can differ significantly from those measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and expenses are similarly affected.
These currencies may continue to fluctuate, in either direction, and such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item comparability.
See Results of Operations – Foreign Currency Impact; Results of Operations – Segment Results – Pre-Tax Income Comparison for 2015 and 2014; Results of Operations – Commercial Insurance – Property Casualty Net Premiums Written by Region; and Results of Operations – Consumer Insurance – Personal Insurance Net Premiums Written by Region.
AIG Priorities for 20142016 |
AIG is focused on the following priorities for 2014:2016: •Emphasis·Improving our Return on customers;Equity (ROE)
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•GrowthCreating a leaner, more profitable and focused insurer by reorganizing our operating model into “modular”, more self-contained business units to enhance transparency and accountability, including through the introduction of a new Legacy Portfolio that aims to maximize value and release capital from run-off of non-strategic assets·Reducing general operating expenses ·Improving the Commercial Insurance Property Casualty accident year loss ratio ·Returning excess capital to shareholders ·Growing book value per common share
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Outlook for Our Operating Businesses
The outlook for each of our businesses and management initiatives to improve growth and performance in 2016 and over the longer term is summarized below.
Commercial insurance Outlook AND Strategic initiatives
Market Conditions and Industry Trends
Commercial Insurance expects the current low interest rate environment relative to historical levels, currency volatility, and ongoing uncertainty in global economic conditions will continue to limit growth and profitability in some markets and challenge growth of net investment income. Due to these conditions and overcapacity in the property casualty insurance industry, Commercial Insurance has continued to diversify its business focusing on growing profitable segments and geographies, exiting unprofitable lines and developing advanced data and analytics to improve profitability.
Property Casualty
Property Casualty has observed improving trends in certain key indicators that may partially offset the effect of current economic challenges. In 2015, the property casualty insurance industry experienced modest growth and an increase in overall exposures in certain markets, although this growth may be leveling off. Property Casualty also expects that expansion in certain growth economies will continue at a faster pace than in developed countries, but at levels lower than those previously expected due to revised economic assumptions. As a result of its ongoing strategy to optimize its portfolio and maintain underwriting discipline, Property Casualty expects that net premiums written for the U.S. Casualty line will continue to decline through 2016.
Overall, Property Casualty experienced a modest increase in rate pressure in 2015 compared to 2014. Property Casualty expects that trend to continue in the near term, particularly in certain lines including in the U.S. Property Excess and Surplus market. Property Casualty continues to differentiate its underwriting capacity from its peers by leveraging its global footprint, diverse product offering, risk engineering expertise and significant underwriting experience.
In the U.S., Property Casualty’s exposure to terrorism risk is mitigated by TRIPRA in addition to limited private reinsurance protections. For additional information on TRIPRA, see Item 1A. Risk Factors — Reserves and Exposures and Item 7. MD&A — Enterprise Risk Management — Insurance Operations Risks — Non-Life Insurance Companies Key Insurance Risks — Terrorism Risk.
Mortgage Guaranty
During 2015, the U.S. market experienced an increase in mortgage loan originations driven by a decrease inresidential mortgage interest rates in the latter part of 2014 that persisted throughout most of 2015, and experienced increased purchase volume that was favorably impacted by a drop in unemployment, improving housing prices, and lower down payment requirements. In addition, the current economic environment has favorably impacted incurred losses through fewer delinquencies and higher cure rates. If the current economic environment persists, Mortgage Guaranty expects to benefit through increased purchase volume and, forpolicies originated in the higher interest rate environment prior to 2012, increased refinancing activity. Mortgage Guaranty also expects current interest rates to have a favorable impact on the persistency of business written during 2012 and the first half of 2013, since refinancing would be unattractive to homeowners who originated mortgages at the lower residential mortgage interest rates prevalent in that time period.
Mortgage Guarantyalso expects that the delinquency rate and cure rate will remain close to 2015 levels during 2016. Mortgage Guarantybelieves the combination of the factors described above will result in favorable operating results for 2016.
On December 31, 2015, the Private Mortgage Insurer Eligibility Requirements (PMIERs) issued by Fannie Mae and Freddie Mac (collectively, the GSEs) became effective. Mortgage Guaranty met the PMIERs requirements as of December 31, 2015. Subject to interpretation and the prospective amendment of the new requirements by the GSEs, Mortgage Guaranty’s minimum required assets under PMIERs was $3.0 billion as of December 31, 2015, and its estimated available assets were $3.6 billion, exceeding the required assets by $600 million.
Institutional Markets
Institutional Markets is expected to continue growing its assets under management from the structured settlement business and the stable value wrap business, as well as from disciplined growth through the pursuit of select opportunities related to pension buyouts. Volatility in the earnings of our alternative investment portfolio will continue to affect Institutional Markets’ results.
Strategic Initiatives
Customer — Strive to be our clients’ most valued insurer by offering innovative products, superior service and access to an extensive global network. Sharpen Commercial Focus — Achieve ROE in excess of target across our businesses primarily through improvements in our core insurance businesses;
•Enhanceloss ratio. Improve our business portfolio through risk selection by using enhanced data, analytics and the yield onapplication of science to deliver superior risk-adjusted returns. Exit or remediate targeted sub-segments of underperforming portfolios that do not meet our investments while maintaining focus on credit quality;
•Manage our capital more efficiently by improving our capital structure and redeploying capital to areas that promote profitable growth;
•Consummate the sale of our interest in ILFC;
•Work with the Board of Governors of the Federal Reserve System (the FRB) in its capacity as our principal regulator; and
•Pursue initiatives that continue to reduce expenses and improve efficiencies to best meet the needs of our customers, including centralizing work streams to lower-cost locations and creating a more streamlined organization.Outlook for Our Operating Businessesrisk acceptance or profitability objectives.
The outlook for each of our businesses and management initiatives to improve growth and performance in 2014 and over the longer term is summarized below.
AIG PROPERTY CASUALTY STRATEGIC INITIATIVES AND OUTLOOKDrive Efficiency
Executive Overview
Growth and Business Mix — Grow higher valueReorganize our operating model into “modular”, more self-contained business units to enhance decision making, transparency and accountability, driving performance improvement and strategic flexibility over time; increase profitabilitycapital fungibility and expand in attractive growth economies.
Underwriting Excellence — Enhance risk selection and pricing to earn returns commensurate with the risk assumed.
Claims Best Practices — Improve claims practices, analytics and tools to improve customer service, increase efficiency and lower the loss ratio.
Operating Expense Discipline — Apply operating expense discipline and increase efficiencies by taking full advantage of our global footprint.
Capital Efficiency — Enhance capital management through initiatives todiversification, streamline our legal entity structure, optimize our reinsurance, program and improve tax efficiency.efficiency and reduce expenses.
Investment StrategyInvest to Grow — ExecuteGrow our investment strategy, which includes increased asset diversificationhigher-value businesses while investing in transformative opportunities, continuing initiatives to modernize our technology and yield-enhancement opportunities that meetinfrastructure, advancing our liquidity, capital, risk and return objectives.
AIG 2013 Form 10-K
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ITEM 7 / EXECUTIVE SUMMARY
Market Conditions and Industry Trends
We expect that the current low interest rate environment, currency volatility, and ongoing uncertainty in global economic conditions will continue to challenge the growth of net investment income and limit growth in some markets. Due to these conditions, coupled with overcapacity in the property casualty insurance industry, we have sought to modify terms and conditions, grow profitable segments of the business, exit unprofitable business and develop advanced data analytics to improve profitability.
We have observed improving trends in certain key indicators that may offset the effect of current economic challenges. Commencing in the second quarter of 2011, we have benefitted from favorable pricing trends, particularly in our U.S. commercial business. The property casualty insurance industry is experiencing modest growth as a result of this positive rate trend and an increase in overall exposures in some markets. We also expect that expansion in certain growth economies will occur at a faster pace than in developed countries, although at levels lower than those previously expected due to revised economic assumptions.
In the U.S., our exposure to terrorism risk is mitigated by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) in addition to limited private reinsurance protections. TRIPRA is set to expire on December 31, 2014. We are closely monitoring the legislative developments related to the TRIPRA renewal or expiration, and have implemented appropriate business strategies for potential legislation outcomes, including non-renewal of the law. For additional information on TRIPRA, see Item 1A. Risk Factors — Reserves and Exposures and Item 7. MD&A — Enterprise Risk Management — Insurance Operations Risks — AIG Property Casualty Key Insurance Risks — Terrorism Risk.
Strategic Initiatives
Growth and Business Mix
We continue efforts to better segment our business by industry, geography and type of coverage, to enhance our decision making about risk acceptance and pricing. For example, within workers' compensation we have observed different experience and trends based on this segmentation, which helps inform our risk appetite, pricing and loss mitigation decisions.
As part of our strategy to expand our consumer operations in growth economies, on May 29, 2013, we entered into a joint venture agreement with PICC Life, a subsidiary of PICC Group, to form an agency distribution company in China. Products under consideration to be distributed by the joint venture company include jointly developed life and retirement insurance products, existing PICC Life products, PICC P&C insurance products, AIG Property Casualty products, as well as other products aimed at meeting the needs of this developing market. We will own 24.9 percent of the joint venture company with PICC Life holding the remaining 75.1 percent. Our participation in the joint venture will be managed by AIG Property Casualty. The joint venture is planned to commence operations in 2014 subject to regulatory approval.
We continue to explore other potential life insurance and accident and health opportunities internationally.
Underwriting Excellence
We continue to further enhance our risk selection process and refine technical pricing and producer management, through enhanced tools and analytics. In addition, we remain focused on reducing exposure to capital intensive long-tail lines. We believe that accident year loss ratios will continue to improve due to these actions.
Claims Best Practices
We continue to reduce loss costs by realizing greater efficiencies in servicing customer claims, introducing improved claims analytics and services, developing knowledge of the economic drivers of losses which collectively are expected to mitigate reserve development and legal costs, and improve customer insights and pricing.
AIG 2013 Form 10-K
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ITEM 7 / EXECUTIVE SUMMARY
Operating Expense Discipline
We continue to make strategic investments in systems, processes and talent worldwide, which are expected to create additional value and greater efficiency in the years ahead.
Capital Efficiency
We continue to execute capital management initiatives by enhancing broad-based risk tolerance guidelines for our operating units, implementing underwriting strategies to increase return on equity by line of business and reducing exposure to businesses with inadequate pricing and increased loss trends. In addition, we remain focused on enhancing our global reinsurance strategy to improve overall capital efficiency, but with periodic income statement volatility.
We continue to streamline our legal entity structure to enhance transparency with regulators and optimize capital and tax efficiency. In 2013, we completed a series of legal entity and branch restructuring transactions resulting in a simpler legal ownership structure with fewer ownership tiers and cross ownership. These legal entity restructuring initiatives enhanced our dividend capacity, reduced required capital, and provided tax benefits. Additionally, the restructurings are allowing us to simplify our reinsurance arrangements which further facilitate increased capital optimization. As of February 2014, through branch incorporations, legal entity mergers, and reinsurance changes, we established three key insurance operating units: one insurance pool in the United States with 12 direct writing entities; one pan-European insurance entity in the United Kingdom with 25 branches throughout Europe; and one Japan insurance holding company directly owning all of our operating units in that country. Key highlights include:
•Continued integration of our Japan operations including the 2013 conversion of the AIUI Insurance Company Japan branch to a subsidiary and a plan to effect a similar conversion of the American Home Assurance Japan Branch in 2014, subject to regulatory approval. On July 16, 2013, we announced the planned merger of AIU Insurance Company Ltd. and Fuji, scheduled to take place in 2015 or later, subject to regulatory approvals. The merger is consistent with our growth strategy for the Japan market, and is intended to combine the expertise and experience of these companies to meet our customers' and partners' needs and provideengineering capabilities, innovating new products and services that will target higher levels of customer satisfaction in a cost-effective manner.
•Simplification of the ownership structure of the Admitted and Surplus Lines Pool members, allowing for the combination of our Admitted Lines and Surplus Lines pools, which became effective January 1, 2014. We also transferred the majority of the existing intercompany reinsurance to the pools. In addition, we transferred the majority of the existing intercompany reinsurance held by one of our Bermuda entities to the Admitted Lines pool.
We paid dividends of approximately $1.8 billion to AIG during 2013 as a result of these activities.
Our overall legal entity restructuring is expected to be substantially completed in 2014 (2015 or later for Japan) subject to regulatory approvals in the relevant jurisdictions.
See Segment Results — AIG Property Casualty Operations — AIG Property Casualty Results — AIG Property Casualty Net Investment Income and Net Realized Capital Gains (Losses) and Note 6 to the Consolidated Financial Statements for additional information.
AIG 2013 Form 10-K
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ITEM 7 / EXECUTIVE SUMMARY
AIG LIFE AND RETIREMENT STRATEGIC INITIATIVES AND OUTLOOK
Executive Overview
Product Diversity and Capacity for Growth — Continue to expand our comprehensive portfolio with superior, differentiated product solutions that meet consumer needs for financial and retirement security, using our scale and capital strength to pursue growth opportunities.
Integrated Distribution — Grow assets under management by leveraging our extensive distribution organization of over 300,000 financial professionals and expanding relationships with key distribution partners to effectively market our diverse product offerings across multiple channels under a more unified branding strategy.
Investment Portfolio — Maintain a diversified, high quality portfolio of fixed maturity securities that largely match the duration characteristics of liabilities with assets of comparable duration, and pursue yield-enhancement opportunities that meet our liquidity,client risk and return objectives.
Operational Initiatives — Continue to streamline our life insurance and annuity operations and systems into a lower-cost, more agile model that provides superior service and ease of doing business.
Effective Risk and Capital Management — Deliver solid earnings through disciplined pricing and diversification of risk and increase capital efficiency within our life insurance entities to enhance return on equity.
Market Conditions and Industry Trends
Baby boomers reaching retirement age expect to live longer in retirement and place less reliance on traditional pensions and government retirement benefits than previous generations. These demographic trends, combined with strong equity markets and low volatility, provide a favorable environment for sales of individual variable annuities, and have contributed to growth in separate account assets under management in both our Retirement Income Solutions and Group Retirement product lines. Opportunities to continue growing our position in the individual variable annuities market are being provided by an increasing demographic of Americans approaching retirement and seeking guaranteed income features, combined with changes in the competitive landscape.
The interest rate environment has a significant impact on the life and annuity industry. Low long-term interest rates put pressure on long-term investment returns, negatively affect sales of interest rate sensitive products such as fixed annuities, and reduce future profits on certain existing fixed rate products. Low interest rates may also affect future investment margins, and may affect the recoverability and amortization rate of DAC assets in our variable annuity, fixed annuity and universal life businesses. While long-term interest rates remain low relative to historical levels, the increase in rates since the second half of 2013 has caused demand for fixed annuities products to improve, and continued stable or modestly rising interest rates provide favorable market conditions for our fixed annuity sales and future profitability.
We will continue to actively manage renewal crediting rates and use a disciplined approach to pricing new sales of interest rate sensitive products, including minimum rate guarantees. Also, as market conditions change, we manage our asset and liability interest rate exposures and strategic asset allocation to emphasize lower or higher durations in our investment portfolio.
The life insurance marketplace continues to be highly competitive and driven by price and service, with key players in this market acquiring an increasing market share. Industry sales of universal life have slowed, particularly sales of guaranteed universal life products, which was expected following the implementation of regulatory changes that increased minimum reserving requirements for these guaranteed products.
AIG 2013 Form 10-K
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ITEM 7 / EXECUTIVE SUMMARY
Strategic Initiatives
Product Diversity and Capacity for Growth
We expect to continue to expand our comprehensive portfolio of products by developing superior, differentiated product solutions that meet consumer needs for financial and retirement security while incorporating volatility risk controls. Our scale and capital base provide competitive advantages that enable us to pursue market opportunities for growth.
AIG Life and Retirement has been able to meet the demand for guaranteed products and grow sales while managing risk. We offer competitive products with strong de-risking features, such as volatility control funds, rider fees indexed to a market volatility index and required minimum allocations to fixed accounts, and we employ a dynamic risk hedging program. In addition to individual variable annuities, our Retirement Income Solutions product line is expanding our offerings of index annuities, including those with guarantee features, to provide additional solutions for consumers approaching retirement.
Sales of our fixed annuities are expected to benefit in 2014 from anticipated increasing interest rates and steepening of the yield curve, as these market conditions make fixed annuity products more attractive compared to alternatives such as bank deposits. Our Fixed Annuities product line is also introducing new delayed-income annuities, products that are experiencing significant growth in the marketplace as they provide both flexibility and a guaranteed income stream to consumers approaching retirement.
Our Institutional Markets product line is expected to continue contributing to growth in assets under management with stable value wraps and utilizing a disciplined approach to growth and diversification of our business by pursuing select opportunities in areas such as the terminal funding and pension buyout business.
In the highly competitive life insurance marketplace, we are continuing to execute our strategy of leveraging our scale advantage, utilizing our expertise in risk selection and disciplined approach to pricing new business, and creating differentiated product offerings based on consumer-focused research.
Integrated Distribution Strategy
We intend to expand relationships with key distribution partners to fully realize the benefits of our diverse product offerings across multiple channels, and implement a more uniform branding strategy. Our focus on ease of doing business for consumers and producers includes enhancements to our Group Retirement platform and services and other initiatives to improve the recruitment, training and productivity of our affiliated distribution partners, which are expected to enhance sales and service through these channels.delivering a better client experience.
Investment Portfolio
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Customer
Our investment strategy for AIG Life and Retirement is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset-liability matching and available investment opportunities. Our objective is to maintain a diversified, high quality portfolio of fixed maturity securities having weighted average durations that are matched to the duration and cash flow profile of our liabilities, to the extent practicable.
Operational Initiatives
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Our vision is to be our clients’ most valued insurer. We expect that investments in underwriting, claims services, client risk services, science and data will continue to differentiate us from our peers and drive a superior client experience. For example, during the fourth quarter, AIG increased global commercial property limits to $2.5 billion per occurrence from $1.5 billion, in response to increased demand for capacity and services from clients managing complex global risks and increasing property values. This increase was the result of recent investments in engineering and analytical capabilities, which in turn allowed us to secure meaningful support from a panel of long-standing reinsurers.
Sharpen Commercial Focus
Exit or remediate targeted underperforming portfolios
Commercial Insurance is focused on the products where we have the most potential to deliver value. Experience and emerging data indicate that there are consistently under-performing sub-segments of our business. We will grow where we see opportunity and we will exit or remediate underperforming portfolios. We will continue to further enhance our risk selection process and refine technical pricing through enhanced tools and analytics to achieve this goal.
We are continuing to invest in initiatives to enable a simpler and more agile low-cost operating model that provides superior service and will position our operating platforms to accommodate significant future growth. For example, our One Life initiative is focused on leveraging our most efficient systems environments and increased automation of our underwriting processes.68
Effective Risk and Capital Management
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Item 7 / EXECUTIVE OVERVIEW
We intend to continue to enhance profitability and capital efficiency within our insurance entities through disciplined pricing and effective management of risk. Volatility risk controls within our product design and our comprehensive dynamic hedging program are critical tools for managing volatility for products where we have significant exposure to
AIG 2013 Form 10-K
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Drive Efficiency
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ITEM 7 / EXECUTIVE SUMMARY
equity market volatility and changes in interest rates. Additionally, our scale and the breadth of our product offerings provide diversification of risk across our product portfolio.
See Results of Operations — Segment Results — AIG Life and Retirement Results for additional information.
OTHER OPERATIONS STRATEGIC INITIATIVES AND OUTLOOK
Narrow geographic footprint while continuing to maintain and improve multinational capabilities
Commercial Insurance, along with our other businesses, continues to evaluate the markets and geographies that provide the greatest opportunities, while maintaining the global footprint that our multinational clients greatly value. Additionally, we will continue to leverage our various off-shore centers, taking advantage of opportunities to centralize and standardize processes and platforms. We believe there is great opportunity to further streamline our operating model.
Expand and optimize the use of reinsurance and other risk mitigating strategies
Commercial Insurance continues to execute capital management initiatives by enhancing broad‑based risk tolerance guidelines for its operating units, implementing underwriting strategies to increase ROE by line of business and reducing exposure to businesses with inadequate pricing and increased loss trends. Commercial Insurance remains focused on enhancing its global reinsurance strategy to improve overall capital efficiency, although this strategy may lead to periodic income statement volatility.
Accelerate micro-segmentation of risks using internal and external data
Property Casualty continues to improve decision-making, risk acceptance and pricing based on its ongoing efforts to refine segmentation by customer, industry and geography. For example, after enhancing the segmentation of workers’ compensation, Property Casualty has observed different experience and trends, which helps inform its risk appetite, pricing and loss mitigation decisions.
Invest to Grow
Grow most profitable lines
As part of our strategic goal of diversifying product offerings and providing customers with greater access to unique insurance programs, on March 31, 2015, we paid approximately $239 million to acquire a controlling stake in NSM Insurance Group (NSM), a leading U.S. managing general agent and insurance program administrator. NSM is known for its unique development and implementation of programs for a broad range of niche customer segments. We expect the acquisition of NSM to facilitate closer strategic coordination and provide us with access to new, attractive markets including programs, specialty small commercial insurance solutions, and complementary distribution networks.
Mortgage Guaranty expects to continue as a leading provider of mortgage insurance and seeks to differentiate itself from its competitors by utilizing its proprietary risk-based pricing strategy. This pricing strategy provides Mortgage Guaranty’s customers with mortgage insurance products that are priced commensurate with the underwriting risk, which we believe will result in an appropriately priced, high-quality book of business. As announced on January 26, 2016, we plan to conduct an initial public offering of up to 19.9 percent of Mortgage Guaranty, subject to regulatory and GSE approval, as a first step towards a full separation.
Institutional Markets is expected to continue growing the structured settlement business and continue contributing to growth in assets under management with stable value wraps and utilizing a disciplined approach to growth and diversification of our business by pursuing select opportunities in areas such as the pension buyout business.
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Item 7 / EXECUTIVE OVERVIEW
Risk Selection — Ensure the high quality of our new business through disciplined underwriting and our multi-variant risk-based pricing model.
Innovation — Develop and enhance products, technology, and processes while addressing the needs of stakeholders in the mortgage industry.
Ease of Use — Reduce complexity in the mortgage insurance process.
Expense Management — Streamline our processes through the use of technology and shared services.
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consumer insurance Outlook AND STRATEGIC INITIATIVES
Market Conditions and Industry Trends
Retirement
Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income securities are leading Americans to seek additional financial security as they approach retirement. The strong demand for individual variable and fixed index annuities with guaranteed income features has attracted increased competition in this product space. In addition, higher tax rates and a desire for better investment returns have prompted less risk-averse investors to seek products without guaranteed living benefits, providing the opportunity to further diversify our product portfolio by offering investment-focused variable annuities.
InterestThe sustained low interest rate increases in late 2013 reduced the refinancing activity that drove much of the increased volume in the mortgage loan industry during the year. Asenvironment has a result, UGC anticipates a decrease in new insurance written during 2014 compared to 2013. However, the majority of UGC's new business written during 2013 was originated from home purchases as opposed to refinancing, and we expect the growth in home purchase lending in 2014 to partially offset the decline in refinancing activity. UGC believes the increase in home purchases will be driven by increased buyer confidence arising from home price appreciation and interest rates remaining at low levels relative to historical levels.
Although increasing interest rates may have an unfavorable impact on new mortgage loan volumes, UGC expects that increasing interest rates will have a favorablesignificant impact on the persistencyannuity industry. Low long-term interest rates put pressure on investment returns, which may negatively affect sales of business written overinterest rate sensitive products and reduce future profits on certain existing fixed rate products. In addition, more highly leveraged competitors have entered the last several quarters since refinancingmarket offering higher crediting rates. As long as the low interest rate environment continues, conditions will be challenging for the fixed annuity market. Rapidly rising interest rates could create the potential for increased surrenders. Customers are, however, currently buying fixed annuities with longer surrender periods in pursuit of mortgage loanshigher returns, which may help mitigate the rate of increase in surrenders in a rapidly rising rate environment. Low interest rates have also driven strong sales growth of our fixed index annuity products, which provide additional interest crediting tied to favorable performance in certain equity market indices.
Consumer Insurance provides products and services to certain employee benefit plans that are subject to restrictions imposed by ERISA and the Internal Revenue Code, including rules that generally restrict the provision of investment advice to ERISA plans and participants and IRA holders if the investment recommendation results in fees paid to the individual advisor, his or her firm or their affiliates that vary according to the investment recommendation chosen. In April 2015, the DOL issued a proposed regulation that would, if enacted, expand the definition of "investment advice," which would substantially expand the range of activities considered to be unattractivefiduciary investment advice under ERISA and the Internal Revenue Code. For additional information on the DOL proposed regulation, see Item 1 – Business – Regulation – Other Regulatory Developments - ERISA Considerations. The DOL proposed regulation has generated substantial attention in our industry. If the final DOL regulation and related guidance were to homeowners who originated mortgages atbe finalized as originally proposed, it may be necessary for us, and our competitors, to materially modify product design, marketing, and compensation arrangements with distribution partners and financial advisors for certain products and services. It could also impose additional requirements and/or limitations on certain services that our advisors and employees could provide to ERISA plan sponsors, ERISA plan participants, and IRA holders. These changes could materially affect our ability to sell or service certain types of annuities and other investment products. Once we have fully evaluated the historicallyimpact of the final rule, we intend to strategically invest in the most attractive post-DOL opportunities across the market.
Life
Populations are living longer and have increased needs for financial protection for beneficiaries, estate planning and wealth creation. The Life operating segment addresses these needs with a broad spectrum of products, ranging from the pure protection focus of term life to indexed universal life and investment-oriented products such as variable universal life. Market factors, primarily low interest rates prevalent duringand regulatory changes, have caused the last several periods.universal life market to shift its focus from guaranteed universal life to indexed universal life products that offer cash accumulation and living benefit options.
Personal Insurance
The need for full life cycle products and coverage, increases in personal wealth accumulation, and awareness of insurance protection and risk management continue to support the growth of the Personal Insurance industry. Our Personal Insurance operations focus on group and corporate clients, together with individual customers within national markets. We expect that this higher persistencythe demand for multinational cross-boundary coverage and services to increase due to the internationalization of clients and customers. AIG’s global presence provides Personal Insurance a distinct competitive advantage.
In Japan, the competition for auto insurance has intensified, in part driven by a decline in new car sales and the existence of fewer major insurers. Growth in property insurance generally reflects increases in new housing starts and heightened demand before the duration restriction on long-term fire insurance became effective in October 2015. In the U.S., we compete in the high net worth market and will continue to benefittake advantage of market consolidation and expand our results throughout 2014innovative products and into 2015.services to distribution partners and clients. Outside of Japan and the U.S., our Personal Insurance operating segment continues to invest selectively in markets where we believe higher potential for sustainable profitability exists.
UGC expects cure ratesStrategic Initiatives
Customer — Strive to be our clients’ most valued insurer. Through our unique franchise, which brings together a broad portfolio of retirement, life insurance and personal insurance products offered through multiple distribution networks, Consumer Insurance aims to provide customers with the products and services they desire, delivered through the channels they prefer. Information-driven Strategy — Utilize customer insight, analytics and the application of science to optimize customer acquisition, product profitability, product mix, channel performance and risk management capabilities. Sharpen Consumer Focus — Invest in areas where Consumer Insurance can grow profitably and sustainably. Target growth in select markets according to market size, growth potential, market maturity and customer demographics and narrow our footprint in less profitable markets with insufficient scale. Operational Effectiveness — Simplify processes and enhance operating environments to increase competitiveness, improve service and product capabilities and facilitate delivery of our target customer experience. Investment Strategy — Maintain a diversified, high quality portfolio of fixed maturity securities that largely matches the duration characteristics of the related insurance liabilities, and pursue selective yield-enhancement opportunities that meet liquidity, risk and return objectives. Profitability and Capital Management — Deliver solid earnings through disciplined pricing, sustainable underwriting improvements, expense reductions and diversification of risk, and increase capital efficiency within insurance entities to enhance return on equity. |
Customer
In striving to improve as a resultbe our clients’ most valued insurer, we have implemented initiatives to better serve our target segments. Our focus on ease of home value appreciation since such appreciation will encourage homeownersdoing business for consumers and producers includes enhancements to our platforms and services. We are working to expand relationships with delinquent mortgageskey distribution partners to sell and purchase another home, or to refinance their existing mortgages. offer our products across multiple distribution channels.
Information-driven Strategy
We believe that strengthening our information-driven decision making and marketing capabilities through the combinationuse of enhanced analytics, stronger platforms and tools, a well-designed product portfolio and expanded relationships may allow us to bring more effective product solutions to our chosen markets.
We focus on rate adequacy through our global underwriting practices and tools and analytics, and seek to optimize the value of our business lines through product and portfolio management and refined technical pricing. We strive to deliver leading customer experience and efficiency through claims best practices, deployment of enhanced operating structures and standardized processes and systems, while managing claims-handling efficiency.
Sharpen Consumer Focus
Retirement Income Solutions intends to continue capitalizing on the opportunity to meet consumer demand for guaranteed income by maintaining competitive variable annuity product offerings, while managing risk from guarantee features through risk-mitigating product design and well-developed economic hedging capabilities. Retirement Income Solutions continues to invest in hedging and market risk management capabilities. Retirement Income Solutions is also focused on diversifying its product portfolio by growing sales of fixed index annuities with guarantee features, which provide additional income solutions for consumers approaching retirement, and introducing new investment-focused variable annuities, which offer various investment options, including alternative asset classes, to investors seeking higher persistency and improving cure rates, partially offset by changes in new mortgage loan volumes,returns.
Fixed Annuities sales will continue to strengthen UGC's operating results throughout 2014.
Strategic Initiatives
Risk Selectionbe challenged by the low interest rate environment. Sales of fixed annuities could improve if interest rates rise and the yield curve steepens, as these market conditions make fixed annuity products more attractive compared to alternatives such as bank deposits. The growing market for immediate and deferred income products, driven by customers seeking guaranteed income products, provides an opportunity for Fixed Annuities to increase the diversification of its product portfolio.
During 2014, UGC expects toLife will continue to beinvest to position itself for growth, serve its customers more effectively, and maintain pricing discipline in its overall strategy. Life’s organization has been aligned to serve its customers in the Americas, Asia Pacific and EMEA regions with a leading providerfocus on the demographic, governmental and socioeconomic trends unique to each region. As part of mortgage insurancethis initiative, our Group Benefits business recently merged with our U.S. Life, Health and Disability business to focus on strong existing relationships with multi-line and specialty producers. In 2016, we announced a plan to improve capital efficiency by using reinsurance to reduce certain statutory reserves that are above economic requirements in our domestic Life business.
Personal Insurance aims to provide clients with the products and services they desire, delivered through the channels they prefer. We continue to focus and invest in the most profitable markets and segments, while narrowing our footprint where appropriate. We are also leveraging our multinational capabilities to meet the increasing demand for cross-border coverage and services. Personal Insurance will differentiate itself fromcontinue to utilize its competitorsstrong risk management and market expertise to foster growth by providing superior productsinnovative and competitive solutions to ourits customers and utilizing its proprietary risk-based pricing strategy. This pricing strategy provides UGC's customers with mortgage insurance productsdistributors.
Operational Effectiveness
We are continuing to invest in initiatives that are priced commensurate with the underwriting risk, which we believe will result in an appropriately priced, high-quality book of business. UGC plansmake our operating platforms simpler and more agile, enabling us to provide superior service and accommodate future growth. In Japan, we continue to execute this strategyinvest in 2014. Thetechnology to improve operating efficiency and ease of doing business generated under this strategy, which was initiated during 2009, accounts for approximately 53 percentour distribution partners and customers. In the U.S. Life business, we are focused on leveraging our most efficient systems and increasing automation of net premiums earned in 2013.our underwriting process. We believe that simplifying our operating models will enhance productivity and support further profitable growth.
AIG 2013 Form 10-KInvestment Strategy
AIG Markets acts as the derivatives intermediary between AIG and its subsidiaries and third partiesOur investment objective is to provide hedging services for AIG entities. The derivativemaintain a diversified, high quality portfolio of AIG Markets consists primarilyfixed maturity securities having weighted average durations that are matched to the duration and cash flow profile of interest rateour liabilities, to the extent practicable. Our investment strategy is to maximize net investment income and currency derivatives.
The remaining derivatives portfolio of AIGFP consists primarily of hedges of the assetsvalue, subject to liquidity requirements, capital constraints, diversification requirements, asset-liability matching and liabilities of the DIB and a portion of the legacy hedges for AIG and its subsidiaries. AIGFP's derivative portfolio consists primarily of interest rate, currency, credit, commodity and equity derivatives. Additionally, AIGFP has a credit default swap portfolio that is being managed for economic benefit and with limited risk. The AIGFP portfolio continues to be wound down and is managed consistent with our risk management objectives. Although the portfolio may experience periodic fair value volatility, it consists predominantly of transactions that we believe are of low complexity, low risk or currently not economically appropriate to unwind based on a cost versus benefit analysis.
Direct Investment Book
The DIB consists ofavailable investment opportunities. While a portfolio of assetsalternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and liabilities held directly byperceived market opportunities, and to continue reducing the size of the private equity portfolio. See Investments for additional discussion of investment strategies. If these reductions were to include the sale of alternative investments that support certain payout annuities, we could incur additional loss recognition expense on such products, due to updating assumptions to reflect reinvestment at lower future yields. See Critical Accounting Estimates – Insurance Liabilities - Future Policy Benefits for Life and Accident and Health Insurance Contracts (Life Insurance Companies) for discussion of assumptions related to loss recognition testing.
Profitability and Capital Management
We are focused on enhancing profitability and capital efficiency within our insurance entities through disciplined pricing, in-force profitability management, effective management of risk and expense reductions. For product lines where we have significant equity market risk and exposure to changes in interest rates, we use risk management tools, such as the risk mitigation product features and hedging program in our Retirement Income Solutions and Group Retirement annuity businesses. Additionally, our scale and the breadth of our product offerings provide diversification of risk. Within our Non-Life Insurance Companies, we continue to increase capital efficiency.
In conjunction with our strategic active divestiture program, we announced on January 26, 2016 that we have agreed to sell AIG ParentAdvisor Group, our network of independent broker-dealers, to investment funds affiliated with Lightyear Capital LLC and PSP Investments. The transaction is expected to close in the MIPsecond quarter of 2016, subject to regulatory approvals.
See Results of Operations — Consumer Insurance and certain non-derivative assets and liabilities of AIGFP. The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintains the liquidity we believe is necessary to meet all of its liabilities as they come due, even under stress scenarios, and to maximize returns consistent withInsurance Reserves for additional information about our risk management objectives.
The DIB's assets consist primarily of cash, short-term investments, fixed maturity securities issued by corporations, U.S. government and government sponsored entities and mortgage and asset backed securities. The value of these assets is impacted by macro-economic trends in U.S. and core European markets, including corporate credit spreads, commercial and residential real estate markets, and to a lesser extent, interest rates and foreign exchange rates, among other factors. The majority of these assets are carried at fair value with changes in fair value recognized through earnings. The DIB's liabilities consist primarily of notes and other borrowings supported by assets as well as other short-term financing obligations. The DIB has both liabilities that are held at cost and liabilities that are held at fair value. The liabilities held at fair value vary in price based on changes in AIG's credit spreads with changes in fair value reflected in earnings. Changes in the fundamental drivers of the fair value of DIB assets and liabilities will create earnings volatility for the DIB on a period-to-period comparative basis.
AIG 2013 Form 10-KConsumer Insurance businesses.
TABLE OF CONTENTSTable of Contents
ITEM 7 / RESULTS OF OPERATIONS
Item 7 /Results of Operations
The following section provides a comparative discussion of our Results of Operations on a reported basis for the three-year period ended December 31, 2013.2015. Factors that relate primarily to a specific business segment are discussed in more detail within that business segment discussion. For a discussion of the Critical Accounting Estimates that affect the Results of Operations, see the Critical Accounting Estimates section of this MD&A.
The following table presents our consolidated results of operations:
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Years Ended December 31,
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| | Percentage Change | | | | | | | | | | | | | | Percentage Change |
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(in millions)
| | 2013
| | 2012
| | 2011
| | 2013 vs. 2012
| | 2012 vs. 2011
| | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
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Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums | | $ | 37,350 | | $ | 38,047 | | $ | 39,026 | | (2 | )% | | (3 | )% | | | | | | | $ | 36,655 | $ | 37,254 | $ | 37,499 | | (2) | % | (1) | % |
Policy fees | | | 2,535 | | | 2,349 | | 2,309 | | 8 | | 2 | | | | | | | | | 2,755 | | 2,615 | | 2,340 | | 5 | | 12 | |
Net investment income | | | 15,810 | | | 20,343 | | 14,755 | | (22 | ) | | 38 | | | | | | | | | 14,053 | | 16,079 | | 15,810 | | (13) | | 2 | |
Net realized capital gains | | | 1,744 | | | 930 | | 691 | | 88 | | 35 | | | | | | | | | 776 | | 739 | | 1,939 | | 5 | | (62) | |
Aircraft leasing revenue | | | 4,420 | | | 4,504 | | 4,508 | | (2 | ) | | – | | | | | | | | | - | | 1,602 | | 4,420 | | NM | | (64) | |
Other income | | | 6,819 | | | 4,848 | | 3,816 | | 41 | | 27 | | | | | | | | | 4,088 | | 6,117 | | 6,866 | | (33) | | (11) | |
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Total revenues | | | 68,678 | | | 71,021 | | 65,105 | | (3 | ) | | 9 | | | | | | | | 58,327 | | 64,406 | | 68,874 | | (9) | | (6) | |
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Benefits, claims and expenses: | | | | | | | | | | | | | | |
Policyholder benefits and claims incurred | | | 29,503 | | | 32,036 | | 33,523 | | (8 | ) | | (4 | ) | |
Benefits, losses and expenses: | | | | | | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | | | | | | | | 31,345 | | 28,281 | | 29,503 | | 11 | | (4) | |
Interest credited to policyholder account balances | | | 3,892 | | | 4,340 | | 4,432 | | (10 | ) | | (2 | ) | | | | | | | | 3,731 | | 3,768 | | 3,892 | | (1) | | (3) | |
Amortization of deferred policy acquisition costs | | | 5,157 | | | 5,709 | | 5,486 | | (10 | ) | | 4 | | | | | | | | | 5,236 | | 5,330 | | 5,157 | | (2) | | 3 | |
Other acquisition and insurance expenses | | | 9,166 | | | 9,235 | | 8,458 | | (1 | ) | | 9 | | |
General operating and other expenses | | | | | | | | | 12,686 | | 13,138 | | 13,564 | | (3) | | (3) | |
Interest expense | | | 2,142 | | | 2,319 | | 2,444 | | (8 | ) | | (5 | ) | | | | | | | | 1,281 | | 1,718 | | 2,142 | | (25) | | (20) | |
Loss on extinguishment of debt | | | | | | | | | 756 | | 2,282 | | 651 | | (67) | | 251 | |
Aircraft leasing expenses | | | 4,549 | | | 4,138 | | 5,401 | | 10 | | (23 | ) | | | | | | | | - | | 1,585 | | 4,549 | | NM | | (65) | |
Loss on extinguishment of debt | | | 651 | | | 32 | | 2,908 | | NM | | (99 | ) | |
Net loss on sale of properties and divested businesses | | | 48 | | | 6,736 | | 74 | | (99 | ) | | NM | | |
Other expenses | | | 4,202 | | | 3,585 | | 3,280 | | 17 | | 9 | | |
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Total benefits, claims and expenses | | | 59,310 | | | 68,130 | | 66,006 | | (13 | ) | | 3 | | |
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Income (loss) from continuing operations before income tax expense (benefit) | | | 9,368 | | | 2,891 | | (901 | ) | | 224 | | NM | | |
Income tax expense (benefit) | | | 360 | | | (808 | ) | | (19,764 | ) | | NM | | 96 | | |
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Net (gain) loss on sale of divested businesses | | | | | | | | | 11 | | (2,197) | | 48 | | NM | | NM | |
Total benefits, losses and expenses | | | | | | | | 55,046 | | 53,905 | | 59,506 | | 2 | | (9) | |
Income from continuing operations before | | | | | | | | | | | | | | | | | |
income tax expense | | | | | | | | 3,281 | | 10,501 | | 9,368 | | (69) | | 12 | |
Income tax expense | | | | | | | | 1,059 | | 2,927 | | 360 | | (64) | | NM | |
Income from continuing operations | | | 9,008 | | | 3,699 | | 18,863 | | 144 | | (80 | ) | | | | | | | 2,222 | | 7,574 | | 9,008 | | (71) | | (16) | |
Income from discontinued operations, net of income tax expense (benefit) | | | 84 | | | 1 | | 2,467 | | NM | | (100 | ) | |
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Income (loss) from discontinued operations, | | | | | | | | | | | | | | | | | |
net of income tax expense | | | | | | | | - | | (50) | | 84 | | NM | | NM | |
Net income | | | 9,092 | | | 3,700 | | 21,330 | | 146 | | (83 | ) | | | | | | | 2,222 | | 7,524 | | 9,092 | | (70) | | (17) | |
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Less: Net income attributable to noncontrolling interests | | | 7 | | | 262 | | 708 | | (97 | ) | | (63 | ) | |
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Less: Net income (loss) attributable to noncontrolling | | | | | | | | | | | | | | | | | |
interests | | | | | | | | 26 | | (5) | | 7 | | NM | | NM | |
Net income attributable to AIG | | $ | 9,085 | | $ | 3,438 | | $ | 20,622 | | 164 | % | | (83 | )% | | | | | | | $ | 2,196 | $ | 7,529 | $ | 9,085 | | (71) | % | (17) | % |
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AIG 2013 Form 10-K
Table of Contents
For the year ended December 31, 2015
ITEM 7 / RESULTS OF OPERATIONS,
Consolidated Comparison for 2013 and 2012
Income the effective tax rate on income from continuing operations beforewas 32.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $195 million associated with tax exempt interest income, $127 million related to reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, $58 million associated with the effect of foreign operations, and $109 million related to the partial completion of the Internal Revenue Service examination covering tax year 2006, partially offset by $324 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, and $110 million related to increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions. See Note 22 to the Consolidated Financial Statements for additional information.
For the year ended December 31, 2015, our repatriation assumptionsrelated to certain European operations changed, and related foreign earnings are now considered to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active non-U.S. business operations. Further, we do not intend torepatriate these earnings to fund U.S. operations. As a result, U.S. deferred taxes have not been provided on $1.8 billion of accumulated earnings, including accumulated other comprehensive income, of these non-U.S. affiliates. Potential U.S. income tax expense was $9.4 billionliabilities related to such earnings would be offset, in 2013 comparedwhole or in part, by allowable foreign tax credits resulting from foreign taxes paid to $2.9 billionforeign jurisdictions in 2012, and reflected the following:which such operations are located. As a result, we currently believe that any incremental U.S. income tax
TABLE OF CONTENTS
Item 7 /Results of Operations
• pre-tax income from insurance operations of $5.1 billion, $6.5 billion and $213 million from AIG Property Casualty, AIG Life and Retirement and Mortgage Guaranty in 2013, respectively, compared to pre-tax income of $2.0 billion, $3.8 billion and $15 million for these operations in 2012. Net investment income, excluding gains recognized in 2012 from our previous investments in ML II, ML III and AIA, improved in 2013 compared to 2012 due to higher returns on alternative investments, primarily due to the performance of equity markets. In addition, 2013 includes income from legal settlements related to the financial crisis of $1.0 billion. Included in 2012 pre-tax income for AIG Property Casualty were catastrophe losses of $2.7 billion, largely arising from Storm Sandy and severe losses of $326 million. See Note 3 to the Consolidated Financial Statements for further information;
•
loss on extinguishment of debt of $651 million in 2013 resulting from redemptions and repurchases of, and cash tender offers for, certain debt securities; and
•
net investment income in 2012 reflected an increase in fair value of AIG's interests in AIA ordinary shares and ML III of $2.1 billion and $2.9 billion, respectively.
| | Continued Improvement in
Insurance Operations
•
For the fourth consecutive year we posted a full year profit.
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Our total AIG Property Casualty accident year loss ratio, as adjusted, improved each year during the past four years.
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We enhanced spread income and actively managed through the low interest rate environment.
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Our investment portfolio performance, excluding gains recognized in 2012 from our previous investments in ML II, ML III and AIA, improved due to higher returns on alternative investments, driven primarily by equity market gains.
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liabilities relating to indefinitely reinvested foreign earnings would not be significant. Deferred taxes have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
For the year ended December 31, 2014, the effective tax rate on income from continuing operations was 27.9 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $236 million associated with tax exempt interest income, $209 million related to a decrease in the U.S. Life Insurance Companies’ capital loss carryforward valuation allowance, $182 million of income excludible from gross income related to the global resolution of certain residential mortgage-related disputes and $68 million associated with the effect of foreign operations. See Note 22 to the Consolidated Financial Statements for additional information.
For the year ended December 31, 2013, the effective tax rate on income from continuing operations was 3.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $2.8 billion related to a decrease in AIGthe U.S. Life and Retirement'sInsurance Companies’ capital loss carryforward valuation allowance, $396 million related to a decrease in certain other valuation allowances associated with foreign jurisdictions and $298 million associated with tax exempt interest income. These items were partially offset by charges of $632 million related to uncertain tax positions.
For the year ended December 31, 2012, the effective tax rate on income from continuing operations was (27.9) percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to decreases in AIG Life and Retirement's capital loss carryforward valuation allowance of $1.9 billion related to the actual and projected gains from AIG Life and Retirement's available-for-sale securities, and tax effects associated with tax exempt interest income of $302 million. These items were partially offset by changes in uncertain tax positions of $446 million.
Consolidated Comparison for 2012 and 2011
Income from continuing operations before income tax expense was $2.9 billion in 2012 compared to $(0.9) billion in 2011 and reflected the following:
•pre-tax income from insurance operations of $2.0 billion, $3.8 billion and $15 million from AIG Property Casualty, AIG Life and Retirement and Mortgage Guaranty in 2012, respectively, compared to pre-tax income (loss) of $2.1 billion, $3.0 billion and $(77) million for these operations in 2011. Included in 2012 pre-tax income for AIG Property Casualty were catastrophe losses of $2.7 billion, largely arising from Storm Sandy, and severe losses of $326 million. Included in 2011 pre-tax income for AIG Property Casualty were catastrophe losses of $3.3 billion, largely arising from Hurricane Irene, U.S. tornadoes and the Great Tohoku Earthquake & Tsunami in Japan (the Tohoku Catastrophe) and severe losses of $296 million. See Note 3 to the Consolidated Financial Statements for further information;
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS
•increases in fair value of AIG's interest in AIA ordinary shares of $2.1 billion and $1.3 billion in 2012 and 2011, respectively. The increase in fair value in 2012 included a gain on sale of AIA ordinary shares of approximately $0.8 billion;
•an increase in fair value of AIG's interest in ML III of $2.9 billion in 2012, compared to a decrease in fair value of $646 million in 2011;
•an increase in estimated litigation liability of approximately $783 million for 2012 based on developments in several actions;
•litigation settlement income of $210 million in 2012 from settlements with three financial institutions who participated in the creation, offering and sale of RMBS from which AIG and its subsidiaries suffered losses either directly on their own account or in connection with their participation in AIG's securities lending program; and
•a $3.3 billion net loss in 2011, primarily consisting of the accelerated amortization of the remaining prepaid commitment fee asset resulting from the termination of the credit facility provided by the FRBNY (the FRBNY Credit Facility) in 2011. This was partially offset by a $484 million gain on extinguishment of debt due to the exchange of subordinated debt.
For the year ended December 31, 2011, the effective tax rate on loss from continuing operations was not meaningful, due to the significant effect of releasing approximately $18.4 billion of the deferred tax asset valuation allowance. Other factors that contributed to the difference from the statutory rate included tax benefits of $454 million associated with tax exempt interest income, $386 million associated with the effect of foreign operations, and $224 million related to our investment in subsidiaries and partnerships.
The following table presents a reconciliation of net income attributable to AIG to after-tax operating income (loss) attributable to AIG:
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
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Net income attributable to AIG | | $ | 9,085 | | $ | 3,438 | | $ | 20,622 | |
Income from discontinued operations | | | (84 | ) | | (1 | ) | | (2,448 | ) |
Loss from divested businesses, including Aircraft Leasing | | | 117 | | | 4,039 | | | 663 | |
Uncertain tax positions and other tax adjustments | | | 791 | | | 543 | | | – | |
Legal reserves (settlements) related to legacy crisis matters | | | (460 | ) | | 353 | | | 13 | |
Deferred income tax valuation allowance releases | | | (3,237 | ) | | (1,911 | ) | | (18,307 | ) |
Amortization of FRBNY prepaid commitment fee asset | | | – | | | – | | | 2,358 | |
Changes in fair value of AIG Life and Retirement fixed maturity securities designated to hedge living benefit liabilities, net of interest expense | | | 105 | | | (24 | ) | | – | |
Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains | | | 1,132 | | | 781 | | | 202 | |
AIG Property Casualty other (income) expense – net | | | 47 | | | – | | | – | |
Loss on extinguishment of debt | | | 423 | | | 21 | | | (480 | ) |
Net realized capital gains | | | (1,157 | ) | | (586 | ) | | (453 | ) |
Non-qualifying derivative hedging gains, excluding net realized capital gains | | | – | | | (18 | ) | | (84 | ) |
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After-tax operating income attributable to AIG | | $ | 6,762 | | $ | 6,635 | | $ | 2,086 | |
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Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Net income attributable to AIG | | | | | | $ | 2,196 | $ | 7,529 | $ | 9,085 |
Uncertain tax positions and other tax adjustments | | | | | | | 112 | | 59 | | 791 |
Deferred income tax valuation allowance (releases) charges | | | | | | | 110 | | (181) | | (3,237) |
Changes in fair value of securities used to hedge guaranteed | | | | | | | | | | | |
living benefits | | | | | | | 28 | | (169) | | 105 |
Changes in benefit reserves and DAC, VOBA and SIA | | | | | | | | | | | |
related to net realized capital gains (losses) | | | | | | | 10 | | 141 | | 1,148 |
Other (income) expense - net | | | | | | | 151 | | - | | 47 |
Loss on extinguishment of debt | | | | | | | 491 | | 1,483 | | 423 |
Net realized capital gains | | | | | | | (476) | | (470) | | (1,285) |
(Income) loss from discontinued operations | | | | | | | - | | 50 | | (84) |
(Income) loss from divested businesses | | | | | | | 16 | | (1,462) | | 117 |
Non-operating litigation reserves and settlements | | | | | | | (53) | | (350) | | (460) |
Reserve development related to non-operating run-off | | | | | | | | | | | |
insurance business | | | | | | | 20 | | - | | - |
Restructuring and other costs | | | | | | | 322 | | - | | - |
After-tax operating income attributable to AIG | | | | | | $ | 2,927 | $ | 6,630 | $ | 6,650 |
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Weighted average diluted shares outstanding | | | | | | | 1,334,464,883 | | 1,447,553,652 | | 1,481,206,797 |
Income per common share attributable to AIG (diluted) | | | | | | $ | 1.65 | $ | 5.20 | $ | 6.13 |
After-tax operating income per common share attributable | | | | | | | | | | | |
to AIG (diluted) | | | | | | $ | 2.19 | $ | 4.58 | $ | 4.49 |
After-tax operating income attributable to AIG increased in 2013for 2015 decreased compared to 20122014 primarily due to increasesa decrease in income from insurance operations, discussed above,reflecting adverse prior year loss reserve development in Commercial Property Casualty, decreased net investment income, and lower income tax expense and noncontrolling interests, partially offseton assets held by fair value gains on AIG's previously held interests in AIA ordinary shares, ML II, and ML III.AIG Parent.
After-tax operating income attributable to AIG increased in 2012for 2014 was essentially flat compared to 20112013, primarily due to increases inhigher income from insurance operations and in the fair value gains on AIG's interests in AIA ordinary shares and AIG's interest in ML III, discussed above. This wastax expense, partially offset by an increase in income from insurance operations.
For the year ended December 31, 2015, the effective tax expense in 2012 comparedrate on pre-tax operating income was 28.0 percent. The significant factors that contributed to anthe difference from the statutory rate included tax benefits resulting from tax-exempt interest income,
the effect of foreign operations and other permanent tax benefit in 2011.items, certain tax benefits associated with the partial completion of the Internal Revenue Service examination covering tax year 2006 and the impact of other discrete tax benefits.
For the year ended December 31, 2014, the effective tax rate on pre-tax operating income was 30.9 percent. The significant factors that contributed to the difference from the statutory rate included tax benefits resulting from tax exempt interest income and other permanent tax items, and the impact of discrete tax benefits.
For the year ended December 31, 2013, the effective tax rate on pre-tax operating income was 28.928.8 percent. The significant factors that contributed to the difference from the statutory rate included tax benefits resulting from tax exempt interest income and other permanent tax items, and the impact of discrete tax benefits.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS
For the year ended December 31, 2012, the effective tax rate on pre-tax operating income was 31.6 percent. The significant factors that contributed to the difference from the statutory rate was primarily due to tax exempt interest income and other permanent tax items.
For the year ended December 31, 2011, the effective tax rate on pre-tax operating income was (9.6) percent. The significant factors that contributed to the difference from the statutory rate included tax benefits resulting from tax exempt interest income, tax benefits associated with noncontrolling interests, and the impact of discrete tax benefits.
Segment Results
We report the results of our operations through two reportable segments: AIG Property CasualtyCommercial Insurance and AIG LifeConsumer Insurance. The Corporate and Retirement. The Other Operations category consists of businesses and items not allocated to our reportable segments.
The following table summarizes the operations of each reportable segment and Other Operations.Corporate and Other. See also Note 3 to the Consolidated Financial Statements.
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Years Ended December 31,
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| | Percentage Change | |
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(in millions)
| | 2013
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| | 2013 vs. 2012
| | 2012 vs. 2011
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Total revenues: | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 39,709 | | $ | 39,954 | | $ | 40,977 | | | (1 | )% | | (2 | )% |
AIG Life and Retirement | | | 20,590 | | | 17,645 | | | 16,163 | | | 17 | | | 9 | |
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Total reportable segments | | | 60,299 | | | 57,599 | | | 57,140 | | | 5 | | | 1 | |
Other Operations | | | 8,893 | | | 14,563 | | | 8,526 | | | (39 | ) | | 71 | |
Consolidation and eliminations | | | (514 | ) | | (1,141 | ) | | (561 | ) | | 55 | | | (103 | ) |
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Total revenues | | $ | 68,678 | | $ | 71,021 | | $ | 65,105 | | | (3 | ) | | 9 | |
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Pre-tax income (loss): | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 5,133 | | $ | 2,023 | | $ | 2,100 | | | 154 | | | (4 | ) |
AIG Life and Retirement | | | 6,505 | | | 3,780 | | | 2,956 | | | 72 | | | 28 | |
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Total reportable segments | | | 11,638 | | | 5,803 | | | 5,056 | | | 101 | | | 15 | |
Other Operations: | | | | | | | | | | | | | | | | |
Mortgage Guaranty | | | 213 | | | 15 | | | (77 | ) | | NM | | | NM | |
Global Capital Markets | | | 625 | | | 553 | | | (7 | ) | | 13 | | | NM | |
Direct Investment book | | | 1,544 | | | 1,632 | | | 622 | | | (5 | ) | | 162 | |
Retained interests | | | – | | | 4,957 | | | 486 | | | NM | | | NM | |
Corporate & Other | | | (4,706 | ) | | (10,186 | ) | | (6,007 | ) | | 54 | | | (70 | ) |
Aircraft Leasing | | | (129 | ) | | 339 | | | (1,005 | ) | | NM | | | NM | |
Consolidation and eliminations | | | 4 | | | – | | | – | | | NM | | | NM | |
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Other Operations | | | (2,449 | ) | | (2,690 | ) | | (5,988 | ) | | 9 | | | 55 | |
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Consolidation and eliminations | | | 179 | | | (222 | ) | | 31 | | | NM | | | NM | |
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Total pre-tax income (loss) | | $ | 9,368 | | $ | 2,891 | | $ | (901 | ) | | 224 | | | NM | |
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Pre-tax operating income (loss): | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 4,812 | | $ | 1,793 | | $ | 1,148 | | | 168 | | | 56 | |
AIG Life and Retirement | | | 5,095 | | | 4,160 | | | 3,277 | | | 22 | | | 27 | |
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Total reportable segments | | | 9,907 | | | 5,953 | | | 4,425 | | | 66 | | | 35 | |
Other Operations: | | | | | | | | | | | | | | | | |
Mortgage Guaranty | | | 205 | | | 9 | | | (97 | ) | | NM | | | NM | |
Global Capital Markets | | | 625 | | | 557 | | | (11 | ) | | 12 | | | NM | |
Direct Investment book | | | 1,448 | | | 1,215 | | | 604 | | | 19 | | | 101 | |
Retained interests | | | – | | | 4,957 | | | 486 | | | NM | | | NM | |
Corporate & Other | | | (2,793 | ) | | (2,591 | ) | | (2,686 | ) | | (8 | ) | | 4 | |
Consolidation and eliminations | | | 4 | | | – | | | – | | | NM | | | NM | |
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Other Operations | | | (511 | ) | | 4,147 | | | (1,704 | ) | | NM | | | NM | |
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Consolidations, eliminations and other adjustments | | | 165 | | | (18 | ) | | (181 | ) | | NM | | | 90 | |
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Total pre-tax operating income (loss) | | $ | 9,561 | | $ | 10,082 | | $ | 2,540 | | | (5 | ) | | 297 | |
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AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS
TOTAL REVENUES
(in millions)
Years Ended December 31, | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 |
Commercial Insurance* | | | | | | | | | $ | 1,652 | $ | 5,510 | $ | 4,980 |
Consumer Insurance* | | | | | | | | | | 3,378 | | 4,474 | | 4,564 |
Corporate and Other | | | | | | | | | | (883) | | (379) | | (265) |
Consolidations, eliminations and other adjustments | | | | | | | | | | (92) | | (31) | | 111 |
Pre-tax operating income | | | | | | | | | $ | 4,055 | $ | 9,574 | $ | 9,390 |
Changes in fair value of securities used to hedge guaranteed living | | | | | | | | | | | | | | |
benefits | | | | | | | | | | (43) | | 260 | | (161) |
Changes in benefit reserves and DAC, VOBA, and | | | | | | | | | | | | | | |
SIA related to net realized capital gains (losses) | | | | | | | | | | (15) | | (217) | | (1,608) |
Other income (expense) – net | | | | | | | | | | (233) | | - | | (72) |
Loss on extinguishment of debt | | | | | | | | | | (756) | | (2,282) | | (651) |
Net realized capital gains | | | | | | | | | | 776 | | 739 | | 1,939 |
Income (loss) from divested businesses | | | | | | | | | | (59) | | 2,169 | | (177) |
Non-operating litigation reserves and settlements | | | | | | | | | | 82 | | 258 | | 708 |
Reserve development related to non-operating run-off | | | | | | | | | | | | | | |
insurance business | | | | | | | | | | (30) | | - | | - |
Restructuring and other costs | | | | | | | | | | (496) | | - | | - |
Pre-tax income | | | | | | | | | $ | 3,281 | $ | 10,501 | $ | 9,368 |
A discussion of significant items affecting pre-tax segment income follows. Factors that affect pre-tax operating income for a specific business segment are discussed in the detailed business segment analysis.
Pre-tax Income Comparison for* Certain 2013 and 2012
AIG Property Casualty — Pre-tax income increased in 2013 compared to 2012, primarily as a result of improved underwriting results. The improved underwriting results are attributable to lower catastrophe losses, an improvement in current year losses, reflecting the continued shift to higher value business, enhanced risk selection and improved pricing. The improvement in pre-tax income also reflected higher net investment income in 2013 compared to 2012 due to the strong performance of alternative investments and income associated with the PICC P&C shares that are accountedseverance expenses for under the fair value option.
AIG Life and Retirement — Pre-tax income increased in 2013 compared to 2012, primarily due to increased fee income from growth in our variable annuity account value and continued active spread management related to our interest rate sensitive businesses, income from legal settlements and alternative investments. These increases were partially offset by the absence of fair value gains recognized in 2012 from our investment in ML II, which was liquidated in March 2012. Net realized capital gains increased in 2013 compared to 2012, primarily due to gains in connection with our program to utilize capital loss carryforwards, which were partially offset by the triggering of additional loss recognition reserves, reflected in Policyholder benefits and claims incurred, from the subsequent reinvestment of the proceeds from these sales at lower yields.
Other Operations — Other Operations reported a decline in pre-tax loss in 2013 compared to 2012. The pre-tax loss in 2013 included impairment on investments in life settlements, a loss on extinguishment of debt resulting from the redemptions and repurchases of, and cash tender offers, for certain debt securities, and severance expense, partially
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS
offset by an increase in pre-tax income from GCM and Mortgage Guaranty. The pre-tax income in 2012 included fair value gains from our previously held interests in AIA ordinary shares and ML III.
Mortgage Guaranty's pre-tax operating income increased in 2013 compared to 2012 due to higher net premiums earned in the first-lien business, a decline in newly reported delinquencies and improving cure rates.
The net loss on divested businesses in 2012 includes a loss associated with the announced sale of ILFC.
Pre-tax Income Comparison for 2012 and 2011
AIG Property Casualty — Pre-tax income decreased slightly in 2012 compared to 2011 due to higher acquisition costs as a result of the change in business mix from Commercial Insurance to Consumer Insurance and higher general operating expenses and lower net realized capital gains. Partially offsetting the decrease were lower underwriting losses due to the impact of lower catastrophe losses, underwriting improvements related to rate increases and enhanced risk selection, higher net investment income due to asset diversification by reducing the concentration in tax-exempt municipal instruments and increasing investments in private placement debt and structured securities.
AIG Life and Retirement — Pre-tax income increased in 2012 compared to 2011, principally due to efforts to actively manage net investment spreads. Results benefited from higher net investment income, lower interest credited, lower reserves for death claims and the impact of more favorable separate account performance on DAC amortization and policyholder benefit reserves. These items were partially offset by significant proceeds from a legal settlement in 2011, higher mortality costs and an increase in GIC reserves.
Other Operations — Other Operations recorded a decline in pre-tax loss in 2012 compared to 2011 due to fair value and realized gains in our interest in AIA ordinary shares, and in our interest in ML III, partially offset by an increase in estimated litigation liability, and a loss on extinguishment of debt of $3.3 billion in 2011 in connection with the termination of the FRBNY Credit Facility.
Mortgage Guaranty recorded a pre-tax operating income in 2012 compared to a pre-tax operating loss in 2011 due to a decrease in claims and claims adjustment expense.
The net loss on divested businesses in 2012 includes a loss associated with the announced sale of ILFC.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS
The following table presents reconciliations of pre-tax income (loss) to pre-tax operating income (loss) by reportable segment and after-tax operating income attributable to AIG, which are non-GAAP measures. See Use of Non-GAAP Measures for additional information.
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Years Ended December 31,
(in millions)
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AIG Property Casualty | | | | | | | | | | |
Pre-tax income | | $ | 5,133 | | $ | 2,023 | | $ | 2,100 | |
Net realized capital gains | | | (380 | ) | | (211 | ) | | (957 | ) |
Legal settlements* | | | (13 | ) | | (17 | ) | | – | |
Other (income) expense – net | | | 72 | | | (2 | ) | | 5 | |
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Pre-tax operating income | | $ | 4,812 | | $ | 1,793 | | $ | 1,148 | |
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AIG Life and Retirement | | | | | | | | | | |
Pre-tax income | | $ | 6,505 | | $ | 3,780 | | $ | 2,956 | |
Legal settlements* | | | (1,020 | ) | | (154 | ) | | – | |
Changes in fair value of fixed maturity securities designated to hedge living benefit liabilities, net of interest expense | | | 161 | | | (37 | ) | | – | |
Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains | | | 1,486 | | | 1,201 | | | 327 | |
Net realized capital gains | | | (2,037 | ) | | (630 | ) | | (6 | ) |
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Pre-tax operating income | | $ | 5,095 | | $ | 4,160 | | $ | 3,277 | |
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Other Operations | | | | | | | | | | |
Pre-tax loss | | $ | (2,449 | ) | $ | (2,690 | ) | $ | (5,988 | ) |
Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital (gains) losses | | | 98 | | | – | | | – | |
Net realized capital (gains) losses | | | 685 | | | (289 | ) | | 348 | |
Net loss on sale of divested businesses | | | 48 | | | 6,717 | | | 74 | |
Legal reserves | | | 446 | | | 754 | | | 20 | |
Legal settlements* | | | (119 | ) | | (39 | ) | | – | |
Deferred gain on FRBNY credit facility | | | – | | | – | | | (296 | ) |
Loss on extinguishment of debt | | | 651 | | | 32 | | | 3,204 | |
Aircraft Leasing | | | 129 | | | (338 | ) | | 934 | |
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Pre-tax operating income (loss) | | $ | (511 | ) | $ | 4,147 | | $ | (1,704 | ) |
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Total | | | | | | | | | | |
Pre-tax operating income of reportable segments and Other Operations | | $ | 9,396 | | $ | 10,100 | | $ | 2,721 | |
Consolidations, eliminations and other adjustments | | | 165 | | | (18 | ) | | (181 | ) |
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Pre-tax operating income | | | 9,561 | | | 10,082 | | | 2,540 | |
Income tax benefits (expense) | | | (2,762 | ) | | (3,187 | ) | | 243 | |
Noncontrolling interests excluding net realized capital gains | | | (37 | ) | | (260 | ) | | (697 | ) |
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After-tax operating income attributable to AIG | | $ | 6,762 | | $ | 6,635 | | $ | 2,086 | |
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* Reflects income from settlements with financial institutions that participated in the creation, offering and sale of RMBS from which AIG realized losses during the financial crisis.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
AIG PROPERTY CASUALTY
AIG Property Casualty presents its financial information in two operating segments — Commercial Insurance and Consumer Insurance — as well as an Other category.
We are developing new value-based metrics that provide management with enhanced measures to evaluate our profitability, such as a risk-adjusted profitability model. Along with underwriting results, this risk-adjusted profitability model incorporates elements of capital allocations, costs of capital and net investment income. We believe that such performance measures will allow us to better assess the true economic returns of our business.
AIG Property Casualty 2013 Highlights
Pre-tax Operating Income increased in 2013, compared to the prior year, due to lower catastrophe losses, improvements in underwriting results and strong investment performance. AIG Property Casualty continued to shift its mix of business to higher value products and regions, while benefiting from positive rate trends.
Net premiums written decreased slightly in 2013, compared to the prior year, due to the effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen, which primarily impacted the Consumer Insurance businesses. This decrease was largely offset by an increase in the Commercial Insurance net premiums written due to rate increases, improved retention, growth in new business and changes in our reinsurance program. Excluding the effect of foreign exchange, net premiums written increased by approximately 4 percent compared to the prior year.
The loss ratio improved by 7.2 points in 2013, compared to the prior year, primarily due to positive pricing, continued improvement from our change in business mix and lower catastrophe losses. These improvements were partially offset by an increase in severe losses and adverse prior year development, which added 0.8 points and 0.1 point to the loss ratio, respectively, compared to the prior year. Additionally, an increase in discount for certain workers' compensation reserves improved the loss ratio by 1.0 points compared to the prior year.
The acquisition ratio decreased by 0.2 points in 2013, compared to the prior year. Decreases in the Commercial Insurance acquisition ratio, related to changes in business mix and reinsurance structures, partially offset by increased commission rates in Consumer Insurance, driven by increases in growth targeted lines of business.
The general operating expense ratio increased by 0.2 points in 2013, compared to the prior year. An increase in the cost of our employee incentive plans was partially offset by the decrease in bad debt expense and reduced costs for strategic initiatives. In addition, for 2013, the lower net premiums earned base contributed to the increase, primarily due to the fixed expense base that generally does not vary with production.
Net investment income increased by 10 percent in 2013, compared to the prior year, primarily due to increases in alternative investment returns and income associated with the PICC P&C shares that are accounted for under the fair value option.
We provided $4.3 billion of dividends to AIG Parent during the year ended December 31, 2013, including non-cash dividends of $222 million (including dividends of $1.8 billion related to restructuring activities).
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
AIG Property Casualty Results
The following table presents AIG Property Casualty results(*):
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Years Ended December 31,
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| | Percentage Change | |
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(in millions)
| | 2013
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| | 2011
| | 2013 vs. 2012
| | 2012 vs. 2011
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Commercial Insurance | | | | | | | | | | | | | | | | |
Underwriting results: | | | | | | | | | | | | | | | | |
Net premiums written | | $ | 20,842 | | $ | 20,300 | | $ | 21,055 | | | 3 | % | | (4 | )% |
(Increase) decrease in unearned premiums | | | (205 | ) | | 500 | | | 748 | | | NM | | | (33 | ) |
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Net premiums earned | | | 20,637 | | | 20,800 | | | 21,803 | | | (1 | ) | | (5 | ) |
Claims and claims adjustment expenses incurred | | | 14,828 | | | 16,696 | | | 18,332 | | | (11 | ) | | (9 | ) |
Acquisition expenses | | | 3,329 | | | 3,453 | | | 3,184 | | | (4 | ) | | 8 | |
General operating expenses | | | 2,582 | | | 2,543 | | | 2,136 | | | 2 | | | 19 | |
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Underwriting loss | | | (102 | ) | | (1,892 | ) | | (1,849 | ) | | 95 | | | (2 | ) |
Net investment income | | | 2,500 | | | 2,769 | | | 3,118 | | | (10 | ) | | (11 | ) |
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Pre-tax operating income | | $ | 2,398 | | $ | 877 | | $ | 1,269 | | | 173 | % | | (31 | )% |
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Consumer Insurance | | | | | | | | | | | | | | | | |
Underwriting results: | | | | | | | | | | | | | | | | |
Net premiums written | | $ | 13,552 | | $ | 14,150 | | $ | 13,762 | | | (4 | )% | | 3 | % |
Increase in unearned premiums | | | (323 | ) | | (198 | ) | | (7 | ) | | (63 | ) | | NM | |
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Net premiums earned | | | 13,229 | | | 13,952 | | | 13,755 | | | (5 | ) | | 1 | |
Claims and claims adjustment expenses incurred | | | 7,799 | | | 8,498 | | | 8,900 | | | (8 | ) | | (5 | ) |
Acquisition expenses | | | 3,376 | | | 3,483 | | | 3,274 | | | (3 | ) | | 6 | |
General operating expenses | | | 2,109 | | | 2,130 | | | 1,979 | | | (1 | ) | | 8 | |
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Underwriting loss | | | (55 | ) | | (159 | ) | | (398 | ) | | 65 | | | 60 | |
Net investment income | | | 372 | | | 451 | | | 354 | | | (18 | ) | | 27 | |
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Pre-tax operating income (loss) | | $ | 317 | | $ | 292 | | $ | (44 | ) | | 9 | % | | NM | % |
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Other | | | | | | | | | | | | | | | | |
Underwriting results: | | | | | | | | | | | | | | | | |
Net premiums written | | $ | (6 | ) | $ | (14 | ) | $ | 23 | | | 57 | % | | NM | % |
Decrease in unearned premiums | | | 93 | | | 135 | | | 108 | | | (31 | ) | | 25 | |
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Net premiums earned | | | 87 | | | 121 | | | 131 | | | (28 | ) | | (8 | ) |
Claims and claims adjustment expenses incurred | | | 12 | | | 591 | | | 717 | | | (98 | ) | | (18 | ) |
Acquisition expenses | | | – | | | – | | | 6 | | | NM | | | NM | |
General operating expenses | | | 373 | | | 466 | | | 266 | | | (20 | ) | | 75 | |
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Underwriting loss | | | (298 | ) | | (936 | ) | | (858 | ) | | 68 | | | (9 | ) |
Net investment income | | | 2,395 | | | 1,560 | | | 781 | | | 54 | | | 100 | |
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Pre-tax operating income (loss) | | | 2,097 | | | 624 | | | (77 | ) | | 236 | | | NM | |
Net realized capital gains | | | 380 | | | 211 | | | 957 | | | 80 | | | (78 | ) |
Legal settlement | | | 13 | | | 17 | | | – | | | (24 | ) | | NM | |
Other income (expense) – net | | | (72 | ) | | 2 | | | (5 | ) | | NM | | | NM | |
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Pre-tax income | | $ | 2,418 | | $ | 854 | | $ | 875 | | | 183 | % | | (2 | )% |
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Total AIG Property Casualty | | | | | | | | | | | | | | | | |
Underwriting results: | | | | | | | | | | | | | | | | |
Net premiums written | | $ | 34,388 | | $ | 34,436 | | $ | 34,840 | | | – | % | | (1 | )% |
(Increase) decrease in unearned premiums | | | (435 | ) | | 437 | | | 849 | | | NM | | | (49 | ) |
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Net premiums earned | | | 33,953 | | | 34,873 | | | 35,689 | | | (3 | ) | | (2 | ) |
Claims and claims adjustment expenses incurred | | | 22,639 | | | 25,785 | | | 27,949 | | | (12 | ) | | (8 | ) |
Acquisition expenses | | | 6,705 | | | 6,936 | | | 6,464 | | | (3 | ) | | 7 | |
General operating expenses | | | 5,064 | | | 5,139 | | | 4,381 | | | (1 | ) | | 17 | |
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Underwriting loss | | | (455 | ) | | (2,987 | ) | | (3,105 | ) | | 85 | | | 4 | |
Net investment income | | | 5,267 | | | 4,780 | | | 4,253 | | | 10 | | | 12 | |
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Pre-tax operating income | | | 4,812 | | | 1,793 | | | 1,148 | | | 168 | | | 56 | |
Net realized capital gains | | | 380 | | | 211 | | | 957 | | | 80 | | | (78 | ) |
Legal settlement | | | 13 | | | 17 | | | – | | | (24 | ) | | NM | |
Other income (expense) – net | | | (72 | ) | | 2 | | | (5 | ) | | NM | | | NM | |
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Pre-tax income | | $ | 5,133 | | $ | 2,023 | | $ | 2,100 | | | 154 | % | | (4 | )% |
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* Certain 2013 severance expenses totaling $263 million for AIG Property Casualty are included in AIG's Other Operations.Corporate & Other. As these expenses, arewhich totaled $263 million, were related to an overall AIG initiative to centralize work streams into lower cost locations, and create a more streamlined organization, they have not been allocated to the AIG Property Casualty segment.operating segments.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTSTABLE OF OPERATIONS / AIG PROPERTY CASUALTYCONTENTS
* The operations reported as partItem 7 /Results of Other do not have meaningful levels of Net premiums written.Operations
2013 and 2012 Comparison
AIG Property Casualty Results
pre-tax operating INCOME (in millions) |
commercial insurance
| consumer insurance
|
Pre-tax operatingIncome Comparison for 2015 and 2014
Pre-tax income increased decreased in 2013,2015 compared to the prior year,2014 primarily due to an improvement in underwriting results and an increase in net investment income. The improvement in underwriting results reflected lower catastrophe losses, an improvement in current accident year losses, and an increase in reserve discount compared to the prior year. Net investment income increased due to increases in alternative investment returns and income associated with the PICC P&C shares that are accounted for under the fair value option. The asset diversification strategies that we executed during 2012 enabled us to maintain similar yields in the portfolio despite the continued low interest rate environment in 2013. Catastrophe losses were $787 million and $2.7 billion for the years ended December 31, 2013 and 2012, respectively. The net benefit in reserve discount was $309 million and $63 million for the years ended December 31, 2013 and 2012, respectively. As discussed further in the Discounting of Reserves section, we revised our estimate for discounting of loss reserves with the agreement of our Pennsylvania regulator. We previously applied different Pennsylvania-prescribed discounting practices and factors to our primary and excess workers' compensation reservesto:
•a decrease in Commercial Insurance pre-tax operating income, reflecting an underwriting loss in 2015 compared to underwriting income in 2014 driven by adverse prior year loss reserve development from Property Casualty of $3.5 billion in 2015 compared to $655 million in 2014 and Other. Our revised estimate provides a more consistent approach that better aligns our discount rate with our future expected risk-adjusted yield on the underlying assets and payout patterns.lower net investment income;
Acquisition expenses•a decrease in Consumer Insurance pre-tax operating income decreased in 2013, compared, reflecting lower net investment income, less favorable adjustments related to the prior year, primarily due to the timingupdate of certain guaranty fundsactuarial assumptions, less favorable mortality experience in Life, and other assessments, and the changean underwriting loss in reinsurance structuresPersonal Insurance in Commercial Insurance, which were2015, partially offset by an increase in acquisition expenses in Consumer Insurance due to the change in business mix.higher policy and advisory fees;
General operating expenses• decreased in 2013, compared torestructuring and other costs; and
•lower income from divested businesses as a result of the prior year, due to decreases in bad debt expense and reduced costs for strategic initiatives. Bad debt expense decreased by $149 million from $134 millionsale of ILFC in the prior year. The decrease in bad debt expense was primarily due to reductions in prior year reserves, as collections exceeded the originally estimated recoveries. Strategic initiatives which include infrastructure project expenses and those severance charges borne by AIG Property Casualty, decreased by $158 million from $455 million in the prior year. second quarter of 2014.
These decreases were partially offset by:
•a lower loss on extinguishment of debt from ongoing liability management activities;
•a $264 million increase from the change in the fair value of GMWB and GMAB embedded derivatives related to variable annuity guaranteed living benefits, net of all related economic hedges (See Insurance Reserves – Life Insurance Companies DAC and Reserves – Variable Annuity Guaranteed Features and Hedging Program for additional discussion); and
•higher net realized capital gains from sales of investments, which included realized gains on the sales of Class B shares of Prudential Financial, Inc., a portion of our holdings in PICC P&C shares and common shares of Springleaf Holdings Inc. (Springleaf), mostly offset by a realized loss on the sale of ordinary shares of AerCap and an increase in the costother-than-temporary impairment charges.
TABLE OF CONTENTS
Item 7 /Results of our employee incentive plans of $247 million. The increaseOperations
Pre-tax Income Comparison for 2014 and 2013
Pre-tax income increased in the cost of our employee incentive plans was2014 compared to 2013 primarily due to the alignment of employee performance with the overall performance of the organization, including our stock performance, and accelerated vesting provisions for retirement-eligible individuals in the 2013 share-based plan.to:
Commercial Insurance Results•
Pre-tax operating income increased in 2013, compared to the prior year, primarily due to a decrease in catastrophe losses to $710 million from $2.3 billion in the prior year, partially offset by a decrease in allocated net investment income as a result of a decrease in the risk-free rates used in our investment income allocation model. The lower underwriting loss in 2013 compared to the prior year was primarily due to lower catastrophe losses, rate increases,
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
and enhanced risk selection and loss mitigation activities. As discussed further in the Discounting of Reserves section, our 2013 results included a $322 million charge primarily for the change in reserve discount compared to a $100 million benefit in 2012 from an increase in reserve discount. Prior year adverse development increasedpre-tax operating income for Commercial Insurance;
•a $2.3 billion increase in income from divested businesses associated with the gain recognized upon completion of the sale of ILFC in 2014; and
•lower changes in benefit reserves and DAC, VOBA, and SIA related to net realized capital gains, which were primarily affected by $58loss recognition expensein the Life Insurance Companies of $30 million in 2014 compared to 2012.$1.5 billion in 2013. The current accident year losses forloss recognition in 2013 included severe losses of $569 million comparedwas primarily attributable to the severe losses of $293 million incurredinvestment sales in the prior year. This increaseInstitutional Markets and Retirement operating segments related to capital loss carryforward utilization, with reinvestment of the sales proceeds at lower yields. Loss recognition expense in Corporate and Other was driven largely by a large property loss and related contingent business interruption claims, totaling $131 million and by an increased frequency of severe losses compared to prior periods. Net adverse development, including related premium adjustments was $294$140 million in 2013, which includes $149 million of adverse development related to Storm Sandy, compared to $2362014 and $98 million in the prior year. The adverse development related to Storm Sandy resulted from higher severities on a small number of existing large and complex commercial claims. These increased severities were driven by a number of factors, including the extensive damage caused to properties in the downtown New York metropolitan area.
Acquisition expenses decreased in 2013, compared to the prior year, due to changes in reinsurance, the timing of guaranty funds and other assessments, as well as change in business mix.2013.
General operating expenses increased slightly in 2013, compared to the prior year, primarily due to the increase in employee incentive plan expense, as previously discussed, and strategic initiatives, which was partially offset by a decrease in bad debt expense.
Consumer Insurance Results
Pre-tax operating income increased in 2013, compared to the prior year, primarily due to a lower underwriting loss, which is partially offset by a decrease in allocated net investment income. Underwriting results improved primarily due to lower catastrophe losses and higher net favorable development, coupled with lower acquisition and general operating expenses. Allocated net investment income decreased due to a decrease in the risk-free rates used in our investment income allocation model. Catastrophe losses in 2013 were $77 million, compared to $382 million during the prior year. Net favorable development was $155 million in 2013, compared to $20 million in the prior year. The year ended December 31, 2013 included approximately $41 million of favorable development from Storm Sandy driven primarily by the reduction of reserves for excess flood policies indicated from completed property inspections and lower than expected severity on certain other policy claims.
Acquisition expenses decreased in 2013, compared to the prior year, primarily due to the change in business mix which was partially offset by costs in growth-targeted lines of business. Direct marketing expenses, excluding commissions, for the year ended December 31, 2013 were $440 million, compared to $452 million in the prior year. These expenses, while not deferrable, are expected to generate business that has an average expected overall persistency of approximately five years and, in Japan, approximately nine years. Excluding the effect of foreign exchange, direct marketing expenses increased by approximately $46 million in 2013 compared to the prior year.
General operating expenses decreased in 2013, compared to the prior year, primarily due to reduced costs for strategic initiatives, whichincreases were partially offset by the increase in employee incentive plan expense previously discussed and the strategic expansion into growth economy nations.decreases from:
•higher loss on extinguishment of debt from on-going debt management activities;
Other Results•
Pre-tax operating income increased in 2013, compared to the prior year, primarily due to an increase in net investment income and a decrease in underwriting loss. net realized capital gains driven by lower gains from sales of investments related to capital loss carryforward utilization in 2013;
•a decrease in legal settlements with financial institutions that participated in the creation, offering and sale of RMBS from which we realized losses during the financial crisis, which is reflected in Non-operating litigation reserves and settlements; and
•a $149 million change in the fair value of GMWB and GMAB embedded derivatives related to variable annuity guaranteed living benefits, net of the change in fair value of all related economic hedges.
Net Investment Income
Net investment income increased dueis attributed to improved overall investment performance and a reduced allocation tothe operating segments of Commercial Insurance and Consumer Insurance resulting frombased on internal models consistent with the usenature of lower risk-free rates in ourthe underlying businesses.
For Commercial Insurance — Property Casualty and Consumer Insurance — Personal Insurance, we estimate investable funds based primarily on loss reserves, unearned premiums and a capital allocation for each operating segment. The net investment income allocation model. As discussed further inis calculated based on the Discountingestimated investable funds and risk-free yields (plus a liquidity premium) consistent with the approximate duration of Reserves section, our 2013 results include a $649 million benefit, primarily related to a revision in state prescribed discounting of excess workers' compensation loss reserves that are reported in Other. Net adverse development was $326 million in 2013, compared to $229 million in 2012.
General operating expenses decreased as a result of lower expenses related to strategic initiatives.
2012the liabilities, and 2011 Comparison
AIG Property Casualty Results
Pre-tax operating income increased in 2012, compared to the prior year, primarily due to a decrease in catastrophe losses to $2.7 billion from $3.3 billion in the prior year. In addition,excludes net investment income increased dueassociated with the run-off insurance lines reported in Corporate and Other. The remaining excess is attributed to asset
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
diversification, from concentration in tax-exempt municipal instruments into investments in private placement debt and structured securities. Net prior year adverse development, including premium adjustments, was $445 million for 2012 compared to $39 million for 2011.
Acquisition expenses increased due to the change in business mix to higher value lines of business and the change in business mix from Commercial Insurance to— Property Casualty and Consumer Insurance.
General operating expenses increased due toInsurance — Personal Insurance based on the continued investment in strategic initiatives and human resources, as a result of AIG's continued investment in its employees. For the year ended December 31, 2012, investments in strategic initiatives totaled approximately $455 million, representing an increase of approximately $233 million over the prior year. In addition, bad debt expense increased by approximately $143 million from the prior year.
Commercial Insurance Results
Pre-tax operating income decreased in 2012, compared to the prior year, primarily due to a decrease in allocatedrelative net investment income reflecting a decrease in the risk-free rate. Underwriting losses increased slightly compared to the prior year, reflecting higher acquisition and general operating expenses, and higher adverse prior year development, partially offset by lower catastrophe and improved current accident year losses, the effect of rate increases and enhanced risk selection, and an increase in reserve discount of $100 million.previously allocated.
Acquisition expenses increased primarily as a result of higher commission expense due to the restructuring of the U.S. Casualty, primarily loss-sensitive business, as we move towards higher value lines of business.
General operating expenses increased due to an increase in bad debt expense of approximately $143 million and investments in strategic initiatives.
For Commercial Insurance — Institutional Markets, Consumer Insurance Results
Pre-tax operating income increased in 2012, compared to the prior year, reflecting a reduction in underwriting loss as well as an increase in allocated— Retirement and Consumer Insurance — Life, net investment income resulting primarilyis attributed based on invested assets from the strategic group benefits partnership with AIGsegregated product line portfolios. Invested assets in excess of liabilities are allocated to product lines based on internal capital estimates.
Foreign Currency Impact
Property Casualty, International Life and Retirement. Underwriting results improved due to the combination of lower catastrophe losses, favorable loss reserve development, the effect of rate increases, enhanced risk selection and portfolio management. These improvements were offset in part by higher acquisition and general operating expenses.
Acquisition expenses increased in 2012, compared to the prior year, primarily due to an increase in warranty profit sharing arrangements, increased investment in direct marketing, and a decrease of approximately $49 million in the benefit from the amortization of VOBA liabilities recognized at the time of the Fuji acquisition.
General operating expenses increased in 2012, compared to the prior year, due to investments in infrastructure and strategic expansion in growth economy nations.
Other Results
We continued to invest in a number of strategic initiatives during 2012, including the implementation of global finance and information systems, preparation for Solvency II compliance, readiness for regulation by the FRB, legal entity restructuring, and underwriting and claims improvement initiatives. We also continued to streamline our finance, policy and claims administration and human resources operations. The costs of these initiatives, whichPersonal Insurance businesses are not specific to either Commercial Insurance or Consumer Insurance, are reported as part of the Other category. For the year ended December 31, 2012, these costs totaled $391 million, representing an increase of approximately $195 million over the prior year.
See AIG Property Casualty Underwriting Ratios below for further information on prior year development.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
AIG Property Casualty Net Premiums Written
The following table presents AIG Property Casualty net premiums written by major line of business:
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Commercial Insurance | | | | | | | | | | | | | | | | |
Casualty | | $ | 8,145 | | $ | 8,574 | | $ | 9,820 | | | (5 | )% | | (13 | )% |
Property | | | 4,708 | | | 4,191 | | | 3,811 | | | 12 | | | 10 | |
Specialty | | | 3,730 | | | 3,576 | | | 3,552 | | | 4 | | | 1 | |
Financial lines | | | 4,259 | | | 3,959 | | | 3,872 | | | 8 | | | 2 | |
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Total net premiums written | | $ | 20,842 | | $ | 20,300 | | $ | 21,055 | | | 3 | % | | (4 | )% |
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Consumer Insurance | | | | | | | | | | | | | | | | |
Accident & Health | | $ | 6,621 | | $ | 6,969 | | $ | 6,762 | | | (5 | )% | | 3 | % |
Personal lines | | | 6,931 | | | 7,181 | | | 7,000 | | | (3 | ) | | 3 | |
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Total net premiums written | | $ | 13,552 | | $ | 14,150 | | $ | 13,762 | | | (4 | )% | | 3 | % |
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Other | | | (6 | ) | | (14 | ) | | 23 | | | 57 | | | NM | |
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Total AIG Property Casualty net premiums written | | $ | 34,388 | | $ | 34,436 | | $ | 34,840 | | | – | % | | (1 | )% |
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2013 and 2012 Comparison
Commercial Insurance Net Premiums Written
During 2013, Commercial Insurance continued to focus on the execution of its strategic objectives.
Casualty net premiums written decreased in 2013, compared to the prior year, primarily due to the execution of our strategy to enhance risk selection, particularly in the Americas and EMEA, as well as to increase specific reinsurance purchases to better manage our exposures. Changes in reinsurance strategy decreased net premiums written by approximately $185 million in 2013, compared to the prior year. In line with our strategy, Casualty net premiums written decreased 17.1 percent since 2011 due to the capital intensive nature of the long-tail Casualty book of business. We implemented rate increases in retained business, especially in the U.S., that partially offset these premium decreases.
Property net premiums written increased in 2013, compared to the prior year, primarily due to growth in new business across all regions, favorable retention in renewal businesses and increases in coverage limits and changes to our per-risk reinsurance program to retain more favorable risks, while continuing to manage aggregate exposure. Catastrophe-exposed businesses in the Americas also benefitted from rate increases.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
The increase in net premiums written was partially offset by the effect of catastrophe bond transactions which provide coverage for several years with ceded written premium recognized at the inception of the transaction. In 2013, we entered into two multi-year catastrophe bond transactions, which will provide $525 million of indemnity protection, in the aggregate, against U.S., Caribbean and Gulf of Mexico named storms, and U.S. and Canadian earthquakes through the end of 2018. These transactions reduced net premiums written in 2013 by $140 million. Our previous catastrophe bond issuance occurred in the fourth quarter of 2011.
Specialty net premiums written increased in 2013 compared to the prior year, primarily due to rate increases in environmental business, small-and medium-sized enterprise markets in the Americas region, new business growth in EMEA, as well as the restructuring of our reinsurance program to retain more favorable risks while continuing to manage aggregate exposure, which increased net premiums written by $144 million, compared to the prior year.
Financial lines net premiums written increased in 2013 compared to the prior year, reflecting growth in new business related to targeted growth products, particularly in the EMEA region as well as an improved rate environment globally. Global professional indemnity net premiums written increased by $86 million in 2013, due to improved rates, strong new business growth and the restructuring of our reinsurance program, as part of our decision to retain more favorable risks while continuing to manage aggregate exposure.
See Part I. Item 1 Business — Reinsurance Activities for further discussion on catastrophe bond transactions.
Consumer Insurance Net Premiums Written
Consumer Insurance net premiums written decreased in 2013, compared to the prior year, primarily due to the impact of foreign exchange as the U.S. dollar strengthened against the Japanese yen. Excluding the impact of foreign exchange, net premiums written increased compared to the prior year as the business continued to build momentum through multiple distribution channels and continued focus on direct marketing. In 2013, excluding the impact of foreign exchange, net premiums written generated by direct marketing increased by approximately 5.1 percent compared to the prior year, and accounted for approximately 16.4 percent of Consumer Insurance net premiums written.
A&H net premiums written, excluding the effect of foreign exchange, increased slightly compared to the prior year, primarily due to our focus on the growth of Fuji Life products, direct marketing, individual A&H in Asia Pacific, and travel business which continued to increase in most geographies across the globe.
Personal lines net premiums written, excluding the effects of foreign exchange, increased in 2013 compared to the prior year. The increases were driven by growth in U.S. private client group and warranty business, automobile products and the continued execution of our strategic initiative to grow higher value lines of business in non-automobile products. In addition, the impact of the timing of recognizing the excess of loss ceded premiums written in the second quarter and of the catastrophe bond issuances reduced net premiums written by approximately $58 million compared to the prior year.
2012 and 2011 Comparison
Commercial Insurance Net Premiums Written
In 2012, Commercial Insurance focused on the execution of the previously announced strategic objectives. The overall decrease in Casualty was partially offset by increases in all the other lines of business.
Casualty net premiums written decreased in 2012, compared to the prior year, as planned, primarily due to the execution of our strategy to improve loss ratios. Our enhanced risk selection process, and adherence to pricing targets resulted in the non-renewal of approximately $800 million of net premiums written, primarily within the workers' compensation business in the Americas, and within the Primary Casualty business in EMEA. In addition, the restructuring of the loss-sensitive programs decreased Casualty net premiums written by approximately $260 million in 2012. The additional premiums associated with prior year development in the loss-sensitive business also decreased by approximately $120 million. We also entered into a quota share reinsurance treaty in the U.S. for the Excess Casualty business that decreased net premiums written by approximately $60 million. We implemented rate increases in retained business, especially in the U.S., that partially offset the premium decreases noted above.
Property net premiums written increased in 2012, compared to the prior year, due to rate increases, primarily in the U.S., reduced catastrophe bond purchases in 2012, and the restructuring of the per-risk reinsurance program as part
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
of our decision to retain more favorable risks while continuing to manage aggregate exposure. Catastrophe exposed business retained in the Americas and Asia Pacific region also benefitted from rate increases.
During 2011, as part of the reinsurance strategy discussed above, we secured a three-year catastrophe bond with an industry index, first occurrence trigger, providing for $575 million in protection for U.S. hurricanes and earthquakes. The bond transaction reduced net premiums written by approximately $201 million in 2011. There were no catastrophe bond purchases in 2012.
Specialty net premiums written increased in 2012, compared to the prior year, due to the restructuring of the aerospace reinsurance program to retain more favorable risks while continuing to manage aggregate exposure. This increase was slightly offset by our strategic initiatives related to improved risk selection, particularly within products provided to small and medium sized enterprises in the Americas and EMEA regions. We continue to shift our business mix towards higher value lines, particularly in aerospace.
Financial lines net premiums written increased in 2012, compared to the prior year, reflecting strong business growth in all regions, despite targeted decreases where the business did not meet our risk selection and internal performance criteria. Financial lines net premiums written for year ended December 31, 2011 benefited from a multi-year Errors and Omissions policy in the Americas that produced net premiums written of $148 million.
Consumer Insurance Net Premiums Written
The Consumer Insurance business continued to grow its net premiums written and build momentum through its multiple distribution channels and continuing focus on direct marketing. Consumer Insurance is well-diversified across the major lines of business and has global strategies that are executed across its regions to enhance customer relationships and business performance. Consumer Insurance currently has direct marketing operations in over 50 countries, and we continued to emphasize the growth of this channel, which for the year ended December 31, 2012, accounted for approximately 15 percent of our overall net premiums written.
A&H net premiums written increased in 2012, compared to the prior year, due to the growth of group personal accident business in the Americas and Asia Pacific, strong growth of new business sales in Fuji Life, travel insurance business, direct marketing programs in Japan and other Asia Pacific nations and growth in individual personal accident in other Asia Pacific nations. This was partially offset by the continuing strategies to reposition U.S. direct marketing operations, as well as pricing and underwriting actions in Europe.
Personal lines net premiums written increased in 2012, compared to the prior year, primarily due to the execution of our strategic initiative to grow higher value lines of business in non-automobile products and rate increases in Japan automobile products. Growth in non-automobile net premiums written outpaced growth in automobile net premiums written, increasing its proportion to total net premiums written, due to our focus on diversifying the global product mix.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
AIG Property Casualty Net Premiums Written by Region
The following table presents AIG Property Casualty's net premiums written by region:
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Commercial Insurance: | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 14,042 | | $ | 13,717 | | $ | 14,493 | | | 2 | % | | (5 | )% | | 3 | % | | (5 | )% |
Asia Pacific | | | 2,025 | | | 2,003 | | | 1,868 | | | 1 | | | 7 | | | 11 | | | 7 | |
EMEA | | | 4,775 | | | 4,580 | | | 4,694 | | | 4 | | | (2 | ) | | 4 | | | 1 | |
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Total net premiums written | | $ | 20,842 | | $ | 20,300 | | $ | 21,055 | | | 3 | % | | (4 | )% | | 4 | % | | (3 | )% |
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Americas | | $ | 3,911 | | $ | 3,913 | | $ | 3,628 | | | – | % | | 8 | % | | 1 | % | | 9 | % |
Asia Pacific | | | 7,666 | | | 8,443 | | | 8,194 | | | (9 | ) | | 3 | | | 4 | | | 2 | |
EMEA | | | 1,975 | | | 1,794 | | | 1,940 | | | 10 | | | (8 | ) | | 10 | | | (2 | ) |
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Total net premiums written | | $ | 13,552 | | $ | 14,150 | | $ | 13,762 | | | (4 | )% | | 3 | % | | 4 | % | | 3 | % |
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Americas | | $ | (6 | ) | $ | (16 | ) | $ | 23 | | | 63 | % | | NM | % | | NM | % | | NM | % |
Asia Pacific | | | – | | | 2 | | | – | | | NM | | | NM | | | NM | | | NM | |
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Total net premiums written | | $ | (6 | ) | $ | (14 | ) | $ | 23 | | | 57 | % | | NM | % | | NM | % | | NM | % |
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Total AIG Property Casualty: | | | | | | | | | | | | | | | | | | | | | | |
Americas | | $ | 17,947 | | $ | 17,614 | | $ | 18,144 | | | 2 | % | | (3 | )% | | 2 | % | | (3 | )% |
Asia Pacific | | | 9,691 | | | 10,448 | | | 10,062 | | | (7 | ) | | 4 | | | 5 | | | 3 | |
EMEA | | | 6,750 | | | 6,374 | | | 6,634 | | | 6 | | | (4 | ) | | 6 | | | – | |
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Total net premiums written | | $ | 34,388 | | $ | 34,436 | | $ | 34,840 | | | – | % | | (1 | )% | | 4 | % | | (1 | )% |
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AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
AIG Property Casualty's business is transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the currencies that have the most significant impact toon our businesses:
Years Ended December 31, | | | | | | | | | | | Percentage Change |
Rate for 1 USD | | | | | | | 2015 | 2014 | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Currency: | | | | | | | | | | | | | | |
JPY | | | | | | | 120.82 | 104.43 | 95.86 | | 16 | % | 9 | % |
EUR | | | | | | | 0.89 | 0.75 | 0.76 | | 19 | % | (1) | % |
GBP | | | | | | | 0.65 | 0.61 | 0.64 | | 7 | % | (5) | % |
Unless otherwise noted, references to the effects of foreign exchange in the Commercial Insurance and Consumer Insurance discussion of results of operations are with respect to movements in the three currencies included in the preceding table (the Major Currencies).
Commercial insurance
Commercial Insurance Results
The following table presents Commercial Insurance results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 22,521 | $ | 22,221 | $ | 22,096 | | 1 | % | | 1 | % |
Policy fees | | 199 | | 187 | | 113 | | 6 | | | 65 | |
Net investment income | | 5,474 | | 6,393 | | 6,653 | | (14) | | | (4) | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 20,017 | | 16,575 | | 17,002 | | 21 | | | (3) | |
Interest credited to policyholder account balances | | 408 | | 410 | | 413 | | - | | | (1) | |
Amortization of deferred policy acquisition costs | | 2,342 | | 2,512 | | 2,418 | | (7) | | | 4 | |
General operating and other expenses* | | 3,775 | | 3,794 | | 4,049 | | (1) | | | (6) | |
Pre-tax operating income | $ | 1,652 | $ | 5,510 | $ | 4,980 | | (70) | % | | 11 | % |
* Includes general operating expenses, commissions and other acquisition expenses.
Commercial Insurance Results by Operating Segment
Commercial Insurance presents its financial information in three operating segments – Property Casualty, Mortgage Guaranty and Institutional Markets. The following section provides a comparative discussion of Commercial Insurance Results of Operations for 2015, 2014 and 2013 by operating segment.
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JPY | | | 95.86 | | | 79.32 | | | 80.16 | | | 21 | % | | (1) | % |
EUR | | | 0.76 | | | 0.78 | | | 0.72 | | | (3) | % | | 8 | % |
GBP | | | 0.64 | | | 0.63 | | | 0.62 | | | 2 | % | | 2 | % |
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2013 and 2012 ComparisonTABLE OF CONTENTS
Item 7 / results of operations / commercial insurance
Property Casualty Results
The Americasfollowing table presents Property Casualty results:
Years Ended December 31, | | | | | | | | | | | | | | | | Percentage Change |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | | | | | | | | |
Net premiums written | | | | | | | | | $ | 20,436 | $ | 21,020 | $ | 20,880 | | (3) | % | 1 | % |
Increase in unearned premiums | | | | | | | | | | (407) | | (135) | | (203) | | (201) | | 33 | |
Net premiums earned | | | | | | | | | | 20,029 | | 20,885 | | 20,677 | | (4) | | 1 | |
Losses and loss adjustment expenses incurred | | | | | | | | | | 17,274 | | 14,956 | | 14,872 | | 15 | | 1 | |
Acquisition expenses: | | | | | | | | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | | | | | | | | | 2,309 | | 2,486 | | 2,394 | | (7) | | 4 | |
Other acquisition expenses | | | | | | | | | | 907 | | 796 | | 937 | | 14 | | (15) | |
Total acquisition expenses | | | | | | | | | | 3,216 | | 3,282 | | 3,331 | | (2) | | (1) | |
General operating expenses | | | | | | | | | | 2,542 | | 2,697 | | 2,810 | | (6) | | (4) | |
Underwriting loss | | | | | | | | | | (3,003) | | (50) | | (336) | | NM | | 85 | |
Net investment income | | | | | | | | | | 3,596 | | 4,298 | | 4,431 | | (16) | | (3) | |
Pre-tax operating income | | | | | | | | | $ | 593 | $ | 4,248 | $ | 4,095 | | (86) | % | 4 | % |
NET PREMIUMS WRITTEN (in millions) | | Pre-Tax oPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre‑tax operating incomenet premiums written increased decreased in 2013,2015 compared to the prior year,2014 primarily due to an increase in net adverse prior year loss reserve development and lower net investment income. Net adverse prior year loss reserve development, including related premium adjustments, was $3.5 billion in 2015 compared to $550 million in 2014. The increase in net adverse prior year loss reserve development primarily reflected the rate increases in Commercial Insurance and continued growthloss reserve strengthening of $3.0 billion in the personal property fourth quarter of 2015, in classes of business with long reporting tails, primarily excess and private client groupprimary casualty and rate actionsfinancial lines. Premium adjustments consisted of return premiums of $49 million in 2015 compared to additional premiums of $105 million in 2014. See Insurance Reserves – Non-Life Insurance Companies — Net Loss Development for the warranty retail program in Consumer Insurance. This was partiallyfurther discussion. Current accident year loss ratio, as adjusted, increased due to higher casualty and severe losses, which were mostly offset by decreasesimprovement in casualty businesses reflecting attritional losses in Property and Specialty. Net loss reserve discount benefit was $68 million in 2015 compared to a net loss reserve discount charge of $71
million in 2014. See Insurance Reserves — Non-Life Insurance Companies – Discounting of Reserves for further discussion. Catastrophe losses were $581 million in 2015 compared to $602 million in 2014.
Acquisition expenses decreased slightly in 2015 compared to 2014, primarily due to the executionstrengthening of our strategy to enhance risk selection andthe U.S. dollar against the Major Currencies, as discussed above. Excluding the effect of the timingforeign exchange, acquisition expenses increased primarily due to an increase in commission expenses in certain classes of the catastrophe bond issuances.business in Property and Specialty and higher premium taxes and other assessments reflecting a change in business mix.
Asia PacificGeneral operating expensesnet premiums written decreased in 2013,2015 compared to the prior year,2014, primarily due to the strengthening of the U.S. dollar against the Japanese yen.Major Currencies, as well as lower employee-related expenses, partially offset by increased technology-related costs, and the acquisition of NSM, whose expenses were consolidated commencing in the second quarter of 2015.
Net investment income decreased in 2015 compared to 2014, primarily due to lower income on alternative investments and a decrease in net investment income related to assets accounted for under the fair value option.
See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.
2014 and 2013 Comparison
Pre-tax operating incomeincreased in 2014 compared to 2013 due to decreases in underwriting loss, partially offset by a decrease in net investment income. The decrease in underwriting loss was primarily due to an increase in production, lower charges due to changes in discount for workers’ compensation reserves as discussed further under Insurance Reserves – Non-Life Insurance Companies – Discounting of Reserves, lower catastrophe losses and lower general operating expenses. The loss reserve discount charge decreased to $71 million in 2014 from $322 million in 2013. Catastrophe losses decreased to $602 million in 2014 from $710 million in 2013. These decreases were partially offset by higher net adverse prior year loss reserve development in all lines of business except for Property, and an increase in current accident year losses reflecting higher frequency of non-severe losses in the Property and Specialty businesses. The current accident year losses for 2014 included 30 severe losses totaling $592 million compared to 27 severe losses totaling $569 million in the prior year. Net adverse prior year loss reserve development, including related premium adjustments, was $550 million and $294 million in 2014 and 2013, respectively, as discussed further under Insurance Reserves – Non-Life Insurance Companies – Net Loss Development.
Acquisition expensesdecreased in 2014 compared to 2013 primarily due to a reduction in expenses related to personnel engaged in sales support activities, and lower premium taxes and guaranty fund and other assessments reflecting a change in business mix.
General operating expenses decreased in 2014 compared to 2013, primarily due to efficiencies from organizational realignment initiatives, partially offset by higher technology-related expenses and an increase in bad debt expense. In 2013, general operating expenses benefitted from an unusually low bad debt expense.
Net investment incomedecreased in 2014 compared to 2013, primarily due to a decrease in interest rates during 2014, as yields on new purchases were lower than the weighted average yield of the overall portfolio, lower income on alternative investments, and lower income associated with investments accounted for under the fair value option, as the increase related to the PICC P&C rights offerings was more than offset by a decrease from fixed maturity investments accounted for under the fair value option. These were partially offset by the effect of continued portfolio diversification. The decrease in allocated net investment income is also due to a reduction in net loss reserves.
Property Casualty Net Premiums Written
The following table presents Property Casualty’s net premiums written by major line of business:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
| | | | | | | | U.S. dollars | | Original Currency |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Casualty | $ | 6,957 | $ | 7,649 | $ | 8,154 | | (9) | % | (6) | % | | (6) | % | (6) | % |
Property | | 5,160 | | 5,136 | | 4,718 | | - | | 9 | | | 6 | | 10 | |
Specialty | | 3,653 | | 3,714 | | 3,737 | | (2) | | (1) | | | 3 | | - | |
Financial lines | | 4,666 | | 4,521 | | 4,271 | | 3 | | 6 | | | 9 | | 6 | |
Total Property Casualty net | | | | | | | | | | | | | | | | |
premiums written | $ | 20,436 | $ | 21,020 | $ | 20,880 | | (3) | % | 1 | % | | 2 | % | 1 | % |
Property Casualty NET PREMIUMS WRITTEN by Line of Business (in millions) |
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2015 and 2014 Comparison
Property Casualty net premiums written decreased in 2015 compared to 2014, primarily due to strengthening of the U.S. dollar against the Major Currencies. Excluding the effect of foreign exchange, net premiums written increased in 2015 from 2014, primarily due to new business growth across all regions in Consumer Insuranceall lines except for U.S. Casualty. Additionally, the increase in net premiums written in U.S. Financial lines reflected higher renewal in certain targeted growth products. The following paragraphs discuss the changes within our lines of Fuji Life productsbusiness exclusive of the effect of foreign exchange.
Casualty net premiums written decreased in 2015 compared to 2014, reflecting continued execution of our strategy to enhance the portfolio mix, particularly in the U.S., and direct marketingrate pressure. Additionally, net premiums written included return premiums related to the loss sensitive businesses of $49 million for 2015 compared to additional premiums of $105 million in 2014. An increase in new business in Japan. The expansiontargeted growth products in 2015, particularly in EMEA, was more than offset by the declines in the U.S.
TABLE OF CONTENTS
Item 7 / results of business in Asia Pacific countries outside of Japan also continued supported by growth in individual personal accidentoperations / commercial insurance direct marketing and personal lines products. Commercial Insurance
Property net premiums written increased in the Asia Pacific region2015 compared to 2014, primarily due to organicstrong growth in new business across all regions.
Specialty net premiums written increased in 2015 compared to 2014, primarily due to new business increases related to targeted growth products across all regions, partially offset by a decrease in certain classes of business, particularly in the U.S. as a result of the effect of our strategy to enhance risk selection.
Financial lines net premiums written increased in 2015 compared to 2014 primarily due to strong growth in new business and higher retention related to targeted growth products across all regions. Additionally, 2015 reflected the first quarter renewal of a multi-year E&O policy in the U.S.
2014 and 2013 Comparison
Property Casualty net premiums written increased in 2014 compared to 2013, reflecting increases in new business related to targeted growth products in Property and Financial lines. The following paragraphs discuss the changes within our lines of business exclusive of the effect of foreign exchange.
Casualtynet premiums written decreased in 2014 compared to 2013 primarily due to the effect on renewals from our strategy to enhance risk selection, particularly in the Americas. Strong growth and new writings in certain lines of business, particularly in EMEA, were more than offset by the declines in the Americas.
Property net premiums written increased in 2014 compared to 2013 primarily due to new business increases in targeted growth products, and optimization of Property Casualty’s reinsurance structure as part of its decision to retain more favorable risks while continuing to manage aggregate exposure.
Specialtynet premiums written decreased slightly in 2014, compared to 2013 primarily reflecting lower retention and rate decline in the EMEA region. This decline was largely offset by new business increases related to targeted growth products, including growth in small‑ and medium‑sized enterprise markets in the Americas region.
Financial linesnet premiums written increased in 2014, compared to 2013 reflecting growth in new business related to targeted growth products across all regions, as well as a favorable rate environment in the U.S.
Property Casualty Net Premiums Written by Region
The following table presents Property Casualty’s net premiums written by region:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
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(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Property Casualty: | | | | | | | | | | | | | | | | |
Americas | $ | 13,572 | $ | 13,799 | $ | 14,050 | | (2) | % | (2) | % | | (1) | % | (2) | % |
Asia Pacific | | 1,936 | | 2,029 | | 2,035 | | (5) | | - | | | 7 | | 5 | |
EMEA | | 4,928 | | 5,192 | | 4,795 | | (5) | | 8 | | | 6 | | 7 | |
Total net premiums written | $ | 20,436 | $ | 21,020 | $ | 20,880 | | (3) | % | 1 | % | | 2 | % | 1 | % |
property casualty NET PREMIUMS WRITTEN by Region 
|
The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
2015 and 2014 Comparison
The Americas net premiums written decreased in 2015 compared to 2014, primarily due to continued execution of our strategy to enhance risk selection and optimize our product portfolio in Casualty, largely offset by strong growth in new business related to targeted growth products in Property, Specialty and Casualty. In addition,Financial lines. Additionally, for 2015, net premiums written reflected the renewal of a multi-year E&O policy in the U.S.
Asia Pacific net premiums written increased in 2015 compared to 2014, primarily due to new business and higher retention in all lines of business.
EMEA net premiums written increased in 2015 compared to 2014, primarily due to new business growth in targeted growth products across all lines of business.
2014 and 2013 Comparison
The Americas net premiums written decreased in 2014 compared to 2013, primarily due to declines in new business growth and rate pressure, particularly in the Casualty business. However, for 2014, the decrease in net premiums written was partially offset by lower ceded premiums from catastrophe reinsurance transactions described above in 2014 compared to 2013.
Asia Pacific net premiums written increased slightly in 2014 compared to 2013, primarily due to increases in targeted growth products, and changes to optimize our reinsurance structure as part of our decision to retain more favorable risks while continuing to manage aggregate exposure, particularly in Property and Financial lines increased net premiums written during 2013.Japan.
EMEAnet premiums written increased in 2013,2014 compared to the prior year,2013, due to Commercial Insurance new business growth particularly in Property and Financial lines, a change in reinsurance strategies to retain more favorable risks in those lines, and rate improvements on retained business, as well as growth inacross all lines of Consumer Insurance.businesses, except for Specialty.
TABLE OF CONTENTS
2012 and 2011 Comparison
The Americasnet premiums written decreased primarily due to the restructuring of the Commercial Insurance Casualty book of business primarily in workers' compensation and loss-sensitive business, slightly offset by rate increases. These decreases were partially offset by continued growth in Consumer Insurance, which was primarily attributable to increases to group accident, personal property, and private client group and warranty lines. Additional premium recognized on the loss-sensitive book of business was $54 million for the year ended December 31, 2012 compared to additional premium of $172 million in the prior year.
Asia Pacificnet premiums written increased in 2012 primarily due to an increase in Consumer Insurance reflecting growth of personal property business, group personal accident insurance, and direct marketing business in Japan. The expansion in Asia Pacific countries outside Japan also continued in 2012, supported by growth in individual personal accident insurance, direct marketing and personal lines products. Commercial Insurance increased in the region primarily due to organic growth and rate increases in Property and moderate organic growth in Specialty and Financial lines.
EMEAnet premiums written decreased primarily due to the impact of foreign exchange. The continued execution of underwriting discipline and the reduction in certain casualty lines that did not meet internal performance targets were offset by rate strengthening initiatives on new and renewal business for Commercial Insurance. Consumer Insurance experienced modest growth in travel, warranty, and specialty personal lines products while focused on re-building its direct marketing programs that it previously shared with American Life Insurance Company (ALICO).
AIG 2013 Form 10-K
Table of Contents
ITEMItem 7 / RESULTS OF OPERATIONS results of operations / AIG PROPERTY CASUALTYcommercial insurance
AIG
Property Casualty Underwriting Ratios
The following tables present the AIG Property Casualty combined ratios based on GAAP data and reconciliation to the accident year combined ratio, as adjusted:
Years Ended December 31, | | | | | | | | | | | | | Increase (Decrease) |
| | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
Loss ratio | | | | | | | 86.2 | | 71.6 | | 71.9 | | 14.6 | | (0.3) |
Catastrophe losses and reinstatement premiums | | | | | | | (2.9) | | (2.9) | | (3.4) | | - | | 0.5 |
Prior year development net of premium adjustments | | | | | | | (17.5) | | (2.8) | | (1.5) | | (14.7) | | (1.3) |
Net reserve discount benefit (charge) | | | | | | | 0.4 | | (0.3) | | (1.6) | | 0.7 | | 1.3 |
Accident year loss ratio, as adjusted | | | | | | | 66.2 | | 65.6 | | 65.4 | | 0.6 | | 0.2 |
Acquisition ratio | | | | | | | 16.1 | | 15.7 | | 16.1 | | 0.4 | | (0.4) |
General operating expense ratio | | | | | | | 12.7 | | 12.9 | | 13.6 | | (0.2) | | (0.7) |
Expense ratio | | | | | | | 28.8 | | 28.6 | | 29.7 | | 0.2 | | (1.1) |
Combined ratio | | | | | | | 115.0 | | 100.2 | | 101.6 | | 14.8 | | (1.4) |
Catastrophe losses and reinstatement premiums | | | | | | | (2.9) | | (2.9) | | (3.4) | | - | | 0.5 |
Prior year development net of premium adjustments | | | | | | | (17.5) | | (2.8) | | (1.5) | | (14.7) | | (1.3) |
Net reserve discount benefit (charge) | | | | | | | 0.4 | | (0.3) | | (1.6) | | 0.7 | | 1.3 |
Accident year combined ratio, as adjusted | | | | | | | 95.0 | | 94.2 | | 95.1 | | 0.8 | | (0.9) |
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| | Increase (Decrease) | |
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Years Ended December 31,
| | 2013
| | 2012
| | 2011
| | 2013 vs. 2012
| | 2012 vs. 2011
| |
|---|
| | |
Commercial Insurance | | | | | | | | | | | | | | | | |
Loss ratio | | | 71.9 | | | 80.3 | | | 84.1 | | | (8.4 | ) | | (3.8 | ) |
Catastrophe losses and reinstatement premiums | | | (3.5 | ) | | (10.9 | ) | | (11.9 | ) | | 7.4 | | | 1.0 | |
Prior year development net of premium adjustments | | | (1.5 | ) | | (1.2 | ) | | 1.9 | | | (0.3 | ) | | (3.1 | ) |
Net reserve discount benefit (charge) | | | (1.6 | ) | | 0.5 | | | 0.2 | | | (2.1 | ) | | 0.3 | |
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Accident year loss ratio, as adjusted | | | 65.3 | | | 68.7 | | | 74.3 | | | (3.4 | ) | | (5.6 | ) |
| | |
Acquisition ratio | | | 16.1 | | | 16.6 | | | 14.6 | | | (0.5 | ) | | 2.0 | |
General operating expense ratio | | | 12.5 | | | 12.2 | | | 9.8 | | | 0.3 | | | 2.4 | |
| | |
Expense ratio | | | 28.6 | | | 28.8 | | | 24.4 | | | (0.2 | ) | | 4.4 | |
| | |
Combined ratio | | | 100.5 | | | 109.1 | | | 108.5 | | | (8.6 | ) | | 0.6 | |
Catastrophe losses and reinstatement premiums | | | (3.5 | ) | | (10.9 | ) | | (11.9 | ) | | 7.4 | | | 1.0 | |
Prior year development net of premium adjustments | | | (1.5 | ) | | (1.2 | ) | | 1.9 | | | (0.3 | ) | | (3.1 | ) |
Net reserve discount benefit (charge) | | | (1.6 | ) | | 0.5 | | | 0.2 | | | (2.1 | ) | | 0.3 | |
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Accident year combined ratio, as adjusted | | | 93.9 | | | 97.5 | | | 98.7 | | | (3.6 | ) | | (1.2 | ) |
| | |
Consumer Insurance | | | | | | | | | | | | | | | | |
Loss ratio | | | 59.0 | | | 60.9 | | | 64.7 | | | (1.9 | ) | | (3.8 | ) |
Catastrophe losses and reinstatement premiums | | | (0.6 | ) | | (2.7 | ) | | (5.2 | ) | | 2.1 | | | 2.5 | |
Prior year development net of premium adjustments | | | 1.1 | | | 0.1 | | | (0.6 | ) | | 1.0 | | | 0.7 | |
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Accident year loss ratio, as adjusted | | | 59.5 | | | 58.3 | | | 58.9 | | | 1.2 | | | (0.6 | ) |
| | |
Acquisition ratio | | | 25.5 | | | 25.0 | | | 23.8 | | | 0.5 | | | 1.2 | |
General operating expense ratio | | | 15.9 | | | 15.3 | | | 14.4 | | | 0.6 | | | 0.9 | |
| | |
Expense ratio | | | 41.4 | | | 40.3 | | | 38.2 | | | 1.1 | | | 2.1 | |
| | |
Combined ratio | | | 100.4 | | | 101.2 | | | 102.9 | | | (0.8 | ) | | (1.7 | ) |
Catastrophe losses and reinstatement premiums | | | (0.6 | ) | | (2.7 | ) | | (5.2 | ) | | 2.1 | | | 2.5 | |
Prior year development net of premium adjustments | | | 1.1 | | | 0.1 | | | (0.6 | ) | | 1.0 | | | 0.7 | |
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Accident year combined ratio, as adjusted | | | 100.9 | | | 98.6 | | | 97.1 | | | 2.3 | | | 1.5 | |
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Total AIG Property Casualty | | | | | | | | | | | | | | | | |
Loss ratio | | | 66.7 | | | 73.9 | | | 78.3 | | | (7.2 | ) | | (4.4 | ) |
Catastrophe losses and reinstatement premiums | | | (2.3 | ) | | (7.5 | ) | | (9.2 | ) | | 5.2 | | | 1.7 | |
Prior year development net of premium adjustments | | | (1.5 | ) | | (1.4 | ) | | (0.3 | ) | | (0.1 | ) | | (1.1 | ) |
Net reserve discount benefit (charge) | | | 0.9 | | | 0.2 | | | (0.1 | ) | | 0.7 | | | 0.3 | |
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Accident year loss ratio, as adjusted | | | 63.8 | | | 65.2 | | | 68.7 | | | (1.4 | ) | | (3.5 | ) |
| | |
Acquisition ratio | | | 19.7 | | | 19.9 | | | 18.1 | | | (0.2 | ) | | 1.8 | |
General operating expense ratio | | | 14.9 | | | 14.7 | | | 12.3 | | | 0.2 | | | 2.4 | |
| | |
Expense ratio | | | 34.6 | | | 34.6 | | | 30.4 | | | – | | | 4.2 | |
| | |
Combined ratio | | | 101.3 | | | 108.5 | | | 108.7 | | | (7.2 | ) | | (0.2 | ) |
Catastrophe losses and reinstatement premiums | | | (2.3 | ) | | (7.5 | ) | | (9.2 | ) | | 5.2 | | | 1.7 | |
Prior year development net of premium adjustments | | | (1.5 | ) | | (1.4 | ) | | (0.3 | ) | | (0.1 | ) | | (1.1 | ) |
Net reserve discount benefit (charge) | | | 0.9 | | | 0.2 | | | (0.1 | ) | | 0.7 | | | 0.3 | |
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Accident year combined ratio, as adjusted | | | 98.4 | | | 99.8 | | | 99.1 | | | (1.4 | ) | | 0.7 | |
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property casualty ratios |
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AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
Given the nature of the lines of business and the expenses included in Other, we have determined that the traditional underwriting measures of loss ratio, acquisition ratio, general operating expense ratio and combined ratio do not provide an appropriate measure of underwriting performance. Therefore, these ratios are not presented for Other.
See Liability for Unpaid Claims and Claims Adjustment ExpenseInsurance Reserves – Non-Life Insurance Companies for further discussion of discounting of reserves and prior year development.
TableTABLE OF CONTENTS
Item 7 / results of Contents
operations / commercial insurance
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
The following tables present AIG Property CasualtyCasualty’s accident year catastrophe and severe losses by region and number of events:
Catastrophes(a)
| # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
Year Ended December 31, 2015 | | | | | | | | | |
Flooding | 4 | $ | 74 | $ | - | $ | 69 | $ | 143 |
Windstorms and hailstorms | 14 | | 274 | | 121 | | 15 | | 410 |
Wildfire | 1 | | 9 | | - | | - | | 9 |
Tropical cyclone | 1 | | - | | 12 | | - | | 12 |
Earthquakes | 1 | | 7 | | - | | - | | 7 |
Total catastrophe-related charges | 21 | $ | 364 | $ | 133 | $ | 84 | $ | 581 |
Year Ended December 31, 2014 | | | | | | | | | |
Flooding | 1 | $ | 16 | $ | - | $ | - | $ | 16 |
Windstorms and hailstorms | 14 | | 306 | | 63 | | 21 | | 390 |
Tropical cyclone | 4 | | 96 | | 34 | | 15 | | 145 |
Earthquakes | 1 | | 48 | | - | | 1 | | 49 |
Reinstatement premiums | | | - | | - | | 2 | | 2 |
Total catastrophe-related charges | 20 | $ | 466 | $ | 97 | $ | 39 | $ | 602 |
Year Ended December 31, 2013 | | | | | | | | | |
Flooding | 8 | $ | 195 | $ | 8 | $ | 114 | $ | 317 |
Windstorms and hailstorms | 10 | | 205 | | - | | 78 | | 283 |
Wildfire | 1 | | 40 | | - | | - | | 40 |
Tropical cyclone | 3 | | 4 | | 66 | | - | | 70 |
Total catastrophe-related charges | 22 | $ | 444 | $ | 74 | $ | 192 | $ | 710 |
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| | |
(in millions)
| | # of
Events
| | Americas
| | Asia
Pacific
| | EMEA
| | Total
| |
|---|
| | |
Year Ended December 31, 2013 | | | | | | | | | | | | | | | | |
Flooding | | | 8 | | $ | 221 | | $ | 8 | | $ | 116 | | $ | 345 | |
Windstorms and hailstorms | | | 10 | | | 216 | | | – | | | 83 | | | 299 | |
Wildfire | | | 1 | | | 40 | | | – | | | – | | | 40 | |
Tropical cyclone | | | 3 | | | 4 | | | 99 | | | – | | | 103 | |
| | |
Total catastrophe-related charges | | | 22 | | $ | 481 | | $ | 107 | | $ | 199 | | $ | 787 | |
| | |
Commercial Insurance | | | | | $ | 444 | | $ | 74 | | $ | 192 | | $ | 710 | |
Consumer Insurance | | | | | $ | 37 | | $ | 33 | | $ | 7 | | $ | 77 | |
| | |
Year Ended December 31, 2012 | | | | | | | | | | | | | | | | |
Flooding | | | 1 | | $ | – | | $ | – | | $ | 23 | | $ | 23 | |
Windstorms and hailstorms | | | 9 | | | 311 | | | 48 | | | 23 | | | 382 | |
Wildfire | | | – | | | – | | | – | | | – | | | – | |
Tropical cyclone(b) | | | 3 | | | 1,981 | | | 18 | | | 113 | | | 2,112 | |
Drought | | | 1 | | | 108 | | | – | | | – | | | 108 | |
Reinstatement premiums | | | | | | 27 | | | – | | | – | | | 27 | |
| | |
Total catastrophe-related charges | | | 14 | | $ | 2,427 | | $ | 66 | | $ | 159 | | $ | 2,652 | |
| | |
Commercial Insurance | | | | | $ | 2,072 | | $ | 39 | | $ | 159 | | $ | 2,270 | |
Consumer Insurance | | | | | $ | 355 | | $ | 27 | | $ | – | | $ | 382 | |
| | |
Year Ended December 31, 2011 | | | | | | | | | | | | | | | | |
Flooding | | | 5 | | $ | 201 | | $ | 225 | | $ | 86 | | $ | 512 | |
Windstorms and hailstorms | | | 9 | | | 552 | | | 17 | | | 56 | | | 625 | |
Tropical cyclone | | | 5 | | | 461 | | | 117 | | | 13 | | | 591 | |
Earthquakes(c) | | | 3 | | | 388 | | | 971 | | | 209 | | | 1,568 | |
Reinstatement premiums | | | | | | (5 | ) | | 21 | | | (5 | ) | | 11 | |
| | |
Total catastrophe-related charges | | | 22 | | $ | 1,597 | | $ | 1,351 | | $ | 359 | | $ | 3,307 | |
| | |
Commercial Insurance | | | | | $ | 1,486 | | $ | 747 | | $ | 359 | | $ | 2,592 | |
Consumer Insurance | | | | | $ | 111 | | $ | 604 | | $ | – | | $ | 715 | |
| | |
Severe Losses(a)
| | | | | | | | | | | | | | | | |
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Years Ended December 31,
(in millions)
| | # of
Events
| | Americas
| | Asia
Pacific
| | EMEA
| | Total
| |
|---|
| | |
2013 | | | 28 | | $ | 156 | | $ | 184 | | $ | 246 | | $ | 586 | |
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2012 | | | 23 | | $ | 106 | | $ | 94 | | $ | 126 | | $ | 326 | |
| | |
2011 | | | 21 | | $ | 214 | | $ | 11 | | $ | 71 | | $ | 296 | |
| | |
(a) Events shown in the above tableCatastrophes are catastrophic insuredgenerally weather or seismic events having a net impact on AIG in excess of $10 million each.
Severe Losses(b)
Years Ended December 31, | # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
2015 | 29 | $ | 378 | $ | 27 | $ | 294 | $ | 699 |
2014 | 30 | $ | 169 | $ | 73 | $ | 350 | $ | 592 |
2013 | 27 | $ | 139 | $ | 184 | $ | 246 | $ | 569 |
(b) Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance.
(b) On October 29, 2012, Storm Sandy, one of the largest Atlantic hurricanes on record, came ashore in the U.S. When the storm made landfall, it was categorized as a tropical cyclone, not a hurricane. Storm Sandy was the second-costliest Atlantic hurricane in history, only surpassed by Hurricane Katrina in 2005. Storm Sandy caused widespread floodingreinsurance and wind damage across the mid-Atlantic states. In 2012, we recorded $2,013 million in losses related to this event.
(c) On March 11, 2011, a major earthquake occurred near the northeast coast of Honshu, Japan, triggering a tsunami in the Pacific Ocean. This disaster is referred to as the Tohoku Catastrophe. In 2011, we recorded $1,191 million in losses related to this event.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTYsalvage and subrogation.
20132015 and 20122014 Comparison
Commercial Insurance Ratios
The accident yearloss ratio and combined ratio as adjusted, improvedincreased by 3.614.6 points for the year ended December 31, 2013.
The improvementand 14.8 points, respectively, in the accident year loss ratio, as adjusted, reflects the realization of benefits from the continued execution of our multi-faceted strategy to enhance risk selection, pricing discipline, exposure management and claims processing. Although the execution of these strategies resulted in a reduction of Casualty net premiums written in both the Americas and EMEA regions, it also improved the accident year loss ratio, as adjusted. Severe losses represented approximately 2.8 points2015 compared to 1.4 points in the prior year, and are included in the accident year loss ratio, as adjusted. In 2013, one single event, totaling $131 million, accounted for approximately 0.6 points of the increase.
The acquisition ratio decreased by 0.5 points in the year ended December 31, 20132014, primarily due to a change in business mix and reinsurance structures.
The general operating expense ratio increased by 0.3 points in 2013, compared to thehigher net adverse prior year. The increase in employee incentive plan expense contributed approximately 1.0 point to the increase in the general operating expense ratio. A reduction in bad debt expense in 2013 represented a decrease to the general operating ratio of approximately 0.8 points compared to the prior year.
Consumer Insurance Ratiosyear loss development.
The accident year combined ratio, as adjusted, increased by 2.30.8 points forin 2015 compared to 2014 primarily due to a higher accident year loss ratio, as adjusted, and an increase in the year ended December 31, 2013.acquisition ratio.
The accident year loss ratio, as adjusted, increased by 1.20.6 points in 2015 compared to 2014, primarily due to higher casualty and severe losses, partially offset by lower attritional losses in U.S. Property, and Specialty, particularly in the U.S. and EMEA. Severe losses represented approximately 3.5 points and 2.8 points of the accident year loss ratio, as adjusted, respectively, in 2015 and 2014.
The acquisition ratio increased by 0.4 points in 2015 compared to 2014 primarily due to higher commission expenses in certain classes of business in Property and Specialty and higher premium taxes and other assessments reflecting a change in business mix.
The general operating expense ratio decreased by 0.2 points in 2015 compared to 2014, primarily due to lower employee-related expenses partially offset by additional expense resulting from the NSM acquisition and higher technology-related expenses.
2014 and 2013 Comparison
The combined ratio decreased by 1.4 points in 2014 compared to 2013 reflecting decreases in the expense ratio and the loss ratio.
The accident year combined ratio, as adjusted, decreased by 0.9 points in 2014 compared 2013, primarily due to lower expense ratio which was partially offset by a higher accident year loss ratio, as adjusted.
The accident year loss ratio, as adjusted, increased by 0.2 points in 2014, compared to 2013, primarily due to higher frequency of non-severe losses, particularly in Property and Specialty businesses. This was partially offset by an improvement in Financial lines, particularly in the U.S., reflecting enhanced risk selection and pricing discipline. Severe losses represented approximately 2.8 points of the accident year loss ratio, as adjusted, in both 2014 and 2013.
The acquisition ratio decreased by 0.4 points in 2014 compared to 2013, primarily due to a reduction in expenses of personnel engaged in sales support activities and lower premium taxes and guaranty fund and other assessments.
The general operating expense ratio decreased by 0.7 points in 2014 compared to 2013, primarily due to efficiencies from organizational realignment initiatives, partially offset by higher technology-related expenses and an increase in bad debt expense. In 2013, general operating expenses benefitted from an unusually low bad debt expense.
Mortgage Guaranty Results
The following table presents Mortgage Guaranty results:
Years Ended December 31, | | | | | | | | | | Percentage Change |
(dollars in millions) | | 2015 | | | 2014 | | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | | | |
Net premiums written | $ | 1,050 | | $ | 1,024 | | $ | 1,048 | | 3 | % | | (2) | % |
Increase in unearned premiums | | (138) | | | (120) | | | (239) | | (15) | | | 50 | |
Net premiums earned | | 912 | | | 904 | | | 809 | | 1 | | | 12 | |
Losses and loss adjustment expenses incurred | | 160 | | | 223 | | | 514 | | (28) | | | (57) | |
Acquisition expenses: | | | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | 30 | | | 22 | | | 20 | | 36 | | | 10 | |
Other acquisition expenses | | 51 | | | 49 | | | 60 | | 4 | | | (18) | |
Total acquisition expenses | | 81 | | | 71 | | | 80 | | 14 | | | (11) | |
General operating expenses | | 166 | | | 156 | | | 142 | | 6 | | | 10 | |
Underwriting income | | 505 | | | 454 | | | 73 | | 11 | | | NM | |
Net investment income | | 139 | | | 138 | | | 132 | | 1 | | | 5 | |
Pre-tax operating income | | 644 | | | 592 | | | 205 | | 9 | | | 189 | |
Key metrics: | | | | | | | | | | | | | | |
Prior year loss reserve development (favorable)/ | | | | | | | | | | | | | | |
unfavorable | $ | (69) | | $ | (104) | | $ | 30 | | (34) | % | | NM | % |
Domestic first-lien: | | | | | | | | | | | | | | |
New insurance written | $ | 50,842 | | $ | 42,038 | | $ | 49,356 | | 21 | | | (15) | |
Combined ratio | | 44.6 | | | 52.6 | | | 91.1 | | | | | | |
Risk in force | $ | 47,442 | | $ | 42,106 | | $ | 36,367 | | 13 | | | 16 | |
60+ day delinquency ratio on primary loans(a) | | 3.4 | % | | 4.4 | % | | 5.9 | % | | | | | |
Domestic second-lien: | | | | | | | | | | | | | | |
Risk in force(b) | $ | 399 | | $ | 446 | | $ | 1,026 | | (11) | | | (57) | |
(a) Based on number of policies.
(b) Represents the full amount of second-lien loans insured reduced for contractual aggregate loss limits on certain pools of loans, which is usually 10 percent of the full amount of loans insured in each pool. Certain second-lien pools have reinstatement provisions, which will expire as the loan balances are repaid.
Pre-Tax oPERATING INCOME (in millions) | | domestic first-lien new insurance written on mortgage loans (in millions)
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The following table presents Mortgage Guaranty first-lien results:
Years Ended December 31, | | | | | | | | | Percentage Change |
(dollars in millions) | | 2015 | | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | |
Net premiums written | $ | 990 | | $ | 929 | $ | 950 | | 7 | % | (2) | % |
Increase in unearned premiums | | (137) | | | (117) | | (256) | | (17) | | 54 | |
Net premiums earned | | 853 | | | 812 | | 694 | | 5 | | 17 | |
Losses and loss adjustment expenses incurred | | 174 | | | 233 | | 462 | | (25) | | (50) | |
Acquisition expenses: | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | 29 | | | 21 | | 16 | | 38 | | 31 | |
Other acquisition expenses | | 52 | | | 49 | | 60 | | 6 | | (18) | |
Total acquisition expenses | | 81 | | | 70 | | 76 | | 16 | | (8) | |
General operating expenses | | 150 | | | 124 | | 95 | | 21 | | 31 | |
Underwriting income | | 448 | | | 385 | | 61 | | 16 | | NM | |
Net investment income | | 127 | | | 124 | | 116 | | 2 | | 7 | |
Pre-tax operating income | $ | 575 | | $ | 509 | $ | 177 | | 13 | % | 188 | % |
2015 and 2014 Comparison
Pre-tax operating income increased in 2015 compared to 2014 due to an increase in first-lien net premiums earned as a result of higher new insurance written increasing the amount of insurance in-force, an acceleration of earnings on the cancellations of single premium business for which a return premium is generally not required, and a decline in incurred losses from lower delinquency rates and higher cure rates. Offsetting these increases in operating income was a reduction in favorable prior year loss development of $35 million primarily related to a settlement with a large lender which resulted in $64 million of favorable prior year loss development in 2014.
First-Lien Results
First-lien pre-tax operating income increased $66 million in 2015 compared to 2014, primarily due to improved underwriting income as a result of a $41 million increase in first-lien net premiums earned in 2015 compared to 2014, largely from growth in the book of business and the acceleration of premiums earned as a result of cancellations of single premium business. Additionally, there was a $72 million decrease in accident year losses offset in part by a $13 million reduction in prior year loss development, which was driven primarily by $57 million of favorable prior year loss development from a settlement with a large lender in 2014. The increases in operating income were offset in part by a $37 million increase in acquisition and general operating expenses. The combined ratio was 47.5 points in 2015, compared to 52.6 points in 2014, reflecting a decrease in the loss ratio, partially offset by an increase in the expense ratio.
Acquisition expenses increased in 2015 compared to 2014, primarily as a result of sales support solicitation activities, which generated new insurance written.
General operating expenses increased in 2015 compared to 2014, primarily due to an increase in costs related to servicing the growth of the in-force business, technology-related and customer service initiatives expenses and severance.
Other Business Results
Other business results include international mortgage insurance operations and the run-off portfolios of second-lien insurance and student loan insurance.
The Other business’ pre-tax operating income for 2015 was $69 million compared to $82 million in 2014. The decrease in pre-tax operating income was due to a decrease in net premiums earned and net investment income offset by the decrease in general operating expenses and losses and loss adjustment expenses, which included $35 million of favorable prior year loss development largely attributable to recoveries on previously paid claims.
2014 and 2013 Comparison
Pre-tax operating income increased in 2014 compared to 2013 due to a decline in incurred losses from lower delinquency rates, higher cure rates and an increase in first-lien net premiums earned reflecting higher persistency.
First Lien Results
First-lien pre-tax operating income increased in 2014 compared to 2013, primarily due to improved underwriting income as a result of a $229 million decrease in first-lien losses and loss adjustment expenses incurred reflecting fewer new delinquencies, favorable prior year loss reserve development, and higher cure rates. In addition, first-lien pre-tax operating income increased due to a $119 million increase in first-lien net premiums earned in 2014 compared to 2013, largely from growth in the book of business, higher persistency, and, to a lesser extent, the acceleration of premiums earned as the result of the recognition of a shorter expected coverage period on certain single premium business. The decrease in first-lien losses and loss adjustment expenses incurred combined with the increase in earned premiums resulted in an improved combined ratio of 52.6 points in 2014 compared to 91.1 points in 2013.
Acquisition expenses decreased in 2014 compared to 2013, primarily as a result of the decrease in new insurance written related to the decline in mortgage originations.
General operating expenses increased in 2014 compared to 2013 due to increased technology expenses and an impairment charge on certain capitalized technology costs.
Other Business Results
The Other business’ pre-tax operating income for 2014 was $82 million compared to $27 million in 2013. The increase in pre-tax operating income is due to a decline in losses and loss adjustment expenses incurred of $62 million and a $17 million reduction in underwriting expenses, partially offset by a decline in net premiums earned of $22 million and a decline in net investment income of $2 million.
New Insurance Written
Domestic first-lien new insurance written increased to a record level of $50.8 billion in 2015 compared to $42.0 billion in 2014, driven by an increase in refinancing, improvements in existing home sales due to lower down payment requirements and new purchase volume.
The decline in domestic first-lien new insurance written to $42.0 billion in 2014 from $49.4 billion in 2013 was primarily due to the contraction in the mortgage originations market and an increase in competition.
Delinquency Inventory
The delinquency inventory for domestic first-lien business declined during 2015 as a result of cures and paid claims exceeding the number of newly reported delinquencies. Mortgage Guaranty’s first-lien primary delinquency ratio at December 31, 2015 was 3.4 percent compared to 4.4 percent at December 31, 2014. Over the last several years, Mortgage Guaranty has experienced a decline in newly reported defaults and an increase in cure rates.
The delinquency inventory for domestic first lien business declined during 2014 as a result of cures and paid claims exceeding the number of newly reported delinquencies. Mortgage Guaranty’s first lien primary delinquency ratio at December 31, 2014 was 4.4 percent compared to 5.9 percent at December 31, 2013.
The following table provides a summary of activity in Mortgage Guaranty’s domestic first lien delinquency inventory:
Years Ended December 31, | | | | | |
(number of policies) | 2015 | | 2014 | | 2013 |
Number of delinquencies at the beginning of the year | 38,357 | | 47,518 | | 62,832 |
Newly reported | 39,619 | | 47,239 | | 56,194 |
Cures | (36,279) | | (42,680) | | (51,283) |
Claims paid | (8,451) | | (11,601) | | (19,862) |
Other | (1,961) | | (2,119) | | (363) |
Number of delinquencies at the end of the year | 31,285 | | 38,357 | | 47,518 |
Mortgage Guaranty Underwriting Ratios
The following tables present the Mortgage Guaranty combined ratios based on GAAP data:
Years Ended December 31, | | | | | | | | Increase (Decrease) |
| | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
Loss ratio | | 17.5 | | 24.7 | | 63.5 | | (7.2) | | (38.8) |
Acquisition ratio | | 8.9 | | 7.8 | | 9.9 | | 1.1 | | (2.1) |
General operating expense ratio | | 18.2 | | 17.3 | | 17.5 | | 0.9 | | (0.2) |
Expense ratio | | 27.1 | | 25.1 | | 27.4 | | 2.0 | | (2.3) |
Combined ratio | | 44.6 | | 49.8 | | 90.9 | | (5.2) | | (41.1) |
2015 and 2014 Comparison
The combined ratio decreased by 5.2 points in 2015 compared to 2014. The decrease in the ratio in 2015 was driven primarily by a reduction in the loss ratio due to a decrease in incurred losses driven by lower delinquencies and higher cure rates, partially offset by a reduction in favorable prior year loss development.
The acquisition ratio increased by 1.1 points in 2015 compared to 2014, primarily due to the increases in sales-related activities supporting the $8.8 billion increase in new insurance written.
The general operating expense ratio increased by 0.9 points in 2015 compared to 2014, primarily due to an increase in technology-related expenses, customer service initiatives and severance.
2014 and 2013 Comparison
The combined ratio decreased by 41.1 points in 2014 compared to 2013. The decrease was driven primarily by a reduction in the loss ratio due to lower losses and loss adjustment expenses incurred from fewer new delinquencies, favorable prior year loss reserve development, and higher cure rates.
The acquisition ratio decreased by 2.1 points in 2014 compared to 2013. Acquisition expenses decreased compared to an increase in net premiums earned, driven by the decreases in new insurance written in 2014 due to lower mortgage originations.
The general operating expense ratio decreased by 0.2 points in 2014 compared to 2013. The decrease was driven primarily by growth in net premiums earned.
Institutional Markets Results
The following table presents Institutional Markets results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | |
Premiums | $ | 1,580 | $ | 432 | $ | 610 | | 266 | % | (29) | % |
Policy fees | | 199 | | 187 | | 113 | | 6 | | 65 | |
Net investment income | | 1,739 | | 1,957 | | 2,090 | | (11) | | (6) | |
Benefits and expenses: | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 2,583 | | 1,396 | | 1,616 | | 85 | | (14) | |
Interest credited to policyholder account balances | | 408 | | 410 | | 413 | | - | | (1) | |
Amortization of deferred policy acquisition costs | | 3 | | 4 | | 4 | | (25) | | - | |
Other acquisition expenses | | 32 | | 30 | | 36 | | 7 | | (17) | |
General operating expenses | | 77 | | 66 | | 64 | | 17 | | 3 | |
Pre-tax operating income | $ | 415 | $ | 670 | $ | 680 | | (38) | | (1) | |
INSTITUTIONAL MARKETS pre-tax OPERATING INCOME (in millions) |
|
2015 and 2014 Comparison
Pre-tax operating income in 2015 decreased compared to 2014, primarily due to a decrease in net investment income. Fee income increased in 2015 compared to 2014, driven by growth in reserves and assets under management, primarily from continued development of the stable value wrap business. The notional amount of stable value wrap assets under management at December 31, 2015 grew by $3.0 billion or nine percent from December 31, 2014. The increases in premiums and benefit expense in 2015 compared to 2014 were primarily due to the premiums received and establishment of future policy benefit reserves for terminal funding annuities issued in 2015.
Net investment income in 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and lower yield enhancements from bond call and tender income. See MD&A – Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Institutional Markets business.
General operating expenses in 2015 increased compared to 2014, primarily due to higher state guaranty fund assessment expenses, technology investments and higher interest expense.
2014 and 2013 Comparison
Pre-tax operating income for 2014 decreased slightly compared to 2013, as a decrease in net investment income was only partially offset by an increase in fee income. The increase in fee income was driven by growth in reserves and assets under management, primarily from strong development of the stable value wrap business.The notional amount of stable value wrap assets under management at December 31, 2014 grew by $7.8 billion or 32 percent from December 31, 2013, which excluded a $2.5 billion deposit to the separate accounts for a stable value funding agreement. Growth in reserves also reflected a GIC deposit of $450 million in the fourth quarter of 2014 under a funding agreement-backed notes issuance program, in which an unaffiliated, non-consolidated statutory trust issues to investors medium-term notes, which are secured by GICs issued by one of the Life Insurance Companies. Under the funding agreement-backed notes program, issuances will be made opportunistically based upon pricing and demand available in the marketplace.
Net investment income for 2014 decreased compared to 2013, primarily due to lower net investment income from alternative investments and from the base portfolio. The 2014 decrease in alternative investment income of $41 million compared to 2013 primarily reflected high hedge fund income in 2013 due to favorable equity market conditions. The decrease in base net investment income in 2014 compared to 2013 primarily reflected lower base portfolio yield as a result of reinvestment in the
low interest rate environment, partially offset by growth in average assets. See MD&A – Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Institutional Markets business.
General operating expenses in 2014 increased slightly compared to 2013, primarily due to investments in technology.
Institutional Markets Premiums, Deposits and Net Flows
For Institutional Markets, premiums represent amounts received on traditional life insurance policies and life-contingent payout annuities or structured settlements. Premiums and deposits is a non‑GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance and investment-type annuity contracts, including GICs and stable value wrap funding agreements.
The following table presents a reconciliation of Institutional Markets premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits | $ | 1,782 | $ | 3,797 | $ | 991 |
Deposits | | (169) | | (3,344) | | (354) |
Other | | (33) | | (21) | | (27) |
Premiums | $ | 1,580 | $ | 432 | $ | 610 |
Premiums and deposits for 2015 decreased compared to 2014, primarily due to a $2.5 billion deposit to the separate accounts of one of the Life Insurance Companies for a stable value wrap funding agreement that was reflected in 2014. Excluding the $2.5 billion deposit in the prior year period, premiums and deposits for 2015 increased compared to 2014, primarily due to higher premiums, which reflected increased sales of terminal funding annuities in 2015.
The decrease in premiums in 2014 compared to 2013 was primarily due to a high volume of single-premium products sold in 2013, including life-contingent payout annuities. Sales of these products decreased in 2014 compared to 2013 due to a more competitive environment as well as continued low interest rates. The increase in deposits in 2014 compared to 2013 included a $2.5 billion deposit to the separate accounts of one of the Life Insurance Companies for a stable value wrap funding agreement. The majority of stable value wrap sales are measured based on the notional amount included in assets under management, but do not include the receipt of funds that would be included in premiums and deposits. The increase in deposits in 2014 compared to 2013 also reflected a $450 million GIC issued in 2014.
Consumer insurance
Consumer Insurance Results
The following table presents Consumer Insurance results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 14,085 | $ | 14,936 | $ | 15,302 | | (6) | % | | (2) | % |
Policy fees | | 2,557 | | 2,453 | | 2,252 | | 4 | | | 9 | |
Net investment income | | 8,322 | | 9,082 | | 9,352 | | (8) | | | (3) | |
Other income | | 2,105 | | 1,998 | | 1,754 | | 5 | | | 14 | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 10,475 | | 10,796 | | 10,957 | | (3) | | | (1) | |
Interest credited to policyholder account balances | | 3,316 | | 3,353 | | 3,477 | | (1) | | | (4) | |
Amortization of deferred policy acquisition costs | | 2,887 | | 2,759 | | 2,836 | | 5 | | | (3) | |
General operating and other expenses* | | 7,013 | | 7,087 | | 6,826 | | (1) | | | 4 | |
Pre-tax operating income | $ | 3,378 | $ | 4,474 | $ | 4,564 | | (24) | % | | (2) | % |
* Includes general operating expenses, non deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.
Consumer Insurance Results by Operating Segment
Consumer Insurance presents its operating results in three operating segments – Retirement, Life and Personal Insurance. The following section provides a comparative discussion of Consumer Insurance Results of Operations for 2015, 2014 and 2013 by operating segment.
Retirement Results
The following table presents Retirement results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 168 | $ | 287 | $ | 188 | | (41) | % | | 53 | % |
Policy fees | | 1,072 | | 1,010 | | 861 | | 6 | | | 17 | |
Net investment income | | 6,002 | | 6,489 | | 6,628 | | (8) | | | (2) | |
Advisory fee and other income | | 2,056 | | 1,998 | | 1,754 | | 3 | | | 14 | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 511 | | 537 | | 364 | | (5) | | | 48 | |
Interest credited to policyholder account balances | | 2,823 | | 2,846 | | 2,935 | | (1) | | | (3) | |
Amortization of deferred policy acquisition costs | | 480 | | 346 | | 273 | | 39 | | | 27 | |
Non deferrable insurance commissions | | 282 | | 265 | | 249 | | 6 | | | 6 | |
Advisory fee expenses | | 1,349 | | 1,315 | | 1,175 | | 3 | | | 12 | |
General operating expenses | | 1,014 | | 980 | | 945 | | 3 | | | 4 | |
Pre-tax operating income | $ | 2,839 | $ | 3,495 | $ | 3,490 | | (19) | % | | - | % |
RETIREMENT pre-tax OPERATING INCOME (in millions) |
|
2015 and 2014 Comparison
Pre-tax operating income in 2015 decreased compared to 2014, primarily due to lower net investment income and a lower net positive adjustment to reflect the update of actuarial assumptions, partially offset by growth in fee income. In addition, DAC amortization in Retirement Income Solutions increased in 2015 due to growth in the business and lower equity market returns compared to 2014. Base net investment income decreased in 2015, which resulted in base spreads compression, but this decrease was partially offset by higher policy fees due to growth in variable annuity separate account assets under management, principally driven by positive net flows.
Pre-tax operating income in both years included a net positive impact from the update of certain estimated gross profit assumptions used to amortize DAC and related items in the investment-oriented product lines, which resulted in a $140 million net increase in pre-tax operating income in 2015, compared to a $246 million net increase in pre-tax operating income in 2014. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by product line and financial statement line item and additional discussion.
Net investment incomefor 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and lower base net investment income.
Base net investment income for 2015 decreased compared to 2014, primarily due to the effect of lower base yields from reinvestment at rates below the weighted average yield of the overall portfolio. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.
Overall, Retirement fixed maturity portfolio yields in 2015 declined compared to 2014, primarily as a result of investment purchases and investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio given the sustained low interest rate environment. While average interest crediting rates were down slightly due to active rate management, the decline in base yield resulted in spread compression in Fixed Annuities base spreads compared to 2014. Group Retirement base spread was flat compared to 2014, due to slightly lower average crediting rates as well as additional accretion income in 2015, which helped offset the decline in yield on the base portfolio. See Spread Management below for additional discussion.
General operating expenses increased in 2015 compared to 2014, due in part to technology investments and higher lossesexpenses associated with continued strong sales in the Retirement Income Solutions product line.
2014 and 2013 Comparison
Pre-tax operating income for Retirement in 2014 was comparable to 2013, as higher policy fees and the higher positive impact of actuarial assumption updates were offset by lower net investment income from alternative investments. The increase in policy fees was driven by growth in variable annuity separate account assets from positive net flows and favorable equity markets. A higher volume of commissions and advisory fees included in Other income, net of related expenses, was driven by increased assets under management.
Pre-tax operating income in both years included a warranty retail program,net positive impact from the update of certain estimated gross profit assumptions used to amortize DAC and related items in the investment-oriented product lines, which resulted in a $246 million net increase in pre-tax operating income in 2014, compared to a $233 million net increase in pre-tax operating income in 2013. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by product line and financial statement line item and additional discussion.
Net investment income for 2014 decreased compared to 2013, primarily due to a $158 million decrease in income from alternative investments, including lower hedge fund income, which in 2013 had benefited from favorable equity market conditions and several large hedge fund redemptions. The decrease in hedge fund income in 2014 compared to 2013 was partially offset by an increase in private equity fund income.
Base net investment income for 2014 increased slightly compared to 2013, as participation income on a commercial mortgage loan and income from the redemption of an invested asset in 2014 more than offset the effect of lower base yields from reinvestment at rates below the weighted average yield of the overall portfolio. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.
Overall, Retirement fixed maturity portfolio yields in 2014 declined compared to 2013, primarily as a result of investment purchases and investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio in the historically low interest rate environment. The Fixed Annuities and Group Retirement product lines were able to maintain base spreads in 2014 at a level comparable to 2013, and Retirement Income Solutions base spread increased, as a result of active crediting rate management. See Spread Management below for additional discussion.
General operating expenses increased in 2014 compared to 2013, due in part to technology investments and the volume of continued sales growth of annuities in the Retirement Income Solutions and Fixed Annuities product lines.
Spread Management
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially mitigated through the Life Insurance Companies’ asset‑liability management process, product design elements and crediting rate strategies, a sustained low interest rate environment may negatively affect future profitability.
Disciplined pricing on new business and active crediting rate management are used in the Fixed Annuities and Group Retirement product lines to partially offset the impact of a continued decline in base yields resulting from investment of available cash flows in the low interest rate environment.
Disciplined pricing on new business is used to pursue new sales of annuity products at targeted net investment spreads in the current rate environment. Retirement has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Retirement cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products that had higher minimum rate guarantees have been re-filed with lower crediting rates as permitted under state
insurance laws for new sales. As a result, new sales of fixed annuity products generally have minimum interest rate guarantees of one percent.
Renewal crediting rate management is done under contractual provisions in annuity products that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. Retirement will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields. In addition to deferred annuity products, certain traditional long-duration products for which Retirement does not have the ability to adjust interest rates, such as payout annuities, are exposed to reduced earnings and potential loss recognition reserve increases in a sustained low interest rate environment.
As of December 31, 2015, Retirement’s fixed annuity reserves, which include fixed options offered within variable annuities sold in the Group Retirement and Retirement Income Solutions product lines as well as reserves of the Fixed Annuities product line, had minimum guaranteed interest rates ranging from one percent to 5.5 percent, with the higher rates representing guarantees on older in-force products. As indicated in the table below, approximately 73 percent of annuity account values were at their minimum crediting rates as of December 31, 2015, compared to 71 percent at December 31, 2014. As a result of disciplined pricing on new business and the run-off of older business with higher minimum crediting rates, fixed annuity account values having contractual minimum guaranteed rates above one percent decreased to 74 percent of total fixed annuity reserves at December 31, 2015 from 79 percent at December 31, 2014.
The following table presents fixed annuity account values by contractual minimum guaranteed interest rate and current crediting rates:
| Current Crediting Rates |
December 31, 2015 | | | 1-50 Basis | More than 50 | | | |
Contractual Minimum Guaranteed | At Contractual | Points Above | Basis Points | | | |
Interest Rate | Minimum | Minimum | Above Minimum | | | |
(in millions) | Guarantee | Guarantee | Guarantee | | Total | |
Fixed annuities * | | | | | | | | | |
1% | $ | 5,896 | $ | 6,340 | $ | 12,635 | $ | 24,871 | |
> 1% - 2% | | 12,659 | | 2,341 | | 2,974 | | 17,974 | |
> 2% - 3% | | 30,611 | | 473 | | 1,067 | | 32,151 | |
> 3% - 4% | | 12,231 | | 50 | | 10 | | 12,291 | |
> 4% - 5% | | 7,671 | | - | | 4 | | 7,675 | |
> 5% - 5.5% | | 202 | | - | | 5 | | 207 | |
Total | $ | 69,270 | $ | 9,204 | $ | 16,695 | $ | 95,169 | |
Percentage of total | | 73 | % | 10 | % | 17 | % | 100 | % |
* Fixed annuities shown include fixed options within variable annuities sold in Group Retirement and Retirement Income Solutions product lines.
Retirement Premiums and Deposits, Surrenders and Net Flows
Premiums
For Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums and deposits is a non‑GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts and mutual funds.
The following table presents a reconciliation of Retirement premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits* | $ | 25,241 | $ | 24,023 | $ | 23,729 |
Deposits | | (25,078) | | (23,903) | | (23,690) |
Other | | 5 | | 167 | | 149 |
Premiums | $ | 168 | $ | 287 | $ | 188 |
* Excludes activity related to closed blocks of fixed and variable annuities.
Premiumshave fluctuated since 2013 primarily due to changes in immediate annuity premiums in the Fixed Annuities product line.
Premiums and Deposits and Net Flows
The following table presents Retirement premiums and deposits and net flows by product line:
| | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Fixed Annuities | $ | 3,702 | $ | 3,578 | $ | 2,914 | | 3 | % | | 23 | % |
Retirement Income Solutions | | 10,828 | | 10,325 | | 8,608 | | 5 | | | 20 | |
Retail Mutual Funds | | 3,791 | | 3,377 | | 4,956 | | 12 | | | (32) | |
Group Retirement | | 6,920 | | 6,743 | | 7,251 | | 3 | | | (7) | |
Total Retirement premiums and deposits* | $ | 25,241 | $ | 24,023 | $ | 23,729 | | 5 | % | | 1 | % |
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Net flows | | | | | | |
Fixed Annuities | $ | (2,188) | $ | (2,313) | $ | (2,820) |
Retirement Income Solutions | | 7,010 | | 6,566 | | 5,092 |
Retail Mutual Funds | | 1,026 | | (1) | | 2,780 |
Group Retirement | | (2,135) | | (3,797) | | (492) |
Total Retirement net flows* | $ | 3,713 | $ | 455 | $ | 4,560 |
* Excludes activity related to closed blocks of fixed and variable annuities, which had reserves of approximately $5.0 billion and $5.4 billion at December 31, 2015 and 2014, respectively.
RETIREMENT PREMIUMS AND DEPOSITS by Product Line (in millions) |
|
Premiums and deposits increased in 2015 compared to 2014, primarily due to growth in Retirement Income Solutions and Retail Mutual Funds. Premiums and deposits increased in 2014 compared to 2013, primarily in Retirement Income Solutions product lines and in Fixed Annuities, partially offset by lower deposits in Retail Mutual Funds and Group Retirement.
Net flows for annuity products included in the Fixed Annuities, Retirement Income Solutions and Group Retirement product lines represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows from mutual funds, which are included in both the Retail Mutual Funds and Group Retirement product lines, represent deposits less withdrawals.
Total net flows for Retirement increased in 2015 compared to 2014, primarily due to lower surrenders in Group Retirement, improvement in both sales and the level of withdrawals in Retail Mutual Funds, and continued growth in Retirement Income Solutions.
Total net flows for Retirement decreased in 2014 compared to 2013, primarily due to higher surrenders and withdrawals in 2014, primarily in the Group Retirement and Retail Mutual Funds product lines, which resulted in a significant decrease in net flows compared to 2013.
Premiums and Deposits and Net Flows by Product Line
A discussion of the significant variances in premiums and deposits and net flows for each product line follows:
Fixed Annuities premiums and deposits increased in 2015 compared to 2014, due to new product offerings and increases in market interest rates driven by widening credit spreads in the second half of the year, but net flows continued to be negative, primarily due to the sustained relatively low interest rate environment. The increase in Fixed Annuities deposits in 2014 compared to 2013 was due to modest increases in interest rates and steepening of the yield curve in the first half of 2014, compared to lower rates in the prior year, particularly in the first half of 2013. Fixed Annuities net flows in 2014 were negative, but improved compared to 2013, primarily due to the increased deposits.
Retirement Income Solutions premiums and deposits and net flows increased in 2015 compared to 2014, reflecting an increase in index annuity sales. Premiums and deposits and net flows increased significantly in 2014 compared to 2013, reflecting a high volume of variable and index annuity sales, which benefitted from consumer demand for retirement products with guaranteed benefit features, product enhancements, expanded distribution and a more favorable competitive environment. The improvement in surrender rates in 2015 and 2014 compared to the prior years (see Surrender Rates below) was primarily due to the significant growth in account value driven by the high volume of sales, which has increased the proportion of business that is within the surrender charge period.
Retail Mutual Funds deposits and net flows increased in 2015 compared to 2014, and decreased in 2014 compared to 2013, driven primarily by activity within the Focused Dividend Strategy Portfolio. After record sales in 2013, the Focused Dividend Strategy Portfolio experienced relatively less favorable performance in 2014, putting pressure on 2014 sales and withdrawal activity. In 2015, sales and withdrawals for this portfolio improved, due to a return to strong performance levels, resulting in overall growth in Retail Mutual Funds net flows compared to 2014.
Group Retirement net flows increased in 2015 compared to 2014, primarily due to lower surrender activity. The improvement in the surrender rate in 2015 compared to 2014 was due in part to lower large group accident,surrenders, which were approximately $1.5 billion in 2015, compared to $2.7 billion in 2014. Group Retirementnet flows decreased in 2014 compared to 2013, primarily due to higher group surrender activity, as well as lower premiums and deposits. The large group market has become increasingly competitive and has been impacted by the consolidation of healthcare providers and other employers in our target markets. This trend of heightened competition is expected to continue in 2016 as plan sponsors perform reviews of existing retirement plan relationships.
Surrender Rates
The following table presents reserves for annuity product lines by surrender charge category:
At December 31, | | 2015 | | | | 2014 | |
| | | | | | Retirement | | | | | | | | Retirement | |
| | Group | | Fixed | | Income | | | | Group | | Fixed | | Income | |
(in millions) | | Retirement(a) | | Annuities | | Solutions | | | | Retirement(a) | | Annuities | | Solutions | |
No surrender charge(b)(c) | $ | 60,720 | $ | 34,331 | $ | 14,184 | | | $ | 61,751 | $ | 34,255 | $ | 14,429 | |
Greater than 0% - 2% | | 1,199 | | 1,543 | | 4,517 | | | | 1,648 | | 2,736 | | 4,512 | |
Greater than 2% - 4% | | 1,363 | | 2,285 | | 4,565 | | | | 1,657 | | 2,842 | | 4,254 | |
Greater than 4% | | 5,952 | | 13,138 | | 31,683 | | | | 5,793 | | 12,754 | | 26,165 | |
Non-surrenderable | | 676 | | 3,723 | | 358 | | | | 770 | | 3,605 | | 151 | |
Total reserves | $ | 69,910 | $ | 55,020 | $ | 55,307 | | | $ | 71,619 | $ | 56,192 | $ | 49,511 | |
(a) Excludes mutual fund assets under management of $14.5 billion and $14.6 billion at December 31, 2015 and 2014, respectively.
(b) Group Retirement amounts in this category include reserves of approximately $6.2 billion, at both December 31, 2015 and 2014, which are subject to 20 percent annual withdrawal limitations.
(c) Retirement Income Solutions amounts in this category for 2014 include $12.5 billion of reserves with zero surrender charge that were previously reported within “Greater than 0% - 2%”.
The following table presents surrender rates for deferred annuities by product line:
Years Ended December 31, | | | | | | |
| 2015 | | 2014 | | 2013 | |
Surrenders as a percentage of average account value | | | | | | |
Fixed Annuities | 6.9 | % | 7.0 | % | 6.6 | % |
Retirement Income Solutions | 6.0 | | 7.1 | | 8.7 | |
Group Retirement | 10.0 | | 11.6 | | 9.0 | |
Life Results
The following table presents Life results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 2,759 | $ | 2,679 | $ | 2,737 | | 3 | % | | (2) | % |
Policy fees | | 1,485 | | 1,443 | | 1,391 | | 3 | | | 4 | |
Net investment income | | 2,100 | | 2,199 | | 2,269 | | (5) | | | (3) | |
Other income | | 49 | | - | | - | | NM | | | NM | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 3,812 | | 3,771 | | 3,568 | | 1 | | | 6 | |
Interest credited to policyholder account balances | | 493 | | 507 | | 542 | | (3) | | | (6) | |
Amortization of deferred policy acquisition costs | | 433 | | 321 | | 360 | | 35 | | | (11) | |
Non deferrable insurance commissions | | 222 | | 257 | | 272 | | (14) | | | (6) | |
General operating expenses | | 968 | | 885 | | 849 | | 9 | | | 4 | |
Pre-tax operating income | $ | 465 | $ | 580 | $ | 806 | | (20) | | | (28) | |
Life pre-tax OPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre-tax operating income decreased in 2015 compared to 2014, primarily due to lower net investment income, mortality experience that was within pricing expectations but less favorable than the prior year, and a higher net negative adjustment to reflect updated actuarial assumptions. These decreases were partially offset by a $20 million reduction in the reserve for IBNR death claims related to enhanced claims practices, due to updated estimates in 2015, compared to a $104 million increase in this reserve in 2014, which was primarily related to a legacy block of small policies for which personal data elements were unavailable or incomplete.
Other income in 2015 was primarily related to commission and profit sharing revenues received by Laya Healthcare for the distribution of insurance products. Laya Healthcare, which we acquired on March 31, 2015, is Ireland’s second largest primary health insurance provider. Laya Healthcare distributes and administers primary healthcare for approximately 550,000 customers, and also offers other coverage including life, dental and travel insurance.
The net negative adjustment of $146 million related to an update of actuarial assumptions in 2015 was primarily due to lower assumed surrender rates for certain later-duration universal life with secondary guarantees, which represent approximately eight percent of the Life Insurance Companies’ total U.S. life reserves. The net negative adjustment also reflected lower investment spread assumptions, partially offset by more favorable than expected assumptions for mortality, as well as loss recognition expense of $28 million for certain discontinued long-term care products primarily due to lower future premium assumptions. These negative adjustments were partially offset by a decrease in certain Group Benefit claim reserves based on updated experience data. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by financial statement line item and additional discussion of loss recognition.
Net investment income for 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and, to a lesser extent, a decrease due to lower yields on the base portfolio. See Investments – Life Insurance Companies for additional discussion of the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.
General operating expenses increased in 2015 compared to 2014, primarily related to the expansion of the international Life business through the acquisitions of AIG Life Limited and Laya Healthcare. Higher expenses from the international acquisitions were partially offset by domestic savings from organizational changes.
2014 and 2013 Comparison
Pre-tax operating income decreased in 2014 compared to 2013, primarily due to increases in policyholder benefit reserves, lower net investment income and higher general operating expenses. Updates of actuarial assumptions also decreased pre-tax operating income by $119 million in 2014 compared to $80 million in 2013. These decreases were partially offset by a $28 million increase in pre-tax operating income in 2014 compared to 2013, due to a 2013 increase in equity-indexed universal life reserves, which was reflected in Interest credited to policyholder account balances.
Overall, mortality experience for 2014 was similar to 2013 and within pricing assumptions. Policyholder benefit expense in 2014 included an increase of approximately $104 million to the estimated reserves for IBNR death claims, which reflected continuing efforts to identify deceased insureds and their beneficiaries who have not presented a valid claim, pursuant to the 2012 resolution of a multi-state audit and market conduct examination. The 2014 increase in the IBNR reserve was related primarily to a legacy block of in-force and lapsed small face amount policies, for which certain personal data elements were unavailable or incomplete. In 2014, in the process of reviewing these policies as required under the terms of the regulatory agreement, we refined our estimate of the ultimate cost of these claims. The reserve increase in 2014 was in addition to amounts previously provided for IBNR claims in 2011 and 2012, which totaled $259 million.
Net investment income decreased in 2014 compared to 2013, primarily due to lower income from alternative investments and lower yields on the base portfolio due to investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio. See Investments – Life Insurance Companies for additional discussion of the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.
General operating expenses increased in 2014 compared to 2013 primarily due to strategic investments in technology and service platforms in the U.S. and Japan.
Spread Management
Disciplined pricing on new business is used to pursue new sales of life products at targeted net investment spreads in the current interest rate environment. Life has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Life cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products with higher minimum rate guarantees have been re-filed with lower crediting rates, as permitted under state insurance laws for new sales. Universal life insurance interest rate guarantees are generally two to three percent on new non-indexed products and zero to two percent on new indexed products, and are designed to meet targeted net investment spreads.
In-force Management. Crediting rates for in-force policies are adjusted in accordance with contractual provisions that were designed to allow crediting rates to be reset subject to minimum crediting rate guarantees.
The following table presents universal life account values by contractual minimum guaranteed interest rate and current crediting rates:
| Current Crediting Rates |
December 31, 2015 | | | 1-50 Basis | More than 50 | | | |
Contractual Minimum Guaranteed | At Contractual | Points Above | Basis Points | | | |
Interest Rate | Minimum | Minimum | Above Minimum | | | |
(in millions) | Guarantee | Guarantee | Guarantee | | Total | |
Universal life insurance | | | | | | | | | |
1% | $ | - | $ | - | $ | 7 | $ | 7 | |
> 1% - 2% | | 32 | | 164 | | 212 | | 408 | |
> 2% - 3% | | 552 | | 304 | | 1,452 | | 2,308 | |
> 3% - 4% | | 2,066 | | 495 | | 1,090 | | 3,651 | |
> 4% - 5% | | 3,939 | | 204 | | - | | 4,143 | |
> 5% - 5.5% | | 327 | | - | | - | | 327 | |
Total | $ | 6,916 | $ | 1,167 | $ | 2,761 | $ | 10,844 | |
Percentage of total | | 64 | % | 11 | % | 25 | % | 100 | % |
Life Premiums and Deposits
Premiums for Life represent amounts received on traditional life insurance policies and group benefit policies. Premiums and deposits for Life is a non‑GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.
The following table presents a reconciliation of Life premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits | $ | 4,974 | $ | 4,806 | $ | 4,862 |
Deposits | | (1,540) | | (1,532) | | (1,541) |
Other | | (675) | | (595) | | (584) |
Premiums | $ | 2,759 | $ | 2,679 | $ | 2,737 |
Excluding the effect of foreign exchange, Life premiums and deposits increased six percent in 2015 compared to 2014, and premiums increased eight percent, principally driven by growth in Japan and the acquisition of AIG Life Limited in the U.K.
The decrease in Life premiums in 2014 compared to 2013 was primarily due to the non-renewal of certain group benefit accounts and the strengthening of the U.S. dollar against the Japanese yen, partially offset by solid growth in Japan premiums excluding the effect of foreign exchange. As a result of the decrease in premiums, premiums and deposits also decreased in 2014 compared to 2013.
Personal Insurance Results
The following table presents Personal Insurance results:
Years Ended December 31, | | | | | | | | | | | | | | | | Percentage Change |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | | | | | | | | | |
Net premiums written | | | | | | | | | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | | (2) | % |
Increase in unearned premiums | | | | | | | | | | (422) | | (442) | | (323) | | 5 | | | (37) | |
Net premiums earned | | | | | | | | | | 11,158 | | 11,970 | | 12,377 | | (7) | | | (3) | |
Losses and loss adjustment expenses incurred | | | | | | | | | | 6,152 | | 6,488 | | 7,025 | | (5) | | | (8) | |
Acquisition expenses: | | | | | | | | | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | | | | | | | | | 1,974 | | 2,092 | | 2,203 | | (6) | | | (5) | |
Other acquisition expenses | | | | | | | | | | 1,183 | | 1,165 | | 1,044 | | 2 | | | 12 | |
Total acquisition expenses | | | | | | | | | | 3,157 | | 3,257 | | 3,247 | | (3) | | | - | |
General operating expenses | | | | | | | | | | 1,995 | | 2,220 | | 2,292 | | (10) | | | (3) | |
Underwriting income (loss) | | | | | | | | | | (146) | | 5 | | (187) | | NM | | | NM | |
Net investment income | | | | | | | | | | 220 | | 394 | | 455 | | (44) | | | (13) | |
Pre-tax operating income | | | | | | | | | $ | 74 | $ | 399 | $ | 268 | | (81) | % | | 49 | % |
NET PREMIUMS WRITTEN (in millions) | | Pre-Tax oPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre‑tax operating income decreased in 2015, compared to 2014, primarily due to a decrease in net investment income and underwriting results. Catastrophe losses were $145 million in 2015 compared to $126 million in 2014. In 2015, net favorable prior year loss reserve development was $19 million compared to $77 million in 2014.
Acquisition expenses decreased in 2015 compared to 2014. Excluding the effect of foreign exchange, acquisition expenses increased due to higher acquisition costs, primarily in automobile and property businesses, and higher profit share expenses related to warranty service programs, partially offset by a decrease in non-deferred direct marketing expenses. The non-deferred direct marketing expenses, excluding commissions, for 2015 were approximately $292 million, and, excluding the impact of foreign exchange, decreased by approximately $71 million from 2014.
General operating expenses decreased in 2015 compared to 2014, primarily due to the effect of foreign exchange and reflected an ongoing focus on cost efficiency.
Net investment income decreased in 2015 compared to 2014, primarily due to the continued impact of low interest rates resulting in yields on new purchases that were lower than the weighted average yield of the overall portfolio, negative performance of alternative investments in hedge funds, the strengthening of the U.S. dollar against most major foreign currencies, and lower allocation of net investment income.
See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.
2014 and 2013 Comparison
Pre‑tax operating income increased in 2014 compared to 2013, primarily due to a decrease in current accident year losses and lower general operating expenses, partially offset by higher catastrophe losses and lower net favorable prior year loss reserve development, higher acquisition expenses and a decrease in net investment income. Catastrophe losses were $126 million in 2014, compared to $77 million in 2013. The accident year losses include severe losses of approximately $54 million in 2014 compared to $17 million in 2013. Net favorable loss reserve development was $77 million in 2014 compared to $155 million in 2013, and included approximately $7 million of favorable loss reserve development from Storm Sandy compared to $41 million in 2013. Foreign exchange did not have a significant impact on the pre-tax operating income compared to 2013.
Acquisition expensesincreased in 2014 compared to 2013, primarily due to the change in business mix and higher costs in growth-targeted lines of business, partially offset by the effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen. Direct marketing expenses, excluding commissions, for 2014 were $392 million, compared to $440 million in 2013. Excluding the impact of foreign exchange, direct marketing expenses decreased by approximately $24 million in 2014 compared to 2013. Direct marketing accounted for approximately 17 percent of net premiums written in both 2014 and 2013.
General operating expensesdecreased in 2014 compared to 2013. Excluding the effect of foreign exchange, general operating expenses remained flat, as efficiencies from organizational realignment initiatives were offset by increased technology-related expenses.
Net investment income decreased in 2014 compared to 2013, primarily due to a decrease in interest rates during 2014, as yields on new purchases were lower than the weighted average yield of the overall portfolio, lower income on alternative investments, and lower income associated with investments accounted for under the fair value option method as an increase related to the PICC P&C rights offerings was more than offset by a decrease from fixed maturity investments accounted for under the fair value option. These were partially offset by the effect of continued portfolio diversification. The decrease in allocated net investment income was also due to a reduction in net loss reserves.
See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.
Personal Insurance Net Premiums Written
The following table presents Personal Insurance net premiums written by major line of business:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
| | | | | | | | U.S. dollars | | Original Currency |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Accident & Health | $ | 4,990 | $ | 5,441 | $ | 5,714 | | (8) | % | (5) | % | | 1 | % | (2) | % |
Personal Lines | | 6,590 | | 6,971 | | 6,986 | | (5) | | - | | | 4 | | 5 | |
Total Personal Insurance net | | | | | | | | | | | | | | | | |
premiums written | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | (2) | % | | 3 | % | 2 | % |
Personal Insurance (in millions) |
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2015 and 2014 Comparison
Personal Insurance net premiums written decreased in 2015 compared to 2014 due to the strengthening of the U.S. dollar against the Major Currencies. Excluding the effect of foreign exchange, net premiums written increased in 2015 compared to 2014, as the business continued to grow through multiple product and distribution channels. The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
Accident & Health net premiums written increased in 2015 compared to 2014, primarily due to production increases in Accident and Health in Japan, partially offset by the decrease in Accident and Health in the U.S., due to continued underwriting discipline.
Personal Lines net premiums written increased in 2015 compared to 2014. These increases were primarily due to increased production in personal property business in the U.S. and Canada, whichJapan and in the automobile business in all regions, partially offset by decreased production of warranty service programs. The increase in the U.S. personal property business in 2015 was attributable to new business sales and improved retention in the AIG Private Client Group, whereas in Japan the increase was due to new business sales as a result of the recent increase in new housing starts and heightened demand before the duration restriction on long-term fire insurance became effective in October 2015. In addition, the increase in U.S. personal property business in 2015 reflected changes to optimize our reinsurance structure to retain more favorable risks, while continuing to manage aggregate exposure.
2014 and 2013 Comparison
Personal Insurance net premiums written decreased in 2014 compared to 2013, primarily due to the impact of foreign exchange as the U.S. dollar strengthened against the Japanese yen. Excluding the effect of foreign exchange, net premiums written increased in 2014 compared to 2013 as the business continued to grow through multiple product and distribution channels, including direct marketing. The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
Accident & Healthnet premiums written decreased in 2014 compared to 2013. The decrease was primarily due to our focus on maintaining underwriting discipline in certain classes of business in the U.S., partially offset by growth in Japan and Latin America.
Personal Linesnet premiums written increased in 2014 compared to 2013. The increase was primarily due to increased rates and improved retention in AIG Private Client Group and continued growth of automobile business outside of Japan, partially offset by declines in the U.S. warranty service programs.
Personal Insurance Net Premiums Written by Region
The following table presents Personal Insurance net premiums written by region:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
| | | | | | | | U.S. dollars | | Original Currency |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Americas | $ | 3,810 | $ | 3,824 | $ | 3,794 | | - | % | 1 | % | | 2 | % | 4 | % |
Asia Pacific | | 5,916 | | 6,516 | | 6,893 | | (9) | | (5) | | | 3 | | 1 | |
EMEA | | 1,854 | | 2,072 | | 2,013 | | (11) | | 3 | | | 3 | | 2 | |
Total net premiums written | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | (2) | % | | 3 | % | 2 | % |
Personal insurance NET PREMIUMS WRITTEN by Region 
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The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
2015 and 2014 Comparison
Americas net premiums written in 2015 increased compared to 2014 due to growth in personal property and automobile businesses, offset by decreases in warranty service programs and Accident and Health businesses in the U.S. The growth in personal property business is primarily driven by new business sales and improved retention in AIG Private Client Group in the U.S., as well as the changes in the reinsurance structure discussed above.
Asia Pacific net premiums written increased in 2015 compared to 2014, primarily due to increased production in personal property, Accident and Health and automobile businesses.
EMEA net premiums written increased in 2015 compared to 2014, primarily in automobile and in warranty service programs, partially offset by decreases in Accident and Health.
2014 and 2013 Comparison
Americas net premiums written increased in 2014 compared to 2013, primarily due to an increase in all product lines in our Latin America operations and growth in U.S. personal property and automobile businesses. These were partially offset by a decrease in U.S. Accident and Health due to our continued focus on maintaining underwriting discipline.
Asia Pacific net premiums written increased in 2014 compared to 2013, primarily due to production increases in Japan Accident and Health and in property and automobile business outside of Japan.
EMEA net premiums written increased in 2014 compared to 2013, due to growth in the automobile business and warranty service programs, partially offset by a decrease in the Accident and Health business.
Personal Insurance Underwriting Ratios
The following tables present the Personal Insurance combined ratios based on GAAP data and reconciliation to the accident year combined ratio, as adjusted:
Years Ended December 31, | | | | | | | | | | | | Increase (Decrease) |
| | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
Loss ratio | | | | | | 55.1 | | 54.2 | | 56.8 | | 0.9 | | (2.6) |
Catastrophe losses and reinstatement premiums | | | | | | (1.3) | | (1.1) | | (0.7) | | (0.2) | | (0.4) |
Prior year development net of premium adjustments | | | | | | 0.2 | | 0.7 | | 1.3 | | (0.5) | | (0.6) |
Accident year loss ratio, as adjusted | | | | | | 54.0 | | 53.8 | | 57.4 | | 0.2 | | (3.6) |
Acquisition ratio | | | | | | 28.3 | | 27.2 | | 26.2 | | 1.1 | | 1.0 |
General operating expense ratio | | | | | | 17.9 | | 18.5 | | 18.5 | | (0.6) | | - |
Expense ratio | | | | | | 46.2 | | 45.7 | | 44.7 | | 0.5 | | 1.0 |
Combined ratio | | | | | | 101.3 | | 99.9 | | 101.5 | | 1.4 | | (1.6) |
Catastrophe losses and reinstatement premiums | | | | | | (1.3) | | (1.1) | | (0.7) | | (0.2) | | (0.4) |
Prior year development net of premium adjustments | | | | | | 0.2 | | 0.7 | | 1.3 | | (0.5) | | (0.6) |
Accident year combined ratio, as adjusted | | | | | | 100.2 | | 99.5 | | 102.1 | | 0.7 | | (2.6) |
Personal Insuranceratios |
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The following tables present Personal Insurance accident year catastrophe and severe losses by region and the number of events:
Catastrophes(a)
| # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
Year Ended December 31, 2015 | | | | | | | | | |
Flooding | 4 | $ | 4 | $ | - | $ | 2 | $ | 6 |
Windstorms and hailstorms | 13 | | 82 | | 37 | | - | | 119 |
Wildfire | 1 | | 1 | | - | | - | | 1 |
Tropical cyclone | 1 | | - | | 19 | | - | | 19 |
Total catastrophe-related charges | 19 | $ | 87 | $ | 56 | $ | 2 | $ | 145 |
Year Ended December 31, 2014 | | | | | | | | | |
Windstorms and hailstorms | 14 | | 51 | | 46 | | - | | 97 |
Tropical cyclone | 4 | | 9 | | 19 | | - | | 28 |
Earthquakes | 1 | | 1 | | - | | - | | 1 |
Total catastrophe-related charges | 19 | $ | 61 | $ | 65 | $ | - | $ | 126 |
Year Ended December 31, 2013 | | | | | | | | | |
Flooding | 7 | $ | 26 | $ | - | $ | 2 | $ | 28 |
Windstorms and hailstorms | 2 | | 11 | | - | | 5 | | 16 |
Tropical cyclone | - | | - | | 33 | | - | | 33 |
Total catastrophe-related charges | 9 | $ | 37 | $ | 33 | $ | 7 | $ | 77 |
(a) Catastrophes are generally weather or seismic events having a net impact on AIG in excess of $10 million each.
Severe Losses(b)
Years Ended December 31, | # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
2015 | 1 | $ | 12 | $ | - | $ | - | $ | 12 |
2014 | 4 | $ | 50 | $ | 4 | $ | - | $ | 54 |
2013 | 1 | $ | 17 | $ | - | $ | - | $ | 17 |
* Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.
2015 and 2014 Comparison
The combined ratio increased by 1.4 points in 2015 compared to 2014, reflecting an increase in the loss ratio by 1.6 points. This wasand acquisition ratio, partially offset by improvementsa decrease in the general operating expense ratio. The accident year combined ratio, as adjusted, increased by 0.7 points in 2015 compared to 2014.
The accident year loss ratio, as adjusted, increased by 0.2 points in 2015, compared to 2014, due to higher large but not severe losses in automobile and personal property businesses, partially offset by a decrease in losses in warranty service programs and lower severe losses. The loss ratio improvement in warranty service programs was offset by an increase in the acquisition ratio due to a related profit sharing arrangement.
The acquisition ratio increased by 1.1 points in 2015 compared to 2014, primarily due to increases in acquisition costs in warranty service programs and in the automobile business, partially offset by lower direct marketing expenses in the Accident and Health business.
The general operating expense ratio decreased by 0.6 points in 2015 compared to 2014, reflecting an ongoing focus on cost efficiency.
2014 and 2013 Comparison
The combined ratio decreased by 1.6 points in 2014 compared to 2013, primarily due to a lower loss ratio, partially offset by a higher acquisition ratio as discussed below.
The accident year combined ratio, as adjusted, decreased by 2.6 points in 2014 compared to 2013, primarily due to an improved accident year loss ratio, as adjusted.
The accident year loss ratio, as adjusted, decreased by 3.6 points in 2014 compared to 2013, as a result of rate and underwriting actions taken in current and prior years.improvements across all lines of business. The higherlower losses associated with a warranty retail program were largely offset by a decreasean increase in the related profit sharing arrangement.
Thearrangement, which increased the acquisition ratio increased byin 2014 compared to 2013. The severe losses of $54 million, resulting largely from four fire claims, accounted for 0.5 points primarily due to the combined effect of a lower net premiums earned base, change in business mix and higher costs in growth-targeted lines of business. This was partially offset by a reduction in a profit sharing arrangement in a warranty retail program.
The general operating expense ratio increased by 0.6 points compared to the prior year. The general operating expense ratio increased primarily due to the increase in employee incentive compensation expense previously discussed, partially offset by lower infrastructure project costs.
2012 and 2011 Comparison
Commercial Insurance Ratios
The accident year combined ratio, as adjusted, improved by 1.2 points in 2012.
The improvement in the accident year loss ratio, as adjusted, in 2012, reflects the realization of benefits from the continued execution of our multi-faceted strategy to enhance risk selection, pricing discipline, exposure management and claims processing. Although the execution of these strategies resulted in a reduction of Casualty net premiums written, it also improved the accident year loss ratio as we remediated our primary and excess Casualty books in both the Americas and EMEA regions. Financial lines improved due to rate strengthening and restructuring and re-underwriting of certain products. Property improved due to rate strengthening, enhanced engineering and exposure management.
The acquisition ratio increased by 2.0 points primarily due to our strategy of growing higher value lines, which typically incur higher acquisition costs, and the restructuring of our Casualty lines, especially the loss-sensitive business in the U.S. In addition, ceding commissions decreased as a result of restructuring of the Property and Specialty reinsurance program as part of the strategic decision to retain more profitable business while continuing to manage aggregate exposures.
AIG 2013 Form 10-K
Table of Contents
2014.
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
The general operating expense ratio remained unchanged in 2014 compared to 2013, reflecting the impact of efficiencies from organizational realignment initiatives, offset by increased technology-related expenses.
Corporate and Other
Corporate and Other Results
The following table presents AIG’s Corporate and Other results:
Years Ended December 31, | | | | | | | | | | | | | | | | Percentage Change |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Corporate and Other pre-tax operating loss: | | | | | | | | | | | | | | | | | | | | |
Equity in pre-tax operating earnings of AerCap(a) | | | | | | | | | $ | 255 | $ | 434 | $ | - | | (41) | % | | NM | % |
Fair value of PICC investments(b) | | | | | | | | | | 33 | | 37 | | - | | (11) | | | NM | |
Income from other assets, net(c) | | | | | | | | | | 1,382 | | 373 | | 47 | | 271 | | | NM | |
Corporate general operating expenses | | | | | | | | | | (985) | | (1,146) | | (1,115) | | 14 | | | (3) | |
Severance expense(d) | | | | | | | | | | - | | - | | (265) | | NM | | | NM | |
Interest expense | | | | | | | | | | (1,101) | | (1,233) | | (1,412) | | 11 | | | 13 | |
Direct Investment book | | | | | | | | | | - | | 1,241 | | 1,448 | | NM | | | (14) | |
Global Capital Markets | | | | | | | | | | - | | 359 | | 625 | | NM | | | (43) | |
Run-off insurance Lines | | | | | | | | | | (488) | | (445) | | 403 | | (10) | | | NM | |
Consolidation and eliminations | | | | | | | | | | 21 | | 1 | | 4 | | NM | | | (75) | |
Total Corporate and Other pre-tax operating loss | | | | | | | | | $ | (883) | $ | (379) | $ | (265) | | (133) | % | | (43) | % |
(a) Represents our share of AerCap’s pre-tax operating income, which excludes certain post-acquisition transaction expenses incurred by 2.4 pointsAerCap in connection with its acquisition of ILFC and the difference between expensing AerCap’s maintenance rights assets over the remaining lease term as compared to the remaining economic life of the related aircraft.
(b) During the first quarter of 2015, Non-Life Insurance Companies sold a portion of their investment in PICC P&C to AIG Parent. During 2014, the Life Insurance Companies sold their investment in PICC Group to AIG Parent.
(c) Consists of the results of investments held by AIG Parent to support various corporate needs as well as the remaining positions of AIGFP, life settlements, real estate, equipment leasing and lending and other secured lending investments held by AIG Parent and certain subsidiaries. As a result of the progress of the wind down and de-risking activities of the DIB and the derivative portfolio of AIGFP included within GCM, AIG has discontinued separate reporting of the DIB and GCM. Their results have been reported within Income from other assets, net, beginning with the first quarter of 2015. This reporting aligns with the manner in which AIG manages its financial resources. Prior periods are presented in historical format for informational purposes. Interest expense for 2015 includes $70 million of interest expense previously reported in DIB results.
(d) Includes $263 million of severance expense attributable to the Property Casualty and Personal Insurance operating segments.
Corporate and Other Results
2015 and 2014 Comparison
Corporate and Other pre-tax operating losses increased in 2015 compared to 2014 primarily due to lower fair value appreciation on ABS CDOs, lower credit valuation adjustments on assets for which the fair value option was elected, and lower mark-to-market income on CDS positions as a result of portfolio wind down and more significant spread tightening in 2014, all of which are reflected in Income from other assets, net. Partially offsetting these declines were lower corporate general operating expenses resulting from a pension curtailment credit and lower interest expense from ongoing liability management activities.
Run-off insurance lines reported an increase in pre-tax operating loss in 2015 primarily due to higher net adverse prior year loss reserve development reflecting the loss reserve strengthening in classes of business with long reporting tails and transfers of certain casualty lines, including environmental liability and healthcare coverage that were no longer offered by Commercial Insurance to Run-off insurance lines. See Insurance Reserves – Non-Life Insurance Companies – Net Loss Development for further discussion. These increases in bad debt expense,net adverse prior year loss reserve development were partially offset by excess workers’ compensation net loss reserve discount benefit, primarily reflecting an increase in Treasury rates in 2015. See Insurance Reserves – Non-Life Insurance Companies – Discounting of Reserves for further discussion.
2014 and 2013 Comparison
Corporate and Other pre‑tax operating losses increased in 2014 compared to 2013 primarily due to an increase in general operating expenses as a result of centralizing processes to lower-cost locations and increased costs related to investments in strategic initiativestechnology, lower fair value appreciation on ABS CDOs driven primarily by improved collateral pricing due to more significant improvements in home price indices and human resources, coupled withamortization of the underlying collateral in 2013, lower credit valuation adjustments on assets for which the fair value option was elected, and lower mark-to-market income on CDS positions as a result of portfolio wind down and spread widening, partially offset by our share of AerCap’s pre-tax operating income, which was accounted for under the equity method, and lower net premiums earned base. The lower net premiums earned base contributed approximately 0.2 pointsinterest expense from ongoing debt management activities described in Liquidity and Capital Resources.
Run-off insurance lines reported a pre-tax operating loss of $445 million in 2014 compared to theincome of $403 million in 2013, primarily as a result of a $407 million charge from a decrease in reserve discount in 2014 compared to a $631 million benefit from an increase in the general operating expense ratio. Bad debt expense increaseddiscount in 2013. This discounting-related charge was partially offset by approximately $143a $98 million which contributed approximately 0.7 points to the general operating expense ratio increasedecrease in net adverse prior year loss reserve development and an improvement in current accident year loss experience, particularly in the year ended December 31, 2012. For the year ended December 31, 2012, investments in strategic initiatives, commercial lines platform, our scientific group, underwritingenvironmental liability business (2004 and pricing tools totaled approximately $51 million, representing an increase of approximately $41 million over the prior year.prior). The remainder of the general operating expense ratio increasediscount charge was primarily due to higher personnel costs,the decline in risk free rates during
2014 used under Pennsylvania and Delaware prescribed or permitted practices, change in payout pattern assumptions, including the effect of commutations and accelerated settlements for the certain Excess Workers’ Compensation reserves, as partwell as accretion. See Insurance Reserves - Discounting of Reserves for additional information.
Overview
Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business models for Non-Life Insurance Companies, Life Insurance Companies and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of intermediate and long duration fixed maturity securities.
Investments Highlights in 2015 |
•A rise in rates, widening of credit spreads and sales of equity securities resulted in a decrease in our net unrealized gain position in our investment portfolio. Net unrealized gains in our available for sale portfolio decreased to approximately $8.8 billion as of December 31, 2015 from approximately $19.0 billion as of December 31, 2014. •We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in mortgage loans with favorable risk versus return characteristics to improve yields and increase net investment income. •Our alternative investments portfolio performance experienced a significant drop off in the second half of 2015 due to increased volatility in equity markets, which affected the performance of our hedge fund portfolio. •Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called. •Other-than-temporary impairments increased due to impairments within the energy and emerging markets sectors, driven primarily by slowing growth in China and weakness in commodity markets. •We experienced an increase in gains of sales of securities in 2015 versus 2014 due to a partial divestiture of our PICC equity interests. |
Investment Strategies
Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.
Some of our key investment strategies are as follows:
•Fixed maturity securities held by the U.S. insurance companies included in Non-Life Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.
•Outside of the U.S., fixed maturity securities held by Non-Life Insurance Companies consist primarily of intermediate duration high-grade securities generally denominated in the currencies of the countries in which we operate.
·While more of a focus is placed on asset-liability management in Life Insurance Companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.
·AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. AIG Parent’s liquidity sources are held in the form of cash, short-term investments and publicly traded, intermediate term investment-grade rated fixed maturity securities. Based upon an assessment of its immediate and longer-term funding needs, AIG Parent purchases publicly traded, intermediate term, investment-grade rated fixed maturity securities that can be readily monetized through sales or repurchase agreements. These securities allow us to diversify sources of liquidity while reducing the cost of maintaining sufficient liquidity.
Investments by Legal Entity Category
The following tables summarize the composition of AIG's continued investmentinvestments:
| | Non-Life | | Life | | | | | |
| | Insurance | | Insurance | | Corporate | | | |
(in millions) | | Companies | | Companies | | and Other(a) | | | Total |
December 31, 2015 | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | |
Bonds available for sale, at fair value | $ | 84,849 | $ | 157,150 | $ | 6,246 | | $ | 248,245 |
Other bond securities, at fair value | | 1,463 | | 3,589 | | 11,730 | | | 16,782 |
Equity securities: | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | 2,821 | | 144 | | (50) | | | 2,915 |
Other Common and preferred stock, at fair value | | 355 | | - | | 566 | | | 921 |
Mortgage and other loans receivable, net of allowance | | 8,278 | | 23,979 | | (2,692) | | | 29,565 |
Other invested assets | | 10,571 | | 12,398 | | 6,825 | | | 29,794 |
Short-term investments | | 3,189 | | 2,877 | | 4,066 | | | 10,132 |
Total investments(b) | | 111,526 | | 200,137 | | 26,691 | | | 338,354 |
Cash | | 1,011 | | 557 | | 61 | | | 1,629 |
Total invested assets | $ | 112,537 | $ | 200,694 | $ | 26,752 | | $ | 339,983 |
December 31, 2014 | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | |
Bonds available for sale, at fair value | $ | 92,942 | $ | 164,527 | $ | 2,390 | | $ | 259,859 |
Other bond securities, at fair value | | 1,733 | | 2,785 | | 15,194 | | | 19,712 |
Equity securities: | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | 4,241 | | 150 | | 4 | | | 4,395 |
Other Common and preferred stock, at fair value | | 495 | | - | | 554 | | | 1,049 |
Mortgage and other loans receivable, net of allowance | | 6,686 | | 20,874 | | (2,570) | | | 24,990 |
Other invested assets | | 10,372 | | 11,916 | | 12,230 | | | 34,518 |
Short-term investments | | 4,154 | | 2,131 | | 4,958 | | | 11,243 |
Total investments(b) | | 120,623 | | 202,383 | | 32,760 | | | 355,766 |
Cash | | 1,191 | | 451 | | 116 | | | 1,758 |
Total invested assets | $ | 121,814 | $ | 202,834 | $ | 32,876 | | $ | 357,524 |
(a) Beginning in its employees.the fourth quarter of 2015, Eaglestone Reinsurance Company is reported in Corporate and Other.
Consumer Insurance Ratios
The accident year combined ratio, as adjusted, increased by 1.5 points for the year ended(b) At December 31, 2012.
The accident year loss ratio, as adjusted, in the year ended2015, approximately 90 percent and 10 percent of investments were held by domestic and foreign entities, respectively, compared to approximately 90 percent and 10 percent, respectively, at December 31, 2012 improved in both A&H and Personal lines. The improvement in A&H is primarily attributable to favorable underwriting performance of individual personal accident business in Asia Pacific, targeted underwriting actions, coupled with rate increases and risk selection of group A&H in the U.S. and the overall travel business. The improvement in Personal lines is primarily attributable to improved underwriting and risk selection in the warranty line of business, price sophistication and rate strengthening for Japan, EMEA automobile and the U.S. private client group, and targeted business mix changes that resulted in faster growth in non-automobile products than the automobile line of business. Included in the accident year loss ratio, as adjusted, for the year ended December 31, 2012, are severe losses totaling $33 million. There were no severe losses for the year ended December 31, 2011.
The acquisition ratio increased by 1.2 points primarily due to profit sharing arrangements in lines of business targeted for growth, direct marketing expenses and the reduction in VOBA benefit. Overall direct marketing costs increased by approximately 9 percent in 2012; total direct marketing spending outside the U.S. increased by approximately 18 percent in the same period. There was also a decrease of approximately $49 million in the benefit from the amortization of VOBA liabilities recognized at the time of the Fuji acquisition.
The general operating expense ratio increased by 0.9 points as a result of incurring additional expenses to grow key lines of business across a number of geographic areas and strategic expansion in growth economy nations. For the year ended December 31, 2012, investments in strategic initiatives, including investments in an integrated consumer lines platform and information systems infrastructure totaled approximately $44 million, representing an increase of approximately $27 million or 0.2 points over the prior year. The remainder of the increase was primarily due to higher personnel costs, as we continue our efforts to align employee performance across the globe with our strategic goals.
AIG Property Casualty Net Investment Income and Net Realized Capital Gains (Losses)2014.
The following table presents AIG Property Casualty'sthe components of Net Investment Income:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Interest and dividends | $ | 12,856 | $ | 13,246 | $ | 13,199 |
Alternative investments | | 1,476 | | 2,624 | | 2,803 |
Other investment income* | | 249 | | 726 | | 356 |
Total investment income | | 14,581 | | 16,596 | | 16,358 |
Investment expenses | | 528 | | 517 | | 548 |
Total net investment income | $ | 14,053 | $ | 16,079 | $ | 15,810 |
* Includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and which are used to economically hedge the interest rate risk in GMWB embedded derivatives. For the years ended December 31, 2015, 2014 and 2013, the net investment income (loss) recorded on these securities was $(43) million, $260 million and net realized capital gains (losses):
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| | Percentage Change | |
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | 2013 vs. 2012
| | 2012 vs. 2011
| |
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| | |
Net Investment Income by Component | | | | | | | | | | | | | | | | |
Interest and dividends | | $ | 4,124 | | $ | 4,215 | | $ | 3,988 | | | (2 | )% | | 6 | % |
Alternative investments | | | 870 | | | 484 | | | 371 | | | 80 | | | 30 | |
Fair value option assets | | | 284 | | | 110 | | | (8 | ) | | 158 | | | NM | |
Other income (expense) – net | | | (11 | ) | | (29 | ) | | (98 | ) | | 62 | | | 70 | |
| | |
Total net investment income | | $ | 5,267 | | $ | 4,780 | | $ | 4,253 | | | 10 | % | | 12 | % |
| | |
Net Investment Income by Operating Segment | | | | | | | | | | | | | | | | |
Commercial Insurance | | $ | 2,500 | | $ | 2,769 | | $ | 3,118 | | | (10 | )% | | (11 | )% |
Consumer Insurance | | | 372 | | | 451 | | | 354 | | | (18 | ) | | 27 | |
Other | | | 2,395 | | | 1,560 | | | 781 | | | 54 | | | 100 | |
| | |
Total net investment income | | $ | 5,267 | | $ | 4,780 | | $ | 4,253 | | | 10 | % | | 12 | % |
| | |
Net realized capital gains | | $ | 380 | | $ | 211 | | $ | 957 | | | 80 | % | | (78 | )% |
| | |
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
We manage and account for our invested assets on a legal entity basis in conformity with regulatory requirements. Within a legal entity, invested assets are available to pay claims and expenses of both Commercial Insurance and Consumer Insurance operating segments as well as the Other category. Invested assets are not segregated or otherwise separately identified for the Commercial Insurance and Consumer Insurance operating segments.
Investment income is allocated to the Commercial Insurance and Consumer Insurance operating segments based on an internal investment income allocation model. The model estimates investable funds based primarily on loss reserves, unearned premiums and a capital allocation for each segment. The investment income allocation is calculated based on the estimated investable funds and risk-free yields (plus a liquidity premium) consistent with the approximate duration of the liabilities. The actual yields in excess of the allocated amounts and the investment income from the assets not attributable to the Commercial Insurance and the Consumer Insurance operating segments are assigned to the Other category. Commencing in the first quarter of 2013, we began applying similar duration and risk-free yields (plus a liquidity premium) to the allocated capital of Commercial Insurance and Consumer Insurance as is applied to loss reserves.
Net realized capital gains (losses) and Other income (expense) — net are not allocated to Commercial Insurance and Consumer Insurance, but are reported as part of the Other category.
2013 and 2012 Comparison
Net Investment Income$(161) million, respectively.
Net investment income is influenced by a number of factors, including equity marketdecreased for 2015 compared to 2014 due to lower income on alternative investments, primarily related to hedge fund performance, changes in overall asset allocation, changes inlower income on assets for which the timingfair value option was elected, and amount of expected cash flows on certain structured securities, and the movements of interest rates. lower reinvestment yields.
Net investment income for 2014 increased by $487 million or 10 percent in 2013, compared to 2012,2013 primarily due to increasedpositive performance on bonds where we elected the fair value option, driven by movements in interest rates, partially offset by lower income on alternative investment income derived frominvestments due to equity market performance and income associated with the PICC P&C shares that are accounted for under the fair value option. This alternative investment performance was most visible in investments in hedge funds, which benefited from the equity market performance. Fair value increases also contributedlower reinvestment yields on our fixed maturity securities portfolio due to the netlow interest rate environment.
Non-Life Insurance Companies
For the Non-Life Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment income increase. strategy within the Non-Life Insurance Companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.
The Non-Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Non-Life Insurance Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in PICC P&C shares accounted for under the fair value option, contributed $110 million to net investment income. Although interest rates remained at historically low levels, there were upward movements in rates throughout the year, with the ten year U.S. Treasury yield increasing 126 basis points during the year. These increasing rates, coupled with continued portfolio diversification, helped mitigate the effects of runoff rates on matured or sold investments exceeding new investment yields. The combination of improving yield differential and above average alternative investment returns increased the return on invested assets by approximately 0.4 points to 4.2 percent.
Corporate debt securities continued to be the largest asset category. We continued to focus on risk-weighted opportunistic investments in higher yielding assets such as structured securities and commercial mortgage loans.domestic operations. In addition, we continuedcontinue to maintain a defensive strategy on interest ratesinvest in the current risingboth fixed rate environment by increasing our mix ofand floating rate securities.asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has achieved an increase inmaintained stable average yields while the overall credit ratings of our fixed maturity investmentssecurities were largely unchanged. We expect to continue to refine ourpursue this investment strategy in 2014 to meet ourthe Non-Life Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk-returnrisk‑return and tax objectives.
Our invested assetIn addition, the Non-Life Insurance Companies seek to enhance returns through selective investments in a diversified portfolio decreased by approximately $8 billion, or 6 percent duringof alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the year, duefixed maturity portfolio yields and have provided added diversification to the broader portfolio. The Non-Life Insurance Companies’ investment portfolio also includes, to a declinelesser extent, equity securities.
With respect to non-affiliate over‑the‑counter derivatives, the Non-Life Insurance Companies conduct business with highly rated counterparties and do not expect the counterparties to fail to meet their obligations under the contracts. The Non-Life Insurance Companies have controls in unrealized appreciation from rising interest rates,place to monitor credit exposures by limiting transactions with specific counterparties within specified dollar limits and assessing the creditworthiness of counterparties periodically. The Non-Life Insurance Companies generally use ISDA Master Agreements and Credit Support Annexes (CSAs) with bilateral collateral provisions to reduce counterparty credit exposures.
Fixed maturity investments of the Non-Life Insurance Companies domestic operations, with an intermediate duration of 4.7 years, are currently comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns, as
well as taxable municipal bonds, government and agency bonds, and corporate bonds. The majority of these high quality investments are rated A or higher based on composite ratings.
Fixed maturity investments held in the Non-Life Insurance Companies foreign currency translation adjustment lossesoperations are of high quality, primarily rated A or higher based on composite ratings, and short to intermediate duration, averaging 3.2 years.
Life Insurance Companies
The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.
The Life Insurance Companies use asset‑liability management as a primary tool to monitor and manage risk in our internationaltheir businesses. The Life Insurance Companies' fundamental investment strategy is to maintain a diversified, high quality portfolio as the dollar strengthened against the yen, and approximately $4.3 billion in dividend remittances to AIG Parent.
Net Realized Capital Gains (Losses)
Net realized capital gains in 2013 were driven primarily by gains on the sales of fixed maturity securities that, to the extent possible, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration. An extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses.
The Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans.
In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields. While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio. The Life Insurance Companies investment portfolio also includes, to a lesser extent, equity securities and yield enhancing investments.
The Life Insurance Companies monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. The Life Insurance Companies frequently review their interest rate assumptions and actively manage the crediting rates used for their new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in a historically low interest rate environment. The low interest rate environment makes it more difficult to profitably price many of our products and puts margin pressure on existing products, due to the challenge of investing recurring premiums and deposits and reinvesting investment portfolio cash flows in the low rate environment while maintaining satisfactory investment quality and liquidity. In addition, there is investment risk associated with future premium receipts from certain in‑force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
Fixed maturity investments of the Life Insurance Companies domestic operations, with an intermediate duration of 6.6 years, are comprised of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.
Fixed maturity investments held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, and intermediate to long duration, averaging 13.7 years.
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the National Association of Insurance Companies (NAIC) evaluates the investments of U.S. insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called ‘NAIC Designations.’ In general, NAIC Designations of ‘1’ highest quality, or ‘2’ high quality, include fixed maturity securities considered investment grade, while NAIC Designations of ‘3’ through ‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The following tables summarize the ratings distribution of Life Insurance Companies fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies. See Investments – Credit Ratings herein for a full description of the composite AIG credit ratings.
The following table presents the fixed maturity security portfolio of Life Insurance Companies categorized by NAIC Designation, at fair value:
December 31, 2015 | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Total | | |
| | | | | | Total | | | | | | | | | | | Below | | |
| | | | | | Investment | | | | | | | | | | | Investment | | |
NAIC Designation | | 1 | | 2 | | Grade | | | 3 | | 4 | | 5 | | 6 | | Grade | | Total |
Other fixed maturity securities | $ | 44,714 | $ | 58,029 | $ | 102,743 | | $ | 4,801 | $ | 2,739 | $ | 413 | $ | 133 | $ | 8,086 | $ | 110,829 |
Mortgage-backed, asset-backed and collateralized | | 42,411 | | 2,091 | | 44,502 | | | 239 | | 181 | | 29 | | 471 | | 920 | | 45,422 |
Total* | $ | 87,125 | $ | 60,120 | $ | 147,245 | | $ | 5,040 | $ | 2,920 | $ | 442 | $ | 604 | $ | 9,006 | $ | 156,251 |
* Excludes $4.5 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within Life Insurance Companies that require a statutory filing.
The following table presents the fixed maturity security portfolio of Life Insurance Companiescategorized by composite AIG credit rating, at fair value:
December 31, 2015 | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Total | | |
| | | | | | Total | | | | | | | | | Below | | |
| | | | | | Investment | | | | | | | CCC and | | Investment | | |
Composite AIG Credit Rating | | AAA/AA/A | | BBB | | Grade | | | BB | | B | | Lower | | Grade | | Total |
Other fixed maturity securities | $ | 44,758 | $ | 58,156 | $ | 102,914 | | $ | 4,692 | $ | 2,808 | $ | 415 | $ | 7,915 | $ | 110,829 |
Mortgage-backed, asset-backed and collateralized | | 26,312 | | 3,352 | | 29,664 | | | 1,266 | | 1,033 | | 13,459 | | 15,758 | | 45,422 |
Total* | $ | 71,070 | $ | 61,508 | $ | 132,578 | | $ | 5,958 | $ | 3,841 | $ | 13,874 | $ | 23,673 | $ | 156,251 |
* Excludes $4.5 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within Life Insurance Companies that require a statutory filing.
Credit Ratings
At December 31, 2015, approximately 90 percent of our fixed maturity securities were accomplishedheld by our domestic entities. Approximately 16 percent of such securities were rated AAA by one or more of the principal rating agencies, and approximately 17 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in concertthe internal analysis.
A significant portion of our foreign entities’ fixed maturity securities portfolio is rated by Moody’s Investors’ Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. (S&P), or similar foreign rating services. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At December 31, 2015, approximately 16 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 5 percent were below investment grade or not rated. Approximately 44 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.
Composite AIG Credit Ratings
With respect to our fixed maturity investments, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (over 99 percent of total fixed maturity investments), or (b) our equivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC. The “Non-rated” category in those tables consists of fixed maturity securities that have not been rated by any of the major rating agencies, the NAIC or us.
See Enterprise Risk Management herein for a discussion of credit risks associated with Investments.
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their fair value:
| Available for Sale | | Other | | Total | |
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |
(in millions) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Rating: | | | | | | | | | | | | | | | | | | |
Other fixed maturity | | | | | | | | | | | | | | | | | | |
securities | | | | | | | | | | | | | | | | | | |
AAA | $ | 12,274 | | $ | 15,463 | | $ | 3,222 | | $ | 5,322 | | $ | 15,496 | | $ | 20,785 | |
AA | | 35,344 | | | 36,730 | | | 207 | | | 224 | | | 35,551 | | | 36,954 | |
A | | 50,741 | | | 56,693 | | | 1,781 | | | 242 | | | 52,522 | | | 56,935 | |
BBB | | 71,766 | | | 75,607 | | | 186 | | | 250 | | | 71,952 | | | 75,857 | |
Below investment grade | | 12,305 | | | 10,651 | | | 133 | | | 303 | | | 12,438 | | | 10,954 | |
Non-rated | | 920 | | | 1,035 | | | - | | | - | | | 920 | | | 1,035 | |
Total | $ | 183,350 | | $ | 196,179 | | $ | 5,529 | | $ | 6,341 | | $ | 188,879 | | $ | 202,520 | |
Mortgage-backed, asset- | | | | | | | | | | | | | | | | | | |
backed and collateralized | | | | | | | | | | | | | | | | | | |
AAA | $ | 26,382 | | $ | 24,783 | | $ | 1,756 | | $ | 2,313 | | $ | 28,138 | | $ | 27,096 | |
AA | | 5,003 | | | 4,078 | | | 708 | | | 1,549 | | | 5,711 | | | 5,627 | |
A | | 7,462 | | | 7,606 | | | 416 | | | 494 | | | 7,878 | | | 8,100 | |
BBB | | 4,394 | | | 3,813 | | | 497 | | | 620 | | | 4,891 | | | 4,433 | |
Below investment grade | | 21,638 | | | 23,376 | | | 7,771 | | | 8,314 | | | 29,409 | | | 31,690 | |
Non-rated | | 16 | | | 24 | | | 105 | | | 81 | | | 121 | | | 105 | |
Total | $ | 64,895 | | $ | 63,680 | | $ | 11,253 | | $ | 13,371 | | $ | 76,148 | | $ | 77,051 | |
Total | | | | | | | | | | | | | | | | | | |
AAA | $ | 38,656 | | $ | 40,246 | | $ | 4,978 | | $ | 7,635 | | $ | 43,634 | | $ | 47,881 | |
AA | | 40,347 | | | 40,808 | | | 915 | | | 1,773 | | | 41,262 | | | 42,581 | |
A | | 58,203 | | | 64,299 | | | 2,197 | | | 736 | | | 60,400 | | | 65,035 | |
BBB | | 76,160 | | | 79,420 | | | 683 | | | 870 | | | 76,843 | | | 80,290 | |
Below investment grade | | 33,943 | | | 34,027 | | | 7,904 | | | 8,617 | | | 41,847 | | | 42,644 | |
Non-rated | | 936 | | | 1,059 | | | 105 | | | 81 | | | 1,041 | | | 1,140 | |
Total | $ | 248,245 | | $ | 259,859 | | $ | 16,782 | | $ | 19,712 | | $ | 265,027 | | $ | 279,571 | |
Available‑for‑Sale Investments
The following table presents the fair value of our available‑for‑sale securities:
| | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | 2015 | | 2014 |
Bonds available for sale: | | | | | | | | | | |
U.S. government and government sponsored entities | | | | | | | $ | 1,844 | $ | 2,992 |
Obligations of states, municipalities and political subdivisions | | | | | | | | 27,323 | | 27,659 |
Non-U.S. governments | | | | | | | | 18,195 | | 21,095 |
Corporate debt | | | | | | | | 135,988 | | 144,433 |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | |
RMBS | | | | | | | | 36,227 | | 37,520 |
CMBS | | | | | | | | 13,571 | | 12,885 |
CDO/ABS | | | | | | | | 15,097 | | 13,275 |
Total mortgage-backed, asset-backed and collateralized | | | | | | | | 64,895 | | 63,680 |
Total bonds available for sale* | | | | | | | | 248,245 | | 259,859 |
Equity securities available for sale: | | | | | | | | | | |
Common stock | | | | | | | | 2,401 | | 3,629 |
Preferred stock | | | | | | | | 22 | | 25 |
Mutual funds | | | | | | | | 492 | | 741 |
Total equity securities available for sale | | | | | | | | 2,915 | | 4,395 |
Total | | | | | | | $ | 251,160 | $ | 264,254 |
* At December 31, 2015 and 2014, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $34.9 billion and $35.1 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity securities:
| December 31, | | December 31, |
(in millions) | | 2015 | | | 2014 |
Japan | $ | 5,416 | | $ | 5,728 |
Canada | | 1,453 | | | 2,181 |
Germany | | 832 | | | 1,315 |
France | | 784 | | | 614 |
United Kingdom | | 661 | | | 648 |
Mexico | | 563 | | | 661 |
Netherlands | | 511 | | | 639 |
Norway | | 503 | | | 619 |
Singapore | | 426 | | | 545 |
Chile | | 386 | | | 395 |
Other | | 6,710 | | | 7,752 |
Total | $ | 18,245 | | $ | 21,097 |
The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:
| December 31, 2015 | | |
| | | | | | Non- | | | | | December 31, |
| | | | Financial | | Financial | | Structured | | | | 2014 |
(in millions) | | Sovereign | | Institution | | Corporates | | Products | | Total | | Total |
Euro-Zone countries: | | | | | | | | | | | | |
France | $ | 784 | $ | 1,215 | $ | 2,019 | $ | - | $ | 4,018 | $ | 4,498 |
Netherlands | | 511 | | 991 | | 1,505 | | 397 | | 3,404 | | 4,276 |
Germany | | 832 | | 285 | | 2,227 | | 21 | | 3,365 | | 4,155 |
Ireland | | 2 | | - | | 598 | | 674 | | 1,274 | | 850 |
Spain | | 29 | | 90 | | 968 | | 15 | | 1,102 | | 1,557 |
Italy | | 19 | | 115 | | 863 | | 12 | | 1,009 | | 1,245 |
Belgium | | 219 | | 120 | | 516 | | - | | 855 | | 973 |
Luxembourg | | - | | 18 | | 448 | | 30 | | 496 | | 243 |
Finland | | 65 | | 34 | | 130 | | - | | 229 | | 235 |
Austria | | 104 | | 3 | | 17 | | - | | 124 | | 155 |
Other - EuroZone | | 680 | | 48 | | 200 | | 1 | | 929 | | 1,022 |
Total Euro-Zone | $ | 3,245 | $ | 2,919 | $ | 9,491 | $ | 1,150 | $ | 16,805 | $ | 19,209 |
Remainder of Europe | | | | | | | | | | | | |
United Kingdom | $ | 661 | $ | 2,968 | $ | 8,015 | $ | 3,642 | $ | 15,286 | $ | 16,076 |
Switzerland | | 49 | | 1,195 | | 1,275 | | - | | 2,519 | | 2,941 |
Sweden | | 144 | | 488 | | 195 | | - | | 827 | | 1,135 |
Norway | | 503 | | 43 | | 142 | | - | | 688 | | 846 |
Russian Federation | | 36 | | 8 | | 78 | | - | | 122 | | 311 |
Other - Remainder of Europe | | 198 | | 119 | | 111 | | 15 | | 443 | | 494 |
Total - Remainder of Europe | $ | 1,591 | $ | 4,821 | $ | 9,816 | $ | 3,657 | $ | 19,885 | $ | 21,803 |
Total | $ | 4,836 | $ | 7,740 | $ | 19,307 | $ | 4,807 | $ | 36,690 | $ | 41,012 |
Investments in Municipal Bonds
At December 31, 2015, the U.S. municipal bond portfolio diversificationwas composed primarily of essential service revenue bonds and derisking strategy. Lower overall gains onhigh-quality tax-backed bonds with over 95 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale U.S. municipal bond portfolio by state and municipal bond type:
| December 31, 2015 | | |
| | State | | Local | | | | Total | December 31, |
| | General | | General | | | | Fair | | 2014 |
(in millions) | | Obligation | | Obligation | | Revenue | | Value | | Total Fair Value |
State: | | | | | | | | | | |
New York | $ | 35 | $ | 620 | $ | 3,958 | $ | 4,613 | $ | 4,116 |
California | | 663 | | 610 | | 2,568 | | 3,841 | | 4,707 |
Texas | | 328 | | 1,534 | | 1,553 | | 3,415 | | 3,356 |
Illinois | | 111 | | 367 | | 1,008 | | 1,486 | | 1,364 |
Massachusetts | | 693 | | - | | 694 | | 1,387 | | 1,417 |
Washington | | 530 | | 144 | | 685 | | 1,359 | | 1,278 |
Florida | | 155 | | - | | 980 | | 1,135 | | 1,052 |
Virginia | | 65 | | 5 | | 808 | | 878 | | 918 |
Georgia | | 280 | | 243 | | 347 | | 870 | | 819 |
Washington DC | | 156 | | 1 | | 548 | | 705 | | 607 |
Pennsylvania | | 269 | | 23 | | 384 | | 676 | | 537 |
Arizona | | - | | 94 | | 482 | | 576 | | 734 |
Ohio | | 128 | | 8 | | 395 | | 531 | | 604 |
All other states(a) | | 1,061 | | 547 | | 4,243 | | 5,851 | | 6,150 |
Total(b)(c) | $ | 4,474 | $ | 4,196 | $ | 18,653 | $ | 27,323 | $ | 27,659 |
(a) We did not have material credit exposure to the government of Puerto Rico.
(b) Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.
(c) Includes $2.9 billion of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale corporate debt securities:
| | Fair Value at | | Fair Value at | |
Industry Category | | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Financial institutions: | | | | | |
Money Center /Global Bank Groups | $ | 9,104 | $ | 10,682 | |
Regional banks — other | | 568 | | 543 | |
Life insurance | | 3,295 | | 3,575 | |
Securities firms and other finance companies | | 380 | | 422 | |
Insurance non-life | | 5,421 | | 5,625 | |
Regional banks — North America | | 6,823 | | 6,636 | |
Other financial institutions | | 7,808 | | 8,169 | |
Utilities(a) | | 18,497 | | 19,249 | |
Communications | | 10,251 | | 10,316 | |
Consumer noncyclical | | 15,391 | | 16,792 | |
Capital goods | | 8,973 | | 8,594 | |
Energy(a) | | 13,861 | | 16,494 | |
Consumer cyclical | | 9,767 | | 11,197 | |
Basic | | 7,512 | | 9,187 | |
Other | | 18,337 | | 16,952 | |
Total (b) | $ | 135,988 | $ | 144,433 | |
(a) The Utilities and Energy amounts at December 31, 2014, have been revised from $23.7 billion and $12.0 billion to $19.2 billion and $16.5 billion, respectively, to conform to current industry classification, which are not considered material to previously issued financial statements.
(b) At December 31, 2015 and December 31, 2014, approximately 91 percent and 93 percent, respectively, of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, were 5.6 percent and 6.4 percent at December 31, 2015 and 2014, respectively. The decline in energy exposure from December 31, 2014 resulted from unrealized losses due to reduction in the energy sector pricing, sales of securities and other-than-temporary impairments. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.
Investments in combination with foreign exchange gains due to dollar strengthening more than offset losses from derivatives used to economically hedge foreign currency positions comparedRMBS
The following table presents AIG’s RMBS available for sale investments by year of vintage:
| | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Total RMBS | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,273 | $ | - |
2014 | | | | | | | | | | | 1,096 | | 871 |
2013 | | | | | | | | | | | 2,178 | | 2,724 |
2012 | | | | | | | | | | | 1,944 | | 2,382 |
2011 | | | | | | | | | | | 4,800 | | 5,310 |
2010 and prior* | | | | | | | | | | | 23,936 | | 26,233 |
Total RMBS | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,025 | $ | - |
2014 | | | | | | | | | | | 1,000 | | 799 |
2013 | | | | | | | | | | | 2,094 | | 2,625 |
2012 | | | | | | | | | | | 1,877 | | 2,234 |
2011 | | | | | | | | | | | 2,927 | | 3,428 |
2010 and prior | | | | | | | | | | | 2,628 | | 3,324 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | $ | - | $ | - |
2010 and prior | | | | | | | | | | | 12,831 | | 13,001 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | | - | | - |
2010 and prior | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | - | $ | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | 8 | | 8 |
2012 | | | | | | | | | | | 53 | | 126 |
2011 | | | | | | | | | | | 1,873 | | 1,882 |
2010 and prior | | | | | | | | | | | 5,716 | | 7,047 |
Total Prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
* Includes approximately $13.2 billion and $13.5 billion at December 31, 2015, and December 31, 2014, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. See Note 5 to the prior year. We recognizedConsolidated Financial Statements for additional discussion on Purchased Credit Impaired (PCI) Securities.
The following table presents our RMBS available for sale investments by credit rating:
| | | | | | | | | | Fair Value at | Fair Value at |
| | | | | | | December 31, | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | | | | |
Total RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 14,884 | $ | 14,699 |
AA | | | | | | | | | | | 389 | | 418 |
A | | | | | | | | | | | 509 | | 546 |
BBB | | | | | | | | | | | 661 | | 911 |
Below investment grade(a) | | | | | | | | | | | 19,779 | | 20,937 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total RMBS(b) | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 12,547 | $ | 12,405 |
AA | | | | | | | | | | | 4 | | 5 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 5 | $ | 7 |
AA | | | | | | | | | | | 17 | | 33 |
A | | | | | | | | | | | 121 | | 85 |
BBB | | | | | | | | | | | 216 | | 317 |
Below investment grade(a) | | | | | | | | | | | 12,472 | | 12,559 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 15 | $ | 18 |
AA | | | | | | | | | | | 68 | | 117 |
A | | | | | | | | | | | 247 | | 252 |
BBB | | | | | | | | | | | 200 | | 207 |
Below investment grade(a) | | | | | | | | | | | 1,846 | | 1,829 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 1,986 | $ | 2,076 |
AA | | | | | | | | | | | 188 | | 253 |
A | | | | | | | | | | | 138 | | 205 |
BBB | | | | | | | | | | | 209 | | 351 |
Below investment grade(a) | | | | | | | | | | | 5,124 | | 6,169 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
(a) Includes certain RMBS that had experienced deterioration in credit quality since their origination. See Note 5 to the Consolidated Financial Statements for additional discussion on PCI Securities.
(b) The weighted average expected life was six years at both December 31, 2015 and December 31, 2014.
Our underwriting practices for investing in RMBS, other asset‑backed securities and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.
Investments in CMBS
The following table presents our CMBS available for sale investments:
| | | | | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | | | | 2015 | | 2014 |
CMBS (traditional) | | | | | | | | | | | | | | $ | 11,132 | $ | 11,265 |
Agency | | | | | | | | | | | | | | | 1,622 | | 1,372 |
Other | | | | | | | | | | | | | | | 817 | | 248 |
Total | | | | | | | | | | | | | | $ | 13,571 | $ | 12,885 |
The following table presents the fair value of our CMBS available for sale investments by rating agency designation and by vintage year:
| | | | | | | | | | Below | | | | |
| | | | | | | | | | Investment | | | | |
(in millions) | | AAA | | AA | | A | | BBB | | Grade | | Non-Rated | | Total |
December 31, 2015 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2015 | $ | 824 | $ | 404 | $ | 465 | $ | 240 | $ | - | $ | - | $ | 1,933 |
2014 | | 1,604 | | 183 | | 11 | | - | | - | | - | | 1,798 |
2013 | | 2,611 | | 433 | | 89 | | 54 | | - | | - | | 3,187 |
2012 | | 737 | | 60 | | 31 | | 83 | | - | | 10 | | 921 |
2011 | | 1,015 | | 25 | | 31 | | 21 | | - | | - | | 1,092 |
2010 and prior | | 921 | | 700 | | 635 | | 738 | | 1,646 | | - | | 4,640 |
Total | $ | 7,712 | $ | 1,805 | $ | 1,262 | $ | 1,136 | $ | 1,646 | $ | 10 | $ | 13,571 |
December 31, 2014 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2014 | $ | 1,570 | $ | 183 | $ | 11 | $ | - | $ | - | $ | - | $ | 1,764 |
2013 | | 2,684 | | 442 | | 91 | | 58 | | - | | - | | 3,275 |
2012 | | 1,158 | | 61 | | 28 | | 92 | | - | | 12 | | 1,351 |
2011 | | 1,022 | | 20 | | 37 | | 21 | | - | | - | | 1,100 |
2010 and prior | | 1,119 | | 626 | | 814 | | 843 | | 1,993 | | - | | 5,395 |
Total | $ | 7,553 | $ | 1,332 | $ | 981 | $ | 1,014 | $ | 1,993 | $ | 12 | $ | 12,885 |
The following table presents our CMBS available for sale investments by geographic region:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Geographic region: | | | | | |
New York | $ | 3,149 | $ | 2,759 | |
California | | 1,244 | | 1,305 | |
Texas | | 791 | | 831 | |
Florida | | 520 | | 562 | |
New Jersey | | 433 | | 457 | |
Virginia | | 362 | | 389 | |
Illinois | | 323 | | 344 | |
Pennsylvania | | 295 | | 291 | |
Georgia | | 253 | | 286 | |
Massachusetts | | 231 | | 247 | |
Maryland | | 229 | | 222 | |
North Carolina | | 218 | | 222 | |
All Other* | | 5,523 | | 4,970 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Non-U.S. locations.
The following table presents our CMBS available for sale investments by industry:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Industry: | | | | | |
Retail | $ | 3,978 | $ | 3,700 | |
Office | | 3,896 | | 3,652 | |
Multi-family* | | 3,036 | | 2,889 | |
Lodging | | 1,005 | | 1,127 | |
Industrial | | 868 | | 679 | |
Other | | 788 | | 838 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Agency-backed CMBS.
The fair value of CMBS holdings remained stable throughout 2015. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale investments by collateral type:
| | | | | | | | | | Fair value at | | Fair value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | 2015 | | 2014 |
Collateral Type: | | | | | | | | | | | | |
Bank loans (CLO) | | | | | | | | | $ | 7,962 | $ | 6,683 |
Other | | | | | | | | | | 153 | | 388 |
Total | | | | | | | | | $ | 8,115 | $ | 7,071 |
The following table presents our CDO available for sale investments by credit rating:
| | | | | | | Fair Value at | | Fair Value at |
| | | | | December 31, | | December 31, |
(in millions) | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | |
AAA | | | | | | | $ | 2,870 | $ | 1,922 |
AA | | | | | | | | 2,543 | | 2,135 |
A | | | | | | | | 2,247 | | 2,317 |
BBB | | | | | | | | 298 | | 366 |
Below investment grade | | | | | | | | 157 | | 331 |
Total | | | | | | | $ | 8,115 | $ | 7,071 |
Commercial Mortgage Loans
At December 31, 2015, we had direct commercial mortgage loan exposure of $22.1 billion of which, approximately 99 percent of the loans were current.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
| Number | | | | | | | | | | | | | | | | Percent | |
| of | | Class | | | of | |
(dollars in millions) | Loans | | Apartments | | Offices | | Retail | Industrial | Hotel | | Others | | Total | Total | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 97 | | $ | 823 | $ | 2,968 | $ | 516 | $ | 301 | $ | 166 | $ | 186 | $ | 4,960 | 22 | % |
California | 95 | | | 87 | | 547 | | 433 | | 533 | | 788 | | 308 | | 2,696 | 12 | |
Texas | 60 | | | 120 | | 696 | | 106 | | 147 | | 187 | | 48 | | 1,304 | 6 | |
New Jersey | 45 | | | 441 | | 338 | | 324 | | - | | 29 | | 33 | | 1,165 | 5 | |
Florida | 78 | | | 187 | | 113 | | 374 | | 116 | | 20 | | 146 | | 956 | 4 | |
Illinois | 21 | | | 174 | | 369 | | 21 | | 32 | | 36 | | 23 | | 655 | 3 | |
Massachusetts | 19 | | | 56 | | 168 | | 360 | | - | | - | | 33 | | 617 | 3 | |
Connecticut | 20 | | | 314 | | 152 | | 23 | | 81 | | - | | - | | 570 | 3 | |
Pennsylvania | 28 | | | 6 | | 29 | | 436 | | 62 | | 27 | | 4 | | 564 | 3 | |
Ohio | 37 | | | 122 | | 28 | | 211 | | 67 | | - | | 5 | | 433 | 2 | |
Other states | 302 | | | 1,118 | | 1,203 | | 1,514 | | 414 | | 595 | | 229 | | 5,073 | 23 | |
Foreign | 47 | | | 471 | | 1,234 | | 520 | | 161 | | 250 | | 438 | | 3,074 | 14 | |
Total* | 849 | | $ | 3,919 | $ | 7,845 | $ | 4,838 | $ | 1,914 | $ | 2,098 | $ | 1,453 | $ | 22,067 | 100 | % |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 90 | | $ | 545 | $ | 2,111 | $ | 285 | $ | 148 | $ | 68 | $ | 215 | $ | 3,372 | 18 | % |
California | 115 | | | 29 | | 635 | | 389 | | 472 | | 597 | | 469 | | 2,591 | 14 | |
New Jersey | 48 | | | 490 | | 353 | | 308 | | - | | 30 | | 74 | | 1,255 | 7 | |
Florida | 89 | | | 141 | | 192 | | 335 | | 118 | | 137 | | 161 | | 1,084 | 6 | |
Texas | 58 | | | 62 | | 482 | | 121 | | 171 | | 187 | | 54 | | 1,077 | 6 | |
Illinois | 24 | | | 175 | | 327 | | 26 | | 73 | | 36 | | - | | 637 | 3 | |
Massachusetts | 19 | | | - | | 198 | | 321 | | - | | - | | 34 | | 553 | 3 | |
Colorado | 18 | | | 62 | | 158 | | 48 | | - | | 120 | | 101 | | 489 | 2 | |
Connecticut | 23 | | | 279 | | 155 | | 5 | | 43 | | - | | - | | 482 | 2 | |
Pennsylvania | 49 | | | 45 | | 89 | | 170 | | 107 | | 16 | | 5 | | 432 | 2 | |
Other states | 349 | | | 920 | | 1,140 | | 1,738 | | 494 | | 310 | | 281 | | 4,883 | 26 | |
Foreign | 142 | | | 636 | | 678 | | 78 | | 63 | | 176 | | 423 | | 2,054 | 11 | |
Total* | 1,024 | | $ | 3,384 | $ | 6,518 | $ | 3,824 | $ | 1,689 | $ | 1,677 | $ | 1,817 | $ | 18,909 | 100 | % |
* Does not reflect allowance for credit losses.
See Note 6 to the Consolidated Financial Statements for additional discussion on commercial mortgage loans.
Impairments
The following table presents impairments by investment type:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Other-than-temporary Impairments: | | | | | | | | | | | |
Fixed maturity securities, available for sale | | | | | | $ | 425 | $ | 180 | $ | 173 |
Equity securities, available for sale | | | | | | | 166 | | 37 | | 14 |
Private equity funds and hedge funds | | | | | | | 80 | | 30 | | 45 |
Subtotal | | | | | | | 671 | | 247 | | 232 |
Other impairments: | | | | | | | | | | | |
Investments in life settlements | | | | | | | 540 | | 201 | | 971 |
Other investments | | | | | | | 166 | | 126 | | 112 |
Real estate | | | | | | | 23 | | 8 | | 19 |
Total | | | | | | $ | 1,400 | $ | 582 | $ | 1,334 |
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to recover our estimated future carrying amount, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market mortality assumptions and market yields.
In late 2015, several insurance providers gave notice of increases in policy premiums related to our investments in life settlements. The increase in premiums required to keep policies in force results in lower future expected net cash flows which are insufficient to recover our net investment on certain policies.
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by reportable segment and impairment type:
| | Non-Life | | Life | | Corporate | | |
| | Insurance | | Insurance | | and Other | | |
(in millions) | | Companies | | Companies | | Operations | | Total |
For the Year Ended December 31, 2015 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 13 | $ | - | $ | - | $ | 13 |
Change in intent | | 7 | | 145 | | 81 | | 233 |
Foreign currency declines | | 33 | | 24 | | - | | 57 |
Issuer-specific credit events | | 178 | | 168 | | 2 | | 348 |
Adverse projected cash flows | | 7 | | 13 | | - | | 20 |
Total | $ | 238 | $ | 350 | $ | 83 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 3 | $ | - | $ | - | $ | 3 |
Change in intent | | 8 | | 32 | | - | | 40 |
Foreign currency declines | | 9 | | 10 | | - | | 19 |
Issuer-specific credit events | | 60 | | 109 | | - | | 169 |
Adverse projected cash flows | | 5 | | 11 | | - | | 16 |
Total | $ | 85 | $ | 162 | $ | - | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 6 | $ | - | $ | - | $ | 6 |
Change in intent | | 1 | | 45 | | 2 | | 48 |
Foreign currency declines | | 1 | | - | | - | | 1 |
Issuer-specific credit events | | 43 | | 127 | | - | | 170 |
Adverse projected cash flows | | 1 | | 6 | | - | | 7 |
Total | $ | 52 | $ | 178 | $ | 2 | $ | 232 |
Other-than-temporary impairment charges by investment type and impairment type:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 13 | $ | 13 |
Change in intent | | 3 | | - | | 14 | | 131 | | 85 | | 233 |
Foreign currency declines | | - | | - | | - | | 57 | | - | | 57 |
Issuer-specific credit events | | 79 | | 3 | | 8 | | 110 | | 148 | | 348 |
Adverse projected cash flows | | 20 | | - | | - | | - | | - | | 20 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 3 |
Change in intent | | - | | - | | - | | 27 | | 13 | | 40 |
Foreign currency declines | | - | | - | | - | | 19 | | - | | 19 |
Issuer-specific credit events | | 80 | | 9 | | 21 | | 8 | | 51 | | 169 |
Adverse projected cash flows | | 16 | | - | | - | | - | | - | | 16 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 6 | $ | 6 |
Change in intent | | 1 | | - | | - | | 46 | | 1 | | 48 |
Foreign currency declines | | - | | - | | - | | 1 | | - | | 1 |
Issuer-specific credit events | | 36 | | 5 | | 50 | | 27 | | 52 | | 170 |
Adverse projected cash flows | | 7 | | - | | - | | - | | - | | 7 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
Other-than-temporary impairment charges by investment type and credit rating:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 12 | $ | - | $ | 12 |
AA | | - | | - | | - | | 12 | | - | | 12 |
A | | - | | - | | - | | 12 | | - | | 12 |
BBB | | 2 | | - | | - | | 50 | | - | | 52 |
Below investment grade | | 100 | | 3 | | 22 | | 208 | | - | | 333 |
Non-rated | | - | | - | | - | | 4 | | 246 | | 250 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 4 | $ | - | $ | 4 |
AA | | 3 | | - | | - | | 2 | | - | | 5 |
A | | - | | - | | - | | 2 | | - | | 2 |
BBB | | 2 | | - | | - | | 11 | | - | | 13 |
Below investment grade | | 91 | | 5 | | 21 | | 35 | | - | | 152 |
Non-rated | | - | | 4 | | - | | - | | 67 | | 71 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | 1 | $ | - | $ | - | $ | - | $ | - | $ | 1 |
AA | | 2 | | - | | - | | - | | - | | 2 |
A | | 1 | | - | | - | | - | | - | | 1 |
BBB | | 1 | | - | | - | | 44 | | - | | 45 |
Below investment grade | | 39 | | 5 | | 50 | | 29 | | - | | 123 |
Non-rated | | - | | - | | - | | 1 | | 59 | | 60 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
We recorded other-than-temporary impairment charges in the years ended December 31, 2015, 2014 and 2013 related to:
•issuer-specific credit events;
•securities that we intend to sell or for which it is more likely than not that we will be required to sell;
•declines due to foreign exchange rates;
•adverse changes in estimated cash flows on certain structured securities; and
•securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate and investments in life settlements.
In periods subsequent to the recognition of $53 million, whichan other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was a significant improvement from the $377recognized for these securities in earnings was $735 million in charges recognized2015, $725 million in 2012, as market factors such as improved housing fundamentals resulted2014 and $774 million in structured securities impairments well below those recognized in 2012.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG PROPERTY CASUALTY
2012 and 2011 Comparison
Net Investment Income
Net investment income increased $527 million or 12 percent in 2012, compared to 2011, primarily due2013. See Note 6 to the impactConsolidated Financial Statements for a discussion of our other-than-temporary impairment accounting policy.
The following table shows the aging of the overall diversification in the asset portfolio during the year. We adopted yield-enhancement initiatives in 2011, and continued through 2012, which increased the average yield of our investment portfolio by 0.3 points to 4.0 percent during 2012.
Our invested asset portfolio grew by approximately $4.3 billion, or 3.0 percent during the year with declining interest rates and narrowing spreads in both investment grade and higher yield asset classes contributing to higherpre-tax unrealized appreciation in our portfolio.
Net investment income from other investment categories increased by $231 million in 2012 compared to 2011, of which $113 million was attributed to the strong performance of alternative investments, following a 16 percent increase in the S&P 500 Index during 2012. Other investment income also increased by $69 million due to the strategic group benefits partnership with AIG Life and Retirement, all of which is reported in Consumer Insurance.
Net Realized Capital Gains (Losses)
Net realized capital gains in 2012 were driven by gains recognized on the salelosses of fixed maturity and equity securities, the extent to which were partially offsetthe fair value is less than amortized cost or cost, and the number of respective items in each category:
December 31, 2015 | Less Than or Equal | | | Greater Than 20% | | | Greater Than 50% | | | |
| | to 20% of Cost(b) | | | to 50% of Cost(b) | | | of Cost(b) | | | Total |
Aging(a) | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |
(dollars in millions) | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss(d) | Items(e) |
Investment grade | | | | | | | | | | | | | | | | | | | | | | | |
bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 35,961 | $ | 815 | 5,516 | | $ | 408 | $ | 115 | 82 | | $ | - | $ | - | - | | $ | 36,369 | $ | 930 | 5,598 |
7-11 months | | 23,134 | | 1,342 | 3,594 | | | 1,061 | | 275 | 201 | | | - | | - | - | | | 24,195 | | 1,617 | 3,795 |
12 months or more | | 6,883 | | 501 | 938 | | | 2,363 | | 733 | 183 | | | 21 | | 13 | 6 | | | 9,267 | | 1,247 | 1,127 |
Total | $ | 65,978 | $ | 2,658 | 10,048 | | $ | 3,832 | $ | 1,123 | 466 | | $ | 21 | $ | 13 | 6 | | $ | 69,831 | $ | 3,794 | 10,520 |
Below investment | | | | | | | | | | | | | | | | | | | | | | | |
grade bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 6,024 | $ | 199 | 2,341 | | $ | 567 | $ | 168 | 100 | | $ | 17 | $ | 11 | 13 | | $ | 6,608 | $ | 378 | 2,454 |
7-11 months | | 2,706 | | 168 | 814 | | | 199 | | 59 | 132 | | | 7 | | 6 | 3 | | | 2,912 | | 233 | 949 |
12 months or more | | 5,164 | | 324 | 766 | | | 871 | | 278 | 200 | | | 385 | | 243 | 83 | | | 6,420 | | 845 | 1,049 |
Total | $ | 13,894 | $ | 691 | 3,921 | | $ | 1,637 | $ | 505 | 432 | | $ | 409 | $ | 260 | 99 | | $ | 15,940 | $ | 1,456 | 4,452 |
Total bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 41,985 | $ | 1,014 | 7,857 | | $ | 975 | $ | 283 | 182 | | $ | 17 | $ | 11 | 13 | | $ | 42,977 | $ | 1,308 | 8,052 |
7-11 months | | 25,840 | | 1,510 | 4,408 | | | 1,260 | | 334 | 333 | | | 7 | | 6 | 3 | | | 27,107 | | 1,850 | 4,744 |
12 months or more | | 12,047 | | 825 | 1,704 | | | 3,234 | | 1,011 | 383 | | | 406 | | 256 | 89 | | | 15,687 | | 2,092 | 2,176 |
Total(e) | $ | 79,872 | $ | 3,349 | 13,969 | | $ | 5,469 | $ | 1,628 | 898 | | $ | 430 | $ | 273 | 105 | | $ | 85,771 | $ | 5,250 | 14,972 |
Equity securities | | | | | | | | | | | | | | | | | | | | | | | |
0-11 months | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
Total | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
(a) Represents the number of consecutive months that fair value has been less than cost by an other-than-temporary impairments charge attributedany amount.
(b) Represents the percentage by which fair value is less than cost at December 31, 2015.
(c) For bonds, represents amortized cost.
(d) The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2015 was primarily attributable to decreases in the fair value of fixed maturity securities. For 2015, net unrealized gains related to fixed maturity and equity securities decreased by $10.2 billion due primarily to the rise in rates, widening of credit spreads, and the sale of equity securities.
The change in net unrealized gains and losses on investments in 2014 was primarily attributable to increases in the fair value of fixed maturity securities. For 2014, net unrealized gains related to fixed maturity and equity securities increased by $7.3 billion due to a decrease in recoverable values for structured securities, as well as alternative and equity security investments that were in an unrealized loss position for 12 months. Net realized capital gains were less than 2011, due to fewer gainsinterest rates on sales in ourinvestment grade fixed maturity securities, portfolio and derivative losses as opposedpartially offset by the widening of spreads.
See also Note 5, Investments to derivative gains in 2011 resulting from long term interest rate movements.the Consolidated Financial Statements for further discussion of our investment portfolio.
Liability for Unpaid Claims and Claims Adjustment Expense
The following section provides discussion of insurance reserves for both the Non-Life Insurance Companies and the Life Insurance Companies, including Eaglestone Reinsurance Company, which is reported in Corporate and Other.
Non-Life Insurance Companies
The following section provides discussion of the consolidated liability for unpaid claimslosses and claimsloss adjustment expense (loss reserves) presents loss reservesexpenses for AIG Property Casualty as well as the loss reserves pertaining to the Mortgage Guaranty reporting unit, which is reported in Other Operations.Non-Life Insurance Companies.
The following table presents the components of AIG'sAIG’s gross loss reserves by major lines of business on a U.S. statutory basis*basis(a):
At December 31, | | |
(in millions) | | 2015 | | 2014(b) |
Other liability occurrence (including asbestos and environmental) | $ | 24,856 | $ | 24,988 |
Workers' compensation (net of discount) | | 14,978 | | 16,014 |
Other liability claims made | | 14,006 | | 13,632 |
Property | | 5,823 | | 6,350 |
Auto liability | | 4,692 | | 4,814 |
Accident and health | | 1,783 | | 1,972 |
Products liability | | 1,681 | | 1,678 |
Medical malpractice | | 1,603 | | 1,520 |
Aircraft | | 1,286 | | 1,340 |
Mortgage guaranty / credit | | 733 | | 1,008 |
Other | | 3,501 | | 3,944 |
Total | $ | 74,942 | $ | 77,260 |
Total U.S. & Canada | $ | 58,890 | $ | 58,729 |
Total International (c) | $ | 16,052 | $ | 18,531 |
| | | | | | | |
| |
| |
| |
|---|
| | |
At December 31,
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
Other liability occurrence (including asbestos and environmental) | | $ | 21,023 | | $ | 21,533 | |
International | | | 17,126 | | | 17,453 | |
Workers' compensation (net of discount) | | | 15,390 | | | 17,319 | |
Other liability claims made | | | 10,645 | | | 11,443 | |
Property | | | 4,111 | | | 4,961 | |
Auto liability | | | 2,581 | | | 3,060 | |
Products liability | | | 1,463 | | | 2,195 | |
Medical malpractice | | | 1,714 | | | 1,651 | |
Mortgage guaranty / credit | | | 1,348 | | | 1,957 | |
Accident and health | | | 1,378 | | | 1,518 | |
Commercial multiple peril | | | 1,886 | | | 1,310 | |
Aircraft | | | 1,276 | | | 1,065 | |
Fidelity / surety | | | 538 | | | 647 | |
Other | | | 1,068 | | | 1,879 | |
| | |
Total | | $ | 81,547 | | $ | 87,991 | |
| | |
*(a) Presented by lines of business pursuant to statutory reporting requirements as prescribed by the National AssociationNAIC.
(b) 2014 reflects the reclassification of Insurance Commissioners.International reserves to major lines of business.
(c) The decrease was primarily the effect of foreign exchange on gross reserves, a payment on a large loss, and the net of other claim payments and reserve movements.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 7 / RESULTS OF OPERATIONS insurance reserves / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSENON-LIFE INSURANCE COMPANIES
AIG's gross
Gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for incurred but not reported (IBNR)IBNR and loss expenses, less estimated salvage and subrogation and applicable discount for future investment income. Wediscount. The Non-Life Insurance Companies regularly review and update the methods and assumptions used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected in pre-taxpre‑tax operating income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase prior years'years’ estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease prior years'years’ estimates of ultimate cost are referred to as favorable development. See MD&A Critical Accounting Estimates – Details of the Loss Reserving Process.
The netNet loss reserves represent gross loss reserves reduced by estimated salvage and subrogation, reinsurance recoverable, net of an allowance for unrecoverable reinsurance and applicable discount for future investment income..
The following table presents the components of net loss reserves:
December 31, | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 |
Gross loss reserves before reinsurance and discount | | | | | | $ | 78,090 | $ | 80,337 |
Less: discount | | | | | | | (3,148) | | (3,077) |
Gross loss reserves, net of discount, before reinsurance | | | | | | | 74,942 | | 77,260 |
Less: reinsurance recoverable* | | | | | | | (14,339) | | (15,648) |
Net liability for unpaid losses and loss adjustment expenses | | | | | | $ | 60,603 | $ | 61,612 |
| | | | | | | |
| |
| |
| |
|---|
| | |
December 31,
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
Gross loss reserves before reinsurance and discount | | $ | 85,102 | | $ | 91,237 | |
Less: discount | | | (3,555 | ) | | (3,246 | ) |
| | |
Gross loss reserves, net of discount, before reinsurance | | | 81,547 | | | 87,991 | |
Less: reinsurance recoverable* | | | (17,231 | ) | | (19,209 | ) |
| | |
Net liability for unpaid claims and claims adjustment expense | | $ | 64,316 | | $ | 68,782 | |
| | |
* Includes $1.6$1.8 billion and $1.5 billion of reinsurance recoverable under a retroactive reinsurance agreement at both December 31, 20132015, and 2012.December 31, 2014, respectively.
Our grossGross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.0$12.6 billion and $11.7$12.4 billion at December 31, 20132015 and 2012,2014, respectively. These recoverable amounts are related to certain policies with high deductibles (primarily(meaning, the policy attachment point is above high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements; each referred to generically as “deductibles”), primarily for U.S. commercial casualty business) where webusiness. With respect to deductible portion of the claim the Non-Life Insurance Companies manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 20132015 and 2012, we2014, the Non-Life Insurance Companies held collateral totaling $9.0of approximately $9.6 billion and $8.3$9.4 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and trust agreements.assets in trusts.
The following table classifies the components of net loss reserves by business unit:
December 31, | | |
(in millions) | | 2015 | | 2014 |
Commercial Property Casualty: | | | | |
Casualty | $ | 32,620 | $ | 33,065 |
Financial lines | | 9,265 | | 9,538 |
Specialty | | 5,197 | | 5,786 |
Property | | 4,013 | | 4,079 |
Total Commercial Property Casualty | | 51,095 | | 52,468 |
Commercial Mortgage Guaranty | | 713 | | 977 |
Consumer Personal Insurance | | | | |
Personal lines | | 2,661 | | 2,763 |
Accident and health | | 1,662 | | 1,878 |
Total Consumer Personal Insurance | | 4,323 | | 4,641 |
Other run-off insurance lines* | | 4,472 | | 3,526 |
Net liability for unpaid losses and loss adjustment expenses | $ | 60,603 | $ | 61,612 |
| | | | | | | |
| |
| |
| |
|---|
| | |
December 31,
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
AIG Property Casualty: | | | | | | | |
Commercial Insurance | | | | | | | |
Casualty | | $ | 35,179 | | $ | 35,958 | |
Financial lines | | | 9,607 | | | 10,116 | |
Specialty | | | 5,385 | | | 6,259 | |
Property | | | 4,229 | | | 4,783 | |
| | |
Total Commercial Insurance(a) | | | 54,400 | | | 57,116 | |
| | |
Consumer Insurance | | | | | | | |
Personal lines | | | 3,350 | | | 3,735 | |
Accident and health | | | 1,804 | | | 1,857 | |
| | |
Total Consumer Insurance | | | 5,154 | | | 5,592 | |
| | |
Other(a)(b) | | | 3,475 | | | 4,241 | |
| | |
Total AIG Property Casualty | | | 63,029 | | | 66,949 | |
| | |
Other Operations – Mortgage Guaranty | | | 1,287 | | | 1,833 | |
| | |
Net liability for unpaid claims and claims adjustment expense | | $ | 64,316 | | $ | 68,782 | |
| | |
(a) The 2012 amounts have been revised to conform the presentation of the total discount. The impact of this revision was an increase to Commercial Insurance of $654 million and a corresponding decrease to Other of $654 million, with no income statement or balance sheet impact.
(b) Excludes future policyholder benefits of $3.5 billion.
AIG 2013 Form 10-K
Table* In 2015, $1.2 billion of Contents
loss reserves for certain environmental liability, healthcare, casualty, and specialty coverages, previously reported in Commercial Casualty and Specialty lines of business, were transferred to other run-off insurance lines.
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
Discounting of Reserves
The following table presents the components of AIG Property Casualty's loss reserve discount included above:
December 31, | | 2015 | | 2014 |
| | | | | | | | | | | | | | | | | | | | | | | Run-off | | | | | | | Run-off | | |
| | | | | Property | | Insurance | | | | | Property | | Insurance | | |
| | 2013 | | 2012 | | |
|---|
December 31,
| | Commercial
Insurance
| |
Other
| |
Total
| | Commercial
Insurance
| |
| |
| | |
|---|
(in millions)
| | Other
| | Total
| | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
|---|
| | | |
U.S. workers' compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tabular | | $ | 597 | | $ | 201 | | $ | 798 | | $ | 588 | | $ | 213 | | $ | 801 | | $ | 635 | $ | 218 | $ | 853 | | $ | 623 | $ | 229 | $ | 852 |
Non-tabular | | | 1,622 | | | 1,102 | | | 2,724 | | | 1,953 | | 441 | | 2,394 | | | 1,542 | | 746 | | 2,288 | | | 1,525 | | 689 | | 2,214 |
Asbestos | | | – | | | 33 | | | 33 | | | – | | 51 | | 51 | | | - | | 7 | | 7 | | | - | | 11 | | 11 |
| | | |
Total reserve discount | | $ | 2,219 | | $ | 1,336 | | $ | 3,555 | | $ | 2,541 | | $ | 705 | | $ | 3,246 | | $ | 2,177 | $ | 971 | $ | 3,148 | | $ | 2,148 | $ | 929 | $ | 3,077 |
| | | |
See Note 12 to the Consolidated Financial Statements for additional information on discounting of loss reserves.
The following table presents the net reserve discount benefit (charge):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | 2013 | | 2012 | | 2011 | |
|---|
Years Ended December 31,
| | Commercial
Insurance
| |
Other
| |
Total
| | Commercial
Insurance
| |
Other
| |
Total
| | Commercial
Insurance
| |
Other
| |
Total
| |
|---|
(in millions)
| |
|---|
| | |
Change in loss reserve discount – current accident year | | $ | 175 | | $ | – | | $ | 175 | | $ | 348 | | $ | – | | $ | 348 | | $ | 342 | | $ | – | | $ | 342 | |
Change in loss reserve discount – prior year development | | | (249 | ) | | 707 | | | 458 | | | 100 | | | (13 | ) | | 87 | | | 24 | | | (44 | ) | | (20 | ) |
Accretion of reserve discount | | | (248 | ) | | (76 | ) | | (324 | ) | | (348 | ) | | (24 | ) | | (372 | ) | | (326 | ) | | (30 | ) | | (356 | ) |
| | |
Net reserve discount benefit (charge) | | $ | (322 | ) | $ | 631 | | $ | 309 | | $ | 100 | | $ | (37 | ) | $ | 63 | | $ | 40 | | $ | (74 | ) | $ | (34 | ) |
| | |
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| | | Run-off | | | | | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
Current accident year | $ | 182 | $ | - | $ | 182 | | $ | 189 | $ | - | $ | 189 | | $ | 175 | $ | - | $ | 175 |
Accretion and other | | | | | | | | | | | | | | | | | | | | |
adjustments to prior | | | | | | | | | | | | | | | | | | | | |
year discount | | (262) | | (74) | | (336) | | | (145) | | (235) | | (380) | | | (225) | | 102 | | (123) |
Effect of interest rate | | | | | | | | | | | | | | | | | | | | |
changes | | 148 | | 77 | | 225 | | | (225) | | (172) | | (397) | | | (272) | | 529 | | 257 |
Effect of re-pooling | | - | | - | | - | | | 110 | | - | | 110 | | | - | | - | | - |
Net reserve discount | | | | | | | | | | | | | | | | | | | | |
benefit (charge) | | 68 | | 3 | | 71 | | | (71) | | (407) | | (478) | | | (322) | | 631 | | 309 |
Amount transferred to run-off | | | | | | | | | | | | | | | | | | | | |
insurance lines | | (39) | | 39 | | - | | | - | | - | | - | | | - | | - | | - |
Net change in total reserve | | | | | | | | | | | | | | | | | | | | |
discount | $ | 29 | $ | 42 | $ | 71 | | $ | (71) | $ | (407) | $ | (478) | | $ | (322) | $ | 631 | $ | 309 |
Comprised of: | | | | | | | | | | | | | | | | | | | | |
U.S. Workers' | | | | | | | | | | | | | | | | | | | | |
compensation | $ | 29 | $ | 46 | $ | 75 | | $ | (71) | $ | (385) | $ | (456) | | $ | (322) | $ | 649 | $ | 327 |
Asbestos | $ | - | $ | (4) | $ | (4) | | $ | - | $ | (22) | $ | (22) | | $ | - | $ | (18) | $ | (18) |
WeU.S. Workers’ Compensation
The Non-Life Insurance Companies discount losscertain workers’ compensation reserves in accordance with practices prescribed or permitted by New York, Pennsylvania and Delaware. New York rules generally do not permit non-tabular discounting on IBNR and prescribe a manner consistent with rates and factors approved or prescribed by state regulatory authorities. Effective for the fourth quarter of 2013, our Pennsylvania regulator approved use of a consistentfixed 5 percent discount rate (U.S.for application to case reserves. Pennsylvania permits non-tabular discounting of IBNR and, commencing in 2013, approved variable discount rates determined using risk-free rates based on the U.S. Treasury rateforward yield curve plus a liquidity premium)margin, applicable to IBNR and case reserves. Delaware has permitted discounting on the same basis as the Pennsylvania domiciled companies.
The net increase in workers’ compensation discount in 2015 of $75 million was partially due to the increase in forward yield curve rates used for alldiscounting under the prescribed or permitted practices. The increase in the forward yield curve component of our workers' compensationthe discount rates resulted in a $225 million increase in the loss reserve discount, as Treasury rates generally increased along the payout pattern horizon in 2015. In addition, the effects of the discount attributable to newly established
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Item 7 / insurance reserves in our Pennsylvania-domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers' compensation portfolios. Prior to this change, workers' compensation / NON-LIFE INSURANCE COMPANIES
reserves held by a Pennsylvania-domiciled insurer were discounted as follows: i) for loss reserves associated with accident year 2001 and prior accident years, a prescribed2015 increased the discount factor based on a rate of 6 percent and industry payout patterns,by $182 million in 2015. These increases were applied, ii) for loss reserves associated with accident year 2002 and subsequent accident years, a rate of 4.25 percent and our own payout patterns were applied; and iii) for a portion of loss reserves comprising excess workers' compensation reserves that were assumed into Pennsylvania-domiciled insurers from New York-domiciled insurers during 2011, we applied New York discounting rules, which include a prescribed rate of 5 percent on case reserves only (no discounting of IBNR reserves). The new discount rates more closely approximate the expected risk-adjusted yield on the underlying invested assets over the expected payout periods.
As a result of these changes, the total net discount for workers' compensation reserves increased by $427 million. This amount was partially offset by normal accretion expense of $100 million (associated with maturing reserves partially offset by discounts applied to newly established reserves) for a full year net benefit of $327 million. The net benefit consisted of a $322$332 million reduction within the Commercial Insurance operating segment,for accident years 2014 and prior, primarily from applicationaccretion of a lower discount rate on primary workers' compensation reserves and a benefit of $649 million in Other, primarily from increased payout patterns specific to excess workers' compensation reserves (as opposed to the prescribed discount factors), which were only partially offset by the lower U.S. Treasury-based discount rates. In addition, this amount was offset by $18 million of amortization of asbestos reserves.during 2015.
In addition, commencingOn January 1, 2014, we will be merging ourthe Non-Life Insurance Companies merged their two internal pooling arrangements into one pool, and will be changingchanged the participation percentages of the pool members. We expect that this will resultmembers resulting in an additional workers' compensation loss reserve discount benefita reallocation of approximately $100 millionreserves from New York domiciled companies to be recorded during the first quarter of 2014.those domiciled in Pennsylvania and Delaware. As a result of these changes in the participation percentages and domiciliary states of the participants of the combined pool, the Non-Life Insurance Companies recognized a portiondiscount benefit of the workers' compensation reserves currently held net in New York subsidiaries and discounted pursuant to New York discounting rules, will be transferred to Lexington Insurance Company (Lexington),
AIG 2013 Form 10-K
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ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
domiciled in Delaware. New York discounting rules generally do not permit non-tabular discounting on IBNR and only prescribes a 5 percent rate for application to case reserves. We also expect to receive a permitted practice from the Delaware Department of Insurance to allow discounting on the same basis as Pennsylvania domiciled companies described above. The $100$110 million anticipated impact arises from the application of non-tabular discount to the IBNR transferred out of New York companies to Pennsylvania and Delaware companies, offset partially by a decrease in the effective discount rate from the 5 percent prescribed rate in New York.first quarter of 2014.
Annual Reserving Conclusion
AIG net loss reserves represent our best estimate of ourthe liability for net losses and loss adjustment expenses as of December 31, 2013.2015. While we regularly review the adequacy of established loss reserves, there can be no assurance that our ultimaterecorded loss reserves will not develop adversely in future years and materially exceed our loss reserves as of December 31, 2013.2015. In our opinion, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on our consolidated financial condition, although such events could have a material adverse effect on our consolidated results of operations for an individual reporting period.
The following table presents the rollforward of net loss reserves:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at beginning of year | | | | | | $ | 61,612 | $ | 64,316 | $ | 68,782 |
Foreign exchange effect | | | | | | | (1,429) | | (1,061) | | (617) |
Other, including dispositions | | | | | | | - | | - | | (79) |
Change due to retroactive asbestos reinsurance | | | | | | | 20 | | 141 | | 22 |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | |
Current year, undiscounted | | | | | | | 20,308 | | 21,279 | | 22,171 |
Prior years unfavorable development, undiscounted* | | | | | | | 4,119 | | 703 | | 557 |
Change in discount | | | | | | | (71) | | 478 | | (309) |
Losses and loss adjustment expenses incurred | | | | | | | 24,356 | | 22,460 | | 22,419 |
Losses and loss adjustment expenses paid: | | | | | | | | | | | |
Current year | | | | | | | 5,751 | | 6,358 | | 7,431 |
Prior years | | | | | | | 18,205 | | 17,886 | | 18,780 |
Losses and loss adjustment expenses paid | | | | | | | 23,956 | | 24,244 | | 26,211 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at end of year | | | | | | $ | 60,603 | $ | 61,612 | $ | 64,316 |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Net liability for unpaid claims and claims adjustment expense at beginning of year | | $ | 68,782 | | $ | 70,825 | | $ | 71,507 | |
Foreign exchange effect(a) | | | (617 | ) | | (90 | ) | | 353 | |
Other, including dispositions | | | (79 | ) | | (11 | ) | | – | |
Change due to retroactive asbestos reinsurance transaction | | | 22 | | | 90 | | | (1,703 | ) |
Losses and loss expenses incurred: | | | | | | | | | | |
Current year, undiscounted | | | 22,171 | | | 25,385 | | | 27,931 | |
Prior years unfavorable development, undiscounted(b) | | | 557 | | | 421 | | | 195 | |
Change in discount | | | (309 | ) | | (63 | ) | | 34 | |
| | |
Losses and loss expenses incurred | | | 22,419 | | | 25,743 | | | 28,160 | |
| | |
Losses and loss expenses paid: | | | | | | | | | | |
Current year(a) | | | 7,431 | | | 8,450 | | | 11,534 | |
Prior years | | | 18,780 | | | 19,325 | | | 15,958 | |
| | |
Losses and loss expenses paid | | | 26,211 | | | 27,775 | | | 27,492 | |
| | |
Net liability for unpaid claims and claims adjustment expense at end of year | | $ | 64,316 | | $ | 68,782 | | $ | 70,825 | |
| | |
(a) For the 2012 amounts, $847 million was reclassified from "Foreign exchange effect" to "Losses and loss expenses paid (current year)". The impact of this reclassification was a decrease of $847 million for foreign exchange and loss expenses paid (current year), with no income statement or balance sheet impact.
(b)* See tables below for details of prior year development by business unit, accident year and major class of business.
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ITEMItem 7 / RESULTS OF OPERATIONS insurance reserves / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSENON-LIFE INSURANCE COMPANIES
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years, net of reinsurance, by business unit and major class of business:
|
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| |
| |
| | |
|---|
| | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | | | 2015 | | | 2014 | | 2013 |
Prior accident year development by major class of business: | | | | | | | | | | | | | | | | | | | | | | |
Commercial Insurance U.S.: | | | | | | | | | | |
Commercial Property Casualty - U.S. & Canada: | | | | | | | | | | | | | | |
Excess casualty | | $ | (144 | ) | $ | 157 | | $ | (588 | ) | | | | | | $ | 1,529 | | $ | (36) | $ | (144) |
Financial lines including professional liability | | | (113 | ) | | (283 | ) | | (257 | ) | | | | | | | 579 | | (47) | | (113) |
On-going specialty, excluding pollution products | | | 120 | | | 127 | | 29 | | |
On-going pollution products | | | 31 | | | 34 | | 3 | | |
On-going Environmental | | | | | | | | 108 | | 137 | | 151 |
Primary casualty: | | | | | | | | | | | | | | | | | | | | |
Loss-sensitive | | | 89 | | | 54 | | 172 | | |
Loss-sensitive (offset by premium adjustments below)(a) | | | | | | | | (49) | | 105 | | 89 |
Other | | | 409 | | | 477 | | 514 | | | | | | | | 1,175 | | 445 | | 409 |
Healthcare | | | (54 | ) | | 68 | | (45 | ) | | | | | | | 207 | | 109 | | (54) |
Property excluding natural catastrophes | | | (80 | ) | | (95 | ) | | (154 | ) | | | | | | | (117) | | 50 | | (80) |
Natural catastrophes | | | 179 | | | (144 | ) | | 9 | | | | | | | | (52) | | (102) | | 179 |
All other, net | | | 23 | | | 147 | | 214 | | | | | | | | 6 | | 72 | | 23 |
| | | |
Total Commercial Insurance – U.S. | | | 460 | | | 542 | | (103 | ) | |
| | | |
Commercial Insurance International: | | | | | | | | | | |
Total Commercial Property Casualty - U.S. & Canada | | | | | | | | 3,386 | | 733 | | 460 |
Commercial Property Casualty International: | | | | | | | | | | | | |
Excess casualty | | | (15 | ) | | (10 | ) | | (14 | ) | | | | | | | 71 | | (62) | | (15) |
Primary casualty | | | (25 | ) | | (36 | ) | | (89 | ) | | | | | | | 89 | | (5) | | (25) |
Financial lines | | | 74 | | | 33 | | – | | | | | | | | 47 | | 182 | | 74 |
Specialty | | | (51 | ) | | (77 | ) | | 7 | | | | | | | | (5) | | (30) | | (51) |
Property excluding natural catastrophes | | | (3 | ) | | (54 | ) | | – | | | | | | | | (64) | | (82) | | (3) |
Natural catastrophes | | | (71 | ) | | (105 | ) | | (84 | ) | | | | | | | (44) | | (77) | | (71) |
All other, net | | | (14 | ) | | (3 | ) | | – | | | | | | | | - | | (4) | | (14) |
| | | |
Total Commercial Insurance – International | | | (105 | ) | | (252 | ) | | (180 | ) | |
| | | |
Consumer Insurance – U.S.: | | | | | | | | | | |
Total Commercial Property Casualty - International | | | | | | | | 94 | | (78) | | (105) |
Total Commercial Property Casualty | | | | | | | | 3,480 | | 655 | | 355 |
Commercial Mortgage Guaranty | | | | | | | | (69) | | (104) | | 30 |
Consumer Personal Insurance - U.S. & Canada: | | | | | | | | | | | | |
Natural catastrophes | | | (69 | ) | | 11 | | 6 | | | | | | | | (12) | | (8) | | (69) |
All other, net | | | (46 | ) | | 9 | | 40 | | | | | | | | (54) | | (44) | | (46) |
| | | |
Total Consumer Insurance – U.S. | | | (115 | ) | | 20 | | 46 | | |
| | | |
Consumer Insurance – International: | | | | | | | | | | |
Total Consumer Personal Insurance - U.S. & Canada | | | | | | | | (66) | | (52) | | (115) |
Consumer Personal Insurance - International: | | | | | | | | | | | | |
Natural catastrophes | | | – | | | (26 | ) | | – | | | | | | | | 2 | | (8) | | - |
All other, net | | | (40 | ) | | (14 | ) | | 39 | | | | | | | | 45 | | (17) | | (40) |
| | | |
Total Consumer Insurance – International | | | (40 | ) | | (40 | ) | | 39 | | |
| | | |
Other – U.S.: | | | | | | | | | | |
Total Consumer Personal Insurance - International | | | | | | | | 47 | | (25) | | (40) |
Total Consumer Personal Insurance | | | | | | | | (19) | | (77) | | (155) |
Run-off Insurance Lines | | | | | | | | | | | | |
Asbestos and environmental (1986 and prior) | | | 57 | | | 70 | | 27 | | | | | | | | 281 | | 124 | | 67 |
Run-off environmental (1987 to 2004) | | | 238 | | | 166 | | 382 | | |
Total all other, net | | | 22 | | | – | | (1 | ) | |
| | | |
Total Other – U.S. | | | 317 | | | 236 | | 408 | | |
| | | |
Other – International: | | | | | | | | | | |
Asbestos and environmental (1986 and prior) | | | 10 | | | 5 | | – | | |
Total all other, net | | | – | | | (12 | ) | | 1 | | |
| | | |
Total Other – International | | | 10 | | | (7 | ) | | 1 | | |
| | | |
Total AIG Property Casualty | | | 527 | | | 499 | | 211 | | |
| | | |
Other Operations – Mortgage Guaranty | | | 30 | | | (78 | ) | | (16 | ) | |
| | | |
Run-off environmental | | | | | | | | 132 | | 120 | | 238 |
Run-off healthcare(b) | | | | | | | | 50 | | - | | - |
Other run-off | | | | | | | | 272 | | - | | - |
All other, net | | | | | | | | (8) | | (15) | | 22 |
Total Run-off Insurance Lines | | | | | | | | 727 | | 229 | | 327 |
Total prior year unfavorable development | | $ | 557 | | $ | 421 | | $ | 195 | | | | | | | $ | 4,119 | | $ | 703 | $ | 557 |
| | | | | | | | | | | | | | |
Premium adjustments on primary casualty loss sensitive business | | | | | | | | 49 | | (105) | | (89) |
Total prior year development, net of premium adjustments | | | | | | | $ | 4,168 | | $ | 598 | $ | 468 |
During 2013, the(a) Represents prior year development on active retrospectively rated components of risk-sharing policies.
(b) In 2015, includes $30 million of non-operating adverse prior year loss development net of premium accruals was $438 million. The increase was primarily due to the increases indevelopment.
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Item 7 / insurance reserves by $108 million for Storm Sandy, $219 million for U.S. construction primary general liability lines and $238 million for the run-off environmental (1987 to 2004) book./ NON-LIFE INSURANCE COMPANIES
In addition, we recognized additional premiums on loss-sensitive business of $89 million, $54 million and $172 million for the years ended December 31, 2013, 2012 and 2011, respectively.
For the year ended December 31, 2013, we incurred reinstatement premiums of $27 million, compared to $0 for both years 2012 and 2011.
Net Loss Development by Class of Business
In determining the loss development from prior accident years, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes (including challenges and recommendations from our Enterprise Risk Management group) as well as the views of third party actuarial firms. We use these inputs to improve our evaluation techniques, and to analyze and assess the change in estimated ultimate loss for each accident year by class of business. Our analyses produce a range of indications from various methods, from which we select our best estimate.
We analyze and evaluate the change in estimated ultimate loss for each accident year by class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, we examine the indicated effect such emergence would have on
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ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
the reserves of that class of business. In some cases, the higherlower or lowerhigher than expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the reserves for the class of business for prior accident years.business. In other cases, the higherlower or lowerhigher than expected emergence may result in a larger change, either favorable or unfavorable. As appropriate, we make adjustments forin response to the difference between the actual and expected loss emergence for each accident year. As part of our reserving process, we also consider notices of claims received with respect to emerging and/or evolving issues.issues, in particular those related to complex, claims-related class action litigation and latent exposure claims. Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratio selected (Commercial: 66.2 points; Consumer: 54.0 points; Mortgage Guaranty: 25.1 points) and the current year’s addition to reserves.
In 2015 and 2014, we recognized $4.1 billion and $703 million of adverse development, respectively, driven in each period by adverse loss development in Commercial Property Casualty and Run-off Insurance Lines partially offset by Consumer Personal Insurance and Mortgage Guaranty business. In 2013, we recognized $557 million of adverse development primarily due to the adverse prior year loss reserve development in Commercial Property Casualty, Mortgage Guaranty business and Run-off Insurance Lines, partially offset by Consumer Personal Insurance.
See Results of Operations — Commercial Insurance and Results of Operations — Consumer Personal Insurance Results herein for further discussion of net loss development.
The following is a discussion of the primary reasons for the development in 2013, 20122015, 2014 and 20112013 of those classes of business that experienced significant prior accident year development during the three-year period. See MD&A — Critical Accounting Estimates for a description of our loss reserving process.process, basis for selections and sensitivities to certain assumptions.
Commercial Property Casualty
In 2015, the Commercial Property Casualty adverse prior year loss reserve development of $3.5 billion was driven by Excess Casualty, Primary Casualty, Environmental, Financial Lines, Healthcare and International Excess Casualty, partially offset by Property excluding natural catastrophes and Natural catastrophes.
In 2014, the Commercial Property Casualty adverse prior year loss reserve development of $655 million was driven by Primary Casualty, Environmental, International Financial Lines, and Healthcare, partially offset by Natural catastrophes, International Primary Casualty and International Commercial Property.
In 2013, the Commercial Property Casualty adverse prior year loss reserve development of $355 million was driven by Primary Casualty, International Financial Lines, Environmental, and Healthcare, partially offset by Excess Casualty, Financial Lines, and Natural catastrophes.
Excess Casualty – U.S. & Canada
Excess Casualty
The excess casualty segmentclass presents unique challenges for estimating the liability for unpaid claims. Insuredslosses. Our policies tend to attach at a high layer above underlying policies, usually issued by other insurance companies, which can limit our access to relevant information to help inform our judgments. Our insureds are generally required to provide us with notice of claims that exceed a
threshold, either expressed as a proportion of theour coverage attachment point (e.g., 50 percent of the attachment) or asfor particular types of claims (e.g., death, quadriplegia). This threshold is generally established well below our attachment point, to provide us with a precautionary notice of claims that could potentially piercereach our excess layer of coverage. This means that the majority of claims closereported to us are closed without payment by us because the claims never piercereach our layer, while the claims that reach our layer and close with payment by us can be large and highly variable. Thus, estimates of unpaid claimslosses carry significant uncertainty. For reserve reporting purposes,
During 2015, Excess Casualty experienced $1.5 billion of adverse development largely driven by worse than expected loss emergence reported in 2015, including $1.2 billion (primarily for U.S. risks) in the fourth quarter when we now combinecompleted our scheduled detail valuation review for this class. This increase was largely driven by adverse emergence in both general liability and umbrella auto liability, reflecting worsening trends in the number and nature of high severity losses. Approximately $411 million of the adverse development is related to auto liability. We reacted to the adverse emergence by updating our assumptions about loss severity, loss development patterns and expected loss ratios for the most recent accident years. We have seen an increasing trend in the frequency of high severity claims, especially in the umbrella auto liability portfolio. We also observed deterioration in certain class action claims that have complex coverage uncertainties and high limits characterized by increases in new claims and/or demands reported in 2015 and progress towards potential settlements, which have further informed our actuarial projections of ultimate losses for these types of claims. These types of claim classes have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile. In addition, we also increased losses associated with bad-faith claims by approximately $120 million reflecting an increase in recent settlements. These types of claims have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile.
During 2014, Excess Casualty experienced $36 million of favorable development largely driven by savings on a few large claims. In our Excess Umbrella Excess casualty business withanalysis in 2014, our revised segmentation led to lower 2005 and subsequent accident year estimates for non-mass tort claims where we expect underwriting actions and reductions in policy limits to have a favorable effect on ultimate losses from accident years 2007 to 2013 in particular. This was entirely offset by higher selected ultimate losses for accident years 2004 and prior as a result of updated loss development patterns for mass tort claims which we segmented separately from the high layer Catastrophic Casualty business that attaches when losses exceed $50 million.non-mass tort claims.
During 2013, Excess Casualty experienced $144 million of favorable emergencedevelopment due to favorable outcomes on some large cases from 2010 and lower than expected emergence in high layer Catastrophic Casualty business.
DuringPrimary Casualty – U.S. and Canada
Primary Casualty includes Workers’ Compensation, General Liability and Auto Liability lines of business. The business is segmented by industry and where relevant, by geography.
Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. As part of the year end reserve review related to these policies, in addition to reviewing normal development we enhanced our segmentation to better reflect the specified policy features. Based on the analysis, we increased our reserves by $540 million, primarily for accident years 2012 and prior and in the Excess Casualtyworkers’ compensation class, to reflect estimated increased losses and reduced expectations of business experienced $157future recoveriesfrom our insureds through these risk-sharing features.
We also recognized $100 million of adverse prior year development based on worse than expected Umbrella Excessin Workers’ Compensation coverages sold to government contractors in U.S and non-U.S. military installations as a result of adverse loss emergence primarily from several large accounts in the recent accident years. In addition, we reacted to the adverse outcomes relating to certain large claims from older accident years, from the legacy public entity excess casualty class of business and from a refined analysis applied to claims in excess of $10 million. This refined analysis considered the impact of changing attachment points (primarily impacting frequency of excess claims) and limit structures (primarily impacting severity of excess claims) throughout the loss development period.
During 2011, the Excess Casualty class of business experienced better thanemergence by increasing our expected loss emergence. ratios in recent accident years.
For Umbrella Excess, the expected loss emergenceremainder of the primary workers’ compensation portfolio our analysis was based on the shorter-termed loss development patternrefined segmentation from the year-end 2010 reserve analysis. However, accident year 2010 experienced some large catastrophic losses causing its results to be worse than expected.
Environmental and Pollution Products
We maintain an active environmental insurance business related to pollution legal liability and general liability for environmental consultants and engineers, as well as runoff business for certain environmental coverage which provides cost overrun protection, in some cases over long time periods. We evaluate and report reserves associated with this business separately from the 1986 and prior asbestos and environmental reserves associated with standard General Liability and Umbrella policies discussed under "Asbestos and Environmental Reserves".
In 2013, our analysis of pollution products reflected an updated review of individual cases2014, which indicated large increases inthat prior year loss reserve development was flat after taking into account the value of certain previously reported cases dueinitiatives that our claim function had undertaken to new developments such as the discovery of additional contamination in certain sites, legislative changes, court rulings, expansion of plaintiff damages and increased cost of remediation technologies. Additionally, the number and severity of newly reported claims was higher than expected. As a result,manage high risk claims.
For Primary General Liability, we increased our estimate of ultimate lossesloss estimates for prior accident years by approximately $269$146 million with approximately $201 million of this relatinglargely related to policies written in 2003coverage sold to the Construction sectors as we reacted to noteworthy adverse loss emergence throughout the year, by changing our assumptions about loss development and prior. Significant changes in underwriting during 2004 changedexpected loss ratios. For construction, the terms and conditions materially for policies written after 2003adverse development was driven by construction defect claims. The construction class is being re-underwritten to reduce our exposure to these events.New York and U.S. residential exposures.
Because of an increaseFor Primary Auto liability, we have observed increases in both the frequency and severity of claims observed beginningoccurring since the recovery from the recent U.S. economic downturn, which have significantly outpaced the pricing rate increases implemented during the same period. As a result, we recognized $144 million of adverse development during 2015 as we increased the expected loss ratios for recent accident years to reflect the deteriorating trends.
We also-reassessed the reasonableness of our liability for future claim handling expenses related to existing loss reserves and updated our estimates to reflect the costs from recent investments in 2011,claims systems, processes and people with the 2012objective of improving our ability to better manage total loss costs. We increased our reserve review consistedestimates by $214 million based on refined analyses, $100 million of an intensivewhich was attributable to U.S. & Canada primary casualty. The balance was distributed among other classes.
During 2014, we continued to refine our segmentation of primary workers’ compensation into guaranteed cost and excess of large deductible business by deductible size group. The net result of the analysis was adverse development of $137 million for the primary workers’ compensation class of business. The key drivers of the adverse development in this class of business were increases for guaranteed cost business in California and New York, and increases for excess of large deductible business, as well as adverse experience in the Construction class. Each of these segments appears to have been impacted by specific structural changes in the portfolio. For California business, our tail factor increases were in response to changing long-term medical development patterns. In New York, there has been a lengthening of the period between the date of accident and the classification of non-scheduled permanent partial injuries. We completed a review of reported claimsclaim emergence and payouts for our top six states in workers’ compensation and concluded that California and New York were the main states where the loss development patterns had materially changed since our last review. For excess of large deductible business across all states, we updated our analyses to consider the impact of changes in the mix of retentions that has occurred over time as the data by retention band was becoming more credible. For the Construction class, we note that the construction sector has experienced a multi-disciplinary team including external specialistscomparatively slow recovery in environmental law and engineering science, toxicologists and other specialists, our actuaries, claims managers and underwriters to reassess our indicated loss reserve need. The review improved our understanding of factors that
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ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
drive claim costs such as policy term, limit, pollution conditions covered, location of incident and applicable laws and remediation standards. The analysis used these factors to segment and analyze the claim data to determine ultimate costs, in some cases, on a claim by claim basis.payroll employment. As a result of the diminished employment opportunities in this industry sector, injured workers may experience limited return-to-work opportunities, which moderate the shortening of claim duration that normally accompanies a labor market recovery. For all other states combined excluding California and New York, we saw favorable emergence in our middle market Specialty Workers’ Compensation segment. The net effect of these revised selections had the greatest adverse effect on the Construction class of business ($140 million adverse development) and the National Accounts class of business ($125 million adverse development). The most significant favorable effect was in the Specialty Workers’ Compensation class of business ($155 million favorable development). Our analysis $200 millionconsiders our best estimate expectations of medical inflation and loss costs trends and also reflects the impacts of enhancements in our claim management and loss mitigation activities, such as opioid management, fraud investigation and medical management.
For primary general liability in 2014, we increased our ultimate loss estimates for prior yearyears by $182 million. This was largely driven by the construction segment as a result of several large construction defect claims and increases in the costs of claims in New York associated with New York Labor Law. The construction results in California and New York continue to be the main sources of adverse development in our guaranteed cost primary general liability books although we did experience adverse development from construction defect claims in other states in 2014. Our large account primary non-construction general liability business was recognized during 2012, including $166 million for pollution products reportedadversely impacted by claim activity in the AIG Property Casualty Other reporting unit related to lines that are now in runoff. The majority (81 percent)layers excess of the adverse development related to accident years 2003large insured retentions and prior, before significant underwriting changes were adopted.
Historically, we had used traditional actuarial methods to assess the reserves for the pollution products. The comprehensive claims review provided a more refined approach for the development of actuarial estimates for toxic tort claims (which were found to have a distinctly lengthierincreased our loss development pattern than other general liabilitypatterns for these layers to reflect the changes.
For commercial auto in 2014, we reacted to an increase in frequency of large claims in the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving based estimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with high policy limits (greater than $5 million per policy). Notwithstandingaccident years 2010 to 2013, where the refined methodologyeconomic recovery has contributed to increased frequency and approach applied in 2012 and subsequently, considerable uncertainty remains over the ultimate loss cost for this class of business,severity, especially for business writtenthose claims in accidentexcess of a client deductible of $500,000, which generally take several years 2003to emerge and prior.
We strengthened our Pollution Products reserves in 2011 by $385settle. This led to adverse prior year loss reserve development of $156 million partly due to large reserve increases on several individual claims. Of this amount, $382 million was included infor the AIG Property Casualty Other reporting unit. Approximately 80 percentautomobile subset of the 2011 development was associated with accident years 2003 and prior.primary casualty.
In addition to reserving actions, we have made significant changes to the ongoing environmental business included in Commercial with the goal of ensuring that the current policies are being written to earn an appropriate risk adjusted profit. Underwriting guidelines have been revised to no longer cover known or expected clean up costs, which were a significant driver of historical claims, and a "new emerging contaminants" team has been formed within the dedicated environmental engineering staff to track any new cleanup standards that may be set by federal or state regulators. Further, engineering reviews are required for specific business segments (such as oil and gas, and landfills) that have traditionally generated higher losses.
TABLE OF CONTENTS
Primary Casualty
Primary Casualty includes Workers' Compensation and General Liability in Commercial Risk, Specialty Workers' Compensation, Energy Business units, Worldsource and Non-Admitted business.
The Commercial Risk division writes casualtyItem 7 / insurance for businesses with revenues of less than $700 million. The majority of the business is workers' compensation. The Energy division writes casualty insurance (including workers' compensation) in the mining, oil and gas and power generation sectors. The Commercial Specialty Workers' Compensation division writes small monoline guaranteed cost risks. Our Commercial Specialty Workers' Compensation business unit grew significantly in the early to mid 2000s but has reduced premium writings by nearly 70 percent since 2007.reserves / NON-LIFE INSURANCE COMPANIES
During 2013, we continued to refine the segmentation of our analyses of primary workers'workers’ compensation, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function hashad undertaken to manage high risk claims.
During 2013, for primary general liability, we increased our reserves for prior years by approximately $355 million. Most of the increase was driven by construction-relatedconstruction related primary general liability claims, especially construction defect claims where we increased our ultimate loss estimates by $219 million to reflect the higher than expected frequency and severity of these claims especially in states that experienced heavy increases in construction activity after the 2004 and 2005 hurricanes and during the housing boom prior to 2007. Due to the subsequent home price declines observed in many of these states, the frequency of reported losses has increased as the losses subsequently represented a larger percentage of the equity values of the affected homes, and homeowners increasingly looked to insurance recoveries as a way to recoup some of that lost value.
During 2012, we significantly intensified our claims management efforts for those primary workers' compensation claims which are managed by AIG. These efforts include consulting withFinancial Lines – U.S. and Canada
Financial Lines business includes Director and Officer (D&O) and Related Management Liability, various specialists, including clinical and public health professionals and other advisors. We also continued to refine our actuarial methodologies for estimating ultimate loss costs incorporating a more refined segmentation by state (California and New York were analyzed separately) and a more refined approach forProfessional Liability classes of business subject to deductibles as well as business subject to premium adjustments (loss-sensitive business). Based on these enhanced reviews, we increased reserves by $46 million.
AIG 2013 Form 10-K
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ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
In 2012, we also reviewed the general liability loss experiencebusiness. The Financial Lines book consists mostly of the primary casualtyD&O class of business.
During 2015, we recognized $579 million of adverse development, primarily as a result of our scheduled annual detailed valuation review conducted in the fourth quarter, driven largely by the adverse loss emergence that we have seen over the last year, especially in D&O and Professional Liability. In particular, we have observed greater than expected loss costs for several claims from accident years 2006 through 2010, driven by unfavorable settlements and deterioration in known claims. We responded to this adverse emergence by updating our loss development factors and expected loss ratio assumptions for all accident years. In addition, we recognized losses associated with bad-faith claims primarily based on actual settlements in the fourth quarter.
During 2014, we recognized $47 million of favorable development driven by the Professional Liability and D&O and Related Management Liability classes of business, usingsomewhat offset by adverse development on the Fidelity book in recent accident years due to the changing economic cycle.
During 2013, we recognized $113 million of favorable development driven somewhat evenly among the Professional Liability, Fidelity and D&O and Related Management Liability classes of business. The year-end 2013 Professional Liability loss reserve actuarial review adopted a more refined segmentation for business subject to a deductible as well as loss-sensitive business. Our review focused on applying actuarial loss development analyses to those general liability claims for which these techniques are appropriate. As a result of this analysis, we determined that prior year reserves needed to be increased by $235 million for the primary general liability class of business with the selection of differentiated frequency and severity trends for various Professional Liability classes of business which appear to be behaving differently in 2012the post financial crisis years than when reviewed in total.
Healthcare
During 2015, we recognized $207 million of adverse development driven by deteriorating loss experience in accident years 2008 and subsequent characterized by large claims in various segments including hospitals, nursing homes, and pharmaceutical and medical products liability. We reacted to reflect the worse thanthese large claims by increasing our expected emergence of paid loss severitiesratios for both bodily injury and property damage claims from the more recent accident years (2008 and subsequent).putting physicians and surgeons and pharmaceutical and medical products classes into runoff.
The Commercial Risk, Commercial Specialty Workers' Compensation and Energy divisions contributed $265During 2014, we recognized $109 million $145 million and $115 million, respectively, of adverse development in calendar year 2011. The vast majoritythis class largely driven by three large and relatively unusual claims of $25 million each in relatively recent accident years. While there have not been any significant structural changes to the portfolio, there can be material volatility in loss experience in this adverse development emanates from primary workers' compensation exposure, which was largely from accident year 2010. In 2011, losses for accident year 2010 continued to emerge at higher levels than anticipated at prior year end. A key driver was the effectclass of business where individual claims can be of high unemployment on the frequency of higher severity lost time claims. The poor economic environment precluded some employers from offering "light duty" return-to-work alternatives that might otherwise have mitigated lost time claims. At the same time, the increased use of pain management strategies has led to increased medical claims. The increase in lost time frequency and the adverse effects of medical cost trends resulted in higher loss ratios than anticipated at prior year end. For each of the three classes, our conclusion that the worsening experience necessitated a strengthening of the reserves was confirmed by an independent third-party actuarial review during 2011.
Healthcareseverity.
During 2013, this class recognized $54 million of favorable prior year development due to lower than expected loss emergence in many classes such as Excess Hospital Liability.
International Casualty (Excess and Primary Casualty) and Specialty
During 2012, this class2015, we recognized $68$155 million of adverse prior year development, primarily due to severalthree large product liability claims that involved unusual coverage issues for this class. With the exceptionin our Casualty and Specialty lines totaling approximately $115 million. Two of these claims this class experienced claim activityarose in line with expectations.Japan, which is unusual for our portfolio in that market.
Healthcare business written by AIG Property Casualty's Americas region produced moderateDuring 2014 and 2013, we had $97 million and $91 million of favorable development, respectively. The favorable development in 2011. Healthcareeach year was due to lower than expected loss emergence in many classes and countries outside the U.S., with the majority from various countries in the EMEA region.
Financial Lines – International
During 2014 we implemented an enhanced claims operating model in Europe and Australasia which has provided our actuaries with more detailed case reserve data and analysis, enabling AIG’s actuaries to react sooner to case development than in prior years.
During 2015, we recognized $47 million of adverse prior year development, driven by increased claims emergence and related updates to the assumptions for loss development factors and expected loss ratios used in the annual detailed valuation review for these reserves, have benefited from favorable market conditionsprimarily related to Europe and an improved legal environmentAustralasia risks.
During 2014, we recognized $182 million of adverse development in the international Financial Lines segments, driven by large claims emergence in the U.K., Australasia and Europe. Multiple accident years contributed to this total, but it was concentrated most heavily in accident years 2002 and subsequent, following2008-2011. The Australasia emergence was due to a periodnumber of adverse loss trends and market conditions that beganspecific large losses in the mid 1990s.
Excess Workers' Compensation — U.S.
ThisAustralia and New Zealand D&O business. In Europe, adverse prior year loss reserve development was concentrated in the D&O class of business, has an extremely long tailwhere we have observed a greater incidence of severe claims compared with prior years, and is one of the most challenging classesProfessional class of business, to reserve for, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to small changes in assumptions — in the rate of medical inflation or the longevity of injured workers, for example — which can have a significant effect on the ultimate reserve estimate.with large losses from one insured.
During 2013, we updatedrecognized $74 million of adverse development, all of which stemmed from losses in the D&O books in Europe, UK and Australasia, with the other segments showing modest favorable development. The development we recognized can be directly linked to a small number of specific claims booked throughout the year.
Natural Catastrophes
During 2015 and 2014, we experienced favorable property catastrophe prior year development of $52 million and $102 million, respectively, in our analysis of Excess Workers' Compensation reservesU.S. and determined that no changesCanada business, primarily due to our carried reserves were needed. During the 2012favorable development from several U.S. events in accident year 2013. We also experienced favorable property catastrophe prior year loss reserve review, we augmented traditional reserve methodologies with an analysisdevelopment of underlying claims cost drivers to inform$44 million and $77 million from our judgment of the ultimate loss costs for open reported claims from accident years 2003 and prior (representing approximately 95 percent of all open reported claims) and used the refined analysis to inform our judgment of the ultimate loss cost for claims that have not yet been reported using a frequency/severity approach for these accident years.
This approach was deemed to be most suitable for injured workers whose medical conditions had largely stabilized (i.e., at least 9 to 10 years have elapsed since the date of injury). The reserves for accident years 2004 and subsequent (13 percent of total case and IBNR reserves for this class) were determined using traditional methods. See Critical Accounting Estimates for additional information.
The refined analysis confirmed that significant uncertainty remains for thisinternational property class of business especially from unreported claimsfor 2015 and from the propensity for future medical deterioration. Based on the more refined analysis we did not recognize any material development for accident years 2011 and prior.
Natural Catastrophes2014, respectively.
During 2013, we experienced adverse development from Storm Sandy totaling $108 million, or 5.4 percent of the December 31, 2012 estimate. This development resulted from higher severities on a small number of large and
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ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
complex commercial claims driven by a number of factors including the extensive damage caused to properties in the downtown New York metropolitan area.
Mortgage Guaranty business includes domestic first liens (96 percent of total reserves) and run-off books in second liens, student loans and international.
During 2012,2015, we recognized $69 million of favorable prior year loss reserve development driven by lower than expected frequency due to improving cure rates. Post-claim recoveries also contributed to favorable prior year development.
During 2014, we recognized $104 million of favorable prior year loss reserve development driven primarily by the benefit of a settlement with a mortgage lender, steady increases in year-over-year first lien cure rates, a reflection of the improved
economic environment, and in part by favorable frequency trends and recoveries in second lien claims. Partially offsetting these improvements were upward trends in severity, particularly for older (pre-2012) accident periods.
During 2013, we recognized $30 million of adverse prior year loss reserve development due to unfavorable emergence of overturns of prior claim cancellations and increased severity estimates in first liens, partially offset by favorable frequency in student loans and a reduction in the unallocated loss adjustment expense reserve.
Consumer Personal Insurance
During 2015, 2014 and 2013, we recognized $19 million, $77 million, and $155 million of favorable development, respectively.
During 2015 and 2014, we experienced favorable loss reserve development of $10 million and $16 million, respectively, from Natural Catastrophes.
The remaining $61 million of favorable development in 2014 was primarily from Homeowners, International Accident & Health and U.S. Warranty.
The following is a discussion of the Tohoku Catastrophe dueprimary reasons for the Run-Off Insurance Lines development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period.
Asbestos and Environmental (1986 and prior)
Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos reserves are ceded to commercialNational Indemnity Company (NICO) under a retrospective reinsurance arrangement entered into in 2011. However, certain asbestos-related exposures are not subject to the NICO agreement, including asbestos exposures for which we have negotiated fixed payment schedules, and third party reinsurance assumed policies. The reported claim severities being lessactivity on the assumed claims has increased in the last year. As a result, we modified certain of our loss-reserve-related assumptions to better reflect this AIG-specific experience as well as consideration of recent industry-wide trends regarding expanding coverage theories for liability. As a result, we increased our 2015 reserves by $164 million and by $117 million for Asbestos and Environmental, respectively.
Other Run-Off Insurance
During 2015, we transferred approximately $1.2 billion of loss reserves, largely representing coverages we have not written for at least five years, from Commercial Insurance into Run-off insurance lines. We increased the reserves for these coverages by $272 million to reflect updated assumptions about future loss development.
Excess Workers’ Compensation – U.S.
This class of business, which is reported in our run-off unit, has an extremely long tail and is one of the most challenging classes of business from a reserving perspective, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to small changes in assumptions, e.g. — in the rate of medical inflation or the longevity of injured workers, which can have a significant effect on the ultimate reserve estimate.
During 2015, this class of business did not experience significant development in loss reserves. The proactive management of settlement negotiations and other claims mitigation strategies minimized the volatility observed during 2015. The nominal reduction in reserves as a result of commutations and individual claims settlement strategies amounted to $222 million in 2015 compared to $242 million in 2014 and $25 million in 2013.
During 2014, we updated our analyses of Excess Workers compensation using a range of scenarios and methodologies and determined that our carried reserves were adequate after recognizing $20 million of favorable prior year development as a result of claim settlements and commutations of assumed reinsurance business, as well as reflecting changes in estimates in our loss mitigation strategies. We commuted several large assumed reinsurance agreements in 2014 and reduced the reserves faster than was previously reserved.expected as a result of our proactive management by the run-off unit.
During 2013, we updated our analysis of Excess Workers’ Compensation reserves and determined that no changes to our carried reserves were needed. We also updated our analysis of underlying claims cost drivers used in 2012 through accident year 2004, discussed in more detail below.
As noted above, we write loss sensitive business within our primary casualty portfolio. We recognized (return) additional premiums on loss sensitive business of $(49) million, $105 million and $89 million in 2015, 2014 and 2013, respectively, which entirely offset development in that business.
For the year ended December 31, 2015, we incurred reinsurance reinstatement premiums of $(4) million, compared to $(2) million and $27 million for 2014 and 2013, respectively.
See Item 7. MD&A — Critical Accounting Estimates — Liability for Unpaid ClaimsLosses and ClaimsLoss Adjustment ExpenseExpenses for further discussion of our loss reserving process.
See Commercial Insurance and Consumer Personal Insurance Results herein for further discussion of net loss development.
The following table summarizes development, (favorable) or unfavorable, ofincurred losses and loss adjustment expenses for prior years, net of reinsurance, by accident year:
|
| |
| |
| |
| | |
|---|
| | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | 2014 | | 2013 |
Prior accident year development by accident year: | | | | | | | | | | | | | | | | | | |
Accident Year | | | | | | | | | | | | | | | | | | |
2014 | | | | | | | $ | 397 | $ | - | $ | - |
2013 | | | | | | | | 396 | | (283) | | - |
2012 | | $ | (181 | ) | $ | – | | $ | – | | | | | | | | 488 | | (59) | | (181) |
2011 | | | 217 | | | (162 | ) | | – | | | | | | | | 296 | | 37 | | 217 |
2010 | | | (350 | ) | | (75 | ) | | 402 | | | | | | | | 277 | | 12 | | (350) |
2009 | | | 157 | | | (45 | ) | | 117 | | | | | | | | 188 | | 31 | | 157 |
2008 | | | (1 | ) | | (150 | ) | | (294 | ) | | | | | | | 231 | | 8 | | (1) |
2007 | | | – | | | 157 | | (172 | ) | | | | | | | 48 | | (113) | | - |
2006 | | | (75 | ) | | (20 | ) | | (273 | ) | | | | | | | 103 | | 64 | | (75) |
2005 | | | 61 | | | 112 | | (164 | ) | | | | | | | 90 | | 105 | | 61 |
2004 | | | 62 | | | 33 | | (16 | ) | |
2003 and prior | | | 667 | | | 571 | | 595 | | |
| | | |
2004 and prior (see table below) | | | | | | | | 1,605 | | 901 | | 729 |
Total prior year unfavorable development | | $ | 557 | | $ | 421 | | $ | 195 | | | | | | | $ | 4,119 | $ | 703 | $ | 557 |
| | | |
Net Loss Development by Accident Year
For 2015, the adverse development in accident years 2011 through 2014 was driven by significantly greater actual versus expected loss emergence for primary and excess Auto Liability, Financial Lines and Healthcare. Individual large claims in the non-Auto Excess Casualty and International Casualty books along with deterioration in specific large accounts in the government contractors workers’ compensation portfolio were concentrated in these most recent accident years. The impact of revised loss expectations based on emergence in earlier accident years also contributed to the adverse development for Excess Casualty and Financial Lines in this period. In addition, our updated assumptions for bad-faith claims and unallocated loss adjustment expenses disproportionately impacted these years. Accident years 2005 through 2010 were largely impacted by updated loss development selections in Financial Lines and revised estimates on expected future recoveries from risk-sharing policies in the Primary Casualty portfolio. For accident years 2004 and prior, the adverse development was driven by
Excess Casualty revised tail factor selections, updated loss development selections for various run-off portfolios, updated industry experience for asbestos and revised estimates on expected future recoveries from risk-sharing policies.
For 2014, the favorable development in accident years 2013 and 2012 was driven by Financial Lines, Commercial Property and other short tailed lines, like Personal Lines. For accident year 2007, the favorable development was driven by U.S. and Canada Financial lines and Excess Casualty. For accident years 2004 and prior, the adverse development was driven by the Excess Casualty results of the a mass-tort resegmentation analysis, the updated primary workers’ compensation loss development selections (principally in California, New York and the excess of deductible segments) as well as the run-off pollution products business (1987-2004) and the asbestos and environmental (1986 and prior) exposure.
For 2013, the favorable development from accident year 2012 was driven primarily by consumer lines and lower losses in domestic commercial property, while the favorable development from accident year 2010 was primarily the result of favorable claims emergence from domestic excess casualty and from liability and financial lines coverage policies that are on a claims-made basis. The adverse development from accident year 2011 was driven by large losses in financial lines and adverse development in primary casualty, including the loss-sensitive business. The adverse development from accident year 2009 was driven by large losses in financial lines and adverse development in primary casualty including loss-sensitive business. Also for the same periods, theThe adverse development from accident years 2003 and prior was primarily driven by loss development on toxic tort claims, tort construction general liability claims and pollution product claims.
For 2012, the favorable development from accident year 2011 was driven primarily by the favorable development on natural catastrophes, primarily the Tohoku Catastrophe, and the adverse development from accident years 2003 and prior was primarily the result of the increase in reserves on runoff pollution product business (policies written between 1987and 2003).
For 2011, the adverse development from accident years 2003 and prior was largely driven by runoff pollution products (written between 1987and 2003) and toxic tort claims. Adverse development from accident year 2010 was largely driven by primary workers' compensation and loss-sensitive primary business. Favorable development from accident years 2005 to 2008 was driven by financial lines, claims-made excess classes and other casualty classes.
For certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverables,recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to AIG. These reclassifications are shown as development in the respective years in the tabletables above.
AIGThe following table summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment expenses for accident year 2004 and prior by major class of business and driver of development:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
2004 and prior accident year development by major class of | | | | | | | | | | | |
business and driver of development: | | | | | | | | | | | |
Excess Casualty - primarily mass torts(a) | | | | | | $ | 388 | $ | 301 | $ | - |
Excess Casualty - all other | | | | | | | 104 | | 53 | | 251 |
Primary Casualty - loss sensitive business | | | | | | | 1 | | 37 | | (24) |
Primary Casualty - all other(b) | | | | | | | 362 | | 196 | | 102 |
Run-off environmental (1987 to 2004)(c) | | | | | | | 74 | | 97 | | 214 |
Asbestos and Environmental (1986 and prior) | | | | | | | 281 | | 124 | | 67 |
Commutations and Arbitrations(d) | | | | | | | 62 | | 63 | | 21 |
All Other | | | | | | | 333 | | 30 | | 98 |
Total prior year unfavorable development | | | | | | $ | 1,605 | $ | 901 | $ | 729 |
(a) Updates of mass tort loss development patterns.
(b) Includes loss development on excess of deductible exposures in workers’ compensation, general liability and commercial auto.
(c) Includes results of comprehensive specific large claim file reviews initiated in 2012 and updated in 2013 Form 10-Kand 2014.
(d) The effects of commutations are shown separately from the related classes of business, primarily excess workers’ compensation. Commutations are reflected for the years in which they were contractually binding.
The main sources of unfavorable prior year development for accident years 2004 and prior recorded in 2013 through 2015 are as follows:
•Update of the mass tort loss development patterns and segmentation used for U.S. Excess Casualty, which accounted for $689 million and other loss emergence including specific large loss development totaling $408 million across the three years;
•Loss sensitive business that is entirely offset by premium adjustments accounted for $14 million;
•Update of Contents
the loss development patterns used for U.S. Primary Casualty including loss development patterns used in guaranteed cost workers’ compensation for NY and CA construction class of business and updates to the loss development patterns for business written on excess of deductible exposures in workers’ compensation, general liability and the commercial auto classes of business which collectively accounted for approximately $660 million across the three years;
•Update of the Environmental run-off portfolio’s losses following the 2012 comprehensive claims review that provided a more refined approach for the development of actuarial estimates for toxic tort claims (which were found to have a distinctly lengthier loss development pattern than other general liability claims in the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving based estimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with high policy limits (greater than $5 million per policy). These updates which commenced in 2012 and have been applied in each subsequent year, accounted for approximately $385 million;
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE•Update of our net retained asbestos and environmental exposure from 1986 and prior which accounted for approximately $472 million ($238 million environmental and $234 million asbestos) across the three years;
•Commutations in the three-year period ending December 31, 2015, accounted for approximately $146 million. These commutations serve to reduce the uncertainty in AIG’s required reserves; and
•Update of the assumptions for future loss development for the run-off insurance lines, primarily for coverages we have not written in at least five years, accounted for approximately $272 million of the All Other total amount of $461 million across the three years.
During the period 2013 to 2015, we completed refinements of our reserving methodologies for U.S. mass tort, toxic tort, retained asbestos, environmental and other specific large losses. We also conducted extensive additional studies to corroborate our judgments for our U.S. primary workers compensation and excess workers’ compensation classes of business. Further, we refined our loss reserving methodologies for our U.S. Excess Casualty class of business and our U.S. Primary Casualty class of business written over excess of deductible exposures where loss development patterns may lengthen if client retentions increase over time. Collectively, the reserves for the aforementioned classes of business or loss exposures account for the majority of the remaining net loss reserves for accident years 2004 and prior.
Asbestos and Environmental ReservesMortgage Guaranty Results
The following table presents Mortgage Guaranty results:
Years Ended December 31, | | | | | | | | | | Percentage Change |
(dollars in millions) | | 2015 | | | 2014 | | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | | | |
Net premiums written | $ | 1,050 | | $ | 1,024 | | $ | 1,048 | | 3 | % | | (2) | % |
Increase in unearned premiums | | (138) | | | (120) | | | (239) | | (15) | | | 50 | |
Net premiums earned | | 912 | | | 904 | | | 809 | | 1 | | | 12 | |
Losses and loss adjustment expenses incurred | | 160 | | | 223 | | | 514 | | (28) | | | (57) | |
Acquisition expenses: | | | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | 30 | | | 22 | | | 20 | | 36 | | | 10 | |
Other acquisition expenses | | 51 | | | 49 | | | 60 | | 4 | | | (18) | |
Total acquisition expenses | | 81 | | | 71 | | | 80 | | 14 | | | (11) | |
General operating expenses | | 166 | | | 156 | | | 142 | | 6 | | | 10 | |
Underwriting income | | 505 | | | 454 | | | 73 | | 11 | | | NM | |
Net investment income | | 139 | | | 138 | | | 132 | | 1 | | | 5 | |
Pre-tax operating income | | 644 | | | 592 | | | 205 | | 9 | | | 189 | |
Key metrics: | | | | | | | | | | | | | | |
Prior year loss reserve development (favorable)/ | | | | | | | | | | | | | | |
unfavorable | $ | (69) | | $ | (104) | | $ | 30 | | (34) | % | | NM | % |
Domestic first-lien: | | | | | | | | | | | | | | |
New insurance written | $ | 50,842 | | $ | 42,038 | | $ | 49,356 | | 21 | | | (15) | |
Combined ratio | | 44.6 | | | 52.6 | | | 91.1 | | | | | | |
Risk in force | $ | 47,442 | | $ | 42,106 | | $ | 36,367 | | 13 | | | 16 | |
60+ day delinquency ratio on primary loans(a) | | 3.4 | % | | 4.4 | % | | 5.9 | % | | | | | |
Domestic second-lien: | | | | | | | | | | | | | | |
Risk in force(b) | $ | 399 | | $ | 446 | | $ | 1,026 | | (11) | | | (57) | |
TABLE OF CONTENTS
Asbestos and Environmental Loss Reserve Estimates
Item 7 / results of operations / commercial insurance
(a) Based on number of policies.
(b) Represents the full amount of second-lien loans insured reduced for contractual aggregate loss limits on certain pools of loans, which is usually 10 percent of the full amount of loans insured in each pool. Certain second-lien pools have reinstatement provisions, which will expire as the loan balances are repaid.
Pre-Tax oPERATING INCOME (in millions) | | domestic first-lien new insurance written on mortgage loans (in millions)
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We consider
The following table presents Mortgage Guaranty first-lien results:
Years Ended December 31, | | | | | | | | | Percentage Change |
(dollars in millions) | | 2015 | | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | |
Net premiums written | $ | 990 | | $ | 929 | $ | 950 | | 7 | % | (2) | % |
Increase in unearned premiums | | (137) | | | (117) | | (256) | | (17) | | 54 | |
Net premiums earned | | 853 | | | 812 | | 694 | | 5 | | 17 | |
Losses and loss adjustment expenses incurred | | 174 | | | 233 | | 462 | | (25) | | (50) | |
Acquisition expenses: | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | 29 | | | 21 | | 16 | | 38 | | 31 | |
Other acquisition expenses | | 52 | | | 49 | | 60 | | 6 | | (18) | |
Total acquisition expenses | | 81 | | | 70 | | 76 | | 16 | | (8) | |
General operating expenses | | 150 | | | 124 | | 95 | | 21 | | 31 | |
Underwriting income | | 448 | | | 385 | | 61 | | 16 | | NM | |
Net investment income | | 127 | | | 124 | | 116 | | 2 | | 7 | |
Pre-tax operating income | $ | 575 | | $ | 509 | $ | 177 | | 13 | % | 188 | % |
2015 and 2014 Comparison
Pre-tax operating income increased in 2015 compared to 2014 due to an increase in first-lien net premiums earned as a numberresult of factorshigher new insurance written increasing the amount of insurance in-force, an acceleration of earnings on the cancellations of single premium business for which a return premium is generally not required, and recent experience,a decline in additionincurred losses from lower delinquency rates and higher cure rates. Offsetting these increases in operating income was a reduction in favorable prior year loss development of $35 million primarily related to thea settlement with a large lender which resulted in $64 million of favorable prior year loss development in 2014.
TABLE OF CONTENTS
Item 7 / results of both external and internal analyses,operations / commercial insurance
First-Lien Results
First-lien pre-tax operating income increased $66 million in 2015 compared to estimate asbestos and environmental loss reserves. Nonetheless, we believe that significant uncertainty remains as to our ultimate liability for asbestos and environmental claims, which is2014, primarily due to several factors, including:
•- improved underwriting income as a result of a $41 million increase in first-lien net premiums earned in 2015 compared to 2014, largely from growth in the
long latency period between asbestos exposure and disease manifestation, leading to the potential for involvementbook of multiple policy periods for individual claims;
•claims filed under the non-aggregate premises or operations section of general liability policies;
•the number of insureds seeking bankruptcy protectionbusiness and the effectacceleration of prepackaged bankruptcies;
•diverging legal interpretations;premiums earned as a result of cancellations of single premium business. Additionally, there was a $72 million decrease in accident year losses offset in part by a $13 million reduction in prior year loss development, which was driven primarily by $57 million of favorable prior year loss development from a settlement with a large lender in 2014. The increases in operating income were offset in part by a $37 million increase in acquisition and
•the difficulty general operating expenses. The combined ratio was 47.5 points in estimating the allocation of remediation cost among various parties with respect2015, compared to environmental claims.
We engaged an independent third-party actuarial firm to assist52.6 points in assessing asbestos exposures. This external study was completed2014, reflecting a decrease in early 2011, based on losses evaluated in 2010.The ground-up study conducted by this firm used a proprietary model to calculate the loss exposure onratio, partially offset by an insured-by-insured basis. We believe thatincrease in the accuracyexpense ratio.
Acquisition expenses increased in 2015 compared to 2014, primarily as a result of sales support solicitation activities, which generated new insurance written.
General operating expenses increased in 2015 compared to 2014, primarily due to an increase in costs related to servicing the growth of the in-force business, technology-related and customer service initiatives expenses and severance.
Other Business Results
Other business results include international mortgage insurance operations and the run-off portfolios of second-lien insurance and student loan insurance.
The Other business’ pre-tax operating income for 2015 was $69 million compared to $82 million in 2014. The decrease in pre-tax operating income was due to a decrease in net premiums earned and net investment income offset by the decrease in general operating expenses and losses and loss adjustment expenses, which included $35 million of favorable prior year loss development largely attributable to recoveries on previously paid claims.
2014 and 2013 Comparison
Pre-tax operating income increased in 2014 compared to 2013 due to a decline in incurred losses from lower delinquency rates, higher cure rates and an increase in first-lien net premiums earned reflecting higher persistency.
First Lien Results
First-lien pre-tax operating income increased in 2014 compared to 2013, primarily due to improved underwriting income as a result of a $229 million decrease in first-lien losses and loss adjustment expenses incurred reflecting fewer new delinquencies, favorable prior year loss reserve estimate is greatly enhanced throughdevelopment, and higher cure rates. In addition, first-lien pre-tax operating income increased due to a $119 million increase in first-lien net premiums earned in 2014 compared to 2013, largely from growth in the combinationbook of business, higher persistency, and, to a lesser extent, the acceleration of premiums earned as the result of the actuarial firm's industry modeling techniques and industry knowledge and our own specific account-level experience.
In 2011, in addition to this third-party ground-up asbestos study, we internally completed a top-down report year projections as well as market share projections of our indicated asbestos and environmental loss reserves. These projections consistedrecognition of a seriesshorter expected coverage period on certain single premium business. The decrease in first-lien losses and loss adjustment expenses incurred combined with the increase in earned premiums resulted in an improved combined ratio of tests performed separately for asbestos and for environmental exposures.52.6 points in 2014 compared to 91.1 points in 2013.
For asbestos, these tests project the losses expectedAcquisition expenses decreased in 2014 compared to be reported through 2027. This projection was based on the actual losses reported through 2011 and the expected future loss emergence for these claims. Three scenarios were tested, with a series of assumptions ranging from more optimistic to more conservative. For environmental claims, a comparable series of frequency/severity tests were produced. As2013, primarily as a result of the studies, we concluded that no additional strengthening was required for asbestos and environmentaldecrease in 2011.
In 2012, after we carefully considered the recent experience compared to the results of the 2010 ground-up analysis, as well as all of the above factors related to uncertainty, no adjustment to gross and net asbestos reserves was recognized in 2012. Additionally in 2012, a moderate amount of incurred loss pertaining to the asbestos loss reserve discount is reflected in the table below and isnew insurance written related to the reserves not subjectdecline in mortgage originations.
General operating expenses increased in 2014 compared to 2013 due to increased technology expenses and an impairment charge on certain capitalized technology costs.
Other Business Results
The Other business’ pre-tax operating income for 2014 was $82 million compared to $27 million in 2013. The increase in pre-tax operating income is due to a decline in losses and loss adjustment expenses incurred of $62 million and a $17 million reduction in underwriting expenses, partially offset by a decline in net premiums earned of $22 million and a decline in net investment income of $2 million.
New Insurance Written
Domestic first-lien new insurance written increased to a record level of $50.8 billion in 2015 compared to $42.0 billion in 2014, driven by an increase in refinancing, improvements in existing home sales due to lower down payment requirements and new purchase volume.
The decline in domestic first-lien new insurance written to $42.0 billion in 2014 from $49.4 billion in 2013 was primarily due to the NICO reinsurance agreement. Upon completion of a top-down analysis performed for environmentalcontraction in the fourth quarter of 2012, we concluded that the $150 million gross reserve strengtheningmortgage originations market and $75 million net reserve strengthening recognizedan increase in the first half of 2012 was adequate.competition.
In 2013, we completed a ground-up review of all our remaining retained accountsDelinquency Inventory
The delinquency inventory for asbestos. In addition, a subsidiary of the retrocessionaire for our retroactive reinsurance contract completed a ground-up asbestos study for the largest accounts it assumed. After carefully considering the results of both ground-up studies, we increased gross asbestos loss reserves by $220 million and net asbestos loss reserves by $110 million. These reserve increases also reflect a small amount of estimated uncollectible reinsurance and accretion of discount. A significant portion of the net loss reserve increase will be recoverable under our retroactive reinsurance arrangement. For environmental, we increased gross environmental reserves by $98 million and net environmental reserves by $61 milliondomestic first-lien business declined during 2015 as a result of top-down actuarial analyses performed duringcures and paid claims exceeding the year as well as development on a number of large accounts.
In addition to the U.S. asbestos and environmental reserve amounts shown in the tables below, AIG Property Casualty also has asbestos reserves relating to foreign risks written by non-U.S. entities of $134 million gross and $108 million net as ofnewly reported delinquencies. Mortgage Guaranty’s first-lien primary delinquency ratio at December 31, 20132015 was 3.4 percent compared to $140 million gross and $116 million net as of4.4 percent at December 31, 2012.2014. Over the last several years, Mortgage Guaranty has experienced a decline in newly reported defaults and an increase in cure rates.
AIG 2013 Form 10-K
TableThe delinquency inventory for domestic first lien business declined during 2014 as a result of Contents
cures and paid claims exceeding the number of newly reported delinquencies. Mortgage Guaranty’s first lien primary delinquency ratio at December 31, 2014 was 4.4 percent compared to 5.9 percent at December 31, 2013.
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
The following table provides a summary of reserve activity including estimates for applicable IBNR, relatingin Mortgage Guaranty’s domestic first lien delinquency inventory:
Years Ended December 31, | | | | | |
(number of policies) | 2015 | | 2014 | | 2013 |
Number of delinquencies at the beginning of the year | 38,357 | | 47,518 | | 62,832 |
Newly reported | 39,619 | | 47,239 | | 56,194 |
Cures | (36,279) | | (42,680) | | (51,283) |
Claims paid | (8,451) | | (11,601) | | (19,862) |
Other | (1,961) | | (2,119) | | (363) |
Number of delinquencies at the end of the year | 31,285 | | 38,357 | | 47,518 |
Mortgage Guaranty Underwriting Ratios
The following tables present the Mortgage Guaranty combined ratios based on GAAP data:
Years Ended December 31, | | | | | | | | Increase (Decrease) |
| | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
Loss ratio | | 17.5 | | 24.7 | | 63.5 | | (7.2) | | (38.8) |
Acquisition ratio | | 8.9 | | 7.8 | | 9.9 | | 1.1 | | (2.1) |
General operating expense ratio | | 18.2 | | 17.3 | | 17.5 | | 0.9 | | (0.2) |
Expense ratio | | 27.1 | | 25.1 | | 27.4 | | 2.0 | | (2.3) |
Combined ratio | | 44.6 | | 49.8 | | 90.9 | | (5.2) | | (41.1) |
2015 and 2014 Comparison
The combined ratio decreased by 5.2 points in 2015 compared to asbestos2014. The decrease in the ratio in 2015 was driven primarily by a reduction in the loss ratio due to a decrease in incurred losses driven by lower delinquencies and environmental claims:higher cure rates, partially offset by a reduction in favorable prior year loss development.
The acquisition ratio increased by 1.1 points in 2015 compared to 2014, primarily due to the increases in sales-related activities supporting the $8.8 billion increase in new insurance written.
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As of or for the Years Ended December 31,
| | 2013 | | 2012 | | 2011 | |
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(in millions)
| | Gross
| | Net
| | Gross
| | Net
| | Gross
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Asbestos: | | | | | | | | | | | | | | | | | | | |
Liability for unpaid claims and claims adjustment expense at beginning of year | | $ | 4,896 | | $ | 427 | | $ | 5,226 | | $ | 537 | | $ | 5,526 | | $ | 2,223 | |
Change in net loss reserves due to retroactive reinsurance: | | | | | | | | | | | | | | | | | | | |
Paid losses recoverable under retroactive reinsurance contracts | | | – | | | 113 | | | – | | | 111 | | | – | | | 111 | |
Re-estimation of amounts recoverable under retroactive reinsurance contracts(a) | | | – | | | (91 | ) | | – | | | (21 | ) | | – | | | (1,814 | ) |
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Change in net loss reserves due to retroactive reinsurance | | | – | | | 22 | | | – | | | 90 | | | – | | | (1,703 | ) |
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Dispositions | | | (12 | ) | | (12 | ) | | (10 | ) | | (10 | ) | | – | | | – | |
Loss and loss expenses incurred: | | | | | | | | | | | | | | | | | | | |
Undiscounted | | | 169 | | | 92 | | | 1 | | | 1 | | | 2 | | | 2 | |
Change in discount | | | 51 | | | 18 | | | 83 | | | 37 | | | 190 | | | 74 | |
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Losses and loss expenses incurred(b) | | | 220 | | | 110 | | | 84 | | | 38 | | | 192 | | | 76 | |
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Losses and loss expenses paid(b) | | | (444 | ) | | (145 | ) | | (404 | ) | | (228 | ) | | (492 | ) | | (236 | ) |
Other changes | | | 60 | | | 127 | | | – | | | – | | | – | | | 177 | |
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Liability for unpaid claims and claims adjustment expense at end of year | | $ | 4,720 | | $ | 529 | | $ | 4,896 | | $ | 427 | | $ | 5,226 | | $ | 537 | |
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Environmental: | | | | | | | | | | | | | | | | | | | |
Liability for unpaid claims and claims adjustment expense at beginning of year | | $ | 309 | | $ | 163 | | $ | 204 | | $ | 119 | | $ | 240 | | $ | 127 | |
Dispositions | | | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | | – | | | – | |
Losses and loss expenses incurred | | | 98 | | | 61 | | | 150 | | | 75 | | | 33 | | | 27 | |
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Losses and loss expenses paid | | | (93 | ) | | (60 | ) | | (44 | ) | | (30 | ) | | (69 | ) | | (35 | ) |
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Liability for unpaid claims and claims adjustment expense at end of year | | $ | 313 | | $ | 163 | | $ | 309 | | $ | 163 | | $ | 204 | | $ | 119 | |
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Combined: | | | | | | | | | | | | | | | | | | | |
Liability for unpaid claims and claims adjustment expense at beginning of year | | $ | 5,205 | | $ | 590 | | $ | 5,430 | | $ | 656 | | $ | 5,766 | | $ | 2,350 | |
Change in net loss reserves due to retroactive reinsurance: | | | | | | | | | | | | | | | | | | | |
Paid losses recoverable under retroactive reinsurance contracts | | | – | | | 113 | | | – | | | 111 | | | – | | | 111 | |
Re-estimation of amount recoverable under retroactive reinsurance contracts | | | – | | | (91 | ) | | – | | | (21 | ) | | – | | | (1,814 | ) |
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Change in net loss reserves due to retroactive reinsurance | | | – | | | 22 | | | – | | | 90 | | | – | | | (1,703 | ) |
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Dispositions | | | (13 | ) | | (13 | ) | | (11 | ) | | (11 | ) | | – | | | – | |
Losses and loss expenses incurred: | | | | | | | | | | | | | | | | | | | |
Undiscounted | | | 267 | | | 153 | | | 151 | | | 76 | | | 35 | | | 29 | |
Change in discount | | | 51 | | | 18 | | | 83 | | | 37 | | | 190 | | | 74 | |
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Losses and loss expenses incurred | | | 318 | | | 171 | | | 234 | | | 113 | | | 225 | | | 103 | |
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Losses and loss expenses paid | | | (537 | ) | | (205 | ) | | (448 | ) | | (258 | ) | | (561 | ) | | (271 | ) |
Other changes | | | 60 | | | 127 | | | – | | | – | | | – | | | 177 | |
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Liability for unpaid claims and claims adjustment expense at end of year | | $ | 5,033 | | $ | 692 | | $ | 5,205 | | $ | 590 | | $ | 5,430 | | $ | 656 | |
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(a) Re-estimation of amounts recoverable under retroactive reinsurance contracts includes effect of changes in reserve estimates and changes in discount. Additionally, the 2011 Net amount includes the effect on net loss reserves of the initial cession to NICO.
(b) These amounts exclude benefit from retroactive reinsurance.
Transfer of Domestic Asbestos Liabilities UnderThe general operating expense ratio increased by 0.9 points in 2015 compared to 2014, primarily due to an increase in technology-related expenses, customer service initiatives and severance.
2014 and 2013 Comparison
The combined ratio decreased by 41.1 points in 2014 compared to 2013. The decrease was driven primarily by a Retroactive Reinsurance Arrangement
On June 17, 2011, we completed a transaction under whichreduction in the bulk of AIG Property Casualty's net domestic asbestos liabilities were transferredloss ratio due to NICO, a subsidiary of Berkshire Hathaway, Inc. This was part of our ongoing
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
strategy to reduce our overalllower losses and loss adjustment expenses incurred from fewer new delinquencies, favorable prior year loss reserve development, risk. This transaction covers potentially volatile U.S.-related asbestos exposures. It does not, however, cover asbestos accounts that we believe have already been reservedand higher cure rates.
The acquisition ratio decreased by 2.1 points in 2014 compared to their limit of liability or certain other ancillary asbestos exposure assumed2013. Acquisition expenses decreased compared to an increase in net premiums earned, driven by AIG Property Casualty subsidiaries.the decreases in new insurance written in 2014 due to lower mortgage originations.
Upon the closing of this transaction, but effective as of January 1, 2011, we ceded the bulk of AIG Property Casualty'sThe general operating expense ratio decreased by 0.2 points in 2014 compared to 2013. The decrease was driven primarily by growth in net domestic asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Within this aggregate limit, NICO assumed collection risk for existing third-party reinsurance recoverable associated with these liabilities. AIG Property Casualty paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed approximately $1.82 billion of net U.S. asbestos liabilities. As a result of this transaction, AIG Property Casualty recorded a deferred gain of $150 million in the second quarter of 2011, which is being amortized into income over the settlement period of the underlying claims.premiums earned.
Under retroactive reinsurance arrangements any recoveries for development associated with the ceded losses are not recognized immediately; rather this development increases or decreases the deferred gain, and is amortized into income as described above. During 2013, we recognized approximately $87 million of adverse loss development that was ceded under this reinsurance arrangement, which was partially offset by $15 million of deferred gain amortization. Prior years' amounts were immaterial. This development, net of the deferred gain amortization, is being reported in Other income/expense, consistent with the way we manage the business and assess performance and is therefore excluded from net losses incurred and our loss ratios to avoid distortion related to our ongoing insurance business.Institutional Markets Results
The following table presents the estimateInstitutional Markets results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | |
Premiums | $ | 1,580 | $ | 432 | $ | 610 | | 266 | % | (29) | % |
Policy fees | | 199 | | 187 | | 113 | | 6 | | 65 | |
Net investment income | | 1,739 | | 1,957 | | 2,090 | | (11) | | (6) | |
Benefits and expenses: | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 2,583 | | 1,396 | | 1,616 | | 85 | | (14) | |
Interest credited to policyholder account balances | | 408 | | 410 | | 413 | | - | | (1) | |
Amortization of deferred policy acquisition costs | | 3 | | 4 | | 4 | | (25) | | - | |
Other acquisition expenses | | 32 | | 30 | | 36 | | 7 | | (17) | |
General operating expenses | | 77 | | 66 | | 64 | | 17 | | 3 | |
Pre-tax operating income | $ | 415 | $ | 670 | $ | 680 | | (38) | | (1) | |
INSTITUTIONAL MARKETS pre-tax OPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre-tax operating income in 2015 decreased compared to 2014, primarily due to a decrease in net investment income. Fee income increased in 2015 compared to 2014, driven by growth in reserves and assets under management, primarily from continued development of the grossstable value wrap business. The notional amount of stable value wrap assets under management at December 31, 2015 grew by $3.0 billion or nine percent from December 31, 2014. The increases in premiums and net IBNR includedbenefit expense in the Liability for unpaid claims and claims adjustment expense, relating2015 compared to asbestos and environmental claims:
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December 31,
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(in millions)
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Asbestos | | $ | 3,190 | | $ | 16 | | $ | 3,193 | | $ | 37 | | $ | 3,685 | | $ | 239 | |
Environmental | | | 94 | | | 51 | | | 75 | | | 35 | | | 57 | | | 28 | |
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Combined | | $ | 3,284 | | $ | 67 | | $ | 3,268 | | $ | 72 | | $ | 3,742 | | $ | 267 | |
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* Net IBNR includes the reduction2014 were primarily due to the NICO reinsurance transactionpremiums received and establishment of $1,284 million, $1,310 millionfuture policy benefit reserves for terminal funding annuities issued in 2015.
Net investment income in 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and $1,414 million aslower yield enhancements from bond call and tender income. See MD&A – Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of December 31, 2013, 2012 and 2011, respectively. A significant partour Life Insurance Companies, which include the invested assets of the reductionInstitutional Markets business.
General operating expenses in IBNR in 2012 is2015 increased compared to 2014, primarily due to the reclassification of estimated liabilities on a retained account from IBNR to case reserves.
The following table presents a summary of asbestoshigher state guaranty fund assessment expenses, technology investments and environmental claims count activity:
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As of or for the Years
Ended December 31,
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| | Asbestos
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| | Combined
| | Asbestos
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Claims at beginning of year | | | 5,230 | | | 1,614 | | | 6,844 | | | 5,443 | | | 3,782 | | | 9,225 | | | 4,933 | | | 4,087 | | | 9,020 | |
Claims during year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Opened | | | 83 | | | 306 | | | 389 | | | 226 | | | 222 | | | 448 | | | 141 | | | 207 | | | 348 | |
Settled | | | (194 | ) | | (154 | ) | | (348 | ) | | (254 | ) | | (179 | ) | | (433 | ) | | (183 | ) | | (83 | ) | | (266 | ) |
Dismissed or otherwise resolved(a) | | | (439 | ) | | (249 | ) | | (688 | ) | | (185 | ) | | (2,211 | ) | | (2,396 | ) | | (289 | ) | | (429 | ) | | (718 | ) |
Other(b) | | | – | | | – | | | – | | | – | | | – | | | – | | | 841 | | | – | | | 841 | |
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Claims at end of year | | | 4,680 | | | 1,517 | | | 6,197 | | | 5,230 | | | 1,614 | | | 6,844 | | | 5,443 | | | 3,782 | | | 9,225 | |
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(a) The number of environmental claims dismissed or otherwise resolved, increased substantially during 2012 as a result of AIG Property Casualty's determination that certain methyl tertiary-butyl ether (MTBE) claims presented no further potential for exposure since these underlying claims were resolved through dismissal, settlement, or trial for all of the accounts involved. All of these accounts were fully reserved at the account level and included adequate reserves for those underlying individual claims that contributed to the actual losses. These individual claim closings, therefore, had no impact on AIG Property Casualty's environmental reserves.
(b) Represents an administrative change to the method of determining the number of open claims, which had no effect on carried reserves.
Survival Ratios — Asbestos and Environmentalhigher interest expense.
The following table presents AIG's survival ratios for asbestos2014 and environmental claims at December 31, 2013 2012 and 2011. The survival ratio is derived by dividing the current carried loss reserve by the average payments for the three most recent calendar years for these claims. Therefore, the survival ratio is a simplistic measure estimating theComparison
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
number of years it would take before the current ending loss reserves for these claims would be paid off using recent year average payments.
Many factors, such as aggressive settlement procedures, mix of business and level of coverage provided, have a significant effect on the amount of asbestos and environmental reserves and payments and the resulting survival ratio. Additionally, we primarily base our determination of these reserves based on ground-up and top-down analyses, and not on survival ratios.
The following table presents survival ratios for asbestos and environmental claims, separately and combined, which were based upon a three-year average payment:
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Survival ratios: | | | | | | | | | | | | | | | | | | | |
Asbestos | | | 10.6 | | | 10.5 | | | 9.6 | | | 8.7 | | | 9.1 | | | 10.3 | |
Environmental | | | 4.6 | | | 3.9 | | | 4.5 | | | 4.4 | | | 3.0 | | | 3.1 | |
Combined | | | 9.8 | | | 9.4 | | | 9.0 | | | 8.1 | | | 8.4 | | | 9.3 | |
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* Survival ratios are calculated consistent with the basis on historical reserve excluding the effects of the NICO reinsurance transaction.
AIG LIFE AND RETIREMENT
AIG Life and Retirement presents its operating results in two operating segments —Retail andInstitutional.
AIG Life and Retirement 2013 Highlights
Premiums and deposits improved significantly in 2013 compared to 2012, primarily from strong sales of annuities in our Retirement Income Solutions and Fixed Annuities product lines and increased Retail Mutual Fund sales. The improvement in Retirement Income Solutions resulted from our efforts to increase sales while managing risk by meeting the strong market demand for guaranteed features with innovative variable annuity products and expanded distribution. As a result of the 2013 increase in premiums and deposits, net flows on investment products improved in 2013 compared to 2012. Net flows from our Fixed Annuities product line, while still negative in 2013, improved compared to 2012 as a result of the modest rise in interest rates in the second half of 2013, which has increased the demand for fixed annuities.
Pre-tax operating income increased in 2013for 2014 decreased slightly compared to 2012 due to higher fee income from growth in variable annuity assets under management and active spread management in our interest rate sensitive product lines. The increase2013, as a decrease in net investment income in 2013 compared to 2012 reflected higher alternative investment income, partially offset by fair value gains on ML II in 2012 that did not recur in 2013 and reinvestment of investment proceeds at lower rates. Pre-tax operating income in 2013 also included a $153 million net increase from adjustments to update certain estimated gross profit assumptions used to amortize DAC and related items in our investment-oriented product lines. These adjustments increased 2013 pre-tax operating income in our Retail operating segment by $198 million and decreased 2013 pre-tax operating income in our Institutional operating segment by $45 million. See Critical Accounting Estimates — Estimated Gross Profits for Investment-Oriented Products (AIG Life and Retirement) for additional discussion of updated estimated gross profit assumptions. Pre-tax operating income in 2012 also included $234 million of expenses related to the resolution of multi-state regulatory examinations of death claims practices and additional reserves for long-term care products and the GIC portfolio.
Pre-tax income increased in 2013 compared to 2012, reflecting the increases in pre-tax operating income as well as increases in legal settlements with financial institutions that participated in the creation, offering and sale of RMBS from which AIG and its subsidiaries realized losses during the financial crisis. Additionally, pre-tax income increased due to net realized capital gains from continued investment sales to utilize capital loss carryforwards, which increased in 2013 compared to 2012. However, reinvestment of these sales proceeds at lower current yields has contributed to lower future investment returns, reducing spreads in interest-sensitive product lines, and resulting in loss recognition for certain traditional products in 2013 and 2012, which was reported in Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses). See AIG Life and Retirement Reserves and DAC — Other Reserve Changes for additional discussion of loss recognition.
Dividends and loan repayments paid by AIG Life and Retirement subsidiaries to AIG Parent increased to $4.4 billion in 2013 from $2.9 billion in 2012 from strong pre-tax income, as we continue to pursue capital efficiency and leverage our streamlined legal structure. The increase in dividends in 2013 compared to 2012 is primarily due to legal settlement proceeds in 2013.
AIG 2013 Form 10-K
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
AIG Life and Retirement Results
The following table presents AIG Life and Retirement results:
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Retail | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | |
Premiums | | $ | 1,522 | | $ | 1,524 | | $ | 1,546 | | | – | % | | (1 | )% |
Policy fees | | | 2,000 | | | 1,869 | | | 1,806 | | | 7 | | | 3 | |
Net investment income | | | 6,275 | | | 6,212 | | | 5,662 | | | 1 | | | 10 | |
Other income | | | 1,575 | | | 1,183 | | | 1,222 | | | 33 | | | (3 | ) |
Operating expenses: | | | | | | | | | | | | | | | | |
Policyholder benefits and claims incurred | | | 2,772 | | | 2,791 | | | 2,786 | | | (1 | ) | | – | |
Interest credited to policyholder account balances | | | 2,277 | | | 2,554 | | | 2,695 | | | (11 | ) | | (5 | ) |
Amortization of deferred policy acquisition costs | | | 540 | | | 727 | | | 733 | | | (26 | ) | | (1 | ) |
Other acquisition and insurance expenses | | | 2,626 | | | 2,274 | | | 2,178 | | | 15 | | | 4 | |
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Pre-tax operating income | | | 3,157 | | | 2,442 | | | 1,844 | | | 29 | | | 32 | |
Legal settlements | | | 647 | | | 106 | | | – | | | NM | | | NM | |
Changes in fair value of fixed maturity securities designated to hedge living benefit liabilities, net of interest expense | | | (161 | ) | | 37 | | | – | | | NM | | | NM | |
Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) | | | (137 | ) | | (57 | ) | | (305 | ) | | (140 | ) | | 81 | |
Net realized capital gains (losses) | | | 857 | | | (460 | ) | | (157 | ) | | NM | | | (193 | ) |
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Pre-tax income | | $ | 4,363 | | $ | 2,068 | | $ | 1,382 | | | 111 | % | | 50 | % |
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Institutional | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | |
Premiums | | $ | 1,074 | | $ | 940 | | $ | 1,003 | | | 14 | % | | (6 | )% |
Policy fees | | | 535 | | | 480 | | | 503 | | | 11 | | | (5 | ) |
Net investment income | | | 4,579 | | | 4,506 | | | 4,220 | | | 2 | | | 7 | |
Other income | | | 134 | | | 110 | | | 195 | | | 22 | | | (44 | ) |
Operating expenses: | | | | | | | | | | | | | | | | |
Policyholder benefits and claims incurred | | | 1,966 | | | 1,801 | | | 1,901 | | | 9 | | | (5 | ) |
Interest credited to policyholder account balances | | | 1,613 | | | 1,786 | | | 1,737 | | | (10 | ) | | 3 | |
Amortization of deferred policy acquisition costs | | | 110 | | | 85 | | | 133 | | | 29 | | | (36 | ) |
Other acquisition and insurance expenses | | | 695 | | | 646 | | | 717 | | | 8 | | | (10 | ) |
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Pre-tax operating income | | | 1,938 | | | 1,718 | | | 1,433 | | | 13 | | | 20 | |
Legal settlements | | | 373 | | | 48 | | | – | | | NM | | | NM | |
Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) | | | (1,349 | ) | | (1,144 | ) | | (22 | ) | | (18 | ) | | NM | |
Net realized capital gains (losses) | | | 1,180 | | | 1,090 | | | 163 | | | 8 | | | NM | |
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Pre-tax income | | $ | 2,142 | | $ | 1,712 | | $ | 1,574 | | | 25 | % | | 9 | % |
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Total AIG Life and Retirement | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | |
Premiums | | $ | 2,596 | | $ | 2,464 | | $ | 2,549 | | | 5 | % | | (3 | )% |
Policy fees | | | 2,535 | | | 2,349 | | | 2,309 | | | 8 | | | 2 | |
Net investment income | | | 10,854 | | | 10,718 | | | 9,882 | | | 1 | | | 8 | |
Other income | | | 1,709 | | | 1,293 | | | 1,417 | | | 32 | | | (9 | ) |
Operating expenses: | | | | | | | | | | | | | | | | |
Policyholder benefits and claims incurred | | | 4,738 | | | 4,592 | | | 4,687 | | | 3 | | | (2 | ) |
Interest credited to policyholder account balances | | | 3,890 | | | 4,340 | | | 4,432 | | | (10 | ) | | (2 | ) |
Amortization of deferred policy acquisition costs | | | 650 | | | 812 | | | 866 | | | (20 | ) | | (6 | ) |
Other acquisition and insurance expenses | | | 3,321 | | | 2,920 | | | 2,895 | | | 14 | | | 1 | |
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Pre-tax operating income | | | 5,095 | | | 4,160 | | | 3,277 | | | 22 | | | 27 | |
Legal settlements | | | 1,020 | | | 154 | | | – | | | NM | | | NM | |
Changes in fair value of fixed maturity securities designated to hedge living benefit liabilities, net of interest expense | | | (161 | ) | | 37 | | | – | | | NM | | | NM | |
Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) | | | (1,486 | ) | | (1,201 | ) | | (327 | ) | | (24 | ) | | (267 | ) |
Net realized capital gains (losses) | | | 2,037 | | | 630 | | | 6 | | | 223 | | | NM | |
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Pre-tax income | | $ | 6,505 | | $ | 3,780 | | $ | 2,956 | | | 72 | % | | 28 | % |
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AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
2013 and 2012 Comparison
AIG Life and Retirement Results
Pre-tax operating income increased in 2013 compared to 2012, reflecting higher fee income from variable annuities driven by growth in assets under management, continued active spread management in interest rate sensitive product lines and higher net investment income. Net investment income increased in 2013 compared to 2012, due to higher income from alternative investments, partially offset by ML II fair value gains recognized in 2012 and reinvestment of investment proceeds at lower rates. Pre-tax operating income in 2013 included a net increase of $153 million from adjustments to update certain gross profit assumptions used to amortize DAC and related items in our investment-oriented product lines.
The increase in pre-tax operating income in 2013 compared to the prior year also reflected additional expenses recorded in 2012, which were related to the resolution of multi-state regulatory examinations of death claims practices and additional reserves for long-term care products in the Retail operating segment, and a comprehensive review of reserves for the GIC portfolio in the Institutional operating segment.
Retail Results
Pre-tax operating income for our Retail operating segment increased in 2013 compared to 2012, due in part to higher fee income in the Retirement Income Solutions product line, which reflected growth in variable annuity assets under management driven by strong sales and positive equity market performance. Base spreads (defined as net investment income excluding alternative investments and yield-enhancement activities, less interest credited) improved in 2013 compared to 2012, as a result of active spread management in our interest-sensitive product lines. The impact of life insurance mortality on pre-tax operating income improved in 2013 compared to 2012. Pre-tax operating income for the Retail operating segment in 2013 included $198 million of net favorable adjustments to update estimated gross profit assumptions for annuity spreads, surrender rates and life insurance mortality. See Critical Accounting Estimates — Estimated Gross Profits for Investment-Oriented Products (AIG Life and Retirement) for additional discussion of estimated gross profit assumptions.
The increases in Other income and in Other acquisition and insurance expenses in 2013 compared to 2012 included additional activity in our Brokerage Services product line principally due to the acquisition of Woodbury Financial in November 2012.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
The increase in pre-tax operating income in 2013 compared to the prior year also reflected additional expenses recorded in 2012, which included $67 million of additional reserves for long-term care products and $57 million related to the resolution of multi-state regulatory examinations of death claims practices, and higher general operating expenses related to incentive compensation plans.
Institutional Results
Pre-tax operating income for our Institutional operating segment increased in 2013 compared to 2012, due in part to higher fee income in the Group Retirement product line, which benefited from growth in separate account assets under management driven by favorable equity market performance. In addition, we continued active spread management in our interest rate sensitive product lines, which included lowering renewal crediting rates and disciplined new business pricing in our Group Retirement product line. Pre-tax operating income for the Institutional operating segment in 2013 was reduced by $45 million of net unfavorable adjustments primarily to update estimated gross profit assumptions for annuity spreads,only partially offset by an increase in the assumption for separate account asset long-term growth rates in the Group Retirement product line. See Critical Accounting Estimates — Estimated Gross Profits for Investment-Oriented Products (AIG Life and Retirement) for additional discussion of estimated gross profit assumptions. The increase in pre-tax operating income compared to 2012 also reflected $110 million of expenses recorded in 2012 resulting from a comprehensive review of reserves for the GIC portfolio.
2012 and 2011 Comparison
AIG Life and Retirement Results
Pre-tax operating income increased in 2012 compared to 2011, reflecting active spread management in interest rate sensitive product lines and higher net investmentfee income. The increase in fee income was driven by growth in reserves and assets under management, primarily from strong development of the stable value wrap business.The notional amount of stable value wrap assets under management at December 31, 2014 grew by $7.8 billion or 32 percent from December 31, 2013, which excluded a $2.5 billion deposit to the separate accounts for a stable value funding agreement. Growth in reserves also reflected a GIC deposit of $450 million in the fourth quarter of 2014 under a funding agreement-backed notes issuance program, in which an unaffiliated, non-consolidated statutory trust issues to investors medium-term notes, which are secured by GICs issued by one of the Life Insurance Companies. Under the funding agreement-backed notes program, issuances will be made opportunistically based upon pricing and demand available in the marketplace.
Net investment income for 2014 decreased compared to 2013, primarily due to lower net investment income from alternative investments and from the base portfolio. The 2014 decrease in alternative investment income of $41 million compared to 2011 included reinvestment of significant amounts of cash and short-term investments, higher fair value gains from ML II and PICC Group, lower impairment charges on investments2013 primarily reflected high hedge fund income in leased commercial aircraft and higher2013 due to favorable equity market conditions. The decrease in base net investment income from alternative investments. Benefit expense and DAC amortization expense for variable annuity products were lower in 20122014 compared to 2011,2013 primarily reflected lower base portfolio yield as a result of reinvestment in the
low interest rate environment, partially offset by growth in average assets. See MD&A – Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Institutional Markets business.
General operating expenses in 2014 increased slightly compared to 2013, primarily due to the favorable impact of separate account performance, which more than offset higher life insurance mortality costs. Pre-tax operating income also increased due to lower expenses in 2012 compared to 2011 related to the resolution of multi-state regulatory examinations of death claims practices in the Retail operating segment. Offsetting these increases in Pre-tax operating income were additional reserves for the GIC portfolio in 2012, and a decrease due to legal settlement proceeds of $226 million received in resolution of a litigation matter and included in Other income in 2011.
Retail Results
Pre-tax operating income for our Retail operating segment increased in 2012 compared to 2011, reflecting active spread management in interest rate sensitive product lines and higher net investment income. The increase in net investment income included reinvestment of significant amounts of cash and short-term investments, higher fair value gains from ML II and PICC Group, lower impairment charges on investments in leased commercial aircraft and higher income from alternative investments. Benefit expense and DAC amortization expense related to variable annuity products in the Retirement Income Solutions product line were lower in 2012 than 2011, primarily due to the favorable impact of separate account performance, which more than offset higher mortality costs in the Life Insurance and A&H product line. Pre-tax operating income also increased due to lower expenses of $57 million in 2012 compared to $202 million in 2011 related to the resolution of multi-state regulatory examinations of death claims practices. Offsetting these positive variances was a decrease due to legal settlement proceeds included in Other income in 2011.
Institutional Resultstechnology.
Pre-tax operating income for our Institutional operating segment increased in 2012 compared to 2011 due to active spread management in our Group Retirement product line, which included lowering renewal crediting rates and disciplined new business pricing. Net investment income increased in 2012 compared to 2011 due to reinvestment of significant amounts of cash and short-term investments, higher fair value gains from ML II and PICC Group, lower impairment charges on investments in leased commercial aircraft and higher income from alternative investments. Offsetting these positive variances were decreases in pre-tax operating income compared to 2011 from legal
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
settlement proceeds included in Other income in 2011 and $110 million of expenses recorded in 2012 resulting from a comprehensive review of reserves for the GIC portfolio.
AIG Life and RetirementMarkets Premiums, Deposits and Net Flows
PremiumsFor Institutional Markets, premiums represent amounts received on traditional life insurance policies group benefit policies and deposits on life-contingent payout annuities.annuities or structured settlements. Premiums and deposits is a non-GAAPnon‑GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance and investment-type annuity contracts, including GICs and mutual funds.stable value wrap funding agreements.
The following table presents a reconciliation of Institutional Markets premiums and deposits to GAAP premiums:
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Years Ended December 31,
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Years Ended December 31, | | | | | | | |
(in millions) | | | 2015 | | 2014 | | 2013 |
Premiums and deposits | | $ | 28,809 | | $ | 20,994 | | $ | 24,392 | | $ | 1,782 | $ | 3,797 | $ | 991 |
Deposits | | | (25,542 | ) | | (17,898 | ) | | (21,302 | ) | | (169) | | (3,344) | | (354) |
Other | | | (671 | ) | | (632 | ) | | (541 | ) | | (33) | | (21) | | (27) |
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Premiums | | $ | 2,596 | | $ | 2,464 | | $ | 2,549 | | $ | 1,580 | $ | 432 | $ | 610 |
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Premiums and deposits for 2015 decreased compared to 2014, primarily due to a $2.5 billion deposit to the separate accounts of one of the Life Insurance Companies for a stable value wrap funding agreement that was reflected in 2014. Excluding the $2.5 billion deposit in the prior year period, premiums and deposits for 2015 increased slightlycompared to 2014, primarily due to higher premiums, which reflected increased sales of terminal funding annuities in 2015.
The decrease in premiums in 2014 compared to 2013 was primarily due to a high volume of single-premium products sold in 2013, including life-contingent payout annuities. Sales of these products decreased in 2014 compared to 2012,2013 due to a more competitive environment as well as continued low interest rates. The increase in deposits in 2014 compared to 2013 included a $2.5 billion deposit to the separate accounts of one of the Life Insurance Companies for a stable value wrap funding agreement. The majority of stable value wrap sales are measured based on the notional amount included in assets under management, but do not include the receipt of funds that would be included in premiums and deposits. The increase in deposits in 2014 compared to 2013 also reflected a $450 million GIC issued in 2014.
Consumer insurance
Consumer Insurance Results
The following table presents Consumer Insurance results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 14,085 | $ | 14,936 | $ | 15,302 | | (6) | % | | (2) | % |
Policy fees | | 2,557 | | 2,453 | | 2,252 | | 4 | | | 9 | |
Net investment income | | 8,322 | | 9,082 | | 9,352 | | (8) | | | (3) | |
Other income | | 2,105 | | 1,998 | | 1,754 | | 5 | | | 14 | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 10,475 | | 10,796 | | 10,957 | | (3) | | | (1) | |
Interest credited to policyholder account balances | | 3,316 | | 3,353 | | 3,477 | | (1) | | | (4) | |
Amortization of deferred policy acquisition costs | | 2,887 | | 2,759 | | 2,836 | | 5 | | | (3) | |
General operating and other expenses* | | 7,013 | | 7,087 | | 6,826 | | (1) | | | 4 | |
Pre-tax operating income | $ | 3,378 | $ | 4,474 | $ | 4,564 | | (24) | % | | (2) | % |
* Includes general operating expenses, non deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.
Consumer Insurance Results by Operating Segment
Consumer Insurance presents its operating results in three operating segments – Retirement, Life and Personal Insurance. The following section provides a comparative discussion of Consumer Insurance Results of Operations for 2015, 2014 and 2013 by operating segment.
Retirement Results
The following table presents Retirement results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 168 | $ | 287 | $ | 188 | | (41) | % | | 53 | % |
Policy fees | | 1,072 | | 1,010 | | 861 | | 6 | | | 17 | |
Net investment income | | 6,002 | | 6,489 | | 6,628 | | (8) | | | (2) | |
Advisory fee and other income | | 2,056 | | 1,998 | | 1,754 | | 3 | | | 14 | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 511 | | 537 | | 364 | | (5) | | | 48 | |
Interest credited to policyholder account balances | | 2,823 | | 2,846 | | 2,935 | | (1) | | | (3) | |
Amortization of deferred policy acquisition costs | | 480 | | 346 | | 273 | | 39 | | | 27 | |
Non deferrable insurance commissions | | 282 | | 265 | | 249 | | 6 | | | 6 | |
Advisory fee expenses | | 1,349 | | 1,315 | | 1,175 | | 3 | | | 12 | |
General operating expenses | | 1,014 | | 980 | | 945 | | 3 | | | 4 | |
Pre-tax operating income | $ | 2,839 | $ | 3,495 | $ | 3,490 | | (19) | % | | - | % |
RETIREMENT pre-tax OPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre-tax operating income in 2015 decreased compared to 2014, primarily from higher structured settlementdue to lower net investment income and terminal funding annuity premiumsa lower net positive adjustment to reflect the update of actuarial assumptions, partially offset by growth in fee income. In addition, DAC amortization in Retirement Income Solutions increased in 2015 due to growth in the Institutional Marketsbusiness and lower equity market returns compared to 2014. Base net investment income decreased in 2015, which resulted in base spreads compression, but this decrease was partially offset by higher policy fees due to growth in variable annuity separate account assets under management, principally driven by positive net flows.
Pre-tax operating income in both years included a net positive impact from the update of certain estimated gross profit assumptions used to amortize DAC and related items in the investment-oriented product lines, which resulted in a $140 million net increase in pre-tax operating income in 2015, compared to a $246 million net increase in pre-tax operating income in 2014. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by product line and financial statement line item and additional discussion.
Net investment incomefor 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and lower base net investment income.
Base net investment income for 2015 decreased compared to 2014, primarily due to the effect of lower base yields from reinvestment at rates below the weighted average yield of the overall portfolio. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.
Overall, Retirement fixed maturity portfolio yields in 2015 declined compared to 2014, primarily as a result of investment purchases and investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio given the sustained low interest rate environment. While average interest crediting rates were down slightly due to active rate management, the decline in base yield resulted in spread compression in Fixed Annuities base spreads compared to 2014. Group Retirement base spread was flat compared to 2014, due to slightly lower average crediting rates as well as additional accretion income in 2015, which helped offset the decline in yield on the base portfolio. See Spread Management below for additional discussion.
General operating expenses increased in 2015 compared to 2014, due in part to technology investments and higher expenses associated with continued strong sales in the Retirement Income Solutions product line.
2014 and 2013 Comparison
Pre-tax operating income for Retirement in 2014 was comparable to 2013, as higher policy fees and the higher positive impact of actuarial assumption updates were offset by lower net investment income from alternative investments. The increase in policy fees was driven by growth in variable annuity separate account assets from positive net flows and favorable equity markets. A higher volume of commissions and advisory fees included in Other income, net of related expenses, was driven by increased assets under management.
Pre-tax operating income in both years included a net positive impact from the update of certain estimated gross profit assumptions used to amortize DAC and related items in the investment-oriented product lines, which resulted in a $246 million net increase in pre-tax operating income in 2014, compared to a $233 million net increase in pre-tax operating income in 2013. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by product line and financial statement line item and additional discussion.
Net investment income for 2014 decreased compared to 2013, primarily due to a $158 million decrease in income from alternative investments, including lower hedge fund income, which in 2013 had benefited from favorable equity market conditions and several large hedge fund redemptions. The decrease in hedge fund income in 2014 compared to 2013 was partially offset by an increase in private equity fund income.
Base net investment income for 2014 increased slightly compared to 2013, as participation income on a commercial mortgage loan and income from the redemption of an invested asset in 2014 more than offset the effect of lower base yields from reinvestment at rates below the weighted average yield of the overall portfolio. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.
Overall, Retirement fixed maturity portfolio yields in 2014 declined compared to 2013, primarily as a result of investment purchases and investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio in the historically low interest rate environment. The Fixed Annuities and Group Retirement product lines were able to maintain base spreads in 2014 at a level comparable to 2013, and Retirement Income Solutions base spread increased, as a result of active crediting rate management. See Spread Management below for additional discussion.
General operating expenses increased in 2014 compared to 2013, due in part to technology investments and the volume of continued sales growth of annuities in the Retirement Income Solutions and Fixed Annuities product lines.
Spread Management
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially mitigated through the Life Insurance Companies’ asset‑liability management process, product design elements and crediting rate strategies, a sustained low interest rate environment may negatively affect future profitability.
Disciplined pricing on new business and active crediting rate management are used in the Fixed Annuities and Group Retirement product lines to partially offset the impact of a continued decline in base yields resulting from investment of available cash flows in the low interest rate environment.
Disciplined pricing on new business is used to pursue new sales of annuity products at targeted net investment spreads in the current rate environment. Retirement has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Retirement cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products that had higher minimum rate guarantees have been re-filed with lower crediting rates as permitted under state
insurance laws for new sales. As a result, new sales of fixed annuity products generally have minimum interest rate guarantees of one percent.
Renewal crediting rate management is done under contractual provisions in annuity products that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. Retirement will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields. In addition to deferred annuity products, certain traditional long-duration products for which Retirement does not have the ability to adjust interest rates, such as payout annuities, are exposed to reduced earnings and potential loss recognition reserve increases in a sustained low interest rate environment.
As of December 31, 2015, Retirement’s fixed annuity reserves, which include fixed options offered within variable annuities sold in the Group Retirement and Retirement Income Solutions product lines as well as reserves of the Fixed Annuities product line, had minimum guaranteed interest rates ranging from one percent to 5.5 percent, with the higher rates representing guarantees on older in-force products. As indicated in the table below, approximately 73 percent of annuity account values were at their minimum crediting rates as of December 31, 2015, compared to 71 percent at December 31, 2014. As a result of disciplined pricing on new business and the run-off of older business with higher minimum crediting rates, fixed annuity account values having contractual minimum guaranteed rates above one percent decreased to 74 percent of total fixed annuity reserves at December 31, 2015 from 79 percent at December 31, 2014.
The following table presents fixed annuity account values by contractual minimum guaranteed interest rate and current crediting rates:
| Current Crediting Rates |
December 31, 2015 | | | 1-50 Basis | More than 50 | | | |
Contractual Minimum Guaranteed | At Contractual | Points Above | Basis Points | | | |
Interest Rate | Minimum | Minimum | Above Minimum | | | |
(in millions) | Guarantee | Guarantee | Guarantee | | Total | |
Fixed annuities * | | | | | | | | | |
1% | $ | 5,896 | $ | 6,340 | $ | 12,635 | $ | 24,871 | |
> 1% - 2% | | 12,659 | | 2,341 | | 2,974 | | 17,974 | |
> 2% - 3% | | 30,611 | | 473 | | 1,067 | | 32,151 | |
> 3% - 4% | | 12,231 | | 50 | | 10 | | 12,291 | |
> 4% - 5% | | 7,671 | | - | | 4 | | 7,675 | |
> 5% - 5.5% | | 202 | | - | | 5 | | 207 | |
Total | $ | 69,270 | $ | 9,204 | $ | 16,695 | $ | 95,169 | |
Percentage of total | | 73 | % | 10 | % | 17 | % | 100 | % |
* Fixed annuities shown include fixed options within variable annuities sold in Group Retirement and Retirement Income Solutions product lines.
Retirement Premiums and Deposits, Surrenders and Net Flows
Premiums
For Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums and deposits is a non‑GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts and mutual funds.
The following table presents a reconciliation of Retirement premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits* | $ | 25,241 | $ | 24,023 | $ | 23,729 |
Deposits | | (25,078) | | (23,903) | | (23,690) |
Other | | 5 | | 167 | | 149 |
Premiums | $ | 168 | $ | 287 | $ | 188 |
* Excludes activity related to closed blocks of fixed and variable annuities.
Premiumshave fluctuated since 2013 primarily due to changes in immediate annuity premiums in the Fixed Annuities product line. Premiums decreased slightly in 2012 compared to 2011, due to lower Group Benefit premiums partially offset by higher term life insurance premiums.
Premiums and Deposits and Net Flows
The following table presents Retirement premiums and deposits and net flows by operating segment and product line:
| | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Fixed Annuities | $ | 3,702 | $ | 3,578 | $ | 2,914 | | 3 | % | | 23 | % |
Retirement Income Solutions | | 10,828 | | 10,325 | | 8,608 | | 5 | | | 20 | |
Retail Mutual Funds | | 3,791 | | 3,377 | | 4,956 | | 12 | | | (32) | |
Group Retirement | | 6,920 | | 6,743 | | 7,251 | | 3 | | | (7) | |
Total Retirement premiums and deposits* | $ | 25,241 | $ | 24,023 | $ | 23,729 | | 5 | % | | 1 | % |
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Net flows | | | | | | |
Fixed Annuities | $ | (2,188) | $ | (2,313) | $ | (2,820) |
Retirement Income Solutions | | 7,010 | | 6,566 | | 5,092 |
Retail Mutual Funds | | 1,026 | | (1) | | 2,780 |
Group Retirement | | (2,135) | | (3,797) | | (492) |
Total Retirement net flows* | $ | 3,713 | $ | 455 | $ | 4,560 |
* Excludes activity related to closed blocks of fixed and variable annuities, which had reserves of approximately $5.0 billion and $5.4 billion at December 31, 2015 and 2014, respectively.
RETIREMENT PREMIUMS AND DEPOSITS by Product Line (in millions) |
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| | Percentage Change | |
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | 2013 vs.
2012
| | 2012 vs.
2011
| |
|---|
| | |
Retail | | | | | | | | | | | | | | | | |
Life Insurance and A&H | | $ | 3,342 | | $ | 3,350 | | $ | 3,384 | | | – | % | | (1 | )% |
Fixed Annuities | | | 2,914 | | | 1,469 | | | 6,782 | | | 98 | | | (78 | ) |
Retirement Income Solutions | | | 8,608 | | | 4,828 | | | 3,470 | | | 78 | | | 39 | |
Retail Mutual Funds | | | 4,956 | | | 2,723 | | | 1,925 | | | 82 | | | 41 | |
Closed blocks | | | 92 | | | 142 | | | 174 | | | (35 | ) | | (18 | ) |
| | |
Total premiums and deposits | | $ | 19,912 | | $ | 12,512 | | $ | 15,735 | | | 59 | % | | (20 | )% |
| | |
Institutional | | | | | | | | | | | | | | | | |
Group Retirement | | $ | 7,251 | | $ | 7,028 | | $ | 7,312 | | | 3 | % | | (4 | )% |
Institutional Markets | | | 991 | | | 774 | | | 659 | | | 28 | | | 17 | |
Group Benefits | | | 655 | | | 680 | | | 686 | | | (4 | ) | | (1 | ) |
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Total premiums and deposits | | | 8,897 | | | 8,482 | | | 8,657 | | | 5 | | | (2 | ) |
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Total Life and Retirement premiums and deposits | | $ | 28,809 | | $ | 20,994 | | $ | 24,392 | | | 37 | % | | (14 | )% |
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Premiums and deposits improved significantlyincreased in 20132015 compared to 2012,2014, primarily from strong sales of annuitiesdue to growth in our Retirement Income Solutions and Fixed AnnuitiesRetail Mutual Funds. Premiums and deposits increased in 2014 compared to 2013, primarily in Retirement Income Solutions product lines and increased sales ofin Fixed Annuities, partially offset by lower deposits in Retail Mutual Funds and Group Retirement mutual funds. Within the Group Retirement product line, the increase from mutual funds was largely offset by lower variableRetirement.
Net flows for annuity deposits, due in part to the historically low interest rate environment making deposits into fixed options less attractive. Premiums and deposits decreased in 2012 compared to 2011, primarily due to the impact of the historically low interest rate environment on fixed annuity sales and on Group Retirement deposits into fixed options.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
Net Flows
Net flows are presented for our investment product lines, which include Fixed Annuities, Retirement Income Solutions, Retail Mutual Funds and Group Retirement. Net flows from annuities, which areproducts included in the Fixed Annuities, Retirement Income Solutions and Group Retirement product lines represent premiums and deposits less death, surrender and other withdrawal benefits. Mutual fund netNet flows from mutual funds, which are included in both the Retail Mutual Funds and Group Retirement product lines, represent deposits less withdrawals.
The following table summarizesTotal net flows for our investment product lines:
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
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Net flows | | | | | | | | | | |
Fixed Annuities | | $ | (2,820 | ) | $ | (4,252 | ) | $ | 1,406 | |
Retirement Income Solutions | | | 5,092 | | | 1,598 | | | (48 | ) |
Retail Mutual Funds | | | 2,780 | | | 1,018 | | | 478 | |
Group Retirement | | | (492 | ) | | 302 | | | 1,088 | |
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Total net flows* | | $ | 4,560 | | $ | (1,334 | ) | $ | 2,924 | |
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* Excludes activity relatedRetirement increased in 2015 compared to closed blocks2014, primarily due to lower surrenders in Group Retirement, improvement in both sales and the level of fixedwithdrawals in Retail Mutual Funds, and variable annuities, which have reserves of approximately $6 billion at each of December 31, 2013 and 2012.continued growth in Retirement Income Solutions.
Total net flows from annuities and mutual funds increasedfor Retirement decreased in 20132014 compared to 2012,2013, primarily due to higher surrenders and decreasedwithdrawals in 20122014, primarily in the Group Retirement and Retail Mutual Funds product lines, which resulted in a significant decrease in net flows compared to 2011. 2013.
Premiums and Deposits and Net Flows by Product Line
A discussion of the significant variances in premiums and deposits and net flows for each of these product lines follows, including variances in line follows:
Fixed Annuities premiums and deposits a key componentincreased in 2015 compared to 2014, due to new product offerings and increases in market interest rates driven by widening credit spreads in the second half of net flows.
Retail Net Flows
Fixed Annuitiesthe year, but net flows and premiums andcontinued to be negative, primarily due to the sustained relatively low interest rate environment. The increase in Fixed Annuities deposits showed improvement in 20132014 compared to 2012,2013 was due to modest increases in interest rates and steepening of the yield curve in the secondfirst half of 2013, which made fixed annuity products more attractive2014, compared to lower rates in the marketplaceprior year, particularly in the first half of 2013. Fixed Annuities net flows in 2014 were negative, but improved compared to competing products such as bank deposits. The relatively low level of deposits in 2013, and 2012 comparedprimarily due to 2011, however, resulted in negative net flows for this product line in both 2013 and 2012, reflecting the challenges of the sustained low interest rate environment, as consumers were reluctant to purchase these products at the relatively low crediting rates offered, which have been priced to maintain our targeted spreads. Negative net flows have moderated since the second half of 2013 from the increase inincreased deposits.
Retirement Income Solutionspremiums and deposits and net flows increased in 2015 compared to 2014, reflecting an increase in index annuity sales. Premiums and deposits and net flows increased significantly in 2013 and 20122014 compared to 2011,2013, reflecting highera high volume of variable and index annuity sales, which have benefitted from innovativeconsumer demand for retirement products with guaranteed benefit features, product
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
enhancements, and expanded distribution as well asand a more favorable competitive environment. The improvement in surrender rate for this product line improvedrates in 20132015 and 2014 compared to 2012the prior years (see Surrender Rates below) was primarily due to the significant increasegrowth in average reservesaccount value driven by strongthe high volume of sales, and positive equity market performance.which has increased the proportion of business that is within the surrender charge period.
Retail Mutual FundFunds deposits and net flows increased in 2013 and 20122015 compared to 2011,2014, and decreased in 2014 compared to 2013, driven primarily by sales of ouractivity within the Focused Dividend Strategy product offerings.Portfolio. After record sales in 2013, the Focused Dividend Strategy Portfolio experienced relatively less favorable performance in 2014, putting pressure on 2014 sales and withdrawal activity. In 2015, sales and withdrawals for this portfolio improved, due to a return to strong performance levels, resulting in overall growth in Retail Mutual Funds net flows compared to 2014.
Institutional Net Flows
Group Retirementnet flows increased in 2015 compared to 2014, primarily due to lower surrender activity. The improvement in the surrender rate in 2015 compared to 2014 was due in part to lower large group surrenders, which include were approximately $1.5 billion in 2015, compared to $2.7 billion in 2014. Group Retirementnet flows from mutual funds in group retirement plans, decreased in 2013 and 20122014 compared to 2011, and were negative in 2013, primarily as a result ofdue to higher surrenders of individual participant contractsgroup surrender activity, as well as higherlower premiums and deposits. The large group surrenders. As discussed above, premiumsmarket has become increasingly competitive and deposits for this product line included increaseshas been impacted by the consolidation of healthcare providers and other employers in mutual fund deposits largely offset by lower annuity deposits.our target markets. This trend of heightened competition is expected to continue in 2016 as plan sponsors perform reviews of existing retirement plan relationships.
Surrender Rates
The following table presents reserves for selectedannuity product lines by surrender charge category at December 31, 2013 and 2012, and surrender rates for 2013 and 2012:category:
At December 31, | | 2015 | | | | 2014 | |
| | | | | | Retirement | | | | | | | | Retirement | |
| | Group | | Fixed | | Income | | | | Group | | Fixed | | Income | |
(in millions) | | Retirement(a) | | Annuities | | Solutions | | | | Retirement(a) | | Annuities | | Solutions | |
No surrender charge(b)(c) | $ | 60,720 | $ | 34,331 | $ | 14,184 | | | $ | 61,751 | $ | 34,255 | $ | 14,429 | |
Greater than 0% - 2% | | 1,199 | | 1,543 | | 4,517 | | | | 1,648 | | 2,736 | | 4,512 | |
Greater than 2% - 4% | | 1,363 | | 2,285 | | 4,565 | | | | 1,657 | | 2,842 | | 4,254 | |
Greater than 4% | | 5,952 | | 13,138 | | 31,683 | | | | 5,793 | | 12,754 | | 26,165 | |
Non-surrenderable | | 676 | | 3,723 | | 358 | | | | 770 | | 3,605 | | 151 | |
Total reserves | $ | 69,910 | $ | 55,020 | $ | 55,307 | | | $ | 71,619 | $ | 56,192 | $ | 49,511 | |
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| | 2013 | | 2012 | |
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At December 31,
(in millions)
| | Group
Retirement
Products(a)
| | Individual
Fixed
Annuities
| | Retirement
Income
Solutions
| | Group
Retirement
Products(a)
| | Individual
Fixed
Annuities
| | Retirement
Income
Solutions
| |
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| | |
No surrender charge(b) | | $ | 60,962 | | $ | 30,906 | | $ | 2,065 | | $ | 56,047 | | $ | 26,662 | | $ | 1,909 | |
0% – 2% | | | 1,508 | | | 2,261 | | | 16,839 | | | 1,242 | | | 3,695 | | | 14,824 | |
Greater than 2% – 4% | | | 1,967 | | | 4,349 | | | 2,734 | | | 1,400 | | | 3,383 | | | 2,148 | |
Greater than 4% | | | 5,719 | | | 16,895 | | | 19,039 | | | 4,878 | | | 22,256 | | | 10,842 | |
Non-surrenderable | | | 315 | | | 2,758 | | | 67 | | | 693 | | | 3,066 | | | 1,343 | |
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Total reserves | | $ | 70,471 | | $ | 57,169 | | $ | 40,744 | | $ | 64,260 | | $ | 59,062 | | $ | 31,066 | |
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Surrender rates | | | 9.0 | % | | 6.6 | % | | 8.7 | % | | 8.7 | % | | 6.3 | % | | 10.3 | % |
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(a) Excludes mutual fund assets under management of $15.1$14.5 billion and $11.8$14.6 billion at December 31, 20132015 and 2012,2014, respectively.
(b) Group Retirement Productsamounts in this category include reserves of approximately $6.2 billion, and $6.0 billion at both December 31, 20132015 and 2012, respectively, that2014, which are subject to 20 percent annual withdrawal limitations.
(c) Retirement Income Solutions amounts in this category for 2014 include $12.5 billion of reserves with zero surrender charge that were previously reported within “Greater than 0% - 2%”.
The following table presents surrender rates for deferred annuities by product line:
Years Ended December 31, | | | | | | |
| 2015 | | 2014 | | 2013 | |
Surrenders as a percentage of average account value | | | | | | |
Fixed Annuities | 6.9 | % | 7.0 | % | 6.6 | % |
Retirement Income Solutions | 6.0 | | 7.1 | | 8.7 | |
Group Retirement | 10.0 | | 11.6 | | 9.0 | |
Life Results
The following table presents Life results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 2,759 | $ | 2,679 | $ | 2,737 | | 3 | % | | (2) | % |
Policy fees | | 1,485 | | 1,443 | | 1,391 | | 3 | | | 4 | |
Net investment income | | 2,100 | | 2,199 | | 2,269 | | (5) | | | (3) | |
Other income | | 49 | | - | | - | | NM | | | NM | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 3,812 | | 3,771 | | 3,568 | | 1 | | | 6 | |
Interest credited to policyholder account balances | | 493 | | 507 | | 542 | | (3) | | | (6) | |
Amortization of deferred policy acquisition costs | | 433 | | 321 | | 360 | | 35 | | | (11) | |
Non deferrable insurance commissions | | 222 | | 257 | | 272 | | (14) | | | (6) | |
General operating expenses | | 968 | | 885 | | 849 | | 9 | | | 4 | |
Pre-tax operating income | $ | 465 | $ | 580 | $ | 806 | | (20) | | | (28) | |
Life pre-tax OPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre-tax operating income decreased in 2015 compared to 2014, primarily due to lower net investment income, mortality experience that was within pricing expectations but less favorable than the prior year, and a higher net negative adjustment to reflect updated actuarial assumptions. These decreases were partially offset by a $20 million reduction in the reserve for IBNR death claims related to enhanced claims practices, due to updated estimates in 2015, compared to a $104 million increase in this reserve in 2014, which was primarily related to a legacy block of small policies for which personal data elements were unavailable or incomplete.
Other income in 2015 was primarily related to commission and profit sharing revenues received by Laya Healthcare for the distribution of insurance products. Laya Healthcare, which we acquired on March 31, 2015, is Ireland’s second largest primary health insurance provider. Laya Healthcare distributes and administers primary healthcare for approximately 550,000 customers, and also offers other coverage including life, dental and travel insurance.
The net negative adjustment of $146 million related to an update of actuarial assumptions in 2015 was primarily due to lower assumed surrender rates for certain later-duration universal life with secondary guarantees, which represent approximately eight percent of the Life Insurance Companies’ total U.S. life reserves. The net negative adjustment also reflected lower investment spread assumptions, partially offset by more favorable than expected assumptions for mortality, as well as loss recognition expense of $28 million for certain discontinued long-term care products primarily due to lower future premium assumptions. These negative adjustments were partially offset by a decrease in certain Group Benefit claim reserves based on updated experience data. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by financial statement line item and additional discussion of loss recognition.
Net investment income for 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and, to a lesser extent, a decrease due to lower yields on the base portfolio. See Investments – Life Insurance Companies for additional discussion of the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.
General operating expenses increased in 2015 compared to 2014, primarily related to the expansion of the international Life business through the acquisitions of AIG Life Limited and RetirementLaya Healthcare. Higher expenses from the international acquisitions were partially offset by domestic savings from organizational changes.
2014 and 2013 Comparison
Pre-tax operating income decreased in 2014 compared to 2013, primarily due to increases in policyholder benefit reserves, lower net investment income and higher general operating expenses. Updates of actuarial assumptions also decreased pre-tax operating income by $119 million in 2014 compared to $80 million in 2013. These decreases were partially offset by a $28 million increase in pre-tax operating income in 2014 compared to 2013, due to a 2013 increase in equity-indexed universal life reserves, which was reflected in Interest credited to policyholder account balances.
Overall, mortality experience for 2014 was similar to 2013 and within pricing assumptions. Policyholder benefit expense in 2014 included an increase of approximately $104 million to the estimated reserves for IBNR death claims, which reflected continuing efforts to identify deceased insureds and their beneficiaries who have not presented a valid claim, pursuant to the 2012 resolution of a multi-state audit and market conduct examination. The 2014 increase in the IBNR reserve was related primarily to a legacy block of in-force and lapsed small face amount policies, for which certain personal data elements were unavailable or incomplete. In 2014, in the process of reviewing these policies as required under the terms of the regulatory agreement, we refined our estimate of the ultimate cost of these claims. The reserve increase in 2014 was in addition to amounts previously provided for IBNR claims in 2011 and 2012, which totaled $259 million.
Net investment income decreased in 2014 compared to 2013, primarily due to lower income from alternative investments and lower yields on the base portfolio due to investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio. See Investments – Life Insurance Companies for additional discussion of the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.
General operating expenses increased in 2014 compared to 2013 primarily due to strategic investments in technology and service platforms in the U.S. and Japan.
Spread Management
Disciplined pricing on new business is used to pursue new sales of life products at targeted net investment spreads in the current interest rate environment. Life has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Life cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products with higher minimum rate guarantees have been re-filed with lower crediting rates, as permitted under state insurance laws for new sales. Universal life insurance interest rate guarantees are generally two to three percent on new non-indexed products and zero to two percent on new indexed products, and are designed to meet targeted net investment spreads.
In-force Management. Crediting rates for in-force policies are adjusted in accordance with contractual provisions that were designed to allow crediting rates to be reset subject to minimum crediting rate guarantees.
The following table presents universal life account values by contractual minimum guaranteed interest rate and current crediting rates:
| Current Crediting Rates |
December 31, 2015 | | | 1-50 Basis | More than 50 | | | |
Contractual Minimum Guaranteed | At Contractual | Points Above | Basis Points | | | |
Interest Rate | Minimum | Minimum | Above Minimum | | | |
(in millions) | Guarantee | Guarantee | Guarantee | | Total | |
Universal life insurance | | | | | | | | | |
1% | $ | - | $ | - | $ | 7 | $ | 7 | |
> 1% - 2% | | 32 | | 164 | | 212 | | 408 | |
> 2% - 3% | | 552 | | 304 | | 1,452 | | 2,308 | |
> 3% - 4% | | 2,066 | | 495 | | 1,090 | | 3,651 | |
> 4% - 5% | | 3,939 | | 204 | | - | | 4,143 | |
> 5% - 5.5% | | 327 | | - | | - | | 327 | |
Total | $ | 6,916 | $ | 1,167 | $ | 2,761 | $ | 10,844 | |
Percentage of total | | 64 | % | 11 | % | 25 | % | 100 | % |
Life Premiums and Deposits
Premiums for Life represent amounts received on traditional life insurance policies and group benefit policies. Premiums and deposits for Life is a non‑GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.
The following table presents a reconciliation of Life premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits | $ | 4,974 | $ | 4,806 | $ | 4,862 |
Deposits | | (1,540) | | (1,532) | | (1,541) |
Other | | (675) | | (595) | | (584) |
Premiums | $ | 2,759 | $ | 2,679 | $ | 2,737 |
Excluding the effect of foreign exchange, Life premiums and deposits increased six percent in 2015 compared to 2014, and premiums increased eight percent, principally driven by growth in Japan and the acquisition of AIG Life Limited in the U.K.
The decrease in Life premiums in 2014 compared to 2013 was primarily due to the non-renewal of certain group benefit accounts and the strengthening of the U.S. dollar against the Japanese yen, partially offset by solid growth in Japan premiums excluding the effect of foreign exchange. As a result of the decrease in premiums, premiums and deposits also decreased in 2014 compared to 2013.
Personal Insurance Results
The following table presents Personal Insurance results:
Years Ended December 31, | | | | | | | | | | | | | | | | Percentage Change |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | | | | | | | | | |
Net premiums written | | | | | | | | | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | | (2) | % |
Increase in unearned premiums | | | | | | | | | | (422) | | (442) | | (323) | | 5 | | | (37) | |
Net premiums earned | | | | | | | | | | 11,158 | | 11,970 | | 12,377 | | (7) | | | (3) | |
Losses and loss adjustment expenses incurred | | | | | | | | | | 6,152 | | 6,488 | | 7,025 | | (5) | | | (8) | |
Acquisition expenses: | | | | | | | | | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | | | | | | | | | 1,974 | | 2,092 | | 2,203 | | (6) | | | (5) | |
Other acquisition expenses | | | | | | | | | | 1,183 | | 1,165 | | 1,044 | | 2 | | | 12 | |
Total acquisition expenses | | | | | | | | | | 3,157 | | 3,257 | | 3,247 | | (3) | | | - | |
General operating expenses | | | | | | | | | | 1,995 | | 2,220 | | 2,292 | | (10) | | | (3) | |
Underwriting income (loss) | | | | | | | | | | (146) | | 5 | | (187) | | NM | | | NM | |
Net investment income | | | | | | | | | | 220 | | 394 | | 455 | | (44) | | | (13) | |
Pre-tax operating income | | | | | | | | | $ | 74 | $ | 399 | $ | 268 | | (81) | % | | 49 | % |
NET PREMIUMS WRITTEN (in millions) | | Pre-Tax oPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre‑tax operating income decreased in 2015, compared to 2014, primarily due to a decrease in net investment income and underwriting results. Catastrophe losses were $145 million in 2015 compared to $126 million in 2014. In 2015, net favorable prior year loss reserve development was $19 million compared to $77 million in 2014.
Acquisition expenses decreased in 2015 compared to 2014. Excluding the effect of foreign exchange, acquisition expenses increased due to higher acquisition costs, primarily in automobile and property businesses, and higher profit share expenses related to warranty service programs, partially offset by a decrease in non-deferred direct marketing expenses. The non-deferred direct marketing expenses, excluding commissions, for 2015 were approximately $292 million, and, excluding the impact of foreign exchange, decreased by approximately $71 million from 2014.
General operating expenses decreased in 2015 compared to 2014, primarily due to the effect of foreign exchange and reflected an ongoing focus on cost efficiency.
Net investment income decreased in 2015 compared to 2014, primarily due to the continued impact of low interest rates resulting in yields on new purchases that were lower than the weighted average yield of the overall portfolio, negative performance of alternative investments in hedge funds, the strengthening of the U.S. dollar against most major foreign currencies, and lower allocation of net investment income.
See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.
2014 and 2013 Comparison
Pre‑tax operating income increased in 2014 compared to 2013, primarily due to a decrease in current accident year losses and lower general operating expenses, partially offset by higher catastrophe losses and lower net favorable prior year loss reserve development, higher acquisition expenses and a decrease in net investment income. Catastrophe losses were $126 million in 2014, compared to $77 million in 2013. The accident year losses include severe losses of approximately $54 million in 2014 compared to $17 million in 2013. Net favorable loss reserve development was $77 million in 2014 compared to $155 million in 2013, and included approximately $7 million of favorable loss reserve development from Storm Sandy compared to $41 million in 2013. Foreign exchange did not have a significant impact on the pre-tax operating income compared to 2013.
Acquisition expensesincreased in 2014 compared to 2013, primarily due to the change in business mix and higher costs in growth-targeted lines of business, partially offset by the effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen. Direct marketing expenses, excluding commissions, for 2014 were $392 million, compared to $440 million in 2013. Excluding the impact of foreign exchange, direct marketing expenses decreased by approximately $24 million in 2014 compared to 2013. Direct marketing accounted for approximately 17 percent of net premiums written in both 2014 and 2013.
General operating expensesdecreased in 2014 compared to 2013. Excluding the effect of foreign exchange, general operating expenses remained flat, as efficiencies from organizational realignment initiatives were offset by increased technology-related expenses.
Net investment income decreased in 2014 compared to 2013, primarily due to a decrease in interest rates during 2014, as yields on new purchases were lower than the weighted average yield of the overall portfolio, lower income on alternative investments, and lower income associated with investments accounted for under the fair value option method as an increase related to the PICC P&C rights offerings was more than offset by a decrease from fixed maturity investments accounted for under the fair value option. These were partially offset by the effect of continued portfolio diversification. The decrease in allocated net investment income was also due to a reduction in net loss reserves.
See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.
Personal Insurance Net Premiums Written
The following table presents Personal Insurance net premiums written by major line of business:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
| | | | | | | | U.S. dollars | | Original Currency |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Accident & Health | $ | 4,990 | $ | 5,441 | $ | 5,714 | | (8) | % | (5) | % | | 1 | % | (2) | % |
Personal Lines | | 6,590 | | 6,971 | | 6,986 | | (5) | | - | | | 4 | | 5 | |
Total Personal Insurance net | | | | | | | | | | | | | | | | |
premiums written | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | (2) | % | | 3 | % | 2 | % |
Personal Insurance (in millions) |
|
2015 and 2014 Comparison
Personal Insurance net premiums written decreased in 2015 compared to 2014 due to the strengthening of the U.S. dollar against the Major Currencies. Excluding the effect of foreign exchange, net premiums written increased in 2015 compared to 2014, as the business continued to grow through multiple product and distribution channels. The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
Accident & Health net premiums written increased in 2015 compared to 2014, primarily due to production increases in Accident and Health in Japan, partially offset by the decrease in Accident and Health in the U.S., due to continued underwriting discipline.
Personal Lines net premiums written increased in 2015 compared to 2014. These increases were primarily due to increased production in personal property business in the U.S. and Japan and in the automobile business in all regions, partially offset by decreased production of warranty service programs. The increase in the U.S. personal property business in 2015 was attributable to new business sales and improved retention in the AIG Private Client Group, whereas in Japan the increase was due to new business sales as a result of the recent increase in new housing starts and heightened demand before the duration restriction on long-term fire insurance became effective in October 2015. In addition, the increase in U.S. personal property business in 2015 reflected changes to optimize our reinsurance structure to retain more favorable risks, while continuing to manage aggregate exposure.
2014 and 2013 Comparison
Personal Insurance net premiums written decreased in 2014 compared to 2013, primarily due to the impact of foreign exchange as the U.S. dollar strengthened against the Japanese yen. Excluding the effect of foreign exchange, net premiums written increased in 2014 compared to 2013 as the business continued to grow through multiple product and distribution channels, including direct marketing. The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
Accident & Healthnet premiums written decreased in 2014 compared to 2013. The decrease was primarily due to our focus on maintaining underwriting discipline in certain classes of business in the U.S., partially offset by growth in Japan and Latin America.
Personal Linesnet premiums written increased in 2014 compared to 2013. The increase was primarily due to increased rates and improved retention in AIG Private Client Group and continued growth of automobile business outside of Japan, partially offset by declines in the U.S. warranty service programs.
InvestmentsPersonal Insurance Net Premiums Written by Region
The following table presents Personal Insurance net premiums written by region:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
| | | | | | | | U.S. dollars | | Original Currency |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Americas | $ | 3,810 | $ | 3,824 | $ | 3,794 | | - | % | 1 | % | | 2 | % | 4 | % |
Asia Pacific | | 5,916 | | 6,516 | | 6,893 | | (9) | | (5) | | | 3 | | 1 | |
EMEA | | 1,854 | | 2,072 | | 2,013 | | (11) | | 3 | | | 3 | | 2 | |
Total net premiums written | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | (2) | % | | 3 | % | 2 | % |
Personal insurance NET PREMIUMS WRITTEN by Region
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The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
2015 and 2014 Comparison
Americas net premiums written in 2015 increased compared to 2014 due to growth in personal property and automobile businesses, offset by decreases in warranty service programs and Accident and Health businesses in the U.S. The growth in personal property business is primarily driven by new business sales and improved retention in AIG Private Client Group in the U.S., as well as the changes in the reinsurance structure discussed above.
Asia Pacific net premiums written increased in 2015 compared to 2014, primarily due to increased production in personal property, Accident and Health and automobile businesses.
EMEA net premiums written increased in 2015 compared to 2014, primarily in automobile and in warranty service programs, partially offset by decreases in Accident and Health.
2014 and 2013 Comparison
Americas net premiums written increased in 2014 compared to 2013, primarily due to an increase in all product lines in our Latin America operations and growth in U.S. personal property and automobile businesses. These were partially offset by a decrease in U.S. Accident and Health due to our continued focus on maintaining underwriting discipline.
Asia Pacific net premiums written increased in 2014 compared to 2013, primarily due to production increases in Japan Accident and Health and in property and automobile business outside of Japan.
EMEA net premiums written increased in 2014 compared to 2013, due to growth in the automobile business and warranty service programs, partially offset by a decrease in the Accident and Health business.
Personal Insurance Underwriting Ratios
The following tables present the Personal Insurance combined ratios based on GAAP data and reconciliation to the accident year combined ratio, as adjusted:
Years Ended December 31, | | | | | | | | | | | | Increase (Decrease) |
| | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
Loss ratio | | | | | | 55.1 | | 54.2 | | 56.8 | | 0.9 | | (2.6) |
Catastrophe losses and reinstatement premiums | | | | | | (1.3) | | (1.1) | | (0.7) | | (0.2) | | (0.4) |
Prior year development net of premium adjustments | | | | | | 0.2 | | 0.7 | | 1.3 | | (0.5) | | (0.6) |
Accident year loss ratio, as adjusted | | | | | | 54.0 | | 53.8 | | 57.4 | | 0.2 | | (3.6) |
Acquisition ratio | | | | | | 28.3 | | 27.2 | | 26.2 | | 1.1 | | 1.0 |
General operating expense ratio | | | | | | 17.9 | | 18.5 | | 18.5 | | (0.6) | | - |
Expense ratio | | | | | | 46.2 | | 45.7 | | 44.7 | | 0.5 | | 1.0 |
Combined ratio | | | | | | 101.3 | | 99.9 | | 101.5 | | 1.4 | | (1.6) |
Catastrophe losses and reinstatement premiums | | | | | | (1.3) | | (1.1) | | (0.7) | | (0.2) | | (0.4) |
Prior year development net of premium adjustments | | | | | | 0.2 | | 0.7 | | 1.3 | | (0.5) | | (0.6) |
Accident year combined ratio, as adjusted | | | | | | 100.2 | | 99.5 | | 102.1 | | 0.7 | | (2.6) |
Personal Insuranceratios |
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The following tables present Personal Insurance accident year catastrophe and severe losses by region and the number of events:
Catastrophes(a)
| # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
Year Ended December 31, 2015 | | | | | | | | | |
Flooding | 4 | $ | 4 | $ | - | $ | 2 | $ | 6 |
Windstorms and hailstorms | 13 | | 82 | | 37 | | - | | 119 |
Wildfire | 1 | | 1 | | - | | - | | 1 |
Tropical cyclone | 1 | | - | | 19 | | - | | 19 |
Total catastrophe-related charges | 19 | $ | 87 | $ | 56 | $ | 2 | $ | 145 |
Year Ended December 31, 2014 | | | | | | | | | |
Windstorms and hailstorms | 14 | | 51 | | 46 | | - | | 97 |
Tropical cyclone | 4 | | 9 | | 19 | | - | | 28 |
Earthquakes | 1 | | 1 | | - | | - | | 1 |
Total catastrophe-related charges | 19 | $ | 61 | $ | 65 | $ | - | $ | 126 |
Year Ended December 31, 2013 | | | | | | | | | |
Flooding | 7 | $ | 26 | $ | - | $ | 2 | $ | 28 |
Windstorms and hailstorms | 2 | | 11 | | - | | 5 | | 16 |
Tropical cyclone | - | | - | | 33 | | - | | 33 |
Total catastrophe-related charges | 9 | $ | 37 | $ | 33 | $ | 7 | $ | 77 |
(a) Catastrophes are generally weather or seismic events having a net impact on AIG in excess of $10 million each.
Severe Losses(b)
Years Ended December 31, | # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
2015 | 1 | $ | 12 | $ | - | $ | - | $ | 12 |
2014 | 4 | $ | 50 | $ | 4 | $ | - | $ | 54 |
2013 | 1 | $ | 17 | $ | - | $ | - | $ | 17 |
* Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.
2015 and 2014 Comparison
The combined ratio increased by 1.4 points in 2015 compared to 2014, reflecting an increase in the loss ratio and acquisition ratio, partially offset by a decrease in the general operating expense ratio. The accident year combined ratio, as adjusted, increased by 0.7 points in 2015 compared to 2014.
The accident year loss ratio, as adjusted, increased by 0.2 points in 2015, compared to 2014, due to higher large but not severe losses in automobile and personal property businesses, partially offset by a decrease in losses in warranty service programs and lower severe losses. The loss ratio improvement in warranty service programs was offset by an increase in the acquisition ratio due to a related profit sharing arrangement.
The acquisition ratio increased by 1.1 points in 2015 compared to 2014, primarily due to increases in acquisition costs in warranty service programs and in the automobile business, partially offset by lower direct marketing expenses in the Accident and Health business.
The general operating expense ratio decreased by 0.6 points in 2015 compared to 2014, reflecting an ongoing focus on cost efficiency.
2014 and 2013 Comparison
The combined ratio decreased by 1.6 points in 2014 compared to 2013, primarily due to a lower loss ratio, partially offset by a higher acquisition ratio as discussed below.
The accident year combined ratio, as adjusted, decreased by 2.6 points in 2014 compared to 2013, primarily due to an improved accident year loss ratio, as adjusted.
The accident year loss ratio, as adjusted, decreased by 3.6 points in 2014 compared to 2013, as a result of improvements across all lines of business. The lower losses associated with a warranty retail program were largely offset by an increase in the related profit sharing arrangement, which increased the acquisition ratio in 2014 compared to 2013. The severe losses of $54 million, resulting largely from four fire claims, accounted for 0.5 points of the accident year loss ratio, as adjusted, in 2014.
The general operating expense ratio remained unchanged in 2014 compared to 2013, reflecting the impact of efficiencies from organizational realignment initiatives, offset by increased technology-related expenses.
Corporate and Other
Corporate and Other Results
The following table presents AIG’s Corporate and Other results:
Years Ended December 31, | | | | | | | | | | | | | | | | Percentage Change |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Corporate and Other pre-tax operating loss: | | | | | | | | | | | | | | | | | | | | |
Equity in pre-tax operating earnings of AerCap(a) | | | | | | | | | $ | 255 | $ | 434 | $ | - | | (41) | % | | NM | % |
Fair value of PICC investments(b) | | | | | | | | | | 33 | | 37 | | - | | (11) | | | NM | |
Income from other assets, net(c) | | | | | | | | | | 1,382 | | 373 | | 47 | | 271 | | | NM | |
Corporate general operating expenses | | | | | | | | | | (985) | | (1,146) | | (1,115) | | 14 | | | (3) | |
Severance expense(d) | | | | | | | | | | - | | - | | (265) | | NM | | | NM | |
Interest expense | | | | | | | | | | (1,101) | | (1,233) | | (1,412) | | 11 | | | 13 | |
Direct Investment book | | | | | | | | | | - | | 1,241 | | 1,448 | | NM | | | (14) | |
Global Capital Markets | | | | | | | | | | - | | 359 | | 625 | | NM | | | (43) | |
Run-off insurance Lines | | | | | | | | | | (488) | | (445) | | 403 | | (10) | | | NM | |
Consolidation and eliminations | | | | | | | | | | 21 | | 1 | | 4 | | NM | | | (75) | |
Total Corporate and Other pre-tax operating loss | | | | | | | | | $ | (883) | $ | (379) | $ | (265) | | (133) | % | | (43) | % |
(a) Represents our share of AerCap’s pre-tax operating income, which excludes certain post-acquisition transaction expenses incurred by AerCap in connection with its acquisition of ILFC and the difference between expensing AerCap’s maintenance rights assets over the remaining lease term as compared to the remaining economic life of the related aircraft.
(b) During the first quarter of 2015, Non-Life Insurance Companies sold a portion of their investment in PICC P&C to AIG Parent. During 2014, the Life Insurance Companies sold their investment in PICC Group to AIG Parent.
(c) Consists of the results of investments held by AIG Parent to support various corporate needs as well as the remaining positions of AIGFP, life settlements, real estate, equipment leasing and lending and other secured lending investments held by AIG Parent and certain subsidiaries. As a result of the progress of the wind down and de-risking activities of the DIB and the derivative portfolio of AIGFP included within GCM, AIG has discontinued separate reporting of the DIB and GCM. Their results have been reported within Income from other assets, net, beginning with the first quarter of 2015. This reporting aligns with the manner in which AIG manages its financial resources. Prior periods are presented in historical format for informational purposes. Interest expense for 2015 includes $70 million of interest expense previously reported in DIB results.
(d) Includes $263 million of severance expense attributable to the Property Casualty and Personal Insurance operating segments.
Corporate and Other Results
2015 and 2014 Comparison
Corporate and Other pre-tax operating losses increased in 2015 compared to 2014 primarily due to lower fair value appreciation on ABS CDOs, lower credit valuation adjustments on assets for which the fair value option was elected, and lower mark-to-market income on CDS positions as a result of portfolio wind down and more significant spread tightening in 2014, all of which are reflected in Income from other assets, net. Partially offsetting these declines were lower corporate general operating expenses resulting from a pension curtailment credit and lower interest expense from ongoing liability management activities.
Run-off insurance lines reported an increase in pre-tax operating loss in 2015 primarily due to higher net adverse prior year loss reserve development reflecting the loss reserve strengthening in classes of business with long reporting tails and transfers of certain casualty lines, including environmental liability and healthcare coverage that were no longer offered by Commercial Insurance to Run-off insurance lines. See Insurance Reserves – Non-Life Insurance Companies – Net Loss Development for further discussion. These increases in net adverse prior year loss reserve development were partially offset by excess workers’ compensation net loss reserve discount benefit, primarily reflecting an increase in Treasury rates in 2015. See Insurance Reserves – Non-Life Insurance Companies – Discounting of Reserves for further discussion.
2014 and 2013 Comparison
Corporate and Other pre‑tax operating losses increased in 2014 compared to 2013 primarily due to an increase in general operating expenses as a result of centralizing processes to lower-cost locations and increased costs related to investments in technology, lower fair value appreciation on ABS CDOs driven primarily by improved collateral pricing due to more significant improvements in home price indices and amortization of the underlying collateral in 2013, lower credit valuation adjustments on assets for which the fair value option was elected, and lower mark-to-market income on CDS positions as a result of portfolio wind down and spread widening, partially offset by our share of AerCap’s pre-tax operating income, which was accounted for under the equity method, and lower interest expense from ongoing debt management activities described in Liquidity and Capital Resources.
Run-off insurance lines reported a pre-tax operating loss of $445 million in 2014 compared to income of $403 million in 2013, primarily as a result of a $407 million charge from a decrease in reserve discount in 2014 compared to a $631 million benefit from an increase in discount in 2013. This discounting-related charge was partially offset by a $98 million decrease in net adverse prior year loss reserve development and an improvement in current accident year loss experience, particularly in the environmental liability business (2004 and prior). The discount charge was primarily due to the decline in risk free rates during
2014 used under Pennsylvania and Delaware prescribed or permitted practices, change in payout pattern assumptions, including the effect of commutations and accelerated settlements for the certain Excess Workers’ Compensation reserves, as well as accretion. See Insurance Reserves - Discounting of Reserves for additional information.
Overview
Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business models for Non-Life Insurance Companies, Life Insurance Companies and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of intermediate and long duration fixed maturity securities.
Investments Highlights in 2015 |
•A rise in rates, widening of credit spreads and sales of equity securities resulted in a decrease in our net unrealized gain position in our investment portfolio. Net unrealized gains in our available for sale portfolio decreased to approximately $8.8 billion as of December 31, 2015 from approximately $19.0 billion as of December 31, 2014. •We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in mortgage loans with favorable risk versus return characteristics to improve yields and increase net investment income. •Our alternative investments portfolio performance experienced a significant drop off in the second half of 2015 due to increased volatility in equity markets, which affected the performance of our hedge fund portfolio. •Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called. •Other-than-temporary impairments increased due to impairments within the energy and emerging markets sectors, driven primarily by slowing growth in China and weakness in commodity markets. •We experienced an increase in gains of sales of securities in 2015 versus 2014 due to a partial divestiture of our PICC equity interests. |
We
Investment Strategies
Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.
Some of our key investment strategies are as follows:
•Fixed maturity securities held by the U.S. insurance companies included in Non-Life Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.
•Outside of the U.S., fixed maturity securities held by Non-Life Insurance Companies consist primarily of intermediate duration high-grade securities generally denominated in the currencies of the countries in which we operate.
·While more of a focus is placed on asset-liability management in Life Insurance Companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.
·AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. AIG Parent’s liquidity sources are held in the form of cash, short-term investments and publicly traded, intermediate term investment-grade rated fixed maturity securities. Based upon an assessment of its immediate and longer-term funding needs, AIG Parent purchases publicly traded, intermediate term, investment-grade rated fixed maturity securities that can be readily monetized through sales or repurchase agreements. These securities allow us to diversify sources of liquidity while reducing the cost of maintaining sufficient liquidity.
Investments by Legal Entity Category
The following tables summarize the composition of AIG's investments:
| | Non-Life | | Life | | | | | |
| | Insurance | | Insurance | | Corporate | | | |
(in millions) | | Companies | | Companies | | and Other(a) | | | Total |
December 31, 2015 | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | |
Bonds available for sale, at fair value | $ | 84,849 | $ | 157,150 | $ | 6,246 | | $ | 248,245 |
Other bond securities, at fair value | | 1,463 | | 3,589 | | 11,730 | | | 16,782 |
Equity securities: | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | 2,821 | | 144 | | (50) | | | 2,915 |
Other Common and preferred stock, at fair value | | 355 | | - | | 566 | | | 921 |
Mortgage and other loans receivable, net of allowance | | 8,278 | | 23,979 | | (2,692) | | | 29,565 |
Other invested assets | | 10,571 | | 12,398 | | 6,825 | | | 29,794 |
Short-term investments | | 3,189 | | 2,877 | | 4,066 | | | 10,132 |
Total investments(b) | | 111,526 | | 200,137 | | 26,691 | | | 338,354 |
Cash | | 1,011 | | 557 | | 61 | | | 1,629 |
Total invested assets | $ | 112,537 | $ | 200,694 | $ | 26,752 | | $ | 339,983 |
December 31, 2014 | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | |
Bonds available for sale, at fair value | $ | 92,942 | $ | 164,527 | $ | 2,390 | | $ | 259,859 |
Other bond securities, at fair value | | 1,733 | | 2,785 | | 15,194 | | | 19,712 |
Equity securities: | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | 4,241 | | 150 | | 4 | | | 4,395 |
Other Common and preferred stock, at fair value | | 495 | | - | | 554 | | | 1,049 |
Mortgage and other loans receivable, net of allowance | | 6,686 | | 20,874 | | (2,570) | | | 24,990 |
Other invested assets | | 10,372 | | 11,916 | | 12,230 | | | 34,518 |
Short-term investments | | 4,154 | | 2,131 | | 4,958 | | | 11,243 |
Total investments(b) | | 120,623 | | 202,383 | | 32,760 | | | 355,766 |
Cash | | 1,191 | | 451 | | 116 | | | 1,758 |
Total invested assets | $ | 121,814 | $ | 202,834 | $ | 32,876 | | $ | 357,524 |
(a) Beginning in the fourth quarter of 2015, Eaglestone Reinsurance Company is reported in Corporate and Other.
(b) At December 31, 2015, approximately 90 percent and 10 percent of investments were held by domestic and foreign entities, respectively, compared to approximately 90 percent and 10 percent, respectively, at December 31, 2014.
The following table presents the components of Net Investment Income:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Interest and dividends | $ | 12,856 | $ | 13,246 | $ | 13,199 |
Alternative investments | | 1,476 | | 2,624 | | 2,803 |
Other investment income* | | 249 | | 726 | | 356 |
Total investment income | | 14,581 | | 16,596 | | 16,358 |
Investment expenses | | 528 | | 517 | | 548 |
Total net investment income | $ | 14,053 | $ | 16,079 | $ | 15,810 |
* Includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and which are used to economically hedge the interest rate risk in GMWB embedded derivatives. For the years ended December 31, 2015, 2014 and 2013, the net investment income (loss) recorded on these securities was $(43) million, $260 million and $(161) million, respectively.
Net investment income decreased for 2015 compared to 2014 due to lower income on alternative investments, primarily related to hedge fund performance, lower income on assets for which the fair value option was elected, and lower reinvestment yields.
Net investment income for 2014 increased compared to 2013 primarily due to positive performance on bonds where we elected the fair value option, driven by movements in interest rates, partially offset by lower income on alternative investments due to equity market performance and lower reinvestment yields on our fixed maturity securities portfolio due to the low interest rate environment.
Non-Life Insurance Companies
For the Non-Life Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the Non-Life Insurance Companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.
The Non-Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies;agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate;estate and commercial mortgage loans. Income from theseWhile invested assets backing reserves of the Non-Life Insurance Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as cashto manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the Non-Life Insurance Companies’ liquidity, duration and short term investments, is included in our measure of base net investment income, after excluding certain items such as call and tender income, mortgage prepayment fees, change in accretion of discount for certain high credit quality structured securitiesobjectives as well as current risk‑return and impairment charges on investments in leased commercial aircraft.tax objectives.
In addition, wethe Non-Life Insurance Companies seek to enhance our returns through selective investments in a diversified portfolio of private equity funds, hedge funds and affordable housing partnerships. alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields. Ouryields and have provided added diversification to the broader portfolio. The Non-Life Insurance Companies’ investment portfolio also includes, to a lesser extent, commonequity securities.
With respect to non-affiliate over‑the‑counter derivatives, the Non-Life Insurance Companies conduct business with highly rated counterparties and preferred stocksdo not expect the counterparties to fail to meet their obligations under the contracts. The Non-Life Insurance Companies have controls in place to monitor credit exposures by limiting transactions with specific counterparties within specified dollar limits and yield-enhancement items, suchassessing the creditworthiness of counterparties periodically. The Non-Life Insurance Companies generally use ISDA Master Agreements and Credit Support Annexes (CSAs) with bilateral collateral provisions to reduce counterparty credit exposures.
Fixed maturity investments of the Non-Life Insurance Companies domestic operations, with an intermediate duration of 4.7 years, are currently comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns, as our investment in PICC Group and securities for which the fair value option has been elected, as
well as ML II priortaxable municipal bonds, government and agency bonds, and corporate bonds. The majority of these high quality investments are rated A or higher based on composite ratings.
Fixed maturity investments held in the Non-Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, and short to its liquidationintermediate duration, averaging 3.2 years.
Life Insurance Companies
The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.
The Life Insurance Companies use asset‑liability management as a primary tool to monitor and manage risk in 2012.
Our their businesses. The Life Insurance Companies' fundamental investment strategy is to maintain a diversified, high quality portfolio of fixed maturity securities withthat, to the intent to largely matchextent possible, complements the characteristics of our liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration. See Investments An extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses.
The Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans.
In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields. While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio. The Life Insurance Companies investment portfolio also includes, to a lesser extent, equity securities and yield enhancing investments.
The Life Insurance Companies monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. The Life Insurance Companies frequently review their interest rate assumptions and actively manage the crediting rates used for additional discussiontheir new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in a historically low interest rate environment. The low interest rate environment makes it more difficult to profitably price many of our asset liability management process.products and puts margin pressure on existing products, due to the challenge of investing recurring premiums and deposits and reinvesting investment portfolio cash flows in the low rate environment while maintaining satisfactory investment quality and liquidity. In addition, there is investment risk associated with future premium receipts from certain in‑force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
AIG 2013 Form 10-KFixed maturity investments of the Life Insurance Companies domestic operations, with an intermediate duration of 6.6 years, are comprised of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.
Fixed maturity investments held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, and intermediate to long duration, averaging 13.7 years.
TABLE OF CONTENTSTable of Contents
ITEMItem 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT INVESTMENTS
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the NAICNational Association of Insurance Companies (NAIC) evaluates the investments of U.S. insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called 'NAIC‘NAIC Designations.'’ In general, NAIC Designations of '1'‘1’ highest quality, or '2'‘2’ high quality, include fixed maturity securities considered investment grade, while NAIC Designations of '3'‘3’ through '6'‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The following tables summarize the ratings distribution of ourLife Insurance Companies fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies. See Investments —– Credit Ratings herein for a full description of the composite AIG credit ratings.
The following table presents the fixed maturity security portfolio of AIG Life and RetirementInsurance Companies categorized by NAIC Designation, at fair value:
December 31, 2015 | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Total | | |
| | | | | | Total | | | | | | | | | | | Below | | |
| | | | | | Investment | | | | | | | | | | | Investment | | |
NAIC Designation | | 1 | | 2 | | Grade | | | 3 | | 4 | | 5 | | 6 | | Grade | | Total |
Other fixed maturity securities | $ | 44,714 | $ | 58,029 | $ | 102,743 | | $ | 4,801 | $ | 2,739 | $ | 413 | $ | 133 | $ | 8,086 | $ | 110,829 |
Mortgage-backed, asset-backed and collateralized | | 42,411 | | 2,091 | | 44,502 | | | 239 | | 181 | | 29 | | 471 | | 920 | | 45,422 |
Total* | $ | 87,125 | $ | 60,120 | $ | 147,245 | | $ | 5,040 | $ | 2,920 | $ | 442 | $ | 604 | $ | 9,006 | $ | 156,251 |
| | | | | | | | | | | | |
| | |
December 31, 2013
(in millions)
| | NAIC Designation
| | Other Fixed
Maturity
Securities
| | Mortgage Backed,
Asset Backed and
Collateralized
| | Total*
| |
|---|
| | |
Investment grade: | | | | | | | | | | | | |
| | 1 | | $ | 45,561 | | $ | 38,812 | | $ | 84,373 | |
| | 2 | | | 62,070 | | | 1,458 | | | 63,528 | |
| | |
| | Subtotal investment grade | | | 107,631 | | | 40,270 | | | 147,901 | |
| | |
Below investment grade: | | | | | | | | | | | | |
| | 3 | | | 4,345 | | | 635 | | | 4,980 | |
| | 4 | | | 2,194 | | | 347 | | | 2,541 | |
| | 5 | | | 380 | | | 229 | | | 609 | |
| | 6 | | | 108 | | | 581 | | | 689 | |
| | |
| | Subtotal below investment grade | | | 7,027 | | | 1,792 | | | 8,819 | |
| | |
Total | | | | $ | 114,658 | | $ | 42,062 | | $ | 156,720 | |
| | |
* Excludes $449 million$4.5 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within AIG Life and RetirementInsurance Companies that require a statutory filing.
The following table presents the fixed maturity security portfolio of AIG Life and Retirement Insurance Companiescategorized by composite AIG credit rating, at fair value:
December 31, 2015 | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Total | | |
| | | | | | Total | | | | | | | | | Below | | |
| | | | | | Investment | | | | | | | CCC and | | Investment | | |
Composite AIG Credit Rating | | AAA/AA/A | | BBB | | Grade | | | BB | | B | | Lower | | Grade | | Total |
Other fixed maturity securities | $ | 44,758 | $ | 58,156 | $ | 102,914 | | $ | 4,692 | $ | 2,808 | $ | 415 | $ | 7,915 | $ | 110,829 |
Mortgage-backed, asset-backed and collateralized | | 26,312 | | 3,352 | | 29,664 | | | 1,266 | | 1,033 | | 13,459 | | 15,758 | | 45,422 |
Total* | $ | 71,070 | $ | 61,508 | $ | 132,578 | | $ | 5,958 | $ | 3,841 | $ | 13,874 | $ | 23,673 | $ | 156,251 |
| | | | | | | | | | | | |
| | |
December 31, 2013
(in millions)
| | Composite AIG Credit Rating
| | Other Fixed
Maturity
Securities
| | Mortgage Backed,
Asset Backed and
Collateralized
| | Total*
| |
|---|
| | |
Investment grade: | | | | | | | | | | | | |
| | AAA/AA/A | | $ | 45,490 | | $ | 23,545 | | $ | 69,035 | |
| | BBB | | | 62,479 | | | 3,068 | | | 65,547 | |
| | |
| | Subtotal investment grade | | | 107,969 | | | 26,613 | | | 134,582 | |
| | |
Below investment grade: | | | | | | | | | | | | |
| | BB | | | 4,120 | | | 1,879 | | | 5,999 | |
| | B | | | 2,075 | | | 1,848 | | | 3,923 | |
| | CCC and Lower | | | 494 | | | 11,722 | | | 12,216 | |
| | |
| | Subtotal below investment grade | | | 6,689 | | | 15,449 | | | 22,138 | |
| | |
Total | | | | $ | 114,658 | | $ | 42,062 | | $ | 156,720 | |
| | |
* Excludes $449 million$4.5 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within AIG Life and RetirementInsurance Companies that require a statutory filing.
Credit Ratings
At December 31, 2015, approximately 90 percent of our fixed maturity securities were held by our domestic entities. Approximately 16 percent of such securities were rated AAA by one or more of the principal rating agencies, and approximately 17 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in the internal analysis.
AIG 2013 Form 10-K
TableA significant portion of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
Yield and Net Investment Income
Overall, our yields declined in 2013 as investment purchases were made at yields lower thanforeign entities’ fixed maturity securities portfolio is rated by Moody’s Investors’ Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. (S&P), or similar foreign rating services. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the weighted average yieldcredit quality of the existing portfolio. In 2012,foreign portfolio’s non-rated fixed maturity securities. At December 31, 2015, approximately 16 percent of such investments were either rated AAA or, on the impact of lower yields on new purchases was largely offset by reinvestment of significant amounts of cash and short-term investments during 2011. During prolonged periods of low or declining interest rates, we generally must invest new net flows and reinvest the cash flows from investment sales, interest and maturitiesbasis of our portfolio in lower yielding securities.
Opportunistic investments in structuredinternal analysis, were equivalent from a credit standpoint to securities private placement corporate debt securitiesrated AAA, and commercial mortgage loans continue to be made to improve yields, increase netapproximately 5 percent were below investment income and help to offset the impactgrade or not rated. Approximately 44 percent of the lower interest rate environment.
We maintain investment portfolios for each product line which, to the extent practicable, match established duration targets based on the characteristicsforeign entities’ fixed maturity securities portfolio is comprised of our liabilities. We allocate net investment income from assets that supportsovereign fixed maturity securities supporting policy liabilities to the product line they support. Net investment income from investments in excess of liabilities, which include the majority of our alternative investments, is allocated to the product lines using a capital-based internal allocation model.
2013 and 2012 Comparison
Net Investment Income
Net investment income increased slightly in 2013 compared to 2012, as reinvestment in the low interest rate environment resulted in a 13 basis point decrease incountry of issuance.
Composite AIG Credit Ratings
With respect to our fixed maturity investments, the base portfolio yield in 2013, which was offset by growth in average assets from positive net flows, a $613 million increase in alternative investment income and a $50 million increase in call and tender income. The increase in alternative investment yield to almost 16 percent in 2013 from approximately 10 percent in 2012 reflected higher hedge fund income due to favorable equity market conditions and several large redemptions from hedge funds that are not accounted for using the equity method. This increase in alternative investment income was partially offset by decreases in other investment income enhancement items in 2013, which included net fair value losses of $23 million in 2013 from our investment in PICC Group compared to gains of $57 million in 2012; a $38 million decrease in accretion of discount for certain highly rated structured securities, driven by recent increases in market interest rates; and fair value gains of $246 million recognized in 2012 on our investment in ML II, which was liquidated in March 2012 when we received a distribution of $1.6 billion from the sale by the FRBNY of the securities held in ML II.
2012 and 2011 Comparison
Net investment income increased in 2012 compared to 2011, reflecting higher base portfolio yields of 9 basis points due to the reinvestment of significant amounts of cash and short-term investments during 2011, opportunistic investments in structured securities, fair value gains on MLII and other structured securities, a fair value gain of approximately $57 million on the investment in PICC Group, lower impairment charges on investments in leased commercial aircraft and higher returns on alternative investments.
Spread Management
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in our products may have the effect, in a continued low interest rate environment, of reducing our spreads and thus reducing future profitability. Although we partially mitigate this interest rate risk through our asset-liability management process, product design elements and crediting rate strategies, a prolonged low interest rate environment may negatively affect future profitability.
Disciplined pricing on new business resulted in lower new fixed annuity deposits in the first six months of 2013 relative to the same period in 2012, due to the relatively low crediting rates offered. However, deposits improved in the latter half of 2013 due to the modest increases in market interest rates, resulting in an overall increase in deposits for 2013 compared to 2012. In the historically low interest rate environment experienced in 2013 and 2012, we have continued to pursue new sales of life and annuity products at targeted net investment spreads. We have a dynamic product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that we cannot achieve targeted net investment spreads on new business, products
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
are re-priced or no longer sold. Additionally, current products with higher minimum rate guarantees have been re-filed with lower rates as permitted under state insurance product regulations.
•New sales of fixed annuity products generally have minimum interest rate guarantees of 1 percent.
•Universal life insurance interest rate guarantees are generally 2 to 3 percent on new non-indexed products and zero to 2 percent on new indexed products, and are designed to be sufficient to meet targeted net investment spreads. We are in the process of lowering the minimum guaranteed interest rates on new products, and expect this process to be substantially completed in 2014.
Active management of renewal crediting rates is done under contractual provisions in our annuity and universal life products that were designed to allow crediting rates to be reset at pre-established intervals subject to minimum crediting rate guarantees. We have adjusted, and will continue to adjust, crediting rates to maintain targeted net investment spreads on both new business and in-force business where crediting rates are above minimum guarantees. In addition to annuity and universal life products, certain traditional long-duration products for which we do not have the ability to adjust interest rates, such as payout annuities, are exposed to reduced earnings and potential loss recognition reserve increases in a prolonged low interest rate environment. See AIG Life and Retirement Reserves and DAC — Other Reserve Changes for additional discussion of loss recognition.
Included in 2012 was an additional $110 million of interest credited expense resulting from a comprehensive review of reserves for the GIC portfolio.
As indicatedcredit ratings in the table below approximately 73and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (over 99 percent of total fixed maturity investments), or (b) our annuity and universal life account values were atequivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC. The “Non-rated” category in those tables consists of fixed maturity securities that have not been rated by any of the major rating agencies, the NAIC or us.
See Enterprise Risk Management herein for a discussion of credit risks associated with Investments.
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their minimum crediting rates asfair value:
| Available for Sale | | Other | | Total | |
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |
(in millions) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Rating: | | | | | | | | | | | | | | | | | | |
Other fixed maturity | | | | | | | | | | | | | | | | | | |
securities | | | | | | | | | | | | | | | | | | |
AAA | $ | 12,274 | | $ | 15,463 | | $ | 3,222 | | $ | 5,322 | | $ | 15,496 | | $ | 20,785 | |
AA | | 35,344 | | | 36,730 | | | 207 | | | 224 | | | 35,551 | | | 36,954 | |
A | | 50,741 | | | 56,693 | | | 1,781 | | | 242 | | | 52,522 | | | 56,935 | |
BBB | | 71,766 | | | 75,607 | | | 186 | | | 250 | | | 71,952 | | | 75,857 | |
Below investment grade | | 12,305 | | | 10,651 | | | 133 | | | 303 | | | 12,438 | | | 10,954 | |
Non-rated | | 920 | | | 1,035 | | | - | | | - | | | 920 | | | 1,035 | |
Total | $ | 183,350 | | $ | 196,179 | | $ | 5,529 | | $ | 6,341 | | $ | 188,879 | | $ | 202,520 | |
Mortgage-backed, asset- | | | | | | | | | | | | | | | | | | |
backed and collateralized | | | | | | | | | | | | | | | | | | |
AAA | $ | 26,382 | | $ | 24,783 | | $ | 1,756 | | $ | 2,313 | | $ | 28,138 | | $ | 27,096 | |
AA | | 5,003 | | | 4,078 | | | 708 | | | 1,549 | | | 5,711 | | | 5,627 | |
A | | 7,462 | | | 7,606 | | | 416 | | | 494 | | | 7,878 | | | 8,100 | |
BBB | | 4,394 | | | 3,813 | | | 497 | | | 620 | | | 4,891 | | | 4,433 | |
Below investment grade | | 21,638 | | | 23,376 | | | 7,771 | | | 8,314 | | | 29,409 | | | 31,690 | |
Non-rated | | 16 | | | 24 | | | 105 | | | 81 | | | 121 | | | 105 | |
Total | $ | 64,895 | | $ | 63,680 | | $ | 11,253 | | $ | 13,371 | | $ | 76,148 | | $ | 77,051 | |
Total | | | | | | | | | | | | | | | | | | |
AAA | $ | 38,656 | | $ | 40,246 | | $ | 4,978 | | $ | 7,635 | | $ | 43,634 | | $ | 47,881 | |
AA | | 40,347 | | | 40,808 | | | 915 | | | 1,773 | | | 41,262 | | | 42,581 | |
A | | 58,203 | | | 64,299 | | | 2,197 | | | 736 | | | 60,400 | | | 65,035 | |
BBB | | 76,160 | | | 79,420 | | | 683 | | | 870 | | | 76,843 | | | 80,290 | |
Below investment grade | | 33,943 | | | 34,027 | | | 7,904 | | | 8,617 | | | 41,847 | | | 42,644 | |
Non-rated | | 936 | | | 1,059 | | | 105 | | | 81 | | | 1,041 | | | 1,140 | |
Total | $ | 248,245 | | $ | 259,859 | | $ | 16,782 | | $ | 19,712 | | $ | 265,027 | | $ | 279,571 | |
Available‑for‑Sale Investments
The following table presents the fair value of our available‑for‑sale securities:
| | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | 2015 | | 2014 |
Bonds available for sale: | | | | | | | | | | |
U.S. government and government sponsored entities | | | | | | | $ | 1,844 | $ | 2,992 |
Obligations of states, municipalities and political subdivisions | | | | | | | | 27,323 | | 27,659 |
Non-U.S. governments | | | | | | | | 18,195 | | 21,095 |
Corporate debt | | | | | | | | 135,988 | | 144,433 |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | |
RMBS | | | | | | | | 36,227 | | 37,520 |
CMBS | | | | | | | | 13,571 | | 12,885 |
CDO/ABS | | | | | | | | 15,097 | | 13,275 |
Total mortgage-backed, asset-backed and collateralized | | | | | | | | 64,895 | | 63,680 |
Total bonds available for sale* | | | | | | | | 248,245 | | 259,859 |
Equity securities available for sale: | | | | | | | | | | |
Common stock | | | | | | | | 2,401 | | 3,629 |
Preferred stock | | | | | | | | 22 | | 25 |
Mutual funds | | | | | | | | 492 | | 741 |
Total equity securities available for sale | | | | | | | | 2,915 | | 4,395 |
Total | | | | | | | $ | 251,160 | $ | 264,254 |
* At December 31, 2013, an increase2015 and 2014, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $34.9 billion and $35.1 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity securities:
| December 31, | | December 31, |
(in millions) | | 2015 | | | 2014 |
Japan | $ | 5,416 | | $ | 5,728 |
Canada | | 1,453 | | | 2,181 |
Germany | | 832 | | | 1,315 |
France | | 784 | | | 614 |
United Kingdom | | 661 | | | 648 |
Mexico | | 563 | | | 661 |
Netherlands | | 511 | | | 639 |
Norway | | 503 | | | 619 |
Singapore | | 426 | | | 545 |
Chile | | 386 | | | 395 |
Other | | 6,710 | | | 7,752 |
Total | $ | 18,245 | | $ | 21,097 |
The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:
| December 31, 2015 | | |
| | | | | | Non- | | | | | December 31, |
| | | | Financial | | Financial | | Structured | | | | 2014 |
(in millions) | | Sovereign | | Institution | | Corporates | | Products | | Total | | Total |
Euro-Zone countries: | | | | | | | | | | | | |
France | $ | 784 | $ | 1,215 | $ | 2,019 | $ | - | $ | 4,018 | $ | 4,498 |
Netherlands | | 511 | | 991 | | 1,505 | | 397 | | 3,404 | | 4,276 |
Germany | | 832 | | 285 | | 2,227 | | 21 | | 3,365 | | 4,155 |
Ireland | | 2 | | - | | 598 | | 674 | | 1,274 | | 850 |
Spain | | 29 | | 90 | | 968 | | 15 | | 1,102 | | 1,557 |
Italy | | 19 | | 115 | | 863 | | 12 | | 1,009 | | 1,245 |
Belgium | | 219 | | 120 | | 516 | | - | | 855 | | 973 |
Luxembourg | | - | | 18 | | 448 | | 30 | | 496 | | 243 |
Finland | | 65 | | 34 | | 130 | | - | | 229 | | 235 |
Austria | | 104 | | 3 | | 17 | | - | | 124 | | 155 |
Other - EuroZone | | 680 | | 48 | | 200 | | 1 | | 929 | | 1,022 |
Total Euro-Zone | $ | 3,245 | $ | 2,919 | $ | 9,491 | $ | 1,150 | $ | 16,805 | $ | 19,209 |
Remainder of Europe | | | | | | | | | | | | |
United Kingdom | $ | 661 | $ | 2,968 | $ | 8,015 | $ | 3,642 | $ | 15,286 | $ | 16,076 |
Switzerland | | 49 | | 1,195 | | 1,275 | | - | | 2,519 | | 2,941 |
Sweden | | 144 | | 488 | | 195 | | - | | 827 | | 1,135 |
Norway | | 503 | | 43 | | 142 | | - | | 688 | | 846 |
Russian Federation | | 36 | | 8 | | 78 | | - | | 122 | | 311 |
Other - Remainder of Europe | | 198 | | 119 | | 111 | | 15 | | 443 | | 494 |
Total - Remainder of Europe | $ | 1,591 | $ | 4,821 | $ | 9,816 | $ | 3,657 | $ | 19,885 | $ | 21,803 |
Total | $ | 4,836 | $ | 7,740 | $ | 19,307 | $ | 4,807 | $ | 36,690 | $ | 41,012 |
Investments in Municipal Bonds
At December 31, 2015, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backed bonds with over 95 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale U.S. municipal bond portfolio by state and municipal bond type:
| December 31, 2015 | | |
| | State | | Local | | | | Total | December 31, |
| | General | | General | | | | Fair | | 2014 |
(in millions) | | Obligation | | Obligation | | Revenue | | Value | | Total Fair Value |
State: | | | | | | | | | | |
New York | $ | 35 | $ | 620 | $ | 3,958 | $ | 4,613 | $ | 4,116 |
California | | 663 | | 610 | | 2,568 | | 3,841 | | 4,707 |
Texas | | 328 | | 1,534 | | 1,553 | | 3,415 | | 3,356 |
Illinois | | 111 | | 367 | | 1,008 | | 1,486 | | 1,364 |
Massachusetts | | 693 | | - | | 694 | | 1,387 | | 1,417 |
Washington | | 530 | | 144 | | 685 | | 1,359 | | 1,278 |
Florida | | 155 | | - | | 980 | | 1,135 | | 1,052 |
Virginia | | 65 | | 5 | | 808 | | 878 | | 918 |
Georgia | | 280 | | 243 | | 347 | | 870 | | 819 |
Washington DC | | 156 | | 1 | | 548 | | 705 | | 607 |
Pennsylvania | | 269 | | 23 | | 384 | | 676 | | 537 |
Arizona | | - | | 94 | | 482 | | 576 | | 734 |
Ohio | | 128 | | 8 | | 395 | | 531 | | 604 |
All other states(a) | | 1,061 | | 547 | | 4,243 | | 5,851 | | 6,150 |
Total(b)(c) | $ | 4,474 | $ | 4,196 | $ | 18,653 | $ | 27,323 | $ | 27,659 |
(a) We did not have material credit exposure to the government of Puerto Rico.
(b) Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.
(c) Includes $2.9 billion of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale corporate debt securities:
| | Fair Value at | | Fair Value at | |
Industry Category | | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Financial institutions: | | | | | |
Money Center /Global Bank Groups | $ | 9,104 | $ | 10,682 | |
Regional banks — other | | 568 | | 543 | |
Life insurance | | 3,295 | | 3,575 | |
Securities firms and other finance companies | | 380 | | 422 | |
Insurance non-life | | 5,421 | | 5,625 | |
Regional banks — North America | | 6,823 | | 6,636 | |
Other financial institutions | | 7,808 | | 8,169 | |
Utilities(a) | | 18,497 | | 19,249 | |
Communications | | 10,251 | | 10,316 | |
Consumer noncyclical | | 15,391 | | 16,792 | |
Capital goods | | 8,973 | | 8,594 | |
Energy(a) | | 13,861 | | 16,494 | |
Consumer cyclical | | 9,767 | | 11,197 | |
Basic | | 7,512 | | 9,187 | |
Other | | 18,337 | | 16,952 | |
Total (b) | $ | 135,988 | $ | 144,433 | |
(a) The Utilities and Energy amounts at December 31, 2014, have been revised from 63$23.7 billion and $12.0 billion to $19.2 billion and $16.5 billion, respectively, to conform to current industry classification, which are not considered material to previously issued financial statements.
(b) At December 31, 2015 and December 31, 2014, approximately 91 percent and 93 percent, respectively, of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, were 5.6 percent and 6.4 percent at December 31, 2012. These products have minimum guaranteed interest rates as of2015 and 2014, respectively. The decline in energy exposure from December 31, 2013 ranging2014 resulted from 1 percentunrealized losses due to 5.5 percent, withreduction in the higher rates representing guaranteesenergy sector pricing, sales of securities and other-than-temporary impairments. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.
Investments in RMBS
The following table presents AIG’s RMBS available for sale investments by year of vintage:
| | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Total RMBS | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,273 | $ | - |
2014 | | | | | | | | | | | 1,096 | | 871 |
2013 | | | | | | | | | | | 2,178 | | 2,724 |
2012 | | | | | | | | | | | 1,944 | | 2,382 |
2011 | | | | | | | | | | | 4,800 | | 5,310 |
2010 and prior* | | | | | | | | | | | 23,936 | | 26,233 |
Total RMBS | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,025 | $ | - |
2014 | | | | | | | | | | | 1,000 | | 799 |
2013 | | | | | | | | | | | 2,094 | | 2,625 |
2012 | | | | | | | | | | | 1,877 | | 2,234 |
2011 | | | | | | | | | | | 2,927 | | 3,428 |
2010 and prior | | | | | | | | | | | 2,628 | | 3,324 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | $ | - | $ | - |
2010 and prior | | | | | | | | | | | 12,831 | | 13,001 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | | - | | - |
2010 and prior | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | - | $ | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | 8 | | 8 |
2012 | | | | | | | | | | | 53 | | 126 |
2011 | | | | | | | | | | | 1,873 | | 1,882 |
2010 and prior | | | | | | | | | | | 5,716 | | 7,047 |
Total Prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
* Includes approximately $13.2 billion and $13.5 billion at December 31, 2015, and December 31, 2014, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. See Note 5 to the Consolidated Financial Statements for additional discussion on older products.Purchased Credit Impaired (PCI) Securities.
The following table presents our universal life and fixed annuity account valuesRMBS available for sale investments by contractual minimum guaranteed interest rate and current crediting rates:credit rating:
| | | | | | | | | | Fair Value at | Fair Value at |
| | | | | | | December 31, | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | | | | |
Total RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 14,884 | $ | 14,699 |
AA | | | | | | | | | | | 389 | | 418 |
A | | | | | | | | | | | 509 | | 546 |
BBB | | | | | | | | | | | 661 | | 911 |
Below investment grade(a) | | | | | | | | | | | 19,779 | | 20,937 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total RMBS(b) | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 12,547 | $ | 12,405 |
AA | | | | | | | | | | | 4 | | 5 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 5 | $ | 7 |
AA | | | | | | | | | | | 17 | | 33 |
A | | | | | | | | | | | 121 | | 85 |
BBB | | | | | | | | | | | 216 | | 317 |
Below investment grade(a) | | | | | | | | | | | 12,472 | | 12,559 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 15 | $ | 18 |
AA | | | | | | | | | | | 68 | | 117 |
A | | | | | | | | | | | 247 | | 252 |
BBB | | | | | | | | | | | 200 | | 207 |
Below investment grade(a) | | | | | | | | | | | 1,846 | | 1,829 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 1,986 | $ | 2,076 |
AA | | | | | | | | | | | 188 | | 253 |
A | | | | | | | | | | | 138 | | 205 |
BBB | | | | | | | | | | | 209 | | 351 |
Below investment grade(a) | | | | | | | | | | | 5,124 | | 6,169 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
| | | | | | | | | | | | | |
| | |
| | Current Crediting Rates | |
|---|
December 31, 2013
Contractual Minimum Guaranteed
Interest Rate
(in millions)
| | At Contractual
Minimum
Guarantee
| | 1-50 Basis
Points Above
Minimum
Guarantee
| | More than 50
Basis Points
Above Minimum
Guarantee
| | Total
| |
|---|
| | |
Universal life insurance | | | | | | | | | | | | | |
1% | | $ | 52 | | $ | – | | $ | 1 | | $ | 53 | |
> 1% – 2% | | | 32 | | | 60 | | | 194 | | | 286 | |
> 2% – 3% | | | 374 | | | 255 | | | 1,313 | | | 1,942 | |
> 3% – 4% | | | 2,079 | | | 349 | | | 1,385 | | | 3,813 | |
> 4% – 5% | | | 4,164 | | | 196 | | | – | | | 4,360 | |
> 5% – 5.5% | | | 309 | | | – | | | – | | | 309 | |
| | |
Subtotal | | $ | 7,010 | | $ | 860 | | $ | 2,893 | | $ | 10,763 | |
| | |
Fixed annuities* | | | | | | | | | | | | | |
1% | | $ | 2,922 | | $ | 5,248 | | $ | 7,430 | | $ | 15,600 | |
> 1% – 2% | | | 13,266 | | | 3,118 | | | 5,580 | | | 21,964 | |
> 2% – 3% | | | 32,671 | | | 191 | | | 2,672 | | | 35,534 | |
> 3% – 4% | | | 13,676 | | | 93 | | | 60 | | | 13,829 | |
> 4% – 5% | | | 8,116 | | | – | | | 4 | | | 8,120 | |
> 5% – 5.5% | | | 232 | | | – | | | 5 | | | 237 | |
| | |
Subtotal | | $ | 70,883 | | $ | 8,650 | | $ | 15,751 | | $ | 95,284 | |
| | |
Total | | $ | 77,893 | | $ | 9,510 | | $ | 18,644 | | $ | 106,047 | |
| | |
Percentage of total | | | 73 | % | | 9 | % | | 18 | % | | 100 | % |
| | |
AIG 2013 Form 10-K(a) Includes certain RMBS that had experienced deterioration in credit quality since their origination. See Note 5 to the Consolidated Financial Statements for additional discussion on PCI Securities.
(b) The weighted average expected life was six years at both December 31, 2015 and December 31, 2014.
Our underwriting practices for investing in RMBS, other asset‑backed securities and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.
Investments in CMBS
The following table presents our CMBS available for sale investments:
| | | | | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | | | | 2015 | | 2014 |
CMBS (traditional) | | | | | | | | | | | | | | $ | 11,132 | $ | 11,265 |
Agency | | | | | | | | | | | | | | | 1,622 | | 1,372 |
Other | | | | | | | | | | | | | | | 817 | | 248 |
Total | | | | | | | | | | | | | | $ | 13,571 | $ | 12,885 |
The following table presents the fair value of our CMBS available for sale investments by rating agency designation and by vintage year:
| | | | | | | | | | Below | | | | |
| | | | | | | | | | Investment | | | | |
(in millions) | | AAA | | AA | | A | | BBB | | Grade | | Non-Rated | | Total |
December 31, 2015 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2015 | $ | 824 | $ | 404 | $ | 465 | $ | 240 | $ | - | $ | - | $ | 1,933 |
2014 | | 1,604 | | 183 | | 11 | | - | | - | | - | | 1,798 |
2013 | | 2,611 | | 433 | | 89 | | 54 | | - | | - | | 3,187 |
2012 | | 737 | | 60 | | 31 | | 83 | | - | | 10 | | 921 |
2011 | | 1,015 | | 25 | | 31 | | 21 | | - | | - | | 1,092 |
2010 and prior | | 921 | | 700 | | 635 | | 738 | | 1,646 | | - | | 4,640 |
Total | $ | 7,712 | $ | 1,805 | $ | 1,262 | $ | 1,136 | $ | 1,646 | $ | 10 | $ | 13,571 |
December 31, 2014 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2014 | $ | 1,570 | $ | 183 | $ | 11 | $ | - | $ | - | $ | - | $ | 1,764 |
2013 | | 2,684 | | 442 | | 91 | | 58 | | - | | - | | 3,275 |
2012 | | 1,158 | | 61 | | 28 | | 92 | | - | | 12 | | 1,351 |
2011 | | 1,022 | | 20 | | 37 | | 21 | | - | | - | | 1,100 |
2010 and prior | | 1,119 | | 626 | | 814 | | 843 | | 1,993 | | - | | 5,395 |
Total | $ | 7,553 | $ | 1,332 | $ | 981 | $ | 1,014 | $ | 1,993 | $ | 12 | $ | 12,885 |
The following table presents our CMBS available for sale investments by geographic region:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Geographic region: | | | | | |
New York | $ | 3,149 | $ | 2,759 | |
California | | 1,244 | | 1,305 | |
Texas | | 791 | | 831 | |
Florida | | 520 | | 562 | |
New Jersey | | 433 | | 457 | |
Virginia | | 362 | | 389 | |
Illinois | | 323 | | 344 | |
Pennsylvania | | 295 | | 291 | |
Georgia | | 253 | | 286 | |
Massachusetts | | 231 | | 247 | |
Maryland | | 229 | | 222 | |
North Carolina | | 218 | | 222 | |
All Other* | | 5,523 | | 4,970 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Non-U.S. locations.
The following table presents our CMBS available for sale investments by industry:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Industry: | | | | | |
Retail | $ | 3,978 | $ | 3,700 | |
Office | | 3,896 | | 3,652 | |
Multi-family* | | 3,036 | | 2,889 | |
Lodging | | 1,005 | | 1,127 | |
Industrial | | 868 | | 679 | |
Other | | 788 | | 838 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Agency-backed CMBS.
The fair value of ContentsCMBS holdings remained stable throughout 2015. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale investments by collateral type:
| | | | | | | | | | Fair value at | | Fair value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | 2015 | | 2014 |
Collateral Type: | | | | | | | | | | | | |
Bank loans (CLO) | | | | | | | | | $ | 7,962 | $ | 6,683 |
Other | | | | | | | | | | 153 | | 388 |
Total | | | | | | | | | $ | 8,115 | $ | 7,071 |
The following table presents our CDO available for sale investments by credit rating:
| | | | | | | Fair Value at | | Fair Value at |
| | | | | December 31, | | December 31, |
(in millions) | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | |
AAA | | | | | | | $ | 2,870 | $ | 1,922 |
AA | | | | | | | | 2,543 | | 2,135 |
A | | | | | | | | 2,247 | | 2,317 |
BBB | | | | | | | | 298 | | 366 |
Below investment grade | | | | | | | | 157 | | 331 |
Total | | | | | | | $ | 8,115 | $ | 7,071 |
Commercial Mortgage Loans
At December 31, 2015, we had direct commercial mortgage loan exposure of $22.1 billion of which, approximately 99 percent of the loans were current.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
| Number | | | | | | | | | | | | | | | | Percent | |
| of | | Class | | | of | |
(dollars in millions) | Loans | | Apartments | | Offices | | Retail | Industrial | Hotel | | Others | | Total | Total | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 97 | | $ | 823 | $ | 2,968 | $ | 516 | $ | 301 | $ | 166 | $ | 186 | $ | 4,960 | 22 | % |
California | 95 | | | 87 | | 547 | | 433 | | 533 | | 788 | | 308 | | 2,696 | 12 | |
Texas | 60 | | | 120 | | 696 | | 106 | | 147 | | 187 | | 48 | | 1,304 | 6 | |
New Jersey | 45 | | | 441 | | 338 | | 324 | | - | | 29 | | 33 | | 1,165 | 5 | |
Florida | 78 | | | 187 | | 113 | | 374 | | 116 | | 20 | | 146 | | 956 | 4 | |
Illinois | 21 | | | 174 | | 369 | | 21 | | 32 | | 36 | | 23 | | 655 | 3 | |
Massachusetts | 19 | | | 56 | | 168 | | 360 | | - | | - | | 33 | | 617 | 3 | |
Connecticut | 20 | | | 314 | | 152 | | 23 | | 81 | | - | | - | | 570 | 3 | |
Pennsylvania | 28 | | | 6 | | 29 | | 436 | | 62 | | 27 | | 4 | | 564 | 3 | |
Ohio | 37 | | | 122 | | 28 | | 211 | | 67 | | - | | 5 | | 433 | 2 | |
Other states | 302 | | | 1,118 | | 1,203 | | 1,514 | | 414 | | 595 | | 229 | | 5,073 | 23 | |
Foreign | 47 | | | 471 | | 1,234 | | 520 | | 161 | | 250 | | 438 | | 3,074 | 14 | |
Total* | 849 | | $ | 3,919 | $ | 7,845 | $ | 4,838 | $ | 1,914 | $ | 2,098 | $ | 1,453 | $ | 22,067 | 100 | % |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 90 | | $ | 545 | $ | 2,111 | $ | 285 | $ | 148 | $ | 68 | $ | 215 | $ | 3,372 | 18 | % |
California | 115 | | | 29 | | 635 | | 389 | | 472 | | 597 | | 469 | | 2,591 | 14 | |
New Jersey | 48 | | | 490 | | 353 | | 308 | | - | | 30 | | 74 | | 1,255 | 7 | |
Florida | 89 | | | 141 | | 192 | | 335 | | 118 | | 137 | | 161 | | 1,084 | 6 | |
Texas | 58 | | | 62 | | 482 | | 121 | | 171 | | 187 | | 54 | | 1,077 | 6 | |
Illinois | 24 | | | 175 | | 327 | | 26 | | 73 | | 36 | | - | | 637 | 3 | |
Massachusetts | 19 | | | - | | 198 | | 321 | | - | | - | | 34 | | 553 | 3 | |
Colorado | 18 | | | 62 | | 158 | | 48 | | - | | 120 | | 101 | | 489 | 2 | |
Connecticut | 23 | | | 279 | | 155 | | 5 | | 43 | | - | | - | | 482 | 2 | |
Pennsylvania | 49 | | | 45 | | 89 | | 170 | | 107 | | 16 | | 5 | | 432 | 2 | |
Other states | 349 | | | 920 | | 1,140 | | 1,738 | | 494 | | 310 | | 281 | | 4,883 | 26 | |
Foreign | 142 | | | 636 | | 678 | | 78 | | 63 | | 176 | | 423 | | 2,054 | 11 | |
Total* | 1,024 | | $ | 3,384 | $ | 6,518 | $ | 3,824 | $ | 1,689 | $ | 1,677 | $ | 1,817 | $ | 18,909 | 100 | % |
* Does not reflect allowance for credit losses.
See Note 6 to Hedge Living Benefits Liabilitiesthe Consolidated Financial Statements for additional discussion on commercial mortgage loans.
Impairments
The following table presents impairments by investment type:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Other-than-temporary Impairments: | | | | | | | | | | | |
Fixed maturity securities, available for sale | | | | | | $ | 425 | $ | 180 | $ | 173 |
Equity securities, available for sale | | | | | | | 166 | | 37 | | 14 |
Private equity funds and hedge funds | | | | | | | 80 | | 30 | | 45 |
Subtotal | | | | | | | 671 | | 247 | | 232 |
Other impairments: | | | | | | | | | | | |
Investments in life settlements | | | | | | | 540 | | 201 | | 971 |
Other investments | | | | | | | 166 | | 126 | | 112 |
Real estate | | | | | | | 23 | | 8 | | 19 |
Total | | | | | | $ | 1,400 | $ | 582 | $ | 1,334 |
ChangesOur investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to recover our estimated future carrying amount, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market mortality assumptions and market yields.
In late 2015, several insurance providers gave notice of increases in policy premiums related to our investments in life settlements. The increase in premiums required to keep policies in force results in lower future expected net cash flows which are insufficient to recover our net investment on certain policies.
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by reportable segment and impairment type:
| | Non-Life | | Life | | Corporate | | |
| | Insurance | | Insurance | | and Other | | |
(in millions) | | Companies | | Companies | | Operations | | Total |
For the Year Ended December 31, 2015 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 13 | $ | - | $ | - | $ | 13 |
Change in intent | | 7 | | 145 | | 81 | | 233 |
Foreign currency declines | | 33 | | 24 | | - | | 57 |
Issuer-specific credit events | | 178 | | 168 | | 2 | | 348 |
Adverse projected cash flows | | 7 | | 13 | | - | | 20 |
Total | $ | 238 | $ | 350 | $ | 83 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 3 | $ | - | $ | - | $ | 3 |
Change in intent | | 8 | | 32 | | - | | 40 |
Foreign currency declines | | 9 | | 10 | | - | | 19 |
Issuer-specific credit events | | 60 | | 109 | | - | | 169 |
Adverse projected cash flows | | 5 | | 11 | | - | | 16 |
Total | $ | 85 | $ | 162 | $ | - | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 6 | $ | - | $ | - | $ | 6 |
Change in intent | | 1 | | 45 | | 2 | | 48 |
Foreign currency declines | | 1 | | - | | - | | 1 |
Issuer-specific credit events | | 43 | | 127 | | - | | 170 |
Adverse projected cash flows | | 1 | | 6 | | - | | 7 |
Total | $ | 52 | $ | 178 | $ | 2 | $ | 232 |
Other-than-temporary impairment charges by investment type and impairment type:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 13 | $ | 13 |
Change in intent | | 3 | | - | | 14 | | 131 | | 85 | | 233 |
Foreign currency declines | | - | | - | | - | | 57 | | - | | 57 |
Issuer-specific credit events | | 79 | | 3 | | 8 | | 110 | | 148 | | 348 |
Adverse projected cash flows | | 20 | | - | | - | | - | | - | | 20 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 3 |
Change in intent | | - | | - | | - | | 27 | | 13 | | 40 |
Foreign currency declines | | - | | - | | - | | 19 | | - | | 19 |
Issuer-specific credit events | | 80 | | 9 | | 21 | | 8 | | 51 | | 169 |
Adverse projected cash flows | | 16 | | - | | - | | - | | - | | 16 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 6 | $ | 6 |
Change in intent | | 1 | | - | | - | | 46 | | 1 | | 48 |
Foreign currency declines | | - | | - | | - | | 1 | | - | | 1 |
Issuer-specific credit events | | 36 | | 5 | | 50 | | 27 | | 52 | | 170 |
Adverse projected cash flows | | 7 | | - | | - | | - | | - | | 7 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
Other-than-temporary impairment charges by investment type and credit rating:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 12 | $ | - | $ | 12 |
AA | | - | | - | | - | | 12 | | - | | 12 |
A | | - | | - | | - | | 12 | | - | | 12 |
BBB | | 2 | | - | | - | | 50 | | - | | 52 |
Below investment grade | | 100 | | 3 | | 22 | | 208 | | - | | 333 |
Non-rated | | - | | - | | - | | 4 | | 246 | | 250 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 4 | $ | - | $ | 4 |
AA | | 3 | | - | | - | | 2 | | - | | 5 |
A | | - | | - | | - | | 2 | | - | | 2 |
BBB | | 2 | | - | | - | | 11 | | - | | 13 |
Below investment grade | | 91 | | 5 | | 21 | | 35 | | - | | 152 |
Non-rated | | - | | 4 | | - | | - | | 67 | | 71 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | 1 | $ | - | $ | - | $ | - | $ | - | $ | 1 |
AA | | 2 | | - | | - | | - | | - | | 2 |
A | | 1 | | - | | - | | - | | - | | 1 |
BBB | | 1 | | - | | - | | 44 | | - | | 45 |
Below investment grade | | 39 | | 5 | | 50 | | 29 | | - | | 123 |
Non-rated | | - | | - | | - | | 1 | | 59 | | 60 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
We recorded other-than-temporary impairment charges in the years ended December 31, 2015, 2014 and 2013 related to:
•issuer-specific credit events;
•securities that we intend to sell or for which it is more likely than not that we will be required to sell;
•declines due to foreign exchange rates;
•adverse changes in estimated cash flows on certain structured securities; and
•securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate and investments in life settlements.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $735 million in 2015, $725 million in 2014 and $774 million in 2013. See Note 6 to the Consolidated Financial Statements for a discussion of our other-than-temporary impairment accounting policy.
The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:
December 31, 2015 | Less Than or Equal | | | Greater Than 20% | | | Greater Than 50% | | | |
| | to 20% of Cost(b) | | | to 50% of Cost(b) | | | of Cost(b) | | | Total |
Aging(a) | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |
(dollars in millions) | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss(d) | Items(e) |
Investment grade | | | | | | | | | | | | | | | | | | | | | | | |
bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 35,961 | $ | 815 | 5,516 | | $ | 408 | $ | 115 | 82 | | $ | - | $ | - | - | | $ | 36,369 | $ | 930 | 5,598 |
7-11 months | | 23,134 | | 1,342 | 3,594 | | | 1,061 | | 275 | 201 | | | - | | - | - | | | 24,195 | | 1,617 | 3,795 |
12 months or more | | 6,883 | | 501 | 938 | | | 2,363 | | 733 | 183 | | | 21 | | 13 | 6 | | | 9,267 | | 1,247 | 1,127 |
Total | $ | 65,978 | $ | 2,658 | 10,048 | | $ | 3,832 | $ | 1,123 | 466 | | $ | 21 | $ | 13 | 6 | | $ | 69,831 | $ | 3,794 | 10,520 |
Below investment | | | | | | | | | | | | | | | | | | | | | | | |
grade bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 6,024 | $ | 199 | 2,341 | | $ | 567 | $ | 168 | 100 | | $ | 17 | $ | 11 | 13 | | $ | 6,608 | $ | 378 | 2,454 |
7-11 months | | 2,706 | | 168 | 814 | | | 199 | | 59 | 132 | | | 7 | | 6 | 3 | | | 2,912 | | 233 | 949 |
12 months or more | | 5,164 | | 324 | 766 | | | 871 | | 278 | 200 | | | 385 | | 243 | 83 | | | 6,420 | | 845 | 1,049 |
Total | $ | 13,894 | $ | 691 | 3,921 | | $ | 1,637 | $ | 505 | 432 | | $ | 409 | $ | 260 | 99 | | $ | 15,940 | $ | 1,456 | 4,452 |
Total bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 41,985 | $ | 1,014 | 7,857 | | $ | 975 | $ | 283 | 182 | | $ | 17 | $ | 11 | 13 | | $ | 42,977 | $ | 1,308 | 8,052 |
7-11 months | | 25,840 | | 1,510 | 4,408 | | | 1,260 | | 334 | 333 | | | 7 | | 6 | 3 | | | 27,107 | | 1,850 | 4,744 |
12 months or more | | 12,047 | | 825 | 1,704 | | | 3,234 | | 1,011 | 383 | | | 406 | | 256 | 89 | | | 15,687 | | 2,092 | 2,176 |
Total(e) | $ | 79,872 | $ | 3,349 | 13,969 | | $ | 5,469 | $ | 1,628 | 898 | | $ | 430 | $ | 273 | 105 | | $ | 85,771 | $ | 5,250 | 14,972 |
Equity securities | | | | | | | | | | | | | | | | | | | | | | | |
0-11 months | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
Total | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
(a) Represents the number of consecutive months that fair value has been less than cost by any amount.
(b) Represents the percentage by which fair value is less than cost at December 31, 2015.
(c) For bonds, represents amortized cost.
(d) The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2015 was primarily attributable to decreases in the fair value of fixed maturity securities designated to hedge living benefit liabilities, which are excluded from Pre-tax operating income, are a component of AIG Life and Retirement's dynamic hedging program designed to manage economic risk exposure associated with changes in equity markets, interest rates and volatilitiessecurities. For 2015, net unrealized gains related to embedded derivative liabilities containedfixed maturity and equity securities decreased by $10.2 billion due primarily to the rise in guaranteed benefit featuresrates, widening of variable annuities. We substantially hedge our exposure to equity markets,credit spreads, and the majoritysale of our interest rate exposure is hedged with derivative instrumentsequity securities.
The change in net unrealized gains and losses on investments in 2014 was primarily attributable to a lesser extent, with U.S. Treasury bonds that we began purchasing in 2012 as a capital-efficient strategy to reduce our interest rate risk exposure over time. As a result of increases in interest rates on U.S. Treasury bonds during 2013, the fair value of the U.S. Treasury bonds used for hedging, net of financing costs, decreased by $161 million in 2013, compared to an increase in fair value of $37 million in 2012.
Net Realized Capital Gains (Losses)
Net realized capital gains increased in 2013 and 2012 compared to 2011 as a result of higher gains from sales activity in connection with utilizing capital loss carryforwards, lower other-than-temporary impairments, and fair value gains on embedded derivatives, net of hedges, which had net gains of $31 million in 2013, compared to net losses of $799 million in 2012 and $242 million in 2011. The changes in the fair value of embedded derivatives,fixed maturity securities. For 2014, net of hedges, were primarilyunrealized gains related to fixed maturity and equity securities increased by $7.3 billion due to changesa decrease in projected interest rates and equity market returns.on investment grade fixed maturity securities, partially offset by the widening of spreads.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
AIG Life and Retirement Reserves and DAC
The following table presents AIG Life and Retirement insurance reserves and mutual fund assets under management:
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Retail | | | | | | | | | | |
Balance at beginning of year, gross | | $ | 123,699 | | $ | 120,396 | | $ | 117,426 | |
Premiums and deposits | | | 19,912 | | | 12,512 | | | 15,735 | |
Surrenders and withdrawals | | | (9,899 | ) | | (9,268 | ) | | (9,226 | ) |
Death, and other contract benefits | | | (3,467 | ) | | (3,695 | ) | | (3,203 | ) |
| | |
Subtotal | | | 6,546 | | | (451 | ) | | 3,306 | |
Change in fair value of underlying assets and reserve accretion, net of policy fees | | | 5,221 | | | 2,428 | | | (1,211 | ) |
Cost of funds | | | 2,222 | | | 2,423 | | | 2,526 | |
Other reserve changes* | | | (410 | ) | | (1,097 | ) | | (1,651 | ) |
| | |
Balance at end of year | | | 137,278 | | | 123,699 | | | 120,396 | |
Reserves related to unrealized appreciation of investments | | | 9 | | | 456 | | | 360 | |
Reinsurance ceded | | | (1,495 | ) | | (1,514 | ) | | (1,551 | ) |
| | |
Total insurance reserves and retail mutual funds assets under management | | $ | 135,792 | | $ | 122,641 | | $ | 119,205 | |
| | |
Institutional | | | | | | | | | | |
Balance at beginning of year, gross | | $ | 110,494 | | $ | 103,315 | | $ | 103,280 | |
Premiums and deposits | | | 8,897 | | | 8,482 | | | 8,657 | |
Surrenders and withdrawals | | | (9,938 | ) | | (7,509 | ) | | (7,926 | ) |
Death, and other contract benefits | | | (1,997 | ) | | (1,949 | ) | | (1,959 | ) |
| | |
Subtotal | | | (3,038 | ) | | (976 | ) | | (1,228 | ) |
Change in fair value of underlying assets and reserve accretion, net of policy fees | | | 9,973 | | | 5,761 | | | (173 | ) |
Cost of funds | | | 1,569 | | | 1,785 | | | 1,741 | |
Other reserve changes* | | | 894 | | | 609 | | | (305 | ) |
| | |
Balance at end of year | | | 119,892 | | | 110,494 | | | 103,315 | |
Reserves related to unrealized appreciation of investments | | | – | | | 2,359 | | | 1,938 | |
Reinsurance ceded | | | (209 | ) | | (229 | ) | | (285 | ) |
| | |
Total insurance reserves and group mutual fund assets under management | | $ | 119,683 | | $ | 112,624 | | $ | 104,968 | |
| | |
Total AIG Life and Retirement: | | | | | | | | | | |
Balance at beginning of year, gross | | $ | 234,193 | | $ | 223,711 | | $ | 220,706 | |
Premiums and deposits | | | 28,809 | | | 20,994 | | | 24,392 | |
Surrenders and withdrawals | | | (19,837 | ) | | (16,777 | ) | | (17,152 | ) |
Death, and other contract benefits | | | (5,464 | ) | | (5,644 | ) | | (5,162 | ) |
| | |
Subtotal | | | 3,508 | | | (1,427 | ) | | 2,078 | |
Change in fair value of underlying assets and reserve accretion, net of policy fees | | | 15,194 | | | 8,189 | | | (1,384 | ) |
Cost of funds | | | 3,791 | | | 4,208 | | | 4,267 | |
Other reserve changes* | | | 484 | | | (488 | ) | | (1,956 | ) |
| | |
Balance at end of year | | | 257,170 | | | 234,193 | | | 223,711 | |
Reserves related to unrealized appreciation of investments | | | 9 | | | 2,815 | | | 2,298 | |
Reinsurance ceded | | | (1,704 | ) | | (1,743 | ) | | (1,836 | ) |
| | |
Total insurance reserves and mutual fund assets under management | | $ | 255,475 | | $ | 235,265 | | $ | 224,173 | |
| | |
* Other reserve changes include loss recognition in Retail of $135 million and $189 million, and in Institutional of $1.3 billion and $1.0 billion, in 2013 and 2012, respectively.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
Other Reserve Changes
Other reserve changes in the table above include loss recognition, primarily on certain long-term payout annuity contracts. In connection with our program to utilize capital loss carryforwards, we sold investment securities in 2013 and 2012. These and other investment sales with subsequent reinvestment at lower yields triggered recording of loss recognition reserves of $1.5 billion and $1.2 billion on certain long-term payout annuity contracts in 2013 and 2012, respectively. There were loss recognition reserves related to unrealized appreciation of investments as of December 31, 2011, but no actual loss recognition recorded in 2011. Assumptions related to investment yields, mortality experience and expenses are reviewed periodically and updated as appropriate, which couldSee also result in additional loss recognition reserves.
Loss recognition attributable to our program to utilize capital loss carryforwards is excluded from Pre-tax operating income and reported within Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) in the AIG Life and Retirement Results table herein. See Note 95, Investments to the Consolidated Financial Statements for further discussion of our investment portfolio.
The following section provides discussion of insurance reserves for both the Non-Life Insurance Companies and the Life Insurance Companies, including Eaglestone Reinsurance Company, which is reported in Corporate and Other.
Non-Life Insurance Companies
The following section provides discussion of the consolidated liability for unpaid losses and loss adjustment expenses for the Non-Life Insurance Companies.
The following table presents the components of AIG’s gross loss reserves by major lines of business on a U.S. statutory basis(a):
At December 31, | | |
(in millions) | | 2015 | | 2014(b) |
Other liability occurrence (including asbestos and environmental) | $ | 24,856 | $ | 24,988 |
Workers' compensation (net of discount) | | 14,978 | | 16,014 |
Other liability claims made | | 14,006 | | 13,632 |
Property | | 5,823 | | 6,350 |
Auto liability | | 4,692 | | 4,814 |
Accident and health | | 1,783 | | 1,972 |
Products liability | | 1,681 | | 1,678 |
Medical malpractice | | 1,603 | | 1,520 |
Aircraft | | 1,286 | | 1,340 |
Mortgage guaranty / credit | | 733 | | 1,008 |
Other | | 3,501 | | 3,944 |
Total | $ | 74,942 | $ | 77,260 |
Total U.S. & Canada | $ | 58,890 | $ | 58,729 |
Total International (c) | $ | 16,052 | $ | 18,531 |
(a) Presented by lines of business pursuant to statutory reporting requirements as prescribed by the NAIC.
(b) 2014 reflects the reclassification of International reserves to major lines of business.
(c) The decrease was primarily the effect of foreign exchange on gross reserves, a payment on a large loss, and the net of other claim payments and reserve movements.
Gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for IBNR and loss expenses, less estimated salvage and subrogation and applicable discount. The Non-Life Insurance Companies regularly review and update the methods and assumptions used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected in pre‑tax operating income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase prior years’ estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease prior years’ estimates of ultimate cost are referred to as favorable development. See MD&A Critical Accounting Estimates – Details of the Loss Reserving Process.
Net loss reserves represent gross loss reserves reduced by reinsurance recoverable, net of an allowance for unrecoverable reinsurance.
The following table presents the components of net loss reserves:
December 31, | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 |
Gross loss reserves before reinsurance and discount | | | | | | $ | 78,090 | $ | 80,337 |
Less: discount | | | | | | | (3,148) | | (3,077) |
Gross loss reserves, net of discount, before reinsurance | | | | | | | 74,942 | | 77,260 |
Less: reinsurance recoverable* | | | | | | | (14,339) | | (15,648) |
Net liability for unpaid losses and loss adjustment expenses | | | | | | $ | 60,603 | $ | 61,612 |
* Includes $1.8 billion and $1.5 billion of reinsurance recoverable under a retroactive reinsurance agreement at December 31, 2015, and December 31, 2014, respectively.
Gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.6 billion and $12.4 billion at December 31, 2015 and 2014, respectively. These recoverable amounts are related to certain policies with high deductibles (meaning, the policy attachment point is above high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements; each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to deductible portion of the claim the Non-Life Insurance Companies manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 2015 and 2014, the Non-Life Insurance Companies held collateral of approximately $9.6 billion and $9.4 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and assets in trusts.
The following table classifies the components of net loss reserves by business unit:
December 31, | | |
(in millions) | | 2015 | | 2014 |
Commercial Property Casualty: | | | | |
Casualty | $ | 32,620 | $ | 33,065 |
Financial lines | | 9,265 | | 9,538 |
Specialty | | 5,197 | | 5,786 |
Property | | 4,013 | | 4,079 |
Total Commercial Property Casualty | | 51,095 | | 52,468 |
Commercial Mortgage Guaranty | | 713 | | 977 |
Consumer Personal Insurance | | | | |
Personal lines | | 2,661 | | 2,763 |
Accident and health | | 1,662 | | 1,878 |
Total Consumer Personal Insurance | | 4,323 | | 4,641 |
Other run-off insurance lines* | | 4,472 | | 3,526 |
Net liability for unpaid losses and loss adjustment expenses | $ | 60,603 | $ | 61,612 |
* In 2015, $1.2 billion of loss reserves for certain environmental liability, healthcare, casualty, and specialty coverages, previously reported in Commercial Casualty and Specialty lines of business, were transferred to other run-off insurance lines.
Discounting of Reserves
The following table presents the components of loss reserve discount included above:
December 31, | 2015 | | 2014 |
| | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
U.S. workers' compensation: | | | | | | | | | | | | | |
Tabular | $ | 635 | $ | 218 | $ | 853 | | $ | 623 | $ | 229 | $ | 852 |
Non-tabular | | 1,542 | | 746 | | 2,288 | | | 1,525 | | 689 | | 2,214 |
Asbestos | | - | | 7 | | 7 | | | - | | 11 | | 11 |
Total reserve discount | $ | 2,177 | $ | 971 | $ | 3,148 | | $ | 2,148 | $ | 929 | $ | 3,077 |
The following table presents the net reserve discount benefit (charge):
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| | | Run-off | | | | | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
Current accident year | $ | 182 | $ | - | $ | 182 | | $ | 189 | $ | - | $ | 189 | | $ | 175 | $ | - | $ | 175 |
Accretion and other | | | | | | | | | | | | | | | | | | | | |
adjustments to prior | | | | | | | | | | | | | | | | | | | | |
year discount | | (262) | | (74) | | (336) | | | (145) | | (235) | | (380) | | | (225) | | 102 | | (123) |
Effect of interest rate | | | | | | | | | | | | | | | | | | | | |
changes | | 148 | | 77 | | 225 | | | (225) | | (172) | | (397) | | | (272) | | 529 | | 257 |
Effect of re-pooling | | - | | - | | - | | | 110 | | - | | 110 | | | - | | - | | - |
Net reserve discount | | | | | | | | | | | | | | | | | | | | |
benefit (charge) | | 68 | | 3 | | 71 | | | (71) | | (407) | | (478) | | | (322) | | 631 | | 309 |
Amount transferred to run-off | | | | | | | | | | | | | | | | | | | | |
insurance lines | | (39) | | 39 | | - | | | - | | - | | - | | | - | | - | | - |
Net change in total reserve | | | | | | | | | | | | | | | | | | | | |
discount | $ | 29 | $ | 42 | $ | 71 | | $ | (71) | $ | (407) | $ | (478) | | $ | (322) | $ | 631 | $ | 309 |
Comprised of: | | | | | | | | | | | | | | | | | | | | |
U.S. Workers' | | | | | | | | | | | | | | | | | | | | |
compensation | $ | 29 | $ | 46 | $ | 75 | | $ | (71) | $ | (385) | $ | (456) | | $ | (322) | $ | 649 | $ | 327 |
Asbestos | $ | - | $ | (4) | $ | (4) | | $ | - | $ | (22) | $ | (22) | | $ | - | $ | (18) | $ | (18) |
U.S. Workers’ Compensation
The Non-Life Insurance Companies discount certain workers’ compensation reserves in accordance with practices prescribed or permitted by New York, Pennsylvania and Delaware. New York rules generally do not permit non-tabular discounting on IBNR and prescribe a fixed 5 percent discount rate for application to case reserves. Pennsylvania permits non-tabular discounting of IBNR and, commencing in 2013, approved variable discount rates determined using risk-free rates based on the U.S. Treasury forward yield curve plus a liquidity margin, applicable to IBNR and case reserves. Delaware has permitted discounting on the same basis as the Pennsylvania domiciled companies.
The net increase in workers’ compensation discount in 2015 of $75 million was partially due to the increase in forward yield curve rates used for discounting under the prescribed or permitted practices. The increase in the forward yield curve component of the discount rates resulted in a $225 million increase in the loss reserve discount, as Treasury rates generally increased along the payout pattern horizon in 2015. In addition, the effects of the discount attributable to newly established
reserves for accident year 2015 increased the discount by $182 million in 2015. These increases were partially offset by a $332 million reduction for accident years 2014 and prior, primarily from accretion of discount on reserves during 2015.
On January 1, 2014, the Non-Life Insurance Companies merged their two internal pooling arrangements into one pool, and changed the participation percentages of the pool members resulting in a reallocation of reserves from New York domiciled companies to those domiciled in Pennsylvania and Delaware. As a result of these changes in the participation percentages and domiciliary states of the participants of the combined pool, the Non-Life Insurance Companies recognized a discount benefit of $110 million in the first quarter of 2014.
Annual Reserving Conclusion
AIG net loss reserves represent our best estimate of the liability for net losses and loss adjustment expenses as of December 31, 2015. While we regularly review the adequacy of established loss reserves, there can be no assurance that our recorded loss reserves will not develop adversely in future years and materially exceed our loss reserves as of December 31, 2015. In our opinion, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on our consolidated financial condition, although such events could have a material adverse effect on our consolidated results of operations for an individual reporting period.
The following table presents the rollforward of net loss reserves:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at beginning of year | | | | | | $ | 61,612 | $ | 64,316 | $ | 68,782 |
Foreign exchange effect | | | | | | | (1,429) | | (1,061) | | (617) |
Other, including dispositions | | | | | | | - | | - | | (79) |
Change due to retroactive asbestos reinsurance | | | | | | | 20 | | 141 | | 22 |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | |
Current year, undiscounted | | | | | | | 20,308 | | 21,279 | | 22,171 |
Prior years unfavorable development, undiscounted* | | | | | | | 4,119 | | 703 | | 557 |
Change in discount | | | | | | | (71) | | 478 | | (309) |
Losses and loss adjustment expenses incurred | | | | | | | 24,356 | | 22,460 | | 22,419 |
Losses and loss adjustment expenses paid: | | | | | | | | | | | |
Current year | | | | | | | 5,751 | | 6,358 | | 7,431 |
Prior years | | | | | | | 18,205 | | 17,886 | | 18,780 |
Losses and loss adjustment expenses paid | | | | | | | 23,956 | | 24,244 | | 26,211 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at end of year | | | | | | $ | 60,603 | $ | 61,612 | $ | 64,316 |
* See tables below for details of prior year development by business unit, accident year and major class of business.
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years, net of reinsurance, by business unit and major class of business:
Years Ended December 31, | | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | | 2014 | | 2013 |
Prior accident year development by major class of business: | | | | | | | | | | | | | |
Commercial Property Casualty - U.S. & Canada: | | | | | | | | | | | | | |
Excess casualty | | | | | | | $ | 1,529 | | $ | (36) | $ | (144) |
Financial lines including professional liability | | | | | | | | 579 | | | (47) | | (113) |
On-going Environmental | | | | | | | | 108 | | | 137 | | 151 |
Primary casualty: | | | | | | | | | | | | | |
Loss-sensitive (offset by premium adjustments below)(a) | | | | | | | | (49) | | | 105 | | 89 |
Other | | | | | | | | 1,175 | | | 445 | | 409 |
Healthcare | | | | | | | | 207 | | | 109 | | (54) |
Property excluding natural catastrophes | | | | | | | | (117) | | | 50 | | (80) |
Natural catastrophes | | | | | | | | (52) | | | (102) | | 179 |
All other, net | | | | | | | | 6 | | | 72 | | 23 |
Total Commercial Property Casualty - U.S. & Canada | | | | | | | | 3,386 | | | 733 | | 460 |
Commercial Property Casualty International: | | | | | | | | | | | | | |
Excess casualty | | | | | | | | 71 | | | (62) | | (15) |
Primary casualty | | | | | | | | 89 | | | (5) | | (25) |
Financial lines | | | | | | | | 47 | | | 182 | | 74 |
Specialty | | | | | | | | (5) | | | (30) | | (51) |
Property excluding natural catastrophes | | | | | | | | (64) | | | (82) | | (3) |
Natural catastrophes | | | | | | | | (44) | | | (77) | | (71) |
All other, net | | | | | | | | - | | | (4) | | (14) |
Total Commercial Property Casualty - International | | | | | | | | 94 | | | (78) | | (105) |
Total Commercial Property Casualty | | | | | | | | 3,480 | | | 655 | | 355 |
Commercial Mortgage Guaranty | | | | | | | | (69) | | | (104) | | 30 |
Consumer Personal Insurance - U.S. & Canada: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | (12) | | | (8) | | (69) |
All other, net | | | | | | | | (54) | | | (44) | | (46) |
Total Consumer Personal Insurance - U.S. & Canada | | | | | | | | (66) | | | (52) | | (115) |
Consumer Personal Insurance - International: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | 2 | | | (8) | | - |
All other, net | | | | | | | | 45 | | | (17) | | (40) |
Total Consumer Personal Insurance - International | | | | | | | | 47 | | | (25) | | (40) |
Total Consumer Personal Insurance | | | | | | | | (19) | | | (77) | | (155) |
Run-off Insurance Lines | | | | | | | | | | | | | |
Asbestos and environmental (1986 and prior) | | | | | | | | 281 | | | 124 | | 67 |
Run-off environmental | | | | | | | | 132 | | | 120 | | 238 |
Run-off healthcare(b) | | | | | | | | 50 | | | - | | - |
Other run-off | | | | | | | | 272 | | | - | | - |
All other, net | | | | | | | | (8) | | | (15) | | 22 |
Total Run-off Insurance Lines | | | | | | | | 727 | | | 229 | | 327 |
Total prior year unfavorable development | | | | | | | $ | 4,119 | | $ | 703 | $ | 557 |
| | | | | | | | | | | | | |
Premium adjustments on primary casualty loss sensitive business | | | | | | | | 49 | | | (105) | | (89) |
Total prior year development, net of premium adjustments | | | | | | | $ | 4,168 | | $ | 598 | $ | 468 |
(a) Represents prior year development on active retrospectively rated components of risk-sharing policies.
(b) In 2015, includes $30 million of non-operating adverse prior year development.
Net Loss Development
In determining the loss development from prior accident years, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes (including challenges and recommendations from our Enterprise Risk Management group) as well as the views of third party actuarial firms. We use these inputs to improve our evaluation techniques, and to analyze and assess the change in estimated ultimate loss for each accident year by class of business. Our analyses produce a range of indications from various methods, from which we select our best estimate.
We analyze and evaluate the change in estimated ultimate loss for each accident year by class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, we examine the indicated effect such emergence would have on the reserves of that class of business. In some cases, the lower or higher than expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the reserves for the class of business. In other cases, the lower or higher than expected emergence may result in a change, either favorable or unfavorable. As appropriate, we make adjustments in response to the difference between the actual and expected loss emergence for each accident year. As part of our reserving process, we also consider notices of claims received with respect to emerging and/or evolving issues, in particular those related to complex, claims-related class action litigation and latent exposure claims. Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratio selected (Commercial: 66.2 points; Consumer: 54.0 points; Mortgage Guaranty: 25.1 points) and the current year’s addition to reserves.
In 2015 and 2014, we recognized $4.1 billion and $703 million of adverse development, respectively, driven in each period by adverse loss development in Commercial Property Casualty and Run-off Insurance Lines partially offset by Consumer Personal Insurance and Mortgage Guaranty business. In 2013, we recognized $557 million of adverse development primarily due to the adverse prior year loss reserve development in Commercial Property Casualty, Mortgage Guaranty business and Run-off Insurance Lines, partially offset by Consumer Personal Insurance.
See Results of Operations — Commercial Insurance and Results of Operations — Consumer Personal Insurance Results herein for further discussion of net loss development.
The following is a discussion of the primary reasons for the development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period. See MD&A — Critical Accounting Estimates for a description of our loss reserving process, basis for selections and sensitivities to certain assumptions.
Commercial Property Casualty
In 2015, the Commercial Property Casualty adverse prior year loss reserve development of $3.5 billion was driven by Excess Casualty, Primary Casualty, Environmental, Financial Lines, Healthcare and International Excess Casualty, partially offset by Property excluding natural catastrophes and Natural catastrophes.
In 2014, the Commercial Property Casualty adverse prior year loss reserve development of $655 million was driven by Primary Casualty, Environmental, International Financial Lines, and Healthcare, partially offset by Natural catastrophes, International Primary Casualty and International Commercial Property.
In 2013, the Commercial Property Casualty adverse prior year loss reserve development of $355 million was driven by Primary Casualty, International Financial Lines, Environmental, and Healthcare, partially offset by Excess Casualty, Financial Lines, and Natural catastrophes.
Excess Casualty – U.S. & Canada
The excess casualty class presents unique challenges for estimating the liability for unpaid losses. Our policies tend to attach at a high layer above underlying policies, usually issued by other insurance companies, which can limit our access to relevant information to help inform our judgments. Our insureds are generally required to provide us with notice of claims that exceed a
threshold, either expressed as a proportion of our coverage attachment point (e.g., 50 percent of the attachment) or for particular types of claims (e.g., death, quadriplegia). This threshold is generally established well below our attachment point, to provide us with a precautionary notice of claims that could potentially reach our excess layer of coverage. This means that the majority of claims reported to us are closed without payment by us because the claims never reach our layer, while the claims that reach our layer and close with payment by us can be large and highly variable. Thus, estimates of unpaid losses carry significant uncertainty.
During 2015, Excess Casualty experienced $1.5 billion of adverse development largely driven by worse than expected loss emergence reported in 2015, including $1.2 billion (primarily for U.S. risks) in the fourth quarter when we completed our scheduled detail valuation review for this class. This increase was largely driven by adverse emergence in both general liability and umbrella auto liability, reflecting worsening trends in the number and nature of high severity losses. Approximately $411 million of the adverse development is related to auto liability. We reacted to the adverse emergence by updating our assumptions about loss severity, loss development patterns and expected loss ratios for the most recent accident years. We have seen an increasing trend in the frequency of high severity claims, especially in the umbrella auto liability portfolio. We also observed deterioration in certain class action claims that have complex coverage uncertainties and high limits characterized by increases in new claims and/or demands reported in 2015 and progress towards potential settlements, which have further informed our actuarial projections of ultimate losses for these types of claims. These types of claim classes have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile. In addition, we also increased losses associated with bad-faith claims by approximately $120 million reflecting an increase in recent settlements. These types of claims have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile.
During 2014, Excess Casualty experienced $36 million of favorable development largely driven by savings on a few large claims. In our Excess Umbrella analysis in 2014, our revised segmentation led to lower 2005 and subsequent accident year estimates for non-mass tort claims where we expect underwriting actions and reductions in policy limits to have a favorable effect on ultimate losses from accident years 2007 to 2013 in particular. This was entirely offset by higher selected ultimate losses for accident years 2004 and prior as a result of updated loss development patterns for mass tort claims which we segmented separately from the non-mass tort claims.
During 2013, Excess Casualty experienced $144 million of favorable development due to favorable outcomes on some large cases from 2010 and lower than expected emergence in high layer Catastrophic Casualty business.
Primary Casualty – U.S. and Canada
Primary Casualty includes Workers’ Compensation, General Liability and Auto Liability lines of business. The business is segmented by industry and where relevant, by geography.
Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. As part of the year end reserve review related to these policies, in addition to reviewing normal development we enhanced our segmentation to better reflect the specified policy features. Based on the analysis, we increased our reserves by $540 million, primarily for accident years 2012 and prior and in the workers’ compensation class, to reflect estimated increased losses and reduced expectations of future recoveriesfrom our insureds through these risk-sharing features.
We also recognized $100 million of adverse prior year development in Workers’ Compensation coverages sold to government contractors in U.S and non-U.S. military installations as a result of adverse loss emergence from several large accounts in the recent accident years. In addition, we reacted to the adverse emergence by increasing our expected loss ratios in recent accident years.
For the remainder of the primary workers’ compensation portfolio our analysis was based on the refined segmentation from 2014, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
For Primary General Liability, we increased our ultimate loss estimates for prior accident years by $146 million largely related to coverage sold to the Construction sectors as we reacted to noteworthy adverse loss emergence throughout the year, by changing our assumptions about loss development and expected loss ratios. For construction, the adverse development was driven by construction defect claims. The construction class is being re-underwritten to reduce New York and U.S. residential exposures.
For Primary Auto liability, we have observed increases in both the frequency and severity of claims occurring since the recovery from the recent U.S. economic downturn, which have significantly outpaced the pricing rate increases implemented during the same period. As a result, we recognized $144 million of adverse development during 2015 as we increased the expected loss ratios for recent accident years to reflect the deteriorating trends.
We also-reassessed the reasonableness of our liability for future claim handling expenses related to existing loss reserves and updated our estimates to reflect the costs from recent investments in claims systems, processes and people with the objective of improving our ability to better manage total loss costs. We increased our reserve estimates by $214 million based on refined analyses, $100 million of which was attributable to U.S. & Canada primary casualty. The balance was distributed among other classes.
During 2014, we continued to refine our segmentation of primary workers’ compensation into guaranteed cost and excess of large deductible business by deductible size group. The net result of the analysis was adverse development of $137 million for the primary workers’ compensation class of business. The key drivers of the adverse development in this class of business were increases for guaranteed cost business in California and New York, and increases for excess of large deductible business, as well as adverse experience in the Construction class. Each of these segments appears to have been impacted by specific structural changes in the portfolio. For California business, our tail factor increases were in response to changing long-term medical development patterns. In New York, there has been a lengthening of the period between the date of accident and the classification of non-scheduled permanent partial injuries. We completed a review of claim emergence and payouts for our top six states in workers’ compensation and concluded that California and New York were the main states where the loss development patterns had materially changed since our last review. For excess of large deductible business across all states, we updated our analyses to consider the impact of changes in the mix of retentions that has occurred over time as the data by retention band was becoming more credible. For the Construction class, we note that the construction sector has experienced a comparatively slow recovery in payroll employment. As a result of the diminished employment opportunities in this industry sector, injured workers may experience limited return-to-work opportunities, which moderate the shortening of claim duration that normally accompanies a labor market recovery. For all other states combined excluding California and New York, we saw favorable emergence in our middle market Specialty Workers’ Compensation segment. The net effect of these revised selections had the greatest adverse effect on the Construction class of business ($140 million adverse development) and the National Accounts class of business ($125 million adverse development). The most significant favorable effect was in the Specialty Workers’ Compensation class of business ($155 million favorable development). Our analysis considers our best estimate expectations of medical inflation and loss costs trends and also reflects the impacts of enhancements in our claim management and loss mitigation activities, such as opioid management, fraud investigation and medical management.
For primary general liability in 2014, we increased our ultimate loss estimates for prior years by $182 million. This was largely driven by the construction segment as a result of several large construction defect claims and increases in the costs of claims in New York associated with New York Labor Law. The construction results in California and New York continue to be the main sources of adverse development in our guaranteed cost primary general liability books although we did experience adverse development from construction defect claims in other states in 2014. Our large account primary non-construction general liability business was adversely impacted by claim activity in the layers excess of large insured retentions and we increased our loss development patterns for these layers to reflect the changes.
For commercial auto in 2014, we reacted to an increase in frequency of large claims in the accident years 2010 to 2013, where the economic recovery has contributed to increased frequency and severity, especially for those claims in excess of a client deductible of $500,000, which generally take several years to emerge and settle. This led to adverse prior year loss reserve development of $156 million for the automobile subset of primary casualty.
During 2013, we continued to refine the segmentation of our analyses of primary workers’ compensation, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
During 2013, for primary general liability, we increased our reserves for prior years by approximately $355 million. Most of the increase was driven by construction related primary general liability claims, especially construction defect claims where we increased our ultimate loss estimates by $219 million to reflect the higher than expected frequency and severity of these claims especially in states that experienced heavy increases in construction activity after the 2004 and 2005 hurricanes and during the housing boom prior to 2007. Due to the subsequent home price declines observed in many of these states, the frequency of reported losses has increased as the losses subsequently represented a larger percentage of the equity values of the affected homes, and homeowners increasingly looked to insurance recoveries as a way to recoup some of that lost value.
Financial Lines – U.S. and Canada
Financial Lines business includes Director and Officer (D&O) and Related Management Liability, various Professional Liability classes of business as well as the Fidelity book of business. The Financial Lines book consists mostly of the D&O class of business.
During 2015, we recognized $579 million of adverse development, primarily as a result of our scheduled annual detailed valuation review conducted in the fourth quarter, driven largely by the adverse loss emergence that we have seen over the last year, especially in D&O and Professional Liability. In particular, we have observed greater than expected loss costs for several claims from accident years 2006 through 2010, driven by unfavorable settlements and deterioration in known claims. We responded to this adverse emergence by updating our loss development factors and expected loss ratio assumptions for all accident years. In addition, we recognized losses associated with bad-faith claims primarily based on actual settlements in the fourth quarter.
During 2014, we recognized $47 million of favorable development driven by the Professional Liability and D&O and Related Management Liability classes of business, somewhat offset by adverse development on the Fidelity book in recent accident years due to the changing economic cycle.
During 2013, we recognized $113 million of favorable development driven somewhat evenly among the Professional Liability, Fidelity and D&O and Related Management Liability classes of business. The year-end 2013 Professional Liability loss reserve actuarial review adopted a refined segmentation for this class of business with the selection of differentiated frequency and severity trends for various Professional Liability classes of business which appear to be behaving differently in the post financial crisis years than when reviewed in total.
Healthcare
During 2015, we recognized $207 million of adverse development driven by deteriorating loss experience in accident years 2008 and subsequent characterized by large claims in various segments including hospitals, nursing homes, and pharmaceutical and medical products liability. We reacted to these large claims by increasing our expected loss ratios for recent accident years and putting physicians and surgeons and pharmaceutical and medical products classes into runoff.
During 2014, we recognized $109 million of adverse development in this class largely driven by three large and relatively unusual claims of $25 million each in relatively recent accident years. While there have not been any significant structural changes to the portfolio, there can be material volatility in loss experience in this class of business where individual claims can be of high severity.
During 2013, this class recognized $54 million of favorable prior year development due to lower than expected loss emergence in many classes such as Excess Hospital Liability.
International Casualty (Excess and Primary Casualty) and Specialty
During 2015, we recognized $155 million of adverse prior year development, primarily due to three large product liability claims in our Casualty and Specialty lines totaling approximately $115 million. Two of these claims arose in Japan, which is unusual for our portfolio in that market.
During 2014 and 2013, we had $97 million and $91 million of favorable development, respectively. The favorable development in each year was due to lower than expected loss emergence in many classes and countries outside the U.S., with the majority from various countries in the EMEA region.
Financial Lines – International
During 2014 we implemented an enhanced claims operating model in Europe and Australasia which has provided our actuaries with more detailed case reserve data and analysis, enabling AIG’s actuaries to react sooner to case development than in prior years.
During 2015, we recognized $47 million of adverse prior year development, driven by increased claims emergence and related updates to the assumptions for loss development factors and expected loss ratios used in the annual detailed valuation review for these reserves, primarily related to Europe and Australasia risks.
During 2014, we recognized $182 million of adverse development in the international Financial Lines segments, driven by large claims emergence in the U.K., Australasia and Europe. Multiple accident years contributed to this total, but it was concentrated most heavily in accident years 2008-2011. The Australasia emergence was due to a number of specific large losses in the Australia and New Zealand D&O business. In Europe, adverse prior year loss reserve development was concentrated in the D&O class of business, where we have observed a greater incidence of severe claims compared with prior years, and the Professional class of business, with large losses from one insured.
During 2013, we recognized $74 million of adverse development, all of which stemmed from losses in the D&O books in Europe, UK and Australasia, with the other segments showing modest favorable development. The development we recognized can be directly linked to a small number of specific claims booked throughout the year.
Natural Catastrophes
During 2015 and 2014, we experienced favorable property catastrophe prior year development of $52 million and $102 million, respectively, in our U.S. and Canada business, primarily due to favorable development from several U.S. events in accident year 2013. We also experienced favorable property catastrophe prior year loss reserve development of $44 million and $77 million from our international property class of business for 2015 and 2014, respectively.
During 2013, we experienced adverse development from Storm Sandy totaling $108 million, or 5.4 percent of the 2012 estimate. This development resulted from higher severities on a small number of large and complex commercial claims driven by a number of factors including the extensive damage caused to properties in the downtown New York metropolitan area.
Mortgage Guaranty business includes domestic first liens (96 percent of total reserves) and run-off books in second liens, student loans and international.
During 2015, we recognized $69 million of favorable prior year loss reserve development driven by lower than expected frequency due to improving cure rates. Post-claim recoveries also contributed to favorable prior year development.
During 2014, we recognized $104 million of favorable prior year loss reserve development driven primarily by the benefit of a settlement with a mortgage lender, steady increases in year-over-year first lien cure rates, a reflection of the improved
economic environment, and in part by favorable frequency trends and recoveries in second lien claims. Partially offsetting these improvements were upward trends in severity, particularly for older (pre-2012) accident periods.
During 2013, we recognized $30 million of adverse prior year loss reserve development due to unfavorable emergence of overturns of prior claim cancellations and increased severity estimates in first liens, partially offset by favorable frequency in student loans and a reduction in the unallocated loss adjustment expense reserve.
Consumer Personal Insurance
During 2015, 2014 and 2013, we recognized $19 million, $77 million, and $155 million of favorable development, respectively.
During 2015 and 2014, we experienced favorable loss reserve development of $10 million and $16 million, respectively, from Natural Catastrophes.
The remaining $61 million of favorable development in 2014 was primarily from Homeowners, International Accident & Health and U.S. Warranty.
The following is a discussion of the primary reasons for the Run-Off Insurance Lines development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period.
Asbestos and Environmental (1986 and prior)
Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos reserves are ceded to National Indemnity Company (NICO) under a retrospective reinsurance arrangement entered into in 2011. However, certain asbestos-related exposures are not subject to the NICO agreement, including asbestos exposures for which we have negotiated fixed payment schedules, and third party reinsurance assumed policies. The reported claim activity on the assumed claims has increased in the last year. As a result, we modified certain of our loss-reserve-related assumptions to better reflect this AIG-specific experience as well as consideration of recent industry-wide trends regarding expanding coverage theories for liability. As a result, we increased our 2015 reserves by $164 million and by $117 million for Asbestos and Environmental, respectively.
Other Run-Off Insurance
During 2015, we transferred approximately $1.2 billion of loss reserves, largely representing coverages we have not written for at least five years, from Commercial Insurance into Run-off insurance lines. We increased the reserves for these coverages by $272 million to reflect updated assumptions about future loss development.
Excess Workers’ Compensation – U.S.
This class of business, which is reported in our run-off unit, has an extremely long tail and is one of the most challenging classes of business from a reserving perspective, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to small changes in assumptions, e.g. — in the rate of medical inflation or the longevity of injured workers, which can have a significant effect on the ultimate reserve estimate.
During 2015, this class of business did not experience significant development in loss reserves. The proactive management of settlement negotiations and other claims mitigation strategies minimized the volatility observed during 2015. The nominal reduction in reserves as a result of commutations and individual claims settlement strategies amounted to $222 million in 2015 compared to $242 million in 2014 and $25 million in 2013.
During 2014, we updated our analyses of Excess Workers compensation using a range of scenarios and methodologies and determined that our carried reserves were adequate after recognizing $20 million of favorable prior year development as a result of claim settlements and commutations of assumed reinsurance business, as well as reflecting changes in estimates in our loss mitigation strategies. We commuted several large assumed reinsurance agreements in 2014 and reduced the reserves faster than was previously expected as a result of our proactive management by the run-off unit.
During 2013, we updated our analysis of Excess Workers’ Compensation reserves and determined that no changes to our carried reserves were needed. We also updated our analysis of underlying claims cost drivers used in 2012 through accident year 2004, discussed in more detail below.
As noted above, we write loss sensitive business within our primary casualty portfolio. We recognized (return) additional premiums on loss sensitive business of $(49) million, $105 million and $89 million in 2015, 2014 and 2013, respectively, which entirely offset development in that business.
For the year ended December 31, 2015, we incurred reinsurance reinstatement premiums of $(4) million, compared to $(2) million and $27 million for 2014 and 2013, respectively.
See MD&A — Critical Accounting Estimates — Future Policy BenefitsLiability for LifeUnpaid Losses and AccidentLoss Adjustment Expenses for further discussion of our loss reserving process.
See Commercial Insurance and HealthConsumer Personal Insurance Contracts (AIG Life and Retirement)Results herein for additional information onfurther discussion of net loss recognition.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC for investment-oriented products is adjusted at each balance sheet date to reflect the change in DAC as if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. The change in DAC related to unrealized appreciation of investments generally moves in the opposite direction of the changes in unrealized appreciation of the available for sale securities portfolio. When market interest rates rose in 2013, the fair value and unrealized appreciation of the portfolio decreased, resulting in an increase in DAC. In 2012 and 2011, when interest rates were declining and unrealized gains in the portfolio increased, DAC and reserves related to unrealized appreciation decreased.
development.
DAC Rollforward
The following table summarizes the major componentsdevelopment, (favorable) or unfavorable, of the changes in AIG Lifeincurred losses and Retirement DAC:loss adjustment expenses for prior years, net of reinsurance, by accident year:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Prior accident year development by accident year: | | | | | | | | | | | |
Accident Year | | | | | | | | | | | |
2014 | | | | | | $ | 397 | $ | - | $ | - |
2013 | | | | | | | 396 | | (283) | | - |
2012 | | | | | | | 488 | | (59) | | (181) |
2011 | | | | | | | 296 | | 37 | | 217 |
2010 | | | | | | | 277 | | 12 | | (350) |
2009 | | | | | | | 188 | | 31 | | 157 |
2008 | | | | | | | 231 | | 8 | | (1) |
2007 | | | | | | | 48 | | (113) | | - |
2006 | | | | | | | 103 | | 64 | | (75) |
2005 | | | | | | | 90 | | 105 | | 61 |
2004 and prior (see table below) | | | | | | | 1,605 | | 901 | | 729 |
Total prior year unfavorable development | | | | | | $ | 4,119 | $ | 703 | $ | 557 |
Net Loss Development by Accident Year
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
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Balance, beginning of year | | $ | 5,672 | | $ | 6,502 | | $ | 7,258 | |
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Acquisition costs deferred | | | 930 | | | 724 | | | 869 | |
Amortization expense | | | (658 | ) | | (931 | ) | | (1,142 | ) |
Change related to unrealized depreciation (appreciation) of investments | | | 784 | | | (621 | ) | | (486 | ) |
Increase (decrease) due to foreign exchange | | | (5 | ) | | (2 | ) | | 3 | |
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Balance, end of year* | | $ | 6,723 | | $ | 5,672 | | $ | 6,502 | |
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* Balance excluding the amount related to unrealized appreciation of investments was $7.8 billion, $7.5 billion and $7.9 billion at December 31, 2013, 2012 and 2011, respectively.
Estimated Gross Profits for Investment-Oriented Products
Policy acquisition costs and policy issuance costs related to universal life and investment-type products (collectively, investment-oriented products) are deferred and amortized, with interest,For 2015, the adverse development in relation to the incidence of estimated gross profits to be realized over a period that approximates the estimated lives of the contracts. Estimated gross profits include net investment income and spreads, net realized investment gains and losses, fees, surrender charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change significantly, DAC and related reserves are recalculated using the new assumptions, and any resulting adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products. See Critical Accounting Estimates — Estimated Gross Profits for Investment-Oriented Products (AIG Life and Retirement) for additional information on these assumptions.
Pre-tax operating income in 2013 included a net increase of $153 million from adjustments to update certain gross profit assumptions used to amortize DAC and related items in our investment-oriented product lines. These
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / AIG LIFE AND RETIREMENT
adjustments resulted from our comprehensive annual review and update of estimated gross profit assumptions, and from a change in long-term asset growth rate assumptions for Group Retirement variable annuity products, whichaccident years 2011 through 2014 was driven by sustainedsignificantly greater actual versus expected loss emergence for primary and excess Auto Liability, Financial Lines and Healthcare. Individual large claims in the non-Auto Excess Casualty and International Casualty books along with deterioration in specific large accounts in the government contractors workers’ compensation portfolio were concentrated in these most recent accident years. The impact of revised loss expectations based on emergence in earlier accident years also contributed to the adverse development for Excess Casualty and Financial Lines in this period. In addition, our updated assumptions for bad-faith claims and unallocated loss adjustment expenses disproportionately impacted these years. Accident years 2005 through 2010 were largely impacted by updated loss development selections in Financial Lines and revised estimates on expected future recoveries from risk-sharing policies in the Primary Casualty portfolio. For accident years 2004 and prior, the adverse development was driven by
Excess Casualty revised tail factor selections, updated loss development selections for various run-off portfolios, updated industry experience for asbestos and revised estimates on expected future recoveries from risk-sharing policies.
For 2014, the favorable equity market performance.development in accident years 2013 and 2012 was driven by Financial Lines, Commercial Property and other short tailed lines, like Personal Lines. For accident year 2007, the favorable development was driven by U.S. and Canada Financial lines and Excess Casualty. For accident years 2004 and prior, the adverse development was driven by the Excess Casualty results of the a mass-tort resegmentation analysis, the updated primary workers’ compensation loss development selections (principally in California, New York and the excess of deductible segments) as well as the run-off pollution products business (1987-2004) and the asbestos and environmental (1986 and prior) exposure.
TheFor 2013, the favorable development from accident year 2012 was driven primarily by consumer lines and lower losses in domestic commercial property, while the favorable development from accident year 2010 was primarily the result of favorable claims emergence from domestic excess casualty and from liability and financial lines coverage policies that are on a claims-made basis. The adverse development from accident year 2011 was driven by large losses in financial lines and adverse development in primary casualty, including the comprehensive annual review, whichloss-sensitive business. The adverse development from accident year 2009 was completeddriven by large losses in financial lines and adverse development in primary casualty including loss-sensitive business. The adverse development from accident years 2003 and prior was primarily driven by loss development on toxic tort claims, construction general liability claims and pollution product claims.
For certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to AIG. These reclassifications are shown as development in the third quarter of 2013, was a $118 million net increase in Pre-tax operating income in 2013, which included a $198 million net increase in our Retail operating segment and an $80 million decrease in our Institutional operating segment. The net increase in Retail pre-tax operating income was primarily due to a favorable adjustment in our Fixed Annuities product line from updated spread assumptions due to active management of crediting rates and higher future investment yields than those previously assumed. In the Life Insurance and A&H, Retirement Income Solutions and Group Retirement product lines, the update of assumptions for variable annuity spreads, surrender rates, and life insurance mortality had an unfavorable impact on pre-tax operating income. The life insurance mortality assumptions, while unfavorable compared to the previous assumption set, are still within pricing expectations.
The $118 million increase in pre-tax operating income to reflect updated assumptions was comprised of a $98 million net decrease in DAC amortization expense, a $61 million decrease in SIA amortization expense within Interest credited to policyholder account balances, and a $28 million increase in unearned revenue amortization within Policy fees, partially offset by a $69 million increase in Future policy benefits for life and health insurance contracts.
In estimating future gross profits for variable annuity products, a long-term annual asset growth assumption is applied to estimate the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuationsrespective years in the equity markets is partially mitigated through the use of a "reversion to the mean" methodology, whereby short-term asset growth above or below the long-term annual rate assumption will impact the growth assumption applied to the five-year period subsequent to the current balance sheet date. In the fourth quarter of 2013, we revised the growth rate assumptions for the five-year reversion to the mean period for the Group Retirement product line in our Institutional segment. This adjustment, which increased DAC by $31 million, increased SIA by $2 million and reduced the GMDB liability by $2 million, was recorded as a decrease in current period amortization expense and increased our Retail pre-tax operating income by $35 million in 2013. For variable annuities in our Retirement Income Solutions product line, the assumed annual growth rate remained above zero percent for the five-year reversion to the mean period and therefore did not meet our criteria for adjustment; however, additional favorable equity market performance in excess of long-term assumptions could result in "unlocking" in this product line in the future with a positive effect on pre-tax income in the period of the unlocking.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / OTHER OPERATIONS
tables above.
OTHER OPERATIONS
Other Operations Results
The following table presents AIG's Other Operations results:summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment expenses for accident year 2004 and prior by major class of business and driver of development:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
2004 and prior accident year development by major class of | | | | | | | | | | | |
business and driver of development: | | | | | | | | | | | |
Excess Casualty - primarily mass torts(a) | | | | | | $ | 388 | $ | 301 | $ | - |
Excess Casualty - all other | | | | | | | 104 | | 53 | | 251 |
Primary Casualty - loss sensitive business | | | | | | | 1 | | 37 | | (24) |
Primary Casualty - all other(b) | | | | | | | 362 | | 196 | | 102 |
Run-off environmental (1987 to 2004)(c) | | | | | | | 74 | | 97 | | 214 |
Asbestos and Environmental (1986 and prior) | | | | | | | 281 | | 124 | | 67 |
Commutations and Arbitrations(d) | | | | | | | 62 | | 63 | | 21 |
All Other | | | | | | | 333 | | 30 | | 98 |
Total prior year unfavorable development | | | | | | $ | 1,605 | $ | 901 | $ | 729 |
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| | Percentage Change | |
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | 2013 vs. 2012
| | 2012 vs. 2011
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Mortgage Guaranty | | $ | 205 | | $ | 9 | | $ | (97 | ) | | NM | % | | NM | % |
Global Capital Markets | | | 625 | | | 557 | | | (11 | ) | | 12 | | | NM | |
Direct Investment book | | | 1,448 | | | 1,215 | | | 604 | | | 19 | | | 101 | |
Retained interests: | | | | | | | | | | | | | | | | |
Change in fair value of AIA securities, including realized gain in 2012 | | | – | | | 2,069 | | | 1,289 | | | NM | | | 61 | |
Change in fair value of ML III | | | – | | | 2,888 | | | (646 | ) | | NM | | | NM | |
Change in the fair value of the MetLife securities prior to their sale | | | – | | | – | | | (157 | ) | | NM | | | NM | |
Corporate & Other: | | | | | | | | | | | | | | | | |
Interest expense | | | (1,412 | ) | | (1,597 | ) | | (1,685 | ) | | 12 | | | 5 | |
Corporate expenses, net | | | (1,009 | ) | | (900 | ) | | (1,095 | ) | | (12 | ) | | 18 | |
Severance expense(a) | | | (265 | ) | | – | | | – | | | NM | | | NM | |
Other non-core businesses | | | (107 | ) | | (94 | ) | | 94 | | | (14 | ) | | NM | |
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Total Corporate & Other operating loss | | | (2,793 | ) | | (2,591 | ) | | (2,686 | ) | | (8 | ) | | 4 | |
Consolidation and eliminations | | | 4 | | | – | | | – | | | NM | | | NM | |
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Total Other operations pre-tax operating income (loss) | | | (511 | ) | | 4,147 | | | (1,704 | ) | | NM | | | NM | |
Legal reserves | | | (446 | ) | | (754 | ) | | (20 | ) | | 41 | | | NM | |
Legal settlements(b) | | | 119 | | | 39 | | | – | | | 205 | | | NM | |
Loss on extinguishment of debt | | | (651 | ) | | (32 | ) | | (3,204 | ) | | NM | | | 99 | |
Aircraft Leasing | | | (129 | ) | | 338 | | | (934 | ) | | NM | | | NM | |
Net loss on sale of divested businesses | | | (48 | ) | | (6,717 | ) | | (74 | ) | | 99 | | | NM | |
Deferred gain on FRBNY credit facility | | | – | | | – | | | 296 | | | NM | | | NM | |
Changes in benefit reserves and DAC, VOBA and
SIA related to net realized gains (losses) | | | (98 | ) | | – | | | – | | | NM | | | NM | |
Net realized capital gains (losses) | | | (685 | ) | | 289 | | | (348 | ) | | NM | | | NM | |
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Total Other Operations pre-tax loss | | $ | (2,449 | ) | $ | (2,690 | ) | $ | (5,988 | ) | | 9 | % | | 55 | % |
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(a) Updates of mass tort loss development patterns.
(b) Includes $263loss development on excess of deductible exposures in workers’ compensation, general liability and commercial auto.
(c) Includes results of comprehensive specific large claim file reviews initiated in 2012 and updated in 2013 and 2014.
(d) The effects of commutations are shown separately from the related classes of business, primarily excess workers’ compensation. Commutations are reflected for the years in which they were contractually binding.
The main sources of unfavorable prior year development for accident years 2004 and prior recorded in 2013 through 2015 are as follows:
•Update of the mass tort loss development patterns and segmentation used for U.S. Excess Casualty, which accounted for $689 million and other loss emergence including specific large loss development totaling $408 million across the three years;
•Loss sensitive business that is entirely offset by premium adjustments accounted for $14 million;
•Update of the loss development patterns used for U.S. Primary Casualty including loss development patterns used in guaranteed cost workers’ compensation for NY and CA construction class of business and updates to the loss development patterns for business written on excess of deductible exposures in workers’ compensation, general liability and the commercial auto classes of business which collectively accounted for approximately $660 million across the three years;
•Update of the Environmental run-off portfolio’s losses following the 2012 comprehensive claims review that provided a more refined approach for the development of actuarial estimates for toxic tort claims (which were found to have a distinctly lengthier loss development pattern than other general liability claims in the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving based estimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with high policy limits (greater than $5 million per policy). These updates which commenced in 2012 and have been applied in each subsequent year, accounted for approximately $385 million;
•Update of our net retained asbestos and environmental exposure from 1986 and prior which accounted for approximately $472 million ($238 million environmental and $234 million asbestos) across the three years;
•Commutations in the three-year period ending December 31, 2015, accounted for approximately $146 million. These commutations serve to reduce the uncertainty in AIG’s required reserves; and
•Update of the assumptions for future loss development for the run-off insurance lines, primarily for coverages we have not written in at least five years, accounted for approximately $272 million of severance expense attributablethe All Other total amount of $461 million across the three years.
During the period 2013 to AIG Property Casualty.
(b) Reflects income from settlements with financial institutions that participated in2015, we completed refinements of our reserving methodologies for U.S. mass tort, toxic tort, retained asbestos, environmental and other specific large losses. We also conducted extensive additional studies to corroborate our judgments for our U.S. primary workers compensation and excess workers’ compensation classes of business. Further, we refined our loss reserving methodologies for our U.S. Excess Casualty class of business and our U.S. Primary Casualty class of business written over excess of deductible exposures where loss development patterns may lengthen if client retentions increase over time. Collectively, the creation, offeringreserves for the aforementioned classes of business or loss exposures account for the majority of the remaining net loss reserves for accident years 2004 and sale of RMBS from which AIG and its subsidiaries realized losses during the financial crisis.prior.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / OTHER OPERATIONS
Mortgage Guaranty Results
The following table presents Mortgage Guaranty results:
Years Ended December 31, | | | | | | | | | | Percentage Change |
(dollars in millions) | | 2015 | | | 2014 | | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | | | |
Net premiums written | $ | 1,050 | | $ | 1,024 | | $ | 1,048 | | 3 | % | | (2) | % |
Increase in unearned premiums | | (138) | | | (120) | | | (239) | | (15) | | | 50 | |
Net premiums earned | | 912 | | | 904 | | | 809 | | 1 | | | 12 | |
Losses and loss adjustment expenses incurred | | 160 | | | 223 | | | 514 | | (28) | | | (57) | |
Acquisition expenses: | | | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | 30 | | | 22 | | | 20 | | 36 | | | 10 | |
Other acquisition expenses | | 51 | | | 49 | | | 60 | | 4 | | | (18) | |
Total acquisition expenses | | 81 | | | 71 | | | 80 | | 14 | | | (11) | |
General operating expenses | | 166 | | | 156 | | | 142 | | 6 | | | 10 | |
Underwriting income | | 505 | | | 454 | | | 73 | | 11 | | | NM | |
Net investment income | | 139 | | | 138 | | | 132 | | 1 | | | 5 | |
Pre-tax operating income | | 644 | | | 592 | | | 205 | | 9 | | | 189 | |
Key metrics: | | | | | | | | | | | | | | |
Prior year loss reserve development (favorable)/ | | | | | | | | | | | | | | |
unfavorable | $ | (69) | | $ | (104) | | $ | 30 | | (34) | % | | NM | % |
Domestic first-lien: | | | | | | | | | | | | | | |
New insurance written | $ | 50,842 | | $ | 42,038 | | $ | 49,356 | | 21 | | | (15) | |
Combined ratio | | 44.6 | | | 52.6 | | | 91.1 | | | | | | |
Risk in force | $ | 47,442 | | $ | 42,106 | | $ | 36,367 | | 13 | | | 16 | |
60+ day delinquency ratio on primary loans(a) | | 3.4 | % | | 4.4 | % | | 5.9 | % | | | | | |
Domestic second-lien: | | | | | | | | | | | | | | |
Risk in force(b) | $ | 399 | | $ | 446 | | $ | 1,026 | | (11) | | | (57) | |
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Years Ended December 31,
(dollars in millions)
| | 2013
| | 2012
| | 2011
| | 2013 vs. 2012
| | 2012 vs. 2011
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Underwriting results: | | | | | | | | | | | | | | | | |
Net premiums written | | $ | 1,048 | | $ | 858 | | $ | 801 | | | 22 | % | | 7 | % |
Increase in unearned premiums | | | (239 | ) | | (143 | ) | | (9 | ) | | (67 | ) | | NM | |
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Net premiums earned | | | 809 | | | 715 | | | 792 | | | 13 | | | (10 | ) |
Claims and claims adjustment expenses incurred | | | 514 | | | 659 | | | 834 | | | (22 | ) | | (21 | ) |
Underwriting expenses | | | 222 | | | 193 | | | 187 | | | 15 | | | 3 | |
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Underwriting income (loss) | | | 73 | | | (137 | ) | | (229 | ) | | NM | | | 40 | |
Net investment income | | | 132 | | | 146 | | | 132 | | | (10 | ) | | 11 | |
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Pre-tax operating income (loss) | | | 205 | | | 9 | | | (97 | ) | | NM | | | NM | |
Net realized capital gains | | | 8 | | | 6 | | | 20 | | | 33 | | | (70 | ) |
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Pre-tax income (loss) | | $ | 213 | | $ | 15 | | $ | (77 | ) | | NM | % | | NM | % |
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Key metrics: | | | | | | | | | | | | | | | | |
New insurance written | | $ | 49,933 | | $ | 37,509 | | $ | 18,792 | | | 33 | % | | 100 | % |
Domestic first-lien: | | | | | | | | | | | | | | | | |
Risk in force | | $ | 36,367 | | $ | 28,967 | | $ | 25,635 | | | | | | | |
60+ day delinquency ratio on primary loans(a) | | | 5.9 | % | | 8.8 | % | | 13.9 | % | | | | | | |
Domestic second-lien: | | | | | | | | | | | | | | | | |
Risk in force(b) | | $ | 1,026 | | $ | 1,261 | | $ | 1,504 | | | | | | | |
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(a) Based on number of policies.
(b) Represents the full amount of second-lien loans insured reduced for contractual aggregate loss limits on certain pools of loans, which is usually 10 percent of the full amount of loans insured in each pool. Certain second-lien pools have reinstatement provisions, which will expire as the loan balances are repaid.repaid.
Pre-Tax oPERATING INCOME (in millions) | | domestic first-lien new insurance written on mortgage loans (in millions)
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The following table presents Mortgage Guaranty first-lien results:
Years Ended December 31, | | | | | | | | | Percentage Change |
(dollars in millions) | | 2015 | | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | |
Net premiums written | $ | 990 | | $ | 929 | $ | 950 | | 7 | % | (2) | % |
Increase in unearned premiums | | (137) | | | (117) | | (256) | | (17) | | 54 | |
Net premiums earned | | 853 | | | 812 | | 694 | | 5 | | 17 | |
Losses and loss adjustment expenses incurred | | 174 | | | 233 | | 462 | | (25) | | (50) | |
Acquisition expenses: | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | 29 | | | 21 | | 16 | | 38 | | 31 | |
Other acquisition expenses | | 52 | | | 49 | | 60 | | 6 | | (18) | |
Total acquisition expenses | | 81 | | | 70 | | 76 | | 16 | | (8) | |
General operating expenses | | 150 | | | 124 | | 95 | | 21 | | 31 | |
Underwriting income | | 448 | | | 385 | | 61 | | 16 | | NM | |
Net investment income | | 127 | | | 124 | | 116 | | 2 | | 7 | |
Pre-tax operating income | $ | 575 | | $ | 509 | $ | 177 | | 13 | % | 188 | % |
2015 and 2014 Comparison
Pre-tax operating income increased in 2015 compared to 2014 due to an increase in first-lien net premiums earned as a result of higher new insurance written increasing the amount of insurance in-force, an acceleration of earnings on the cancellations of single premium business for which a return premium is generally not required, and a decline in incurred losses from lower delinquency rates and higher cure rates. Offsetting these increases in operating income was a reduction in favorable prior year loss development of $35 million primarily related to a settlement with a large lender which resulted in $64 million of favorable prior year loss development in 2014.
TABLE OF CONTENTS
2013 and 2012 ComparisonItem 7 / results of operations / commercial insurance
Pre-tax
First-Lien Results
First-lien pre-tax operating income increased $66 million in 2013 increased2015 compared to the prior year2014, primarily due to improved underwriting income as a result of ana $41 million increase in first-lien net premiums earned in the first-lien business, and decreases2015 compared to 2014, largely from growth in claims and claims adjustment expenses incurred. Partially offsetting these increases were declines in net premiums earned in second-lien, student loan and international businesses, all of which were placed into run-off during 2008, and an increase in underwriting expenses related to higher volumes of new business.
The first-lien net premiums earned increased $127 million resulting from a 32 percent growth of the book of business and a decline in premium refundsthe acceleration of premiums earned as a result of lower rescissions during 2013 compared to 2012. The declinecancellations of single premium business. Additionally, there was a $72 million decrease in claims and claims adjustment expenses incurred reflected decreasesaccident year losses offset in first-lien and student loan claims and claims
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / OTHER OPERATIONS
adjustment expenses of $157 million and $22 million, respectively, which were partially offsetpart by a $34$13 million reduction in prior year loss development, which was driven primarily by $57 million of favorable prior year loss development from a settlement with a large lender in 2014. The increases in operating income were offset in part by a $37 million increase in second-lienacquisition and international claims and claims adjustmentgeneral operating expenses. The declinecombined ratio was 47.5 points in first-lien claims and claims adjustment expenses incurred was primarily the result of lower newly reported delinquencies and higher cure rates, which were partially offset by $46 million of unfavorable prior year development in 20132015, compared to unfavorable prior year development of $17 million52.6 points in 2012. The decline in student loan claims and claims adjustment expenses reflect recoveries on prior paid losses and the commutation of2014, reflecting a significant portion of the business in early 2013. Second-lien claims and claims adjustment expenses increased primarily due to increased overturns of previously denied claims. International claims adjustment expense increased due to increases to reserves as the portfolio continued to run-off.
New insurance written, which represents the original principal balance of the insured mortgages, increased 33 percent due to elevated levels of refinancing activity during 2013 and the acceptance of UGC's risk-based pricing model by approximately 300 new lenders.
2012 and 2011 Comparison
Mortgage Guaranty recorded pre-tax operating income in 2012 compared to a pre-tax operating loss in 2011. The decrease in claims and claims adjustment expenses reflected decreases in first and second-lien businessesthe loss ratio, partially offset by an increase in the expense ratio.
Acquisition expenses increased in 2015 compared to 2014, primarily as a result of sales support solicitation activities, which generated new insurance written.
General operating expenses increased in 2015 compared to 2014, primarily due to an increase in costs related to servicing the growth of the in-force business, technology-related and customer service initiatives expenses and severance.
Other Business Results
Other business results include international claimsmortgage insurance operations and claims adjustment expenses. Claimsthe run-off portfolios of second-lien insurance and claimsstudent loan insurance.
The Other business’ pre-tax operating income for 2015 was $69 million compared to $82 million in 2014. The decrease in pre-tax operating income was due to a decrease in net premiums earned and net investment income offset by the decrease in general operating expenses and losses and loss adjustment expenses, in 2012which included $35 million of favorable prior year loss development largely attributable to recoveries on previously paid claims.
2014 and 2013 Comparison
Pre-tax operating income increased in second liens, student loans, and international business, partially offset by unfavorable development in first liens. The decrease in first-lien claims and claims adjustment expenses reflected lower levels of newly reported delinquencies, an improvement in the cure rate and lower unfavorable loss development in 20122014 compared to 2011. The unfavorable development in 2012 resulted from delinquencies for which claim requests were not made, partially offset by favorable development arising from the claims requests sent to lenders. The decline in second-lien business claims and claims adjustment expenses reflected a decrease in claims and claims adjustment expenses paid as more business reached the respective stop loss limits. The increased claims and claims adjustment expenses in the international business reflected a reduction in claim reserves in 20112013 due to a settlement of certain delinquencies with a major European lender.
These items were partially offset by a decline in incurred losses from lower delinquency rates, higher cure rates and an increase in first-lien net premiums earned reflecting higher premium refundspersistency.
First Lien Results
First-lien pre-tax operating income increased in 2014 compared to 2013, primarily due to the rescissions arising from the claims requests sentimproved underwriting income as a result of a $229 million decrease in first-lien losses and loss adjustment expenses incurred reflecting fewer new delinquencies, favorable prior year loss reserve development, and higher cure rates. In addition, first-lien pre-tax operating income increased due to lenders during the fourth quarter of 2011 and continuing throughout 2012. Additionally,a $119 million increase in first-lien net premiums earned declinedin 2014 compared to 2013, largely from growth in the book of business, higher persistency, and, to a lesser extent, the acceleration of premiums earned as the result of the recognition of a shorter expected coverage period on second-liencertain single premium business. The decrease in first-lien losses and international businesses, both of which were placed into run-off during 2008. Underwritingloss adjustment expenses increased driven primarily by anincurred combined with the increase in underwriting, sales and product initiatives, allearned premiums resulted in an improved combined ratio of which supported52.6 points in 2014 compared to 91.1 points in 2013.
Acquisition expenses decreased in 2014 compared to 2013, primarily as a result of the increasedecrease in new insurance written related to the decline in mortgage originations.
General operating expenses increased in 2014 compared to 2013 due to increased technology expenses and an impairment charge on certain capitalized technology costs.
Other Business Results
The Other business’ pre-tax operating incomefor the year.
New insurance written2014 was approximately $37 billion and $19 billion$82 million compared to $27 million in 2012 and 2011, respectively.2013. The increase in new insurance written was the result of the market acceptance by lenders of UGC's risk-based pricing model and withdrawal of certain competitors from the market during 2011.
Global Capital Markets Results
2013 and 2012 Comparison
GCM's pre-tax income and pre-tax operating income increased in 2013 compared to 2012 primarilyis due to an improvement in net credit valuation adjustments on derivative assets and liabilities, partially offset by a decline in unrealized market valuation gains related to the super senior credit default swap (CDS) portfoliolosses and an increase in operating expenses.
Net credit valuationloss adjustment gainsexpenses incurred of $195 million were recognized in 2013 compared to net credit valuation adjustment losses of $30 million in 2012. The improvement resulted primarily from lower losses on derivative liabilities due to less significant tightening of AIG's credit spreads in 2013 compared to 2012 and higher gains on derivative assets due to more significant tightening of counterparty credit spreads in 2013 compared to 2012.
Unrealized market valuation gains on the CDS portfolio of $550$62 million and $617a $17 million were recognizedreduction in 2013 and 2012, respectively. The decline resulted primarily from amortization, price movements, terminations and maturities within the CDS portfolio.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / OTHER OPERATIONS
2012 and 2011 Comparison
GCM reported pre-tax income and pre-tax operating income in 2012 compared to pre-tax loss and pre-tax operating loss in 2011 primarily due to improvement in unrealized market valuations related to the super senior CDS portfolio, a decrease in operatingunderwriting expenses, and lower costs related to the wind-down of AIGFP's businesses and portfolios.
Unrealized market valuation gains on the CDS portfolio of $617 million and $339 million were recognized in 2012 and 2011, respectively. The improvement resulted primarily from amortization and price movements within the CDS portfolio. For 2012, the remaining portfolio of AIGFP continued to be wound down and was managed consistent with AIG's risk management objectives. The active wind-down of the AIGFP derivatives portfolio was completed by the end of the second quarter of 2011.
Direct Investment Book Results
The following table presents Direct Investment book results:
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Years Ended December 31,
(in millions)
| | 2013
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| | 2013 vs. 2012
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Pre-tax operating income | | $ | 1,448 | | $ | 1,215 | | $ | 604 | | | 19 | % | | 101 | % |
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Legal settlements | | | 45 | | | 26 | | | – | | | 73 | | | NM | |
Loss on extinguishment of debt | | | (15 | ) | | – | | | – | | | NM | | | NM | |
Net realized capital gains | | | 66 | | | 391 | | | 18 | | | (83 | ) | | NM | |
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Pre-tax income | | $ | 1,544 | | $ | 1,632 | | $ | 622 | | | (5 | )% | | 162 | % |
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2013 and 2012 Comparison
DIB pre-tax income decreased in 2013 compared to 2012 primarily due to a one-time realized capital gain of $426 million recorded in 2012 on the sale of 35.7 million common units of The Blackstone Group L.P., partially offset by improvements in pre-tax operating income. DIB pre-tax operating income increased in 2013 compared to 2012 primarily due to fair value appreciation on ABS CDOs that were acquired in the fourth quarter of 2012, partially offset by a decline in net credit valuation adjustmentspremiums earned of $22 million and a decline in net investment income of $2 million.
New Insurance Written
Domestic first-lien new insurance written increased to a record level of $50.8 billion in 2015 compared to $42.0 billion in 2014, driven by an increase in refinancing, improvements in existing home sales due to lower down payment requirements and new purchase volume.
The decline in domestic first-lien new insurance written to $42.0 billion in 2014 from $49.4 billion in 2013 was primarily due to the contraction in the mortgage originations market and an increase in competition.
Delinquency Inventory
The delinquency inventory for domestic first-lien business declined during 2015 as a result of cures and paid claims exceeding the number of newly reported delinquencies. Mortgage Guaranty’s first-lien primary delinquency ratio at December 31, 2015 was 3.4 percent compared to 4.4 percent at December 31, 2014. Over the last several years, Mortgage Guaranty has experienced a decline in newly reported defaults and an increase in cure rates.
The delinquency inventory for domestic first lien business declined during 2014 as a result of cures and paid claims exceeding the number of newly reported delinquencies. Mortgage Guaranty’s first lien primary delinquency ratio at December 31, 2014 was 4.4 percent compared to 5.9 percent at December 31, 2013.
The following table provides a summary of activity in Mortgage Guaranty’s domestic first lien delinquency inventory:
Years Ended December 31, | | | | | |
(number of policies) | 2015 | | 2014 | | 2013 |
Number of delinquencies at the beginning of the year | 38,357 | | 47,518 | | 62,832 |
Newly reported | 39,619 | | 47,239 | | 56,194 |
Cures | (36,279) | | (42,680) | | (51,283) |
Claims paid | (8,451) | | (11,601) | | (19,862) |
Other | (1,961) | | (2,119) | | (363) |
Number of delinquencies at the end of the year | 31,285 | | 38,357 | | 47,518 |
Mortgage Guaranty Underwriting Ratios
The following tables present the Mortgage Guaranty combined ratios based on GAAP data:
Years Ended December 31, | | | | | | | | Increase (Decrease) |
| | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
Loss ratio | | 17.5 | | 24.7 | | 63.5 | | (7.2) | | (38.8) |
Acquisition ratio | | 8.9 | | 7.8 | | 9.9 | | 1.1 | | (2.1) |
General operating expense ratio | | 18.2 | | 17.3 | | 17.5 | | 0.9 | | (0.2) |
Expense ratio | | 27.1 | | 25.1 | | 27.4 | | 2.0 | | (2.3) |
Combined ratio | | 44.6 | | 49.8 | | 90.9 | | (5.2) | | (41.1) |
2015 and 2014 Comparison
The combined ratio decreased by 5.2 points in 2015 compared to 2014. The decrease in the ratio in 2015 was driven primarily by a reduction in the loss ratio due to a decrease in incurred losses driven by lower delinquencies and higher cure rates, partially offset by a reduction in favorable prior year loss development.
The acquisition ratio increased by 1.1 points in 2015 compared to 2014, primarily due to the increases in sales-related activities supporting the $8.8 billion increase in new insurance written.
The general operating expense ratio increased by 0.9 points in 2015 compared to 2014, primarily due to an increase in technology-related expenses, customer service initiatives and severance.
2014 and 2013 Comparison
The combined ratio decreased by 41.1 points in 2014 compared to 2013. The decrease was driven primarily by a reduction in the loss ratio due to lower losses and loss adjustment expenses incurred from fewer new delinquencies, favorable prior year loss reserve development, and higher cure rates.
The acquisition ratio decreased by 2.1 points in 2014 compared to 2013. Acquisition expenses decreased compared to an increase in net premiums earned, driven by the decreases in new insurance written in 2014 due to lower mortgage originations.
The general operating expense ratio decreased by 0.2 points in 2014 compared to 2013. The decrease was driven primarily by growth in net premiums earned.
Institutional Markets Results
The following table presents Institutional Markets results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | |
Premiums | $ | 1,580 | $ | 432 | $ | 610 | | 266 | % | (29) | % |
Policy fees | | 199 | | 187 | | 113 | | 6 | | 65 | |
Net investment income | | 1,739 | | 1,957 | | 2,090 | | (11) | | (6) | |
Benefits and expenses: | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 2,583 | | 1,396 | | 1,616 | | 85 | | (14) | |
Interest credited to policyholder account balances | | 408 | | 410 | | 413 | | - | | (1) | |
Amortization of deferred policy acquisition costs | | 3 | | 4 | | 4 | | (25) | | - | |
Other acquisition expenses | | 32 | | 30 | | 36 | | 7 | | (17) | |
General operating expenses | | 77 | | 66 | | 64 | | 17 | | 3 | |
Pre-tax operating income | $ | 415 | $ | 670 | $ | 680 | | (38) | | (1) | |
INSTITUTIONAL MARKETS pre-tax OPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre-tax operating income in 2015 decreased compared to 2014, primarily due to a decrease in net investment income. Fee income increased in 2015 compared to 2014, driven by growth in reserves and assets under management, primarily from continued development of the stable value wrap business. The notional amount of stable value wrap assets under management at December 31, 2015 grew by $3.0 billion or nine percent from December 31, 2014. The increases in premiums and liabilitiesbenefit expense in 2015 compared to 2014 were primarily due to the premiums received and establishment of future policy benefit reserves for terminal funding annuities issued in 2015.
Net investment income in 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and lower yield enhancements from bond call and tender income. See MD&A – Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Institutional Markets business.
General operating expenses in 2015 increased compared to 2014, primarily due to higher state guaranty fund assessment expenses, technology investments and higher interest expense.
2014 and 2013 Comparison
Pre-tax operating income for 2014 decreased slightly compared to 2013, as a decrease in net investment income was only partially offset by an increase in fee income. The increase in fee income was driven by growth in reserves and assets under management, primarily from strong development of the stable value wrap business.The notional amount of stable value wrap assets under management at December 31, 2014 grew by $7.8 billion or 32 percent from December 31, 2013, which excluded a $2.5 billion deposit to the separate accounts for a stable value funding agreement. Growth in reserves also reflected a GIC deposit of $450 million in the fourth quarter of 2014 under a funding agreement-backed notes issuance program, in which an unaffiliated, non-consolidated statutory trust issues to investors medium-term notes, which are secured by GICs issued by one of the Life Insurance Companies. Under the funding agreement-backed notes program, issuances will be made opportunistically based upon pricing and demand available in the marketplace.
Net investment income for 2014 decreased compared to 2013, primarily due to lower net investment income from alternative investments and from the base portfolio. The 2014 decrease in alternative investment income of $41 million compared to 2013 primarily reflected high hedge fund income in 2013 due to favorable equity market conditions. The decrease in base net investment income in 2014 compared to 2013 primarily reflected lower base portfolio yield as a result of reinvestment in the
low interest rate environment, partially offset by growth in average assets. See MD&A – Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Institutional Markets business.
General operating expenses in 2014 increased slightly compared to 2013, primarily due to investments in technology.
Institutional Markets Premiums, Deposits and Net Flows
For Institutional Markets, premiums represent amounts received on traditional life insurance policies and life-contingent payout annuities or structured settlements. Premiums and deposits is a non‑GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance and investment-type annuity contracts, including GICs and stable value wrap funding agreements.
The following table presents a reconciliation of Institutional Markets premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits | $ | 1,782 | $ | 3,797 | $ | 991 |
Deposits | | (169) | | (3,344) | | (354) |
Other | | (33) | | (21) | | (27) |
Premiums | $ | 1,580 | $ | 432 | $ | 610 |
Premiums and deposits for 2015 decreased compared to 2014, primarily due to a $2.5 billion deposit to the separate accounts of one of the Life Insurance Companies for a stable value wrap funding agreement that was reflected in 2014. Excluding the $2.5 billion deposit in the prior year period, premiums and deposits for 2015 increased compared to 2014, primarily due to higher premiums, which reflected increased sales of terminal funding annuities in 2015.
The decrease in premiums in 2014 compared to 2013 was primarily due to a high volume of single-premium products sold in 2013, including life-contingent payout annuities. Sales of these products decreased in 2014 compared to 2013 due to a more competitive environment as well as continued low interest rates. The increase in deposits in 2014 compared to 2013 included a $2.5 billion deposit to the separate accounts of one of the Life Insurance Companies for a stable value wrap funding agreement. The majority of stable value wrap sales are measured based on the notional amount included in assets under management, but do not include the receipt of funds that would be included in premiums and deposits. The increase in deposits in 2014 compared to 2013 also reflected a $450 million GIC issued in 2014.
Consumer insurance
Consumer Insurance Results
The following table presents Consumer Insurance results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 14,085 | $ | 14,936 | $ | 15,302 | | (6) | % | | (2) | % |
Policy fees | | 2,557 | | 2,453 | | 2,252 | | 4 | | | 9 | |
Net investment income | | 8,322 | | 9,082 | | 9,352 | | (8) | | | (3) | |
Other income | | 2,105 | | 1,998 | | 1,754 | | 5 | | | 14 | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 10,475 | | 10,796 | | 10,957 | | (3) | | | (1) | |
Interest credited to policyholder account balances | | 3,316 | | 3,353 | | 3,477 | | (1) | | | (4) | |
Amortization of deferred policy acquisition costs | | 2,887 | | 2,759 | | 2,836 | | 5 | | | (3) | |
General operating and other expenses* | | 7,013 | | 7,087 | | 6,826 | | (1) | | | 4 | |
Pre-tax operating income | $ | 3,378 | $ | 4,474 | $ | 4,564 | | (24) | % | | (2) | % |
* Includes general operating expenses, non deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.
Consumer Insurance Results by Operating Segment
Consumer Insurance presents its operating results in three operating segments – Retirement, Life and Personal Insurance. The following section provides a comparative discussion of Consumer Insurance Results of Operations for 2015, 2014 and 2013 by operating segment.
Retirement Results
The following table presents Retirement results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 168 | $ | 287 | $ | 188 | | (41) | % | | 53 | % |
Policy fees | | 1,072 | | 1,010 | | 861 | | 6 | | | 17 | |
Net investment income | | 6,002 | | 6,489 | | 6,628 | | (8) | | | (2) | |
Advisory fee and other income | | 2,056 | | 1,998 | | 1,754 | | 3 | | | 14 | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 511 | | 537 | | 364 | | (5) | | | 48 | |
Interest credited to policyholder account balances | | 2,823 | | 2,846 | | 2,935 | | (1) | | | (3) | |
Amortization of deferred policy acquisition costs | | 480 | | 346 | | 273 | | 39 | | | 27 | |
Non deferrable insurance commissions | | 282 | | 265 | | 249 | | 6 | | | 6 | |
Advisory fee expenses | | 1,349 | | 1,315 | | 1,175 | | 3 | | | 12 | |
General operating expenses | | 1,014 | | 980 | | 945 | | 3 | | | 4 | |
Pre-tax operating income | $ | 2,839 | $ | 3,495 | $ | 3,490 | | (19) | % | | - | % |
RETIREMENT pre-tax OPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre-tax operating income in 2015 decreased compared to 2014, primarily due to lower net investment income and a lower net positive adjustment to reflect the update of actuarial assumptions, partially offset by growth in fee income. In addition, DAC amortization in Retirement Income Solutions increased in 2015 due to growth in the business and lower equity market returns compared to 2014. Base net investment income decreased in 2015, which resulted in base spreads compression, but this decrease was partially offset by higher policy fees due to growth in variable annuity separate account assets under management, principally driven by positive net flows.
Pre-tax operating income in both years included a net positive impact from the update of certain estimated gross profit assumptions used to amortize DAC and related items in the investment-oriented product lines, which resulted in a $140 million net increase in pre-tax operating income in 2015, compared to a $246 million net increase in pre-tax operating income in 2014. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by product line and financial statement line item and additional discussion.
Net investment incomefor 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and lower base net investment income.
Base net investment income for 2015 decreased compared to 2014, primarily due to the effect of lower base yields from reinvestment at rates below the weighted average yield of the overall portfolio. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.
Overall, Retirement fixed maturity portfolio yields in 2015 declined compared to 2014, primarily as a result of investment purchases and investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio given the sustained low interest rate environment. While average interest crediting rates were down slightly due to active rate management, the decline in base yield resulted in spread compression in Fixed Annuities base spreads compared to 2014. Group Retirement base spread was flat compared to 2014, due to slightly lower average crediting rates as well as additional accretion income in 2015, which helped offset the decline in yield on the base portfolio. See Spread Management below for additional discussion.
General operating expenses increased in 2015 compared to 2014, due in part to technology investments and higher expenses associated with continued strong sales in the Retirement Income Solutions product line.
2014 and 2013 Comparison
Pre-tax operating income for Retirement in 2014 was comparable to 2013, as higher policy fees and the higher positive impact of actuarial assumption updates were offset by lower net investment income from alternative investments. The increase in policy fees was driven by growth in variable annuity separate account assets from positive net flows and favorable equity markets. A higher volume of commissions and advisory fees included in Other income, net of related expenses, was driven by increased assets under management.
Pre-tax operating income in both years included a net positive impact from the update of certain estimated gross profit assumptions used to amortize DAC and related items in the investment-oriented product lines, which resulted in a $246 million net increase in pre-tax operating income in 2014, compared to a $233 million net increase in pre-tax operating income in 2013. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by product line and financial statement line item and additional discussion.
Net investment income for 2014 decreased compared to 2013, primarily due to a $158 million decrease in income from alternative investments, including lower hedge fund income, which in 2013 had benefited from favorable equity market conditions and several large hedge fund redemptions. The decrease in hedge fund income in 2014 compared to 2013 was partially offset by an increase in private equity fund income.
Base net investment income for 2014 increased slightly compared to 2013, as participation income on a commercial mortgage loan and income from the redemption of an invested asset in 2014 more than offset the effect of lower base yields from reinvestment at rates below the weighted average yield of the overall portfolio. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.
Overall, Retirement fixed maturity portfolio yields in 2014 declined compared to 2013, primarily as a result of investment purchases and investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio in the historically low interest rate environment. The Fixed Annuities and Group Retirement product lines were able to maintain base spreads in 2014 at a level comparable to 2013, and Retirement Income Solutions base spread increased, as a result of active crediting rate management. See Spread Management below for additional discussion.
General operating expenses increased in 2014 compared to 2013, due in part to technology investments and the volume of continued sales growth of annuities in the Retirement Income Solutions and Fixed Annuities product lines.
Spread Management
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially mitigated through the Life Insurance Companies’ asset‑liability management process, product design elements and crediting rate strategies, a sustained low interest rate environment may negatively affect future profitability.
Disciplined pricing on new business and active crediting rate management are used in the Fixed Annuities and Group Retirement product lines to partially offset the impact of a continued decline in base yields resulting from investment of available cash flows in the low interest rate environment.
Disciplined pricing on new business is used to pursue new sales of annuity products at targeted net investment spreads in the current rate environment. Retirement has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Retirement cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products that had higher minimum rate guarantees have been re-filed with lower crediting rates as permitted under state
insurance laws for new sales. As a result, new sales of fixed annuity products generally have minimum interest rate guarantees of one percent.
Renewal crediting rate management is done under contractual provisions in annuity products that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. Retirement will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields. In addition to deferred annuity products, certain traditional long-duration products for which Retirement does not have the fairability to adjust interest rates, such as payout annuities, are exposed to reduced earnings and potential loss recognition reserve increases in a sustained low interest rate environment.
As of December 31, 2015, Retirement’s fixed annuity reserves, which include fixed options offered within variable annuities sold in the Group Retirement and Retirement Income Solutions product lines as well as reserves of the Fixed Annuities product line, had minimum guaranteed interest rates ranging from one percent to 5.5 percent, with the higher rates representing guarantees on older in-force products. As indicated in the table below, approximately 73 percent of annuity account values were at their minimum crediting rates as of December 31, 2015, compared to 71 percent at December 31, 2014. As a result of disciplined pricing on new business and the run-off of older business with higher minimum crediting rates, fixed annuity account values having contractual minimum guaranteed rates above one percent decreased to 74 percent of total fixed annuity reserves at December 31, 2015 from 79 percent at December 31, 2014.
The following table presents fixed annuity account values by contractual minimum guaranteed interest rate and current crediting rates:
| Current Crediting Rates |
December 31, 2015 | | | 1-50 Basis | More than 50 | | | |
Contractual Minimum Guaranteed | At Contractual | Points Above | Basis Points | | | |
Interest Rate | Minimum | Minimum | Above Minimum | | | |
(in millions) | Guarantee | Guarantee | Guarantee | | Total | |
Fixed annuities * | | | | | | | | | |
1% | $ | 5,896 | $ | 6,340 | $ | 12,635 | $ | 24,871 | |
> 1% - 2% | | 12,659 | | 2,341 | | 2,974 | | 17,974 | |
> 2% - 3% | | 30,611 | | 473 | | 1,067 | | 32,151 | |
> 3% - 4% | | 12,231 | | 50 | | 10 | | 12,291 | |
> 4% - 5% | | 7,671 | | - | | 4 | | 7,675 | |
> 5% - 5.5% | | 202 | | - | | 5 | | 207 | |
Total | $ | 69,270 | $ | 9,204 | $ | 16,695 | $ | 95,169 | |
Percentage of total | | 73 | % | 10 | % | 17 | % | 100 | % |
* Fixed annuities shown include fixed options within variable annuities sold in Group Retirement and Retirement Income Solutions product lines.
Retirement Premiums and Deposits, Surrenders and Net Flows
Premiums
For Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums and deposits is a non‑GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts and mutual funds.
The following table presents a reconciliation of Retirement premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits* | $ | 25,241 | $ | 24,023 | $ | 23,729 |
Deposits | | (25,078) | | (23,903) | | (23,690) |
Other | | 5 | | 167 | | 149 |
Premiums | $ | 168 | $ | 287 | $ | 188 |
* Excludes activity related to closed blocks of fixed and variable annuities.
Premiumshave fluctuated since 2013 primarily due to changes in immediate annuity premiums in the Fixed Annuities product line.
Premiums and Deposits and Net Flows
The following table presents Retirement premiums and deposits and net flows by product line:
| | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Fixed Annuities | $ | 3,702 | $ | 3,578 | $ | 2,914 | | 3 | % | | 23 | % |
Retirement Income Solutions | | 10,828 | | 10,325 | | 8,608 | | 5 | | | 20 | |
Retail Mutual Funds | | 3,791 | | 3,377 | | 4,956 | | 12 | | | (32) | |
Group Retirement | | 6,920 | | 6,743 | | 7,251 | | 3 | | | (7) | |
Total Retirement premiums and deposits* | $ | 25,241 | $ | 24,023 | $ | 23,729 | | 5 | % | | 1 | % |
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Net flows | | | | | | |
Fixed Annuities | $ | (2,188) | $ | (2,313) | $ | (2,820) |
Retirement Income Solutions | | 7,010 | | 6,566 | | 5,092 |
Retail Mutual Funds | | 1,026 | | (1) | | 2,780 |
Group Retirement | | (2,135) | | (3,797) | | (492) |
Total Retirement net flows* | $ | 3,713 | $ | 455 | $ | 4,560 |
* Excludes activity related to closed blocks of fixed and variable annuities, which had reserves of approximately $5.0 billion and $5.4 billion at December 31, 2015 and 2014, respectively.
RETIREMENT PREMIUMS AND DEPOSITS by Product Line (in millions) |
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Premiums and deposits increased in 2015 compared to 2014, primarily due to growth in Retirement Income Solutions and Retail Mutual Funds. Premiums and deposits increased in 2014 compared to 2013, primarily in Retirement Income Solutions product lines and in Fixed Annuities, partially offset by lower deposits in Retail Mutual Funds and Group Retirement.
Net flows for annuity products included in the Fixed Annuities, Retirement Income Solutions and Group Retirement product lines represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows from mutual funds, which are included in both the Retail Mutual Funds and Group Retirement product lines, represent deposits less withdrawals.
Total net flows for Retirement increased in 2015 compared to 2014, primarily due to lower surrenders in Group Retirement, improvement in both sales and the level of withdrawals in Retail Mutual Funds, and continued growth in Retirement Income Solutions.
Total net flows for Retirement decreased in 2014 compared to 2013, primarily due to higher surrenders and withdrawals in 2014, primarily in the Group Retirement and Retail Mutual Funds product lines, which resulted in a significant decrease in net flows compared to 2013.
Premiums and Deposits and Net Flows by Product Line
A discussion of the significant variances in premiums and deposits and net flows for each product line follows:
Fixed Annuities premiums and deposits increased in 2015 compared to 2014, due to new product offerings and increases in market interest rates driven by widening credit spreads in the second half of the year, but net flows continued to be negative, primarily due to the sustained relatively low interest rate environment. The increase in Fixed Annuities deposits in 2014 compared to 2013 was due to modest increases in interest rates and steepening of the yield curve in the first half of 2014, compared to lower rates in the prior year, particularly in the first half of 2013. Fixed Annuities net flows in 2014 were negative, but improved compared to 2013, primarily due to the increased deposits.
Retirement Income Solutions premiums and deposits and net flows increased in 2015 compared to 2014, reflecting an increase in index annuity sales. Premiums and deposits and net flows increased significantly in 2014 compared to 2013, reflecting a high volume of variable and index annuity sales, which benefitted from consumer demand for retirement products with guaranteed benefit features, product enhancements, expanded distribution and a more favorable competitive environment. The improvement in surrender rates in 2015 and 2014 compared to the prior years (see Surrender Rates below) was primarily due to the significant growth in account value option was elected.driven by the high volume of sales, which has increased the proportion of business that is within the surrender charge period.
Fair value appreciation on ABS CDOs was $954 million forRetail Mutual Funds deposits and net flows increased in 2015 compared to 2014, and decreased in 2014 compared to 2013, driven primarily by activity within the Focused Dividend Strategy Portfolio. After record sales in 2013, the Focused Dividend Strategy Portfolio experienced relatively less favorable performance in 2014, putting pressure on 2014 sales and withdrawal activity. In 2015, sales and withdrawals for this portfolio improved, collateral pricing due to improvementsa return to strong performance levels, resulting in home price indices and amortization of the underlying collateral.overall growth in Retail Mutual Funds net flows compared to 2014.
Net credit valuation adjustment gains of $444 million and $789 million were recognized for 2013 and 2012, respectively.Group Retirement net flows increased in 2015 compared to 2014, primarily due to lower surrender activity. The decrease resulted primarily from a declineimprovement in the portfolio sizesurrender rate in 2015 compared to 2014 was due in part to lower large group surrenders, which were approximately $1.5 billion in 2015, compared to $2.7 billion in 2014. Group Retirementnet flows decreased in 2014 compared to 2013, primarily due to sales and maturitieshigher group surrender activity, as well as lower gains onpremiums and deposits. The large group market has become increasingly competitive and has been impacted by the consolidation of healthcare providers and other employers in our target markets. This trend of heightened competition is expected to continue in 2016 as plan sponsors perform reviews of existing retirement plan relationships.
Surrender Rates
The following table presents reserves for annuity product lines by surrender charge category:
At December 31, | | 2015 | | | | 2014 | |
| | | | | | Retirement | | | | | | | | Retirement | |
| | Group | | Fixed | | Income | | | | Group | | Fixed | | Income | |
(in millions) | | Retirement(a) | | Annuities | | Solutions | | | | Retirement(a) | | Annuities | | Solutions | |
No surrender charge(b)(c) | $ | 60,720 | $ | 34,331 | $ | 14,184 | | | $ | 61,751 | $ | 34,255 | $ | 14,429 | |
Greater than 0% - 2% | | 1,199 | | 1,543 | | 4,517 | | | | 1,648 | | 2,736 | | 4,512 | |
Greater than 2% - 4% | | 1,363 | | 2,285 | | 4,565 | | | | 1,657 | | 2,842 | | 4,254 | |
Greater than 4% | | 5,952 | | 13,138 | | 31,683 | | | | 5,793 | | 12,754 | | 26,165 | |
Non-surrenderable | | 676 | | 3,723 | | 358 | | | | 770 | | 3,605 | | 151 | |
Total reserves | $ | 69,910 | $ | 55,020 | $ | 55,307 | | | $ | 71,619 | $ | 56,192 | $ | 49,511 | |
(a) Excludes mutual fund assets under management of $14.5 billion and $14.6 billion at December 31, 2015 and 2014, respectively.
(b) Group Retirement amounts in this category include reserves of approximately $6.2 billion, at both December 31, 2015 and 2014, which are subject to 20 percent annual withdrawal limitations.
(c) Retirement Income Solutions amounts in this category for 2014 include $12.5 billion of reserves with zero surrender charge that were previously reported within “Greater than 0% - 2%”.
The following table presents surrender rates for deferred annuities by product line:
Years Ended December 31, | | | | | | |
| 2015 | | 2014 | | 2013 | |
Surrenders as a percentage of average account value | | | | | | |
Fixed Annuities | 6.9 | % | 7.0 | % | 6.6 | % |
Retirement Income Solutions | 6.0 | | 7.1 | | 8.7 | |
Group Retirement | 10.0 | | 11.6 | | 9.0 | |
Life Results
The following table presents Life results:
Years Ended December 31, | | | | | | | | Percentage Change |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Revenues: | | | | | | | | | | | | |
Premiums | $ | 2,759 | $ | 2,679 | $ | 2,737 | | 3 | % | | (2) | % |
Policy fees | | 1,485 | | 1,443 | | 1,391 | | 3 | | | 4 | |
Net investment income | | 2,100 | | 2,199 | | 2,269 | | (5) | | | (3) | |
Other income | | 49 | | - | | - | | NM | | | NM | |
Benefits and expenses: | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | 3,812 | | 3,771 | | 3,568 | | 1 | | | 6 | |
Interest credited to policyholder account balances | | 493 | | 507 | | 542 | | (3) | | | (6) | |
Amortization of deferred policy acquisition costs | | 433 | | 321 | | 360 | | 35 | | | (11) | |
Non deferrable insurance commissions | | 222 | | 257 | | 272 | | (14) | | | (6) | |
General operating expenses | | 968 | | 885 | | 849 | | 9 | | | 4 | |
Pre-tax operating income | $ | 465 | $ | 580 | $ | 806 | | (20) | | | (28) | |
Life pre-tax OPERATING INCOME (in millions) |
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2015 and 2014 Comparison
Pre-tax operating income decreased in 2015 compared to 2014, primarily due to lower net investment income, mortality experience that was within pricing expectations but less significant tightening of counterparty credit spreads,favorable than the prior year, and a higher net negative adjustment to reflect updated actuarial assumptions. These decreases were partially offset by lower losses on liabilitiesa $20 million reduction in the reserve for IBNR death claims related to enhanced claims practices, due to less significant tighteningupdated estimates in 2015, compared to a $104 million increase in this reserve in 2014, which was primarily related to a legacy block of AIG's creditsmall policies for which personal data elements were unavailable or incomplete.
Other income in 2015 was primarily related to commission and profit sharing revenues received by Laya Healthcare for the distribution of insurance products. Laya Healthcare, which we acquired on March 31, 2015, is Ireland’s second largest primary health insurance provider. Laya Healthcare distributes and administers primary healthcare for approximately 550,000 customers, and also offers other coverage including life, dental and travel insurance.
The net negative adjustment of $146 million related to an update of actuarial assumptions in 2015 was primarily due to lower assumed surrender rates for certain later-duration universal life with secondary guarantees, which represent approximately eight percent of the Life Insurance Companies’ total U.S. life reserves. The net negative adjustment also reflected lower investment spread assumptions, partially offset by more favorable than expected assumptions for mortality, as well as loss recognition expense of $28 million for certain discontinued long-term care products primarily due to lower future premium assumptions. These negative adjustments were partially offset by a decrease in certain Group Benefit claim reserves based on updated experience data. See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by financial statement line item and additional discussion of loss recognition.
Net investment income for 2015 decreased compared to 2014, primarily due to lower returns on alternative investments in hedge funds and, to a lesser extent, a decrease due to lower yields on the base portfolio. See Investments – Life Insurance Companies for additional discussion of the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.
General operating expenses increased in 2015 compared to 2014, primarily related to the expansion of the international Life business through the acquisitions of AIG Life Limited and Laya Healthcare. Higher expenses from the international acquisitions were partially offset by domestic savings from organizational changes.
2014 and 2013 Comparison
Pre-tax operating income decreased in 2014 compared to 2013, primarily due to increases in policyholder benefit reserves, lower net investment income and higher general operating expenses. Updates of actuarial assumptions also decreased pre-tax operating income by $119 million in 2014 compared to $80 million in 2013. These decreases were partially offset by a $28 million increase in pre-tax operating income in 2014 compared to 2013, due to a 2013 increase in equity-indexed universal life reserves, which was reflected in Interest credited to policyholder account balances.
Overall, mortality experience for 2014 was similar to 2013 and within pricing assumptions. Policyholder benefit expense in 2014 included an increase of approximately $104 million to the estimated reserves for IBNR death claims, which reflected continuing efforts to identify deceased insureds and their beneficiaries who have not presented a valid claim, pursuant to the 2012 resolution of a multi-state audit and market conduct examination. The 2014 increase in the IBNR reserve was related primarily to a legacy block of in-force and lapsed small face amount policies, for which certain personal data elements were unavailable or incomplete. In 2014, in the process of reviewing these policies as required under the terms of the regulatory agreement, we refined our estimate of the ultimate cost of these claims. The reserve increase in 2014 was in addition to amounts previously provided for IBNR claims in 2011 and 2012, which totaled $259 million.
Net investment income decreased in 2014 compared to 2013, primarily due to lower income from alternative investments and lower yields on the base portfolio due to investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio. See Investments – Life Insurance Companies for additional discussion of the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.
General operating expenses increased in 2014 compared to 2013 primarily due to strategic investments in technology and service platforms in the U.S. and Japan.
Spread Management
Disciplined pricing on new business is used to pursue new sales of life products at targeted net investment spreads in 2013the current interest rate environment. Life has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Life cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products with higher minimum rate guarantees have been re-filed with lower crediting rates, as permitted under state insurance laws for new sales. Universal life insurance interest rate guarantees are generally two to three percent on new non-indexed products and zero to two percent on new indexed products, and are designed to meet targeted net investment spreads.
In-force Management. Crediting rates for in-force policies are adjusted in accordance with contractual provisions that were designed to allow crediting rates to be reset subject to minimum crediting rate guarantees.
The following table presents universal life account values by contractual minimum guaranteed interest rate and current crediting rates:
| Current Crediting Rates |
December 31, 2015 | | | 1-50 Basis | More than 50 | | | |
Contractual Minimum Guaranteed | At Contractual | Points Above | Basis Points | | | |
Interest Rate | Minimum | Minimum | Above Minimum | | | |
(in millions) | Guarantee | Guarantee | Guarantee | | Total | |
Universal life insurance | | | | | | | | | |
1% | $ | - | $ | - | $ | 7 | $ | 7 | |
> 1% - 2% | | 32 | | 164 | | 212 | | 408 | |
> 2% - 3% | | 552 | | 304 | | 1,452 | | 2,308 | |
> 3% - 4% | | 2,066 | | 495 | | 1,090 | | 3,651 | |
> 4% - 5% | | 3,939 | | 204 | | - | | 4,143 | |
> 5% - 5.5% | | 327 | | - | | - | | 327 | |
Total | $ | 6,916 | $ | 1,167 | $ | 2,761 | $ | 10,844 | |
Percentage of total | | 64 | % | 11 | % | 25 | % | 100 | % |
Life Premiums and Deposits
Premiums for Life represent amounts received on traditional life insurance policies and group benefit policies. Premiums and deposits for Life is a non‑GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.
The following table presents a reconciliation of Life premiums and deposits to GAAP premiums:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Premiums and deposits | $ | 4,974 | $ | 4,806 | $ | 4,862 |
Deposits | | (1,540) | | (1,532) | | (1,541) |
Other | | (675) | | (595) | | (584) |
Premiums | $ | 2,759 | $ | 2,679 | $ | 2,737 |
Excluding the effect of foreign exchange, Life premiums and deposits increased six percent in 2015 compared to 2012.2014, and premiums increased eight percent, principally driven by growth in Japan and the acquisition of AIG Life Limited in the U.K.
2012 and 2011 Comparison
DIB pre-tax income increasedThe decrease in 2012Life premiums in 2014 compared to 20112013 was primarily due to the non-renewal of certain group benefit accounts and the strengthening of the U.S. dollar against the Japanese yen, partially offset by solid growth in Japan premiums excluding the effect of foreign exchange. As a result of the decrease in premiums, premiums and deposits also decreased in 2014 compared to 2013.
Personal Insurance Results
The following table presents Personal Insurance results:
Years Ended December 31, | | | | | | | | | | | | | | | | Percentage Change |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Underwriting results: | | | | | | | | | | | | | | | | | | | | |
Net premiums written | | | | | | | | | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | | (2) | % |
Increase in unearned premiums | | | | | | | | | | (422) | | (442) | | (323) | | 5 | | | (37) | |
Net premiums earned | | | | | | | | | | 11,158 | | 11,970 | | 12,377 | | (7) | | | (3) | |
Losses and loss adjustment expenses incurred | | | | | | | | | | 6,152 | | 6,488 | | 7,025 | | (5) | | | (8) | |
Acquisition expenses: | | | | | | | | | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | | | | | | | | | 1,974 | | 2,092 | | 2,203 | | (6) | | | (5) | |
Other acquisition expenses | | | | | | | | | | 1,183 | | 1,165 | | 1,044 | | 2 | | | 12 | |
Total acquisition expenses | | | | | | | | | | 3,157 | | 3,257 | | 3,247 | | (3) | | | - | |
General operating expenses | | | | | | | | | | 1,995 | | 2,220 | | 2,292 | | (10) | | | (3) | |
Underwriting income (loss) | | | | | | | | | | (146) | | 5 | | (187) | | NM | | | NM | |
Net investment income | | | | | | | | | | 220 | | 394 | | 455 | | (44) | | | (13) | |
Pre-tax operating income | | | | | | | | | $ | 74 | $ | 399 | $ | 268 | | (81) | % | | 49 | % |
NET PREMIUMS WRITTEN (in millions) | | Pre-Tax oPERATING INCOME (in millions) |
| |
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2015 and 2014 Comparison
Pre‑tax operating income decreased in 2015, compared to 2014, primarily due to a capital gaindecrease in net investment income and underwriting results. Catastrophe losses were $145 million in 2015 compared to $126 million in 2014. In 2015, net favorable prior year loss reserve development was $19 million compared to $77 million in 2014.
Acquisition expenses decreased in 2015 compared to 2014. Excluding the effect of foreign exchange, acquisition expenses increased due to higher acquisition costs, primarily in automobile and property businesses, and higher profit share expenses related to warranty service programs, partially offset by a decrease in non-deferred direct marketing expenses. The non-deferred direct marketing expenses, excluding commissions, for 2015 were approximately $292 million, and, excluding the impact of foreign exchange, decreased by approximately $71 million from 2014.
General operating expenses decreased in 2015 compared to 2014, primarily due to the effect of foreign exchange and reflected an ongoing focus on cost efficiency.
Net investment income decreased in 2015 compared to 2014, primarily due to the continued impact of low interest rates resulting in yields on new purchases that were lower than the weighted average yield of the overall portfolio, negative performance of alternative investments in hedge funds, the strengthening of the U.S. dollar against most major foreign currencies, and lower allocation of net investment income.
See MD&A — Investments for additional information on the saleNon-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.
2014 and 2013 Comparison
Pre‑tax operating income increased in 2014 compared to 2013, primarily due to a decrease in current accident year losses and lower general operating expenses, partially offset by higher catastrophe losses and lower net favorable prior year loss reserve development, higher acquisition expenses and a decrease in net investment income. Catastrophe losses were $126 million in 2014, compared to $77 million in 2013. The accident year losses include severe losses of common unitsapproximately $54 million in 2014 compared to $17 million in 2013. Net favorable loss reserve development was $77 million in 2014 compared to $155 million in 2013, and included approximately $7 million of The Blackstone Group L.P. mentioned above and improvementsfavorable loss reserve development from Storm Sandy compared to $41 million in pre-tax operating income. DIB2013. Foreign exchange did not have a significant impact on the pre-tax operating income compared to 2013.
Acquisition expensesincreased in 20122014 compared to 20112013, primarily due to improvementthe change in net credit valuation adjustments on assetsbusiness mix and liabilities for which the fair value option was elected. Net credit valuation adjustment gainshigher costs in growth-targeted lines of $789 million and $380 million were recognized for 2012 and 2011, respectively. The improvement resulted primarily from gains on assets due to the tightening of counterparty credit spreads,business, partially offset by losses on liabilitiesthe effect of foreign exchange as a result of the strengthening of the U.S. dollar against the Japanese yen. Direct marketing expenses, excluding commissions, for 2014 were $392 million, compared to $440 million in 2013. Excluding the impact of foreign exchange, direct marketing expenses decreased by approximately $24 million in 2014 compared to 2013. Direct marketing accounted for approximately 17 percent of net premiums written in both 2014 and 2013.
General operating expensesdecreased in 2014 compared to 2013. Excluding the effect of foreign exchange, general operating expenses remained flat, as efficiencies from organizational realignment initiatives were offset by increased technology-related expenses.
Net investment income decreased in 2014 compared to 2013, primarily due to a decrease in interest rates during 2014, as yields on new purchases were lower than the tighteningweighted average yield of AIG's credit spreads.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / OTHER OPERATIONS
The following table presents credit valuation adjustment gains (losses) for the DIB (excluding intercompany transactions):overall portfolio
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
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Counterparty Credit Valuation Adjustment on Assets: | | | | | | | | | | |
Other bond securities | | $ | 488 | | $ | 1,401 | | $ | (71 | ) |
Loans and other assets | | | 10 | | | 29 | | | 31 | |
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Increase (decrease) in assets | | | 498 | | | 1,430 | | | (40 | ) |
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AIG's Own Credit Valuation Adjustment on Liabilities: | | | | | | | | | | |
Notes and bonds payable | | | (88 | ) | | (526 | ) | | 288 | |
Guaranteed Investment Agreements | | | 41 | | | (81 | ) | | 112 | |
Other liabilities | | | (7 | ) | | (34 | ) | | 20 | |
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(Increase) decrease in liabilities | | | (54 | ) | | (641 | ) | | 420 | |
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Net increase to pre-tax operating income | | $ | 444 | | $ | 789 | | $ | 380 | |
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Retained Interests
Change in Fair Value of AIA Securities Prior to Their Sale
We sold our remaining 33 percent interest in AIA ordinary shares for proceeds of $14.5 billion, lower income on alternative investments, and a net gain of $2.1 billion through three sale transactions on March 7, September 11 and December 20, 2012.
We recognized a $1.3 billion gain in 2011, representing a 12 percent increase in the value of AIG's then 33 percent interest in AIA, which was recorded in Other invested assets andlower income associated with investments accounted for under the fair value option method as an increase related to the PICC P&C rights offerings was more than offset by a decrease from fixed maturity investments accounted for under the fair value option. These were partially offset by the effect of continued portfolio diversification. The decrease in allocated net investment income was also due to a reduction in net loss reserves.
See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.
Personal Insurance Net Premiums Written
The following table presents Personal Insurance net premiums written by major line of business:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
| | | | | | | | U.S. dollars | | Original Currency |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Accident & Health | $ | 4,990 | $ | 5,441 | $ | 5,714 | | (8) | % | (5) | % | | 1 | % | (2) | % |
Personal Lines | | 6,590 | | 6,971 | | 6,986 | | (5) | | - | | | 4 | | 5 | |
Total Personal Insurance net | | | | | | | | | | | | | | | | |
premiums written | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | (2) | % | | 3 | % | 2 | % |
Personal Insurance (in millions) |
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2015 and 2014 Comparison
Personal Insurance net premiums written decreased in Fair Value2015 compared to 2014 due to the strengthening of ML III Priorthe U.S. dollar against the Major Currencies. Excluding the effect of foreign exchange, net premiums written increased in 2015 compared to Liquidation2014, as the business continued to grow through multiple product and distribution channels. The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
Accident & Health net premiums written increased in 2015 compared to 2014, primarily due to production increases in Accident and Health in Japan, partially offset by the decrease in Accident and Health in the U.S., due to continued underwriting discipline.
Personal Lines net premiums written increased in 2015 compared to 2014. These increases were primarily due to increased production in personal property business in the U.S. and Japan and in the automobile business in all regions, partially offset by decreased production of warranty service programs. The gainsincrease in the U.S. personal property business in 2015 was attributable to AIG's interest in ML III for 2012 were based in part on the completion of the final auction of ML III assets by the FRBNY,new business sales and improved retention in the third quarter of 2012.
The loss attributable to AIG's interestAIG Private Client Group, whereas in ML III for 2011Japan the increase was due to significant spread wideningnew business sales as a result of the recent increase in new housing starts and reduced interest rates.heightened demand before the duration restriction on long-term fire insurance became effective in October 2015. In addition, the increase in U.S. personal property business in 2015 reflected changes to optimize our reinsurance structure to retain more favorable risks, while continuing to manage aggregate exposure.
2014 and 2013 Comparison
ChangePersonal Insurance net premiums written decreased in 2014 compared to 2013, primarily due to the impact of foreign exchange as the U.S. dollar strengthened against the Japanese yen. Excluding the effect of foreign exchange, net premiums written increased in 2014 compared to 2013 as the business continued to grow through multiple product and distribution channels, including direct marketing. The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
Accident & Healthnet premiums written decreased in 2014 compared to 2013. The decrease was primarily due to our focus on maintaining underwriting discipline in certain classes of business in the Fair ValueU.S., partially offset by growth in Japan and Latin America.
Personal Linesnet premiums written increased in 2014 compared to 2013. The increase was primarily due to increased rates and improved retention in AIG Private Client Group and continued growth of automobile business outside of Japan, partially offset by declines in the U.S. warranty service programs.
Personal Insurance Net Premiums Written by Region
The following table presents Personal Insurance net premiums written by region:
Years Ended December 31, | | | | | | | | Percentage Change in | | Percentage Change in |
| | | | | | | | U.S. dollars | | Original Currency |
(in millions) | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 | | | 2015 vs. 2014 | | 2014 vs. 2013 | |
Americas | $ | 3,810 | $ | 3,824 | $ | 3,794 | | - | % | 1 | % | | 2 | % | 4 | % |
Asia Pacific | | 5,916 | | 6,516 | | 6,893 | | (9) | | (5) | | | 3 | | 1 | |
EMEA | | 1,854 | | 2,072 | | 2,013 | | (11) | | 3 | | | 3 | | 2 | |
Total net premiums written | $ | 11,580 | $ | 12,412 | $ | 12,700 | | (7) | % | (2) | % | | 3 | % | 2 | % |
Personal insurance NET PREMIUMS WRITTEN by Region
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The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.
2015 and 2014 Comparison
Americas net premiums written in 2015 increased compared to 2014 due to growth in personal property and automobile businesses, offset by decreases in warranty service programs and Accident and Health businesses in the U.S. The growth in personal property business is primarily driven by new business sales and improved retention in AIG Private Client Group in the U.S., as well as the changes in the reinsurance structure discussed above.
Asia Pacific net premiums written increased in 2015 compared to 2014, primarily due to increased production in personal property, Accident and Health and automobile businesses.
EMEA net premiums written increased in 2015 compared to 2014, primarily in automobile and in warranty service programs, partially offset by decreases in Accident and Health.
2014 and 2013 Comparison
Americas net premiums written increased in 2014 compared to 2013, primarily due to an increase in all product lines in our Latin America operations and growth in U.S. personal property and automobile businesses. These were partially offset by a decrease in U.S. Accident and Health due to our continued focus on maintaining underwriting discipline.
Asia Pacific net premiums written increased in 2014 compared to 2013, primarily due to production increases in Japan Accident and Health and in property and automobile business outside of Japan.
EMEA net premiums written increased in 2014 compared to 2013, due to growth in the automobile business and warranty service programs, partially offset by a decrease in the Accident and Health business.
Personal Insurance Underwriting Ratios
The following tables present the Personal Insurance combined ratios based on GAAP data and reconciliation to the accident year combined ratio, as adjusted:
Years Ended December 31, | | | | | | | | | | | | Increase (Decrease) |
| | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
Loss ratio | | | | | | 55.1 | | 54.2 | | 56.8 | | 0.9 | | (2.6) |
Catastrophe losses and reinstatement premiums | | | | | | (1.3) | | (1.1) | | (0.7) | | (0.2) | | (0.4) |
Prior year development net of premium adjustments | | | | | | 0.2 | | 0.7 | | 1.3 | | (0.5) | | (0.6) |
Accident year loss ratio, as adjusted | | | | | | 54.0 | | 53.8 | | 57.4 | | 0.2 | | (3.6) |
Acquisition ratio | | | | | | 28.3 | | 27.2 | | 26.2 | | 1.1 | | 1.0 |
General operating expense ratio | | | | | | 17.9 | | 18.5 | | 18.5 | | (0.6) | | - |
Expense ratio | | | | | | 46.2 | | 45.7 | | 44.7 | | 0.5 | | 1.0 |
Combined ratio | | | | | | 101.3 | | 99.9 | | 101.5 | | 1.4 | | (1.6) |
Catastrophe losses and reinstatement premiums | | | | | | (1.3) | | (1.1) | | (0.7) | | (0.2) | | (0.4) |
Prior year development net of premium adjustments | | | | | | 0.2 | | 0.7 | | 1.3 | | (0.5) | | (0.6) |
Accident year combined ratio, as adjusted | | | | | | 100.2 | | 99.5 | | 102.1 | | 0.7 | | (2.6) |
Personal Insuranceratios |
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The following tables present Personal Insurance accident year catastrophe and severe losses by region and the number of events:
Catastrophes(a)
| # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
Year Ended December 31, 2015 | | | | | | | | | |
Flooding | 4 | $ | 4 | $ | - | $ | 2 | $ | 6 |
Windstorms and hailstorms | 13 | | 82 | | 37 | | - | | 119 |
Wildfire | 1 | | 1 | | - | | - | | 1 |
Tropical cyclone | 1 | | - | | 19 | | - | | 19 |
Total catastrophe-related charges | 19 | $ | 87 | $ | 56 | $ | 2 | $ | 145 |
Year Ended December 31, 2014 | | | | | | | | | |
Windstorms and hailstorms | 14 | | 51 | | 46 | | - | | 97 |
Tropical cyclone | 4 | | 9 | | 19 | | - | | 28 |
Earthquakes | 1 | | 1 | | - | | - | | 1 |
Total catastrophe-related charges | 19 | $ | 61 | $ | 65 | $ | - | $ | 126 |
Year Ended December 31, 2013 | | | | | | | | | |
Flooding | 7 | $ | 26 | $ | - | $ | 2 | $ | 28 |
Windstorms and hailstorms | 2 | | 11 | | - | | 5 | | 16 |
Tropical cyclone | - | | - | | 33 | | - | | 33 |
Total catastrophe-related charges | 9 | $ | 37 | $ | 33 | $ | 7 | $ | 77 |
(a) Catastrophes are generally weather or seismic events having a net impact on AIG in excess of $10 million each.
Severe Losses(b)
Years Ended December 31, | # of | | Asia | | | |
(in millions) | Events | Americas | Pacific | EMEA | | Total |
2015 | 1 | $ | 12 | $ | - | $ | - | $ | 12 |
2014 | 4 | $ | 50 | $ | 4 | $ | - | $ | 54 |
2013 | 1 | $ | 17 | $ | - | $ | - | $ | 17 |
* Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.
2015 and 2014 Comparison
The combined ratio increased by 1.4 points in 2015 compared to 2014, reflecting an increase in the loss ratio and acquisition ratio, partially offset by a decrease in the general operating expense ratio. The accident year combined ratio, as adjusted, increased by 0.7 points in 2015 compared to 2014.
The accident year loss ratio, as adjusted, increased by 0.2 points in 2015, compared to 2014, due to higher large but not severe losses in automobile and personal property businesses, partially offset by a decrease in losses in warranty service programs and lower severe losses. The loss ratio improvement in warranty service programs was offset by an increase in the acquisition ratio due to a related profit sharing arrangement.
The acquisition ratio increased by 1.1 points in 2015 compared to 2014, primarily due to increases in acquisition costs in warranty service programs and in the automobile business, partially offset by lower direct marketing expenses in the Accident and Health business.
The general operating expense ratio decreased by 0.6 points in 2015 compared to 2014, reflecting an ongoing focus on cost efficiency.
2014 and 2013 Comparison
The combined ratio decreased by 1.6 points in 2014 compared to 2013, primarily due to a lower loss ratio, partially offset by a higher acquisition ratio as discussed below.
The accident year combined ratio, as adjusted, decreased by 2.6 points in 2014 compared to 2013, primarily due to an improved accident year loss ratio, as adjusted.
The accident year loss ratio, as adjusted, decreased by 3.6 points in 2014 compared to 2013, as a result of improvements across all lines of business. The lower losses associated with a warranty retail program were largely offset by an increase in the related profit sharing arrangement, which increased the acquisition ratio in 2014 compared to 2013. The severe losses of $54 million, resulting largely from four fire claims, accounted for 0.5 points of the MetLife Securities Prioraccident year loss ratio, as adjusted, in 2014.
The general operating expense ratio remained unchanged in 2014 compared to Their Sale2013, reflecting the impact of efficiencies from organizational realignment initiatives, offset by increased technology-related expenses.
Corporate and Other
Corporate and Other Results
The following table presents AIG’s Corporate and Other results:
Years Ended December 31, | | | | | | | | | | | | | | | | Percentage Change |
(in millions) | | | | | | | | | | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | | 2014 vs. 2013 | |
Corporate and Other pre-tax operating loss: | | | | | | | | | | | | | | | | | | | | |
Equity in pre-tax operating earnings of AerCap(a) | | | | | | | | | $ | 255 | $ | 434 | $ | - | | (41) | % | | NM | % |
Fair value of PICC investments(b) | | | | | | | | | | 33 | | 37 | | - | | (11) | | | NM | |
Income from other assets, net(c) | | | | | | | | | | 1,382 | | 373 | | 47 | | 271 | | | NM | |
Corporate general operating expenses | | | | | | | | | | (985) | | (1,146) | | (1,115) | | 14 | | | (3) | |
Severance expense(d) | | | | | | | | | | - | | - | | (265) | | NM | | | NM | |
Interest expense | | | | | | | | | | (1,101) | | (1,233) | | (1,412) | | 11 | | | 13 | |
TABLE OF CONTENTS
We recognized a loss
Item 7 / results of operations / Corporate and other
Direct Investment book | | | | | | | | | | - | | 1,241 | | 1,448 | | NM | | | (14) | |
Global Capital Markets | | | | | | | | | | - | | 359 | | 625 | | NM | | | (43) | |
Run-off insurance Lines | | | | | | | | | | (488) | | (445) | | 403 | | (10) | | | NM | |
Consolidation and eliminations | | | | | | | | | | 21 | | 1 | | 4 | | NM | | | (75) | |
Total Corporate and Other pre-tax operating loss | | | | | | | | | $ | (883) | $ | (379) | $ | (265) | | (133) | % | | (43) | % |
(a) Represents our share of AerCap’s pre-tax operating income, which excludes certain post-acquisition transaction expenses incurred by AerCap in 2011, representingconnection with its acquisition of ILFC and the decline indifference between expensing AerCap’s maintenance rights assets over the securities' value, dueremaining lease term as compared to market conditions, from December 31, 2010 through the dateremaining economic life of their sale inthe related aircraft.
(b) During the first quarter of 2011.2015, Non-Life Insurance Companies sold a portion of their investment in PICC P&C to AIG Parent. During 2014, the Life Insurance Companies sold their investment in PICC Group to AIG Parent.
(c) Consists of the results of investments held by AIG Parent to support various corporate needs as well as the remaining positions of AIGFP, life settlements, real estate, equipment leasing and lending and other secured lending investments held by AIG Parent and certain subsidiaries. As a result of the progress of the wind down and de-risking activities of the DIB and the derivative portfolio of AIGFP included within GCM, AIG has discontinued separate reporting of the DIB and GCM. Their results have been reported within Income from other assets, net, beginning with the first quarter of 2015. This reporting aligns with the manner in which AIG manages its financial resources. Prior periods are presented in historical format for informational purposes. Interest expense for 2015 includes $70 million of interest expense previously reported in DIB results.
(d) Includes $263 million of severance expense attributable to the Property Casualty and Personal Insurance operating segments.
Corporate and Other Results
20132015 and 20122014 Comparison
Corporate &and Other pre-tax operating losses increased in 2015 compared to 2014 primarily due to lower fair value appreciation on ABS CDOs, lower credit valuation adjustments on assets for which the fair value option was elected, and lower mark-to-market income on CDS positions as a result of portfolio wind down and more significant spread tightening in 2014, all of which are reflected in Income from other assets, net. Partially offsetting these declines were lower corporate general operating expenses resulting from a pension curtailment credit and lower interest expense from ongoing liability management activities.
Run-off insurance lines reported an increase in pre-tax operating lossesloss in 2013 compared to 20122015 primarily due to severance chargeshigher net adverse prior year loss reserve development reflecting the loss reserve strengthening in classes of business with long reporting tails and transfers of certain casualty lines, including environmental liability and healthcare coverage that were no longer offered by Commercial Insurance to Run-off insurance lines. See Insurance Reserves – Non-Life Insurance Companies – Net Loss Development for further discussion. These increases in net adverse prior year loss reserve development were partially offset by excess workers’ compensation net loss reserve discount benefit, primarily reflecting an increase in Treasury rates in 2015. See Insurance Reserves – Non-Life Insurance Companies – Discounting of Reserves for further discussion.
2014 and 2013 of $265 millionComparison
Corporate and Other pre‑tax operating losses increased in 2014 compared to 2013 primarily due to an increase in general operating expenses as a result of centralizing work streamsprocesses to lower-cost locations and creatingincreased costs related to investments in technology, lower fair value appreciation on ABS CDOs driven primarily by improved collateral pricing due to more significant improvements in home price indices and amortization of the underlying collateral in 2013, lower credit valuation adjustments on assets for which the fair value option was elected, and lower mark-to-market income on CDS positions as a result of portfolio wind down and spread widening, partially offset by our share of AerCap’s pre-tax operating income, which was accounted for under the equity method, and lower interest expense from ongoing debt management activities described in Liquidity and Capital Resources.
Run-off insurance lines reported a pre-tax operating loss of $445 million in 2014 compared to income of $403 million in 2013, primarily as a result of a $407 million charge from a decrease in reserve discount in 2014 compared to a $631 million benefit from an increase in discount in 2013. This discounting-related charge was partially offset by a $98 million decrease in net adverse prior year loss reserve development and an improvement in current accident year loss experience, particularly in the environmental liability business (2004 and prior). The discount charge was primarily due to the decline in risk free rates during
2014 used under Pennsylvania and Delaware prescribed or permitted practices, change in payout pattern assumptions, including the effect of commutations and accelerated settlements for the certain Excess Workers’ Compensation reserves, as well as accretion. See Insurance Reserves - Discounting of Reserves for additional information.
Overview
Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business models for Non-Life Insurance Companies, Life Insurance Companies and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of intermediate and long duration fixed maturity securities.
Investments Highlights in 2015 |
•A rise in rates, widening of credit spreads and sales of equity securities resulted in a decrease in our net unrealized gain position in our investment portfolio. Net unrealized gains in our available for sale portfolio decreased to approximately $8.8 billion as of December 31, 2015 from approximately $19.0 billion as of December 31, 2014. •We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in mortgage loans with favorable risk versus return characteristics to improve yields and increase net investment income. •Our alternative investments portfolio performance experienced a significant drop off in the second half of 2015 due to increased volatility in equity markets, which affected the performance of our hedge fund portfolio. •Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called. •Other-than-temporary impairments increased due to impairments within the energy and emerging markets sectors, driven primarily by slowing growth in China and weakness in commodity markets. •We experienced an increase in gains of sales of securities in 2015 versus 2014 due to a partial divestiture of our PICC equity interests. |
Investment Strategies
Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.
Some of our key investment strategies are as follows:
•Fixed maturity securities held by the U.S. insurance companies included in Non-Life Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.
•Outside of the U.S., fixed maturity securities held by Non-Life Insurance Companies consist primarily of intermediate duration high-grade securities generally denominated in the currencies of the countries in which we operate.
·While more of a focus is placed on asset-liability management in Life Insurance Companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.
·AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. AIG Parent’s liquidity sources are held in the form of cash, short-term investments and publicly traded, intermediate term investment-grade rated fixed maturity securities. Based upon an assessment of its immediate and longer-term funding needs, AIG Parent purchases publicly traded, intermediate term, investment-grade rated fixed maturity securities that can be readily monetized through sales or repurchase agreements. These securities allow us to diversify sources of liquidity while reducing the cost of maintaining sufficient liquidity.
Investments by Legal Entity Category
The following tables summarize the composition of AIG's investments:
| | Non-Life | | Life | | | | | |
| | Insurance | | Insurance | | Corporate | | | |
(in millions) | | Companies | | Companies | | and Other(a) | | | Total |
December 31, 2015 | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | |
Bonds available for sale, at fair value | $ | 84,849 | $ | 157,150 | $ | 6,246 | | $ | 248,245 |
Other bond securities, at fair value | | 1,463 | | 3,589 | | 11,730 | | | 16,782 |
Equity securities: | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | 2,821 | | 144 | | (50) | | | 2,915 |
Other Common and preferred stock, at fair value | | 355 | | - | | 566 | | | 921 |
Mortgage and other loans receivable, net of allowance | | 8,278 | | 23,979 | | (2,692) | | | 29,565 |
Other invested assets | | 10,571 | | 12,398 | | 6,825 | | | 29,794 |
Short-term investments | | 3,189 | | 2,877 | | 4,066 | | | 10,132 |
Total investments(b) | | 111,526 | | 200,137 | | 26,691 | | | 338,354 |
Cash | | 1,011 | | 557 | | 61 | | | 1,629 |
Total invested assets | $ | 112,537 | $ | 200,694 | $ | 26,752 | | $ | 339,983 |
December 31, 2014 | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | |
Bonds available for sale, at fair value | $ | 92,942 | $ | 164,527 | $ | 2,390 | | $ | 259,859 |
Other bond securities, at fair value | | 1,733 | | 2,785 | | 15,194 | | | 19,712 |
Equity securities: | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | 4,241 | | 150 | | 4 | | | 4,395 |
Other Common and preferred stock, at fair value | | 495 | | - | | 554 | | | 1,049 |
Mortgage and other loans receivable, net of allowance | | 6,686 | | 20,874 | | (2,570) | | | 24,990 |
Other invested assets | | 10,372 | | 11,916 | | 12,230 | | | 34,518 |
Short-term investments | | 4,154 | | 2,131 | | 4,958 | | | 11,243 |
Total investments(b) | | 120,623 | | 202,383 | | 32,760 | | | 355,766 |
Cash | | 1,191 | | 451 | | 116 | | | 1,758 |
Total invested assets | $ | 121,814 | $ | 202,834 | $ | 32,876 | | $ | 357,524 |
(a) Beginning in the fourth quarter of 2015, Eaglestone Reinsurance Company is reported in Corporate and Other.
(b) At December 31, 2015, approximately 90 percent and 10 percent of investments were held by domestic and foreign entities, respectively, compared to approximately 90 percent and 10 percent, respectively, at December 31, 2014.
The following table presents the components of Net Investment Income:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Interest and dividends | $ | 12,856 | $ | 13,246 | $ | 13,199 |
Alternative investments | | 1,476 | | 2,624 | | 2,803 |
Other investment income* | | 249 | | 726 | | 356 |
Total investment income | | 14,581 | | 16,596 | | 16,358 |
Investment expenses | | 528 | | 517 | | 548 |
Total net investment income | $ | 14,053 | $ | 16,079 | $ | 15,810 |
* Includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and which are used to economically hedge the interest rate risk in GMWB embedded derivatives. For the years ended December 31, 2015, 2014 and 2013, the net investment income (loss) recorded on these securities was $(43) million, $260 million and $(161) million, respectively.
Net investment income decreased for 2015 compared to 2014 due to lower income on alternative investments, primarily related to hedge fund performance, lower income on assets for which the fair value option was elected, and lower reinvestment yields.
Net investment income for 2014 increased compared to 2013 primarily due to positive performance on bonds where we elected the fair value option, driven by movements in interest rates, partially offset by lower income on alternative investments due to equity market performance and lower reinvestment yields on our fixed maturity securities portfolio due to the low interest rate environment.
Non-Life Insurance Companies
For the Non-Life Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the Non-Life Insurance Companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.
The Non-Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Non-Life Insurance Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the Non-Life Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.
In addition, the Non-Life Insurance Companies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. The Non-Life Insurance Companies’ investment portfolio also includes, to a lesser extent, equity securities.
With respect to non-affiliate over‑the‑counter derivatives, the Non-Life Insurance Companies conduct business with highly rated counterparties and do not expect the counterparties to fail to meet their obligations under the contracts. The Non-Life Insurance Companies have controls in place to monitor credit exposures by limiting transactions with specific counterparties within specified dollar limits and assessing the creditworthiness of counterparties periodically. The Non-Life Insurance Companies generally use ISDA Master Agreements and Credit Support Annexes (CSAs) with bilateral collateral provisions to reduce counterparty credit exposures.
Fixed maturity investments of the Non-Life Insurance Companies domestic operations, with an intermediate duration of 4.7 years, are currently comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns, as
well as taxable municipal bonds, government and agency bonds, and corporate bonds. The majority of these high quality investments are rated A or higher based on composite ratings.
Fixed maturity investments held in the Non-Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, and short to intermediate duration, averaging 3.2 years.
Life Insurance Companies
The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.
The Life Insurance Companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life Insurance Companies' fundamental investment strategy is to maintain a diversified, high quality portfolio of fixed maturity securities that, to the extent possible, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration. An extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses.
The Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans.
In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields. While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio. The Life Insurance Companies investment portfolio also includes, to a lesser extent, equity securities and yield enhancing investments.
The Life Insurance Companies monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. The Life Insurance Companies frequently review their interest rate assumptions and actively manage the crediting rates used for their new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in a historically low interest rate environment. The low interest rate environment makes it more difficult to profitably price many of our products and puts margin pressure on existing products, due to the challenge of investing recurring premiums and deposits and reinvesting investment portfolio cash flows in the low rate environment while maintaining satisfactory investment quality and liquidity. In addition, there is investment risk associated with future premium receipts from certain in‑force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
Fixed maturity investments of the Life Insurance Companies domestic operations, with an intermediate duration of 6.6 years, are comprised of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.
Fixed maturity investments held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, and intermediate to long duration, averaging 13.7 years.
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the National Association of Insurance Companies (NAIC) evaluates the investments of U.S. insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called ‘NAIC Designations.’ In general, NAIC Designations of ‘1’ highest quality, or ‘2’ high quality, include fixed maturity securities considered investment grade, while NAIC Designations of ‘3’ through ‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more streamlined organization,precise assessment of the value of such structured securities and higher incentiveincrease the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The following tables summarize the ratings distribution of Life Insurance Companies fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies. See Investments – Credit Ratings herein for a full description of the composite AIG credit ratings.
The following table presents the fixed maturity security portfolio of Life Insurance Companies categorized by NAIC Designation, at fair value:
December 31, 2015 | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Total | | |
| | | | | | Total | | | | | | | | | | | Below | | |
| | | | | | Investment | | | | | | | | | | | Investment | | |
NAIC Designation | | 1 | | 2 | | Grade | | | 3 | | 4 | | 5 | | 6 | | Grade | | Total |
Other fixed maturity securities | $ | 44,714 | $ | 58,029 | $ | 102,743 | | $ | 4,801 | $ | 2,739 | $ | 413 | $ | 133 | $ | 8,086 | $ | 110,829 |
Mortgage-backed, asset-backed and collateralized | | 42,411 | | 2,091 | | 44,502 | | | 239 | | 181 | | 29 | | 471 | | 920 | | 45,422 |
Total* | $ | 87,125 | $ | 60,120 | $ | 147,245 | | $ | 5,040 | $ | 2,920 | $ | 442 | $ | 604 | $ | 9,006 | $ | 156,251 |
* Excludes $4.5 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within Life Insurance Companies that require a statutory filing.
The following table presents the fixed maturity security portfolio of Life Insurance Companiescategorized by composite AIG credit rating, at fair value:
December 31, 2015 | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Total | | |
| | | | | | Total | | | | | | | | | Below | | |
| | | | | | Investment | | | | | | | CCC and | | Investment | | |
Composite AIG Credit Rating | | AAA/AA/A | | BBB | | Grade | | | BB | | B | | Lower | | Grade | | Total |
Other fixed maturity securities | $ | 44,758 | $ | 58,156 | $ | 102,914 | | $ | 4,692 | $ | 2,808 | $ | 415 | $ | 7,915 | $ | 110,829 |
Mortgage-backed, asset-backed and collateralized | | 26,312 | | 3,352 | | 29,664 | | | 1,266 | | 1,033 | | 13,459 | | 15,758 | | 45,422 |
Total* | $ | 71,070 | $ | 61,508 | $ | 132,578 | | $ | 5,958 | $ | 3,841 | $ | 13,874 | $ | 23,673 | $ | 156,251 |
* Excludes $4.5 billion of fixed maturity securities for which no NAIC Designation is available because they are not held in legal entities within Life Insurance Companies that require a statutory filing.
Credit Ratings
At December 31, 2015, approximately 90 percent of our fixed maturity securities were held by our domestic entities. Approximately 16 percent of such securities were rated AAA by one or more of the principal rating agencies, and approximately 17 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in the internal analysis.
A significant portion of our foreign entities’ fixed maturity securities portfolio is rated by Moody’s Investors’ Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. (S&P), or similar foreign rating services. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At December 31, 2015, approximately 16 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 5 percent were below investment grade or not rated. Approximately 44 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.
Composite AIG Credit Ratings
With respect to our fixed maturity investments, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (over 99 percent of total fixed maturity investments), or (b) our equivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC. The “Non-rated” category in those tables consists of fixed maturity securities that have not been rated by any of the major rating agencies, the NAIC or us.
See Enterprise Risk Management herein for a discussion of credit risks associated with Investments.
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their fair value:
| Available for Sale | | Other | | Total | |
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |
(in millions) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Rating: | | | | | | | | | | | | | | | | | | |
Other fixed maturity | | | | | | | | | | | | | | | | | | |
securities | | | | | | | | | | | | | | | | | | |
AAA | $ | 12,274 | | $ | 15,463 | | $ | 3,222 | | $ | 5,322 | | $ | 15,496 | | $ | 20,785 | |
AA | | 35,344 | | | 36,730 | | | 207 | | | 224 | | | 35,551 | | | 36,954 | |
A | | 50,741 | | | 56,693 | | | 1,781 | | | 242 | | | 52,522 | | | 56,935 | |
BBB | | 71,766 | | | 75,607 | | | 186 | | | 250 | | | 71,952 | | | 75,857 | |
Below investment grade | | 12,305 | | | 10,651 | | | 133 | | | 303 | | | 12,438 | | | 10,954 | |
Non-rated | | 920 | | | 1,035 | | | - | | | - | | | 920 | | | 1,035 | |
Total | $ | 183,350 | | $ | 196,179 | | $ | 5,529 | | $ | 6,341 | | $ | 188,879 | | $ | 202,520 | |
Mortgage-backed, asset- | | | | | | | | | | | | | | | | | | |
backed and collateralized | | | | | | | | | | | | | | | | | | |
AAA | $ | 26,382 | | $ | 24,783 | | $ | 1,756 | | $ | 2,313 | | $ | 28,138 | | $ | 27,096 | |
AA | | 5,003 | | | 4,078 | | | 708 | | | 1,549 | | | 5,711 | | | 5,627 | |
A | | 7,462 | | | 7,606 | | | 416 | | | 494 | | | 7,878 | | | 8,100 | |
BBB | | 4,394 | | | 3,813 | | | 497 | | | 620 | | | 4,891 | | | 4,433 | |
Below investment grade | | 21,638 | | | 23,376 | | | 7,771 | | | 8,314 | | | 29,409 | | | 31,690 | |
Non-rated | | 16 | | | 24 | | | 105 | | | 81 | | | 121 | | | 105 | |
Total | $ | 64,895 | | $ | 63,680 | | $ | 11,253 | | $ | 13,371 | | $ | 76,148 | | $ | 77,051 | |
Total | | | | | | | | | | | | | | | | | | |
AAA | $ | 38,656 | | $ | 40,246 | | $ | 4,978 | | $ | 7,635 | | $ | 43,634 | | $ | 47,881 | |
AA | | 40,347 | | | 40,808 | | | 915 | | | 1,773 | | | 41,262 | | | 42,581 | |
A | | 58,203 | | | 64,299 | | | 2,197 | | | 736 | | | 60,400 | | | 65,035 | |
BBB | | 76,160 | | | 79,420 | | | 683 | | | 870 | | | 76,843 | | | 80,290 | |
Below investment grade | | 33,943 | | | 34,027 | | | 7,904 | | | 8,617 | | | 41,847 | | | 42,644 | |
Non-rated | | 936 | | | 1,059 | | | 105 | | | 81 | | | 1,041 | | | 1,140 | |
Total | $ | 248,245 | | $ | 259,859 | | $ | 16,782 | | $ | 19,712 | | $ | 265,027 | | $ | 279,571 | |
Available‑for‑Sale Investments
The following table presents the fair value of our available‑for‑sale securities:
| | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | 2015 | | 2014 |
Bonds available for sale: | | | | | | | | | | |
U.S. government and government sponsored entities | | | | | | | $ | 1,844 | $ | 2,992 |
Obligations of states, municipalities and political subdivisions | | | | | | | | 27,323 | | 27,659 |
Non-U.S. governments | | | | | | | | 18,195 | | 21,095 |
Corporate debt | | | | | | | | 135,988 | | 144,433 |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | |
RMBS | | | | | | | | 36,227 | | 37,520 |
CMBS | | | | | | | | 13,571 | | 12,885 |
CDO/ABS | | | | | | | | 15,097 | | 13,275 |
Total mortgage-backed, asset-backed and collateralized | | | | | | | | 64,895 | | 63,680 |
Total bonds available for sale* | | | | | | | | 248,245 | | 259,859 |
Equity securities available for sale: | | | | | | | | | | |
Common stock | | | | | | | | 2,401 | | 3,629 |
Preferred stock | | | | | | | | 22 | | 25 |
Mutual funds | | | | | | | | 492 | | 741 |
Total equity securities available for sale | | | | | | | | 2,915 | | 4,395 |
Total | | | | | | | $ | 251,160 | $ | 264,254 |
* At December 31, 2015 and 2014, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $34.9 billion and $35.1 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity securities:
| December 31, | | December 31, |
(in millions) | | 2015 | | | 2014 |
Japan | $ | 5,416 | | $ | 5,728 |
Canada | | 1,453 | | | 2,181 |
Germany | | 832 | | | 1,315 |
France | | 784 | | | 614 |
United Kingdom | | 661 | | | 648 |
Mexico | | 563 | | | 661 |
Netherlands | | 511 | | | 639 |
Norway | | 503 | | | 619 |
Singapore | | 426 | | | 545 |
Chile | | 386 | | | 395 |
Other | | 6,710 | | | 7,752 |
Total | $ | 18,245 | | $ | 21,097 |
The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:
| December 31, 2015 | | |
| | | | | | Non- | | | | | December 31, |
| | | | Financial | | Financial | | Structured | | | | 2014 |
(in millions) | | Sovereign | | Institution | | Corporates | | Products | | Total | | Total |
Euro-Zone countries: | | | | | | | | | | | | |
France | $ | 784 | $ | 1,215 | $ | 2,019 | $ | - | $ | 4,018 | $ | 4,498 |
Netherlands | | 511 | | 991 | | 1,505 | | 397 | | 3,404 | | 4,276 |
Germany | | 832 | | 285 | | 2,227 | | 21 | | 3,365 | | 4,155 |
Ireland | | 2 | | - | | 598 | | 674 | | 1,274 | | 850 |
Spain | | 29 | | 90 | | 968 | | 15 | | 1,102 | | 1,557 |
Italy | | 19 | | 115 | | 863 | | 12 | | 1,009 | | 1,245 |
Belgium | | 219 | | 120 | | 516 | | - | | 855 | | 973 |
Luxembourg | | - | | 18 | | 448 | | 30 | | 496 | | 243 |
Finland | | 65 | | 34 | | 130 | | - | | 229 | | 235 |
Austria | | 104 | | 3 | | 17 | | - | | 124 | | 155 |
Other - EuroZone | | 680 | | 48 | | 200 | | 1 | | 929 | | 1,022 |
Total Euro-Zone | $ | 3,245 | $ | 2,919 | $ | 9,491 | $ | 1,150 | $ | 16,805 | $ | 19,209 |
Remainder of Europe | | | | | | | | | | | | |
United Kingdom | $ | 661 | $ | 2,968 | $ | 8,015 | $ | 3,642 | $ | 15,286 | $ | 16,076 |
Switzerland | | 49 | | 1,195 | | 1,275 | | - | | 2,519 | | 2,941 |
Sweden | | 144 | | 488 | | 195 | | - | | 827 | | 1,135 |
Norway | | 503 | | 43 | | 142 | | - | | 688 | | 846 |
Russian Federation | | 36 | | 8 | | 78 | | - | | 122 | | 311 |
Other - Remainder of Europe | | 198 | | 119 | | 111 | | 15 | | 443 | | 494 |
Total - Remainder of Europe | $ | 1,591 | $ | 4,821 | $ | 9,816 | $ | 3,657 | $ | 19,885 | $ | 21,803 |
Total | $ | 4,836 | $ | 7,740 | $ | 19,307 | $ | 4,807 | $ | 36,690 | $ | 41,012 |
Investments in Municipal Bonds
At December 31, 2015, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backed bonds with over 95 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale U.S. municipal bond portfolio by state and municipal bond type:
| December 31, 2015 | | |
| | State | | Local | | | | Total | December 31, |
| | General | | General | | | | Fair | | 2014 |
(in millions) | | Obligation | | Obligation | | Revenue | | Value | | Total Fair Value |
State: | | | | | | | | | | |
New York | $ | 35 | $ | 620 | $ | 3,958 | $ | 4,613 | $ | 4,116 |
California | | 663 | | 610 | | 2,568 | | 3,841 | | 4,707 |
Texas | | 328 | | 1,534 | | 1,553 | | 3,415 | | 3,356 |
Illinois | | 111 | | 367 | | 1,008 | | 1,486 | | 1,364 |
Massachusetts | | 693 | | - | | 694 | | 1,387 | | 1,417 |
Washington | | 530 | | 144 | | 685 | | 1,359 | | 1,278 |
Florida | | 155 | | - | | 980 | | 1,135 | | 1,052 |
Virginia | | 65 | | 5 | | 808 | | 878 | | 918 |
Georgia | | 280 | | 243 | | 347 | | 870 | | 819 |
Washington DC | | 156 | | 1 | | 548 | | 705 | | 607 |
Pennsylvania | | 269 | | 23 | | 384 | | 676 | | 537 |
Arizona | | - | | 94 | | 482 | | 576 | | 734 |
Ohio | | 128 | | 8 | | 395 | | 531 | | 604 |
All other states(a) | | 1,061 | | 547 | | 4,243 | | 5,851 | | 6,150 |
Total(b)(c) | $ | 4,474 | $ | 4,196 | $ | 18,653 | $ | 27,323 | $ | 27,659 |
(a) We did not have material credit exposure to the government of Puerto Rico.
(b) Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.
(c) Includes $2.9 billion of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale corporate debt securities:
| | Fair Value at | | Fair Value at | |
Industry Category | | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Financial institutions: | | | | | |
Money Center /Global Bank Groups | $ | 9,104 | $ | 10,682 | |
Regional banks — other | | 568 | | 543 | |
Life insurance | | 3,295 | | 3,575 | |
Securities firms and other finance companies | | 380 | | 422 | |
Insurance non-life | | 5,421 | | 5,625 | |
Regional banks — North America | | 6,823 | | 6,636 | |
Other financial institutions | | 7,808 | | 8,169 | |
Utilities(a) | | 18,497 | | 19,249 | |
Communications | | 10,251 | | 10,316 | |
Consumer noncyclical | | 15,391 | | 16,792 | |
Capital goods | | 8,973 | | 8,594 | |
Energy(a) | | 13,861 | | 16,494 | |
Consumer cyclical | | 9,767 | | 11,197 | |
Basic | | 7,512 | | 9,187 | |
Other | | 18,337 | | 16,952 | |
Total (b) | $ | 135,988 | $ | 144,433 | |
(a) The Utilities and Energy amounts at December 31, 2014, have been revised from $23.7 billion and $12.0 billion to $19.2 billion and $16.5 billion, respectively, to conform to current industry classification, which are not considered material to previously issued financial statements.
(b) At December 31, 2015 and December 31, 2014, approximately 91 percent and 93 percent, respectively, of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, were 5.6 percent and 6.4 percent at December 31, 2015 and 2014, respectively. The decline in energy exposure from December 31, 2014 resulted from unrealized losses due to reduction in the energy sector pricing, sales of securities and other-than-temporary impairments. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.
Investments in RMBS
The following table presents AIG’s RMBS available for sale investments by year of vintage:
| | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Total RMBS | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,273 | $ | - |
2014 | | | | | | | | | | | 1,096 | | 871 |
2013 | | | | | | | | | | | 2,178 | | 2,724 |
2012 | | | | | | | | | | | 1,944 | | 2,382 |
2011 | | | | | | | | | | | 4,800 | | 5,310 |
2010 and prior* | | | | | | | | | | | 23,936 | | 26,233 |
Total RMBS | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,025 | $ | - |
2014 | | | | | | | | | | | 1,000 | | 799 |
2013 | | | | | | | | | | | 2,094 | | 2,625 |
2012 | | | | | | | | | | | 1,877 | | 2,234 |
2011 | | | | | | | | | | | 2,927 | | 3,428 |
2010 and prior | | | | | | | | | | | 2,628 | | 3,324 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | $ | - | $ | - |
2010 and prior | | | | | | | | | | | 12,831 | | 13,001 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | | - | | - |
2010 and prior | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | - | $ | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | 8 | | 8 |
2012 | | | | | | | | | | | 53 | | 126 |
2011 | | | | | | | | | | | 1,873 | | 1,882 |
2010 and prior | | | | | | | | | | | 5,716 | | 7,047 |
Total Prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
* Includes approximately $13.2 billion and $13.5 billion at December 31, 2015, and December 31, 2014, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. See Note 5 to the Consolidated Financial Statements for additional discussion on Purchased Credit Impaired (PCI) Securities.
The following table presents our RMBS available for sale investments by credit rating:
| | | | | | | | | | Fair Value at | Fair Value at |
| | | | | | | December 31, | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | | | | |
Total RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 14,884 | $ | 14,699 |
AA | | | | | | | | | | | 389 | | 418 |
A | | | | | | | | | | | 509 | | 546 |
BBB | | | | | | | | | | | 661 | | 911 |
Below investment grade(a) | | | | | | | | | | | 19,779 | | 20,937 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total RMBS(b) | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 12,547 | $ | 12,405 |
AA | | | | | | | | | | | 4 | | 5 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 5 | $ | 7 |
AA | | | | | | | | | | | 17 | | 33 |
A | | | | | | | | | | | 121 | | 85 |
BBB | | | | | | | | | | | 216 | | 317 |
Below investment grade(a) | | | | | | | | | | | 12,472 | | 12,559 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 15 | $ | 18 |
AA | | | | | | | | | | | 68 | | 117 |
A | | | | | | | | | | | 247 | | 252 |
BBB | | | | | | | | | | | 200 | | 207 |
Below investment grade(a) | | | | | | | | | | | 1,846 | | 1,829 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 1,986 | $ | 2,076 |
AA | | | | | | | | | | | 188 | | 253 |
A | | | | | | | | | | | 138 | | 205 |
BBB | | | | | | | | | | | 209 | | 351 |
Below investment grade(a) | | | | | | | | | | | 5,124 | | 6,169 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
(a) Includes certain RMBS that had experienced deterioration in credit quality since their origination. See Note 5 to the Consolidated Financial Statements for additional discussion on PCI Securities.
(b) The weighted average expected life was six years at both December 31, 2015 and December 31, 2014.
Our underwriting practices for investing in RMBS, other asset‑backed securities and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.
Investments in CMBS
The following table presents our CMBS available for sale investments:
| | | | | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | | | | 2015 | | 2014 |
CMBS (traditional) | | | | | | | | | | | | | | $ | 11,132 | $ | 11,265 |
Agency | | | | | | | | | | | | | | | 1,622 | | 1,372 |
Other | | | | | | | | | | | | | | | 817 | | 248 |
Total | | | | | | | | | | | | | | $ | 13,571 | $ | 12,885 |
The following table presents the fair value of our CMBS available for sale investments by rating agency designation and by vintage year:
| | | | | | | | | | Below | | | | |
| | | | | | | | | | Investment | | | | |
(in millions) | | AAA | | AA | | A | | BBB | | Grade | | Non-Rated | | Total |
December 31, 2015 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2015 | $ | 824 | $ | 404 | $ | 465 | $ | 240 | $ | - | $ | - | $ | 1,933 |
2014 | | 1,604 | | 183 | | 11 | | - | | - | | - | | 1,798 |
2013 | | 2,611 | | 433 | | 89 | | 54 | | - | | - | | 3,187 |
2012 | | 737 | | 60 | | 31 | | 83 | | - | | 10 | | 921 |
2011 | | 1,015 | | 25 | | 31 | | 21 | | - | | - | | 1,092 |
2010 and prior | | 921 | | 700 | | 635 | | 738 | | 1,646 | | - | | 4,640 |
Total | $ | 7,712 | $ | 1,805 | $ | 1,262 | $ | 1,136 | $ | 1,646 | $ | 10 | $ | 13,571 |
December 31, 2014 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2014 | $ | 1,570 | $ | 183 | $ | 11 | $ | - | $ | - | $ | - | $ | 1,764 |
2013 | | 2,684 | | 442 | | 91 | | 58 | | - | | - | | 3,275 |
2012 | | 1,158 | | 61 | | 28 | | 92 | | - | | 12 | | 1,351 |
2011 | | 1,022 | | 20 | | 37 | | 21 | | - | | - | | 1,100 |
2010 and prior | | 1,119 | | 626 | | 814 | | 843 | | 1,993 | | - | | 5,395 |
Total | $ | 7,553 | $ | 1,332 | $ | 981 | $ | 1,014 | $ | 1,993 | $ | 12 | $ | 12,885 |
The following table presents our CMBS available for sale investments by geographic region:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Geographic region: | | | | | |
New York | $ | 3,149 | $ | 2,759 | |
California | | 1,244 | | 1,305 | |
Texas | | 791 | | 831 | |
Florida | | 520 | | 562 | |
New Jersey | | 433 | | 457 | |
Virginia | | 362 | | 389 | |
Illinois | | 323 | | 344 | |
Pennsylvania | | 295 | | 291 | |
Georgia | | 253 | | 286 | |
Massachusetts | | 231 | | 247 | |
Maryland | | 229 | | 222 | |
North Carolina | | 218 | | 222 | |
All Other* | | 5,523 | | 4,970 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Non-U.S. locations.
The following table presents our CMBS available for sale investments by industry:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Industry: | | | | | |
Retail | $ | 3,978 | $ | 3,700 | |
Office | | 3,896 | | 3,652 | |
Multi-family* | | 3,036 | | 2,889 | |
Lodging | | 1,005 | | 1,127 | |
Industrial | | 868 | | 679 | |
Other | | 788 | | 838 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Agency-backed CMBS.
The fair value of CMBS holdings remained stable throughout 2015. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale investments by collateral type:
| | | | | | | | | | Fair value at | | Fair value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | 2015 | | 2014 |
Collateral Type: | | | | | | | | | | | | |
Bank loans (CLO) | | | | | | | | | $ | 7,962 | $ | 6,683 |
Other | | | | | | | | | | 153 | | 388 |
Total | | | | | | | | | $ | 8,115 | $ | 7,071 |
The following table presents our CDO available for sale investments by credit rating:
| | | | | | | Fair Value at | | Fair Value at |
| | | | | December 31, | | December 31, |
(in millions) | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | |
AAA | | | | | | | $ | 2,870 | $ | 1,922 |
AA | | | | | | | | 2,543 | | 2,135 |
A | | | | | | | | 2,247 | | 2,317 |
BBB | | | | | | | | 298 | | 366 |
Below investment grade | | | | | | | | 157 | | 331 |
Total | | | | | | | $ | 8,115 | $ | 7,071 |
Commercial Mortgage Loans
At December 31, 2015, we had direct commercial mortgage loan exposure of $22.1 billion of which, approximately 99 percent of the loans were current.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
| Number | | | | | | | | | | | | | | | | Percent | |
| of | | Class | | | of | |
(dollars in millions) | Loans | | Apartments | | Offices | | Retail | Industrial | Hotel | | Others | | Total | Total | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 97 | | $ | 823 | $ | 2,968 | $ | 516 | $ | 301 | $ | 166 | $ | 186 | $ | 4,960 | 22 | % |
California | 95 | | | 87 | | 547 | | 433 | | 533 | | 788 | | 308 | | 2,696 | 12 | |
Texas | 60 | | | 120 | | 696 | | 106 | | 147 | | 187 | | 48 | | 1,304 | 6 | |
New Jersey | 45 | | | 441 | | 338 | | 324 | | - | | 29 | | 33 | | 1,165 | 5 | |
Florida | 78 | | | 187 | | 113 | | 374 | | 116 | | 20 | | 146 | | 956 | 4 | |
Illinois | 21 | | | 174 | | 369 | | 21 | | 32 | | 36 | | 23 | | 655 | 3 | |
Massachusetts | 19 | | | 56 | | 168 | | 360 | | - | | - | | 33 | | 617 | 3 | |
Connecticut | 20 | | | 314 | | 152 | | 23 | | 81 | | - | | - | | 570 | 3 | |
Pennsylvania | 28 | | | 6 | | 29 | | 436 | | 62 | | 27 | | 4 | | 564 | 3 | |
Ohio | 37 | | | 122 | | 28 | | 211 | | 67 | | - | | 5 | | 433 | 2 | |
Other states | 302 | | | 1,118 | | 1,203 | | 1,514 | | 414 | | 595 | | 229 | | 5,073 | 23 | |
Foreign | 47 | | | 471 | | 1,234 | | 520 | | 161 | | 250 | | 438 | | 3,074 | 14 | |
Total* | 849 | | $ | 3,919 | $ | 7,845 | $ | 4,838 | $ | 1,914 | $ | 2,098 | $ | 1,453 | $ | 22,067 | 100 | % |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 90 | | $ | 545 | $ | 2,111 | $ | 285 | $ | 148 | $ | 68 | $ | 215 | $ | 3,372 | 18 | % |
California | 115 | | | 29 | | 635 | | 389 | | 472 | | 597 | | 469 | | 2,591 | 14 | |
New Jersey | 48 | | | 490 | | 353 | | 308 | | - | | 30 | | 74 | | 1,255 | 7 | |
Florida | 89 | | | 141 | | 192 | | 335 | | 118 | | 137 | | 161 | | 1,084 | 6 | |
Texas | 58 | | | 62 | | 482 | | 121 | | 171 | | 187 | | 54 | | 1,077 | 6 | |
Illinois | 24 | | | 175 | | 327 | | 26 | | 73 | | 36 | | - | | 637 | 3 | |
Massachusetts | 19 | | | - | | 198 | | 321 | | - | | - | | 34 | | 553 | 3 | |
Colorado | 18 | | | 62 | | 158 | | 48 | | - | | 120 | | 101 | | 489 | 2 | |
Connecticut | 23 | | | 279 | | 155 | | 5 | | 43 | | - | | - | | 482 | 2 | |
Pennsylvania | 49 | | | 45 | | 89 | | 170 | | 107 | | 16 | | 5 | | 432 | 2 | |
Other states | 349 | | | 920 | | 1,140 | | 1,738 | | 494 | | 310 | | 281 | | 4,883 | 26 | |
Foreign | 142 | | | 636 | | 678 | | 78 | | 63 | | 176 | | 423 | | 2,054 | 11 | |
Total* | 1,024 | | $ | 3,384 | $ | 6,518 | $ | 3,824 | $ | 1,689 | $ | 1,677 | $ | 1,817 | $ | 18,909 | 100 | % |
* Does not reflect allowance for credit losses.
See Note 6 to the Consolidated Financial Statements for additional discussion on commercial mortgage loans.
Impairments
The following table presents impairments by investment type:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Other-than-temporary Impairments: | | | | | | | | | | | |
Fixed maturity securities, available for sale | | | | | | $ | 425 | $ | 180 | $ | 173 |
Equity securities, available for sale | | | | | | | 166 | | 37 | | 14 |
Private equity funds and hedge funds | | | | | | | 80 | | 30 | | 45 |
Subtotal | | | | | | | 671 | | 247 | | 232 |
Other impairments: | | | | | | | | | | | |
Investments in life settlements | | | | | | | 540 | | 201 | | 971 |
Other investments | | | | | | | 166 | | 126 | | 112 |
Real estate | | | | | | | 23 | | 8 | | 19 |
Total | | | | | | $ | 1,400 | $ | 582 | $ | 1,334 |
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to recover our estimated future carrying amount, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market mortality assumptions and market yields.
In late 2015, several insurance providers gave notice of increases in policy premiums related to our investments in life settlements. The increase in premiums required to keep policies in force results in lower future expected net cash flows which are insufficient to recover our net investment on certain policies.
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by reportable segment and impairment type:
| | Non-Life | | Life | | Corporate | | |
| | Insurance | | Insurance | | and Other | | |
(in millions) | | Companies | | Companies | | Operations | | Total |
For the Year Ended December 31, 2015 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 13 | $ | - | $ | - | $ | 13 |
Change in intent | | 7 | | 145 | | 81 | | 233 |
Foreign currency declines | | 33 | | 24 | | - | | 57 |
Issuer-specific credit events | | 178 | | 168 | | 2 | | 348 |
Adverse projected cash flows | | 7 | | 13 | | - | | 20 |
Total | $ | 238 | $ | 350 | $ | 83 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 3 | $ | - | $ | - | $ | 3 |
Change in intent | | 8 | | 32 | | - | | 40 |
Foreign currency declines | | 9 | | 10 | | - | | 19 |
Issuer-specific credit events | | 60 | | 109 | | - | | 169 |
Adverse projected cash flows | | 5 | | 11 | | - | | 16 |
Total | $ | 85 | $ | 162 | $ | - | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 6 | $ | - | $ | - | $ | 6 |
Change in intent | | 1 | | 45 | | 2 | | 48 |
Foreign currency declines | | 1 | | - | | - | | 1 |
Issuer-specific credit events | | 43 | | 127 | | - | | 170 |
Adverse projected cash flows | | 1 | | 6 | | - | | 7 |
Total | $ | 52 | $ | 178 | $ | 2 | $ | 232 |
Other-than-temporary impairment charges by investment type and impairment type:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 13 | $ | 13 |
Change in intent | | 3 | | - | | 14 | | 131 | | 85 | | 233 |
Foreign currency declines | | - | | - | | - | | 57 | | - | | 57 |
Issuer-specific credit events | | 79 | | 3 | | 8 | | 110 | | 148 | | 348 |
Adverse projected cash flows | | 20 | | - | | - | | - | | - | | 20 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 3 |
Change in intent | | - | | - | | - | | 27 | | 13 | | 40 |
Foreign currency declines | | - | | - | | - | | 19 | | - | | 19 |
Issuer-specific credit events | | 80 | | 9 | | 21 | | 8 | | 51 | | 169 |
Adverse projected cash flows | | 16 | | - | | - | | - | | - | | 16 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 6 | $ | 6 |
Change in intent | | 1 | | - | | - | | 46 | | 1 | | 48 |
Foreign currency declines | | - | | - | | - | | 1 | | - | | 1 |
Issuer-specific credit events | | 36 | | 5 | | 50 | | 27 | | 52 | | 170 |
Adverse projected cash flows | | 7 | | - | | - | | - | | - | | 7 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
Other-than-temporary impairment charges by investment type and credit rating:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 12 | $ | - | $ | 12 |
AA | | - | | - | | - | | 12 | | - | | 12 |
A | | - | | - | | - | | 12 | | - | | 12 |
BBB | | 2 | | - | | - | | 50 | | - | | 52 |
Below investment grade | | 100 | | 3 | | 22 | | 208 | | - | | 333 |
Non-rated | | - | | - | | - | | 4 | | 246 | | 250 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 4 | $ | - | $ | 4 |
AA | | 3 | | - | | - | | 2 | | - | | 5 |
A | | - | | - | | - | | 2 | | - | | 2 |
BBB | | 2 | | - | | - | | 11 | | - | | 13 |
Below investment grade | | 91 | | 5 | | 21 | | 35 | | - | | 152 |
Non-rated | | - | | 4 | | - | | - | | 67 | | 71 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | 1 | $ | - | $ | - | $ | - | $ | - | $ | 1 |
AA | | 2 | | - | | - | | - | | - | | 2 |
A | | 1 | | - | | - | | - | | - | | 1 |
BBB | | 1 | | - | | - | | 44 | | - | | 45 |
Below investment grade | | 39 | | 5 | | 50 | | 29 | | - | | 123 |
Non-rated | | - | | - | | - | | 1 | | 59 | | 60 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
We recorded other-than-temporary impairment charges in the years ended December 31, 2015, 2014 and 2013 related to:
•issuer-specific credit events;
•securities that we intend to sell or for which it is more likely than not that we will be required to sell;
•declines due to foreign exchange rates;
•adverse changes in estimated cash flows on certain structured securities; and
•securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate and investments in life settlements.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $735 million in 2015, $725 million in 2014 and $774 million in 2013. See Note 6 to the Consolidated Financial Statements for a discussion of our other-than-temporary impairment accounting policy.
The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:
December 31, 2015 | Less Than or Equal | | | Greater Than 20% | | | Greater Than 50% | | | |
| | to 20% of Cost(b) | | | to 50% of Cost(b) | | | of Cost(b) | | | Total |
Aging(a) | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |
(dollars in millions) | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss(d) | Items(e) |
Investment grade | | | | | | | | | | | | | | | | | | | | | | | |
bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 35,961 | $ | 815 | 5,516 | | $ | 408 | $ | 115 | 82 | | $ | - | $ | - | - | | $ | 36,369 | $ | 930 | 5,598 |
7-11 months | | 23,134 | | 1,342 | 3,594 | | | 1,061 | | 275 | 201 | | | - | | - | - | | | 24,195 | | 1,617 | 3,795 |
12 months or more | | 6,883 | | 501 | 938 | | | 2,363 | | 733 | 183 | | | 21 | | 13 | 6 | | | 9,267 | | 1,247 | 1,127 |
Total | $ | 65,978 | $ | 2,658 | 10,048 | | $ | 3,832 | $ | 1,123 | 466 | | $ | 21 | $ | 13 | 6 | | $ | 69,831 | $ | 3,794 | 10,520 |
Below investment | | | | | | | | | | | | | | | | | | | | | | | |
grade bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 6,024 | $ | 199 | 2,341 | | $ | 567 | $ | 168 | 100 | | $ | 17 | $ | 11 | 13 | | $ | 6,608 | $ | 378 | 2,454 |
7-11 months | | 2,706 | | 168 | 814 | | | 199 | | 59 | 132 | | | 7 | | 6 | 3 | | | 2,912 | | 233 | 949 |
12 months or more | | 5,164 | | 324 | 766 | | | 871 | | 278 | 200 | | | 385 | | 243 | 83 | | | 6,420 | | 845 | 1,049 |
Total | $ | 13,894 | $ | 691 | 3,921 | | $ | 1,637 | $ | 505 | 432 | | $ | 409 | $ | 260 | 99 | | $ | 15,940 | $ | 1,456 | 4,452 |
Total bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 41,985 | $ | 1,014 | 7,857 | | $ | 975 | $ | 283 | 182 | | $ | 17 | $ | 11 | 13 | | $ | 42,977 | $ | 1,308 | 8,052 |
7-11 months | | 25,840 | | 1,510 | 4,408 | | | 1,260 | | 334 | 333 | | | 7 | | 6 | 3 | | | 27,107 | | 1,850 | 4,744 |
12 months or more | | 12,047 | | 825 | 1,704 | | | 3,234 | | 1,011 | 383 | | | 406 | | 256 | 89 | | | 15,687 | | 2,092 | 2,176 |
Total(e) | $ | 79,872 | $ | 3,349 | 13,969 | | $ | 5,469 | $ | 1,628 | 898 | | $ | 430 | $ | 273 | 105 | | $ | 85,771 | $ | 5,250 | 14,972 |
Equity securities | | | | | | | | | | | | | | | | | | | | | | | |
0-11 months | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
Total | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
(a) Represents the number of consecutive months that fair value has been less than cost by any amount.
(b) Represents the percentage by which fair value is less than cost at December 31, 2015.
(c) For bonds, represents amortized cost.
(d) The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2015 was primarily attributable to decreases in the fair value of fixed maturity securities. For 2015, net unrealized gains related to fixed maturity and equity securities decreased by $10.2 billion due primarily to the rise in rates, widening of credit spreads, and the sale of equity securities.
The change in net unrealized gains and losses on investments in 2014 was primarily attributable to increases in the fair value of fixed maturity securities. For 2014, net unrealized gains related to fixed maturity and equity securities increased by $7.3 billion due to a decrease in interest rates on investment grade fixed maturity securities, partially offset by the widening of spreads.
See also Note 5, Investments to the Consolidated Financial Statements for further discussion of our investment portfolio.
The following section provides discussion of insurance reserves for both the Non-Life Insurance Companies and the Life Insurance Companies, including Eaglestone Reinsurance Company, which is reported in Corporate and Other.
Non-Life Insurance Companies
The following section provides discussion of the consolidated liability for unpaid losses and loss adjustment expenses for the Non-Life Insurance Companies.
The following table presents the components of AIG’s gross loss reserves by major lines of business on a U.S. statutory basis(a):
At December 31, | | |
(in millions) | | 2015 | | 2014(b) |
Other liability occurrence (including asbestos and environmental) | $ | 24,856 | $ | 24,988 |
Workers' compensation (net of discount) | | 14,978 | | 16,014 |
Other liability claims made | | 14,006 | | 13,632 |
Property | | 5,823 | | 6,350 |
Auto liability | | 4,692 | | 4,814 |
Accident and health | | 1,783 | | 1,972 |
Products liability | | 1,681 | | 1,678 |
Medical malpractice | | 1,603 | | 1,520 |
Aircraft | | 1,286 | | 1,340 |
Mortgage guaranty / credit | | 733 | | 1,008 |
Other | | 3,501 | | 3,944 |
Total | $ | 74,942 | $ | 77,260 |
Total U.S. & Canada | $ | 58,890 | $ | 58,729 |
Total International (c) | $ | 16,052 | $ | 18,531 |
(a) Presented by lines of business pursuant to statutory reporting requirements as prescribed by the NAIC.
(b) 2014 reflects the reclassification of International reserves to major lines of business.
(c) The decrease was primarily the effect of foreign exchange on gross reserves, a payment on a large loss, and the net of other claim payments and reserve movements.
Gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for IBNR and loss expenses, less estimated salvage and subrogation and applicable discount. The Non-Life Insurance Companies regularly review and update the methods and assumptions used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected in pre‑tax operating income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase prior years’ estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease prior years’ estimates of ultimate cost are referred to as favorable development. See MD&A Critical Accounting Estimates – Details of the Loss Reserving Process.
Net loss reserves represent gross loss reserves reduced by reinsurance recoverable, net of an allowance for unrecoverable reinsurance.
The following table presents the components of net loss reserves:
December 31, | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 |
Gross loss reserves before reinsurance and discount | | | | | | $ | 78,090 | $ | 80,337 |
Less: discount | | | | | | | (3,148) | | (3,077) |
Gross loss reserves, net of discount, before reinsurance | | | | | | | 74,942 | | 77,260 |
Less: reinsurance recoverable* | | | | | | | (14,339) | | (15,648) |
Net liability for unpaid losses and loss adjustment expenses | | | | | | $ | 60,603 | $ | 61,612 |
* Includes $1.8 billion and $1.5 billion of reinsurance recoverable under a retroactive reinsurance agreement at December 31, 2015, and December 31, 2014, respectively.
Gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.6 billion and $12.4 billion at December 31, 2015 and 2014, respectively. These recoverable amounts are related to certain policies with high deductibles (meaning, the policy attachment point is above high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements; each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to deductible portion of the claim the Non-Life Insurance Companies manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 2015 and 2014, the Non-Life Insurance Companies held collateral of approximately $9.6 billion and $9.4 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and assets in trusts.
The following table classifies the components of net loss reserves by business unit:
December 31, | | |
(in millions) | | 2015 | | 2014 |
Commercial Property Casualty: | | | | |
Casualty | $ | 32,620 | $ | 33,065 |
Financial lines | | 9,265 | | 9,538 |
Specialty | | 5,197 | | 5,786 |
Property | | 4,013 | | 4,079 |
Total Commercial Property Casualty | | 51,095 | | 52,468 |
Commercial Mortgage Guaranty | | 713 | | 977 |
Consumer Personal Insurance | | | | |
Personal lines | | 2,661 | | 2,763 |
Accident and health | | 1,662 | | 1,878 |
Total Consumer Personal Insurance | | 4,323 | | 4,641 |
Other run-off insurance lines* | | 4,472 | | 3,526 |
Net liability for unpaid losses and loss adjustment expenses | $ | 60,603 | $ | 61,612 |
* In 2015, $1.2 billion of loss reserves for certain environmental liability, healthcare, casualty, and specialty coverages, previously reported in Commercial Casualty and Specialty lines of business, were transferred to other run-off insurance lines.
Discounting of Reserves
The following table presents the components of loss reserve discount included above:
December 31, | 2015 | | 2014 |
| | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
U.S. workers' compensation: | | | | | | | | | | | | | |
Tabular | $ | 635 | $ | 218 | $ | 853 | | $ | 623 | $ | 229 | $ | 852 |
Non-tabular | | 1,542 | | 746 | | 2,288 | | | 1,525 | | 689 | | 2,214 |
Asbestos | | - | | 7 | | 7 | | | - | | 11 | | 11 |
Total reserve discount | $ | 2,177 | $ | 971 | $ | 3,148 | | $ | 2,148 | $ | 929 | $ | 3,077 |
The following table presents the net reserve discount benefit (charge):
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| | | Run-off | | | | | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
Current accident year | $ | 182 | $ | - | $ | 182 | | $ | 189 | $ | - | $ | 189 | | $ | 175 | $ | - | $ | 175 |
Accretion and other | | | | | | | | | | | | | | | | | | | | |
adjustments to prior | | | | | | | | | | | | | | | | | | | | |
year discount | | (262) | | (74) | | (336) | | | (145) | | (235) | | (380) | | | (225) | | 102 | | (123) |
Effect of interest rate | | | | | | | | | | | | | | | | | | | | |
changes | | 148 | | 77 | | 225 | | | (225) | | (172) | | (397) | | | (272) | | 529 | | 257 |
Effect of re-pooling | | - | | - | | - | | | 110 | | - | | 110 | | | - | | - | | - |
Net reserve discount | | | | | | | | | | | | | | | | | | | | |
benefit (charge) | | 68 | | 3 | | 71 | | | (71) | | (407) | | (478) | | | (322) | | 631 | | 309 |
Amount transferred to run-off | | | | | | | | | | | | | | | | | | | | |
insurance lines | | (39) | | 39 | | - | | | - | | - | | - | | | - | | - | | - |
Net change in total reserve | | | | | | | | | | | | | | | | | | | | |
discount | $ | 29 | $ | 42 | $ | 71 | | $ | (71) | $ | (407) | $ | (478) | | $ | (322) | $ | 631 | $ | 309 |
Comprised of: | | | | | | | | | | | | | | | | | | | | |
U.S. Workers' | | | | | | | | | | | | | | | | | | | | |
compensation | $ | 29 | $ | 46 | $ | 75 | | $ | (71) | $ | (385) | $ | (456) | | $ | (322) | $ | 649 | $ | 327 |
Asbestos | $ | - | $ | (4) | $ | (4) | | $ | - | $ | (22) | $ | (22) | | $ | - | $ | (18) | $ | (18) |
U.S. Workers’ Compensation
The Non-Life Insurance Companies discount certain workers’ compensation costs.reserves in accordance with practices prescribed or permitted by New York, Pennsylvania and Delaware. New York rules generally do not permit non-tabular discounting on IBNR and prescribe a fixed 5 percent discount rate for application to case reserves. Pennsylvania permits non-tabular discounting of IBNR and, commencing in 2013, approved variable discount rates determined using risk-free rates based on the U.S. Treasury forward yield curve plus a liquidity margin, applicable to IBNR and case reserves. Delaware has permitted discounting on the same basis as the Pennsylvania domiciled companies.
The net increase in workers’ compensation discount in 2015 of $75 million was partially due to the increase in forward yield curve rates used for discounting under the prescribed or permitted practices. The increase in the forward yield curve component of the discount rates resulted in a $225 million increase in the loss reserve discount, as Treasury rates generally increased along the payout pattern horizon in 2015. In addition, the effects of the discount attributable to newly established
reserves for accident year 2015 increased the discount by $182 million in 2015. These increases were partially offset by lower interest expense duea $332 million reduction for accident years 2014 and prior, primarily from accretion of discount on reserves during 2015.
On January 1, 2014, the Non-Life Insurance Companies merged their two internal pooling arrangements into one pool, and changed the participation percentages of the pool members resulting in a reallocation of reserves from New York domiciled companies to various debt reduction activities describedthose domiciled in LiquidityPennsylvania and Capital Resources. In addition, Corporate expenses,Delaware. As a result of these changes in the participation percentages and domiciliary states of the participants of the combined pool, the Non-Life Insurance Companies recognized a discount benefit of $110 million in the first quarter of 2014.
Annual Reserving Conclusion
AIG net in 2012 included reductions in expenses of $211 million, from the decrease in theloss reserves represent our best estimate of the liability for net losses and loss adjustment expenses as of December 31, 2015. While we regularly review the Departmentadequacy of the Treasury's underwriting feesestablished loss reserves, there can be no assurance that our recorded loss reserves will not develop adversely in connection with the salesfuture years and materially exceed our loss reserves as of AIG Common Stock.December 31, 2015. In our opinion, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on our consolidated financial condition, although such events could have a material adverse effect on our consolidated results of operations for an individual reporting period.
2012The following table presents the rollforward of net loss reserves:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at beginning of year | | | | | | $ | 61,612 | $ | 64,316 | $ | 68,782 |
Foreign exchange effect | | | | | | | (1,429) | | (1,061) | | (617) |
Other, including dispositions | | | | | | | - | | - | | (79) |
Change due to retroactive asbestos reinsurance | | | | | | | 20 | | 141 | | 22 |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | |
Current year, undiscounted | | | | | | | 20,308 | | 21,279 | | 22,171 |
Prior years unfavorable development, undiscounted* | | | | | | | 4,119 | | 703 | | 557 |
Change in discount | | | | | | | (71) | | 478 | | (309) |
Losses and loss adjustment expenses incurred | | | | | | | 24,356 | | 22,460 | | 22,419 |
Losses and loss adjustment expenses paid: | | | | | | | | | | | |
Current year | | | | | | | 5,751 | | 6,358 | | 7,431 |
Prior years | | | | | | | 18,205 | | 17,886 | | 18,780 |
Losses and loss adjustment expenses paid | | | | | | | 23,956 | | 24,244 | | 26,211 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at end of year | | | | | | $ | 60,603 | $ | 61,612 | $ | 64,316 |
* See tables below for details of prior year development by business unit, accident year and 2011 Comparisonmajor class of business.
TABLE OF CONTENTS
Corporate & Other reported
Item 7 / insurance reserves / NON-LIFE INSURANCE COMPANIES
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years, net of reinsurance, by business unit and major class of business:
Years Ended December 31, | | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | | 2014 | | 2013 |
Prior accident year development by major class of business: | | | | | | | | | | | | | |
Commercial Property Casualty - U.S. & Canada: | | | | | | | | | | | | | |
Excess casualty | | | | | | | $ | 1,529 | | $ | (36) | $ | (144) |
Financial lines including professional liability | | | | | | | | 579 | | | (47) | | (113) |
On-going Environmental | | | | | | | | 108 | | | 137 | | 151 |
Primary casualty: | | | | | | | | | | | | | |
Loss-sensitive (offset by premium adjustments below)(a) | | | | | | | | (49) | | | 105 | | 89 |
Other | | | | | | | | 1,175 | | | 445 | | 409 |
Healthcare | | | | | | | | 207 | | | 109 | | (54) |
Property excluding natural catastrophes | | | | | | | | (117) | | | 50 | | (80) |
Natural catastrophes | | | | | | | | (52) | | | (102) | | 179 |
All other, net | | | | | | | | 6 | | | 72 | | 23 |
Total Commercial Property Casualty - U.S. & Canada | | | | | | | | 3,386 | | | 733 | | 460 |
Commercial Property Casualty International: | | | | | | | | | | | | | |
Excess casualty | | | | | | | | 71 | | | (62) | | (15) |
Primary casualty | | | | | | | | 89 | | | (5) | | (25) |
Financial lines | | | | | | | | 47 | | | 182 | | 74 |
Specialty | | | | | | | | (5) | | | (30) | | (51) |
Property excluding natural catastrophes | | | | | | | | (64) | | | (82) | | (3) |
Natural catastrophes | | | | | | | | (44) | | | (77) | | (71) |
All other, net | | | | | | | | - | | | (4) | | (14) |
Total Commercial Property Casualty - International | | | | | | | | 94 | | | (78) | | (105) |
Total Commercial Property Casualty | | | | | | | | 3,480 | | | 655 | | 355 |
Commercial Mortgage Guaranty | | | | | | | | (69) | | | (104) | | 30 |
Consumer Personal Insurance - U.S. & Canada: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | (12) | | | (8) | | (69) |
All other, net | | | | | | | | (54) | | | (44) | | (46) |
Total Consumer Personal Insurance - U.S. & Canada | | | | | | | | (66) | | | (52) | | (115) |
Consumer Personal Insurance - International: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | 2 | | | (8) | | - |
All other, net | | | | | | | | 45 | | | (17) | | (40) |
Total Consumer Personal Insurance - International | | | | | | | | 47 | | | (25) | | (40) |
Total Consumer Personal Insurance | | | | | | | | (19) | | | (77) | | (155) |
Run-off Insurance Lines | | | | | | | | | | | | | |
Asbestos and environmental (1986 and prior) | | | | | | | | 281 | | | 124 | | 67 |
Run-off environmental | | | | | | | | 132 | | | 120 | | 238 |
Run-off healthcare(b) | | | | | | | | 50 | | | - | | - |
Other run-off | | | | | | | | 272 | | | - | | - |
All other, net | | | | | | | | (8) | | | (15) | | 22 |
Total Run-off Insurance Lines | | | | | | | | 727 | | | 229 | | 327 |
Total prior year unfavorable development | | | | | | | $ | 4,119 | | $ | 703 | $ | 557 |
| | | | | | | | | | | | | |
Premium adjustments on primary casualty loss sensitive business | | | | | | | | 49 | | | (105) | | (89) |
Total prior year development, net of premium adjustments | | | | | | | $ | 4,168 | | $ | 598 | $ | 468 |
(a) Represents prior year development on active retrospectively rated components of risk-sharing policies.
(b) In 2015, includes $30 million of non-operating adverse prior year development.
Net Loss Development
In determining the loss development from prior accident years, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes (including challenges and recommendations from our Enterprise Risk Management group) as well as the views of third party actuarial firms. We use these inputs to improve our evaluation techniques, and to analyze and assess the change in estimated ultimate loss for each accident year by class of business. Our analyses produce a range of indications from various methods, from which we select our best estimate.
We analyze and evaluate the change in estimated ultimate loss for each accident year by class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, we examine the indicated effect such emergence would have on the reserves of that class of business. In some cases, the lower operating lossesor higher than expected emergence may result in 2012 comparedno clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to 2011the reserves for the class of business. In other cases, the lower or higher than expected emergence may result in a change, either favorable or unfavorable. As appropriate, we make adjustments in response to the difference between the actual and expected loss emergence for each accident year. As part of our reserving process, we also consider notices of claims received with respect to emerging and/or evolving issues, in particular those related to complex, claims-related class action litigation and latent exposure claims. Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratio selected (Commercial: 66.2 points; Consumer: 54.0 points; Mortgage Guaranty: 25.1 points) and the current year’s addition to reserves.
In 2015 and 2014, we recognized $4.1 billion and $703 million of adverse development, respectively, driven in each period by adverse loss development in Commercial Property Casualty and Run-off Insurance Lines partially offset by Consumer Personal Insurance and Mortgage Guaranty business. In 2013, we recognized $557 million of adverse development primarily due to the adverse prior year loss reserve development in Commercial Property Casualty, Mortgage Guaranty business and Run-off Insurance Lines, partially offset by Consumer Personal Insurance.
See Results of Operations — Commercial Insurance and Results of Operations — Consumer Personal Insurance Results herein for further discussion of net loss development.
The following is a discussion of the primary reasons for the development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period. See MD&A — Critical Accounting Estimates for a description of our loss reserving process, basis for selections and sensitivities to certain assumptions.
Commercial Property Casualty
In 2015, the Commercial Property Casualty adverse prior year loss reserve development of $3.5 billion was driven by Excess Casualty, Primary Casualty, Environmental, Financial Lines, Healthcare and International Excess Casualty, partially offset by Property excluding natural catastrophes and Natural catastrophes.
In 2014, the Commercial Property Casualty adverse prior year loss reserve development of $655 million was driven by Primary Casualty, Environmental, International Financial Lines, and Healthcare, partially offset by Natural catastrophes, International Primary Casualty and International Commercial Property.
In 2013, the Commercial Property Casualty adverse prior year loss reserve development of $355 million was driven by Primary Casualty, International Financial Lines, Environmental, and Healthcare, partially offset by Excess Casualty, Financial Lines, and Natural catastrophes.
Excess Casualty – U.S. & Canada
The excess casualty class presents unique challenges for estimating the liability for unpaid losses. Our policies tend to attach at a high layer above underlying policies, usually issued by other insurance companies, which can limit our access to relevant information to help inform our judgments. Our insureds are generally required to provide us with notice of claims that exceed a
threshold, either expressed as a proportion of our coverage attachment point (e.g., 50 percent of the attachment) or for particular types of claims (e.g., death, quadriplegia). This threshold is generally established well below our attachment point, to provide us with a precautionary notice of claims that could potentially reach our excess layer of coverage. This means that the majority of claims reported to us are closed without payment by us because the claims never reach our layer, while the claims that reach our layer and close with payment by us can be large and highly variable. Thus, estimates of unpaid losses carry significant uncertainty.
During 2015, Excess Casualty experienced $1.5 billion of adverse development largely driven by worse than expected loss emergence reported in 2015, including $1.2 billion (primarily for U.S. risks) in the fourth quarter when we completed our scheduled detail valuation review for this class. This increase was largely driven by adverse emergence in both general liability and umbrella auto liability, reflecting worsening trends in the number and nature of high severity losses. Approximately $411 million of the adverse development is related to auto liability. We reacted to the adverse emergence by updating our assumptions about loss severity, loss development patterns and expected loss ratios for the most recent accident years. We have seen an increasing trend in the frequency of high severity claims, especially in the umbrella auto liability portfolio. We also observed deterioration in certain class action claims that have complex coverage uncertainties and high limits characterized by increases in new claims and/or demands reported in 2015 and progress towards potential settlements, which have further informed our actuarial projections of ultimate losses for these types of claims. These types of claim classes have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile. In addition, we also increased losses associated with bad-faith claims by approximately $120 million reflecting an increase in recent settlements. These types of claims have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile.
During 2014, Excess Casualty experienced $36 million of favorable development largely driven by savings on a few large claims. In our Excess Umbrella analysis in 2014, our revised segmentation led to lower 2005 and subsequent accident year estimates for non-mass tort claims where we expect underwriting actions and reductions in policy limits to have a favorable effect on ultimate losses from accident years 2007 to 2013 in particular. This was entirely offset by higher selected ultimate losses for accident years 2004 and prior as a result of updated loss development patterns for mass tort claims which we segmented separately from the non-mass tort claims.
During 2013, Excess Casualty experienced $144 million of favorable development due to favorable outcomes on some large cases from 2010 and lower than expected emergence in high layer Catastrophic Casualty business.
Primary Casualty – U.S. and Canada
Primary Casualty includes Workers’ Compensation, General Liability and Auto Liability lines of business. The business is segmented by industry and where relevant, by geography.
Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. As part of the year end reserve review related to these policies, in addition to reviewing normal development we enhanced our segmentation to better reflect the specified policy features. Based on the analysis, we increased our reserves by $540 million, primarily for accident years 2012 and prior and in the workers’ compensation class, to reflect estimated increased losses and reduced expectations of future recoveriesfrom our insureds through these risk-sharing features.
We also recognized $100 million of adverse prior year development in Workers’ Compensation coverages sold to government contractors in U.S and non-U.S. military installations as a result of adverse loss emergence from several large accounts in the recent accident years. In addition, we reacted to the adverse emergence by increasing our expected loss ratios in recent accident years.
For the remainder of the primary workers’ compensation portfolio our analysis was based on the refined segmentation from 2014, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
For Primary General Liability, we increased our ultimate loss estimates for prior accident years by $146 million largely related to coverage sold to the Construction sectors as we reacted to noteworthy adverse loss emergence throughout the year, by changing our assumptions about loss development and expected loss ratios. For construction, the adverse development was driven by construction defect claims. The construction class is being re-underwritten to reduce New York and U.S. residential exposures.
For Primary Auto liability, we have observed increases in both the frequency and severity of claims occurring since the recovery from the recent U.S. economic downturn, which have significantly outpaced the pricing rate increases implemented during the same period. As a result, we recognized $144 million of adverse development during 2015 as we increased the expected loss ratios for recent accident years to reflect the deteriorating trends.
We also-reassessed the reasonableness of our liability for future claim handling expenses related to existing loss reserves and updated our estimates to reflect the costs from recent investments in claims systems, processes and people with the objective of improving our ability to better manage total loss costs. We increased our reserve estimates by $214 million based on refined analyses, $100 million of which was attributable to U.S. & Canada primary casualty. The balance was distributed among other classes.
During 2014, we continued to refine our segmentation of primary workers’ compensation into guaranteed cost and excess of large deductible business by deductible size group. The net result of the analysis was adverse development of $137 million for the primary workers’ compensation class of business. The key drivers of the adverse development in this class of business were increases for guaranteed cost business in California and New York, and increases for excess of large deductible business, as well as adverse experience in the Construction class. Each of these segments appears to have been impacted by specific structural changes in the portfolio. For California business, our tail factor increases were in response to changing long-term medical development patterns. In New York, there has been a lengthening of the period between the date of accident and the classification of non-scheduled permanent partial injuries. We completed a review of claim emergence and payouts for our top six states in workers’ compensation and concluded that California and New York were the main states where the loss development patterns had materially changed since our last review. For excess of large deductible business across all states, we updated our analyses to consider the impact of changes in the mix of retentions that has occurred over time as the data by retention band was becoming more credible. For the Construction class, we note that the construction sector has experienced a comparatively slow recovery in payroll employment. As a result of the diminished employment opportunities in this industry sector, injured workers may experience limited return-to-work opportunities, which moderate the shortening of claim duration that normally accompanies a labor market recovery. For all other states combined excluding California and New York, we saw favorable emergence in our middle market Specialty Workers’ Compensation segment. The net effect of these revised selections had the greatest adverse effect on the Construction class of business ($140 million adverse development) and the National Accounts class of business ($125 million adverse development). The most significant favorable effect was in the Specialty Workers’ Compensation class of business ($155 million favorable development). Our analysis considers our best estimate expectations of medical inflation and loss costs trends and also reflects the impacts of enhancements in our claim management and loss mitigation activities, such as opioid management, fraud investigation and medical management.
For primary general liability in 2014, we increased our ultimate loss estimates for prior years by $182 million. This was largely driven by the construction segment as a result of several large construction defect claims and increases in the costs of claims in New York associated with New York Labor Law. The construction results in California and New York continue to be the main sources of adverse development in our guaranteed cost primary general liability books although we did experience adverse development from construction defect claims in other states in 2014. Our large account primary non-construction general liability business was adversely impacted by claim activity in the layers excess of large insured retentions and we increased our loss development patterns for these layers to reflect the changes.
For commercial auto in 2014, we reacted to an increase in frequency of large claims in the accident years 2010 to 2013, where the economic recovery has contributed to increased frequency and severity, especially for those claims in excess of a client deductible of $500,000, which generally take several years to emerge and settle. This led to adverse prior year loss reserve development of $156 million for the automobile subset of primary casualty.
During 2013, we continued to refine the segmentation of our analyses of primary workers’ compensation, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
During 2013, for primary general liability, we increased our reserves for prior years by approximately $355 million. Most of the increase was driven by construction related primary general liability claims, especially construction defect claims where we increased our ultimate loss estimates by $219 million to reflect the higher than expected frequency and severity of these claims especially in states that experienced heavy increases in construction activity after the 2004 and 2005 hurricanes and during the housing boom prior to 2007. Due to the subsequent home price declines observed in many of these states, the frequency of reported losses has increased as the losses subsequently represented a larger percentage of the equity values of the affected homes, and homeowners increasingly looked to insurance recoveries as a way to recoup some of that lost value.
Financial Lines – U.S. and Canada
Financial Lines business includes Director and Officer (D&O) and Related Management Liability, various Professional Liability classes of business as well as the Fidelity book of business. The Financial Lines book consists mostly of the D&O class of business.
During 2015, we recognized $579 million of adverse development, primarily as a result of our scheduled annual detailed valuation review conducted in the fourth quarter, driven largely by the adverse loss emergence that we have seen over the last year, especially in D&O and Professional Liability. In particular, we have observed greater than expected loss costs for several claims from accident years 2006 through 2010, driven by unfavorable settlements and deterioration in known claims. We responded to this adverse emergence by updating our loss development factors and expected loss ratio assumptions for all accident years. In addition, we recognized losses associated with bad-faith claims primarily based on actual settlements in the fourth quarter.
During 2014, we recognized $47 million of favorable development driven by the Professional Liability and D&O and Related Management Liability classes of business, somewhat offset by adverse development on the Fidelity book in recent accident years due to the changing economic cycle.
During 2013, we recognized $113 million of favorable development driven somewhat evenly among the Professional Liability, Fidelity and D&O and Related Management Liability classes of business. The year-end 2013 Professional Liability loss reserve actuarial review adopted a refined segmentation for this class of business with the selection of differentiated frequency and severity trends for various Professional Liability classes of business which appear to be behaving differently in the post financial crisis years than when reviewed in total.
Healthcare
During 2015, we recognized $207 million of adverse development driven by deteriorating loss experience in accident years 2008 and subsequent characterized by large claims in various segments including hospitals, nursing homes, and pharmaceutical and medical products liability. We reacted to these large claims by increasing our expected loss ratios for recent accident years and putting physicians and surgeons and pharmaceutical and medical products classes into runoff.
During 2014, we recognized $109 million of adverse development in this class largely driven by three large and relatively unusual claims of $25 million each in relatively recent accident years. While there have not been any significant structural changes to the portfolio, there can be material volatility in loss experience in this class of business where individual claims can be of high severity.
During 2013, this class recognized $54 million of favorable prior year development due to lower than expected loss emergence in many classes such as Excess Hospital Liability.
International Casualty (Excess and Primary Casualty) and Specialty
During 2015, we recognized $155 million of adverse prior year development, primarily due to three large product liability claims in our Casualty and Specialty lines totaling approximately $115 million. Two of these claims arose in Japan, which is unusual for our portfolio in that market.
During 2014 and 2013, we had $97 million and $91 million of favorable development, respectively. The favorable development in each year was due to lower than expected loss emergence in many classes and countries outside the U.S., with the majority from various countries in the EMEA region.
Financial Lines – International
During 2014 we implemented an enhanced claims operating model in Europe and Australasia which has provided our actuaries with more detailed case reserve data and analysis, enabling AIG’s actuaries to react sooner to case development than in prior years.
During 2015, we recognized $47 million of adverse prior year development, driven by increased claims emergence and related updates to the assumptions for loss development factors and expected loss ratios used in the annual detailed valuation review for these reserves, primarily related to Europe and Australasia risks.
During 2014, we recognized $182 million of adverse development in the international Financial Lines segments, driven by large claims emergence in the U.K., Australasia and Europe. Multiple accident years contributed to this total, but it was concentrated most heavily in accident years 2008-2011. The Australasia emergence was due to a number of specific large losses in the Australia and New Zealand D&O business. In Europe, adverse prior year loss reserve development was concentrated in the D&O class of business, where we have observed a greater incidence of severe claims compared with prior years, and the Professional class of business, with large losses from one insured.
During 2013, we recognized $74 million of adverse development, all of which stemmed from losses in the D&O books in Europe, UK and Australasia, with the other segments showing modest favorable development. The development we recognized can be directly linked to a small number of specific claims booked throughout the year.
Natural Catastrophes
During 2015 and 2014, we experienced favorable property catastrophe prior year development of $52 million and $102 million, respectively, in our U.S. and Canada business, primarily due to favorable development from several U.S. events in accident year 2013. We also experienced favorable property catastrophe prior year loss reserve development of $44 million and $77 million from our international property class of business for 2015 and 2014, respectively.
During 2013, we experienced adverse development from Storm Sandy totaling $108 million, or 5.4 percent of the 2012 estimate. This development resulted from higher severities on a small number of large and complex commercial claims driven by a number of factors including the extensive damage caused to properties in the downtown New York metropolitan area.
Mortgage Guaranty business includes domestic first liens (96 percent of total reserves) and run-off books in second liens, student loans and international.
During 2015, we recognized $69 million of favorable prior year loss reserve development driven by lower than expected frequency due to improving cure rates. Post-claim recoveries also contributed to favorable prior year development.
During 2014, we recognized $104 million of favorable prior year loss reserve development driven primarily by the benefit of a settlement with a mortgage lender, steady increases in year-over-year first lien cure rates, a reflection of the improved
economic environment, and in part by favorable frequency trends and recoveries in second lien claims. Partially offsetting these improvements were upward trends in severity, particularly for older (pre-2012) accident periods.
During 2013, we recognized $30 million of adverse prior year loss reserve development due to unfavorable emergence of overturns of prior claim cancellations and increased severity estimates in first liens, partially offset by favorable frequency in student loans and a reduction in the unallocated loss adjustment expense reserve.
Consumer Personal Insurance
During 2015, 2014 and 2013, we recognized $19 million, $77 million, and $155 million of $211favorable development, respectively.
During 2015 and 2014, we experienced favorable loss reserve development of $10 million and $16 million, respectively, from Natural Catastrophes.
The remaining $61 million of favorable development in 2014 was primarily from Homeowners, International Accident & Health and U.S. Warranty.
The following is a discussion of the primary reasons for the Run-Off Insurance Lines development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period.
Asbestos and Environmental (1986 and prior)
Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos reserves are ceded to National Indemnity Company (NICO) under a retrospective reinsurance arrangement entered into in 2011. However, certain asbestos-related exposures are not subject to the NICO agreement, including asbestos exposures for which we have negotiated fixed payment schedules, and third party reinsurance assumed policies. The reported claim activity on the assumed claims has increased in the last year. As a result, we modified certain of our loss-reserve-related assumptions to better reflect this AIG-specific experience as well as consideration of recent industry-wide trends regarding expanding coverage theories for liability. As a result, we increased our 2015 reserves by $164 million and by $117 million for Asbestos and Environmental, respectively.
Other Run-Off Insurance
During 2015, we transferred approximately $1.2 billion of loss reserves, largely representing coverages we have not written for at least five years, from Commercial Insurance into Run-off insurance lines. We increased the reserves for these coverages by $272 million to reflect updated assumptions about future loss development.
Excess Workers’ Compensation – U.S.
This class of business, which is reported in our run-off unit, has an extremely long tail and is one of the most challenging classes of business from a reserving perspective, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to small changes in assumptions, e.g. — in the rate of medical inflation or the longevity of injured workers, which can have a significant effect on the ultimate reserve estimate.
During 2015, this class of business did not experience significant development in loss reserves. The proactive management of settlement negotiations and other claims mitigation strategies minimized the volatility observed during 2015. The nominal reduction in reserves as a result of commutations and individual claims settlement strategies amounted to $222 million in 2015 compared to $242 million in 2014 and $25 million in 2013.
During 2014, we updated our analyses of Excess Workers compensation using a range of scenarios and methodologies and determined that our carried reserves were adequate after recognizing $20 million of favorable prior year development as a result of claim settlements and commutations of assumed reinsurance business, as well as reflecting changes in estimates in our loss mitigation strategies. We commuted several large assumed reinsurance agreements in 2014 and reduced the reserves faster than was previously expected as a result of our proactive management by the run-off unit.
During 2013, we updated our analysis of Excess Workers’ Compensation reserves and determined that no changes to our carried reserves were needed. We also updated our analysis of underlying claims cost drivers used in 2012 resultingthrough accident year 2004, discussed in more detail below.
As noted above, we write loss sensitive business within our primary casualty portfolio. We recognized (return) additional premiums on loss sensitive business of $(49) million, $105 million and $89 million in 2015, 2014 and 2013, respectively, which entirely offset development in that business.
For the year ended December 31, 2015, we incurred reinsurance reinstatement premiums of $(4) million, compared to $(2) million and $27 million for 2014 and 2013, respectively.
See MD&A — Critical Accounting Estimates — Liability for Unpaid Losses and Loss Adjustment Expenses for further discussion of our loss reserving process.
See Commercial Insurance and Consumer Personal Insurance Results herein for further discussion of net loss development.
The following table summarizes development, (favorable) or unfavorable, ofincurred losses and loss adjustment expenses for prior years, net of reinsurance, by accident year:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Prior accident year development by accident year: | | | | | | | | | | | |
Accident Year | | | | | | | | | | | |
2014 | | | | | | $ | 397 | $ | - | $ | - |
2013 | | | | | | | 396 | | (283) | | - |
2012 | | | | | | | 488 | | (59) | | (181) |
2011 | | | | | | | 296 | | 37 | | 217 |
2010 | | | | | | | 277 | | 12 | | (350) |
2009 | | | | | | | 188 | | 31 | | 157 |
2008 | | | | | | | 231 | | 8 | | (1) |
2007 | | | | | | | 48 | | (113) | | - |
2006 | | | | | | | 103 | | 64 | | (75) |
2005 | | | | | | | 90 | | 105 | | 61 |
2004 and prior (see table below) | | | | | | | 1,605 | | 901 | | 729 |
Total prior year unfavorable development | | | | | | $ | 4,119 | $ | 703 | $ | 557 |
Net Loss Development by Accident Year
For 2015, the adverse development in accident years 2011 through 2014 was driven by significantly greater actual versus expected loss emergence for primary and excess Auto Liability, Financial Lines and Healthcare. Individual large claims in the non-Auto Excess Casualty and International Casualty books along with deterioration in specific large accounts in the government contractors workers’ compensation portfolio were concentrated in these most recent accident years. The impact of revised loss expectations based on emergence in earlier accident years also contributed to the adverse development for Excess Casualty and Financial Lines in this period. In addition, our updated assumptions for bad-faith claims and unallocated loss adjustment expenses disproportionately impacted these years. Accident years 2005 through 2010 were largely impacted by updated loss development selections in Financial Lines and revised estimates on expected future recoveries from settlementsrisk-sharing policies in the Primary Casualty portfolio. For accident years 2004 and prior, the adverse development was driven by
Excess Casualty revised tail factor selections, updated loss development selections for various run-off portfolios, updated industry experience for asbestos and revised estimates on expected future recoveries from risk-sharing policies.
For 2014, the favorable development in accident years 2013 and 2012 was driven by Financial Lines, Commercial Property and other short tailed lines, like Personal Lines. For accident year 2007, the favorable development was driven by U.S. and Canada Financial lines and Excess Casualty. For accident years 2004 and prior, the adverse development was driven by the Excess Casualty results of the a mass-tort resegmentation analysis, the updated primary workers’ compensation loss development selections (principally in California, New York and the excess of deductible segments) as well as the run-off pollution products business (1987-2004) and the asbestos and environmental (1986 and prior) exposure.
For 2013, the favorable development from accident year 2012 was driven primarily by consumer lines and lower losses in domestic commercial property, while the favorable development from accident year 2010 was primarily the result of favorable claims emergence from domestic excess casualty and from liability and financial lines coverage policies that are on a claims-made basis. The adverse development from accident year 2011 was driven by large losses in financial lines and adverse development in primary casualty, including the loss-sensitive business. The adverse development from accident year 2009 was driven by large losses in financial lines and adverse development in primary casualty including loss-sensitive business. The adverse development from accident years 2003 and prior was primarily driven by loss development on toxic tort claims, construction general liability claims and pollution product claims.
For certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to AIG. These reclassifications are shown as development in the respective years in the tables above.
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment expenses for accident year 2004 and prior by major class of business and driver of development:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
2004 and prior accident year development by major class of | | | | | | | | | | | |
business and driver of development: | | | | | | | | | | | |
Excess Casualty - primarily mass torts(a) | | | | | | $ | 388 | $ | 301 | $ | - |
Excess Casualty - all other | | | | | | | 104 | | 53 | | 251 |
Primary Casualty - loss sensitive business | | | | | | | 1 | | 37 | | (24) |
Primary Casualty - all other(b) | | | | | | | 362 | | 196 | | 102 |
Run-off environmental (1987 to 2004)(c) | | | | | | | 74 | | 97 | | 214 |
Asbestos and Environmental (1986 and prior) | | | | | | | 281 | | 124 | | 67 |
Commutations and Arbitrations(d) | | | | | | | 62 | | 63 | | 21 |
All Other | | | | | | | 333 | | 30 | | 98 |
Total prior year unfavorable development | | | | | | $ | 1,605 | $ | 901 | $ | 729 |
(a) Updates of mass tort loss development patterns.
(b) Includes loss development on excess of deductible exposures in workers’ compensation, general liability and commercial auto.
(c) Includes results of comprehensive specific large claim file reviews initiated in 2012 and updated in 2013 and 2014.
(d) The effects of commutations are shown separately from the related classes of business, primarily excess workers’ compensation. Commutations are reflected for the years in which they were contractually binding.
The main sources of unfavorable prior year development for accident years 2004 and prior recorded in 2013 through 2015 are as follows:
•Update of the mass tort loss development patterns and segmentation used for U.S. Excess Casualty, which accounted for $689 million and other loss emergence including specific large loss development totaling $408 million across the three years;
•Loss sensitive business that is entirely offset by premium adjustments accounted for $14 million;
•Update of the loss development patterns used for U.S. Primary Casualty including loss development patterns used in guaranteed cost workers’ compensation for NY and CA construction class of business and updates to the loss development patterns for business written on excess of deductible exposures in workers’ compensation, general liability and the commercial auto classes of business which collectively accounted for approximately $660 million across the three years;
•Update of the Environmental run-off portfolio’s losses following the 2012 comprehensive claims review that provided a more refined approach for the development of actuarial estimates for toxic tort claims (which were found to have a distinctly lengthier loss development pattern than other general liability claims in the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving based estimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with high policy limits (greater than $5 million per policy). These updates which commenced in 2012 and have been applied in each subsequent year, accounted for approximately $385 million;
•Update of our net retained asbestos and environmental exposure from 1986 and prior which accounted for approximately $472 million ($238 million environmental and $234 million asbestos) across the three years;
•Commutations in the three-year period ending December 31, 2015, accounted for approximately $146 million. These commutations serve to reduce the uncertainty in AIG’s required reserves; and
•Update of the assumptions for future loss development for the run-off insurance lines, primarily for coverages we have not written in at least five years, accounted for approximately $272 million of the All Other total amount of $461 million across the three years.
During the period 2013 to 2015, we completed refinements of our reserving methodologies for U.S. mass tort, toxic tort, retained asbestos, environmental and other specific large losses. We also conducted extensive additional studies to corroborate our judgments for our U.S. primary workers compensation and excess workers’ compensation classes of business. Further, we refined our loss reserving methodologies for our U.S. Excess Casualty class of business and our U.S. Primary Casualty class of business written over excess of deductible exposures where loss development patterns may lengthen if client retentions increase over time. Collectively, the reserves for the aforementioned classes of business or loss exposures account for the majority of the remaining net loss reserves for accident years 2004 and prior.
Asbestos and Environmental Reserves
Loss Reserve Estimates - Asbestos and Environmental
We consider a number of factors and recent experience, in addition to the results of both external and internal analyses, to estimate asbestos and environmental loss reserves. Nonetheless, we believe that significant uncertainty remains as to our ultimate liability for asbestos and environmental claims, which is due to several factors, including:
•the Departmentlong latency period between asbestos exposure and disease manifestation, leading to the potential for involvement of multiple policy periods for individual claims;
•claims filed under the non‑aggregate premises or operations section of general liability policies;
•the number of insureds seeking bankruptcy protection and the effect of prepackaged bankruptcies;
•diverging legal interpretations; and
•the difficulty in estimating the allocation of remediation cost among various parties with respect to environmental claims.
In 2015, as in prior years, both the retained accounts and retroceded accounts ground-up reviews for asbestos were updated. As a result, we increased gross undiscounted asbestos incurred losses by $13 million and increased net undiscounted asbestos incurred losses by $164 million. The net undiscounted change reflects an increase primarily due to third party assumed reinsurance exposures. With the gross incurred loss increase less than the net incurred loss increase, the resulting ceded incurred losses were reduced. For environmental, we increased gross environmental incurred losses by $214 million and net environmental incurred losses by $117 million as a result of top‑down actuarial analyses performed during the year, as well as development on a large sediment site.
In 2014, both the retained accounts and retroceded accounts ground-up reviews for asbestos were updated. As a result, we decreased gross undiscounted asbestos incurred losses by $6 million and increased net undiscounted asbestos incurred losses by $64 million. The net undiscounted increase reflects a buyout settlement on a retained account as well as a reduction in estimated ceded loss reserves (prior to the retroactive reinsurance retrocession). For environmental, we increased gross environmental incurred losses by $140 million and net environmental incurred losses by $60 million as a result of top‑down actuarial analyses performed during the year as well as development on a number of large accounts.
In 2013, we completed a ground‑up review of all our remaining retained accounts for asbestos. In addition, a subsidiary of the Treasury's underwriting feesretrocessionaire for our retroactive reinsurance contract completed a ground‑up asbestos study for the salelargest accounts it assumed. As a result, we increased gross asbestos incurred losses by $169 million and net asbestos incurred losses by $6 million. For environmental, we increased gross environmental incurred losses by $98 million and net environmental incurred losses by $61 million as a result of top‑down actuarial analyses performed during the year as well as development on a number of large accounts.
In addition to the U.S. asbestos and environmental reserve amounts shown in the tables below, the Non - Life Insurance Companiesalso have asbestos reserves relating to foreign risks written by non‑U.S. entities of $121 million gross and $93 million net as of December 31, 2015. The asbestos reserves relating to non‑U.S. risks written by non‑U.S. entities were $132 million gross and $105 million net as of December 31, 2014.
The following table provides a summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims:
As of or for the Years Ended December 31, | | 2015 | | 2014 | | 2013 |
(in millions) | Gross | | Net | | Gross | | Net | | Gross | | Net |
Asbestos: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 4,117 | $ | 388 | $ | 4,720 | $ | 529 | $ | 4,896 | $ | 427 |
Change in net loss reserves due to retroactive reinsurance | | - | | 20 | | - | | 141 | | - | | 22 |
Dispositions | | - | | - | | - | | - | | (12) | | (12) |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | | |
Undiscounted | | 13 | | 164 | | (6) | | 64 | | 169 | | 6 |
Change in discount | | 9 | | 4 | | 39 | | 22 | | 51 | | 18 |
Losses and loss adjustment expenses incurred* | | 22 | | 168 | | 33 | | 86 | | 220 | | 24 |
Losses and loss adjustment expenses paid* | | (544) | | (130) | | (636) | | (368) | | (444) | | (59) |
Other changes | | - | | - | | - | | - | | 60 | | 127 |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 3,595 | $ | 446 | $ | 4,117 | $ | 388 | $ | 4,720 | $ | 529 |
Environmental: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 368 | $ | 185 | $ | 313 | $ | 163 | $ | 309 | $ | 163 |
Dispositions | | - | | - | | - | | - | | (1) | | (1) |
Losses and loss adjustment expenses incurred | | 214 | | 117 | | 140 | | 60 | | 98 | | 61 |
Losses and loss adjustment expenses paid | | (37) | | (32) | | (85) | | (38) | | (93) | | (60) |
Other changes | | - | | 6 | | - | | - | | - | | - |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 545 | $ | 276 | $ | 368 | $ | 185 | $ | 313 | $ | 163 |
Combined: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 4,485 | $ | 573 | $ | 5,033 | $ | 692 | $ | 5,205 | $ | 590 |
Change in net loss reserves due to retroactive reinsurance | | - | | 20 | | - | | 141 | | - | | 22 |
Dispositions | | - | | - | | - | | - | | (13) | | (13) |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | | |
Undiscounted | | 227 | | 281 | | 134 | | 124 | | 267 | | 67 |
Change in discount | | 9 | | 4 | | 39 | | 22 | | 51 | | 18 |
Losses and loss adjustment expenses incurred | | 236 | | 285 | | 173 | | 146 | | 318 | | 85 |
Losses and loss adjustment expenses paid | | (581) | | (162) | | (721) | | (406) | | (537) | | (119) |
Other changes | | - | | 6 | | - | | - | | 60 | | 127 |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 4,140 | $ | 722 | $ | 4,485 | $ | 573 | $ | 5,033 | $ | 692 |
* These amounts exclude benefit from retroactive reinsurance.
On June 17, 2011, we completed a transaction under which the bulk of AIG Common StockProperty Casualty’s net domestic asbestos liabilities were transferred to National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway, Inc. This was part of our ongoing strategy to reduce our overall loss reserve development risk. This transaction covers potentially volatile U.S.-related asbestos exposures. It does not, however, cover asbestos accounts that we believe have already been reserved to their limit of liability or certain other ancillary asbestos exposure assumed by AIG Property Casualty subsidiaries.
Upon the closing of this transaction, but effective as of January 1, 2011, we ceded the bulk of AIG Property Casualty’s net domestic asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Within this aggregate limit, NICO assumed collection risk for existing third-party reinsurance recoverable associated with these liabilities. AIG Property Casualty paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed approximately $1.82 billion of net U.S. asbestos liabilities. As a result of this transaction, AIG Property Casualty recorded a deferred gain of $150 million in the second quarter of 2011, which is being amortized into income over the settlement period of the underlying claims.
Under retroactive reinsurance arrangements any recoveries for development associated with the ceded losses are not recognized immediately; rather this development increases or decreases the deferred gain, which is amortized into income as described above. During 2015, 2014 and 2013, we recognized approximately $233 million, $0 and $72 million, respectively, of adverse loss development that was ceded under this reinsurance arrangement. This development, which is net of the deferred gain amortization, is being reported in Other income/expense, consistent with the way we manage the business and assess performance and is therefore excluded from net losses incurred and our loss ratios to avoid distortion of our ongoing insurance business.
IBNR Loss Reserve Estimates — Asbestos and Environmental
The following table presents the estimate of the gross and net IBNR included in the Liability for unpaid losses and loss adjustment expenses, relating to asbestos and environmental claims:
December 31, | | 2015 | | 2014 | | 2013 |
(in millions) | | Gross | | Net* | | Gross | | Net* | | Gross | | Net* |
Asbestos | $ | 1,680 | $ | 162 | $ | 2,363 | $ | 79 | $ | 3,190 | $ | 16 |
Environmental | | 331 | | 171 | | 157 | | 87 | | 94 | | 51 |
Combined | $ | 2,011 | $ | 333 | $ | 2,520 | $ | 166 | $ | 3,284 | $ | 67 |
* Net IBNR includes the reduction due to the NICO reinsurance transaction of $912 million, $803 million and $1,284 million as of December 31, 2015, 2014 and 2013, respectively.
Claim Counts — Asbestos and Environmental
The following table presents a summary of asbestos and environmental claims count activity:
As of or for the Years | 2015 | | 2014 | | 2013 |
Ended December 31, | Asbestos | Environmental | Combined | | Asbestos | Environmental | Combined | | Asbestos | Environmental | Combined |
Claims at beginning of year | 4,049 | 1,240 | 5,289 | | 4,680 | 1,517 | 6,197 | | 5,230 | 1,614 | 6,844 |
Claims during year: | | | | | | | | | | | |
Opened | 279 | 209 | 488 | | 130 | 126 | 256 | | 83 | 306 | 389 |
Settled | (310) | (182) | (492) | | (216) | (163) | (379) | | (194) | (154) | (348) |
Dismissed or otherwise | | | | | | | | | | | |
resolved | (509) | (350) | (859) | | (545) | (240) | (785) | | (439) | (249) | (688) |
Other | - | - | - | | - | - | - | | - | - | - |
Claims at end of year | 3,509 | 917 | 4,426 | | 4,049 | 1,240 | 5,289 | | 4,680 | 1,517 | 6,197 |
Survival Ratios — Asbestos and Environmental
The following table presents AIG’s survival ratios for asbestos and environmental claims at amounts lower than had been estimated atDecember 31, 2015, 2014 and 2013. The survival ratio is derived by dividing the timecurrent carried loss reserve by the accrual was established,average payments for the three most recent calendar years for these claims. Therefore, the survival ratio is a simplistic measure estimating the number of years it would take before the current ending loss reserves for these claims would be paid off using recent year average payments.
Many factors, such as aggressive settlement procedures, reinsurance commutations, mix of business and AIG purchasedlevel of coverage provided, have a significant effect on the amount of sharesasbestos and environmental reserves and payments and the resulting survival ratio. Additionally, we primarily base our determination of these reserves based on ground-up and top-down analyses, and not on survival ratios. The net Asbestos survival ratio for 2015 was significantly impacted by both the increase in net loss reserves as a result of our ground-up review, as well as the by the large ceded reinsurance commutation executed in the fourth quarter of 2015, the proceeds of which no paymentwere booked a negative paid loss.
The following table presents survival ratios for asbestos and environmental claims, separately and combined, which were based upon a three-year average payment:
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| Gross | Net* | | Gross | Net* | | Gross | Net* |
Survival ratios: | | | | | | | | |
Asbestos | 6.6 | 15.0 | | 8.3 | 7.6 | | 10.6 | 10.5 |
Environmental | 7.6 | 6.4 | | 5.0 | 4.3 | | 4.6 | 3.9 |
Combined | 6.8 | 13.1 | | 7.9 | 7.1 | | 9.8 | 9.4 |
* Survival ratios are calculated consistent with the basis on historical reserve excluding the effects of the NICO reinsurance transaction.
Life Insurance Companies DAC and Reserves
The following section provides discussion of deferred policy acquisition costs and insurance reserves for Life Insurance Companies.
Update of Actuarial Assumptions
The Life Insurance Companies review and update estimated gross profit assumptions used to amortize DAC and related items for investment-oriented products at least annually. Estimated gross profit assumptions include net investment income and spreads, net realized capital gains and losses, fees, surrender charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change significantly, DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserve) are recalculated using the new assumptions, and any resulting
TABLE OF CONTENTS
Item 7 / Insurance reserves / Life Insurance companies
adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products.
In addition to estimated gross profit assumptions, the update of actuarial assumptions in 2015, 2014 and 2013 included adjustments to reserves for universal life with secondary guarantees, group benefit claim reserves and loss recognition for certain long-term care products. The update of assumptions also included adjustments to the underwriters wasvaluation of variable annuity GMWB features that are accounted for as embedded derivatives. Changes in the fair value of such embedded derivatives are recorded in net realized capital gains (losses) and, together with related DAC adjustments, are excluded from pre-tax operating income.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / RESULTS OF OPERATIONS / OTHER OPERATIONS
required,The net increases (decreases) to pre-tax operating income and a decline in interest expensepre-tax income as a result of the repaymentupdate of actuarial assumptions in 2015, 2014 and 2013 are shown in the FRBNY Credit Facility and the exchange of outstanding junior subordinated debentures for senior unsecured notes in 2011.following tables.
Other non-core businesses declined due to lower gains on real estate dispositions and higher equity losses on real estate investments in 2012 compared to 2011.
Legal Reserves
Legal reserves relate to increased estimated litigation liability based on developments in several actions.
Loss on Extinguishment of Debt
The increase in loss on extinguishment of debt in 2013 compared to the prior year resulted from redemptions and repurchases of, and cash tender offers for, certain debt securities in 2013. The loss on extinguishment of debt in 2011 includes a $3.3 billion charge primarily consisting of the accelerated amortization of the remaining prepaid commitment fee asset resulting from the termination of the FRBNY Credit Facility.
Aircraft Leasing Results
The following table presents Aircraft Leasing results:the increase (decrease) in pre-tax operating income resulting from the update of actuarial assumptions for the U.S. Life Insurance Companies, by product line:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Consumer Insurance: | | | | | | |
Retirement | | | | | | |
Fixed Annuities | $ | 92 | $ | 196 | $ | 306 |
Retirement Income Solutions | | - | | 4 | | (28) |
Group Retirement | | 48 | | 46 | | (45) |
Total Retirement | | 140 | | 246 | | 233 |
Life | | (146) | | (119) | | (80) |
Total Consumer Insurance | | (6) | | 127 | | 153 |
Commercial Insurance: | | | | | | |
Institutional Markets | | - | | 2 | | - |
Total increase (decrease) in pre-tax operating income from update of assumptions | | (6) | | 129 | | 153 |
The following table presents the increase (decrease) in pre-tax income resulting from the update of actuarial assumptions of the U.S. Life Insurance Companies, by line item as reported in Results of Operations:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Policy fees | $ | 21 | $ | 27 | $ | 28 |
Interest credited to policyholder account balances | | 74 | | 90 | | 63 |
Amortization of deferred policy acquisition costs | | 79 | | 181 | | 129 |
Policyholder benefits and losses incurred | | (180) | | (169) | | (67) |
Increase (decrease) in pre-tax operating income | | (6) | | 129 | | 153 |
Change in DAC related to net realized capital gains (losses) | | 11 | | (12) | | (21) |
Net realized capital gains (losses) | | (2) | | 51 | | 82 |
Increase in pre-tax income | $ | 3 | $ | 168 | $ | 214 |
In 2015, pre-tax operating income of the Life Insurance Companies in the aggregate was reduced by $6 million as a result of the update of actuarial assumptions. This aggregate net adjustment of $6 million included a net negative adjustment of $146 million in the Life operating segment, which was offset in large part by net positive adjustments in the Retirement operating segment of $92 million in Fixed Annuities and $48 million in Group Retirement. See Update of Actuarial Assumptions by Operating Segment for additional discussion of the adjustments for each segment.
In 2014, pre-tax operating income of the Life Insurance Companies in the aggregate was increased by $129 million as a result of the update of assumptions, primarily due to net positive adjustments related to investment spread assumptions in the Retirement operating segment from the update of estimated gross profit assumptions in Fixed Annuities and Group Retirement, partially offset by loss recognition for certain long-term care business and additions to reserves for universal life with secondary guarantees in the Life operating segment.
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Aircraft leasing revenues, excluding net realized capital gains (losses): | | | | | | | | | | | | | | | | |
Rental revenue | | $ | 4,241 | | $ | 4,358 | | $ | 4,447 | | | (3 | )% | | (2 | )% |
Interest and other revenues | | | 179 | | | 141 | | | 20 | | | 27 | | | NM | |
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Total aircraft leasing revenues, excluding net realized capital gains (losses) | | | 4,420 | | | 4,499 | | | 4,467 | | | (2 | ) | | 1 | |
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Operating expenses: | | | | | | | | | | | | | | | | |
Loss on extinguishment of debt | | | – | | | 23 | | | 61 | | | NM | | | (62 | ) |
Aircraft leasing expense: | | | | | | | | | | | | | | | | |
Depreciation expense | | | – | | | 1,927 | | | 1,871 | | | NM | | | 3 | |
Impairment charges, fair value adjustments and lease-related charges | | | 108 | | | 230 | | | 1,689 | | | (53 | ) | | (86 | ) |
Other expenses | | | 4,441 | | | 1,981 | | | 1,841 | | | 124 | | | 8 | |
| | |
Total aircraft leasing expense | | | 4,549 | | | 4,138 | | | 5,401 | | | 10 | | | (23 | ) |
| | |
Operating income (loss) | | | (129 | ) | | 338 | | | (995 | ) | | NM | | | NM | |
Net realized capital gains (losses) | | | – | | | 1 | | | (10 | ) | | NM | | | NM | |
| | |
Pre-tax income (loss) | | $ | (129 | ) | $ | 339 | | $ | (1,005 | ) | | NM | % | | NM | % |
| | |
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Item 7 / Insurance reserves / Life Insurance companies
In 2013, pre-tax operating income of the Life Insurance Companies in the aggregate increased by a net positive adjustment of $153 million as a result of the update of assumptions, primarily due to a net positive adjustment in Fixed Annuities, partially offset by net negative adjustments in Retirement Income Solutions and 2012 ComparisonGroup Retirement and a negative adjustment in Life from the update of mortality assumptions. In Group Retirement, the negative adjustments were partially offset by an increase in the assumption for separate account asset long-term growth rates.
Aircraft Leasing reportedAdjustments related to the update of assumptions for the valuation of variable annuity GMWB features accounted for as embedded derivatives and measured at fair value, which are primarily in the Retirement Income Solutions and Group Retirement product lines, are recorded in net realized capital gains (losses) and excluded from pre-tax operating income. The update of GMWB valuation assumptions in 2015, which included improved mortality, lapse and withdrawal assumptions, resulted in a net decrease in the GMWB liability. After offsets for related adjustments to DAC, this update of GMWB valuation assumptions resulted in a net increase to 2015 pre-tax lossincome of $9 million.
In 2014, improved mortality, lapse and withdrawal assumptions for GMWB embedded derivative liabilities resulted in 2013 compareda net increase to pre-tax income of $39 million, net of DAC. In 2013, the update of GMWB valuation assumptions resulted in 2012,a net increase to pre-tax income of $61 million, net of DAC, primarily due to certainupdated mortality assumptions.
A discussion of the adjustments to ILFC's assetsreflect the update of assumptions for the Retirement and Life operating segments follows.
Update of Actuarial Assumptions by Operating Segment
Retirement
The update of actuarial assumptions resulted in net positive adjustments to pre-tax operating income of the Retirement operating segment of $140 million, $246 million and $233 million in 2015, 2014 and 2013, respectively.
In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $92 million in 2015, which reflected refinements to investment spread assumptions, lower terminations than previously assumed and decreases to expense assumptions. In 2014, a net positive adjustment of $196 million in Fixed Annuities was primarily due to better spreads than previously assumed. In 2013, a net positive adjustment of $306 million in the Fixed Annuities product line was the result of active spread management of crediting rates and higher future investment yields than those previously assumed.
In Retirement Income Solutions, there were offsetting changes to assumed investment fees, modeled expenses, and terminations resulting in no adjustment to pre-tax operating income in 2015, compared to a $4 million net positive adjustment in 2014, due to the update of estimated gross profit assumptions. A net negative adjustment of $28 million in Retirement Income Solutions in 2013 resulted primarily from the update of variable annuity spreads and surrender rates. Adjustments related to the update of assumptions for the valuation of variable annuity GMWB features accounted for as embedded derivatives and measured at fair value, which primarily relate to the Retirement Income Solutions product line, are recorded in net realized capital gains (losses) and excluded from pre-tax operating income. See Update of Actuarial Assumptions above for discussion of these adjustments.
In Group Retirement, a net positive adjustment from the update of estimated gross profit assumptions of $48 million in 2015 was primarily due to revisions to mortality and surrender assumptions, partially offset by decreased spread assumptions. In 2014, a net positive adjustment of $46 million in Group Retirement was primarily due to more favorable assumptions for investment spreads and surrenders than previously assumed. A net negative adjustment of $45 million in Group Retirement in 2013 resulted primarily from the update of variable annuity spreads and surrender rates, partially offset by an increase in the assumption for separate account asset long-term growth rates under our reversion to the mean methodology.
Life
The net negative adjustment of $146 million related to the update of actuarial assumptions, which reduced pre-tax operating income of the Life operating segment in 2015, included additions to reserves for universal life with secondary guarantees due to lower surrender rates (partially offset by better mortality than previously assumed), loss recognition expense for certain long-
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Item 7 / Insurance reserves / Life Insurance companies
term care products primarily due to updated future premium assumptions, and an additional net negative adjustment from the update of estimated gross profit assumptions primarily due to lower investment spread assumptions. These negative adjustments were partially offset by a decrease in certain Group Benefit claim reserves based on updated experience data.
A net negative adjustment of $119 million in the Life operating segment in 2014 was primarily due to loss recognition expense, as discussed below, and also included additions to reserves for universal life with secondary guarantees, primarily due to lower investment spread and mortality assumptions which, while higher than previously assumed, were still within pricing assumptions.
A negative adjustment of $80 million in the Life operating segment in 2013 resulted primarily from the update of mortality assumptions.
The Life operating segment recorded loss recognition expense of $28 million and $87 million to increase reserves for certain long-term care business in 2015 and 2014, respectively, which reduced pre-tax operating income in those periods. Loss recognition expense is included in Other reserve changes in the rollforward table presented in Life Insurance Companies Reserves. The Life loss recognition for both periods was primarily a result of lower future premium increase assumptions and, in 2014, lower yield assumptions. Assumptions related to investment yields, mortality experience and expenses are reviewed periodically and updated as appropriate, which could result in additional loss recognition reserves. While the U.S. Life Insurance Companies do not currently offer standalone long-term care products, these needs are addressed with various benefits and riders in the existing portfolio, such as chronic illness riders.
Variable Annuity Guaranteed Benefit Features and Hedging Program
Our Retirement Income Solutions and Group Retirement businesses offer variable annuity products with riders that provide guaranteed living benefit features, which include GMWB and GMAB. The liabilities classifiedfor GMWB and GMAB are accounted for as heldembedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads and market volatility.
In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage market risk from GMWB and GMAB, including exposures to changes in interest rates, equity prices, credit spreads and volatilities. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election. See Enterprise Risk Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Program for sale.additional discussion of market risk management related to these product features.
Impact on Pre-tax Income
Changes in the fair value of the GMWB and GMAB embedded derivatives, and changes in the fair value of related derivative hedging instruments, are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of the fixed maturity securities used in the variable annuity hedging program, for which the fair value option has been elected, are excluded from pre-tax operating income of the Retirement operating segment.
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Item 7 / Insurance reserves / Life Insurance companies
The following table presents the net increase (decrease) to consolidated pre-tax income from changes in the fair value of the GMWB and GMAB embedded derivatives and related hedges:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Change in fair value of GMWB and GMAB embedded derivatives | $ | 63 | $ | (759) | $ | 1,252 |
Change in fair value of variable annuity hedging portfolio: | | | | | | |
Fixed maturity securities | | (43) | | 260 | | (161) |
Interest rate derivative contracts | | 343 | | 742 | | (468) |
Equity derivative contracts | | (86) | | (230) | | (461) |
Net impact on pre-tax income | $ | 277 | $ | 13 | $ | 162 |
The effect of the changes in the fair value of the GMWB and GMAB embedded derivatives and the related hedging portfolio had a net positive impact on consolidated pre-tax income in 2015, 2014 and 2013. The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to differences between the U.S. GAAP valuation of the embedded derivatives and the economic hedge target, which include a non-performance or “own credit” spread adjustment (NPA) to the rate used to discount projected benefit cash flows. When corporate credit spreads widen, as they did in 2015, the change in the NPA generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA generally increases the fair value of the embedded derivative liabilities, resulting in a loss. See Note 4 to the Consolidated Financial Statements for additional discussion of the fair value measurement of the embedded derivatives under U.S. GAAP and the estimation of the NPA, and see Differences in Valuation of Embedded Derivatives and Economic Hedge Target, below.
In 2015, there was a slight gain from a decline in the fair value of the embedded derivative liabilities, as losses from the decrease in market interest rates were more information regarding Aircraft Leasing.than offset by gains from a higher NPA, related to widening corporate credit spreads. The losses from the decrease in market interest rates in 2015 were largely offset by interest rate hedges. In 2014, the decrease in market interest rates resulted in losses from a significant increase in the fair value of the embedded derivative liabilities, which was only partially offset by higher equity markets. Since the change in NPA was relatively small in 2014, the loss on the embedded derivatives was primarily offset by hedging. In 2013, there was a significant decline in the embedded derivative liabilities, driven by both higher interest rates and higher equity markets, which was only partially offset by a decline in NPA from spread tightening. The embedded derivative gains due to higher interest rates were offset by interest rate hedging to a lesser extent in 2013, as we had not elected to fully hedge interest rate risk until the second half of 2014.
These changes in the fair value of the embedded derivatives were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:
•Changes in the fair value of fixed maturity securities, for which the fair value option has been elected, that are used as a capital-efficient way to economically hedge interest rate risk. In 2012, we began to use U.S. Treasury bonds in this hedging program to reduce our interest rate risk exposure over time. Effective June 30, 2015, we discontinued the U.S. Treasury bond interest rate hedging program and 2011 Comparisoninitiated a corporate bond hedging program, which is intended to provide the same capital efficiency as the previous U.S. Treasury bond hedging program. The 2015 losses from the change in the fair value of fixed maturity securities were primarily due to the impact on the U.S. Treasury position in the first half of the year from increasing market interest rates. The gains in 2014 and losses in 2013 from the change in the fair value of the fixed maturities securities were due to market interest rates, which decreased in 2014 and increased 2013.
Aircraft Leasing•Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions, futures and options, resulted in gains in 2015 and 2014 due to decreasing market interest rates, and losses in 2013 driven by increasing interest rates. Prior to 2014, we had elected to only partially hedge GMWB and GMAB interest rate risk.
•Losses from the change in the fair value of equity derivative contracts, which included futures and options, were relatively smaller in 2015 compared to 2014 and 2013, due to higher equity market returns in those years.
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Item 7 / Insurance reserves / Life Insurance companies
Differences in Valuation of Embedded Derivatives and Economic Hedge Target
The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic drivers of the embedded derivatives. The economic hedge target differs from the U.S. GAAP valuation of the GMWB and GMAB embedded derivatives due to the following:
•Rider fees are 100 percent included in the economic hedge target present value calculations; the U.S. GAAP valuation reflects those collected fees attributed to the embedded derivative such that the initial value at contract issue equals zero;
•Actuarial assumptions for U.S. GAAP are adjusted to remove explicit risk margins, including margins for policyholder behavior and fund basis risk, and use best estimate assumptions for the economic hedge target; and
•Non-performance adjustment (NPA or “own credit” risk) is excluded from the discount rates used for the economic hedge target.
The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life Insurance Companies have cash and invested assets available to cover future claims payable under these guarantees. The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
•Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
•Realized volatility versus implied volatility;
•Actual versus expected changes in the hedge target related to items not subject to hedging, particularly policyholder behavior; and
•Risk exposures that we have elected not to explicitly or fully hedge, which in 2014 and 2013 included a portion of the interest rate risk.
DAC
The following table summarizes the major components of the changes in Life Insurance Companies DAC, including VOBA:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Balance, beginning of year | $ | 7,258 | $ | 6,920 | $ | 5,815 |
Acquisition costs deferred | | 1,288 | | 1,114 | | 1,034 |
Amortization expense: | | | | | | |
Update of assumptions included in pre-tax operating income | | 79 | | 183 | | 129 |
Related to realized capital gains and losses | | (1) | | (23) | | (23) |
All other operating amortization | | (994) | | (887) | | (780) |
Increase (decrease) in DAC due to foreign exchange | | (34) | | (32) | | (39) |
Other change in DAC | | 23 | | 343 | | - |
Change related to unrealized depreciation (appreciation) of investments | | 848 | | (360) | | 784 |
Balance, end of year* | $ | 8,467 | $ | 7,258 | $ | 6,920 |
* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.1 billion, $8.7 billion, and $8.0 billion at December 31, 2015, 2014 and 2013, respectively.
The net adjustments to DAC amortization from the update of actuarial assumptions for estimated gross profits in 2015 and 2014, including those reported within change in DAC related to net realized capital gains (losses), represented one percent and two percent of the DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments as of December 31, 2015 and 2014, respectively.
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Item 7 / Insurance reserves / Life Insurance companies
Reversion to the Mean
In 2013, we revised the growth rate assumptions for the five-year reversion to the mean period for the Group Retirement product line in our Retirement segment, because annual growth assumptions indicated for that period had fallen below our floor of zero percent due to the favorable performance of equity markets. This adjustment increased Retirement pre-tax operating income by $35 million in 2013. For variable annuities in the Retirement Income Solutions product line, the assumed annual growth rate has remained above zero percent for the five-year reversion to the mean period and therefore has not met the criteria for adjustment in 2015, 2014 or 2013; however, additional favorable equity market performance in excess of long-term assumptions could result in unlocking in this product line in the future, with a positive effect on pre-tax income in 2012 comparedthe period of the unlocking. See Critical Accounting Estimates – Estimated Gross Profits for Investment-Oriented Products (Life Insurance Companies) for additional discussion of assumptions related to a pre-tax loss in 2011 primarily dueour reversion to a decrease in impairment charges, fair value adjustmentsthe mean methodology.
DAC and lease-related charges on aircraftReserves Related to Unrealized Appreciation of Investments
DAC for universal life and lower losses on extinguishment of debt. This was partially offset by lower lease revenue and increased costs dueinvestment-type products (collectively, investment-oriented products) is adjusted at each balance sheet date to early returns of aircraft by lessees who ceased operations, lower lease revenue earned on re-leased aircraft in ILFC's fleet, charges relating to
AIG 2013 Form 10-K
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ITEM 7 / RESULTS OF OPERATIONS / OTHER OPERATIONS
reserves recorded for potential exposure under aircraft assets value guarantees and an increase in depreciation expense due toreflect the change in depreciable livesDAC as if fixed maturity and residualequity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow DAC). The change in shadow DAC generally moves in the opposite direction of certain aircraft.
Net Loss on Salethe change in unrealized appreciation of Divested Businesses
the available for sale securities portfolio. In 2012, we recognized a pre-tax lossaddition, significant unrealized appreciation of $6.7 billion associated with the announced sale of ILFC.
Net Realized Capital Gains (Losses)
Includes impairments on investments in life settlements of $971 million, $309 million and $312 million in 2013, 2012, and 2011, respectively. Also included in 2012 is a $426 million gain on the sale of common units of The Blackstone Group L.P. Impairments on investments in life settlementsprolonged low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves). Market interest rates increased in 2013 compared to 2012 as a result of updated longevity assumptionswidening spreads in 2015. As a result, the valuation tables used to estimate future expected cash flows. These updates were due to observed experience deviating significantlyLife Insurance Companies’ unrealized appreciation of investments at December 31, 2015 decreased by $7.4 billion compared to prior expectations.December 31, 2014, which resulted in an increase in shadow DAC and a decrease in shadow loss reserves. Shadow loss reserves decreased to $18 million at December 31, 2015 compared to $1.2 billion at December 31, 2014.
Life Insurance Companies Reserves
The following table presents a rollforward of Life Insurance Companies’ insurance reserves, including separate accounts and mutual fund assets under management, by operating segment:
Years Ended December 31, | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | 2014 | | 2013 |
Institutional Markets: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 35,080 | $ | 32,100 | $ | 32,242 |
Premiums and deposits | | | | | | | | 1,782 | | 3,797 | | 991 |
Surrenders and withdrawals | | | | | | | | (674) | | (766) | | (2,620) |
Death and other contract benefits | | | | | | | | (1,628) | | (1,530) | | (1,371) |
Subtotal | | | | | | | | (520) | | 1,501 | | (3,000) |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | 982 | | 1,130 | | 1,156 |
Cost of funds | | | | | | | | 408 | | 410 | | 413 |
Other reserve changes | | | | | | | | (127) | | (61) | | 1,289 |
Balance at end of year | | | | | | | | 35,823 | | 35,080 | | 32,100 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 1,054 | | - |
Reinsurance ceded | | | | | | | | (5) | | (5) | | (5) |
Total insurance reserves | | | | | | | $ | 35,818 | $ | 36,129 | $ | 32,095 |
Retirement: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 204,627 | $ | 195,493 | $ | 173,281 |
Premiums and deposits | | | | | | | | 25,297 | | 24,077 | | 23,788 |
Surrenders and withdrawals | | | | | | | | (18,251) | | (20,504) | | (16,459) |
Death and other contract benefits | | | | | | | | (3,894) | | (3,690) | | (3,353) |
Subtotal | | | | | | | | 3,152 | | (117) | | 3,976 |
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DISCONTINUED OPERATIONS
Item 7 / Insurance reserves / Life Insurance companies
Income (loss) from Discontinued Operations is
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (2,255) | | 6,390 | | 14,482 |
Cost of funds | | | | | | | | 2,724 | | 2,781 | | 2,837 |
Other reserve changes | | | | | | | | 85 | | 80 | | 917 |
Balance at end of year | | | | | | | | 208,333 | | 204,627 | | 195,493 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 100 | | - |
Reinsurance ceded | | | | | | | | (361) | | (353) | | (366) |
Total insurance reserves and mutual fund assets under management | | | | | | | $ | 207,972 | $ | 204,374 | $ | 195,127 |
Life: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 33,536 | $ | 32,810 | $ | 32,176 |
Premiums and deposits | | | | | | | | 4,974 | | 4,806 | | 4,862 |
Surrenders and withdrawals | | | | | | | | (759) | | (853) | | (896) |
Death and other contract benefits | | | | | | | | (954) | | (812) | | (772) |
Subtotal | | | | | | | | 3,261 | | 3,141 | | 3,194 |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (802) | | (691) | | (673) |
Cost of funds | | | | | | | | 493 | | 507 | | 541 |
Other reserve changes | | | | | | | | (2,318) | | (2,231) | | (2,428) |
Balance at end of year | | | | | | | | 34,170 | | 33,536 | | 32,810 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | - | | - |
Reinsurance ceded | | | | | | | | (1,395) | | (1,315) | | (1,354) |
Total insurance reserves | | | | | | | $ | 32,775 | $ | 32,221 | $ | 31,456 |
Total Life Insurance Companies: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 273,243 | $ | 260,403 | $ | 237,699 |
Premiums and deposits | | | | | | | | 32,053 | | 32,680 | | 29,641 |
Surrenders and withdrawals | | | | | | | | (19,684) | | (22,123) | | (19,975) |
Death and other contract benefits | | | | | | | | (6,476) | | (6,032) | | (5,496) |
Subtotal | | | | | | | | 5,893 | | 4,525 | | 4,170 |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (2,075) | | 6,829 | | 14,965 |
Cost of funds | | | | | | | | 3,625 | | 3,698 | | 3,791 |
Other reserve changes | | | | | | | | (2,360) | | (2,212) | | (222) |
Balance at end of year | | | | | | | | 278,326 | | 273,243 | | 260,403 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 1,154 | | - |
Reinsurance ceded | | | | | | | | (1,761) | | (1,673) | | (1,725) |
Total insurance reserves and mutual fund assets under management | | | | | | | $ | 276,565 | $ | 272,724 | $ | 258,678 |
Life Insurance Companies insurance reserves including separate accounts and mutual fund assets under management were comprised of the following:following balances:
At December 31, | | | | | | |
(in millions) | | | | 2015 | | 2014 |
Future policy benefits* | | | $ | 41,562 | $ | 40,931 |
Policyholder contract deposits | | | | 127,704 | | 124,716 |
Separate account liabilities | | | | 79,564 | | 80,025 |
Total insurance reserves | | | | 248,830 | | 245,672 |
Mutual fund assets under management | | | | 27,735 | | 27,052 |
Total insurance reserves and mutual fund assets under management | | | $ | 276,565 | $ | 272,724 |
* Excludes certain intercompany assumed reinsurance.
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Foreign life insurance businesses | | $ | – | | $ | – | | $ | 1,170 | |
Net gain on sale | | | 150 | | | 1 | | | 2,338 | |
Consolidation adjustments | | | – | | | – | | | (1 | ) |
Interest allocation | | | – | | | – | | | (2 | ) |
| | |
Income from discontinued operations | | | 150 | | | 1 | | | 3,505 | |
Income tax expense | | | 66 | | | – | | | 1,038 | |
| | |
Income from discontinued operations, net of tax | | $ | 84 | | $ | 1 | | $ | 2,467 | |
| | |
Significant items affecting the comparison of results from discontinued operations included the following:
•a pre-tax gain of $150 million for 2013 in connection with the sale of American Life Insurance Company (ALICO) primarily attributable to the refund of taxes, interest and penalties, together with other matters;
•a gain on the sale of AIG Star Life Insurance Co., Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison) in 2011;
•tax effects of the above transactions, notably the impact of non-deductible goodwill impairment and the change in investment in subsidiaries, which was principally related to changes in the estimated U.S. tax liability with respect to the planned sales.
See Note 4 to the Consolidated Financial Statements for further discussion of discontinued operations.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 7 / LIQUIDITY AND CAPITAL RESOURCESrESOURCES
Liquidity and Capital Resources
Overview
Liquidity and Capital Resources |
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to measuremanage liquidity at both the amountAIG Parent and composition of our liquiditysubsidiaries to meet our financial obligations in both normal and stressed markets.over a twelve-month period under a liquidity stress scenario. See Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement and — Enterprise Risk Management — Liquidity Risk Management below for additional information.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is the profitability of our insurance subsidiaries. We and our insurance subsidiaries must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy for both AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM'sERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources.resources as was the case in 2008. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share repurchases.
AIG 2013 Form 10-K
Liquidity and Capital Resources Activity for 2015 |
Sources •AIG Parent Funding from Subsidiaries During 2015, AIG Parent received $7.8 billion(a) in dividends and loan repayments from subsidiaries. Of this amount, $3.2 billion was dividends in the form of cash and fixed maturity securities from our Non-Life Insurance Companies and $4.6 billion(a) was dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies. The $7.8 billion in dividends and loan repayments included $2.8 billion of dividends that were declared during the fourth quarter of 2014. AIG Parent also received a net amount of $1.4 billion(a) in tax sharing payments from our insurance businesses in 2015, reflecting $102 million(a) that was reimbursed from AIG Parent to our insurance businesses during the fourth quarter of 2015 as a result of adjustments made to prior-year tax sharing payments. The tax sharing payments may continue to be subject to adjustment in future periods. ·Debt Issuances In January 2015, we issued $1.2 billion aggregate principal amount of 3.875% Notes due 2035 and $800 million aggregate principal amount of 4.375% Notes due 2055. In March 2015, we issued $350 million aggregate principal amount of 4.35% Callable Notes due 2045. In July 2015, we issued $1.25 billion aggregate principal amount of 3.750% Notes due 2025, $500 million aggregate principal amount of 4.700% Notes due 2035 and $750 million aggregate principal amount of 4.800% Notes due 2045. In addition, in July 2015, we issued $290 million aggregate principal amount of 4.90% Callable Notes due 2045. In September 2015, we issued $420 million aggregate principal amount of 4.90% Callable Notes due 2045. ·PICC P&C and Springleaf In April 2015, AIG Parent received gross proceeds of approximately $500 million from our sale of 256 million ordinary H shares of PICC P&C by means of a placement to certain institutional investors. In May 2015, AIG Parent received net proceeds of approximately $410 million from the sale of approximately 8.4 million shares of common stock of Springleaf. In December 2015, AIG Parent received gross proceeds of approximately $381 million from our sale of 184 million ordinary H shares of PICC P&C by means of a placement to certain institutional investors. ·AerCap In June 2015, AIG Parent received net proceeds of approximately $3.7 billion from the sale of approximately 86.9 million ordinary shares of AerCap by means of an underwritten public offering of approximately 71.2 million ordinary shares and a private sale of approximately 15.7 million ordinary shares to AerCap. In August 2015, AIG Parent received net proceeds of approximately $500 million from the sale of our remaining approximately 10.7 million ordinary shares of AerCap by means of an underwritten public offering. |
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Liquidity and Capital Resources Highlights 2013Item 7 /
Sources
•AIG Parent Funding from Subsidiaries
We collected $8.7 billion in cash dividends and loan repayments from our insurance subsidiaries — $4.1 billion in cash dividends from AIG Property Casualty, $4.4 billion in cash dividends and loan repayments from AIG Life and Retirement and $90 million in cash dividends from Mortgage Guaranty. Infrequent events at our insurance subsidiaries including capital management initiatives at AIG Property Casualty and proceeds from legal settlements at AIG Life and Retirement resulted in higher than usual dividends.
•Legal Settlements
On August 26, 2013, we agreed to the termination of an interest rate swap agreement with Brookfield Asset Management, Inc. and Brysons International, Ltd, in exchange for a payment to AIGFP of $905 million.
We received $1.0 billion from settlements with financial institutions that participated in the creation, offering and sale of RMBS from which we realized losses during the financial crisis.
•Debt Issuances
On August 9, 2013, we issued $1.0 billion aggregate principal amount of 3.375% senior notes due 2020. On October 2, 2013, we issued $1.0 billion aggregate principal amount of 4.125% senior notes due 2024.
•ALICO Escrow Release
On May 1, 2013, $547 million held in escrow to secure indemnifications provided to MetLife, Inc. (MetLife) under the ALICO stock purchase agreement was released to AIG.
Uses
•Debt Reduction*
We repaid approximately $9.7 billion of debt as follows.
We redeemed:
•$1.1 billion aggregate principal amount of our 7.70% Series A-5 Junior Subordinated Debentures and $750 million aggregate principal amount of our 6.45% Series A-4 Junior Subordinated Debentures, in each case for a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest; and
•$500 million aggregate principal amount of our 3.650% senior notes due 2014 for a redemption price of 101.1 percent of the principal amount, plus accrued and unpaid interest.
We purchased, in cash tender offers:
•for an aggregate purchase price of approximately $1 billion, approximately 77 million British pounds aggregate principal amount of our 8.625% Series A-8 Junior Subordinated Debentures, approximately 182 million Euro aggregate principal amount of our 8.000% Series A-7 Junior Subordinated Debentures, approximately $79 million aggregate principal amount of our 6.25% Series A-1 Junior Subordinated Debentures and approximately $366 million aggregate principal amount of our 8.175% Series A-6 Junior Subordinated Debentures;
•for an aggregate purchase price of approximately $211 million, approximately $19 million liquidation amount of 81/2% Capital Trust Pass-Through Securities, approximately $114 million liquidation amount of 7.57% Capital Securities, Series A and approximately $29 million liquidation amount of 81/8% Capital Securities, Series B, all of which were issued by statutory trusts controlled by AIG Life Holdings, Inc; and
•for an aggregate purchase price of approximately $61 million, approximately $62 million aggregate principal amount of 5.60% Senior Debentures we had assumed that were originally issued by SunAmerica Inc.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / LIQUIDITY AND CAPITAL RESOURCESrESOURCES
Uses(b) •Debt Reduction In March 2015, we repurchased, through cash tender offers, approximately $1.0 billion aggregate principal amount of certain senior notes issued or guaranteed by AIG for an aggregate purchase price of approximately $1.1 billion. In April 2015, we repurchased, through cash tender offers, (i) approximately $22 million aggregate principal amount of certain senior notes issued or guaranteed by AIG for an aggregate purchase price of approximately $24 million, and (ii) approximately $915 million aggregate principal amount of certain junior subordinated debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $1.25 billion. In July 2015, we repurchased, through cash tender offers, (i) approximately $142 million aggregate principal amount of certain senior notes issued by AIG for an aggregate purchase price of approximately $153 million, and (ii) approximately $3.3 billion aggregate principal amount of certain senior notes and junior subordinated notes issued or guaranteed by AIG for an aggregate purchase price of approximately $3.6 billion. We also made other repurchases and repayments of approximately $4.6 billion during 2015. AIG Parent made interest payments on our debt instruments totaling $1.0 billion during 2015. •Dividend We paid a cash dividend of $0.125 per share on AIG Common Stock during each of the first and second quarters of 2015, and a cash dividend of $0.28 per share during each of the third and fourth quarters of 2015. •Repurchase of Common Stock(c) We repurchased approximately 182 million shares of AIG Common Stock during 2015, for an aggregate purchase price of approximately $10.7 billion. The total number of shares of AIG Common Stock repurchased in 2015 includes (but the aggregate purchase price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an ASR agreement executed in the fourth quarter of 2014. •PICC P&C During 2015, AIG Parent purchased 440 million ordinary H shares of PICC P&C from our Non-Life Insurance Companies for approximately $864 million. |
(a) Presented net of $818 million of tax payments to the Life Insurance Companies, which were returned in the form of dividends.
(b) In January 2016, AIG Parent made other repaymentsa capital contribution of approximately $6.3 billion. AIG Parent repaid $4.2$2.9 billion to our Non-Life Insurance Companies.
(c) Pursuant to Exchange Act Rule 10b5-1 repurchase plans, from January 1 to February 11, 2016, we have repurchased approximately $2.5 billion of debt, including $1.1 billion of MIP and $300 million of Series AIGFP long-term debt, and made interest payments on our debt instruments totaling $2.0 billion.
•Purchase of Warrants
We paid approximately $25 million in the first quarter 2013 in the aggregate to purchase a warrant issued to the Department of the Treasury in 2008 that provided the right to purchase approximately 2.7 millionadditional shares of AIG Common Stock at $50.00 perStock. As of February 11, 2016, approximately $5.8 billion remained under our share and a warrant issued to the Department of the Treasury in 2009 that provided the right to purchase up to 150 shares of AIG Common Stock at $0.00002 per share.
•Dividends
We paid cash dividends of $0.10 per share on AIG Common Stock in each of the third and fourth quarters of 2013.
•Repurchase of Common Stock
We repurchased a total of approximately 12 million shares of AIG Common Stock in the third and fourth quarters of 2013, for an aggregate purchase price of approximately $597 million.
•AIG Parent Funding to Subsidiaries
We made $2.1 billion in net capital contributions to subsidiaries, including a contribution of approximately $1.9 billion to AIG Capital Corporation related to the transfer of investments in life settlements from AIG Property Casualty.
repurchase authorization.
AIG Parent repaid $0.5 billion of its $1.1 billion outstanding loan from ILFC in the fourth quarter of 2013.
* In January 2014, AIG reduced DIB debt by $2.2 billion through a redemption of $1.2 billion aggregate principal amount of its 4.250% Notes due 2014 and a repurchase of $1.0 billion of its 8.25% Notes due 2018 using cash and short term investments allocated to the DIB.
Analysis of Sources and Uses of Cash
The following table presents selected data from AIG's Consolidated Statements of Cash Flows:
Years Ended December 31, | | | | | | | | |
(in millions) | | | | 2015 | | 2014* | | 2013 |
Sources: | | | | | | | | |
Net cash provided by operating activities | | | $ | 2,877 | $ | 5,007 | $ | 5,865 |
Net cash provided by changes in restricted cash | | | | 1,457 | | - | | 1,244 |
Net cash provided by other investing activities | | | | 7,005 | | 15,731 | | 5,855 |
Changes in policyholder contract balances | | | | 2,410 | | 1,719 | | - |
Issuance of long-term debt | | | | 6,867 | | 6,687 | | 5,235 |
Total sources | | | | 20,616 | | 29,144 | | 18,199 |
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Sources: | | | | | | | | | | |
Net cash provided by (used in) operating activities – continuing operations | | $ | 5,865 | | $ | 3,676 | | $ | (3,451 | ) |
Net cash provided by (used in) operating activities – discontinued operations | | | – | | | – | | | 3,370 | |
Net cash provided by changes in restricted cash(a) | | | 1,244 | | | 414 | | | 27,244 | |
Net cash provided by other investing activities | | | 5,855 | | | 16,198 | | | 9,204 | |
Changes in policyholder contract balances | | | – | | | – | | | 4,333 | |
Issuance of long-term debt | | | 5,235 | | | 8,612 | | | 7,762 | |
Proceeds from drawdown on the Department of Treasury Commitment | | | – | | | – | | | 20,292 | |
Issuance of Common Stock | | | – | | | – | | | 5,055 | |
Net cash provided by (used in) other financing activities | | | – | | | 4,251 | | | – | |
| | |
Total sources | | | 18,199 | | | 33,151 | | | 73,809 | |
| | |
Uses: | | | | | | | | | | |
Change in policyholder contract balances | | | (547 | ) | | (690 | ) | | – | |
Repayments of long-term debt | | | (14,197 | ) | | (11,101 | ) | | (17,810 | ) |
Federal Reserve Bank of New York credit facility repayments | | | – | | | – | | | (14,622 | ) |
Repayment of Department of Treasury SPV Preferred Interests | | | – | | | (8,636 | ) | | (12,425 | ) |
Repayment of Federal Reserve Bank of New York SPV Preferred Interests | | | – | | | – | | | (26,432 | ) |
Purchases of AIG Common Stock | | | (597 | ) | | (13,000 | ) | | (70 | ) |
Net cash used in other financing activities(b) | | | (1,652 | ) | | – | | | (3,009 | ) |
| | |
Total uses | | | (16,993 | ) | | (33,427 | ) | | (74,368 | ) |
| | |
Effect of exchange rate changes on cash | | | (92 | ) | | 16 | | | 29 | |
| | |
Increase (decrease) in cash | | $ | 1,114 | | $ | (260 | ) | $ | (530 | ) |
| | |
(a) Includes return of cash from ALICO escrow arrangement.
(b) Includes payment of two quarterly cash dividends.
AIG 2013 Form 10-K
Uses: | | | | | | | | |
Change in restricted cash | | | | - | | (1,447) | | - |
Change in policyholder contract balances | | | | - | | - | | (547) |
Repayments of long-term debt | | | | (9,805) | | (16,160) | | (14,197) |
Purchases of AIG Common Stock | | | | (10,691) | | (4,902) | | (597) |
Net cash used in other financing activities | | | | (210) | | (7,132) | | (1,652) |
Total uses | | | | (20,706) | | (29,641) | | (16,993) |
Effect of exchange rate changes on cash | | | | (39) | | (74) | | (92) |
Increase (decrease) in cash | | | $ | (129) | $ | (571) | $ | 1,114 |
* For 2014, cash decreased by $162 million due to reclassification of $289 million to restricted cash presented in Other assets, partially offset by a $127 million reclassification from Short-term investments, to correct prior period presentation.
The following table presents a summary of AIG'sAIG’s Consolidated Statement of Cash Flows:
|
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| |
| |
| | |
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| | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | | | | |
(in millions) | | | | | | 2015 | | 2014 | | 2013 |
Summary: | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 5,865 | | $ | 3,676 | | $ | (81 | ) | |
Net cash provided by operating activities | | | | | $ | 2,877 | $ | 5,007 | $ | 5,865 |
Net cash provided by investing activities | | | 7,099 | | | 16,612 | | 36,448 | | | | | | 8,462 | | 14,284 | | 7,099 |
Net cash used in financing activities | | | (11,758 | ) | | (20,564 | ) | | (36,926 | ) | | | | | (11,429) | | (19,788) | | (11,758) |
Effect of exchange rate changes on cash | | | (92 | ) | | 16 | | 29 | | | | | | (39) | | (74) | | (92) |
| | | |
Increase (decrease) in cash | | | 1,114 | | | (260 | ) | | (530 | ) | | | | | (129) | | (571) | | 1,114 |
Cash at beginning of year | | | 1,151 | | | 1,474 | | 1,558 | | | | | | 1,758 | | 2,241 | | 1,151 |
Change in cash of businesses held for sale | | | (24 | ) | | (63 | ) | | 446 | | | | | | - | | 88 | | (24) |
| | | |
Cash at end of year | | $ | 2,241 | | $ | 1,151 | | $ | 1,474 | | | | | $ | 1,629 | $ | 1,758 | $ | 2,241 |
| | | |
Operating Cash Flow Activities
Interest payments totaled $3.9 billion in 2013 compared to $4.0 billion in 2012. Excluding interest payments, AIG generated positive operating cash flow of $9.7 billion and $7.7 billion in 2013 and 2012, respectively.
|
Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates and operating expenses.
Interest payments totaled $1.4 billion in 2015, compared to $3.4 billion in 2014 and $3.9 billion in 2013. Excluding interest payments, AIG generated positive operating cash flow of $4.2 billion, $8.3 billion and $9.7 billion in 2015, 2014 and 2013, respectively.
Cash provided by AIG Property Casualty operating activities of our Non-Life Insurance Companies was $1.0 billion in 2015, compared to $0.9 billion in 2014 and $0.4 billion in 20132013. The increase in 2014 compared to $1.1 billion in 2012,2013 was primarily reflectingdue to the timing of the payments related to catastrophe losses.
Cash provided by AIG Life and Retirement operating activities was $4.3 billion in 2013 compared to $2.9 billion in 2012, primarily due to higher pre-tax operating income and the receipt of approximately $800 million of legal settlement proceeds inlosses for 2013.
Cash provided by operating activities of businessour Life Insurance Companies was $3.8 billion in 2015, compared to $4.4 billion in 2014 and $4.3 billion in 2013. The decline in 2015 compared to 2014 was primarily due to a greater increase in other assets and liabilities, net.
Cash provided by operating activities of businesses held for sale was $2.9 billion for each of 2013 and 2012.2013.
TABLE OF CONTENTS
Net cash provided by operating activities improved in 2012 compared to 2011, principally due to cash paid for interest in 2011 by AIG Parent of $6.4 billion in accrued compounded interest and fees under the FRBNY Credit Facility, partially offset by a decline in cash provided by operating activities of foreign life subsidiaries of $3.4 billion due to the sale of those subsidiaries (AIA, ALICO, AIG Star, AIG Edison and Nan Shan Life Insurance Company, LTD. (Nan Shan)) in 2011.
Item 7 / LIQUIDITY AND CAPITAL rESOURCES
Investing Cash Flow Activities
Net cash provided by investing activities in 2015 included:
•approximately $1.8 billion of cash collateral received in connection with our Life Insurance Companies’ securities lending program; and
•approximately $4.2 billion of net cash proceeds from the sale of ordinary shares of AerCap.
Net cash provided by investing activities in 2014 included:
•a reduction in net investment purchase activity; and
•approximately $2.4 billion of net cash proceeds from the sale of ILFC.
Net cash provided by investing activities for 2013 includes approximately $0.9 billion of cash collateral receivedincluded an increase in connection with the securities lending program launched during 2012 by AIG Life and Retirement.
Net cash provided by investing activities for 2012 includes:
•payments received relating to the sale of the underlying assets held by ML II of approximately $1.6 billion;
•payments of approximately $8.5 billion received in connection with the dispositions of ML III assets by the FRBNY;
•gross proceeds of approximately $14.5 billion from the sale of AIA ordinary shares; and
•approximately $2.1 billion of cash collateral received in connection with the securities lending program launched during 2012 by AIG Life and Retirement.
Net cash provided by investing activities for 2011 includes:
•the utilization of $26.4 billion of restricted cash generated from the AIA initial public offering and ALICO sale in connection with the Recapitalization and $9.6 billion from the disposition of MetLife securities;
•the sale of AIG Star, AIG Edison and Nan Shan in 2011 for total proceeds of $6.4 billion; and
•- net
sales of short term investments and maturities of available for sale investments, primarily at AIG Property Casualty and AIG Life and Retirement, which were partially offset by purchases of available for sale investments.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / LIQUIDITY AND CAPITAL RESOURCESinvestment purchase activity.
Financing Cash Flow Activities
Net cash used in financing activities in 2015 included:
•approximately $1.0 billion in the aggregate to pay a dividend of $0.125 per share on AIG Common Stock in each of the first and second quarters of 2015 and $0.28 per share on AIG Common Stock in each of the third and fourth quarters of 2015;
•approximately $10.7 billion to repurchase approximately 182 million shares of AIG Common Stock; and
•approximately $9.9 billion to repay long-term debt.
These items were partially offset by approximately $6.9 billion in proceeds from the issuance of long-term debt.
Net cash used in financing activities for 2014 included:
•approximately $712 million in the aggregate to pay dividends of $0.125 per share on AIG Common Stock in each of the four quarters of 2014;
•approximately $4.9 billion to repurchase approximately 88 million shares of AIG Common Stock;
•approximately $271 million to repay long-term debt of business held-for-sale; and
•approximately $16.2 billion to repay long-term debt.
Net cash used in financing activities for 2013 includes:included:
•
- approximately $294 million in the aggregate to pay dividends of $0.10 per share on AIG Common Stock in each of the third and fourth quarters of 2013;
•
•- approximately $597 million to repurchase approximately 12 million shares of AIG Common Stock;
and
•
•- approximately $9.3 billion to repay long term debt;
see Debt — Debt Maturities below.and
•approximately $4.9 billion in repayments of long term debt of business held-for-sale.
Net cash used in financing activities for 2012 includes:
•$8.6 billion to pay down the Department of the Treasury's preferred interests (AIA SPV Preferred Interests) in the special purpose vehicle holding the AIA ordinary shares; and
•total payments of approximately $13.0 billion for the purchase of shares of AIG Common Stock.
Net cash used in financing activities for 2011 primarily includes repayment of the FRBNY Credit Facility and the $12.4 billion partial repayment of the AIA SPV Preferred Interests and the ALICO SPV in connection with the Recapitalization and use of proceeds received from the sales of foreign life insurance entities in 2011.
Liquidity and Capital Resources of AIG Parent and Subsidiaries
AIG Parent
As of December 31, 2013,2015, AIG Parent had approximately $17.6$13.7 billion in liquidity sources. AIG Parent'sParent’s liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, intermediate-term investment grade rated fixed maturity securities. Fixed maturity securities consist ofprimarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, and corporate and municipal bonds.bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. During 2013,Based upon an assessment of its immediate and longer-term funding needs, AIG Parent purchased publicly traded, intermediate-term investment grade rated fixed maturity securities thatthe liquidity sources can be readily monetized through sales, repurchase agreements or repurchase agreements. These securities allow uscontributed as admitted assets to diversify sources of liquidity while reducing the cost of maintaining sufficient liquidity.regulated insurance companies. AIG Parent liquidity sources areis monitored through the use of various internal liquidity risk measures. AIG Parent'sParent’s primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries as well asand credit and contingent liquidity facilities. AIG Parent'sParent’s primary uses of liquidity are for debt service, capital and liability management, operating expenses and subsidiary capital needs.
We generally manage capital flows between AIG Parent and its subsidiaries through internal, Board‑approved policies and standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain AIG Property Casualty, AIG Life and Retirement and Mortgage Guaranty subsidiaries to facilitate the transfer of capital and liquidity within AIG. On February 18, 2014, certain of these CMAs were recharacterized as capital support agreements as a result of our intention to manage capital flows between AIG Parent and its subsidiaries through internal, Board-approved policies and guidelines rather than CMAs. See AIG Property Casualty, AIG Life and Retirement and Other Operations — Mortgage Guaranty below for additional details regarding CMAs that we have entered into with our insurance subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt markets from time to time to meet funding requirements as needed.
We utilize our capital resources to support our businesses, with the majority of capital allocated to our core insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividenddividends or share repurchase authorizations or deploy such capital towards liability management.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
In the normal course, it is expected that a portion of the capital generatedreleased by our core insurance operations through earnings or through the utilization of AIG'sAIG’s deferred tax assets may be available for distribution to shareholders. Additionally, it is expected that capital associated with businesses or investments that do not directly support our core insurance operations may be available for distribution to shareholders or deployment towards liability management upon theirits monetization.
In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: the capital resources available to support our core insurance operations and business strategies, AIG'sAIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, as well as regulatory standards for capital and capital distributions.
In January 2016, AIG Parent made a capital contribution of approximately $2.9 billion to our Non-Life Insurance Companies as a result of our fourth quarter reserve strengthening.
The following table presents AIG Parent's liquidity sources:
| As of | As of |
(In millions) | December 31, 2015 | December 31, 2014 |
Cash and short-term investments(a) | $ | 3,497 | $ | 5,085 |
Unencumbered fixed maturity securities(b) | | 5,723 | | 4,727 |
Total AIG Parent liquidity | | 9,220 | | 9,812 |
Available capacity under syndicated credit facility(c) | | 4,500 | | 4,000 |
Available capacity under contingent liquidity facility(d) | | - | | 500 |
Total AIG Parent liquidity sources | $ | 13,720 | $ | 14,312 |
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| | |
(In millions)
| | As of
December 31, 2013
| | As of
December 31, 2012
| |
|---|
| | |
Cash and short-term investments(a)(b) | | $ | 10,154 | | $ | 12,586 | |
Unencumbered fixed maturity securities(c) | | | 2,968 | | | – | |
| | |
Total AIG Parent liquidity | | | 13,122 | | | 12,586 | |
| | |
Available capacity under syndicated credit facility(d) | | | 3,947 | | | 3,037 | |
Available capacity under contingent liquidity facility(e) | | | 500 | | | 500 | |
| | |
Total AIG Parent liquidity sources | | $ | 17,569 | | $ | 16,123 | |
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(a) Cash and short-term investments include reverse repurchase agreements totaling $6.9$1.5 billion and $8.9$1.6 billion as of December 31, 20132015 and 2012,2014, respectively.
(b) $5.9 billion and $4.6 billion of cash and short-term investments as of December 31, 2013 and 2012, respectively, are allocated toward future maturities of liabilities and contingent liquidity stress needs of DIB and GCM.
(c) Unencumbered securities consist of publicly traded, intermediate-term investment grade rated fixed maturity securities. Fixed maturity securities consist ofprimarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, and corporate and municipal bonds.bonds and certain other highly rated securities.
(d)(c) For additional information relating to this syndicated credit facility, see Credit Facilities below.
(e)(d) The contingent liquidity facility expired by its terms on December 15, 2015. For additional information relating to the contingent liquidity facility, see Contingent Liquidity Facilities below.
AIG Property CasualtyNon-Life Insurance Companies
We expect that AIG Property Casualty subsidiariesour Non-Life Insurance Companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations portfolio interest, scheduled investment maturities and, to the extent necessary, monetization of invested assets. AIG Property Casualty's subsidiaries'Our Non-Life Insurance Companies’ liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
National Union FireEach of our Non-Life Insurance CompanyCompanies’ liquidity is monitored through the use of Pittsburgh, Pa. (NUFI) is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh, AIG Specialty Insurance Company (ASI) is a member of the FHLB of Chicago and Lexington Insurance Company (Lexington) is a member of the FHLB of Boston. FHLB membership provides participants with access to various services, including access to low-cost advances through pledging of certain mortgage-backed securities, government and agency securities and other qualifying assets. These advances may be used to provide an additional sourceinternal liquidity risk measures. The primary sources of liquidity for balance sheet management or contingency funding purposes. Asare premiums, fees, reinsurance recoverables and investment income.The primary uses of December 31, 2013, there were no FHLB advances outstanding for NUFI, CSI or Lexington.liquidity are paid losses, reinsurance payments, dividends, expenses, investments and collateral requirements.
AIG Property Casualty's subsidiariesOur Non-Life Insurance Companies may require additional funding to meet capital or liquidity needs under certain circumstances.
Large catastrophes may require AIGus to provide additional support to our affected operations. Downgrades in AIG'sour credit ratings could put pressure on the insurer financial strength ratings of AIG'sour subsidiaries, which could result in non-renewalsnon‑renewals or cancellations by policyholders and adversely affect the subsidiary'ssubsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to
AIG 2013 Form 10-K
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ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.
Certain Non-Life Insurance Companies are members of the Federal Home Loan Banks (FHLBs) in their respective districts. Borrowings from the FHLBs may be used to supplement liquidity. As of December 31, 2015 and 2014, none of our Non-Life Insurance Companies had FHLB borrowings outstanding.
In April 2015, AIG Parent and Ascot Corporate Name Limited (ACNL), an AIG Property Casualty subsidiary, are parties to a Non-Life Insurance Company, entered into a new $725 million letter of credit facility, which replaced the prior $625 million letter of credit facility. ACNL, as a member of the Lloyd'sLloyd’s of London insurance syndicate (Lloyd's)(Lloyd’s), is required to hold capital at Lloyd's,Lloyd’s, known as Funds at Lloyds (FAL). Under the new facility, which supports the 2013, 2014 and 2015 years of account, the entire FAL capital requirement of $600$625 million as of December 31, 2013,2015, which supports the 2015, 2016 and 2017 years of account, was satisfied with a letter of credit in that amount issued under the facility.
AIG Parent, AIG Property Casualty Inc. and certain AIG Property Casualty domestic insurance subsidiaries are parties to a consolidated CMA. Among other things, the CMA provides that AIG Parent will maintain the total adjustedgenerally manages capital of these AIG Property Casualty insurance subsidiaries, measured as a group (the Fleet), at or above the specified minimum percentage of the Fleet's projected total authorized control level Risk-Based Capital (RBC). In addition, the CMA provided that if the total adjusted capital of the Fleet exceeds that same specified minimum percentage of the Fleet's total authorized control level RBC, subject to approval by their respective boards, and compliance with applicable insurance laws, the AIG Property Casualty insurance subsidiaries would declare and pay ordinary dividends to their respective equity holders up to an amount necessary to reduce the Fleet's projected or actual total adjusted capital to a level equal to or not materially greater than such specified minimum percentage. On February 18, 2014, the CMA was recharacterized as a capital support agreement and amended to remove the exclusion of deferred tax assets from the calculation of total adjusted capital and remove the dividend requirement of the Fleet. The specified minimum percentage in the CMA was also reduced from 325 percent to 300 percent. AIG will continue to manage capital flows between AIG Parent and the AIG Property Casualty insurance subsidiariesour Non-Life Insurance Companies through internal, Board-approved policies and guidelines.
AIG Property Casualty paid cash and non-cash dividends totaling $4.3 billion to AIG Parent in 2013, including $2.6 billion of cash dividends in the fourth quarter of 2013. For the years ended December 31, 2013 and 2012, AIG Parent received approximately $4.3 billion and $2.3 billion, respectively, in dividends from AIG Property Casualty Inc. that were made under the CMAs then in place, and AIG Parent was not required to make any capital contributions in either period pursuant to the CMAs then in place.
AIG Life and Retirement
We expect that AIG Life and Retirement subsidiaries will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. AIG Life and Retirement subsidiaries' liquidity resources are held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Certain AIG Life and Retirement insurance subsidiaries are members of the FHLBs in their respective districts. As of December 31, 2013, AIG Life and Retirement had outstanding borrowings of $50 million from the FHLBs. Borrowings from the FHLBs are used to supplement liquidity or for other general corporate purposes.
The need to fund product surrenders, withdrawals and maturities creates a potential liquidity requirement for AIG Life and Retirement's insurance subsidiaries. We believe that because of the size and liquidity of our investment portfolios, AIG Life and Retirement does not face a significant liquidity risk due to normal deviations from projected claim or surrender experience. Furthermore, AIG Life and Retirement's products contain certain features that mitigate surrender risk, including surrender charges. As part of its risk management framework, AIG Life and Retirement continues to evaluate and, where appropriate, pursue strategies and programs to improve its liquidity position and facilitate AIG Life and Retirement's ability to maintain a fully invested asset portfolio. AIG Life and Retirement also has developed a robust contingent liquidity plan to address any unforeseen liquidity needs.
AIG Life and Retirement executes programs, which began in 2012, that lend securities from its investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, AIG Life and Retirement insurance subsidiaries lend securities to financial institutions and receive collateral equal to 102 percent of the fair value of the loaned securities. Reinvestment of cash collateral received is restricted to liquid investments. Additionally, the aggregate amount of securities that an AIG Life and Retirement insurance company may lend under its program at any time is limited to five percent of its general account admitted assets. AIG Life and Retirement's liability to borrowers for collateral received was $4.0 billion as of December 31, 2013.
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ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
In addition, AIG Parent is party to CMAs with certain AIG Life and Retirement insurance subsidiaries. Among other things, the CMAs provide that AIG Parent will maintain the total adjusted capital of each of these AIG Life and Retirement insurance subsidiaries at or above a specified minimum percentage of the subsidiary's projected NAIC Company Action Level RBC. In addition, the CMAs provided that if the total adjusted capital of these AIG Life and Retirement insurance subsidiaries is in excess of that same specified minimum percentage of their respective total company action level RBC, subject to approval by their respective boards and compliance with applicable insurance laws, the subsidiaries would declare and pay ordinary dividends to their respective equity holders up to an amount necessary to reduce projected or actual total adjusted capital to a level equal to or not materially greater than such specified minimum percentage. On February 18, 2014, the CMAs were recharacterized as capital support agreements and amended to remove the dividend requirement of the AIG Life and Retirement insurance subsidiaries. The specified minimum percentage in the CMAs remained at 385 percent, except for the CMA with AGC Life Insurance Company, where the specified minimum percentage remained at 250 percent. AIG will continue to manage capital between AIG Parent and these AIG Life and Retirement insurance subsidiaries through internal, Board-approved policies and guidelines.
In 2013, AIG Life and Retirement provided $4.4 billion of liquidity to AIG Parent in the form of cash dividends and loan repayments, including $1.3 billion of liquidity in the fourth quarter of 2013, which was funded by the payment of cash dividends from AIG Life and Retirement's insurance subsidiaries that were made under the CMAs. AIG Parent was not required to make any capital contributions to AIG Life and Retirement subsidiaries in either period under the CMAs then in place.
Other Operations
Mortgage Guaranty
We expect that Mortgage Guaranty subsidiaries will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Mortgage Guaranty's liquidity resources are held in the form of cash, short-term investments and publicly traded, investment grade rated, fixed maturity securities. These securities could be monetized in the event liquidity levels are insufficient to meet obligations.
On July 1, 2013, AIG Parent entered into a CMA with aits Mortgage Guaranty insurance subsidiary.company. Among other things, the CMA provides that AIG Parent will maintain capital and surplus of thisthe Mortgage Guaranty insurance subsidiarycompany at or above a specified minimum required capital based on a specified risk-to-capital ratio. In addition, the CMA provides that if capital and surplus of thisthe Mortgage Guaranty insurance subsidiarycompany is in excess of that same specified minimum required capital, subject to its board approval and compliance with applicable insurance laws, thisthe Mortgage Guaranty insurance subsidiarycompany would declare and pay ordinary dividends to its equity holders up to an amount necessary to reduce projected or actual capital and surplus to a level equal to or not materially greater than such specified minimum required capital. As structured, the CMA contemplates that the specified minimum required capital would be reviewed and agreed upon at least annually. As of December 31, 2013,2015, the minimum required capital for the CMA with the Mortgage Guaranty insurance company is based on a risk-to-capital ratio of 2119 to 1.
In 2013, Mortgage Guaranty2015, our Non-Life Insurance Companies paid $90 million of cashapproximately $3.2 billion in dividends to AIG Parent. No dividends were paid, and AIG Parent was not required to make any capital contributions, under the CMA in 2013.
Global Capital Markets
Derivative transactions between AIG and its subsidiaries and third parties are generally centralized through GCM, specifically AIG Markets. Commencing June 10, 2013, GCM was required to clear certain derivatives transactions through central regulated clearing organizations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). To the extent a derivatives transaction is subject to a clearing obligation, GCM is required to post collateral in amounts determined by the relevant clearing organization and GCM's clearing agreements with its futures commission merchants. To the extent a derivatives transaction is not subject to a clearing obligation, these derivative transactions are governed by bilateral master agreements, the form of cash and fixed maturity securities to AIG Parent, of which is published$600 million represented the remainder of dividends that were declared by the International Swaps and Derivatives Association, Inc. (ISDA). Many of these agreements, primarily between GCM and third party financial institutions, require collateral postings. Many of GCM's transactions with AIG and its
AIG 2013 Form 10-Kour Non-Life
Table of ContentsTABLE OF CONTENTS
ITEMItem 7 / LIQUIDITY AND CAPITAL RESOURCESrESOURCES
subsidiaries also include collateral posting requirements, the purpose of which are to provide collateral to GCM, which in turn is used to satisfy posting requirements with third parties, including the margin requirements of clearing organizations and futures commission merchants.
In addition, most of GCM's CDSs within AIGFP are subject to collateral posting provisions. The collateral posting provisions containedInsurance Companies in the ISDA Master Agreements and related transaction documents with respect to CDSs differ among counterparties and asset classes.fourth quarter of 2014. The amount of future collateral posting requirements for super senior CDSs is a function of our credit ratings, the rating of the relevant reference obligations and the market value of the relevant reference obligations, with market value being the most significant factor. We estimate the amount of potential future collateral postings associated with the super senior CDSs using various methodologies. The contingent liquidity requirements associated with such potential future collateral postings are incorporated into our liquidity planning assumptions.
As of December 31, 2013 and December 31, 2012, respectively, GCM had total assets of $7.7 billion and $8.0 billion and total liabilities of $3.1 billion and $4.9 billion. GCM's assets consist primarily of cash, short-term investments, other receivables, net of allowance, and unrealized gains on swaps, options and forwards. GCM's liabilities consist primarily of trade payables and unrealized losses on swaps, options and forwards. Collateral posted by GCM to third parties was $3.0 billion and $4.2 billion at December 31, 2013 and December 31, 2012, respectively. GCM obtained collateral from third parties totaling $572 million and $846 million at December 31, 2013 and December 31, 2012, respectively. The collateral amounts reflect counterparty netting adjustments available under ISDA Master Agreements and are inclusive of collateral that exceeded the fair value of derivatives as of the reporting date.
Direct Investment Book
The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintains the liquidity we believe is necessary to meet all of its liabilities as they come due, even under stress scenarios, and to maximize returns consistent with our risk management objectives. We are focused on meeting the DIB's liquidity needs, including the need for contingent liquidity arising from collateral posting for debt positions of the DIB, without relying on resources beyond the DIB. As part of this program management, we may from time to time access the capital markets, including issuing and repurchasing debt, and selling assets on an opportunistic basis, in each case subject to market conditions. If the DIB's risk target is breached, we expect to take appropriate actions to increase the DIB's liquidity sources or reduce liquidity requirements to maintain the risk target, although no assurance can be given that this can be achieved under then-prevailing market conditions. Any additional liquidity shortfalls would need to be funded by AIG Parent.
From time to time, we may utilize cash allocated to the DIB that is not required to meet the risk target for the DIB for general corporate purposes unrelated to the DIB.
The DIB's assets consist primarily of cash, short-term investments, fixed maturity securities issued by corporations,primarily include U.S. government and government sponsored entitiesentity securities, U.S. agency mortgage-backed securities, corporate and mortgagemunicipal bonds and certain other highly rated securities.
Life Insurance Companies
We expect that our Life Insurance Companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our Life Insurance Companies’ liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our Life Insurance Companies’ liquidity is monitored through the use of various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income. The primary uses of liquidity are benefit claims, interest payments, surrenders, withdrawals, dividends, expenses, investments and collateral requirements.
Management believes that because of the size and liquidity of our Life Insurance Companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. However, as we saw in 2008, in times of extreme capital markets disruption, liquidity needs could outpace resources.Furthermore, our Life Insurance Companies’ products contain certain features that mitigate surrender risk, including surrender charges. As part of their risk management framework, our Life Insurance Companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity position and facilitate their ability to maintain a fully invested asset backedportfolio.
Certain of our U.S. Life Insurance Companies are members of the FHLBs in their respective districts. Borrowings from the FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. Life Insurance Companies had outstanding borrowings from the FHLBs in an aggregate amount of $2 million and $44 million as of December 31, 2015 and 2014, respectively.
Certain of our U.S. Life Insurance Companies have programs, which began in 2012, that lend securities from their investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life Insurance Companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of the loaned securities. The DIB'sCash collateral received is invested in short-term investments. Additionally, the aggregate amount of securities that a Life Insurance Company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. At December 31, 2015, our U.S. Life Insurance Companies had $1.1 billion of securities subject to these agreements and $1.1 billion of liabilities consist primarilyto borrowers for collateral received. Our U.S. Life Insurance Companies had no securities subject to lending agreements and no collateral liability at December 31, 2014.
AIG generally manages capital between AIG Parent and our Life Insurance Companies through internal, Board-approved policies and guidelines. In addition, AIG Parent is party to a CMA with AGC Life Insurance Company. Among other things, the CMA provides that AIG Parent will maintain the total adjusted capital of notes and other borrowings supported by assets as well as other short-term financing obligations.AGC Life Insurance Company at or above a specified minimum percentage of its projected NAIC Company Action Level Risk-Based Capital (RBC). As of December 31, 20132015, the specified minimum percentage under this CMA was 250 percent.
In 2015, our U.S. Life Insurance Companies paid approximately $4.6 billion to AIG Parent, which included $5.4 billion in dividends and December 31, 2012, respectively, the DIB had total assets of $23.3 billion and $28.5 billion and total liabilities of $20.0 billion and $23.8 billion.
The overall hedging activity for the assets and liabilities of the DIB is executed by GCM, The value of hedges related to the non-derivative assets and liabilities of AIGFPloan repayments in the DIB isform of cash and fixed maturity securities, net of an $818 million tax settlement payment received from AIG Parent. The 2015 dividend payments included within$2.2 billion that represented the assets, liabilities and operating resultsremainder of GCM and is not included within the DIB's assets, liabilities or operating results.
Collateral posted by operations includeddividends that were declared in the DIB to third parties was $4.2 billion at December 31, 2013 and $4.3 billion December 31, 2012. This collateralfourth quarter of 2014. The fixed maturity securities primarily consists of securities of theincluded U.S. government and government sponsored entitiesentity securities, U.S. agency mortgage-backed securities, corporate and generally cannot be repledged or resold by the counterparties.
During 2013, the DIB funded maturitiesmunicipal bonds and repurchased debt in the open market in the amount of $2.5 billion. The repurchased debt resulted in a loss on extinguishment of debt of $15 million.certain other highly rated securities.
Credit Facilities
We maintain a committed, revolving four-year syndicated credit facility (the Four-Year Facility) as a potential source of liquidity for general corporate purposes. On November 5, 2015, we amended and restated the five-year syndicated credit facility that was entered into on June 19, 2014 (the Previous Facility). The Four-Year Facility alsoamended and restated five-year syndicated facility (the Five-Year Facility) provides for aggregate commitments by the issuance of letters of credit. We
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ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
currently expectbank syndicate to replace or extend the Four-Year Facility on or prior to its expiration in October 2016, although no assurance can be given that the Four-Year Facility will be replaced on favorable terms or at all.
The Four-Year Facility provides for $4.0 billion ofprovide unsecured revolving loans which includes a $2.0 billion letterand/or standby letters of credit sublimit. of up to $4.5 billion (increased from a $4.0 billion commitment in the Previous Facility) without any limits on the type of borrowings and is scheduled to expire in November 2020 (the Previous Facility was scheduled to expire in June 2019). The increased commitment of $500 million to the Five-Year Facility offsets the effect of the expiration of our $500 million contingent liquidity facility. See Contingent Liquidity Facilities below.
As of December 31, 2013,2015, a total of approximately $3.9$4.5 billion remains available under the Four-Year Facility, of which approximately $1.9 billion remains available for letters of credit. During each of the third and fourth quarters of 2013, we reduced our utilization of letters of credit under the Four-YearFive-Year Facility. Our ability to borrow under the Four-YearFive-Year Facility is not contingent on our credit ratings. However, our ability to borrow under the Four-YearFive-Year Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Four-YearFive-Year Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Four-YearFive-Year Facility would restrict our access to the Four-YearFive-Year Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to borrow under the Four-YearFive-Year Facility from time to time, and may use the proceeds for general corporate purposes.
Contingent Liquidity Facilities
AIG Parent hashad access to a contingent liquidity facility of up to $500 million as a potential source of liquidity for general corporate purposes. Under this facility, we havehad the unconditional right, prior to December 15, 2015, to issue up to $500 million in senior debt to the counterparty, based on a put option agreement between AIG Parent and the counterparty.
Our ability to borrow under this The contingent liquidity facility expired by its terms on December 15, 2015. The expiration of the contingent liquidity facility is not contingent onoffset by the effect of the increased commitment of $500 million to our credit ratings.Five-Year Facility. See Credit Facilities above.
Contractual Obligations
The following table summarizes contractual obligations in total, and by remaining maturity:
December 31, 2015 | | | Payments due by Period |
| | Total | | | | 2017 - | | 2019 - | | |
(in millions) | | Payments | | 2016 | | 2018 | | 2020 | | Thereafter |
Insurance operations | | | | | | | | | | |
Loss reserves | $ | 78,090 | $ | 19,035 | $ | 22,202 | $ | 12,243 | $ | 24,610 |
Insurance and investment contract liabilities | | 229,806 | | 15,691 | | 28,322 | | 24,999 | | 160,794 |
Borrowings | | 813 | | - | | - | | 106 | | 707 |
Interest payments on borrowings | | 1,141 | | 54 | | 109 | | 109 | | 869 |
Operating leases | | 986 | | 253 | | 350 | | 197 | | 186 |
Other long-term obligations | | 25 | | 4 | | 11 | | 6 | | 4 |
Total | $ | 310,861 | $ | 35,037 | $ | 50,994 | $ | 37,660 | $ | 187,170 |
Other | | | | | | | | | | |
Borrowings | $ | 23,548 | $ | 1,619 | $ | 3,208 | $ | 2,475 | $ | 16,246 |
Interest payments on borrowings | | 17,142 | | 1,067 | | 1,998 | | 1,759 | | 12,318 |
Operating leases | | 149 | | 51 | | 52 | | 23 | | 24 |
Other long-term obligations | | 107 | | - | | - | | - | | 107 |
Total | $ | 40,946 | $ | 2,737 | $ | 5,258 | $ | 4,257 | $ | 28,695 |
Consolidated | | | | | | | | | | |
Loss reserves | $ | 78,090 | $ | 19,035 | $ | 22,202 | $ | 12,243 | $ | 24,610 |
Insurance and investment contract liabilities | | 229,806 | | 15,691 | | 28,322 | | 24,999 | | 160,794 |
Borrowings | | 24,361 | | 1,619 | | 3,208 | | 2,581 | | 16,953 |
Interest payments on borrowings | | 18,283 | | 1,121 | | 2,107 | | 1,868 | | 13,187 |
Operating leases | | 1,135 | | 304 | | 402 | | 219 | | 210 |
Other long-term obligations(a) | | 132 | | 4 | | 11 | | 6 | | 111 |
Total(b) | $ | 351,807 | $ | 37,774 | $ | 56,252 | $ | 41,916 | $ | 215,865 |
| | | | | | | | | | | | | | | | |
| | |
| |
| | Payments due by Period | |
|---|
December 31, 2013
(in millions)
| | Total
Payments
| | 2014
| | 2015 –
2016
| | 2017 –
2018
| | Thereafter
| |
|---|
| | |
Insurance operations | | | | | | | | | | | | | | | | |
Loss reserves | | $ | 85,102 | | $ | 21,993 | | $ | 24,355 | | $ | 12,574 | | $ | 26,180 | |
Insurance and investment contract liabilities | | | 227,715 | | | 13,332 | | | 28,594 | | | 25,245 | | | 160,544 | |
Borrowings | | | 1,991 | | | 7 | | | 46 | | | 8 | | | 1,930 | |
Interest payments on borrowings | | | 2,708 | | | 107 | | | 217 | | | 219 | | | 2,165 | |
Operating leases | | | 1,219 | | | 267 | | | 406 | | | 262 | | | 284 | |
Other long-term obligations | | | 32 | | | 4 | | | 15 | | | 7 | | | 6 | |
| | |
Total | | $ | 318,767 | | $ | 35,710 | | $ | 53,633 | | $ | 38,315 | | $ | 191,109 | |
| | |
Other and Held for Sale | | | | | | | | | | | | | | | | |
Borrowings(a) | | $ | 59,214 | | $ | 6,369 | | $ | 12,663 | | $ | 17,432 | | $ | 22,750 | |
Interest payments on borrowings | | | 35,433 | | | 3,309 | | | 5,822 | | | 4,068 | | | 22,234 | |
Operating leases | | | 258 | | | 81 | | | 75 | | | 41 | | | 61 | |
Aircraft purchase commitments | | | 21,714 | | | 2,162 | | | 6,147 | | | 8,887 | | | 4,518 | |
Other long-term obligations | | | 259 | | | 74 | | | 52 | | | 10 | | | 123 | |
| | |
Total | | $ | 116,878 | | $ | 11,995 | | $ | 24,759 | | $ | 30,438 | | $ | 49,686 | |
| | |
Consolidated | | | | | | | | | | | | | | | | |
Loss reserves | | $ | 85,102 | | $ | 21,993 | | $ | 24,355 | | $ | 12,574 | | $ | 26,180 | |
Insurance and investment contract liabilities | | | 227,715 | | | 13,332 | | | 28,594 | | | 25,245 | | | 160,544 | |
Borrowings(a) | | | 61,205 | | | 6,376 | | | 12,709 | | | 17,440 | | | 24,680 | |
Interest payments on borrowings | | | 38,141 | | | 3,416 | | | 6,039 | | | 4,287 | | | 24,399 | |
Operating leases | | | 1,477 | | | 348 | | | 481 | | | 303 | | | 345 | |
Aircraft purchase commitments | | | 21,714 | | | 2,162 | | | 6,147 | | | 8,887 | | | 4,518 | |
Other long-term obligations(b) | | | 291 | | | 78 | | | 67 | | | 17 | | | 129 | |
| | |
Total(c) | | $ | 435,645 | | $ | 47,705 | | $ | 78,392 | | $ | 68,753 | | $ | 240,795 | |
| | |
(a) Includes $21.4 billion of borrowings related to ILFC, which is reported as held for sale.
(b) Primarily includes contracts to purchase future services and other capital expenditures.
(c)(b) Does not reflect unrecognized tax benefits of $4.3 billion, ($4.0 billion excluding ILFC), the timing of which is uncertain.
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ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
Loss Reserves
Loss reserves relate to the AIG Property Casualty and the Mortgage Guaranty businesses,our Non-Life Insurance Companies and represent future losslosses and loss adjustment expense payments estimated based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that AIG Property Casualty and Mortgage Guaranty subsidiariesour Non-Life Insurance Companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to AIGour Life and Retirement businesses.Insurance Companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments of a term certain nature. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently not making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event out ofbeyond our control.
We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.
We believe that AIGour Life and Retirement subsidiariesInsurance Companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, AIGour Life and Retirement businessesInsurance Companies maintain significant levels of investment-gradeinvestment grade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.
Borrowings
Borrowings
Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.
AIG 2013 Form 10-K
Off-Balance Sheet Arrangements and Commercial Commitments
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:
December 31, 2015 | | | Amount of Commitment Expiring |
| | Total Amounts | | | | 2017 - | | 2019 - | | |
(in millions) | | Committed | | 2016 | | 2018 | | 2020 | | Thereafter |
Insurance operations | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Standby letters of credit | $ | 870 | $ | 180 | $ | 59 | $ | 627 | $ | 4 |
Guarantees of indebtedness | | 128 | | 101 | | 27 | | - | | - |
All other guarantees(a) | | - | | - | | - | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 2,406 | | 1,615 | | 538 | | 247 | | 6 |
Commitments to extend credit | | 2,403 | | 1,171 | | 856 | | 290 | | 86 |
Letters of credit | | 6 | | 6 | | - | | - | | - |
Total(c) | $ | 5,813 | $ | 3,073 | $ | 1,480 | $ | 1,164 | $ | 96 |
Other | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit | | 208 | | 208 | | - | | - | | - |
All other guarantees | | 153 | | 140 | | 13 | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 145 | | 72 | | 1 | | - | | 72 |
Commitments to extend credit(e) | | 500 | | - | | - | | 500 | | - |
Letters of credit | | 25 | | 25 | | - | | - | | - |
Total(c)(f) | $ | 1,105 | $ | 445 | $ | 14 | $ | 500 | $ | 146 |
Consolidated | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit | | 1,078 | | 388 | | 59 | | 627 | | 4 |
Guarantees of indebtedness | | 128 | | 101 | | 27 | | - | | - |
All other guarantees(a) | | 153 | | 140 | | 13 | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 2,551 | | 1,687 | | 539 | | 247 | | 78 |
Commitments to extend credit(e) | | 2,903 | | 1,171 | | 856 | | 790 | | 86 |
Letters of credit | | 31 | | 31 | | - | | - | | - |
Total(c)(f) | $ | 6,918 | $ | 3,518 | $ | 1,494 | $ | 1,664 | $ | 242 |
| | | | | | | | | | | | | | | | |
| | |
| |
| | Amount of Commitment Expiring | |
|---|
December 31, 2013
(in millions)
| | Total Amounts
Committed
| | 2014
| | 2015 –
2016
| | 2017 –
2018
| | Thereafter
| |
|---|
| | |
Insurance operations | | | | | | | | | | | | | | | | |
Guarantees: | | | | | | | | | | | | | | | | |
Standby letters of credit | | $ | 869 | | $ | 8 | | $ | 184 | | $ | 600 | | $ | 77 | |
Guarantees of indebtedness | | | 169 | | | – | | | – | | | – | | | 169 | |
All other guarantees(a) | | | 8 | | | – | | | – | | | 1 | | | 7 | |
Commitments: | | | | | | | | | | | | | | | | |
Investment commitments(b) | | | 2,078 | | | 1,454 | | | 496 | | | 123 | | | 5 | |
Commitments to extend credit | | | 1,090 | | | 1,001 | | | 89 | | | – | | | – | |
Letters of credit | | | 6 | | | 6 | | | – | | | – | | | – | |
Other commercial commitments | | | 627 | | | – | | | – | | | – | | | 627 | |
| | |
Total(c) | | $ | 4,847 | | $ | 2,469 | | $ | 769 | | $ | 724 | | $ | 885 | |
| | |
Other and Held for Sale | | | | | | | | | | | | | | | | |
Guarantees: | | | | | | | | | | | | | | | | |
Liquidity facilities(d) | | $ | 101 | | $ | – | | $ | – | | $ | – | | $ | 101 | |
Standby letters of credit | | | 241 | | | 236 | | | 4 | | | 1 | | | – | |
All other guarantees(a) | | | 148 | | | 15 | | | 23 | | | 50 | | | 60 | |
Commitments: | | | | | | | | | | | | | | | | |
Investment commitments(b) | | | 338 | | | 254 | | | 39 | | | 7 | | | 38 | |
Commitments to extend credit | | | 2 | | | 1 | | | – | | | – | | | 1 | |
Letters of credit | | | 24 | | | 24 | | | – | | | – | | | – | |
Other commercial commitments(e) | | | 4 | | | 5 | | | – | | | – | | | (1 | ) |
| | |
Total(c)(f) | | $ | 858 | | $ | 535 | | $ | 66 | | $ | 58 | | $ | 199 | |
| | |
Consolidated | | | | | | | | | | | | | | | | |
Guarantees: | | | | | | | | | | | | | | | | |
Liquidity facilities(d) | | $ | 101 | | $ | – | | $ | – | | $ | – | | $ | 101 | |
Standby letters of credit | | | 1,110 | | | 244 | | | 188 | | | 601 | | | 77 | |
Guarantees of indebtedness | | | 169 | | | – | | | – | | | – | | | 169 | |
All other guarantees(a) | | | 156 | | | 15 | | | 23 | | | 51 | | | 67 | |
Commitments: | | | | | | | | | | | | | | | | |
Investment commitments(b) | | | 2,416 | | | 1,708 | | | 535 | | | 130 | | | 43 | |
Commitments to extend credit | | | 1,092 | | | 1,002 | | | 89 | | | – | | | 1 | |
Letters of credit | | | 30 | | | 30 | | | – | | | – | | | – | |
Other commercial commitments(e) | | | 631 | | | 5 | | | – | | | – | | | 626 | |
| | |
Total(c)(f) | | $ | 5,705 | | $ | 3,004 | | $ | 835 | | $ | 782 | | $ | 1,084 | |
| | |
(a) Includes residual value guarantees associated with aircraft and AIG Life and Retirement construction guarantees connected to affordable housing investments.investments by our Life Insurance Companies. Excludes potential amounts for indemnification obligations included in asset sales agreements. See Note 159 to the Consolidated Financial Statements for further information on indemnification obligations.
(b) Includes commitments to invest in private equity funds, hedge funds and mutual funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.
(c) Does not include guarantees, capital maintenance agreementsCMAs or other support arrangements among AIG consolidated entities.
(d) Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e) Includes a five-year senior unsecured revolving credit facility between AerCap Ireland Capital Limited, as borrower, and AIG Parent, as lender (the AerCap Credit Facility) scheduled to mature in May 2019. The AerCap Credit Facility permits loans for general corporate purposes. In June 2015, upon the receipt by AIG Parent of the $500 million principal amount of 6.50% fixed-to-floating rate junior subordinated notes issued by AerCap Global Aviation Trust, the aggregate commitment under the AerCap Credit Facility was reduced to $500 million from $1.0 billion. At December 31, 2015, no amounts were outstanding under the AerCap Credit Facility.
(f) Excludes commitments with respect to pension plans. The annual pension contribution for 20142016 is expected to be approximately $177$67 million for U.S. and non-U.S. plansplans.
(f) Includes $333 million attributable to ILFC, which is reported as held for sale.
AIG 2013 Form 10-K
Arrangements with Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE when we are the primary beneficiary of the entity. For a further discussion of our involvement with VIEs, see Note 109 to the Consolidated Financial Statements.
Indemnification Agreements
We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by the contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations. For additional information regarding our indemnification agreements, see Note 15 to the Consolidated Financial Statements.
We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.
Debt
Debt
The following table provides the rollforward of AIG'sAIG’s total debt outstanding:
| | Balance at | | | | Maturities | | Effect of | | | | | Balance at |
Year Ended December 31, 2015 | | December 31, | | | | and | | Foreign | | Other | | December 31, |
(in millions) | | 2014 | | Issuances | Repayments | | Exchange | | Changes | | | 2015 |
Debt issued or guaranteed by AIG: | | | | | | | | | | | | | |
AIG general borrowings: | | | | | | | | | | | | | |
Notes and bonds payable | $ | 15,570 | $ | 5,540 | $ | (3,828) | $ | (156) | $ | 10 | | $ | 17,136 |
Subordinated debt | | 250 | | - | | (250) | | - | | - | | | - |
Junior subordinated debt | | 2,466 | | - | | (1,073) | | (57) | | 1 | | | 1,337 |
AIG Japan Holdings Kabushiki Kaisha | | - | | 110 | | (1) | | (3) | | - | | | 106 |
AIGLH notes and bonds payable | | 284 | | - | | - | | - | | - | | | 284 |
AIGLH junior subordinated debt | | 536 | | - | | (114) | | - | | - | | | 422 |
Total AIG general borrowings | | 19,106 | | 5,650 | | (5,266) | | (216) | | 11 | | | 19,285 |
AIG borrowings supported by assets:(a) | | | | | | | | | | | | | |
MIP notes payable | | 2,870 | | - | | (1,351) | | (143) | | (4) | | | 1,372 |
Series AIGFP matched notes and bonds payable | | 34 | | - | | (2) | | - | | 2 | | | 34 |
GIAs, at fair value | | 4,648 | | 388 | | (1,812) | | - | | 52 | (b) | | 3,276 |
Notes and bonds payable, at fair value | | 818 | | 16 | | (431) | | - | | (9) | (b) | | 394 |
Total AIG borrowings supported by assets | | 8,370 | | 404 | | (3,596) | | (143) | | 41 | | | 5,076 |
Total debt issued or guaranteed by AIG | | 27,476 | | 6,054 | | (8,862) | | (359) | | 52 | | | 24,361 |
Debt not guaranteed by AIG: | | | | | | | | | | | | | |
Other subsidiaries notes, bonds, loans and | | | | | | | | | | | | | |
mortgages payable | | 58 | | 450 | | (505) | | (1) | | - | | | 2 |
Debt of consolidated investments(c) | | 3,683 | | 363 | | (614) | | (1) | | 1,556 | (d) | | 4,987 |
Total debt not guaranteed by AIG | | 3,741 | | 813 | | (1,119) | | (2) | | 1,556 | | | 4,989 |
Total debt | $ | 31,217 | $ | 6,867 | $ | (9,981) | $ | (361) | $ | 1,608 | | $ | 29,350 |
| | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
|---|
| | |
Year Ended December 31, 2013
(in millions)
| | Balance at
December 31,
2012
| | Issuances
| | Maturities
and
Repayments
| | Effect of
Foreign
Exchange
| | Other
Changes
| | Balance at
December 31,
2013
| |
|---|
| | |
Debt issued or guaranteed by AIG: | | | | | | | | | | | | | | | | | | | |
AIG general borrowings: | | | | | | | | | | | | | | | | | | | |
Notes and bonds payable | | $ | 14,084 | | $ | 2,024 | | $ | (2,148 | ) | $ | 83 | | $ | 19 | | $ | 14,062 | |
Subordinated debt | | | 250 | | | – | | | – | | | – | | | – | | | 250 | |
Junior subordinated debt | | | 9,416 | | | – | | | (3,910 | ) | | 21 | | | 6 | | | 5,533 | |
Loans and mortgages payable | | | 79 | | | – | | | (78 | ) | | – | | | – | | | 1 | |
AIGLH notes and bonds payable | | | 298 | | | – | | | – | | | – | | | 1 | | | 299 | |
AIGLH junior subordinated debt(a) | | | 1,339 | | | – | | | (286 | ) | | – | | | 1 | | | 1,054 | |
| | |
Total AIG general borrowings | | | 25,466 | | | 2,024 | | | (6,422 | ) | | 104 | | | 27 | | | 21,199 | |
| | |
AIG/DIB borrowings supported by assets:(b) | | | | | | | | | | | | | | | | | | | |
MIP notes payable | | | 9,296 | | | – | | | (1,082 | ) | | (183 | ) | | (68 | ) | | 7,963 | |
Series AIGFP matched notes and bonds payable | | | 3,544 | | | – | | | (300 | ) | | – | | | (25 | ) | | 3,219 | |
GIAs, at fair value | | | 6,501 | | | 528 | | | (927 | ) | | – | | | (572 | )(c) | | 5,530 | |
Notes and bonds payable, at fair value | | | 1,554 | | | 34 | | | (613 | ) | | – | | | 242 | (c) | | 1,217 | |
| | |
Total AIG/DIB borrowings supported by assets | | | 20,895 | | | 562 | | | (2,922 | ) | | (183 | ) | | (423 | ) | | 17,929 | |
| | |
Total debt issued or guaranteed by AIG | | | 46,361 | | | 2,586 | | | (9,344 | ) | | (79 | ) | | (396 | ) | | 39,128 | |
| | |
Debt not guaranteed by AIG: | | | | | | | | | | | | | | | | | | | |
Other subsidiaries notes, bonds, loans and mortgages payable | | | 325 | | | 546 | | | (207 | ) | | (26 | ) | | 18 | | | 656 | |
| | |
Debt of consolidated investments(d) | | | 1,814 | | | 150 | | | (126 | ) | | 18 | | | 53 | | | 1,909 | |
| | |
Total debt not guaranteed by AIG | | | 2,139 | | | 696 | | | (333 | ) | | (8 | ) | | 71 | | | 2,565 | |
| | |
Total debt(e) | | $ | 48,500 | | $ | 3,282 | | $ | (9,677 | ) | $ | (87 | ) | $ | (325 | ) | $ | 41,693 | |
| | |
(a) On July 11, 2013, AIGLH junior subordinated debentures with the same terms as the trust preferred securities were distributed to holders of the trust preferred securities, and the trust preferred securities were cancelled.
AIG 2013 Form 10-K
(a) AIG Parent guarantees all DIBsuch debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $2.4 billion and $3.5 billion at December 31, 2015 and 2014, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
(c)(b) Primarily represents adjustments to the fair value of debt.
(d)(c) At December 31, 2013,2015, includes debt of consolidated investment vehicles related to real estate investments primarily held through AIG Global Real Estate Investment Corp., AIG Property Casualty U.S., AIG Credit Corp.of $2.4 billion, affordable housing partnership investments and AIG Lifesecuritizations of $2.2 billion and Retirementother securitization vehicles and investments of $1.5$359 million. At December 31, 2014, includes debt of consolidated investment vehicles related to real estate investments of $2.1 billion, $58 million, $111affordable housing partnership investments and securitizations of $853 million, and $201 million, respectively.
(e) Excludes $21.4 billionother securitization vehicles and $24.3 billion related to ILFC as it is classified as a held-for-sale business at December 31, 2013 and 2012, respectively.
The decrease (d) Includes the effect of consolidating previously unconsolidated partnerships.
Total DEBT OUTSTANDING
(in total debt outstanding as of December 31, 2013 compared to December 31, 2012 was primarily due to maturities and repayments of debt, including cash tender offers, redemptions and repurchases of certain debt securities discussed above.millions)
Debt MaturitiesComposite AIG Credit Ratings
With respect to our fixed maturity investments, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (over 99 percent of total fixed maturity investments), or (b) our equivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC. The following table summarizes maturing debt at December 31, 2013“Non-rated” category in those tables consists of AIG (excluding $1.9 billionfixed maturity securities that have not been rated by any of borrowings of consolidated investments) for the next four quarters:
| | | | | | | | | | | | | | | | |
| | |
(in millions)
| | First
Quarter
2014
| | Second
Quarter
2014
| | Third
Quarter
2014
| | Fourth
Quarter
2014
| | Total
| |
|---|
| | |
AIG/DIB borrowings supported by assets(b) | | $ | 2,674 | | $ | 506 | | $ | 102 | | $ | 41 | | $ | 3,323 | |
Other subsidiaries notes, bonds, loans and mortgages payable | | | 1 | | | – | | | 6 | | | – | | | 7 | |
| | |
Total(a) | | $ | 2,675 | | $ | 506 | | $ | 108 | | $ | 41 | | $ | 3,330 | |
| | |
(a) There is no debt related to AIG general borrowings set to mature in 2014. This debt will begin maturing in 2015.
(b) In January 2014, AIG reduced DIB debt by $2.2 billion through a redemption of $1.2 billion aggregate principal amount of its 4.250% Notes due 2014 and a repurchase of $1.0 billion of its 8.25% Notes due 2018 using cash and short term investments allocated tomajor rating agencies, the DIB.NAIC or us.
See Note 14 to the Consolidated Financial StatementsEnterprise Risk Management herein for additional details for debt outstanding.a discussion of credit risks associated with Investments.
Credit Ratings
Credit ratings estimate a company's ability to meet its obligations and may directly affect the cost and availability of financing to that company.The following table presents the composite AIG credit ratings of AIG and certain of its subsidiaries as of February 1, 2014. Figures in parentheses indicate the relative ranking of the ratings within the
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
agency's rating categories; that ranking refers only to the major rating category and not to the modifiers assigned by the rating agencies.
| | | | | | | | | | |
| | |
| | Short-Term Debt | | Senior Long-Term Debt | |
|---|
| | Moody's
| | S&P
| | Moody's(a)
| | S&P(b)
| | Fitch(c)
| |
|---|
| | |
AIG | | P-2 (2nd of 3) | | A-2 (2nd of 8) | | Baa 1 (4th of 9) | | A- (3rd of 8) | | BBB (4th of 9) | |
| | Stable Outlook | | | | Stable Outlook | | Negative Outlook | | Stable Outlook | |
| |
AIG Financial Products Corp.(d) | | P-2
Stable Outlook | | A-2 | | Baa 1
Stable Outlook | | A-
Negative Outlook | | – | |
| |
AIG Funding, Inc.(d) | | P-2 | | A-2 | | – | | – | | – | |
| | Stable Outlook | | | | | | | | | |
| |
(a) Moody's appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.
(b) S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(c) Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d) AIG guarantees all obligations of AIG Financial Products Corp. and AIG Funding, Inc.
These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.
We are party to some agreements that contain "ratings triggers". Dependingfixed maturity securities calculated on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitationbasis of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.their fair value:
| Available for Sale | | Other | | Total | |
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |
(in millions) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Rating: | | | | | | | | | | | | | | | | | | |
Other fixed maturity | | | | | | | | | | | | | | | | | | |
securities | | | | | | | | | | | | | | | | | | |
AAA | $ | 12,274 | | $ | 15,463 | | $ | 3,222 | | $ | 5,322 | | $ | 15,496 | | $ | 20,785 | |
AA | | 35,344 | | | 36,730 | | | 207 | | | 224 | | | 35,551 | | | 36,954 | |
A | | 50,741 | | | 56,693 | | | 1,781 | | | 242 | | | 52,522 | | | 56,935 | |
BBB | | 71,766 | | | 75,607 | | | 186 | | | 250 | | | 71,952 | | | 75,857 | |
Below investment grade | | 12,305 | | | 10,651 | | | 133 | | | 303 | | | 12,438 | | | 10,954 | |
Non-rated | | 920 | | | 1,035 | | | - | | | - | | | 920 | | | 1,035 | |
Total | $ | 183,350 | | $ | 196,179 | | $ | 5,529 | | $ | 6,341 | | $ | 188,879 | | $ | 202,520 | |
Mortgage-backed, asset- | | | | | | | | | | | | | | | | | | |
backed and collateralized | | | | | | | | | | | | | | | | | | |
AAA | $ | 26,382 | | $ | 24,783 | | $ | 1,756 | | $ | 2,313 | | $ | 28,138 | | $ | 27,096 | |
AA | | 5,003 | | | 4,078 | | | 708 | | | 1,549 | | | 5,711 | | | 5,627 | |
A | | 7,462 | | | 7,606 | | | 416 | | | 494 | | | 7,878 | | | 8,100 | |
BBB | | 4,394 | | | 3,813 | | | 497 | | | 620 | | | 4,891 | | | 4,433 | |
Below investment grade | | 21,638 | | | 23,376 | | | 7,771 | | | 8,314 | | | 29,409 | | | 31,690 | |
Non-rated | | 16 | | | 24 | | | 105 | | | 81 | | | 121 | | | 105 | |
Total | $ | 64,895 | | $ | 63,680 | | $ | 11,253 | | $ | 13,371 | | $ | 76,148 | | $ | 77,051 | |
Total | | | | | | | | | | | | | | | | | | |
AAA | $ | 38,656 | | $ | 40,246 | | $ | 4,978 | | $ | 7,635 | | $ | 43,634 | | $ | 47,881 | |
AA | | 40,347 | | | 40,808 | | | 915 | | | 1,773 | | | 41,262 | | | 42,581 | |
A | | 58,203 | | | 64,299 | | | 2,197 | | | 736 | | | 60,400 | | | 65,035 | |
BBB | | 76,160 | | | 79,420 | | | 683 | | | 870 | | | 76,843 | | | 80,290 | |
Below investment grade | | 33,943 | | | 34,027 | | | 7,904 | | | 8,617 | | | 41,847 | | | 42,644 | |
Non-rated | | 936 | | | 1,059 | | | 105 | | | 81 | | | 1,041 | | | 1,140 | |
Total | $ | 248,245 | | $ | 259,859 | | $ | 16,782 | | $ | 19,712 | | $ | 265,027 | | $ | 279,571 | |
TABLE OF CONTENTS
In the event of adverse actions on our long-term debt ratings by the major rating agencies, AIGFP and certain other GCM entities would be required to post additional collateral under some derivative transactions, or could experience termination of the transactions. Such transactions could adversely affect our business, our consolidated results of operations in a reporting period or our liquidity. In the event of a further downgrade of AIG's long-term senior debt ratings, AIGFP and certain other GCM entities would be required to post additional collateral, and certain of the counterparties of AIGFP or of certain other GCM entities would be permitted to terminate their contracts early.
Item 7 / INVESTMENTS
Available‑for‑Sale Investments
The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depend on market conditions,following table presents the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade.
For a discussion of the effects of downgrades in the financial strength ratings of our insurance companies or our credit ratings, see Note 11 to the Consolidated Financial Statements and Part I, Item 1A. Risk Factors — Liquidity, Capital and Credit.available‑for‑sale securities:
| | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | 2015 | | 2014 |
Bonds available for sale: | | | | | | | | | | |
U.S. government and government sponsored entities | | | | | | | $ | 1,844 | $ | 2,992 |
Obligations of states, municipalities and political subdivisions | | | | | | | | 27,323 | | 27,659 |
Non-U.S. governments | | | | | | | | 18,195 | | 21,095 |
Corporate debt | | | | | | | | 135,988 | | 144,433 |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | |
RMBS | | | | | | | | 36,227 | | 37,520 |
CMBS | | | | | | | | 13,571 | | 12,885 |
CDO/ABS | | | | | | | | 15,097 | | 13,275 |
Total mortgage-backed, asset-backed and collateralized | | | | | | | | 64,895 | | 63,680 |
Total bonds available for sale* | | | | | | | | 248,245 | | 259,859 |
Equity securities available for sale: | | | | | | | | | | |
Common stock | | | | | | | | 2,401 | | 3,629 |
Preferred stock | | | | | | | | 22 | | 25 |
Mutual funds | | | | | | | | 492 | | 741 |
Total equity securities available for sale | | | | | | | | 2,915 | | 4,395 |
Total | | | | | | | $ | 251,160 | $ | 264,254 |
Regulation and Supervision* At
For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources, see Item 1. Business — Regulation and Item 1A. Risk Factors — Regulation.
Dividends and Repurchases of AIG Common Stock
On August 1, 2013, our Board of Directors declared a cash dividend on AIG Common Stock of $0.10 per share, which was paid on September 26, 2013 to shareholders of record on September 12, 2013.
On October 31, 2013, our Board of Directors declared a cash dividend on AIG Common Stock of $0.10 per share, which was paid on December 19, 2013 to shareholders of record on December 5, 2013.
On February 13, 2014, our Board of Directors declared a cash dividend on AIG Common Stock of $0.125 per share, payable on March 25, 2014 to shareholders of record on March 11, 2014. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, including the regulatory framework applicable to us, as discussed further in Note 16 to the Consolidated Financial Statements.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
On August 1, 2013, our Board of Directors authorized the repurchase of shares of AIG Common Stock, with an aggregate purchase price of up to $1.0 billion, from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise. As of December 31, 2013, we have repurchased approximately 12 million shares2015 and 2014, the fair value of AIG Common Stockbonds available for an aggregate purchase price of approximately $597 million pursuant to this authorization. On February 13, 2014, our Board of Directors authorized an increase to the August 1, 2013 repurchase authorization of AIG Common Stocksale held by $1.0us that were below investment grade or not rated totaled $34.9 billion resulting in an aggregate remaining authorization of approximately $1.4and $35.1 billion, of AIG Common Stock, which may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise. The timing of such repurchases will depend on market conditions, our financial condition, results of operations, liquidity and other factors.
Dividend Restrictionsrespectively.
Dividend paymentsThe following table presents the fair value of our aggregate credit exposures to AIG Parentnon-U.S. governments for our fixed maturity securities:
| December 31, | | December 31, |
(in millions) | | 2015 | | | 2014 |
Japan | $ | 5,416 | | $ | 5,728 |
Canada | | 1,453 | | | 2,181 |
Germany | | 832 | | | 1,315 |
France | | 784 | | | 614 |
United Kingdom | | 661 | | | 648 |
Mexico | | 563 | | | 661 |
Netherlands | | 511 | | | 639 |
Norway | | 503 | | | 619 |
Singapore | | 426 | | | 545 |
Chile | | 386 | | | 395 |
Other | | 6,710 | | | 7,752 |
Total | $ | 18,245 | | $ | 21,097 |
The following table presents the fair value of our aggregate European credit exposures by major sector for our insurance subsidiaries are subject to certain restrictions imposedfixed maturity securities:
| December 31, 2015 | | |
| | | | | | Non- | | | | | December 31, |
| | | | Financial | | Financial | | Structured | | | | 2014 |
(in millions) | | Sovereign | | Institution | | Corporates | | Products | | Total | | Total |
Euro-Zone countries: | | | | | | | | | | | | |
France | $ | 784 | $ | 1,215 | $ | 2,019 | $ | - | $ | 4,018 | $ | 4,498 |
Netherlands | | 511 | | 991 | | 1,505 | | 397 | | 3,404 | | 4,276 |
Germany | | 832 | | 285 | | 2,227 | | 21 | | 3,365 | | 4,155 |
Ireland | | 2 | | - | | 598 | | 674 | | 1,274 | | 850 |
Spain | | 29 | | 90 | | 968 | | 15 | | 1,102 | | 1,557 |
Italy | | 19 | | 115 | | 863 | | 12 | | 1,009 | | 1,245 |
Belgium | | 219 | | 120 | | 516 | | - | | 855 | | 973 |
Luxembourg | | - | | 18 | | 448 | | 30 | | 496 | | 243 |
Finland | | 65 | | 34 | | 130 | | - | | 229 | | 235 |
Austria | | 104 | | 3 | | 17 | | - | | 124 | | 155 |
Other - EuroZone | | 680 | | 48 | | 200 | | 1 | | 929 | | 1,022 |
Total Euro-Zone | $ | 3,245 | $ | 2,919 | $ | 9,491 | $ | 1,150 | $ | 16,805 | $ | 19,209 |
Remainder of Europe | | | | | | | | | | | | |
United Kingdom | $ | 661 | $ | 2,968 | $ | 8,015 | $ | 3,642 | $ | 15,286 | $ | 16,076 |
Switzerland | | 49 | | 1,195 | | 1,275 | | - | | 2,519 | | 2,941 |
Sweden | | 144 | | 488 | | 195 | | - | | 827 | | 1,135 |
Norway | | 503 | | 43 | | 142 | | - | | 688 | | 846 |
Russian Federation | | 36 | | 8 | | 78 | | - | | 122 | | 311 |
Other - Remainder of Europe | | 198 | | 119 | | 111 | | 15 | | 443 | | 494 |
Total - Remainder of Europe | $ | 1,591 | $ | 4,821 | $ | 9,816 | $ | 3,657 | $ | 19,885 | $ | 21,803 |
Total | $ | 4,836 | $ | 7,740 | $ | 19,307 | $ | 4,807 | $ | 36,690 | $ | 41,012 |
Investments in Municipal Bonds
At December 31, 2015, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backed bonds with over 95 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale U.S. municipal bond portfolio by regulatory authorities. With respect to our domestic insurance subsidiaries, the payment of any dividend requires formal noticestate and municipal bond type:
| December 31, 2015 | | |
| | State | | Local | | | | Total | December 31, |
| | General | | General | | | | Fair | | 2014 |
(in millions) | | Obligation | | Obligation | | Revenue | | Value | | Total Fair Value |
State: | | | | | | | | | | |
New York | $ | 35 | $ | 620 | $ | 3,958 | $ | 4,613 | $ | 4,116 |
California | | 663 | | 610 | | 2,568 | | 3,841 | | 4,707 |
Texas | | 328 | | 1,534 | | 1,553 | | 3,415 | | 3,356 |
Illinois | | 111 | | 367 | | 1,008 | | 1,486 | | 1,364 |
Massachusetts | | 693 | | - | | 694 | | 1,387 | | 1,417 |
Washington | | 530 | | 144 | | 685 | | 1,359 | | 1,278 |
Florida | | 155 | | - | | 980 | | 1,135 | | 1,052 |
Virginia | | 65 | | 5 | | 808 | | 878 | | 918 |
Georgia | | 280 | | 243 | | 347 | | 870 | | 819 |
Washington DC | | 156 | | 1 | | 548 | | 705 | | 607 |
Pennsylvania | | 269 | | 23 | | 384 | | 676 | | 537 |
Arizona | | - | | 94 | | 482 | | 576 | | 734 |
Ohio | | 128 | | 8 | | 395 | | 531 | | 604 |
All other states(a) | | 1,061 | | 547 | | 4,243 | | 5,851 | | 6,150 |
Total(b)(c) | $ | 4,474 | $ | 4,196 | $ | 18,653 | $ | 27,323 | $ | 27,659 |
(a) We did not have material credit exposure to the insurance departmentgovernment of Puerto Rico.
(b) Excludes certain university and not-for-profit entities that issue their bonds in which the particular insurance subsidiary is domiciled. Foreign jurisdictions may restrictcorporate debt market. Includes industrial revenue bonds.
(c) Includes $2.9 billion of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the abilityindustry categories of our foreign insurance subsidiariesavailable for sale corporate debt securities:
| | Fair Value at | | Fair Value at | |
Industry Category | | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Financial institutions: | | | | | |
Money Center /Global Bank Groups | $ | 9,104 | $ | 10,682 | |
Regional banks — other | | 568 | | 543 | |
Life insurance | | 3,295 | | 3,575 | |
Securities firms and other finance companies | | 380 | | 422 | |
Insurance non-life | | 5,421 | | 5,625 | |
Regional banks — North America | | 6,823 | | 6,636 | |
Other financial institutions | | 7,808 | | 8,169 | |
Utilities(a) | | 18,497 | | 19,249 | |
Communications | | 10,251 | | 10,316 | |
Consumer noncyclical | | 15,391 | | 16,792 | |
Capital goods | | 8,973 | | 8,594 | |
Energy(a) | | 13,861 | | 16,494 | |
Consumer cyclical | | 9,767 | | 11,197 | |
Basic | | 7,512 | | 9,187 | |
Other | | 18,337 | | 16,952 | |
Total (b) | $ | 135,988 | $ | 144,433 | |
(a) The Utilities and Energy amounts at December 31, 2014, have been revised from $23.7 billion and $12.0 billion to pay dividends,$19.2 billion and dividends$16.5 billion, respectively, to conform to current industry classification, which are not considered material to previously issued financial statements.
(b) At December 31, 2015 and December 31, 2014, approximately 91 percent and 93 percent, respectively, of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, were 5.6 percent and 6.4 percent at December 31, 2015 and 2014, respectively. The decline in energy exposure from foreign subsidiaries may also have unfavorable income tax consequences. ThereDecember 31, 2014 resulted from unrealized losses due to reduction in the energy sector pricing, sales of securities and other-than-temporary impairments. While the energy investments are also various local restrictions limiting cash loansprimarily investment grade and advancesare actively managed, the category continues to AIG Parentexperience volatility that could adversely affect credit quality and fair value.
Investments in RMBS
The following table presents AIG’s RMBS available for sale investments by our subsidiaries.year of vintage:
| | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Total RMBS | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,273 | $ | - |
2014 | | | | | | | | | | | 1,096 | | 871 |
2013 | | | | | | | | | | | 2,178 | | 2,724 |
2012 | | | | | | | | | | | 1,944 | | 2,382 |
2011 | | | | | | | | | | | 4,800 | | 5,310 |
2010 and prior* | | | | | | | | | | | 23,936 | | 26,233 |
Total RMBS | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,025 | $ | - |
2014 | | | | | | | | | | | 1,000 | | 799 |
2013 | | | | | | | | | | | 2,094 | | 2,625 |
2012 | | | | | | | | | | | 1,877 | | 2,234 |
2011 | | | | | | | | | | | 2,927 | | 3,428 |
2010 and prior | | | | | | | | | | | 2,628 | | 3,324 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | $ | - | $ | - |
2010 and prior | | | | | | | | | | | 12,831 | | 13,001 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | | - | | - |
2010 and prior | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | - | $ | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | 8 | | 8 |
2012 | | | | | | | | | | | 53 | | 126 |
2011 | | | | | | | | | | | 1,873 | | 1,882 |
2010 and prior | | | | | | | | | | | 5,716 | | 7,047 |
Total Prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
* Includes approximately $13.2 billion and $13.5 billion at December 31, 2015, and December 31, 2014, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. See Note 195 to the Consolidated Financial Statements for additional discussion of restrictions on payments of dividendsPurchased Credit Impaired (PCI) Securities.
The following table presents our RMBS available for sale investments by AIG and its subsidiaries.credit rating:
| | | | | | | | | | Fair Value at | Fair Value at |
| | | | | | | December 31, | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | | | | |
Total RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 14,884 | $ | 14,699 |
AA | | | | | | | | | | | 389 | | 418 |
A | | | | | | | | | | | 509 | | 546 |
BBB | | | | | | | | | | | 661 | | 911 |
Below investment grade(a) | | | | | | | | | | | 19,779 | | 20,937 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total RMBS(b) | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 12,547 | $ | 12,405 |
AA | | | | | | | | | | | 4 | | 5 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 5 | $ | 7 |
AA | | | | | | | | | | | 17 | | 33 |
A | | | | | | | | | | | 121 | | 85 |
BBB | | | | | | | | | | | 216 | | 317 |
Below investment grade(a) | | | | | | | | | | | 12,472 | | 12,559 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 15 | $ | 18 |
AA | | | | | | | | | | | 68 | | 117 |
A | | | | | | | | | | | 247 | | 252 |
BBB | | | | | | | | | | | 200 | | 207 |
Below investment grade(a) | | | | | | | | | | | 1,846 | | 1,829 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 1,986 | $ | 2,076 |
AA | | | | | | | | | | | 188 | | 253 |
A | | | | | | | | | | | 138 | | 205 |
BBB | | | | | | | | | | | 209 | | 351 |
Below investment grade(a) | | | | | | | | | | | 5,124 | | 6,169 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
(a) Includes certain RMBS that had experienced deterioration in credit quality since their origination. See Note 5 to the Consolidated Financial Statements for additional discussion on PCI Securities.
(b) The weighted average expected life was six years at both December 31, 2015 and December 31, 2014.
Our underwriting practices for investing in RMBS, other asset‑backed securities and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.
Investments in CMBS
The following table presents our CMBS available for sale investments:
| | | | | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | | | | 2015 | | 2014 |
CMBS (traditional) | | | | | | | | | | | | | | $ | 11,132 | $ | 11,265 |
Agency | | | | | | | | | | | | | | | 1,622 | | 1,372 |
Other | | | | | | | | | | | | | | | 817 | | 248 |
Total | | | | | | | | | | | | | | $ | 13,571 | $ | 12,885 |
The following table presents the fair value of our CMBS available for sale investments by rating agency designation and by vintage year:
| | | | | | | | | | Below | | | | |
| | | | | | | | | | Investment | | | | |
(in millions) | | AAA | | AA | | A | | BBB | | Grade | | Non-Rated | | Total |
December 31, 2015 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2015 | $ | 824 | $ | 404 | $ | 465 | $ | 240 | $ | - | $ | - | $ | 1,933 |
2014 | | 1,604 | | 183 | | 11 | | - | | - | | - | | 1,798 |
2013 | | 2,611 | | 433 | | 89 | | 54 | | - | | - | | 3,187 |
2012 | | 737 | | 60 | | 31 | | 83 | | - | | 10 | | 921 |
2011 | | 1,015 | | 25 | | 31 | | 21 | | - | | - | | 1,092 |
2010 and prior | | 921 | | 700 | | 635 | | 738 | | 1,646 | | - | | 4,640 |
Total | $ | 7,712 | $ | 1,805 | $ | 1,262 | $ | 1,136 | $ | 1,646 | $ | 10 | $ | 13,571 |
December 31, 2014 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2014 | $ | 1,570 | $ | 183 | $ | 11 | $ | - | $ | - | $ | - | $ | 1,764 |
2013 | | 2,684 | | 442 | | 91 | | 58 | | - | | - | | 3,275 |
2012 | | 1,158 | | 61 | | 28 | | 92 | | - | | 12 | | 1,351 |
2011 | | 1,022 | | 20 | | 37 | | 21 | | - | | - | | 1,100 |
2010 and prior | | 1,119 | | 626 | | 814 | | 843 | | 1,993 | | - | | 5,395 |
Total | $ | 7,553 | $ | 1,332 | $ | 981 | $ | 1,014 | $ | 1,993 | $ | 12 | $ | 12,885 |
OVERVIEWThe following table presents our CMBS available for sale investments by geographic region:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Geographic region: | | | | | |
New York | $ | 3,149 | $ | 2,759 | |
California | | 1,244 | | 1,305 | |
Texas | | 791 | | 831 | |
Florida | | 520 | | 562 | |
New Jersey | | 433 | | 457 | |
Virginia | | 362 | | 389 | |
Illinois | | 323 | | 344 | |
Pennsylvania | | 295 | | 291 | |
Georgia | | 253 | | 286 | |
Massachusetts | | 231 | | 247 | |
Maryland | | 229 | | 222 | |
North Carolina | | 218 | | 222 | |
All Other* | | 5,523 | | 4,970 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Non-U.S. locations.
Our investment strategies are tailored to the specific business needsThe following table presents our CMBS available for sale investments by industry:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Industry: | | | | | |
Retail | $ | 3,978 | $ | 3,700 | |
Office | | 3,896 | | 3,652 | |
Multi-family* | | 3,036 | | 2,889 | |
Lodging | | 1,005 | | 1,127 | |
Industrial | | 868 | | 679 | |
Other | | 788 | | 838 | |
Total | $ | 13,571 | $ | 12,885 | |
* Includes Agency-backed CMBS.
The fair value of each operating unit. The investment objectives are driven by the respective business models for AIG Property Casualty, AIG Life and Retirement, and AIG Parent including the DIB. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products.CMBS holdings remained stable throughout 2015. The majority of assets backing our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale investments by collateral type:
| | | | | | | | | | Fair value at | | Fair value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | 2015 | | 2014 |
Collateral Type: | | | | | | | | | | | | |
Bank loans (CLO) | | | | | | | | | $ | 7,962 | $ | 6,683 |
Other | | | | | | | | | | 153 | | 388 |
Total | | | | | | | | | $ | 8,115 | $ | 7,071 |
The following table presents our CDO available for sale investments by credit rating:
| | | | | | | Fair Value at | | Fair Value at |
| | | | | December 31, | | December 31, |
(in millions) | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | |
AAA | | | | | | | $ | 2,870 | $ | 1,922 |
AA | | | | | | | | 2,543 | | 2,135 |
A | | | | | | | | 2,247 | | 2,317 |
BBB | | | | | | | | 298 | | 366 |
Below investment grade | | | | | | | | 157 | | 331 |
Total | | | | | | | $ | 8,115 | $ | 7,071 |
Commercial Mortgage Loans
At December 31, 2015, we had direct commercial mortgage loan exposure of $22.1 billion of which, approximately 99 percent of the loans were current.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
| Number | | | | | | | | | | | | | | | | Percent | |
| of | | Class | | | of | |
(dollars in millions) | Loans | | Apartments | | Offices | | Retail | Industrial | Hotel | | Others | | Total | Total | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 97 | | $ | 823 | $ | 2,968 | $ | 516 | $ | 301 | $ | 166 | $ | 186 | $ | 4,960 | 22 | % |
California | 95 | | | 87 | | 547 | | 433 | | 533 | | 788 | | 308 | | 2,696 | 12 | |
Texas | 60 | | | 120 | | 696 | | 106 | | 147 | | 187 | | 48 | | 1,304 | 6 | |
New Jersey | 45 | | | 441 | | 338 | | 324 | | - | | 29 | | 33 | | 1,165 | 5 | |
Florida | 78 | | | 187 | | 113 | | 374 | | 116 | | 20 | | 146 | | 956 | 4 | |
Illinois | 21 | | | 174 | | 369 | | 21 | | 32 | | 36 | | 23 | | 655 | 3 | |
Massachusetts | 19 | | | 56 | | 168 | | 360 | | - | | - | | 33 | | 617 | 3 | |
Connecticut | 20 | | | 314 | | 152 | | 23 | | 81 | | - | | - | | 570 | 3 | |
Pennsylvania | 28 | | | 6 | | 29 | | 436 | | 62 | | 27 | | 4 | | 564 | 3 | |
Ohio | 37 | | | 122 | | 28 | | 211 | | 67 | | - | | 5 | | 433 | 2 | |
Other states | 302 | | | 1,118 | | 1,203 | | 1,514 | | 414 | | 595 | | 229 | | 5,073 | 23 | |
Foreign | 47 | | | 471 | | 1,234 | | 520 | | 161 | | 250 | | 438 | | 3,074 | 14 | |
Total* | 849 | | $ | 3,919 | $ | 7,845 | $ | 4,838 | $ | 1,914 | $ | 2,098 | $ | 1,453 | $ | 22,067 | 100 | % |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 90 | | $ | 545 | $ | 2,111 | $ | 285 | $ | 148 | $ | 68 | $ | 215 | $ | 3,372 | 18 | % |
California | 115 | | | 29 | | 635 | | 389 | | 472 | | 597 | | 469 | | 2,591 | 14 | |
New Jersey | 48 | | | 490 | | 353 | | 308 | | - | | 30 | | 74 | | 1,255 | 7 | |
Florida | 89 | | | 141 | | 192 | | 335 | | 118 | | 137 | | 161 | | 1,084 | 6 | |
Texas | 58 | | | 62 | | 482 | | 121 | | 171 | | 187 | | 54 | | 1,077 | 6 | |
Illinois | 24 | | | 175 | | 327 | | 26 | | 73 | | 36 | | - | | 637 | 3 | |
Massachusetts | 19 | | | - | | 198 | | 321 | | - | | - | | 34 | | 553 | 3 | |
Colorado | 18 | | | 62 | | 158 | | 48 | | - | | 120 | | 101 | | 489 | 2 | |
Connecticut | 23 | | | 279 | | 155 | | 5 | | 43 | | - | | - | | 482 | 2 | |
Pennsylvania | 49 | | | 45 | | 89 | | 170 | | 107 | | 16 | | 5 | | 432 | 2 | |
Other states | 349 | | | 920 | | 1,140 | | 1,738 | | 494 | | 310 | | 281 | | 4,883 | 26 | |
Foreign | 142 | | | 636 | | 678 | | 78 | | 63 | | 176 | | 423 | | 2,054 | 11 | |
Total* | 1,024 | | $ | 3,384 | $ | 6,518 | $ | 3,824 | $ | 1,689 | $ | 1,677 | $ | 1,817 | $ | 18,909 | 100 | % |
* Does not reflect allowance for credit losses.
See Note 6 to the Consolidated Financial Statements for additional discussion on commercial mortgage loans.
Impairments
The following table presents impairments by investment type:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Other-than-temporary Impairments: | | | | | | | | | | | |
Fixed maturity securities, available for sale | | | | | | $ | 425 | $ | 180 | $ | 173 |
Equity securities, available for sale | | | | | | | 166 | | 37 | | 14 |
Private equity funds and hedge funds | | | | | | | 80 | | 30 | | 45 |
Subtotal | | | | | | | 671 | | 247 | | 232 |
Other impairments: | | | | | | | | | | | |
Investments in life settlements | | | | | | | 540 | | 201 | | 971 |
Other investments | | | | | | | 166 | | 126 | | 112 |
Real estate | | | | | | | 23 | | 8 | | 19 |
Total | | | | | | $ | 1,400 | $ | 582 | $ | 1,334 |
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to recover our estimated future carrying amount, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market mortality assumptions and market yields.
In late 2015, several insurance liabilities consistproviders gave notice of intermediate and long durationincreases in policy premiums related to our investments in life settlements. The increase in premiums required to keep policies in force results in lower future expected net cash flows which are insufficient to recover our net investment on certain policies.
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities.securities, equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by reportable segment and impairment type:
| | Non-Life | | Life | | Corporate | | |
| | Insurance | | Insurance | | and Other | | |
(in millions) | | Companies | | Companies | | Operations | | Total |
For the Year Ended December 31, 2015 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 13 | $ | - | $ | - | $ | 13 |
Change in intent | | 7 | | 145 | | 81 | | 233 |
Foreign currency declines | | 33 | | 24 | | - | | 57 |
Issuer-specific credit events | | 178 | | 168 | | 2 | | 348 |
Adverse projected cash flows | | 7 | | 13 | | - | | 20 |
Total | $ | 238 | $ | 350 | $ | 83 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 3 | $ | - | $ | - | $ | 3 |
Change in intent | | 8 | | 32 | | - | | 40 |
Foreign currency declines | | 9 | | 10 | | - | | 19 |
Issuer-specific credit events | | 60 | | 109 | | - | | 169 |
Adverse projected cash flows | | 5 | | 11 | | - | | 16 |
Total | $ | 85 | $ | 162 | $ | - | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | |
Impairment Type: | | | | | | | | |
Severity | $ | 6 | $ | - | $ | - | $ | 6 |
Change in intent | | 1 | | 45 | | 2 | | 48 |
Foreign currency declines | | 1 | | - | | - | | 1 |
Issuer-specific credit events | | 43 | | 127 | | - | | 170 |
Adverse projected cash flows | | 1 | | 6 | | - | | 7 |
Total | $ | 52 | $ | 178 | $ | 2 | $ | 232 |
Other-than-temporary impairment charges by investment type and impairment type:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 13 | $ | 13 |
Change in intent | | 3 | | - | | 14 | | 131 | | 85 | | 233 |
Foreign currency declines | | - | | - | | - | | 57 | | - | | 57 |
Issuer-specific credit events | | 79 | | 3 | | 8 | | 110 | | 148 | | 348 |
Adverse projected cash flows | | 20 | | - | | - | | - | | - | | 20 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 3 |
Change in intent | | - | | - | | - | | 27 | | 13 | | 40 |
Foreign currency declines | | - | | - | | - | | 19 | | - | | 19 |
Issuer-specific credit events | | 80 | | 9 | | 21 | | 8 | | 51 | | 169 |
Adverse projected cash flows | | 16 | | - | | - | | - | | - | | 16 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 6 | $ | 6 |
Change in intent | | 1 | | - | | - | | 46 | | 1 | | 48 |
Foreign currency declines | | - | | - | | - | | 1 | | - | | 1 |
Issuer-specific credit events | | 36 | | 5 | | 50 | | 27 | | 52 | | 170 |
Adverse projected cash flows | | 7 | | - | | - | | - | | - | | 7 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
Other-than-temporary impairment charges by investment type and credit rating:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 12 | $ | - | $ | 12 |
AA | | - | | - | | - | | 12 | | - | | 12 |
A | | - | | - | | - | | 12 | | - | | 12 |
BBB | | 2 | | - | | - | | 50 | | - | | 52 |
Below investment grade | | 100 | | 3 | | 22 | | 208 | | - | | 333 |
Non-rated | | - | | - | | - | | 4 | | 246 | | 250 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 4 | $ | - | $ | 4 |
AA | | 3 | | - | | - | | 2 | | - | | 5 |
A | | - | | - | | - | | 2 | | - | | 2 |
BBB | | 2 | | - | | - | | 11 | | - | | 13 |
Below investment grade | | 91 | | 5 | | 21 | | 35 | | - | | 152 |
Non-rated | | - | | 4 | | - | | - | | 67 | | 71 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | 1 | $ | - | $ | - | $ | - | $ | - | $ | 1 |
AA | | 2 | | - | | - | | - | | - | | 2 |
A | | 1 | | - | | - | | - | | - | | 1 |
BBB | | 1 | | - | | - | | 44 | | - | | 45 |
Below investment grade | | 39 | | 5 | | 50 | | 29 | | - | | 123 |
Non-rated | | - | | - | | - | | 1 | | 59 | | 60 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
We recorded other-than-temporary impairment charges in the years ended December 31, 2015, 2014 and 2013 related to:
•issuer-specific credit events;
•securities that we intend to sell or for which it is more likely than not that we will be required to sell;
•declines due to foreign exchange rates;
•adverse changes in estimated cash flows on certain structured securities; and
•securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate and investments in life settlements.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $735 million in 2015, $725 million in 2014 and $774 million in 2013. See Note 6 to the Consolidated Financial Statements for a discussion of our other-than-temporary impairment accounting policy.
The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:
December 31, 2015 | Less Than or Equal | | | Greater Than 20% | | | Greater Than 50% | | | |
| | to 20% of Cost(b) | | | to 50% of Cost(b) | | | of Cost(b) | | | Total |
Aging(a) | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |
(dollars in millions) | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss(d) | Items(e) |
Investment grade | | | | | | | | | | | | | | | | | | | | | | | |
bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 35,961 | $ | 815 | 5,516 | | $ | 408 | $ | 115 | 82 | | $ | - | $ | - | - | | $ | 36,369 | $ | 930 | 5,598 |
7-11 months | | 23,134 | | 1,342 | 3,594 | | | 1,061 | | 275 | 201 | | | - | | - | - | | | 24,195 | | 1,617 | 3,795 |
12 months or more | | 6,883 | | 501 | 938 | | | 2,363 | | 733 | 183 | | | 21 | | 13 | 6 | | | 9,267 | | 1,247 | 1,127 |
Total | $ | 65,978 | $ | 2,658 | 10,048 | | $ | 3,832 | $ | 1,123 | 466 | | $ | 21 | $ | 13 | 6 | | $ | 69,831 | $ | 3,794 | 10,520 |
Below investment | | | | | | | | | | | | | | | | | | | | | | | |
grade bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 6,024 | $ | 199 | 2,341 | | $ | 567 | $ | 168 | 100 | | $ | 17 | $ | 11 | 13 | | $ | 6,608 | $ | 378 | 2,454 |
7-11 months | | 2,706 | | 168 | 814 | | | 199 | | 59 | 132 | | | 7 | | 6 | 3 | | | 2,912 | | 233 | 949 |
12 months or more | | 5,164 | | 324 | 766 | | | 871 | | 278 | 200 | | | 385 | | 243 | 83 | | | 6,420 | | 845 | 1,049 |
Total | $ | 13,894 | $ | 691 | 3,921 | | $ | 1,637 | $ | 505 | 432 | | $ | 409 | $ | 260 | 99 | | $ | 15,940 | $ | 1,456 | 4,452 |
Total bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 41,985 | $ | 1,014 | 7,857 | | $ | 975 | $ | 283 | 182 | | $ | 17 | $ | 11 | 13 | | $ | 42,977 | $ | 1,308 | 8,052 |
7-11 months | | 25,840 | | 1,510 | 4,408 | | | 1,260 | | 334 | 333 | | | 7 | | 6 | 3 | | | 27,107 | | 1,850 | 4,744 |
12 months or more | | 12,047 | | 825 | 1,704 | | | 3,234 | | 1,011 | 383 | | | 406 | | 256 | 89 | | | 15,687 | | 2,092 | 2,176 |
Total(e) | $ | 79,872 | $ | 3,349 | 13,969 | | $ | 5,469 | $ | 1,628 | 898 | | $ | 430 | $ | 273 | 105 | | $ | 85,771 | $ | 5,250 | 14,972 |
Equity securities | | | | | | | | | | | | | | | | | | | | | | | |
0-11 months | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
Total | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
(a) Represents the number of consecutive months that fair value has been less than cost by any amount.
(b) Represents the percentage by which fair value is less than cost at December 31, 2015.
(c) For bonds, represents amortized cost.
(d) The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2015 was primarily attributable to decreases in the fair value of fixed maturity securities. For 2015, net unrealized gains related to fixed maturity and equity securities decreased by $10.2 billion due primarily to the rise in rates, widening of credit spreads, and the sale of equity securities.
The change in net unrealized gains and losses on investments in 2014 was primarily attributable to increases in the fair value of fixed maturity securities. For 2014, net unrealized gains related to fixed maturity and equity securities increased by $7.3 billion due to a decrease in interest rates on investment grade fixed maturity securities, partially offset by narrowing spreadsthe widening of spreads.
See also Note 5, Investments to the Consolidated Financial Statements for further discussion of our investment portfolio.
The following section provides discussion of insurance reserves for both the Non-Life Insurance Companies and the Life Insurance Companies, including Eaglestone Reinsurance Company, which is reported in Corporate and Other.
Non-Life Insurance Companies
The following section provides discussion of the consolidated liability for unpaid losses and loss adjustment expenses for the Non-Life Insurance Companies.
The following table presents the components of AIG’s gross loss reserves by major lines of business on a U.S. statutory basis(a):
At December 31, | | |
(in millions) | | 2015 | | 2014(b) |
Other liability occurrence (including asbestos and environmental) | $ | 24,856 | $ | 24,988 |
Workers' compensation (net of discount) | | 14,978 | | 16,014 |
Other liability claims made | | 14,006 | | 13,632 |
Property | | 5,823 | | 6,350 |
Auto liability | | 4,692 | | 4,814 |
Accident and health | | 1,783 | | 1,972 |
Products liability | | 1,681 | | 1,678 |
Medical malpractice | | 1,603 | | 1,520 |
Aircraft | | 1,286 | | 1,340 |
Mortgage guaranty / credit | | 733 | | 1,008 |
Other | | 3,501 | | 3,944 |
Total | $ | 74,942 | $ | 77,260 |
Total U.S. & Canada | $ | 58,890 | $ | 58,729 |
Total International (c) | $ | 16,052 | $ | 18,531 |
(a) Presented by lines of business pursuant to statutory reporting requirements as prescribed by the NAIC.
(b) 2014 reflects the reclassification of International reserves to major lines of business.
(c) The decrease was primarily the effect of foreign exchange on gross reserves, a payment on a large loss, and the net of other claim payments and reserve movements.
Gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for IBNR and loss expenses, less estimated salvage and subrogation and applicable discount. The Non-Life Insurance Companies regularly review and update the methods and assumptions used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected in pre‑tax operating income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase prior years’ estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease prior years’ estimates of ultimate cost are referred to as favorable development. See MD&A Critical Accounting Estimates – Details of the Loss Reserving Process.
Net loss reserves represent gross loss reserves reduced by reinsurance recoverable, net of an allowance for unrecoverable reinsurance.
The following table presents the components of net loss reserves:
December 31, | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 |
Gross loss reserves before reinsurance and discount | | | | | | $ | 78,090 | $ | 80,337 |
Less: discount | | | | | | | (3,148) | | (3,077) |
Gross loss reserves, net of discount, before reinsurance | | | | | | | 74,942 | | 77,260 |
Less: reinsurance recoverable* | | | | | | | (14,339) | | (15,648) |
Net liability for unpaid losses and loss adjustment expenses | | | | | | $ | 60,603 | $ | 61,612 |
* Includes $1.8 billion and $1.5 billion of reinsurance recoverable under a retroactive reinsurance agreement at December 31, 2015, and December 31, 2014, respectively.
Gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.6 billion and $12.4 billion at December 31, 2015 and 2014, respectively. These recoverable amounts are related to certain policies with high deductibles (meaning, the policy attachment point is above high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements; each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to deductible portion of the claim the Non-Life Insurance Companies manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 2015 and 2014, the Non-Life Insurance Companies held collateral of approximately $9.6 billion and $9.4 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and assets in trusts.
The following table classifies the components of net loss reserves by business unit:
December 31, | | |
(in millions) | | 2015 | | 2014 |
Commercial Property Casualty: | | | | |
Casualty | $ | 32,620 | $ | 33,065 |
Financial lines | | 9,265 | | 9,538 |
Specialty | | 5,197 | | 5,786 |
Property | | 4,013 | | 4,079 |
Total Commercial Property Casualty | | 51,095 | | 52,468 |
Commercial Mortgage Guaranty | | 713 | | 977 |
Consumer Personal Insurance | | | | |
Personal lines | | 2,661 | | 2,763 |
Accident and health | | 1,662 | | 1,878 |
Total Consumer Personal Insurance | | 4,323 | | 4,641 |
Other run-off insurance lines* | | 4,472 | | 3,526 |
Net liability for unpaid losses and loss adjustment expenses | $ | 60,603 | $ | 61,612 |
* In 2015, $1.2 billion of loss reserves for certain environmental liability, healthcare, casualty, and specialty coverages, previously reported in Commercial Casualty and Specialty lines of business, were transferred to other run-off insurance lines.
Discounting of Reserves
The following table presents the components of loss reserve discount included above:
December 31, | 2015 | | 2014 |
| | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
U.S. workers' compensation: | | | | | | | | | | | | | |
Tabular | $ | 635 | $ | 218 | $ | 853 | | $ | 623 | $ | 229 | $ | 852 |
Non-tabular | | 1,542 | | 746 | | 2,288 | | | 1,525 | | 689 | | 2,214 |
Asbestos | | - | | 7 | | 7 | | | - | | 11 | | 11 |
Total reserve discount | $ | 2,177 | $ | 971 | $ | 3,148 | | $ | 2,148 | $ | 929 | $ | 3,077 |
The following table presents the net reserve discount benefit (charge):
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| | | Run-off | | | | | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
Current accident year | $ | 182 | $ | - | $ | 182 | | $ | 189 | $ | - | $ | 189 | | $ | 175 | $ | - | $ | 175 |
Accretion and other | | | | | | | | | | | | | | | | | | | | |
adjustments to prior | | | | | | | | | | | | | | | | | | | | |
year discount | | (262) | | (74) | | (336) | | | (145) | | (235) | | (380) | | | (225) | | 102 | | (123) |
Effect of interest rate | | | | | | | | | | | | | | | | | | | | |
changes | | 148 | | 77 | | 225 | | | (225) | | (172) | | (397) | | | (272) | | 529 | | 257 |
Effect of re-pooling | | - | | - | | - | | | 110 | | - | | 110 | | | - | | - | | - |
Net reserve discount | | | | | | | | | | | | | | | | | | | | |
benefit (charge) | | 68 | | 3 | | 71 | | | (71) | | (407) | | (478) | | | (322) | | 631 | | 309 |
Amount transferred to run-off | | | | | | | | | | | | | | | | | | | | |
insurance lines | | (39) | | 39 | | - | | | - | | - | | - | | | - | | - | | - |
Net change in total reserve | | | | | | | | | | | | | | | | | | | | |
discount | $ | 29 | $ | 42 | $ | 71 | | $ | (71) | $ | (407) | $ | (478) | | $ | (322) | $ | 631 | $ | 309 |
Comprised of: | | | | | | | | | | | | | | | | | | | | |
U.S. Workers' | | | | | | | | | | | | | | | | | | | | |
compensation | $ | 29 | $ | 46 | $ | 75 | | $ | (71) | $ | (385) | $ | (456) | | $ | (322) | $ | 649 | $ | 327 |
Asbestos | $ | - | $ | (4) | $ | (4) | | $ | - | $ | (22) | $ | (22) | | $ | - | $ | (18) | $ | (18) |
U.S. Workers’ Compensation
The Non-Life Insurance Companies discount certain workers’ compensation reserves in accordance with practices prescribed or permitted by New York, Pennsylvania and Delaware. New York rules generally do not permit non-tabular discounting on IBNR and prescribe a fixed 5 percent discount rate for application to case reserves. Pennsylvania permits non-tabular discounting of IBNR and, commencing in 2013, approved variable discount rates determined using risk-free rates based on the U.S. Treasury forward yield securities,curve plus a liquidity margin, applicable to IBNR and case reserves. Delaware has permitted discounting on the same basis as the Pennsylvania domiciled companies.
The net increase in workers’ compensation discount in 2015 of $75 million was partially due to the increase in forward yield curve rates used for discounting under the prescribed or permitted practices. The increase in the forward yield curve component of the discount rates resulted in net unrealized lossesa $225 million increase in the investment portfolio. Net unrealized gainsloss reserve discount, as Treasury rates generally increased along the payout pattern horizon in 2015. In addition, the effects of the discount attributable to newly established
reserves for accident year 2015 increased the discount by $182 million in 2015. These increases were partially offset by a $332 million reduction for accident years 2014 and prior, primarily from accretion of discount on reserves during 2015.
On January 1, 2014, the Non-Life Insurance Companies merged their two internal pooling arrangements into one pool, and changed the participation percentages of the pool members resulting in a reallocation of reserves from New York domiciled companies to those domiciled in Pennsylvania and Delaware. As a result of these changes in the participation percentages and domiciliary states of the participants of the combined pool, the Non-Life Insurance Companies recognized a discount benefit of $110 million in the first quarter of 2014.
Annual Reserving Conclusion
AIG net loss reserves represent our available-for-sale portfolio declined to approximately $12 billionbest estimate of the liability for net losses and loss adjustment expenses as of December 31, 2013 from approximately $25 billion2015. While we regularly review the adequacy of established loss reserves, there can be no assurance that our recorded loss reserves will not develop adversely in future years and materially exceed our loss reserves as of December 31, 2012.2015. In our opinion, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on our consolidated financial condition, although such events could have a material adverse effect on our consolidated results of operations for an individual reporting period.
The following table presents the rollforward of net loss reserves:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at beginning of year | | | | | | $ | 61,612 | $ | 64,316 | $ | 68,782 |
Foreign exchange effect | | | | | | | (1,429) | | (1,061) | | (617) |
Other, including dispositions | | | | | | | - | | - | | (79) |
Change due to retroactive asbestos reinsurance | | | | | | | 20 | | 141 | | 22 |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | |
Current year, undiscounted | | | | | | | 20,308 | | 21,279 | | 22,171 |
Prior years unfavorable development, undiscounted* | | | | | | | 4,119 | | 703 | | 557 |
Change in discount | | | | | | | (71) | | 478 | | (309) |
Losses and loss adjustment expenses incurred | | | | | | | 24,356 | | 22,460 | | 22,419 |
Losses and loss adjustment expenses paid: | | | | | | | | | | | |
Current year | | | | | | | 5,751 | | 6,358 | | 7,431 |
Prior years | | | | | | | 18,205 | | 17,886 | | 18,780 |
Losses and loss adjustment expenses paid | | | | | | | 23,956 | | 24,244 | | 26,211 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at end of year | | | | | | $ | 60,603 | $ | 61,612 | $ | 64,316 |
* See tables below for details of prior year development by business unit, accident year and major class of business.
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years, net of reinsurance, by business unit and major class of business:
Years Ended December 31, | | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | | 2014 | | 2013 |
Prior accident year development by major class of business: | | | | | | | | | | | | | |
Commercial Property Casualty - U.S. & Canada: | | | | | | | | | | | | | |
Excess casualty | | | | | | | $ | 1,529 | | $ | (36) | $ | (144) |
Financial lines including professional liability | | | | | | | | 579 | | | (47) | | (113) |
On-going Environmental | | | | | | | | 108 | | | 137 | | 151 |
Primary casualty: | | | | | | | | | | | | | |
Loss-sensitive (offset by premium adjustments below)(a) | | | | | | | | (49) | | | 105 | | 89 |
Other | | | | | | | | 1,175 | | | 445 | | 409 |
Healthcare | | | | | | | | 207 | | | 109 | | (54) |
Property excluding natural catastrophes | | | | | | | | (117) | | | 50 | | (80) |
Natural catastrophes | | | | | | | | (52) | | | (102) | | 179 |
All other, net | | | | | | | | 6 | | | 72 | | 23 |
Total Commercial Property Casualty - U.S. & Canada | | | | | | | | 3,386 | | | 733 | | 460 |
Commercial Property Casualty International: | | | | | | | | | | | | | |
Excess casualty | | | | | | | | 71 | | | (62) | | (15) |
Primary casualty | | | | | | | | 89 | | | (5) | | (25) |
Financial lines | | | | | | | | 47 | | | 182 | | 74 |
Specialty | | | | | | | | (5) | | | (30) | | (51) |
Property excluding natural catastrophes | | | | | | | | (64) | | | (82) | | (3) |
Natural catastrophes | | | | | | | | (44) | | | (77) | | (71) |
All other, net | | | | | | | | - | | | (4) | | (14) |
Total Commercial Property Casualty - International | | | | | | | | 94 | | | (78) | | (105) |
Total Commercial Property Casualty | | | | | | | | 3,480 | | | 655 | | 355 |
Commercial Mortgage Guaranty | | | | | | | | (69) | | | (104) | | 30 |
Consumer Personal Insurance - U.S. & Canada: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | (12) | | | (8) | | (69) |
All other, net | | | | | | | | (54) | | | (44) | | (46) |
Total Consumer Personal Insurance - U.S. & Canada | | | | | | | | (66) | | | (52) | | (115) |
Consumer Personal Insurance - International: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | 2 | | | (8) | | - |
All other, net | | | | | | | | 45 | | | (17) | | (40) |
Total Consumer Personal Insurance - International | | | | | | | | 47 | | | (25) | | (40) |
Total Consumer Personal Insurance | | | | | | | | (19) | | | (77) | | (155) |
Run-off Insurance Lines | | | | | | | | | | | | | |
Asbestos and environmental (1986 and prior) | | | | | | | | 281 | | | 124 | | 67 |
Run-off environmental | | | | | | | | 132 | | | 120 | | 238 |
Run-off healthcare(b) | | | | | | | | 50 | | | - | | - |
Other run-off | | | | | | | | 272 | | | - | | - |
All other, net | | | | | | | | (8) | | | (15) | | 22 |
Total Run-off Insurance Lines | | | | | | | | 727 | | | 229 | | 327 |
Total prior year unfavorable development | | | | | | | $ | 4,119 | | $ | 703 | $ | 557 |
| | | | | | | | | | | | | |
Premium adjustments on primary casualty loss sensitive business | | | | | | | | 49 | | | (105) | | (89) |
Total prior year development, net of premium adjustments | | | | | | | $ | 4,168 | | $ | 598 | $ | 468 |
(a) Represents prior year development on active retrospectively rated components of risk-sharing policies.
(b) In 2015, includes $30 million of non-operating adverse prior year development.
Net Loss Development
In determining the loss development from prior accident years, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes (including challenges and recommendations from our Enterprise Risk Management group) as well as the views of third party actuarial firms. We continued to make investments in structured securities, other fixed maturity securities and mortgage loans with favorable risk versus return characteristicsuse these inputs to improve yieldsour evaluation techniques, and increase net investment income.
•Net investment income benefitedto analyze and assess the change in estimated ultimate loss for each accident year by class of business. Our analyses produce a range of indications from various methods, from which we select our best estimate.We analyze and evaluate the change in estimated ultimate loss for each accident year by class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, we examine the indicated effect such emergence would have on the reserves of that class of business. In some cases, the lower or higher returns on alternative investmentsthan expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the reserves for the class of business. In other cases, the lower or higher than expected emergence may result in a change, either favorable or unfavorable. As appropriate, we make adjustments in response to the difference between the actual and expected loss emergence for each accident year. As part of our reserving process, we also consider notices of claims received with respect to emerging and/or evolving issues, in particular those related to complex, claims-related class action litigation and latent exposure claims. Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratio selected (Commercial: 66.2 points; Consumer: 54.0 points; Mortgage Guaranty: 25.1 points) and the current year’s addition to reserves.
In 2015 and 2014, we recognized $4.1 billion and $703 million of adverse development, respectively, driven in each period by adverse loss development in Commercial Property Casualty and Run-off Insurance Lines partially offset by Consumer Personal Insurance and Mortgage Guaranty business. In 2013, we recognized $557 million of adverse development primarily due to strong equity market performance.
•Blended investment yields on new AIG Life and Retirement and AIGthe adverse prior year loss reserve development in Commercial Property Casualty, investments were lower than blended rates on investmentsMortgage Guaranty business and Run-off Insurance Lines, partially offset by Consumer Personal Insurance.See Results of Operations — Commercial Insurance and Results of Operations — Consumer Personal Insurance Results herein for further discussion of net loss development.
The following is a discussion of the primary reasons for the development in 2015, 2014 and 2013 of those classes of business that were sold, maturedexperienced significant prior accident year development during the three-year period. See MD&A — Critical Accounting Estimates for a description of our loss reserving process, basis for selections and sensitivities to certain assumptions.
Commercial Property Casualty
In 2015, the Commercial Property Casualty adverse prior year loss reserve development of $3.5 billion was driven by Excess Casualty, Primary Casualty, Environmental, Financial Lines, Healthcare and International Excess Casualty, partially offset by Property excluding natural catastrophes and Natural catastrophes.
In 2014, the Commercial Property Casualty adverse prior year loss reserve development of $655 million was driven by Primary Casualty, Environmental, International Financial Lines, and Healthcare, partially offset by Natural catastrophes, International Primary Casualty and International Commercial Property.
In 2013, the Commercial Property Casualty adverse prior year loss reserve development of $355 million was driven by Primary Casualty, International Financial Lines, Environmental, and Healthcare, partially offset by Excess Casualty, Financial Lines, and Natural catastrophes.
Excess Casualty – U.S. & Canada
The excess casualty class presents unique challenges for estimating the liability for unpaid losses. Our policies tend to attach at a high layer above underlying policies, usually issued by other insurance companies, which can limit our access to relevant information to help inform our judgments. Our insureds are generally required to provide us with notice of claims that exceed a
threshold, either expressed as a proportion of our coverage attachment point (e.g., 50 percent of the attachment) or called.
•Other-than-temporary-impairment charges on fixed maturity securities, equity securities, private equity funds and hedge funds remained at low levels,for particular types of claims (e.g., death, quadriplegia). This threshold is generally established well below our attachment point, to provide us with a small portionprecautionary notice of impairments attributableclaims that could potentially reach our excess layer of coverage. This means that the majority of claims reported to structured securities.us are closed without payment by us because the claims never reach our layer, while the claims that reach our layer and close with payment by us can be large and highly variable. Thus, estimates of unpaid losses carry significant uncertainty.
•ImpairmentsDuring 2015, Excess Casualty experienced $1.5 billion of adverse development largely driven by worse than expected loss emergence reported in 2015, including $1.2 billion (primarily for U.S. risks) in the fourth quarter when we completed our scheduled detail valuation review for this class. This increase was largely driven by adverse emergence in both general liability and umbrella auto liability, reflecting worsening trends in the number and nature of high severity losses. Approximately $411 million of the adverse development is related to auto liability. We reacted to the adverse emergence by updating our assumptions about loss severity, loss development patterns and expected loss ratios for the most recent accident years. We have seen an increasing trend in the frequency of high severity claims, especially in the umbrella auto liability portfolio. We also observed deterioration in certain class action claims that have complex coverage uncertainties and high limits characterized by increases in new claims and/or demands reported in 2015 and progress towards potential settlements, which have further informed our actuarial projections of ultimate losses for these types of claims. These types of claim classes have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile. In addition, we also increased losses associated with bad-faith claims by approximately $120 million reflecting an increase in recent settlements. These types of claims have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile.
During 2014, Excess Casualty experienced $36 million of favorable development largely driven by savings on investmentsa few large claims. In our Excess Umbrella analysis in life settlements increased2014, our revised segmentation led to lower 2005 and subsequent accident year estimates for non-mass tort claims where we expect underwriting actions and reductions in policy limits to have a favorable effect on ultimate losses from accident years 2007 to 2013 compared to 2012in particular. This was entirely offset by higher selected ultimate losses for accident years 2004 and prior as a result of updated longevity assumptionsloss development patterns for mass tort claims which we segmented separately from the non-mass tort claims.
During 2013, Excess Casualty experienced $144 million of favorable development due to favorable outcomes on some large cases from 2010 and lower than expected emergence in high layer Catastrophic Casualty business.
Primary Casualty – U.S. and Canada
Primary Casualty includes Workers’ Compensation, General Liability and Auto Liability lines of business. The business is segmented by industry and where relevant, by geography.
Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. As part of the year end reserve review related to these policies, in addition to reviewing normal development we enhanced our segmentation to better reflect the specified policy features. Based on the analysis, we increased our reserves by $540 million, primarily for accident years 2012 and prior and in the workers’ compensation class, to reflect estimated increased losses and reduced expectations of future recoveriesfrom our insureds through these risk-sharing features.
We also recognized $100 million of adverse prior year development in Workers’ Compensation coverages sold to government contractors in U.S and non-U.S. military installations as a result of adverse loss emergence from several large accounts in the recent accident years. In addition, we reacted to the adverse emergence by increasing our expected loss ratios in recent accident years.
For the remainder of the primary workers’ compensation portfolio our analysis was based on the refined segmentation from 2014, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
For Primary General Liability, we increased our ultimate loss estimates for prior accident years by $146 million largely related to coverage sold to the Construction sectors as we reacted to noteworthy adverse loss emergence throughout the year, by changing our assumptions about loss development and expected loss ratios. For construction, the adverse development was driven by construction defect claims. The construction class is being re-underwritten to reduce New York and U.S. residential exposures.
For Primary Auto liability, we have observed increases in both the frequency and severity of claims occurring since the recovery from the recent U.S. economic downturn, which have significantly outpaced the pricing rate increases implemented during the same period. As a result, we recognized $144 million of adverse development during 2015 as we increased the expected loss ratios for recent accident years to reflect the deteriorating trends.
We also-reassessed the reasonableness of our liability for future claim handling expenses related to existing loss reserves and updated our estimates to reflect the costs from recent investments in claims systems, processes and people with the objective of improving our ability to better manage total loss costs. We increased our reserve estimates by $214 million based on refined analyses, $100 million of which was attributable to U.S. & Canada primary casualty. The balance was distributed among other classes.
During 2014, we continued to refine our segmentation of primary workers’ compensation into guaranteed cost and excess of large deductible business by deductible size group. The net result of the analysis was adverse development of $137 million for the primary workers’ compensation class of business. The key drivers of the adverse development in this class of business were increases for guaranteed cost business in California and New York, and increases for excess of large deductible business, as well as adverse experience in the Construction class. Each of these segments appears to have been impacted by specific structural changes in the portfolio. For California business, our tail factor increases were in response to changing long-term medical development patterns. In New York, there has been a lengthening of the period between the date of accident and the classification of non-scheduled permanent partial injuries. We completed a review of claim emergence and payouts for our top six states in workers’ compensation and concluded that California and New York were the main states where the loss development patterns had materially changed since our last review. For excess of large deductible business across all states, we updated our analyses to consider the impact of changes in the mix of retentions that has occurred over time as the data by retention band was becoming more credible. For the Construction class, we note that the construction sector has experienced a comparatively slow recovery in payroll employment. As a result of the diminished employment opportunities in this industry sector, injured workers may experience limited return-to-work opportunities, which moderate the shortening of claim duration that normally accompanies a labor market recovery. For all other states combined excluding California and New York, we saw favorable emergence in our middle market Specialty Workers’ Compensation segment. The net effect of these revised selections had the greatest adverse effect on the Construction class of business ($140 million adverse development) and the National Accounts class of business ($125 million adverse development). The most significant favorable effect was in the Specialty Workers’ Compensation class of business ($155 million favorable development). Our analysis considers our best estimate expectations of medical inflation and loss costs trends and also reflects the impacts of enhancements in our claim management and loss mitigation activities, such as opioid management, fraud investigation and medical management.
For primary general liability in 2014, we increased our ultimate loss estimates for prior years by $182 million. This was largely driven by the construction segment as a result of several large construction defect claims and increases in the costs of claims in New York associated with New York Labor Law. The construction results in California and New York continue to be the main sources of adverse development in our guaranteed cost primary general liability books although we did experience adverse development from construction defect claims in other states in 2014. Our large account primary non-construction general liability business was adversely impacted by claim activity in the layers excess of large insured retentions and we increased our loss development patterns for these layers to reflect the changes.
For commercial auto in 2014, we reacted to an increase in frequency of large claims in the accident years 2010 to 2013, where the economic recovery has contributed to increased frequency and severity, especially for those claims in excess of a client deductible of $500,000, which generally take several years to emerge and settle. This led to adverse prior year loss reserve development of $156 million for the automobile subset of primary casualty.
During 2013, we continued to refine the segmentation of our analyses of primary workers’ compensation, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
During 2013, for primary general liability, we increased our reserves for prior years by approximately $355 million. Most of the increase was driven by construction related primary general liability claims, especially construction defect claims where we increased our ultimate loss estimates by $219 million to reflect the higher than expected frequency and severity of these claims especially in states that experienced heavy increases in construction activity after the 2004 and 2005 hurricanes and during the housing boom prior to 2007. Due to the subsequent home price declines observed in many of these states, the frequency of reported losses has increased as the losses subsequently represented a larger percentage of the equity values of the affected homes, and homeowners increasingly looked to insurance recoveries as a way to recoup some of that lost value.
Financial Lines – U.S. and Canada
Financial Lines business includes Director and Officer (D&O) and Related Management Liability, various Professional Liability classes of business as well as the Fidelity book of business. The Financial Lines book consists mostly of the D&O class of business.
During 2015, we recognized $579 million of adverse development, primarily as a result of our scheduled annual detailed valuation review conducted in the fourth quarter, driven largely by the adverse loss emergence that we have seen over the last year, especially in D&O and Professional Liability. In particular, we have observed greater than expected loss costs for several claims from accident years 2006 through 2010, driven by unfavorable settlements and deterioration in known claims. We responded to this adverse emergence by updating our loss development factors and expected loss ratio assumptions for all accident years. In addition, we recognized losses associated with bad-faith claims primarily based on actual settlements in the fourth quarter.
During 2014, we recognized $47 million of favorable development driven by the Professional Liability and D&O and Related Management Liability classes of business, somewhat offset by adverse development on the Fidelity book in recent accident years due to the changing economic cycle.
During 2013, we recognized $113 million of favorable development driven somewhat evenly among the Professional Liability, Fidelity and D&O and Related Management Liability classes of business. The year-end 2013 Professional Liability loss reserve actuarial review adopted a refined segmentation for this class of business with the selection of differentiated frequency and severity trends for various Professional Liability classes of business which appear to be behaving differently in the post financial crisis years than when reviewed in total.
Healthcare
During 2015, we recognized $207 million of adverse development driven by deteriorating loss experience in accident years 2008 and subsequent characterized by large claims in various segments including hospitals, nursing homes, and pharmaceutical and medical products liability. We reacted to these large claims by increasing our expected loss ratios for recent accident years and putting physicians and surgeons and pharmaceutical and medical products classes into runoff.
During 2014, we recognized $109 million of adverse development in this class largely driven by three large and relatively unusual claims of $25 million each in relatively recent accident years. While there have not been any significant structural changes to the portfolio, there can be material volatility in loss experience in this class of business where individual claims can be of high severity.
During 2013, this class recognized $54 million of favorable prior year development due to lower than expected loss emergence in many classes such as Excess Hospital Liability.
International Casualty (Excess and Primary Casualty) and Specialty
During 2015, we recognized $155 million of adverse prior year development, primarily due to three large product liability claims in our Casualty and Specialty lines totaling approximately $115 million. Two of these claims arose in Japan, which is unusual for our portfolio in that market.
During 2014 and 2013, we had $97 million and $91 million of favorable development, respectively. The favorable development in each year was due to lower than expected loss emergence in many classes and countries outside the U.S., with the majority from various countries in the EMEA region.
Financial Lines – International
During 2014 we implemented an enhanced claims operating model in Europe and Australasia which has provided our actuaries with more detailed case reserve data and analysis, enabling AIG’s actuaries to react sooner to case development than in prior years.
During 2015, we recognized $47 million of adverse prior year development, driven by increased claims emergence and related updates to the assumptions for loss development factors and expected loss ratios used in the annual detailed valuation review for these reserves, primarily related to Europe and Australasia risks.
During 2014, we recognized $182 million of adverse development in the international Financial Lines segments, driven by large claims emergence in the U.K., Australasia and Europe. Multiple accident years contributed to this total, but it was concentrated most heavily in accident years 2008-2011. The Australasia emergence was due to a number of specific large losses in the Australia and New Zealand D&O business. In Europe, adverse prior year loss reserve development was concentrated in the D&O class of business, where we have observed a greater incidence of severe claims compared with prior years, and the Professional class of business, with large losses from one insured.
During 2013, we recognized $74 million of adverse development, all of which stemmed from losses in the D&O books in Europe, UK and Australasia, with the other segments showing modest favorable development. The development we recognized can be directly linked to a small number of specific claims booked throughout the year.
Natural Catastrophes
During 2015 and 2014, we experienced favorable property catastrophe prior year development of $52 million and $102 million, respectively, in our U.S. and Canada business, primarily due to favorable development from several U.S. events in accident year 2013. We also experienced favorable property catastrophe prior year loss reserve development of $44 million and $77 million from our international property class of business for 2015 and 2014, respectively.
During 2013, we experienced adverse development from Storm Sandy totaling $108 million, or 5.4 percent of the 2012 estimate. This development resulted from higher severities on a small number of large and complex commercial claims driven by a number of factors including the extensive damage caused to properties in the downtown New York metropolitan area.
Mortgage Guaranty business includes domestic first liens (96 percent of total reserves) and run-off books in second liens, student loans and international.
During 2015, we recognized $69 million of favorable prior year loss reserve development driven by lower than expected frequency due to improving cure rates. Post-claim recoveries also contributed to favorable prior year development.
During 2014, we recognized $104 million of favorable prior year loss reserve development driven primarily by the benefit of a settlement with a mortgage lender, steady increases in year-over-year first lien cure rates, a reflection of the improved
economic environment, and in part by favorable frequency trends and recoveries in second lien claims. Partially offsetting these improvements were upward trends in severity, particularly for older (pre-2012) accident periods.
During 2013, we recognized $30 million of adverse prior year loss reserve development due to unfavorable emergence of overturns of prior claim cancellations and increased severity estimates in first liens, partially offset by favorable frequency in student loans and a reduction in the unallocated loss adjustment expense reserve.
Consumer Personal Insurance
During 2015, 2014 and 2013, we recognized $19 million, $77 million, and $155 million of favorable development, respectively.
During 2015 and 2014, we experienced favorable loss reserve development of $10 million and $16 million, respectively, from Natural Catastrophes.
The remaining $61 million of favorable development in 2014 was primarily from Homeowners, International Accident & Health and U.S. Warranty.
The following is a discussion of the primary reasons for the Run-Off Insurance Lines development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period.
Asbestos and Environmental (1986 and prior)
Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos reserves are ceded to National Indemnity Company (NICO) under a retrospective reinsurance arrangement entered into in 2011. However, certain asbestos-related exposures are not subject to the NICO agreement, including asbestos exposures for which we have negotiated fixed payment schedules, and third party reinsurance assumed policies. The reported claim activity on the assumed claims has increased in the last year. As a result, we modified certain of our loss-reserve-related assumptions to better reflect this AIG-specific experience as well as consideration of recent industry-wide trends regarding expanding coverage theories for liability. As a result, we increased our 2015 reserves by $164 million and by $117 million for Asbestos and Environmental, respectively.
Other Run-Off Insurance
During 2015, we transferred approximately $1.2 billion of loss reserves, largely representing coverages we have not written for at least five years, from Commercial Insurance into Run-off insurance lines. We increased the reserves for these coverages by $272 million to reflect updated assumptions about future loss development.
Excess Workers’ Compensation – U.S.
This class of business, which is reported in our run-off unit, has an extremely long tail and is one of the most challenging classes of business from a reserving perspective, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to small changes in assumptions, e.g. — in the rate of medical inflation or the longevity of injured workers, which can have a significant effect on the ultimate reserve estimate.
During 2015, this class of business did not experience significant development in loss reserves. The proactive management of settlement negotiations and other claims mitigation strategies minimized the volatility observed during 2015. The nominal reduction in reserves as a result of commutations and individual claims settlement strategies amounted to $222 million in 2015 compared to $242 million in 2014 and $25 million in 2013.
During 2014, we updated our analyses of Excess Workers compensation using a range of scenarios and methodologies and determined that our carried reserves were adequate after recognizing $20 million of favorable prior year development as a result of claim settlements and commutations of assumed reinsurance business, as well as reflecting changes in estimates in our loss mitigation strategies. We commuted several large assumed reinsurance agreements in 2014 and reduced the reserves faster than was previously expected as a result of our proactive management by the run-off unit.
During 2013, we updated our analysis of Excess Workers’ Compensation reserves and determined that no changes to our carried reserves were needed. We also updated our analysis of underlying claims cost drivers used in 2012 through accident year 2004, discussed in more detail below.
As noted above, we write loss sensitive business within our primary casualty portfolio. We recognized (return) additional premiums on loss sensitive business of $(49) million, $105 million and $89 million in 2015, 2014 and 2013, respectively, which entirely offset development in that business.
For the year ended December 31, 2015, we incurred reinsurance reinstatement premiums of $(4) million, compared to $(2) million and $27 million for 2014 and 2013, respectively.
See MD&A — Critical Accounting Estimates — Liability for Unpaid Losses and Loss Adjustment Expenses for further discussion of our loss reserving process.
See Commercial Insurance and Consumer Personal Insurance Results herein for further discussion of net loss development.
The following table summarizes development, (favorable) or unfavorable, ofincurred losses and loss adjustment expenses for prior years, net of reinsurance, by accident year:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Prior accident year development by accident year: | | | | | | | | | | | |
Accident Year | | | | | | | | | | | |
2014 | | | | | | $ | 397 | $ | - | $ | - |
2013 | | | | | | | 396 | | (283) | | - |
2012 | | | | | | | 488 | | (59) | | (181) |
2011 | | | | | | | 296 | | 37 | | 217 |
2010 | | | | | | | 277 | | 12 | | (350) |
2009 | | | | | | | 188 | | 31 | | 157 |
2008 | | | | | | | 231 | | 8 | | (1) |
2007 | | | | | | | 48 | | (113) | | - |
2006 | | | | | | | 103 | | 64 | | (75) |
2005 | | | | | | | 90 | | 105 | | 61 |
2004 and prior (see table below) | | | | | | | 1,605 | | 901 | | 729 |
Total prior year unfavorable development | | | | | | $ | 4,119 | $ | 703 | $ | 557 |
Net Loss Development by Accident Year
For 2015, the adverse development in accident years 2011 through 2014 was driven by significantly greater actual versus expected loss emergence for primary and excess Auto Liability, Financial Lines and Healthcare. Individual large claims in the non-Auto Excess Casualty and International Casualty books along with deterioration in specific large accounts in the government contractors workers’ compensation portfolio were concentrated in these most recent accident years. The impact of revised loss expectations based on emergence in earlier accident years also contributed to the adverse development for Excess Casualty and Financial Lines in this period. In addition, our updated assumptions for bad-faith claims and unallocated loss adjustment expenses disproportionately impacted these years. Accident years 2005 through 2010 were largely impacted by updated loss development selections in Financial Lines and revised estimates on expected future recoveries from risk-sharing policies in the Primary Casualty portfolio. For accident years 2004 and prior, the adverse development was driven by
Excess Casualty revised tail factor selections, updated loss development selections for various run-off portfolios, updated industry experience for asbestos and revised estimates on expected future recoveries from risk-sharing policies.
For 2014, the favorable development in accident years 2013 and 2012 was driven by Financial Lines, Commercial Property and other short tailed lines, like Personal Lines. For accident year 2007, the favorable development was driven by U.S. and Canada Financial lines and Excess Casualty. For accident years 2004 and prior, the adverse development was driven by the Excess Casualty results of the a mass-tort resegmentation analysis, the updated primary workers’ compensation loss development selections (principally in California, New York and the excess of deductible segments) as well as the run-off pollution products business (1987-2004) and the asbestos and environmental (1986 and prior) exposure.
For 2013, the favorable development from accident year 2012 was driven primarily by consumer lines and lower losses in domestic commercial property, while the favorable development from accident year 2010 was primarily the result of favorable claims emergence from domestic excess casualty and from liability and financial lines coverage policies that are on a claims-made basis. The adverse development from accident year 2011 was driven by large losses in financial lines and adverse development in primary casualty, including the loss-sensitive business. The adverse development from accident year 2009 was driven by large losses in financial lines and adverse development in primary casualty including loss-sensitive business. The adverse development from accident years 2003 and prior was primarily driven by loss development on toxic tort claims, construction general liability claims and pollution product claims.
For certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to AIG. These reclassifications are shown as development in the respective years in the tables above.
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment expenses for accident year 2004 and prior by major class of business and driver of development:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
2004 and prior accident year development by major class of | | | | | | | | | | | |
business and driver of development: | | | | | | | | | | | |
Excess Casualty - primarily mass torts(a) | | | | | | $ | 388 | $ | 301 | $ | - |
Excess Casualty - all other | | | | | | | 104 | | 53 | | 251 |
Primary Casualty - loss sensitive business | | | | | | | 1 | | 37 | | (24) |
Primary Casualty - all other(b) | | | | | | | 362 | | 196 | | 102 |
Run-off environmental (1987 to 2004)(c) | | | | | | | 74 | | 97 | | 214 |
Asbestos and Environmental (1986 and prior) | | | | | | | 281 | | 124 | | 67 |
Commutations and Arbitrations(d) | | | | | | | 62 | | 63 | | 21 |
All Other | | | | | | | 333 | | 30 | | 98 |
Total prior year unfavorable development | | | | | | $ | 1,605 | $ | 901 | $ | 729 |
(a) Updates of mass tort loss development patterns.
(b) Includes loss development on excess of deductible exposures in workers’ compensation, general liability and commercial auto.
(c) Includes results of comprehensive specific large claim file reviews initiated in 2012 and updated in 2013 and 2014.
(d) The effects of commutations are shown separately from the related classes of business, primarily excess workers’ compensation. Commutations are reflected for the years in which they were contractually binding.
The main sources of unfavorable prior year development for accident years 2004 and prior recorded in 2013 through 2015 are as follows:
•Update of the mass tort loss development patterns and segmentation used for U.S. Excess Casualty, which accounted for $689 million and other loss emergence including specific large loss development totaling $408 million across the three years;
•Loss sensitive business that is entirely offset by premium adjustments accounted for $14 million;
•Update of the loss development patterns used for U.S. Primary Casualty including loss development patterns used in guaranteed cost workers’ compensation for NY and CA construction class of business and updates to the loss development patterns for business written on excess of deductible exposures in workers’ compensation, general liability and the commercial auto classes of business which collectively accounted for approximately $660 million across the three years;
•Update of the Environmental run-off portfolio’s losses following the 2012 comprehensive claims review that provided a more refined approach for the development of actuarial estimates for toxic tort claims (which were found to have a distinctly lengthier loss development pattern than other general liability claims in the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving based estimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with high policy limits (greater than $5 million per policy). These updates which commenced in 2012 and have been applied in each subsequent year, accounted for approximately $385 million;
•Update of our net retained asbestos and environmental exposure from 1986 and prior which accounted for approximately $472 million ($238 million environmental and $234 million asbestos) across the three years;
•Commutations in the three-year period ending December 31, 2015, accounted for approximately $146 million. These commutations serve to reduce the uncertainty in AIG’s required reserves; and
•Update of the assumptions for future loss development for the run-off insurance lines, primarily for coverages we have not written in at least five years, accounted for approximately $272 million of the All Other total amount of $461 million across the three years.
During the period 2013 to 2015, we completed refinements of our reserving methodologies for U.S. mass tort, toxic tort, retained asbestos, environmental and other specific large losses. We also conducted extensive additional studies to corroborate our judgments for our U.S. primary workers compensation and excess workers’ compensation classes of business. Further, we refined our loss reserving methodologies for our U.S. Excess Casualty class of business and our U.S. Primary Casualty class of business written over excess of deductible exposures where loss development patterns may lengthen if client retentions increase over time. Collectively, the reserves for the aforementioned classes of business or loss exposures account for the majority of the remaining net loss reserves for accident years 2004 and prior.
Asbestos and Environmental Reserves
Loss Reserve Estimates - Asbestos and Environmental
We consider a number of factors and recent experience, in addition to the results of both external and internal analyses, to estimate future expected cash flows.asbestos and environmental loss reserves. Nonetheless, we believe that significant uncertainty remains as to our ultimate liability for asbestos and environmental claims, which is due to several factors, including:
•the long latency period between asbestos exposure and disease manifestation, leading to the potential for involvement of multiple policy periods for individual claims;
•claims filed under the non‑aggregate premises or operations section of general liability policies;
•the number of insureds seeking bankruptcy protection and the effect of prepackaged bankruptcies;
•diverging legal interpretations; and
•the difficulty in estimating the allocation of remediation cost among various parties with respect to environmental claims.
In 2015, as in prior years, both the retained accounts and retroceded accounts ground-up reviews for asbestos were updated. As a result, we increased gross undiscounted asbestos incurred losses by $13 million and increased net undiscounted asbestos incurred losses by $164 million. The net undiscounted change reflects an increase primarily due to third party assumed reinsurance exposures. With the gross incurred loss increase less than the net incurred loss increase, the resulting ceded incurred losses were reduced. For environmental, we increased gross environmental incurred losses by $214 million and net environmental incurred losses by $117 million as a result of top‑down actuarial analyses performed during the year, as well as development on a large sediment site.
TABLE OF CONTENTSTable of Contents
ITEM 7 / INVESTMENTS
Item 7 / insurance reserves / NON-LIFE INSURANCE COMPANIES
In 2014, both the retained accounts and retroceded accounts ground-up reviews for asbestos were updated. As a result, we decreased gross undiscounted asbestos incurred losses by $6 million and increased net undiscounted asbestos incurred losses by $64 million. The net undiscounted increase reflects a buyout settlement on a retained account as well as a reduction in estimated ceded loss reserves (prior to the retroactive reinsurance retrocession). For environmental, we increased gross environmental incurred losses by $140 million and net environmental incurred losses by $60 million as a result of top‑down actuarial analyses performed during the year as well as development on a number of large accounts.
In 2013, we completed a ground‑up review of all our remaining retained accounts for asbestos. In addition, a subsidiary of the retrocessionaire for our retroactive reinsurance contract completed a ground‑up asbestos study for the largest accounts it assumed. As a result, we increased gross asbestos incurred losses by $169 million and net asbestos incurred losses by $6 million. For environmental, we increased gross environmental incurred losses by $98 million and net environmental incurred losses by $61 million as a result of top‑down actuarial analyses performed during the year as well as development on a number of large accounts.
In addition to the U.S. asbestos and environmental reserve amounts shown in the tables below, the Non - Life Insurance Companiesalso have asbestos reserves relating to foreign risks written by non‑U.S. entities of $121 million gross and $93 million net as of December 31, 2015. The asbestos reserves relating to non‑U.S. risks written by non‑U.S. entities were $132 million gross and $105 million net as of December 31, 2014.
The following table provides a summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims:
As of or for the Years Ended December 31, | | 2015 | | 2014 | | 2013 |
(in millions) | Gross | | Net | | Gross | | Net | | Gross | | Net |
Asbestos: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 4,117 | $ | 388 | $ | 4,720 | $ | 529 | $ | 4,896 | $ | 427 |
Change in net loss reserves due to retroactive reinsurance | | - | | 20 | | - | | 141 | | - | | 22 |
Dispositions | | - | | - | | - | | - | | (12) | | (12) |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | | |
Undiscounted | | 13 | | 164 | | (6) | | 64 | | 169 | | 6 |
Change in discount | | 9 | | 4 | | 39 | | 22 | | 51 | | 18 |
Losses and loss adjustment expenses incurred* | | 22 | | 168 | | 33 | | 86 | | 220 | | 24 |
Losses and loss adjustment expenses paid* | | (544) | | (130) | | (636) | | (368) | | (444) | | (59) |
Other changes | | - | | - | | - | | - | | 60 | | 127 |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 3,595 | $ | 446 | $ | 4,117 | $ | 388 | $ | 4,720 | $ | 529 |
Environmental: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 368 | $ | 185 | $ | 313 | $ | 163 | $ | 309 | $ | 163 |
Dispositions | | - | | - | | - | | - | | (1) | | (1) |
Losses and loss adjustment expenses incurred | | 214 | | 117 | | 140 | | 60 | | 98 | | 61 |
Losses and loss adjustment expenses paid | | (37) | | (32) | | (85) | | (38) | | (93) | | (60) |
Other changes | | - | | 6 | | - | | - | | - | | - |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 545 | $ | 276 | $ | 368 | $ | 185 | $ | 313 | $ | 163 |
Combined: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 4,485 | $ | 573 | $ | 5,033 | $ | 692 | $ | 5,205 | $ | 590 |
Change in net loss reserves due to retroactive reinsurance | | - | | 20 | | - | | 141 | | - | | 22 |
Dispositions | | - | | - | | - | | - | | (13) | | (13) |
Investment StrategiesLosses and loss adjustment expenses incurred: | | | | | | | | | | | | |
Undiscounted | | 227 | | 281 | | 134 | | 124 | | 267 | | 67 |
Change in discount | | 9 | | 4 | | 39 | | 22 | | 51 | | 18 |
Losses and loss adjustment expenses incurred | | 236 | | 285 | | 173 | | 146 | | 318 | | 85 |
Losses and loss adjustment expenses paid | | (581) | | (162) | | (721) | | (406) | | (537) | | (119) |
Other changes | | - | | 6 | | - | | - | | 60 | | 127 |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 4,140 | $ | 722 | $ | 4,485 | $ | 573 | $ | 5,033 | $ | 692 |
* These amounts exclude benefit from retroactive reinsurance.
Investment strategies are based on considerations that includeOn June 17, 2011, we completed a transaction under which the local market, general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.
•While morebulk of AIG Property Casualty’s net domestic asbestos liabilities were transferred to National Indemnity Company (NICO), a focus is placed on asset-liability matching in AIG Life and Retirement, our fundamental strategy across allsubsidiary of Berkshire Hathaway, Inc. This was part of our investment portfolios isongoing strategy to match the duration characteristicsreduce our overall loss reserve development risk. This transaction covers potentially volatile U.S.-related asbestos exposures. It does not, however, cover asbestos accounts that we believe have already been reserved to their limit of the liabilities with assets of comparable duration, to the extent practicable.
•Fixed maturity securities held by the domestic insurance companies included in AIG Property Casualty consist of a mix of tax-exempt municipal bonds and taxable instruments that meet our current risk-return, tax, liquidity, credit quality, and diversification objectives.
•Outside of the U.S., fixed maturity securities heldliability or certain other ancillary asbestos exposure assumed by AIG Property Casualty consist primarilysubsidiaries.Upon the closing of intermediate duration high-grade securities generally denominatedthis transaction, but effective as of January 1, 2011, we ceded the bulk of AIG Property Casualty’s net domestic asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Within this aggregate limit, NICO assumed collection risk for existing third-party reinsurance recoverable associated with these liabilities. AIG Property Casualty paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed approximately $1.82 billion of net U.S. asbestos liabilities. As a result of this transaction, AIG Property Casualty recorded a deferred gain of $150 million in the currenciessecond quarter of 2011, which is being amortized into income over the settlement period of the countriesunderlying claims.
Under retroactive reinsurance arrangements any recoveries for development associated with the ceded losses are not recognized immediately; rather this development increases or decreases the deferred gain, which is amortized into income as described above. During 2015, 2014 and 2013, we recognized approximately $233 million, $0 and $72 million, respectively, of adverse loss development that was ceded under this reinsurance arrangement. This development, which is net of the deferred gain amortization, is being reported in Other income/expense, consistent with the way we manage the business and assess performance and is therefore excluded from net losses incurred and our loss ratios to avoid distortion of our ongoing insurance business.
IBNR Loss Reserve Estimates — Asbestos and Environmental
The following table presents the estimate of the gross and net IBNR included in the Liability for unpaid losses and loss adjustment expenses, relating to asbestos and environmental claims:
December 31, | | 2015 | | 2014 | | 2013 |
(in millions) | | Gross | | Net* | | Gross | | Net* | | Gross | | Net* |
Asbestos | $ | 1,680 | $ | 162 | $ | 2,363 | $ | 79 | $ | 3,190 | $ | 16 |
Environmental | | 331 | | 171 | | 157 | | 87 | | 94 | | 51 |
Combined | $ | 2,011 | $ | 333 | $ | 2,520 | $ | 166 | $ | 3,284 | $ | 67 |
* Net IBNR includes the reduction due to the NICO reinsurance transaction of $912 million, $803 million and $1,284 million as of December 31, 2015, 2014 and 2013, respectively.
Claim Counts — Asbestos and Environmental
The following table presents a summary of asbestos and environmental claims count activity:
As of or for the Years | 2015 | | 2014 | | 2013 |
Ended December 31, | Asbestos | Environmental | Combined | | Asbestos | Environmental | Combined | | Asbestos | Environmental | Combined |
Claims at beginning of year | 4,049 | 1,240 | 5,289 | | 4,680 | 1,517 | 6,197 | | 5,230 | 1,614 | 6,844 |
Claims during year: | | | | | | | | | | | |
Opened | 279 | 209 | 488 | | 130 | 126 | 256 | | 83 | 306 | 389 |
Settled | (310) | (182) | (492) | | (216) | (163) | (379) | | (194) | (154) | (348) |
Dismissed or otherwise | | | | | | | | | | | |
resolved | (509) | (350) | (859) | | (545) | (240) | (785) | | (439) | (249) | (688) |
Other | - | - | - | | - | - | - | | - | - | - |
Claims at end of year | 3,509 | 917 | 4,426 | | 4,049 | 1,240 | 5,289 | | 4,680 | 1,517 | 6,197 |
Survival Ratios — Asbestos and Environmental
The following table presents AIG’s survival ratios for asbestos and environmental claims at December 31, 2015, 2014 and 2013. The survival ratio is derived by dividing the current carried loss reserve by the average payments for the three most recent calendar years for these claims. Therefore, the survival ratio is a simplistic measure estimating the number of years it would take before the current ending loss reserves for these claims would be paid off using recent year average payments.
Many factors, such as aggressive settlement procedures, reinsurance commutations, mix of business and level of coverage provided, have a significant effect on the amount of asbestos and environmental reserves and payments and the resulting survival ratio. Additionally, we primarily base our determination of these reserves based on ground-up and top-down analyses, and not on survival ratios. The net Asbestos survival ratio for 2015 was significantly impacted by both the increase in net loss reserves as a result of our ground-up review, as well as the by the large ceded reinsurance commutation executed in the fourth quarter of 2015, the proceeds of which were booked a negative paid loss.
The following table presents survival ratios for asbestos and environmental claims, separately and combined, which were based upon a three-year average payment:
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| Gross | Net* | | Gross | Net* | | Gross | Net* |
Survival ratios: | | | | | | | | |
Asbestos | 6.6 | 15.0 | | 8.3 | 7.6 | | 10.6 | 10.5 |
Environmental | 7.6 | 6.4 | | 5.0 | 4.3 | | 4.6 | 3.9 |
Combined | 6.8 | 13.1 | | 7.9 | 7.1 | | 9.8 | 9.4 |
* Survival ratios are calculated consistent with the basis on historical reserve excluding the effects of the NICO reinsurance transaction.
Life Insurance Companies DAC and Reserves
The following section provides discussion of deferred policy acquisition costs and insurance reserves for Life Insurance Companies.
Update of Actuarial Assumptions
The Life Insurance Companies review and update estimated gross profit assumptions used to amortize DAC and related items for investment-oriented products at least annually. Estimated gross profit assumptions include net investment income and spreads, net realized capital gains and losses, fees, surrender charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change significantly, DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserve) are recalculated using the new assumptions, and any resulting
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adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products.
In addition to estimated gross profit assumptions, the update of actuarial assumptions in 2015, 2014 and 2013 included adjustments to reserves for universal life with secondary guarantees, group benefit claim reserves and loss recognition for certain long-term care products. The update of assumptions also included adjustments to the valuation of variable annuity GMWB features that are accounted for as embedded derivatives. Changes in the fair value of such embedded derivatives are recorded in net realized capital gains (losses) and, together with related DAC adjustments, are excluded from pre-tax operating income.
The net increases (decreases) to pre-tax operating income and pre-tax income as a result of the update of actuarial assumptions in 2015, 2014 and 2013 are shown in the following tables.
The following table presents the increase (decrease) in pre-tax operating income resulting from the update of actuarial assumptions for the U.S. Life Insurance Companies, by product line:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Consumer Insurance: | | | | | | |
Retirement | | | | | | |
Fixed Annuities | $ | 92 | $ | 196 | $ | 306 |
Retirement Income Solutions | | - | | 4 | | (28) |
Group Retirement | | 48 | | 46 | | (45) |
Total Retirement | | 140 | | 246 | | 233 |
Life | | (146) | | (119) | | (80) |
Total Consumer Insurance | | (6) | | 127 | | 153 |
Commercial Insurance: | | | | | | |
Institutional Markets | | - | | 2 | | - |
Total increase (decrease) in pre-tax operating income from update of assumptions | | (6) | | 129 | | 153 |
The following table presents the increase (decrease) in pre-tax income resulting from the update of actuarial assumptions of the U.S. Life Insurance Companies, by line item as reported in Results of Operations:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Policy fees | $ | 21 | $ | 27 | $ | 28 |
Interest credited to policyholder account balances | | 74 | | 90 | | 63 |
Amortization of deferred policy acquisition costs | | 79 | | 181 | | 129 |
Policyholder benefits and losses incurred | | (180) | | (169) | | (67) |
Increase (decrease) in pre-tax operating income | | (6) | | 129 | | 153 |
Change in DAC related to net realized capital gains (losses) | | 11 | | (12) | | (21) |
Net realized capital gains (losses) | | (2) | | 51 | | 82 |
Increase in pre-tax income | $ | 3 | $ | 168 | $ | 214 |
In 2015, pre-tax operating income of the Life Insurance Companies in the aggregate was reduced by $6 million as a result of the update of actuarial assumptions. This aggregate net adjustment of $6 million included a net negative adjustment of $146 million in the Life operating segment, which was offset in large part by net positive adjustments in the Retirement operating segment of $92 million in Fixed Annuities and $48 million in Group Retirement. See Update of Actuarial Assumptions by Operating Segment for additional discussion of the adjustments for each segment.
In 2014, pre-tax operating income of the Life Insurance Companies in the aggregate was increased by $129 million as a result of the update of assumptions, primarily due to net positive adjustments related to investment spread assumptions in the Retirement operating segment from the update of estimated gross profit assumptions in Fixed Annuities and Group Retirement, partially offset by loss recognition for certain long-term care business and additions to reserves for universal life with secondary guarantees in the Life operating segment.
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In 2013, pre-tax operating income of the Life Insurance Companies in the aggregate increased by a net positive adjustment of $153 million as a result of the update of assumptions, primarily due to a net positive adjustment in Fixed Annuities, partially offset by net negative adjustments in Retirement Income Solutions and Group Retirement and a negative adjustment in Life from the update of mortality assumptions. In Group Retirement, the negative adjustments were partially offset by an increase in the assumption for separate account asset long-term growth rates.
Adjustments related to the update of assumptions for the valuation of variable annuity GMWB features accounted for as embedded derivatives and measured at fair value, which are primarily in the Retirement Income Solutions and Group Retirement product lines, are recorded in net realized capital gains (losses) and excluded from pre-tax operating income. The update of GMWB valuation assumptions in 2015, which included improved mortality, lapse and withdrawal assumptions, resulted in a net decrease in the GMWB liability. After offsets for related adjustments to DAC, this update of GMWB valuation assumptions resulted in a net increase to 2015 pre-tax income of $9 million.
In 2014, improved mortality, lapse and withdrawal assumptions for GMWB embedded derivative liabilities resulted in a net increase to pre-tax income of $39 million, net of DAC. In 2013, the update of GMWB valuation assumptions resulted in a net increase to pre-tax income of $61 million, net of DAC, primarily due to updated mortality assumptions.
A discussion of the adjustments to reflect the update of assumptions for the Retirement and Life operating segments follows.
Update of Actuarial Assumptions by Operating Segment
Retirement
The update of actuarial assumptions resulted in net positive adjustments to pre-tax operating income of the Retirement operating segment of $140 million, $246 million and $233 million in 2015, 2014 and 2013, respectively.
In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $92 million in 2015, which reflected refinements to investment spread assumptions, lower terminations than previously assumed and decreases to expense assumptions. In 2014, a net positive adjustment of $196 million in Fixed Annuities was primarily due to better spreads than previously assumed. In 2013, a net positive adjustment of $306 million in the Fixed Annuities product line was the result of active spread management of crediting rates and higher future investment yields than those previously assumed.
In Retirement Income Solutions, there were offsetting changes to assumed investment fees, modeled expenses, and terminations resulting in no adjustment to pre-tax operating income in 2015, compared to a $4 million net positive adjustment in 2014, due to the update of estimated gross profit assumptions. A net negative adjustment of $28 million in Retirement Income Solutions in 2013 resulted primarily from the update of variable annuity spreads and surrender rates. Adjustments related to the update of assumptions for the valuation of variable annuity GMWB features accounted for as embedded derivatives and measured at fair value, which primarily relate to the Retirement Income Solutions product line, are recorded in net realized capital gains (losses) and excluded from pre-tax operating income. See Update of Actuarial Assumptions above for discussion of these adjustments.
In Group Retirement, a net positive adjustment from the update of estimated gross profit assumptions of $48 million in 2015 was primarily due to revisions to mortality and surrender assumptions, partially offset by decreased spread assumptions. In 2014, a net positive adjustment of $46 million in Group Retirement was primarily due to more favorable assumptions for investment spreads and surrenders than previously assumed. A net negative adjustment of $45 million in Group Retirement in 2013 resulted primarily from the update of variable annuity spreads and surrender rates, partially offset by an increase in the assumption for separate account asset long-term growth rates under our reversion to the mean methodology.
Life
The net negative adjustment of $146 million related to the update of actuarial assumptions, which reduced pre-tax operating income of the Life operating segment in 2015, included additions to reserves for universal life with secondary guarantees due to lower surrender rates (partially offset by better mortality than previously assumed), loss recognition expense for certain long-
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term care products primarily due to updated future premium assumptions, and an additional net negative adjustment from the update of estimated gross profit assumptions primarily due to lower investment spread assumptions. These negative adjustments were partially offset by a decrease in certain Group Benefit claim reserves based on updated experience data.
A net negative adjustment of $119 million in the Life operating segment in 2014 was primarily due to loss recognition expense, as discussed below, and also included additions to reserves for universal life with secondary guarantees, primarily due to lower investment spread and mortality assumptions which, while higher than previously assumed, were still within pricing assumptions.
A negative adjustment of $80 million in the Life operating segment in 2013 resulted primarily from the update of mortality assumptions.
The Life operating segment recorded loss recognition expense of $28 million and $87 million to increase reserves for certain long-term care business in 2015 and 2014, respectively, which reduced pre-tax operating income in those periods. Loss recognition expense is included in Other reserve changes in the rollforward table presented in Life Insurance Companies Reserves. The Life loss recognition for both periods was primarily a result of lower future premium increase assumptions and, in 2014, lower yield assumptions. Assumptions related to investment yields, mortality experience and expenses are reviewed periodically and updated as appropriate, which could result in additional loss recognition reserves. While the U.S. Life Insurance Companies do not currently offer standalone long-term care products, these needs are addressed with various benefits and riders in the existing portfolio, such as chronic illness riders.
Variable Annuity Guaranteed Benefit Features and Hedging Program
Our Retirement Income Solutions and Group Retirement businesses offer variable annuity products with riders that provide guaranteed living benefit features, which include GMWB and GMAB. The liabilities for GMWB and GMAB are accounted for as embedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads and market volatility.
In addition to risk-mitigating features in our variable annuity product design, we operate.have an economic hedging program designed to manage market risk from GMWB and GMAB, including exposures to changes in interest rates, equity prices, credit spreads and volatilities. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election. See Enterprise Risk Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Program for additional discussion of market risk management related to these product features.
Impact on Pre-tax Income
Changes in the fair value of the GMWB and GMAB embedded derivatives, and changes in the fair value of related derivative hedging instruments, are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of the fixed maturity securities used in the variable annuity hedging program, for which the fair value option has been elected, are excluded from pre-tax operating income of the Retirement operating segment.
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Insurance reserves / Life Insurance companies
The following table presents the net increase (decrease) to consolidated pre-tax income from changes in the fair value of the GMWB and GMAB embedded derivatives and related hedges:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Change in fair value of GMWB and GMAB embedded derivatives | $ | 63 | $ | (759) | $ | 1,252 |
Change in fair value of variable annuity hedging portfolio: | | | | | | |
Fixed maturity securities | | (43) | | 260 | | (161) |
Interest rate derivative contracts | | 343 | | 742 | | (468) |
Equity derivative contracts | | (86) | | (230) | | (461) |
Net impact on pre-tax income | $ | 277 | $ | 13 | $ | 162 |
The effect of the changes in the fair value of the GMWB and GMAB embedded derivatives and the related hedging portfolio had a net positive impact on consolidated pre-tax income in 2015, 2014 and 2013. The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to differences between the U.S. GAAP valuation of the embedded derivatives and the economic hedge target, which include a non-performance or “own credit” spread adjustment (NPA) to the rate used to discount projected benefit cash flows. When corporate credit spreads widen, as they did in 2015, the change in the NPA generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA generally increases the fair value of the embedded derivative liabilities, resulting in a loss. See Note 4 to the Consolidated Financial Statements for additional discussion of the fair value measurement of the embedded derivatives under U.S. GAAP and the estimation of the NPA, and see Differences in Valuation of Embedded Derivatives and Economic Hedge Target, below.
In 2015, there was a slight gain from a decline in the fair value of the embedded derivative liabilities, as losses from the decrease in market interest rates were more than offset by gains from a higher NPA, related to widening corporate credit spreads. The losses from the decrease in market interest rates in 2015 were largely offset by interest rate hedges. In 2014, the decrease in market interest rates resulted in losses from a significant increase in the fair value of the embedded derivative liabilities, which was only partially offset by higher equity markets. Since the change in NPA was relatively small in 2014, the loss on the embedded derivatives was primarily offset by hedging. In 2013, there was a significant decline in the embedded derivative liabilities, driven by both higher interest rates and higher equity markets, which was only partially offset by a decline in NPA from spread tightening. The embedded derivative gains due to higher interest rates were offset by interest rate hedging to a lesser extent in 2013, as we had not elected to fully hedge interest rate risk until the second half of 2014.
These changes in the fair value of the embedded derivatives were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:
•Changes in the fair value of fixed maturity securities, for which the fair value option has been elected, that are used as a capital-efficient way to economically hedge interest rate risk. In 2012, we began to use U.S. Treasury bonds in this hedging program to reduce our interest rate risk exposure over time. Effective June 30, 2015, we discontinued the U.S. Treasury bond interest rate hedging program and initiated a corporate bond hedging program, which is intended to provide the same capital efficiency as the previous U.S. Treasury bond hedging program. The 2015 losses from the change in the fair value of fixed maturity securities were primarily due to the impact on the U.S. Treasury position in the first half of the year from increasing market interest rates. The gains in 2014 and losses in 2013 from the change in the fair value of the fixed maturities securities were due to market interest rates, which decreased in 2014 and increased 2013.
•Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions, futures and options, resulted in gains in 2015 and 2014 due to decreasing market interest rates, and losses in 2013 driven by increasing interest rates. Prior to 2014, we had elected to only partially hedge GMWB and GMAB interest rate risk.
•Losses from the change in the fair value of equity derivative contracts, which included futures and options, were relatively smaller in 2015 compared to 2014 and 2013, due to higher equity market returns in those years.
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Differences in Valuation of Embedded Derivatives and Economic Hedge Target
The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic drivers of the embedded derivatives. The economic hedge target differs from the U.S. GAAP valuation of the GMWB and GMAB embedded derivatives due to the following:
•Rider fees are 100 percent included in the economic hedge target present value calculations; the U.S. GAAP valuation reflects those collected fees attributed to the embedded derivative such that the initial value at contract issue equals zero;
•Actuarial assumptions for U.S. GAAP are adjusted to remove explicit risk margins, including margins for policyholder behavior and fund basis risk, and use best estimate assumptions for the economic hedge target; and
•Non-performance adjustment (NPA or “own credit” risk) is excluded from the discount rates used for the economic hedge target.
The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life Insurance Companies have cash and invested assets available to cover future claims payable under these guarantees. The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
•Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
•Realized volatility versus implied volatility;
•Actual versus expected changes in the hedge target related to items not subject to hedging, particularly policyholder behavior; and
•Risk exposures that we have elected not to explicitly or fully hedge, which in 2014 and 2013 included a portion of the interest rate risk.
DAC
The following table summarizes the major components of the changes in Life Insurance Companies DAC, including VOBA:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Balance, beginning of year | $ | 7,258 | $ | 6,920 | $ | 5,815 |
Acquisition costs deferred | | 1,288 | | 1,114 | | 1,034 |
Amortization expense: | | | | | | |
Update of assumptions included in pre-tax operating income | | 79 | | 183 | | 129 |
Related to realized capital gains and losses | | (1) | | (23) | | (23) |
All other operating amortization | | (994) | | (887) | | (780) |
Increase (decrease) in DAC due to foreign exchange | | (34) | | (32) | | (39) |
Other change in DAC | | 23 | | 343 | | - |
Change related to unrealized depreciation (appreciation) of investments | | 848 | | (360) | | 784 |
Balance, end of year* | $ | 8,467 | $ | 7,258 | $ | 6,920 |
* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.1 billion, $8.7 billion, and $8.0 billion at December 31, 2015, 2014 and 2013, respectively.
The net adjustments to DAC amortization from the update of actuarial assumptions for estimated gross profits in 2015 and 2014, including those reported within change in DAC related to net realized capital gains (losses), represented one percent and two percent of the DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments as of December 31, 2015 and 2014, respectively.
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Reversion to the Mean
In 2013, we revised the growth rate assumptions for the five-year reversion to the mean period for the Group Retirement product line in our Retirement segment, because annual growth assumptions indicated for that period had fallen below our floor of zero percent due to the favorable performance of equity markets. This adjustment increased Retirement pre-tax operating income by $35 million in 2013. For variable annuities in the Retirement Income Solutions product line, the assumed annual growth rate has remained above zero percent for the five-year reversion to the mean period and therefore has not met the criteria for adjustment in 2015, 2014 or 2013; however, additional favorable equity market performance in excess of long-term assumptions could result in unlocking in this product line in the future, with a positive effect on pre-tax income in the period of the unlocking. See Critical Accounting Estimates – Estimated Gross Profits for Investment-Oriented Products (Life Insurance Companies) for additional discussion of assumptions related to our reversion to the mean methodology.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC for universal life and investment-type products (collectively, investment-oriented products) is adjusted at each balance sheet date to reflect the change in DAC as if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow DAC). The change in shadow DAC generally moves in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio. In addition, significant unrealized appreciation of investments in a prolonged low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves). Market interest rates increased as a result of widening spreads in 2015. As a result, the Life Insurance Companies’ unrealized appreciation of investments at December 31, 2015 decreased by $7.4 billion compared to December 31, 2014, which resulted in an increase in shadow DAC and a decrease in shadow loss reserves. Shadow loss reserves decreased to $18 million at December 31, 2015 compared to $1.2 billion at December 31, 2014.
Life Insurance Companies Reserves
The following table presents a rollforward of Life Insurance Companies’ insurance reserves, including separate accounts and mutual fund assets under management, by operating segment:
Years Ended December 31, | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | 2014 | | 2013 |
Institutional Markets: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 35,080 | $ | 32,100 | $ | 32,242 |
Premiums and deposits | | | | | | | | 1,782 | | 3,797 | | 991 |
Surrenders and withdrawals | | | | | | | | (674) | | (766) | | (2,620) |
Death and other contract benefits | | | | | | | | (1,628) | | (1,530) | | (1,371) |
Subtotal | | | | | | | | (520) | | 1,501 | | (3,000) |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | 982 | | 1,130 | | 1,156 |
Cost of funds | | | | | | | | 408 | | 410 | | 413 |
Other reserve changes | | | | | | | | (127) | | (61) | | 1,289 |
Balance at end of year | | | | | | | | 35,823 | | 35,080 | | 32,100 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 1,054 | | - |
Reinsurance ceded | | | | | | | | (5) | | (5) | | (5) |
Total insurance reserves | | | | | | | $ | 35,818 | $ | 36,129 | $ | 32,095 |
Retirement: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 204,627 | $ | 195,493 | $ | 173,281 |
Premiums and deposits | | | | | | | | 25,297 | | 24,077 | | 23,788 |
Surrenders and withdrawals | | | | | | | | (18,251) | | (20,504) | | (16,459) |
Death and other contract benefits | | | | | | | | (3,894) | | (3,690) | | (3,353) |
Subtotal | | | | | | | | 3,152 | | (117) | | 3,976 |
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Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (2,255) | | 6,390 | | 14,482 |
Cost of funds | | | | | | | | 2,724 | | 2,781 | | 2,837 |
Other reserve changes | | | | | | | | 85 | | 80 | | 917 |
Balance at end of year | | | | | | | | 208,333 | | 204,627 | | 195,493 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 100 | | - |
Reinsurance ceded | | | | | | | | (361) | | (353) | | (366) |
Total insurance reserves and mutual fund assets under management | | | | | | | $ | 207,972 | $ | 204,374 | $ | 195,127 |
Life: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 33,536 | $ | 32,810 | $ | 32,176 |
Premiums and deposits | | | | | | | | 4,974 | | 4,806 | | 4,862 |
Surrenders and withdrawals | | | | | | | | (759) | | (853) | | (896) |
Death and other contract benefits | | | | | | | | (954) | | (812) | | (772) |
Subtotal | | | | | | | | 3,261 | | 3,141 | | 3,194 |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (802) | | (691) | | (673) |
Cost of funds | | | | | | | | 493 | | 507 | | 541 |
Other reserve changes | | | | | | | | (2,318) | | (2,231) | | (2,428) |
Balance at end of year | | | | | | | | 34,170 | | 33,536 | | 32,810 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | - | | - |
Reinsurance ceded | | | | | | | | (1,395) | | (1,315) | | (1,354) |
Total insurance reserves | | | | | | | $ | 32,775 | $ | 32,221 | $ | 31,456 |
Total Life Insurance Companies: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 273,243 | $ | 260,403 | $ | 237,699 |
Premiums and deposits | | | | | | | | 32,053 | | 32,680 | | 29,641 |
Surrenders and withdrawals | | | | | | | | (19,684) | | (22,123) | | (19,975) |
Death and other contract benefits | | | | | | | | (6,476) | | (6,032) | | (5,496) |
Subtotal | | | | | | | | 5,893 | | 4,525 | | 4,170 |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (2,075) | | 6,829 | | 14,965 |
Cost of funds | | | | | | | | 3,625 | | 3,698 | | 3,791 |
Other reserve changes | | | | | | | | (2,360) | | (2,212) | | (222) |
Balance at end of year | | | | | | | | 278,326 | | 273,243 | | 260,403 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 1,154 | | - |
Reinsurance ceded | | | | | | | | (1,761) | | (1,673) | | (1,725) |
Total insurance reserves and mutual fund assets under management | | | | | | | $ | 276,565 | $ | 272,724 | $ | 258,678 |
Life Insurance Companies insurance reserves including separate accounts and mutual fund assets under management were comprised of the following balances:
At December 31, | | | | | | |
(in millions) | | | | 2015 | | 2014 |
Future policy benefits* | | | $ | 41,562 | $ | 40,931 |
Policyholder contract deposits | | | | 127,704 | | 124,716 |
Separate account liabilities | | | | 79,564 | | 80,025 |
Total insurance reserves | | | | 248,830 | | 245,672 |
Mutual fund assets under management | | | | 27,735 | | 27,052 |
Total insurance reserves and mutual fund assets under management | | | $ | 276,565 | $ | 272,724 |
* Excludes certain intercompany assumed reinsurance.
Liquidity and Capital Resources |
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity at both AIG Parent'sParent and subsidiaries to meet our financial obligations over a twelve-month period under a liquidity stress scenario. See Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement and Enterprise Risk Management — Liquidity Risk Management below for additional information.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy for both AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources as was the case in 2008. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share repurchases.
Liquidity and Capital Resources Activity for 2015 |
Sources •AIG Parent Funding from Subsidiaries During 2015, AIG Parent received $7.8 billion(a) in dividends and loan repayments from subsidiaries. Of this amount, $3.2 billion was dividends in the form of cash and fixed maturity securities from our Non-Life Insurance Companies and $4.6 billion(a) was dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies. The $7.8 billion in dividends and loan repayments included $2.8 billion of dividends that were declared during the fourth quarter of 2014. AIG Parent also received a net amount of $1.4 billion(a) in tax sharing payments from our insurance businesses in 2015, reflecting $102 million(a) that was reimbursed from AIG Parent to our insurance businesses during the fourth quarter of 2015 as a result of adjustments made to prior-year tax sharing payments. The tax sharing payments may continue to be subject to adjustment in future periods. ·Debt Issuances In January 2015, we issued $1.2 billion aggregate principal amount of 3.875% Notes due 2035 and $800 million aggregate principal amount of 4.375% Notes due 2055. In March 2015, we issued $350 million aggregate principal amount of 4.35% Callable Notes due 2045. In July 2015, we issued $1.25 billion aggregate principal amount of 3.750% Notes due 2025, $500 million aggregate principal amount of 4.700% Notes due 2035 and $750 million aggregate principal amount of 4.800% Notes due 2045. In addition, in July 2015, we issued $290 million aggregate principal amount of 4.90% Callable Notes due 2045. In September 2015, we issued $420 million aggregate principal amount of 4.90% Callable Notes due 2045. ·PICC P&C and Springleaf In April 2015, AIG Parent received gross proceeds of approximately $500 million from our sale of 256 million ordinary H shares of PICC P&C by means of a placement to certain institutional investors. In May 2015, AIG Parent received net proceeds of approximately $410 million from the sale of approximately 8.4 million shares of common stock of Springleaf. In December 2015, AIG Parent received gross proceeds of approximately $381 million from our sale of 184 million ordinary H shares of PICC P&C by means of a placement to certain institutional investors. ·AerCap In June 2015, AIG Parent received net proceeds of approximately $3.7 billion from the sale of approximately 86.9 million ordinary shares of AerCap by means of an underwritten public offering of approximately 71.2 million ordinary shares and a private sale of approximately 15.7 million ordinary shares to AerCap. In August 2015, AIG Parent received net proceeds of approximately $500 million from the sale of our remaining approximately 10.7 million ordinary shares of AerCap by means of an underwritten public offering. |
Uses(b) •Debt Reduction In March 2015, we repurchased, through cash tender offers, approximately $1.0 billion aggregate principal amount of certain senior notes issued or guaranteed by AIG for an aggregate purchase price of approximately $1.1 billion. In April 2015, we repurchased, through cash tender offers, (i) approximately $22 million aggregate principal amount of certain senior notes issued or guaranteed by AIG for an aggregate purchase price of approximately $24 million, and (ii) approximately $915 million aggregate principal amount of certain junior subordinated debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $1.25 billion. In July 2015, we repurchased, through cash tender offers, (i) approximately $142 million aggregate principal amount of certain senior notes issued by AIG for an aggregate purchase price of approximately $153 million, and (ii) approximately $3.3 billion aggregate principal amount of certain senior notes and junior subordinated notes issued or guaranteed by AIG for an aggregate purchase price of approximately $3.6 billion. We also made other repurchases and repayments of approximately $4.6 billion during 2015. AIG Parent made interest payments on our debt instruments totaling $1.0 billion during 2015. •Dividend We paid a cash dividend of $0.125 per share on AIG Common Stock during each of the first and second quarters of 2015, and a cash dividend of $0.28 per share during each of the third and fourth quarters of 2015. •Repurchase of Common Stock(c) We repurchased approximately 182 million shares of AIG Common Stock during 2015, for an aggregate purchase price of approximately $10.7 billion. The total number of shares of AIG Common Stock repurchased in 2015 includes (but the aggregate purchase price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an ASR agreement executed in the fourth quarter of 2014. •PICC P&C During 2015, AIG Parent purchased 440 million ordinary H shares of PICC P&C from our Non-Life Insurance Companies for approximately $864 million. |
(a) Presented net of $818 million of tax payments to the Life Insurance Companies, which were returned in the form of dividends.
(b) In January 2016, AIG Parent made a capital contribution of approximately $2.9 billion to our Non-Life Insurance Companies.
(c) Pursuant to Exchange Act Rule 10b5-1 repurchase plans, from January 1 to February 11, 2016, we have repurchased approximately $2.5 billion of additional shares of AIG Common Stock. As of February 11, 2016, approximately $5.8 billion remained under our share repurchase authorization.
Analysis of Sources and Uses of Cash
The following table presents selected data from AIG's Consolidated Statements of Cash Flows:
Years Ended December 31, | | | | | | | | |
(in millions) | | | | 2015 | | 2014* | | 2013 |
Sources: | | | | | | | | |
Net cash provided by operating activities | | | $ | 2,877 | $ | 5,007 | $ | 5,865 |
Net cash provided by changes in restricted cash | | | | 1,457 | | - | | 1,244 |
Net cash provided by other investing activities | | | | 7,005 | | 15,731 | | 5,855 |
Changes in policyholder contract balances | | | | 2,410 | | 1,719 | | - |
Issuance of long-term debt | | | | 6,867 | | 6,687 | | 5,235 |
Total sources | | | | 20,616 | | 29,144 | | 18,199 |
Uses: | | | | | | | | |
Change in restricted cash | | | | - | | (1,447) | | - |
Change in policyholder contract balances | | | | - | | - | | (547) |
Repayments of long-term debt | | | | (9,805) | | (16,160) | | (14,197) |
Purchases of AIG Common Stock | | | | (10,691) | | (4,902) | | (597) |
Net cash used in other financing activities | | | | (210) | | (7,132) | | (1,652) |
Total uses | | | | (20,706) | | (29,641) | | (16,993) |
Effect of exchange rate changes on cash | | | | (39) | | (74) | | (92) |
Increase (decrease) in cash | | | $ | (129) | $ | (571) | $ | 1,114 |
* For 2014, cash decreased by $162 million due to reclassification of $289 million to restricted cash presented in Other assets, partially offset by a $127 million reclassification from Short-term investments, to correct prior period presentation.
The following table presents a summary of AIG’s Consolidated Statement of Cash Flows:
Years Ended December 31, | | | | | | | | | |
(in millions) | | | | | 2015 | | 2014 | | 2013 |
Summary: | | | | | | | | | |
Net cash provided by operating activities | | | | $ | 2,877 | $ | 5,007 | $ | 5,865 |
Net cash provided by investing activities | | | | | 8,462 | | 14,284 | | 7,099 |
Net cash used in financing activities | | | | | (11,429) | | (19,788) | | (11,758) |
Effect of exchange rate changes on cash | | | | | (39) | | (74) | | (92) |
Increase (decrease) in cash | | | | | (129) | | (571) | | 1,114 |
Cash at beginning of year | | | | | 1,758 | | 2,241 | | 1,151 |
Change in cash of businesses held for sale | | | | | - | | 88 | | (24) |
Cash at end of year | | | | $ | 1,629 | $ | 1,758 | $ | 2,241 |
Operating Cash Flow Activities
Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates and operating expenses.
Interest payments totaled $1.4 billion in 2015, compared to $3.4 billion in 2014 and $3.9 billion in 2013. Excluding interest payments, AIG generated positive operating cash flow of $4.2 billion, $8.3 billion and $9.7 billion in 2015, 2014 and 2013, respectively.
Cash provided by operating activities of our Non-Life Insurance Companies was $1.0 billion in 2015, compared to $0.9 billion in 2014 and $0.4 billion in 2013. The increase in 2014 compared to 2013 was primarily due to the timing of the payments related to catastrophe losses for 2013.
Cash provided by operating activities of our Life Insurance Companies was $3.8 billion in 2015, compared to $4.4 billion in 2014 and $4.3 billion in 2013. The decline in 2015 compared to 2014 was primarily due to a greater increase in other assets and liabilities, net.
Cash provided by operating activities of businesses held for sale was $2.9 billion for 2013.
Investing Cash Flow Activities
Net cash provided by investing activities in 2015 included:
•approximately $1.8 billion of cash collateral received in connection with our Life Insurance Companies’ securities lending program; and
•approximately $4.2 billion of net cash proceeds from the sale of ordinary shares of AerCap.
Net cash provided by investing activities in 2014 included:
•a reduction in net investment purchase activity; and
•approximately $2.4 billion of net cash proceeds from the sale of ILFC.
Net cash provided by investing activities for 2013 included an increase in net investment purchase activity.
Financing Cash Flow Activities
Net cash used in financing activities in 2015 included:
•approximately $1.0 billion in the aggregate to pay a dividend of $0.125 per share on AIG Common Stock in each of the first and second quarters of 2015 and $0.28 per share on AIG Common Stock in each of the third and fourth quarters of 2015;
•approximately $10.7 billion to repurchase approximately 182 million shares of AIG Common Stock; and
•approximately $9.9 billion to repay long-term debt.
These items were partially offset by approximately $6.9 billion in proceeds from the issuance of long-term debt.
Net cash used in financing activities for 2014 included:
•approximately $712 million in the aggregate to pay dividends of $0.125 per share on AIG Common Stock in each of the four quarters of 2014;
•approximately $4.9 billion to repurchase approximately 88 million shares of AIG Common Stock;
•approximately $271 million to repay long-term debt of business held-for-sale; and
•approximately $16.2 billion to repay long-term debt.
Net cash used in financing activities for 2013 included:
•approximately $294 million in the aggregate to pay dividends of $0.10 per share on AIG Common Stock in each of the third and fourth quarters of 2013;
•approximately $597 million to repurchase approximately 12 million shares of AIG Common Stock;
•approximately $9.3 billion to repay long term debt; and
approximately $4.9 billion in repayments of long term debt of business held-for-sale.
Liquidity and Capital Resources of AIG Parent and Subsidiaries
AIG Parent
As of December 31, 2015, AIG Parent had approximately $13.7 billion in liquidity sources. AIG Parent’s liquidity sources are primarily held in the form of cash, short- termshort-term investments and publicly traded, intermediate duration investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and tenor. During 2013,duration. Based upon an assessment of its immediate and longer-term funding needs, the liquidity sources can be readily monetized through sales, repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent purchasedliquidity is monitored through the use of various internal liquidity risk measures. AIG Parent’s primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries and credit facilities. AIG Parent’s primary uses of liquidity are for debt service, capital and liability management, operating expenses and subsidiary capital needs.
We generally manage capital flows between AIG Parent and its subsidiaries through internal, Board‑approved policies and standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt markets from time to time to meet funding requirements as needed.
We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or share repurchase authorizations or deploy such capital towards liability management.
In the normal course, it is expected that a portion of the capital released by our insurance operations or through the utilization of AIG’s deferred tax assets may be available for distribution to shareholders. Additionally, it is expected that capital associated with businesses or investments that do not directly support our insurance operations may be available for distribution to shareholders or deployment towards liability management upon its monetization.
In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: the capital resources available to support our insurance operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, as well as regulatory standards for capital and capital distributions.
In January 2016, AIG Parent made a capital contribution of approximately $2.9 billion to our Non-Life Insurance Companies as a result of our fourth quarter reserve strengthening.
The following table presents AIG Parent's liquidity sources:
| As of | As of |
(In millions) | December 31, 2015 | December 31, 2014 |
Cash and short-term investments(a) | $ | 3,497 | $ | 5,085 |
Unencumbered fixed maturity securities(b) | | 5,723 | | 4,727 |
Total AIG Parent liquidity | | 9,220 | | 9,812 |
Available capacity under syndicated credit facility(c) | | 4,500 | | 4,000 |
Available capacity under contingent liquidity facility(d) | | - | | 500 |
Total AIG Parent liquidity sources | $ | 13,720 | $ | 14,312 |
(a) Cash and short-term investments include reverse repurchase agreements totaling $1.5 billion and $1.6 billion as of December 31, 2015 and 2014, respectively.
(b) Unencumbered securities consist of publicly traded, intermediateinvestment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
(c) For additional information relating to this syndicated credit facility, see Credit Facilities below.
(d) The contingent liquidity facility expired by its terms on December 15, 2015. For additional information relating to the contingent liquidity facility, see Contingent Liquidity Facilities below.
Non-Life Insurance Companies
We expect that our Non-Life Insurance Companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our Non-Life Insurance Companies’ liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our Non-Life Insurance Companies’ liquidity is monitored through the use of various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income.The primary uses of liquidity are paid losses, reinsurance payments, dividends, expenses, investments and collateral requirements.
Our Non-Life Insurance Companies may require additional funding to meet capital or liquidity needs under certain circumstances. Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non‑renewals or cancellations by policyholders and adversely affect the subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.
Certain Non-Life Insurance Companies are members of the Federal Home Loan Banks (FHLBs) in their respective districts. Borrowings from the FHLBs may be used to supplement liquidity. As of December 31, 2015 and 2014, none of our Non-Life Insurance Companies had FHLB borrowings outstanding.
In April 2015, AIG Parent and Ascot Corporate Name Limited (ACNL), a Non-Life Insurance Company, entered into a new $725 million letter of credit facility, which replaced the prior $625 million letter of credit facility. ACNL, as a member of the Lloyd’s of London insurance syndicate (Lloyd’s), is required to hold capital at Lloyd’s, known as Funds at Lloyds (FAL). Under the new facility, the entire FAL capital requirement of $625 million as of December 31, 2015, which supports the 2015, 2016 and 2017 years of account, was satisfied with a letter of credit in that amount issued under the facility.
AIG generally manages capital between AIG Parent and our Non-Life Insurance Companies through internal, Board-approved policies and guidelines. In addition, AIG Parent is party to a CMA with its Mortgage Guaranty insurance company. Among other things, the CMA provides that AIG Parent will maintain capital and surplus of the Mortgage Guaranty insurance company at or above a specified minimum required capital based on a specified risk-to-capital ratio. In addition, the CMA provides that if capital and surplus of the Mortgage Guaranty insurance company is in excess of that same specified minimum required capital, subject to its board approval and compliance with applicable insurance laws, the Mortgage Guaranty insurance company would declare and pay ordinary dividends to its equity holders up to an amount necessary to reduce projected or actual capital and surplus to a level equal to or not materially greater than such specified minimum required capital. As structured, the CMA contemplates that the specified minimum required capital would be reviewed and agreed upon at least annually. As of December 31, 2015, the minimum required capital for the CMA with the Mortgage Guaranty insurance company is based on a risk-to-capital ratio of 19 to 1.
In 2015, our Non-Life Insurance Companies paid approximately $3.2 billion in dividends in the form of cash and fixed maturity securities to AIG Parent, of which $600 million represented the remainder of dividends that were declared by our Non-Life
Insurance Companies in the fourth quarter of 2014. The fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
Life Insurance Companies
We expect that our Life Insurance Companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our Life Insurance Companies’ liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our Life Insurance Companies’ liquidity is monitored through the use of various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income. The primary uses of liquidity are benefit claims, interest payments, surrenders, withdrawals, dividends, expenses, investments and collateral requirements.
Management believes that because of the size and liquidity of our Life Insurance Companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. However, as we saw in 2008, in times of extreme capital markets disruption, liquidity needs could outpace resources.Furthermore, our Life Insurance Companies’ products contain certain features that mitigate surrender risk, including surrender charges. As part of their risk management framework, our Life Insurance Companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity position and facilitate their ability to maintain a fully invested asset portfolio.
Certain of our U.S. Life Insurance Companies are members of the FHLBs in their respective districts. Borrowings from the FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. Life Insurance Companies had outstanding borrowings from the FHLBs in an aggregate amount of $2 million and $44 million as of December 31, 2015 and 2014, respectively.
Certain of our U.S. Life Insurance Companies have programs, which began in 2012, that lend securities from their investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life Insurance Companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of the loaned securities. Cash collateral received is invested in short-term investments. Additionally, the aggregate amount of securities that a Life Insurance Company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. At December 31, 2015, our U.S. Life Insurance Companies had $1.1 billion of securities subject to these agreements and $1.1 billion of liabilities to borrowers for collateral received. Our U.S. Life Insurance Companies had no securities subject to lending agreements and no collateral liability at December 31, 2014.
AIG generally manages capital between AIG Parent and our Life Insurance Companies through internal, Board-approved policies and guidelines. In addition, AIG Parent is party to a CMA with AGC Life Insurance Company. Among other things, the CMA provides that AIG Parent will maintain the total adjusted capital of AGC Life Insurance Company at or above a specified minimum percentage of its projected NAIC Company Action Level Risk-Based Capital (RBC). As of December 31, 2015, the specified minimum percentage under this CMA was 250 percent.
In 2015, our U.S. Life Insurance Companies paid approximately $4.6 billion to AIG Parent, which included $5.4 billion in dividends and loan repayments in the form of cash and fixed maturity securities, net of an $818 million tax settlement payment received from AIG Parent. The 2015 dividend payments included $2.2 billion that represented the remainder of dividends that were declared in the fourth quarter of 2014. The fixed maturity securities primarily included U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
Credit Facilities
We maintain a committed, revolving syndicated credit facility as a potential source of liquidity for general corporate purposes. On November 5, 2015, we amended and restated the five-year syndicated credit facility that was entered into on June 19, 2014 (the Previous Facility). The amended and restated five-year syndicated facility (the Five-Year Facility) provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion (increased from a $4.0 billion commitment in the Previous Facility) without any limits on the type of borrowings and is scheduled to expire in November 2020 (the Previous Facility was scheduled to expire in June 2019). The increased commitment of $500 million to the Five-Year Facility offsets the effect of the expiration of our $500 million contingent liquidity facility. See Contingent Liquidity Facilities below.
As of December 31, 2015, a total of $4.5 billion remains available under the Five-Year Facility. Our ability to borrow under the Five-Year Facility is not contingent on our credit ratings. However, our ability to borrow under the Five-Year Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Five-Year Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Five-Year Facility would restrict our access to the Five-Year Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to borrow under the Five-Year Facility from time to time, and may use the proceeds for general corporate purposes.
Contingent Liquidity Facilities
AIG Parent had access to a contingent liquidity facility of up to $500 million as a potential source of liquidity for general corporate purposes. Under this facility, we had the unconditional right, prior to December 15, 2015, to issue up to $500 million in senior debt to the counterparty, based on a put option agreement between AIG Parent and the counterparty. The contingent liquidity facility expired by its terms on December 15, 2015. The expiration of the contingent liquidity facility is offset by the effect of the increased commitment of $500 million to our Five-Year Facility. See Credit Facilities above.
Contractual Obligations
The following table summarizes contractual obligations in total, and by remaining maturity:
December 31, 2015 | | | Payments due by Period |
| | Total | | | | 2017 - | | 2019 - | | |
(in millions) | | Payments | | 2016 | | 2018 | | 2020 | | Thereafter |
Insurance operations | | | | | | | | | | |
Loss reserves | $ | 78,090 | $ | 19,035 | $ | 22,202 | $ | 12,243 | $ | 24,610 |
Insurance and investment contract liabilities | | 229,806 | | 15,691 | | 28,322 | | 24,999 | | 160,794 |
Borrowings | | 813 | | - | | - | | 106 | | 707 |
Interest payments on borrowings | | 1,141 | | 54 | | 109 | | 109 | | 869 |
Operating leases | | 986 | | 253 | | 350 | | 197 | | 186 |
Other long-term obligations | | 25 | | 4 | | 11 | | 6 | | 4 |
Total | $ | 310,861 | $ | 35,037 | $ | 50,994 | $ | 37,660 | $ | 187,170 |
Other | | | | | | | | | | |
Borrowings | $ | 23,548 | $ | 1,619 | $ | 3,208 | $ | 2,475 | $ | 16,246 |
Interest payments on borrowings | | 17,142 | | 1,067 | | 1,998 | | 1,759 | | 12,318 |
Operating leases | | 149 | | 51 | | 52 | | 23 | | 24 |
Other long-term obligations | | 107 | | - | | - | | - | | 107 |
Total | $ | 40,946 | $ | 2,737 | $ | 5,258 | $ | 4,257 | $ | 28,695 |
Consolidated | | | | | | | | | | |
Loss reserves | $ | 78,090 | $ | 19,035 | $ | 22,202 | $ | 12,243 | $ | 24,610 |
Insurance and investment contract liabilities | | 229,806 | | 15,691 | | 28,322 | | 24,999 | | 160,794 |
Borrowings | | 24,361 | | 1,619 | | 3,208 | | 2,581 | | 16,953 |
Interest payments on borrowings | | 18,283 | | 1,121 | | 2,107 | | 1,868 | | 13,187 |
Operating leases | | 1,135 | | 304 | | 402 | | 219 | | 210 |
Other long-term obligations(a) | | 132 | | 4 | | 11 | | 6 | | 111 |
Total(b) | $ | 351,807 | $ | 37,774 | $ | 56,252 | $ | 41,916 | $ | 215,865 |
(a) Primarily includes contracts to purchase future services and other capital expenditures.
(b) Does not reflect unrecognized tax benefits of $4.3 billion, the timing of which is uncertain.
Loss Reserves
Loss reserves relate to our Non-Life Insurance Companies and represent future losses and loss adjustment expense payments estimated based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our Non-Life Insurance Companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life Insurance Companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments of a term certain nature. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.
We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.
We believe that our Life Insurance Companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life Insurance Companies maintain significant levels of investment grade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.
Borrowings
Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that can be readily monetized through sales or repurchase agreements. These securities allow us to diversify sourcesare supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of liquidity while reducing the cost of maintaining sufficient liquidity.those obligations.
Off-Balance Sheet Arrangements and Commercial Commitments
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:
December 31, 2015 | | | Amount of Commitment Expiring |
| | Total Amounts | | | | 2017 - | | 2019 - | | |
(in millions) | | Committed | | 2016 | | 2018 | | 2020 | | Thereafter |
Insurance operations | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Standby letters of credit | $ | 870 | $ | 180 | $ | 59 | $ | 627 | $ | 4 |
Guarantees of indebtedness | | 128 | | 101 | | 27 | | - | | - |
All other guarantees(a) | | - | | - | | - | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 2,406 | | 1,615 | | 538 | | 247 | | 6 |
Commitments to extend credit | | 2,403 | | 1,171 | | 856 | | 290 | | 86 |
Letters of credit | | 6 | | 6 | | - | | - | | - |
Total(c) | $ | 5,813 | $ | 3,073 | $ | 1,480 | $ | 1,164 | $ | 96 |
Other | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit | | 208 | | 208 | | - | | - | | - |
All other guarantees | | 153 | | 140 | | 13 | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 145 | | 72 | | 1 | | - | | 72 |
Commitments to extend credit(e) | | 500 | | - | | - | | 500 | | - |
Letters of credit | | 25 | | 25 | | - | | - | | - |
Total(c)(f) | $ | 1,105 | $ | 445 | $ | 14 | $ | 500 | $ | 146 |
Consolidated | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit | | 1,078 | | 388 | | 59 | | 627 | | 4 |
Guarantees of indebtedness | | 128 | | 101 | | 27 | | - | | - |
All other guarantees(a) | | 153 | | 140 | | 13 | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 2,551 | | 1,687 | | 539 | | 247 | | 78 |
Commitments to extend credit(e) | | 2,903 | | 1,171 | | 856 | | 790 | | 86 |
Letters of credit | | 31 | | 31 | | - | | - | | - |
Total(c)(f) | $ | 6,918 | $ | 3,518 | $ | 1,494 | $ | 1,664 | $ | 242 |
(a) Includes construction guarantees connected to affordable housing investments by our Life Insurance Companies. Excludes potential amounts for indemnification obligations included in asset sales agreements. See Note 9 to the Consolidated Financial Statements for further information on indemnification obligations.
(b) Includes commitments to invest in private equity funds, hedge funds and mutual funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.
(c) Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.
(d) Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e) Includes a five-year senior unsecured revolving credit facility between AerCap Ireland Capital Limited, as borrower, and AIG Parent, as lender (the AerCap Credit Facility) scheduled to mature in May 2019. The AerCap Credit Facility permits loans for general corporate purposes. In June 2015, upon the receipt by AIG Parent of the $500 million principal amount of 6.50% fixed-to-floating rate junior subordinated notes issued by AerCap Global Aviation Trust, the aggregate commitment under the AerCap Credit Facility was reduced to $500 million from $1.0 billion. At December 31, 2013,2015, no amounts were outstanding under the AerCap Credit Facility.
(f) Excludes commitments with respect to pension plans. The annual pension contribution for 2016 is expected to be approximately 89 percent$67 million for U.S. and non-U.S. plans.
Arrangements with Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of fixed maturity securities were held by our domestic entities. Approximately 17 percent of such securities were rated AAA by one or morebusiness, and we consolidate a VIE when we are the primary beneficiary of the principal rating agencies,entity. For a further discussion of our involvement with VIEs, see Note 9 to the Consolidated Financial Statements.
Indemnification Agreements
We are subject to financial guarantees and approximately 16 percent were rated below investment gradeindemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services' ratings and opinions provide one sourcebe subject to contractual limitations. For additional information regarding our indemnification agreements, see Note 15 to the Consolidated Financial Statements.
We have recorded liabilities for certain of independent perspective for considerationthese arrangements where it is possible to estimate them. These liabilities are not material in the internal analysis.
A significant portion of our foreign entities' fixed maturity securities portfolio is rated by Moody's, S&P or similar foreign rating services. Rating servicesaggregate. We are not available for some foreign issued securities. Our Credit Risk Management department closely reviews the credit qualityunable to develop a reasonable estimate of the foreign portfolio's non-rated fixed maturity securities.maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.
Debt
The following table provides the rollforward of AIG’s total debt outstanding:
| | Balance at | | | | Maturities | | Effect of | | | | | Balance at |
Year Ended December 31, 2015 | | December 31, | | | | and | | Foreign | | Other | | December 31, |
(in millions) | | 2014 | | Issuances | Repayments | | Exchange | | Changes | | | 2015 |
Debt issued or guaranteed by AIG: | | | | | | | | | | | | | |
AIG general borrowings: | | | | | | | | | | | | | |
Notes and bonds payable | $ | 15,570 | $ | 5,540 | $ | (3,828) | $ | (156) | $ | 10 | | $ | 17,136 |
Subordinated debt | | 250 | | - | | (250) | | - | | - | | | - |
Junior subordinated debt | | 2,466 | | - | | (1,073) | | (57) | | 1 | | | 1,337 |
AIG Japan Holdings Kabushiki Kaisha | | - | | 110 | | (1) | | (3) | | - | | | 106 |
AIGLH notes and bonds payable | | 284 | | - | | - | | - | | - | | | 284 |
AIGLH junior subordinated debt | | 536 | | - | | (114) | | - | | - | | | 422 |
Total AIG general borrowings | | 19,106 | | 5,650 | | (5,266) | | (216) | | 11 | | | 19,285 |
AIG borrowings supported by assets:(a) | | | | | | | | | | | | | |
MIP notes payable | | 2,870 | | - | | (1,351) | | (143) | | (4) | | | 1,372 |
Series AIGFP matched notes and bonds payable | | 34 | | - | | (2) | | - | | 2 | | | 34 |
GIAs, at fair value | | 4,648 | | 388 | | (1,812) | | - | | 52 | (b) | | 3,276 |
Notes and bonds payable, at fair value | | 818 | | 16 | | (431) | | - | | (9) | (b) | | 394 |
Total AIG borrowings supported by assets | | 8,370 | | 404 | | (3,596) | | (143) | | 41 | | | 5,076 |
Total debt issued or guaranteed by AIG | | 27,476 | | 6,054 | | (8,862) | | (359) | | 52 | | | 24,361 |
Debt not guaranteed by AIG: | | | | | | | | | | | | | |
Other subsidiaries notes, bonds, loans and | | | | | | | | | | | | | |
mortgages payable | | 58 | | 450 | | (505) | | (1) | | - | | | 2 |
Debt of consolidated investments(c) | | 3,683 | | 363 | | (614) | | (1) | | 1,556 | (d) | | 4,987 |
Total debt not guaranteed by AIG | | 3,741 | | 813 | | (1,119) | | (2) | | 1,556 | | | 4,989 |
Total debt | $ | 31,217 | $ | 6,867 | $ | (9,981) | $ | (361) | $ | 1,608 | | $ | 29,350 |
(a) AIG Parent guarantees all such debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $2.4 billion and $3.5 billion at December 31, 2015 and 2014, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
(b) Primarily represents adjustments to the fair value of debt.
(c) At December 31, 2013, approximately 15 percent2015, includes debt of consolidated investment vehicles related to real estate investments of $2.4 billion, affordable housing partnership investments and securitizations of $2.2 billion and other securitization vehicles and investments of $359 million. At December 31, 2014, includes debt of consolidated investment vehicles related to real estate investments of $2.1 billion, affordable housing partnership investments and securitizations of $853 million, and other securitization vehicles and investments of $728 million.
(d) Includes the foreign entities' fixed maturity securities were either rated AAA or, on the basiseffect of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 5 percent were rated below investment grade or not rated at that date. Approximately 45 percent of the foreign entities' fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities consolidating previously unconsolidated partnerships.
Total DEBT OUTSTANDING
(in the country of issuance.millions)
Composite AIG Credit Ratings
With respect to our fixed maturity investments, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC Securities Valuations Office (SVO)SVO (over 99 percent of total fixed maturity investments), or (b) our equivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC. The "Non-rated"“Non-rated” category in those tables consists of fixed maturity securities spread among various asset classes and issuers that have not been rated to date by any of the major rating agencies, the NAIC or us.
See Enterprise Risk Management herein for a discussion of credit risks associated with Investments.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / INVESTMENTS
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their fair value:
| Available for Sale | | Other | | Total | |
| December 31, | | December 31, | | December 31, | | December 31, | | December 31, | | December 31, | |
(in millions) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Rating: | | | | | | | | | | | | | | | | | | |
Other fixed maturity | | | | | | | | | | | | | | | | | | |
securities | | | | | | | | | | | | | | | | | | |
AAA | $ | 12,274 | | $ | 15,463 | | $ | 3,222 | | $ | 5,322 | | $ | 15,496 | | $ | 20,785 | |
AA | | 35,344 | | | 36,730 | | | 207 | | | 224 | | | 35,551 | | | 36,954 | |
A | | 50,741 | | | 56,693 | | | 1,781 | | | 242 | | | 52,522 | | | 56,935 | |
BBB | | 71,766 | | | 75,607 | | | 186 | | | 250 | | | 71,952 | | | 75,857 | |
Below investment grade | | 12,305 | | | 10,651 | | | 133 | | | 303 | | | 12,438 | | | 10,954 | |
Non-rated | | 920 | | | 1,035 | | | - | | | - | | | 920 | | | 1,035 | |
Total | $ | 183,350 | | $ | 196,179 | | $ | 5,529 | | $ | 6,341 | | $ | 188,879 | | $ | 202,520 | |
Mortgage-backed, asset- | | | | | | | | | | | | | | | | | | |
backed and collateralized | | | | | | | | | | | | | | | | | | |
AAA | $ | 26,382 | | $ | 24,783 | | $ | 1,756 | | $ | 2,313 | | $ | 28,138 | | $ | 27,096 | |
AA | | 5,003 | | | 4,078 | | | 708 | | | 1,549 | | | 5,711 | | | 5,627 | |
A | | 7,462 | | | 7,606 | | | 416 | | | 494 | | | 7,878 | | | 8,100 | |
BBB | | 4,394 | | | 3,813 | | | 497 | | | 620 | | | 4,891 | | | 4,433 | |
Below investment grade | | 21,638 | | | 23,376 | | | 7,771 | | | 8,314 | | | 29,409 | | | 31,690 | |
Non-rated | | 16 | | | 24 | | | 105 | | | 81 | | | 121 | | | 105 | |
Total | $ | 64,895 | | $ | 63,680 | | $ | 11,253 | | $ | 13,371 | | $ | 76,148 | | $ | 77,051 | |
Total | | | | | | | | | | | | | | | | | | |
AAA | $ | 38,656 | | $ | 40,246 | | $ | 4,978 | | $ | 7,635 | | $ | 43,634 | | $ | 47,881 | |
AA | | 40,347 | | | 40,808 | | | 915 | | | 1,773 | | | 41,262 | | | 42,581 | |
A | | 58,203 | | | 64,299 | | | 2,197 | | | 736 | | | 60,400 | | | 65,035 | |
BBB | | 76,160 | | | 79,420 | | | 683 | | | 870 | | | 76,843 | | | 80,290 | |
Below investment grade | | 33,943 | | | 34,027 | | | 7,904 | | | 8,617 | | | 41,847 | | | 42,644 | |
Non-rated | | 936 | | | 1,059 | | | 105 | | | 81 | | | 1,041 | | | 1,140 | |
Total | $ | 248,245 | | $ | 259,859 | | $ | 16,782 | | $ | 19,712 | | $ | 265,027 | | $ | 279,571 | |
| | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
|---|
| | |
| | Available for Sale | | Other | | Total | |
|---|
| | December 31,
2013
| | December 31,
2012
| | December 31,
2013
| | December 31,
2012
| | December 31,
2013
| | December 31,
2012
| |
|---|
| | |
Rating: | | | | | | | | | | | | | | | | | | | |
Other fixed maturity securities | | | | | | | | | | | | | | | | | | | |
AAA | | $ | 17,437 | | $ | 21,433 | | $ | 5,510 | | $ | 6,047 | | $ | 22,947 | | $ | 27,480 | |
AA | | | 39,478 | | | 44,224 | | | 261 | | | 636 | | | 39,739 | | | 44,860 | |
A | | | 56,838 | | | 62,824 | | | 445 | | | 588 | | | 57,283 | | | 63,412 | |
BBB | | | 75,668 | | | 78,554 | | | 478 | | | 468 | | | 76,146 | | | 79,022 | |
Below investment grade | | | 9,904 | | | 9,775 | | | 321 | | | 265 | | | 10,225 | | | 10,040 | |
Non-rated | | | 311 | | | 290 | | | – | | | 112 | | | 311 | | | 402 | |
| | |
Total | | $ | 199,636 | | $ | 217,100 | | $ | 7,015 | | $ | 8,116 | | $ | 206,651 | | $ | 225,216 | |
| | |
Mortgage-backed, asset-backed and collateralized | | | | | | | | | | | | | | | | | | | |
AAA | | $ | 21,982 | | $ | 21,151 | | $ | 3,120 | | $ | 2,843 | | $ | 25,102 | | $ | 23,994 | |
AA | | | 3,404 | | | 3,162 | | | 2,357 | | | 2,889 | | | 5,761 | | | 6,051 | |
A | | | 6,906 | | | 5,533 | | | 660 | | | 928 | | | 7,566 | | | 6,461 | |
BBB | | | 3,973 | | | 3,497 | | | 679 | | | 807 | | | 4,652 | | | 4,304 | |
Below investment grade | | | 22,333 | | | 19,390 | | | 8,683 | | | 8,957 | | | 31,016 | | | 28,347 | |
Non-rated | | | 40 | | | 126 | | | 109 | | | 44 | | | 149 | | | 170 | |
| | |
Total | | $ | 58,638 | | $ | 52,859 | | $ | 15,608 | | $ | 16,468 | | $ | 74,246 | | $ | 69,327 | |
| | |
Total | | | | | | | | | | | | | | | | | | | |
AAA | | $ | 39,419 | | $ | 42,584 | | $ | 8,630 | | $ | 8,890 | | $ | 48,049 | | $ | 51,474 | |
AA | | | 42,882 | | | 47,386 | | | 2,618 | | | 3,525 | | | 45,500 | | | 50,911 | |
A | | | 63,744 | | | 68,357 | | | 1,105 | | | 1,516 | | | 64,849 | | | 69,873 | |
BBB | | | 79,641 | | | 82,051 | | | 1,157 | | | 1,275 | | | 80,798 | | | 83,326 | |
Below investment grade | | | 32,237 | | | 29,165 | | | 9,004 | | | 9,222 | | | 41,241 | | | 38,387 | |
Non-rated | | | 351 | | | 416 | | | 109 | | | 156 | | | 460 | | | 572 | |
| | |
Total | | $ | 258,274 | | $ | 269,959 | | $ | 22,623 | | $ | 24,584 | | $ | 280,897 | | $ | 294,543 | |
| | |
AIG 2013 Form 10-K
Table of ContentsTABLE OF CONTENTS
ITEM 7 / INVESTMENTS
Investments by Segment
The following tables summarize the composition of AIG's investments by reportable segment:Item 7 / INVESTMENTS
| | | | | | | | | | | | | | | | |
| | |
| | Reportable Segment | |
| |
| |
| |
|---|
| |
| | Consolidation
and
Eliminations
| |
| |
|---|
(in millions)
| | AIG Property
Casualty
| | AIG Life and
Retirement
| | Other
Operations
| | Total
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | | | | | | |
Bonds available for sale, at fair value | | $ | 96,972 | | $ | 154,763 | | $ | 10,974 | | $ | (4,435 | ) | $ | 258,274 | |
Other bond securities, at fair value | | | 1,995 | | | 2,406 | | | 18,558 | | | (336 | ) | | 22,623 | |
Equity securities: | | | | | | | | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | | 3,618 | | | 36 | | | 2 | | | – | | | 3,656 | |
Other Common and preferred stock, at fair value | | | 198 | | | 538 | | | 98 | | | – | | | 834 | |
Mortgage and other loans receivable, net of allowance | | | 4,217 | | | 19,078 | | | 852 | | | (3,382 | ) | | 20,765 | |
Other invested assets | | | 9,316 | | | 13,025 | | | 6,422 | | | (104 | ) | | 28,659 | |
Short-term investments | | | 5,236 | | | 6,462 | | | 11,036 | | | (1,117 | ) | | 21,617 | |
| | |
Total investments* | | | 121,552 | | | 196,308 | | | 47,942 | | | (9,374 | ) | | 356,428 | |
Cash | | | 1,501 | | | 547 | | | 193 | | | – | | | 2,241 | |
| | |
Total invested assets | | $ | 123,053 | | $ | 196,855 | | $ | 48,135 | | $ | (9,374 | ) | $ | 358,669 | |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | |
Fixed maturity securities: | | | | | | | | | | | | | | | | |
Bonds available for sale, at fair value | | $ | 104,766 | | $ | 163,550 | | $ | 6,860 | | $ | (5,217 | ) | $ | 269,959 | |
Other bond securities, at fair value | | | 1,597 | | | 1,856 | | | 21,362 | | | (231 | ) | | 24,584 | |
Equity securities: | | | | | | | | | | | | | | | | |
Common and preferred stock available for sale, at fair value | | | 3,093 | | | 111 | | | 8 | | | – | | | 3,212 | |
Other Common and preferred stock, at fair value | | | – | | | 562 | | | 100 | | | – | | | 662 | |
Mortgage and other loans receivable, net of allowance | | | 4,478 | | | 18,755 | | | 2,024 | | | (5,775 | ) | | 19,482 | |
Other invested assets | | | 8,365 | | | 12,737 | | | 7,635 | | | 380 | | | 29,117 | |
Short-term investments | | | 7,858 | | | 7,392 | | | 14,509 | | | (951 | ) | | 28,808 | |
| | |
Total investments* | | | 130,157 | | | 204,963 | | | 52,498 | | | (11,794 | ) | | 375,824 | |
Cash | | | 649 | | | 297 | | | 205 | | | – | | | 1,151 | |
| | |
Total invested assets | | $ | 130,806 | | $ | 205,260 | | $ | 52,703 | | $ | (11,794 | ) | $ | 376,975 | |
| | |
* At December 31, 2013, approximately 89 percent and 11 percent of investments were held by domestic and foreign entities, respectively, compared to approximately 88 percent and 12 percent, respectively, at December 31, 2012.
AIG Property Casualty
For AIG Property Casualty, the duration of liabilities for long-tail casualty lines is greater than that for other lines. As opposed to the focus in AIG Life and Retirement, the focus is not on asset-liability matching, but on preservation of capital and growth of surplus.
Fixed maturity securities of AIG Property Casualty's domestic operations, with an average duration of 3.9 years, are currently comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns, as well as taxable municipal bonds, government and agency bonds, and corporate bonds. The majority of these high quality investments are rated A or higher based on composite ratings.
AIG 2013 Form 10-KAvailable‑for‑Sale Investments
Table of Contents
ITEM 7 / INVESTMENTS
Fixed maturity securities held in AIG Property Casualty's foreign operations are of high quality being rated A or higher based on composite ratings, and are of short to intermediate duration, averaging 4.3 years.
While invested assets backing reserves are primarily invested in conventional fixed maturity securities in AIG Property Casualty's domestic operations, a modest portion of surplus is allocated to alternative investments, including private equity and hedge funds. These investments provide a combination of added diversification and attractive long-term returns.
AIG Life and Retirement
Our investment strategy is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset-liability matching and available investment opportunities.
We use asset-liability management as a primary tool to monitor and manage risk in our businesses. Our objective is to maintain an investment portfolio with assets having weighted average durations that are matched to the duration and cash flow profile of our liabilities, to the extent practicable. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration. An extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses.
AIG Life and Retirement monitors fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. AIG Life and Retirement frequently reviews its interest rate assumptions and actively manages the crediting rates used for its new and in force business. Business strategies continue to evolve to maintain profitability of the overall business in a historically low interest rate environment. The low interest rate environment makes it more difficult to profitably price attractive guaranteed return products and puts margin pressure on existing products, due to the challenge of investing recurring premiums and deposits and reinvesting investment portfolio cash flows in the low rate environment while maintaining satisfactory investment quality and liquidity. In addition, there is investment risk associated with future premium receipts from certain in-force business. That is, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
A number of guaranteed benefits, such as living benefits and guaranteed minimum death benefits, are offered on certain variable and indexed annuity products. The fair value of these benefits is measured based on actuarial and capital market assumptions related to projected cash flows over the expected lives of the contracts. We manage our exposure resulting from these long-term guarantees through reinsurance or capital market hedging instruments. We actively review underlying assumptions of policyholder behavior and persistency related to these guarantees. We have taken positions in certain derivative financial instruments to hedge the impact of changes in equity markets and interest rates on these benefit guarantees. We execute listed futures and options contracts on equity indexes to hedge certain guarantees of variable and indexed annuity products. We also enter into various types of futures and options contracts, primarily to hedge changes in value of certain guarantees of variable and indexed annuities due to fluctuations in interest rates. We use several instruments to hedge interest rate exposure, including listed futures on government securities, listed options on government securities and the purchase of government securities.
With respect to over-the-counter derivatives, we deal with highly rated counterparties and do not expect the counterparties to fail to meet their obligations under the contracts. We have controls in place to monitor credit exposures by limiting transactions with specific counterparties within specified dollar limits and assessing the creditworthiness of counterparties periodically. We generally use ISDA Master Agreements and Credit Support Annexes (CSAs) with bilateral collateral provisions to reduce counterparty credit exposures.
Fixed maturity securities of AIG Life and Retirement, with an average duration of 6.4 years, are comprised of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non-agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on our composite ratings.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / INVESTMENTS
Available-for-Sale Investments
The following table presents the fair value of our available-for-saleavailable‑for‑sale securities:
| | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | 2015 | | 2014 |
Bonds available for sale: | | | | | | | | | | |
U.S. government and government sponsored entities | | | | | | | $ | 1,844 | $ | 2,992 |
Obligations of states, municipalities and political subdivisions | | | | | | | | 27,323 | | 27,659 |
Non-U.S. governments | | | | | | | | 18,195 | | 21,095 |
Corporate debt | | | | | | | | 135,988 | | 144,433 |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | |
RMBS | | | | | | | | 36,227 | | 37,520 |
CMBS | | | | | | | | 13,571 | | 12,885 |
CDO/ABS | | | | | | | | 15,097 | | 13,275 |
Total mortgage-backed, asset-backed and collateralized | | | | | | | | 64,895 | | 63,680 |
Total bonds available for sale* | | | | | | | | 248,245 | | 259,859 |
Equity securities available for sale: | | | | | | | | | | |
Common stock | | | | | | | | 2,401 | | 3,629 |
Preferred stock | | | | | | | | 22 | | 25 |
Mutual funds | | | | | | | | 492 | | 741 |
Total equity securities available for sale | | | | | | | | 2,915 | | 4,395 |
Total | | | | | | | $ | 251,160 | $ | 264,254 |
| | | | | | | |
| |
| |
| |
|---|
| | |
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| |
|---|
| | |
Bonds available for sale: | | | | | | | |
U.S. government and government sponsored entities | | $ | 3,195 | | $ | 3,483 | |
Obligations of states, municipalities and political subdivisions | | | 29,380 | | | 35,705 | |
Non-U.S. governments | | | 22,509 | | | 26,800 | |
Corporate debt | | | 144,552 | | | 151,112 | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | |
RMBS | | | 36,148 | | | 34,392 | |
CMBS | | | 11,482 | | | 9,915 | |
CDO/ABS | | | 11,008 | | | 8,552 | |
| | |
Total mortgage-backed, asset-backed and collateralized | | | 58,638 | | | 52,859 | |
| | |
Total bonds available for sale* | | | 258,274 | | | 269,959 | |
| | |
Equity securities available for sale: | | | | | | | |
Common stock | | | 3,219 | | | 3,029 | |
Preferred stock | | | 27 | | | 78 | |
Mutual funds | | | 410 | | | 105 | |
| | |
Total equity securities available for sale | | | 3,656 | | | 3,212 | |
| | |
Total | | $ | 261,930 | | $ | 273,171 | |
| | |
* At December 31, 20132015 and December 31, 2012,2014, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $32.6$34.9 billion and $29.6$35.1 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to non-U.S. governments and their agencies, financial institutions and local governments for our fixed maturity securities:
| December 31, | | December 31, |
(in millions) | | 2015 | | | 2014 |
Japan | $ | 5,416 | | $ | 5,728 |
Canada | | 1,453 | | | 2,181 |
Germany | | 832 | | | 1,315 |
France | | 784 | | | 614 |
United Kingdom | | 661 | | | 648 |
Mexico | | 563 | | | 661 |
Netherlands | | 511 | | | 639 |
Norway | | 503 | | | 619 |
Singapore | | 426 | | | 545 |
Chile | | 386 | | | 395 |
Other | | 6,710 | | | 7,752 |
Total | $ | 18,245 | | $ | 21,097 |
| | | | | | | |
| |
| |
| |
|---|
| | |
(in millions)
| | December 31,
2013
| | December 31,
2012
| |
|---|
| | |
Japan | | $ | 6,350 | | $ | 9,280 | |
Canada | | | 2,714 | | | 2,841 | |
Germany | | | 1,281 | | | 1,408 | |
France | | | 1,005 | | | 876 | |
Netherlands | | | 759 | | | 778 | |
Norway | | | 682 | | | 850 | |
Mexico | | | 622 | | | 655 | |
South Korea | | | 538 | | | 552 | |
United Kingdom | | | 510 | | | 742 | |
Sweden | | | 488 | | | 564 | |
Other | | | 7,562 | | | 8,256 | |
| | |
Total | | $ | 22,511 | | $ | 26,802 | |
| | |
AIG 2013 Form 10-K
The following table presents the fair value of our aggregate United Kingdom and European credit exposures by major sector for our fixed maturity securities:
|
| |
| |
| | December 31, 2015 | | |
|---|
| | | | | | | | | Non- | | | | | December 31, |
| | December 31, 2013 | |
| | | | | Financial | | Financial | | Structured | | | | 2014 |
|---|
(in millions)
| | Sovereign
| | Financial
Institution
| | Non-
Financial
Corporates
| | Structured
Products
| | Total
| | December 31,
2012
Total
| | | Sovereign | | Institution | | Corporates | | Products | | Total | | Total |
|---|
| | | |
Euro-Zone countries: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
France | | $ | 1,005 | | $ | 1,353 | | $ | 2,688 | | $ | 112 | | $ | 5,158 | | $ | 4,592 | | $ | 784 | $ | 1,215 | $ | 2,019 | $ | - | $ | 4,018 | $ | 4,498 |
Netherlands | | | 511 | | 991 | | 1,505 | | 397 | | 3,404 | | 4,276 |
Germany | | | 1,281 | | | 529 | | | 2,515 | | | 362 | | | 4,687 | | | 3,919 | | | 832 | | 285 | | 2,227 | | 21 | | 3,365 | | 4,155 |
Netherlands | | | 759 | | | 1,556 | | | 1,727 | | | 354 | | | 4,396 | | | 5,964 | | |
Ireland | | | 2 | | - | | 598 | | 674 | | 1,274 | | 850 |
Spain | | | 134 | | | 489 | | | 1,197 | | | 24 | | | 1,844 | | | 1,542 | | | 29 | | 90 | | 968 | | 15 | | 1,102 | | 1,557 |
Italy | | | 90 | | | 270 | | | 978 | | | 13 | | | 1,351 | | | 1,376 | | | 19 | | 115 | | 863 | | 12 | | 1,009 | | 1,245 |
Belgium | | | 150 | | | 25 | | | 667 | | | – | | | 842 | | | 469 | | | 219 | | 120 | | 516 | | - | | 855 | | 973 |
Ireland | | | – | | | 7 | | | 567 | | | 118 | | | 692 | | | 1,402 | | |
Luxembourg | | | - | | 18 | | 448 | | 30 | | 496 | | 243 |
Finland | | | 114 | | | 25 | | | 141 | | | 1 | | | 281 | | | 365 | | | 65 | | 34 | | 130 | | - | | 229 | | 235 |
Austria | | | 216 | | | 19 | | | 15 | | | – | | | 250 | | | 331 | | | 104 | | 3 | | 17 | | - | | 124 | | 155 |
Luxembourg | | | – | | | – | | | 182 | | | 24 | | | 206 | | | 410 | | |
Other Euro-Zone | | | 629 | | | 76 | | | 194 | | | 3 | | | 902 | | | 1,051 | | |
| | | |
Other - EuroZone | | | 680 | | 48 | | 200 | | 1 | | 929 | | 1,022 |
Total Euro-Zone | | $ | 4,378 | | $ | 4,349 | | $ | 10,871 | | $ | 1,011 | | $ | 20,609 | | $ | 21,421 | | $ | 3,245 | $ | 2,919 | $ | 9,491 | $ | 1,150 | $ | 16,805 | $ | 19,209 |
| | | |
Remainder of Europe | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United Kingdom | | $ | 510 | | $ | 3,442 | | $ | 7,990 | | $ | 4,877 | | $ | 16,819 | | $ | 16,720 | | $ | 661 | $ | 2,968 | $ | 8,015 | $ | 3,642 | $ | 15,286 | $ | 16,076 |
Switzerland | | | 74 | | | 1,219 | | | 1,605 | | | – | | | 2,898 | | | 1,554 | | | 49 | | 1,195 | | 1,275 | | - | | 2,519 | | 2,941 |
Sweden | | | 488 | | | 859 | | | 258 | | | – | | | 1,605 | | | 1,617 | | | 144 | | 488 | | 195 | | - | | 827 | | 1,135 |
Other remainder of Europe | | | 1,105 | | | 227 | | | 714 | | | 50 | | | 2,096 | | | 2,270 | | |
| | | |
Total remainder of Europe | | $ | 2,177 | | $ | 5,747 | | $ | 10,567 | | $ | 4,927 | | $ | 23,418 | | $ | 22,161 | | |
| | | |
Norway | | | 503 | | 43 | | 142 | | - | | 688 | | 846 |
Russian Federation | | | 36 | | 8 | | 78 | | - | | 122 | | 311 |
Other - Remainder of Europe | | | 198 | | 119 | | 111 | | 15 | | 443 | | 494 |
Total - Remainder of Europe | | $ | 1,591 | $ | 4,821 | $ | 9,816 | $ | 3,657 | $ | 19,885 | $ | 21,803 |
Total | | $ | 6,555 | | $ | 10,096 | | $ | 21,438 | | $ | 5,938 | | $ | 44,027 | | $ | 43,582 | | $ | 4,836 | $ | 7,740 | $ | 19,307 | $ | 4,807 | $ | 36,690 | $ | 41,012 |
| | | |
Investments in Municipal Bonds
At December 31, 2013,2015, the U.S. municipal bond portfolio of AIG Property Casualty was composed primarily of essential service revenue bonds and high qualityhigh-quality tax-backed bonds with over 9795 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale U.S. municipal bond portfolio by state and municipal bond type:
| December 31, 2015 | | |
| | State | | Local | | | | Total | December 31, |
| | General | | General | | | | Fair | | 2014 |
(in millions) | | Obligation | | Obligation | | Revenue | | Value | | Total Fair Value |
State: | | | | | | | | | | |
New York | $ | 35 | $ | 620 | $ | 3,958 | $ | 4,613 | $ | 4,116 |
California | | 663 | | 610 | | 2,568 | | 3,841 | | 4,707 |
Texas | | 328 | | 1,534 | | 1,553 | | 3,415 | | 3,356 |
Illinois | | 111 | | 367 | | 1,008 | | 1,486 | | 1,364 |
Massachusetts | | 693 | | - | | 694 | | 1,387 | | 1,417 |
Washington | | 530 | | 144 | | 685 | | 1,359 | | 1,278 |
Florida | | 155 | | - | | 980 | | 1,135 | | 1,052 |
Virginia | | 65 | | 5 | | 808 | | 878 | | 918 |
Georgia | | 280 | | 243 | | 347 | | 870 | | 819 |
Washington DC | | 156 | | 1 | | 548 | | 705 | | 607 |
Pennsylvania | | 269 | | 23 | | 384 | | 676 | | 537 |
Arizona | | - | | 94 | | 482 | | 576 | | 734 |
Ohio | | 128 | | 8 | | 395 | | 531 | | 604 |
All other states(a) | | 1,061 | | 547 | | 4,243 | | 5,851 | | 6,150 |
Total(b)(c) | $ | 4,474 | $ | 4,196 | $ | 18,653 | $ | 27,323 | $ | 27,659 |
| | | | | | | | | | | | | |
| | |
December 31, 2013
(in millions)
| | State
General
Obligation
| | Local
General
Obligation
| | Revenue
| | Total
Fair
Value
| |
|---|
| | |
State: | | | | | | | | | | | | | |
California | | $ | 649 | | $ | 999 | | $ | 2,647 | | $ | 4,295 | |
New York | | | 27 | | | 774 | | | 3,392 | | | 4,193 | |
Texas | | | 226 | | | 2,081 | | | 1,797 | | | 4,104 | |
Massachusetts | | | 712 | | | – | | | 746 | | | 1,458 | |
Washington | | | 562 | | | 192 | | | 626 | | | 1,380 | |
Illinois | | | 151 | | | 540 | | | 686 | | | 1,377 | |
Florida | | | 287 | | | 9 | | | 834 | | | 1,130 | |
Virginia | | | 87 | | | 113 | | | 780 | | | 980 | |
Georgia | | | 434 | | | 155 | | | 365 | | | 954 | |
Arizona | | | – | | | 146 | | | 690 | | | 836 | |
Maryland | | | 404 | | | 76 | | | 158 | | | 638 | |
Ohio | | | 169 | | | 54 | | | 401 | | | 624 | |
Wisconsin | | | 288 | | | 29 | | | 294 | | | 611 | |
All other states | | | 1,344 | | | 888 | | | 4,568 | | | 6,800 | |
| | |
Total(a)(b) | | $ | 5,340 | | $ | 6,056 | | $ | 17,984 | | $ | 29,380 | |
| | |
(a) We did not have material credit exposure to the government of Puerto Rico.
(b) Excludes certain university and not- for- profitnot-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.
(b)(c) Includes $6.1$2.9 billion of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale corporate debt securities:
| | Fair Value at | | Fair Value at | |
Industry Category | | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Financial institutions: | | | | | |
Money Center /Global Bank Groups | $ | 9,104 | $ | 10,682 | |
Regional banks — other | | 568 | | 543 | |
Life insurance | | 3,295 | | 3,575 | |
Securities firms and other finance companies | | 380 | | 422 | |
Insurance non-life | | 5,421 | | 5,625 | |
Regional banks — North America | | 6,823 | | 6,636 | |
Other financial institutions | | 7,808 | | 8,169 | |
Utilities(a) | | 18,497 | | 19,249 | |
Communications | | 10,251 | | 10,316 | |
Consumer noncyclical | | 15,391 | | 16,792 | |
Capital goods | | 8,973 | | 8,594 | |
Energy(a) | | 13,861 | | 16,494 | |
Consumer cyclical | | 9,767 | | 11,197 | |
Basic | | 7,512 | | 9,187 | |
Other | | 18,337 | | 16,952 | |
Total (b) | $ | 135,988 | $ | 144,433 | |
(a) The Utilities and Energy amounts at December 31, 2014, have been revised from $23.7 billion and $12.0 billion to $19.2 billion and $16.5 billion, respectively, to conform to current industry classification, which are not considered material to previously issued financial statements.
| | | | | | | |
| |
| |
| |
|---|
| | |
Industry Category
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| |
|---|
| | |
Financial institutions: | | | | | | | |
Money Center /Global Bank Groups | | $ | 11,250 | | $ | 12,300 | |
Regional banks – other | | | 594 | | | 885 | |
Life insurance | | | 3,918 | | | 4,180 | |
Securities firms and other finance companies | | | 458 | | | 636 | |
Insurance non-life | | | 4,899 | | | 5,429 | |
Regional banks – North America | | | 6,875 | | | 7,729 | |
Other financial institutions | | | 7,900 | | | 7,633 | |
Utilities | | | 22,645 | | | 24,993 | |
Communications | | | 10,590 | | | 11,744 | |
Consumer noncyclical | | | 17,420 | | | 17,307 | |
Capital goods | | | 9,082 | | | 9,697 | |
Energy | | | 12,072 | | | 11,275 | |
Consumer cyclical | | | 10,787 | | | 10,781 | |
Basic | | | 9,855 | | | 9,753 | |
Other | | | 16,207 | | | 16,770 | |
| | |
Total* | | $ | 144,552 | | $ | 151,112 | |
| | |
(b) At December 31, 20132015 and December 31, 2012,2014, approximately 91 percent and 93 percent, and 94 percentrespectively, of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, were 5.6 percent and 6.4 percent at December 31, 2015 and 2014, respectively. The decline in energy exposure from December 31, 2014 resulted from unrealized losses due to reduction in the energy sector pricing, sales of securities and other-than-temporary impairments. While the energy investments are primarily investment grade respectively.
AIG 2013 Form 10-K
Table of Contents
and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.
ITEM 7 / INVESTMENTS
Investments in RMBS
The following table presents AIG'sAIG’s RMBS available for sale investments by year of vintage:
| | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Total RMBS | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,273 | $ | - |
2014 | | | | | | | | | | | 1,096 | | 871 |
2013 | | | | | | | | | | | 2,178 | | 2,724 |
2012 | | | | | | | | | | | 1,944 | | 2,382 |
2011 | | | | | | | | | | | 4,800 | | 5,310 |
2010 and prior* | | | | | | | | | | | 23,936 | | 26,233 |
Total RMBS | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 2,025 | $ | - |
2014 | | | | | | | | | | | 1,000 | | 799 |
2013 | | | | | | | | | | | 2,094 | | 2,625 |
2012 | | | | | | | | | | | 1,877 | | 2,234 |
2011 | | | | | | | | | | | 2,927 | | 3,428 |
2010 and prior | | | | | | | | | | | 2,628 | | 3,324 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | $ | - | $ | - |
2010 and prior | | | | | | | | | | | 12,831 | | 13,001 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime | | | | | | | | | | | | | |
2015 | | | | | | | | | | | - | | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | - | | - |
2012 | | | | | | | | | | | - | | - |
2011 | | | | | | | | | | | - | | - |
2010 and prior | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
| | | | | | | |
| |
| |
| |
|---|
| | |
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| |
|---|
| | |
Total RMBS | | | | | | | |
2013 | | $ | 2,371 | | $ | – | |
2012 | | | 2,375 | | | 1,630 | |
2011 | | | 5,736 | | | 7,545 | |
2010 | | | 1,843 | | | 2,951 | |
2009 | | | 198 | | | 378 | |
2008 and prior* | | | 23,625 | | | 21,888 | |
| | |
Total RMBS | | $ | 36,148 | | $ | 34,392 | |
| | |
Agency | | | | | | | |
2013 | | $ | 2,259 | | $ | – | |
2012 | | | 2,164 | | | 1,395 | |
2011 | | | 3,860 | | | 5,498 | |
2010 | | | 1,797 | | | 2,812 | |
2009 | | | 157 | | | 321 | |
2008 and prior | | | 1,979 | | | 3,548 | |
| | |
Total Agency | | $ | 12,216 | | $ | 13,574 | |
| | |
Alt-A | | | | | | | |
2010 | | | 37 | | | 53 | |
2008 and prior | | | 10,894 | | | 7,871 | |
| | |
Total Alt-A | | $ | 10,931 | | $ | 7,924 | |
| | |
Subprime | | | | | | | |
2008 and prior | | $ | 2,386 | | $ | 2,151 | |
| | |
Total Subprime | | $ | 2,386 | | $ | 2,151 | |
| | |
Prime non-agency | | | | | | | |
2013 | | $ | 27 | | $ | – | |
2012 | | | 202 | | | 235 | |
2011 | | | 1,876 | | | 2,047 | |
2010 | | | 9 | | | 86 | |
2009 | | | 41 | | | 58 | |
2008 and prior | | | 7,903 | | | 7,910 | |
| | |
Total Prime non-agency | | $ | 10,058 | | $ | 10,336 | |
| | |
Total Other housing related | | $ | 557 | | $ | 407 | |
| | |
Prime non-agency | | | | | | | | | | | | | |
2015 | | | | | | | | | | $ | - | $ | - |
2014 | | | | | | | | | | | - | | - |
2013 | | | | | | | | | | | 8 | | 8 |
2012 | | | | | | | | | | | 53 | | 126 |
2011 | | | | | | | | | | | 1,873 | | 1,882 |
2010 and prior | | | | | | | | | | | 5,716 | | 7,047 |
Total Prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
* Commencing in the second quarterIncludes approximately $13.2 billion and $13.5 billion at December 31, 2015, and December 31, 2014, respectively, of 2011, we began purchasing certain RMBS that had experienced deterioration in credit quality since their origination. See Note 65 to the Consolidated Financial Statements Investments —for additional discussion on Purchased Credit Impaired (PCI) Securities, for additional discussion. Includes approximately $11.3 billion and $8.8 billion at December 31, 2013 and 2012, respectively, of these securities.
AIG 2013 Form 10-K
Table of Contents
Securities.
ITEM 7 / INVESTMENTS
The following table presents our RMBS available for sale investments by credit rating:
| | | | | | | | | | Fair Value at | Fair Value at |
| | | | | | | December 31, | December 31, |
(in millions) | | | | | | | | | | | 2015 | | 2014 |
Rating: | | | | | | | | | | | | | |
Total RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 14,884 | $ | 14,699 |
AA | | | | | | | | | | | 389 | | 418 |
A | | | | | | | | | | | 509 | | 546 |
BBB | | | | | | | | | | | 661 | | 911 |
Below investment grade(a) | | | | | | | | | | | 19,779 | | 20,937 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total RMBS(b) | | | | | | | | | | $ | 36,227 | $ | 37,520 |
Agency RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 12,547 | $ | 12,405 |
AA | | | | | | | | | | | 4 | | 5 |
Total Agency | | | | | | | | | | $ | 12,551 | $ | 12,410 |
Alt-A RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 5 | $ | 7 |
AA | | | | | | | | | | | 17 | | 33 |
A | | | | | | | | | | | 121 | | 85 |
BBB | | | | | | | | | | | 216 | | 317 |
Below investment grade(a) | | | | | | | | | | | 12,472 | | 12,559 |
Total Alt-A | | | | | | | | | | $ | 12,831 | $ | 13,001 |
Subprime RMBS | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 15 | $ | 18 |
AA | | | | | | | | | | | 68 | | 117 |
A | | | | | | | | | | | 247 | | 252 |
BBB | | | | | | | | | | | 200 | | 207 |
Below investment grade(a) | | | | | | | | | | | 1,846 | | 1,829 |
Total Subprime | | | | | | | | | | $ | 2,376 | $ | 2,423 |
Prime non-agency | | | | | | | | | | | | | |
AAA | | | | | | | | | | $ | 1,986 | $ | 2,076 |
AA | | | | | | | | | | | 188 | | 253 |
A | | | | | | | | | | | 138 | | 205 |
BBB | | | | | | | | | | | 209 | | 351 |
Below investment grade(a) | | | | | | | | | | | 5,124 | | 6,169 |
Non-rated | | | | | | | | | | | 5 | | 9 |
Total prime non-agency | | | | | | | | | | $ | 7,650 | $ | 9,063 |
Total Other housing related | | | | | | | | | | $ | 819 | $ | 623 |
| | | | | | | |
| |
| |
| |
|---|
| | |
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| |
|---|
| | |
Rating: | | | | | | | |
Total RMBS | | | | | | | |
AAA | | $ | 14,833 | | $ | 16,048 | |
AA | | | 477 | | | 795 | |
A | | | 598 | | | 411 | |
BBB | | | 1,051 | | | 744 | |
Below investment grade(a) | | | 19,163 | | | 16,283 | |
Non-rated | | | 26 | | | 111 | |
| | |
Total RMBS(b) | | $ | 36,148 | | $ | 34,392 | |
| | |
Agency RMBS | | | | | | | |
AAA | | $ | 12,210 | | $ | 13,464 | |
AA | | | 6 | | | 110 | |
| | |
Total Agency | | $ | 12,216 | | $ | 13,574 | |
| | |
Alt-A RMBS | | | | | | | |
AAA | | $ | 32 | | $ | 57 | |
AA | | | 54 | | | 195 | |
A | | | 114 | | | 83 | |
BBB | | | 381 | | | 314 | |
Below investment grade(a) | | | 10,350 | | | 7,275 | |
| | |
Total Alt-A | | $ | 10,931 | | $ | 7,924 | |
| | |
Subprime RMBS | | | | | | | |
AAA | | $ | 27 | | $ | 38 | |
AA | | | 117 | | | 170 | |
A | | | 233 | | | 129 | |
BBB | | | 248 | | | 185 | |
Below investment grade(a) | | | 1,761 | | | 1,629 | |
| | |
Total Subprime | | $ | 2,386 | | $ | 2,151 | |
| | |
Prime non-agency | | | | | | | |
AAA | | $ | 2,462 | | $ | 2,487 | |
AA | | | 288 | | | 317 | |
A | | | 248 | | | 196 | |
BBB | | | 383 | | | 208 | |
Below investment grade(a) | | | 6,651 | | | 7,017 | |
Non-rated | | | 26 | | | 111 | |
| | |
Total prime non-agency | | $ | 10,058 | | $ | 10,336 | |
| | |
Total Other housing related | | $ | 557 | | $ | 407 | |
| | |
(a) Commencing in the second quarter of 2011, we began purchasingIncludes certain RMBS that had experienced deterioration in credit quality since their origination. See Note 65 to the Consolidated Financial Statements Investments — Purchased Credit Impaired (PCI) Securities, for additional discussion.discussion on PCI Securities.
(b) The weighted average expected life was 7six years at both December 31, 20132015 and 6 years at December 31, 2012.2014.
Our underwriting practices for investing in RMBS, other asset-backedasset‑backed securities and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / INVESTMENTS
Investments in CMBS
The following table presents our CMBS available for sale investments:
| | | | | | | |
| | |
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| |
|---|
| | |
CMBS (traditional) | | $ | 9,794 | | $ | 7,880 | |
Agency | | | 1,558 | | | 1,486 | |
Other | | | 130 | | | 549 | |
| | |
Total* | | $ | 11,482 | | $ | 9,915 | |
| | |
* The increase in value is primarily attributable to net purchases of approximately $3.0 billion of highly rated CMBS securities, partially offset by changes in net unrealized losses.
| | | | | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | | | | | December 31, | | December 31, |
(in millions) | | | | | | | | | | | | | | 2015 | | 2014 |
CMBS (traditional) | | | | | | | | | | | | | | $ | 11,132 | $ | 11,265 |
Agency | | | | | | | | | | | | | | | 1,622 | | 1,372 |
Other | | | | | | | | | | | | | | | 817 | | 248 |
Total | | | | | | | | | | | | | | $ | 13,571 | $ | 12,885 |
The following table presents the fair value of our CMBS holdingsavailable for sale investments by rating agency designation and by vintage year:
| | | | | | | | | | Below | | | | |
| | | | | | | | | | Investment | | | | |
(in millions) | | AAA | | AA | | A | | BBB | | Grade | | Non-Rated | | Total |
December 31, 2015 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2015 | $ | 824 | $ | 404 | $ | 465 | $ | 240 | $ | - | $ | - | $ | 1,933 |
2014 | | 1,604 | | 183 | | 11 | | - | | - | | - | | 1,798 |
2013 | | 2,611 | | 433 | | 89 | | 54 | | - | | - | | 3,187 |
2012 | | 737 | | 60 | | 31 | | 83 | | - | | 10 | | 921 |
2011 | | 1,015 | | 25 | | 31 | | 21 | | - | | - | | 1,092 |
2010 and prior | | 921 | | 700 | | 635 | | 738 | | 1,646 | | - | | 4,640 |
Total | $ | 7,712 | $ | 1,805 | $ | 1,262 | $ | 1,136 | $ | 1,646 | $ | 10 | $ | 13,571 |
December 31, 2014 | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | |
2014 | $ | 1,570 | $ | 183 | $ | 11 | $ | - | $ | - | $ | - | $ | 1,764 |
2013 | | 2,684 | | 442 | | 91 | | 58 | | - | | - | | 3,275 |
2012 | | 1,158 | | 61 | | 28 | | 92 | | - | | 12 | | 1,351 |
2011 | | 1,022 | | 20 | | 37 | | 21 | | - | | - | | 1,100 |
2010 and prior | | 1,119 | | 626 | | 814 | | 843 | | 1,993 | | - | | 5,395 |
Total | $ | 7,553 | $ | 1,332 | $ | 981 | $ | 1,014 | $ | 1,993 | $ | 12 | $ | 12,885 |
| | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
|---|
| | |
(in millions)
| | AAA
| | AA
| | A
| | BBB
| | Below
Investment
Grade
| | Non-Rated
| | Total
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | | | | | | | | | |
2013 | | $ | 2,490 | | $ | 378 | | $ | 79 | | $ | 58 | | $ | – | | $ | – | | $ | 3,005 | |
2012 | | | 1,064 | | | 57 | | | 26 | | | 35 | | | – | | | 14 | | | 1,196 | |
2011 | | | 1,112 | | | 19 | | | 36 | | | 20 | | | – | | | – | | | 1,187 | |
2010 | | | 172 | | | 7 | | | – | | | – | | | – | | | – | | | 179 | |
2009 | | | 5 | | | – | | | – | | | – | | | – | | | – | | | 5 | |
2008 and prior | | | 1,098 | | | 819 | | | 688 | | | 1,115 | | | 2,190 | | | – | | | 5,910 | |
| | |
Total | | $ | 5,941 | | $ | 1,280 | | $ | 829 | | $ | 1,228 | | $ | 2,190 | | $ | 14 | | $ | 11,482 | |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | |
Year: | | | | | | | | | | | | | | | | | | | | | | |
2012 | | $ | 1,314 | | $ | 46 | | $ | 24 | | $ | 28 | | $ | – | | $ | 15 | | $ | 1,427 | |
2011 | | | 1,220 | | | 81 | | | 24 | | | 22 | | | – | | | – | | | 1,347 | |
2010 | | | 265 | | | 501 | | | 41 | | | – | | | – | | | – | | | 807 | |
2009 | | | 44 | | | – | | | – | | | – | | | – | | | – | | | 44 | |
2008 and prior | | | 1,433 | | | 963 | | | 719 | | | 1,178 | | | 1,997 | | | – | | | 6,290 | |
| | |
Total | | $ | 4,276 | | $ | 1,591 | | $ | 808 | | $ | 1,228 | | $ | 1,997 | | $ | 15 | | $ | 9,915 | |
| | |
AIG 2013 Form 10-K
The following table presents our CMBS available for sale investments by geographic region:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Geographic region: | | | | | |
New York | $ | 3,149 | $ | 2,759 | |
California | | 1,244 | | 1,305 | |
Texas | | 791 | | 831 | |
Florida | | 520 | | 562 | |
New Jersey | | 433 | | 457 | |
Virginia | | 362 | | 389 | |
Illinois | | 323 | | 344 | |
Pennsylvania | | 295 | | 291 | |
Georgia | | 253 | | 286 | |
Massachusetts | | 231 | | 247 | |
Maryland | | 229 | | 222 | |
North Carolina | | 218 | | 222 | |
All Other* | | 5,523 | | 4,970 | |
Total | $ | 13,571 | $ | 12,885 | |
| | | | | | | |
| | |
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| |
|---|
| | |
Geographic region: | | | | | | | |
New York | | $ | 2,110 | | $ | 1,833 | |
California | | | 1,187 | | | 923 | |
Texas | | | 718 | | | 574 | |
Florida | | | 501 | | | 395 | |
New Jersey | | | 436 | | | 267 | |
Virginia | | | 373 | | | 319 | |
Illinois | | | 317 | | | 288 | |
Georgia | | | 240 | | | 185 | |
Pennsylvania | | | 236 | | | 198 | |
Massachusetts | | | 224 | | | 183 | |
North Carolina | | | 204 | | | 145 | |
Nevada | | | 199 | | | 173 | |
All Other* | | | 4,737 | | | 4,432 | |
| | |
Total | | $ | 11,482 | | $ | 9,915 | |
| | |
* Includes Non-U.S. locations.
The following table presents our CMBS available for sale investments by industry:
| | Fair Value at | | Fair Value at | |
| | December 31, | | December 31, | |
(in millions) | | 2015 | | 2014 | |
Industry: | | | | | |
Retail | $ | 3,978 | $ | 3,700 | |
Office | | 3,896 | | 3,652 | |
Multi-family* | | 3,036 | | 2,889 | |
Lodging | | 1,005 | | 1,127 | |
Industrial | | 868 | | 679 | |
Other | | 788 | | 838 | |
Total | $ | 13,571 | $ | 12,885 | |
| | | | | | | |
| | |
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| |
|---|
| | |
Industry: | | | | | | | |
Office | | $ | 3,205 | | $ | 2,696 | |
Multi-family* | | | 2,643 | | | 2,423 | |
Retail | | | 3,146 | | | 2,409 | |
Lodging | | | 1,023 | | | 1,215 | |
Industrial | | | 621 | | | 552 | |
Other | | | 844 | | | 620 | |
| | |
Total | | $ | 11,482 | | $ | 9,915 | |
| | |
* Includes Agency-backed CMBS.
The fair value of CMBS holdings remained stable throughout 2013.2015. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale investments by collateral type:
| | | | | | | | | | | | | | | | | Fair value at | | Fair value at |
| | | | | | | | | | | December 31, | | December 31, |
(in millions)
| | Fair value at
December 31,
2013
| | Fair value at
December 31,
2012
| | | | | | | | | | | 2015 | | 2014 |
|---|
| | | |
Collateral Type: | | | | | | | | | | | | | | | | | | | |
Bank loans (CLO) | | $ | 4,613 | | $ | 2,579 | | | | | | | | | | $ | 7,962 | $ | 6,683 |
Synthetic investment grade | | | – | | | 25 | | |
Other | | | 529 | | | 643 | | | | | | | | | | | 153 | | 388 |
Subprime ABS | | | – | | | 10 | | |
| | | |
Total | | $ | 5,142 | | $ | 3,257 | | | | | | | | | | $ | 8,115 | $ | 7,071 |
| | | |
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / INVESTMENTS
The following table presents our CDO available for sale investments by credit rating:
| | | | | | | | | | | | | | Fair Value at | | Fair Value at |
| | | | | | | | December 31, | | December 31, |
(in millions)
| | Fair Value at
December 31,
2013
| | Fair Value at
December 31,
2012
| | | | | | | | 2015 | | 2014 |
|---|
| | | |
Rating: | | | | | | | | | | | | | | | | | |
AAA | | $ | 594 | | $ | 145 | | | | | | | | $ | 2,870 | $ | 1,922 |
AA | | | 1,374 | | | 543 | | | | | | | | | 2,543 | | 2,135 |
A | | | 2,158 | | | 1,303 | | | | | | | | | 2,247 | | 2,317 |
BBB | | | 499 | | | 524 | | | | | | | | | 298 | | 366 |
Below investment grade | | | 517 | | | 742 | | | | | | | | | 157 | | 331 |
| | | |
Total | | $ | 5,142 | | $ | 3,257 | | | | | | | | $ | 8,115 | $ | 7,071 |
| | | |
Commercial Mortgage Loans
At December 31, 2013,2015, we had direct commercial mortgage loan exposure of $16.2 billion. At that date, over$22.1 billion of which, approximately 99 percent of the loans were current.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
| Number | | | | | | | | | | | | | | | | Percent | |
| of | | Class | | | of | |
(dollars in millions) | Loans | | Apartments | | Offices | | Retail | Industrial | Hotel | | Others | | Total | Total | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 97 | | $ | 823 | $ | 2,968 | $ | 516 | $ | 301 | $ | 166 | $ | 186 | $ | 4,960 | 22 | % |
California | 95 | | | 87 | | 547 | | 433 | | 533 | | 788 | | 308 | | 2,696 | 12 | |
Texas | 60 | | | 120 | | 696 | | 106 | | 147 | | 187 | | 48 | | 1,304 | 6 | |
New Jersey | 45 | | | 441 | | 338 | | 324 | | - | | 29 | | 33 | | 1,165 | 5 | |
Florida | 78 | | | 187 | | 113 | | 374 | | 116 | | 20 | | 146 | | 956 | 4 | |
Illinois | 21 | | | 174 | | 369 | | 21 | | 32 | | 36 | | 23 | | 655 | 3 | |
Massachusetts | 19 | | | 56 | | 168 | | 360 | | - | | - | | 33 | | 617 | 3 | |
Connecticut | 20 | | | 314 | | 152 | | 23 | | 81 | | - | | - | | 570 | 3 | |
Pennsylvania | 28 | | | 6 | | 29 | | 436 | | 62 | | 27 | | 4 | | 564 | 3 | |
Ohio | 37 | | | 122 | | 28 | | 211 | | 67 | | - | | 5 | | 433 | 2 | |
Other states | 302 | | | 1,118 | | 1,203 | | 1,514 | | 414 | | 595 | | 229 | | 5,073 | 23 | |
Foreign | 47 | | | 471 | | 1,234 | | 520 | | 161 | | 250 | | 438 | | 3,074 | 14 | |
Total* | 849 | | $ | 3,919 | $ | 7,845 | $ | 4,838 | $ | 1,914 | $ | 2,098 | $ | 1,453 | $ | 22,067 | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Number
of
Loans
| | Class | |
| | Percent
of
Total
| |
|---|
(dollars in millions)
| | Apartments
| | Offices
| | Retails
| | Industrials
| | Hotels
| | Others
| | Total
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
California | | | 142 | | $ | 30 | | $ | 804 | | $ | 429 | | $ | 515 | | $ | 366 | | $ | 697 | | $ | 2,841 | | | 18 | % |
New York | | | 88 | | | 662 | | | 1,472 | | | 243 | | | 68 | | | 100 | | | 152 | | | 2,697 | | | 17 | |
New Jersey | | | 53 | | | 510 | | | 326 | | | 297 | | | 7 | | | 31 | | | 42 | | | 1,213 | | | 6 | |
Florida | | | 94 | | | 87 | | | 170 | | | 377 | | | 123 | | | 137 | | | 165 | | | 1,059 | | | 7 | |
Texas | | | 54 | | | 32 | | | 184 | | | 165 | | | 182 | | | 150 | | | 62 | | | 775 | | | 5 | |
Connecticut | | | 22 | | | 279 | | | 143 | | | 5 | | | 44 | | | – | | | – | | | 471 | | | 3 | |
Pennsylvania | | | 52 | | | 47 | | | 97 | | | 155 | | | 110 | | | 16 | | | 13 | | | 438 | | | 3 | |
Ohio | | | 44 | | | 145 | | | 33 | | | 188 | | | 61 | | | – | | | 3 | | | 430 | | | 3 | |
Maryland | | | 21 | | | 20 | | | 139 | | | 200 | | | 12 | | | 4 | | | 4 | | | 379 | | | 2 | |
Massachusetts | | | 17 | | | – | | | 178 | | | 158 | | | – | | | – | | | 34 | | | 370 | | | 2 | |
Other states | | | 345 | | | 666 | | | 1,203 | | | 1,158 | | | 416 | | | 525 | | | 490 | | | 4,458 | | | 27 | |
Foreign | | | 63 | | | 361 | | | 139 | | | – | | | 69 | | | 102 | | | 393 | | | 1,064 | | | 7 | |
| | |
Total* | | | 995 | | $ | 2,839 | | $ | 4,888 | | $ | 3,375 | | $ | 1,607 | | $ | 1,431 | | $ | 2,055 | | $ | 16,195 | | | 100 | % |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
California | | | 153 | | $ | 119 | | $ | 942 | | $ | 286 | | $ | 640 | | $ | 394 | | $ | 652 | | $ | 3,033 | | | 22 | % |
New York | | | 85 | | | 268 | | | 1,320 | | | 176 | | | 98 | | | 101 | | | 120 | | | 2,083 | | | 15 | |
New Jersey | | | 57 | | | 477 | | | 283 | | | 302 | | | 8 | | | 19 | | | 65 | | | 1,154 | | | 8 | |
Florida | | | 93 | | | 52 | | | 175 | | | 255 | | | 99 | | | 20 | | | 231 | | | 832 | | | 6 | |
Texas | | | 58 | | | 37 | | | 294 | | | 154 | | | 208 | | | 101 | | | 32 | | | 826 | | | 6 | |
Pennsylvania | | | 57 | | | 48 | | | 99 | | | 171 | | | 119 | | | 17 | | | 13 | | | 467 | | | 3 | |
Ohio | | | 54 | | | 167 | | | 40 | | | 98 | | | 64 | | | 38 | | | 10 | | | 417 | | | 3 | |
Colorado | | | 19 | | | 11 | | | 198 | | | 1 | | | – | | | 97 | | | 58 | | | 365 | | | 3 | |
Maryland | | | 21 | | | 22 | | | 145 | | | 170 | | | 13 | | | 4 | | | 4 | | | 358 | | | 3 | |
Virginia | | | 25 | | | 38 | | | 186 | | | 50 | | | 10 | | | 17 | | | – | | | 301 | | | 2 | |
Other states | | | 333 | | | 359 | | | 1,253 | | | 1,010 | | | 397 | | | 345 | | | 465 | | | 3,829 | | | 28 | |
Foreign | | | 61 | | | 1 | | | – | | | – | | | – | | | – | | | 122 | | | 123 | | | 1 | |
| | |
Total* | | | 1,016 | | $ | 1,599 | | $ | 4,935 | | $ | 2,673 | | $ | 1,656 | | $ | 1,153 | | $ | 1,772 | | $ | 13,788 | | | 100 | % |
| | |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | | |
New York | 90 | | $ | 545 | $ | 2,111 | $ | 285 | $ | 148 | $ | 68 | $ | 215 | $ | 3,372 | 18 | % |
California | 115 | | | 29 | | 635 | | 389 | | 472 | | 597 | | 469 | | 2,591 | 14 | |
New Jersey | 48 | | | 490 | | 353 | | 308 | | - | | 30 | | 74 | | 1,255 | 7 | |
Florida | 89 | | | 141 | | 192 | | 335 | | 118 | | 137 | | 161 | | 1,084 | 6 | |
Texas | 58 | | | 62 | | 482 | | 121 | | 171 | | 187 | | 54 | | 1,077 | 6 | |
Illinois | 24 | | | 175 | | 327 | | 26 | | 73 | | 36 | | - | | 637 | 3 | |
Massachusetts | 19 | | | - | | 198 | | 321 | | - | | - | | 34 | | 553 | 3 | |
Colorado | 18 | | | 62 | | 158 | | 48 | | - | | 120 | | 101 | | 489 | 2 | |
Connecticut | 23 | | | 279 | | 155 | | 5 | | 43 | | - | | - | | 482 | 2 | |
Pennsylvania | 49 | | | 45 | | 89 | | 170 | | 107 | | 16 | | 5 | | 432 | 2 | |
Other states | 349 | | | 920 | | 1,140 | | 1,738 | | 494 | | 310 | | 281 | | 4,883 | 26 | |
Foreign | 142 | | | 636 | | 678 | | 78 | | 63 | | 176 | | 423 | | 2,054 | 11 | |
Total* | 1,024 | | $ | 3,384 | $ | 6,518 | $ | 3,824 | $ | 1,689 | $ | 1,677 | $ | 1,817 | $ | 18,909 | 100 | % |
* Excludes portfolio valuationDoes not reflect allowance for credit losses.
See Note 6 to the Consolidated Financial Statements for further discussion.additional discussion on commercial mortgage loans.
AIG 2013 Form 10-KImpairments
Table of Contents
ITEM 7 / INVESTMENTS
Impairments
The following table presents impairments by investment type:
|
| |
| |
| |
| | |
|---|
| | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | 2014 | | 2013 |
Other-than-temporary Impairments: | | | | | | | | | | | | |
Fixed maturity securities, available for sale | | $ | 173 | | $ | 723 | | $ | 1,009 | | | | | | | $ | 425 | $ | 180 | $ | 173 |
Equity securities, available for sale | | | 14 | | | 106 | | 39 | | | | | | | | 166 | | 37 | | 14 |
Private equity funds and hedge funds | | | 140 | | | 338 | | 232 | | | | | | | | 80 | | 30 | | 45 |
| | | |
Subtotal | | | 327 | | | 1,167 | | 1,280 | | | | | | | | 671 | | 247 | | 232 |
| | | |
Other impairments: | | | | | | | | | | | | |
Investments in life settlements | | | 971 | | | 309 | | 312 | | | | | | | | 540 | | 201 | | 971 |
Aircraft trusts | | | – | | | – | | 168 | | |
Other investments | | | – | | | 9 | | – | | | | | | | | 166 | | 126 | | 112 |
Real estate | | | 19 | | | 7 | | 30 | | | | | | | | 23 | | 8 | | 19 |
| | | |
Total | | $ | 1,317 | | $ | 1,492 | | $ | 1,790 | | | | | | | $ | 1,400 | $ | 582 | $ | 1,334 |
| | | |
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to recover our estimated future carrying amount, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market longevitymortality assumptions and market yields.
In 2011, we revised the valuation table for estimating the future net cash flows fromlate 2015, several insurance providers gave notice of increases in policy premiums related to our investments in life settlements. This resulted in anThe increase in the number of investmentspremiums required to keep policies in life settlements identified as potentially impaired compared to previous analyses. Since that time, we have continued to monitor the longevity experience of the portfolio, new medical information as it becomes available regarding insureds, as well as U.S. industry experience studies that have become available for portfolios with similar insureds. The cumulative mortality experience through December 31, 2013, was sufficientlyforce results in lower than the prior assumptions indicating that it was appropriate to revise our future mortality assumptions, despite the small number of lives in the portfolio.
Our new mortality assumptions are based on an industry table that was supplemented with proprietary data on the older age mortality of U.S. insured lives. In addition, mortality improvement factors were applied to our new assumptions based on our view of future mortality improvements likely to apply to the U.S. insured lives population. These mortality improvement assumptions were based on our analysis of various public industry sources and proprietary research conducted by our specialist advisors. Using these new mortality assumptions coupled with the adopted future mortality improvement rates, we revised our estimate of futureexpected net cash flows from the investments in life settlements. This resulted in a significant increase in the number of investments in life settlements identified as impaired as of December 31, 2013.
Additional impairmentswhich are expectedinsufficient to occur in the future due to the fact that continued payment of premiums required to maintain policies will cause the expected lifetime undiscounted cash flows for some policies to become negative in future reporting periods, even in the absence of future changes to the mortality assumptions. Impairments may also occur due torecover our future sale or lapse of select policies at a value that is below carrying value.net investment on certain policies.
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by reportable segment and impairment type:
| | | | | | Non-Life | | Life | | Corporate | | |
| | Reportable Segment | |
| |
| | | Insurance | | Insurance | | and Other | | |
|---|
(in millions)
| | AIG Property
Casualty
| | AIG Life and
Retirement
| | Other
Operations
| | Total
| | | Companies | | Companies | | Operations | | Total |
|---|
| | | |
For the Year Ended December 31, 2015 | | | | | | | | | |
Impairment Type: | | | | | | | | | |
Severity | | $ | 13 | $ | - | $ | - | $ | 13 |
Change in intent | | | 7 | | 145 | | 81 | | 233 |
Foreign currency declines | | | 33 | | 24 | | - | | 57 |
Issuer-specific credit events | | | 178 | | 168 | | 2 | | 348 |
Adverse projected cash flows | | | 7 | | 13 | | - | | 20 |
Total | | $ | 238 | $ | 350 | $ | 83 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | |
Impairment Type: | | | | | | | | | |
Severity | | $ | 3 | $ | - | $ | - | $ | 3 |
Change in intent | | | 8 | | 32 | | - | | 40 |
Foreign currency declines | | | 9 | | 10 | | - | | 19 |
Issuer-specific credit events | | | 60 | | 109 | | - | | 169 |
Adverse projected cash flows | | | 5 | | 11 | | - | | 16 |
Total | | $ | 85 | $ | 162 | $ | - | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | | | | | | |
Severity | | $ | 6 | | $ | – | | $ | – | | $ | 6 | | $ | 6 | $ | - | $ | - | $ | 6 |
Change in intent | | 2 | | 44 | | 2 | | 48 | | | 1 | | 45 | | 2 | | 48 |
Foreign currency declines | | 1 | | – | | – | | 1 | | | 1 | | - | | - | | 1 |
Issuer-specific credit events | | 43 | | 222 | | – | | 265 | | | 43 | | 127 | | - | | 170 |
Adverse projected cash flows | | 1 | | 6 | | – | | 7 | | | 1 | | 6 | | - | | 7 |
| | | |
Total | | $ | 53 | | $ | 272 | | $ | 2 | | $ | 327 | | $ | 52 | $ | 178 | $ | 2 | $ | 232 |
| | | |
For the Year Ended December 31, 2012 | | |
Impairment Type: | | |
Severity | | $ | 35 | | $ | 9 | | $ | – | | $ | 44 | | |
Change in intent | | 4 | | 20 | | 38 | | 62 | | |
Foreign currency declines | | 8 | | – | | – | | 8 | | |
Issuer-specific credit events | | 330 | | 691 | | 27 | | 1,048 | | |
Adverse projected cash flows | | 1 | | 4 | | – | | 5 | | |
| | | |
Total | | $ | 378 | | $ | 724 | | $ | 65 | | $ | 1,167 | | |
| | | |
For the Year Ended December 31, 2011 | | |
Impairment Type: | | |
Severity | | $ | 47 | | $ | 4 | | $ | – | | $ | 51 | | |
Change in intent | | 1 | | 11 | | – | | 12 | | |
Foreign currency declines | | 32 | | – | | – | | 32 | | |
Issuer-specific credit events | | 193 | | 943 | | 29 | | 1,165 | | |
Adverse projected cash flows | | 1 | | 19 | | – | | 20 | | |
| | | |
Total | | $ | 274 | | $ | 977 | | $ | 29 | | $ | 1,280 | | |
| | | |
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / INVESTMENTS
Other-than-temporary impairment charges by investment type and impairment type:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 13 | $ | 13 |
Change in intent | | 3 | | - | | 14 | | 131 | | 85 | | 233 |
Foreign currency declines | | - | | - | | - | | 57 | | - | | 57 |
Issuer-specific credit events | | 79 | | 3 | | 8 | | 110 | | 148 | | 348 |
Adverse projected cash flows | | 20 | | - | | - | | - | | - | | 20 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
| | | | | | | | | | | | | | | | | | | |
| | |
(in millions)
| | RMBS
| | CDO/ABS
| | CMBS
| | Other Fixed
Maturity
| | Equities/Other
Invested Assets*
| | Total
| |
|---|
| | |
For the Year Ended December 31, 2013 | | | | | | | | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | | | | | | | | |
Severity | | $ | – | | $ | – | | $ | – | | $ | – | | $ | 6 | | $ | 6 | |
Change in intent | | | 1 | | | – | | | – | | | 46 | | | 1 | | | 48 | |
Foreign currency declines | | | – | | | – | | | – | | | 1 | | | – | | | 1 | |
Issuer-specific credit events | | | 36 | | | 5 | | | 50 | | | 27 | | | 147 | | | 265 | |
Adverse projected cash flows | | | 7 | | | – | | | – | | | – | | | – | | | 7 | |
| | |
Total | | $ | 44 | | $ | 5 | | $ | 50 | | $ | 74 | | $ | 154 | | $ | 327 | |
| | |
For the Year Ended December 31, 2012 | | | | | | | | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | | | | | | | | |
Severity | | $ | – | | $ | – | | $ | – | | $ | – | | $ | 44 | | $ | 44 | |
Change in intent | | | 4 | | | – | | | – | | | 34 | | | 24 | | | 62 | |
Foreign currency declines | | | – | | | – | | | – | | | 8 | | | – | | | 8 | |
Issuer-specific credit events | | | 433 | | | 7 | | | 208 | | | 24 | | | 376 | | | 1,048 | |
Adverse projected cash flows | | | 5 | | | – | | | – | | | – | | | – | | | 5 | |
| | |
Total | | $ | 442 | | $ | 7 | | $ | 208 | | $ | 66 | | $ | 444 | | $ | 1,167 | |
| | |
For the Year Ended December 31, 2011 | | | | | | | | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | | | | | | | | |
Severity | | $ | – | | $ | – | | $ | – | | $ | – | | $ | 51 | | $ | 51 | |
Change in intent | | | – | | | – | | | – | | | 7 | | | 5 | | | 12 | |
Foreign currency declines | | | – | | | – | | | – | | | 32 | | | – | | | 32 | |
Issuer-specific credit events | | | 769 | | | 20 | | | 150 | | | 11 | | | 215 | | | 1,165 | |
Adverse projected cash flows | | | 20 | | | – | | | – | | | – | | | – | | | 20 | |
| | |
Total | | $ | 789 | | $ | 20 | | $ | 150 | | $ | 50 | | $ | 271 | | $ | 1,280 | |
| | |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 3 |
Change in intent | | - | | - | | - | | 27 | | 13 | | 40 |
Foreign currency declines | | - | | - | | - | | 19 | | - | | 19 |
Issuer-specific credit events | | 80 | | 9 | | 21 | | 8 | | 51 | | 169 |
Adverse projected cash flows | | 16 | | - | | - | | - | | - | | 16 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Impairment Type: | | | | | | | | | | | | |
Severity | $ | - | $ | - | $ | - | $ | - | $ | 6 | $ | 6 |
Change in intent | | 1 | | - | | - | | 46 | | 1 | | 48 |
Foreign currency declines | | - | | - | | - | | 1 | | - | | 1 |
Issuer-specific credit events | | 36 | | 5 | | 50 | | 27 | | 52 | | 170 |
Adverse projected cash flows | | 7 | | - | | - | | - | | - | | 7 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / INVESTMENTS
Other-than-temporary impairment charges by investment type and credit rating:
| | | | | | Other Fixed | Equities/Other | | |
(in millions) | RMBS | CDO/ABS | CMBS | Maturity | Invested Assets* | | Total |
For the Year Ended December 31, 2015 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 12 | $ | - | $ | 12 |
AA | | - | | - | | - | | 12 | | - | | 12 |
A | | - | | - | | - | | 12 | | - | | 12 |
BBB | | 2 | | - | | - | | 50 | | - | | 52 |
Below investment grade | | 100 | | 3 | | 22 | | 208 | | - | | 333 |
Non-rated | | - | | - | | - | | 4 | | 246 | | 250 |
Total | $ | 102 | $ | 3 | $ | 22 | $ | 298 | $ | 246 | $ | 671 |
For the Year Ended December 31, 2014 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | - | $ | - | $ | - | $ | 4 | $ | - | $ | 4 |
AA | | 3 | | - | | - | | 2 | | - | | 5 |
A | | - | | - | | - | | 2 | | - | | 2 |
BBB | | 2 | | - | | - | | 11 | | - | | 13 |
Below investment grade | | 91 | | 5 | | 21 | | 35 | | - | | 152 |
Non-rated | | - | | 4 | | - | | - | | 67 | | 71 |
Total | $ | 96 | $ | 9 | $ | 21 | $ | 54 | $ | 67 | $ | 247 |
For the Year Ended December 31, 2013 | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | |
AAA | $ | 1 | $ | - | $ | - | $ | - | $ | - | $ | 1 |
AA | | 2 | | - | | - | | - | | - | | 2 |
A | | 1 | | - | | - | | - | | - | | 1 |
BBB | | 1 | | - | | - | | 44 | | - | | 45 |
Below investment grade | | 39 | | 5 | | 50 | | 29 | | - | | 123 |
Non-rated | | - | | - | | - | | 1 | | 59 | | 60 |
Total | $ | 44 | $ | 5 | $ | 50 | $ | 74 | $ | 59 | $ | 232 |
| | | | | | | | | | | | | | | | | | | |
| | |
(in millions)
| | RMBS
| | CDO/ABS
| | CMBS
| | Other Fixed
Maturity
| | Equities/Other
Invested Assets*
| | Total
| |
|---|
| | |
For the Year Ended December 31, 2013 | | | | | | | | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | | | | | | | | |
AAA | | $ | 1 | | $ | – | | $ | – | | $ | – | | $ | – | | $ | 1 | |
AA | | | 2 | | | – | | | – | | | – | | | – | | | 2 | |
A | | | 1 | | | – | | | – | | | – | | | – | | | 1 | |
BBB | | | 1 | | | – | | | – | | | 44 | | | – | | | 45 | |
Below investment grade | | | 39 | | | 5 | | | 50 | | | 29 | | | – | | | 123 | |
Non-rated | | | – | | | – | | | – | | | 1 | | | 154 | | | 155 | |
| | |
Total | | $ | 44 | | $ | 5 | | $ | 50 | | $ | 74 | | $ | 154 | | $ | 327 | |
| | |
For the Year Ended December 31, 2012 | | | | | | | | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | | | | | | | | |
AAA | | $ | – | | $ | – | | $ | – | | $ | 2 | | $ | – | | $ | 2 | |
AA | | | 10 | | | – | | | – | | | – | | | – | | | 10 | |
A | | | – | | | 2 | | | – | | | 4 | | | – | | | 6 | |
BBB | | | – | | | – | | | – | | | – | | | – | | | – | |
Below investment grade | | | 432 | | | 5 | | | 208 | | | 26 | | | – | | | 671 | |
Non-rated | | | – | | | – | | | – | | | 34 | | | 444 | | | 478 | |
| | |
Total | | $ | 442 | | $ | 7 | | $ | 208 | | $ | 66 | | $ | 444 | | $ | 1,167 | |
| | |
For the Year Ended December 31, 2011 | | | | | | | | | | | | | | | | | | | |
Rating: | | | | | | | | | | | | | | | | | | | |
AAA | | $ | 3 | | $ | – | | $ | – | | $ | 9 | | $ | – | | $ | 12 | |
AA | | | 24 | | | – | | | – | | | 10 | | | – | | | 34 | |
A | | | 7 | | | – | | | – | | | 15 | | | – | | | 22 | |
BBB | | | 6 | | | 5 | | | – | | | 1 | | | – | | | 12 | |
Below investment grade | | | 749 | | | 15 | | | 150 | | | 14 | | | – | | | 928 | |
Non-rated | | | – | | | – | | | – | | | 1 | | | 271 | | | 272 | |
| | |
Total | | $ | 789 | | $ | 20 | | $ | 150 | | $ | 50 | | $ | 271 | | $ | 1,280 | |
| | |
* Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.
We recorded other-than-temporary impairment charges in the years ended December 31, 2013, 20122015, 2014 and 20112013 related to:
•
- issuer-specific credit events;
•
•- securities that we intend to sell or for which it is more likely than not that we
have changed our intent from holdwill be required to sell;
•
•- declines due to foreign exchange rates;
•
•- adverse changes in estimated cash flows on certain structured securities; and
•
•- securities that experienced severe market valuation
declines;
declines.In addition, impairments are also recorded on real estate and investments in life settlements.
There was no significant impact to our consolidated financial condition or results of operations from other-than-temporary impairment charges for any one single credit. Also, no individual other-than-temporary impairment charge exceeded 0.02 percent, 0.11 percent and 0.20 percent of total equity at December 31, 2013, 2012 or 2011, respectively.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoveryrecoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $735 million in 2015, $725 million in 2014 and $774 million in 2013,
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / INVESTMENTS
$915 million in 2012, and $542 million in 2011. For a discussion of AIG's other-than-temporary impairment accounting policy, see2013. See Note 6 to the Consolidated Financial Statements.Statements for a discussion of our other-than-temporary impairment accounting policy.
The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:
December 31, 2015 | Less Than or Equal | | | Greater Than 20% | | | Greater Than 50% | | | |
| | to 20% of Cost(b) | | | to 50% of Cost(b) | | | of Cost(b) | | | Total |
Aging(a) | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | | Unrealized | |
(dollars in millions) | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss | Items(e) | | | Cost(c) | | Loss(d) | Items(e) |
Investment grade | | | | | | | | | | | | | | | | | | | | | | | |
bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 35,961 | $ | 815 | 5,516 | | $ | 408 | $ | 115 | 82 | | $ | - | $ | - | - | | $ | 36,369 | $ | 930 | 5,598 |
7-11 months | | 23,134 | | 1,342 | 3,594 | | | 1,061 | | 275 | 201 | | | - | | - | - | | | 24,195 | | 1,617 | 3,795 |
12 months or more | | 6,883 | | 501 | 938 | | | 2,363 | | 733 | 183 | | | 21 | | 13 | 6 | | | 9,267 | | 1,247 | 1,127 |
Total | $ | 65,978 | $ | 2,658 | 10,048 | | $ | 3,832 | $ | 1,123 | 466 | | $ | 21 | $ | 13 | 6 | | $ | 69,831 | $ | 3,794 | 10,520 |
Below investment | | | | | | | | | | | | | | | | | | | | | | | |
grade bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 6,024 | $ | 199 | 2,341 | | $ | 567 | $ | 168 | 100 | | $ | 17 | $ | 11 | 13 | | $ | 6,608 | $ | 378 | 2,454 |
7-11 months | | 2,706 | | 168 | 814 | | | 199 | | 59 | 132 | | | 7 | | 6 | 3 | | | 2,912 | | 233 | 949 |
12 months or more | | 5,164 | | 324 | 766 | | | 871 | | 278 | 200 | | | 385 | | 243 | 83 | | | 6,420 | | 845 | 1,049 |
Total | $ | 13,894 | $ | 691 | 3,921 | | $ | 1,637 | $ | 505 | 432 | | $ | 409 | $ | 260 | 99 | | $ | 15,940 | $ | 1,456 | 4,452 |
Total bonds | | | | | | | | | | | | | | | | | | | | | | | |
0-6 months | $ | 41,985 | $ | 1,014 | 7,857 | | $ | 975 | $ | 283 | 182 | | $ | 17 | $ | 11 | 13 | | $ | 42,977 | $ | 1,308 | 8,052 |
7-11 months | | 25,840 | | 1,510 | 4,408 | | | 1,260 | | 334 | 333 | | | 7 | | 6 | 3 | | | 27,107 | | 1,850 | 4,744 |
12 months or more | | 12,047 | | 825 | 1,704 | | | 3,234 | | 1,011 | 383 | | | 406 | | 256 | 89 | | | 15,687 | | 2,092 | 2,176 |
Total(e) | $ | 79,872 | $ | 3,349 | 13,969 | | $ | 5,469 | $ | 1,628 | 898 | | $ | 430 | $ | 273 | 105 | | $ | 85,771 | $ | 5,250 | 14,972 |
Equity securities | | | | | | | | | | | | | | | | | | | | | | | |
0-11 months | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
Total | $ | 280 | $ | 13 | 124 | | $ | 35 | $ | 11 | 50 | | $ | - | $ | - | - | | $ | 315 | $ | 24 | 174 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
December 31, 2013
| |
| | Less Than or Equal
to 20% of Cost(b) | |
| | Greater Than 20%
to 50% of Cost(b) | |
| | Greater Than 50%
of Cost(b) | |
| | Total | |
|---|
Aging(a)
(dollars in millions)
| |
| | Cost(c)
| | Unrealized
Loss
| | Items(e)
| |
| | Cost(c)
| | Unrealized
Loss
| | Items(e)
| |
| | Cost(c)
| | Unrealized
Loss
| | Items(e)
| |
| | Cost(c)
| | Unrealized
Loss(d)
| | Items(e)
| |
|---|
| | |
Investment grade bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0 – 6 months | | | | $ | 25,831 | | $ | 516 | | | 2,355 | | | | $ | 6 | | $ | 1 | | | 1 | | | | $ | – | | $ | – | | | – | | | | $ | 25,837 | | $ | 517 | | | 2,356 | |
7 – 11 months | | | | | 35,609 | | | 2,603 | | | 3,146 | | | | | 478 | | | 107 | | | 60 | | | | | – | | | – | | | – | | | | | 36,087 | | | 2,710 | | | 3,206 | |
12 months or more | | | | | 7,069 | | | 665 | | | 439 | | | | | 841 | | | 198 | | | 37 | | | | | 11 | | | 9 | | | 2 | | | | | 7,921 | | | 872 | | | 478 | |
| | |
Total | | | | $ | 68,509 | | $ | 3,784 | | | 5,940 | | | | $ | 1,325 | | $ | 306 | | | 98 | | | | $ | 11 | | $ | 9 | | | 2 | | | | $ | 69,845 | | $ | 4,099 | | | 6,040 | |
| | |
Below investment grade bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0 – 6 months | | | | $ | 2,499 | | $ | 52 | | | 744 | | | | $ | 8 | | $ | 2 | | | 3 | | | | $ | 2 | | $ | 2 | | | 2 | | | | $ | 2,509 | | $ | 56 | | | 749 | |
7 – 11 months | | | | | 3,339 | | | 155 | | | 484 | | | | | 106 | | | 29 | | | 7 | | | | | 1 | | | 1 | | | 2 | | | | | 3,446 | | | 185 | | | 493 | |
12 months or more | | | | | 2,332 | | | 200 | | | 303 | | | | | 297 | | | 88 | | | 58 | | | | | 31 | | | 20 | | | 9 | | | | | 2,660 | | | 308 | | | 370 | |
| | |
Total | | | | $ | 8,170 | | $ | 407 | | | 1,531 | | | | $ | 411 | | $ | 119 | | | 68 | | | | $ | 34 | | $ | 23 | | | 13 | | | | $ | 8,615 | | $ | 549 | | | 1,612 | |
| | |
Total bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0 – 6 months | | | | $ | 28,330 | | $ | 568 | | | 3,099 | | | | $ | 14 | | $ | 3 | | | 4 | | | | $ | 2 | | $ | 2 | | | 2 | | | | $ | 28,346 | | $ | 573 | | | 3,105 | |
7 – 11 months | | | | | 38,948 | | | 2,758 | | | 3,630 | | | | | 584 | | | 136 | | | 67 | | | | | 1 | | | 1 | | | 2 | | | | | 39,533 | | | 2,895 | | | 3,699 | |
12 months or more | | | | | 9,401 | | | 865 | | | 742 | | | | | 1,138 | | | 286 | | | 95 | | | | | 42 | | | 29 | | | 11 | | | | | 10,581 | | | 1,180 | | | 848 | |
| | |
Total(e) | | | | $ | 76,679 | | $ | 4,191 | | | 7,471 | | | | $ | 1,736 | | $ | 425 | | | 166 | | | | $ | 45 | | $ | 32 | | | 15 | | | | $ | 78,460 | | $ | 4,648 | | | 7,652 | |
| | |
Equity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0 – 11 months | | | | $ | 477 | | $ | 29 | | | 103 | | | | $ | 32 | | $ | 10 | | | 23 | | | | $ | – | | $ | – | | | – | | | | $ | 509 | | $ | 39 | | | 126 | |
| | |
Total | | | | $ | 477 | | $ | 29 | | | 103 | | | | $ | 32 | | $ | 10 | | | 23 | | | | $ | – | | $ | – | | | – | | | | $ | 509 | | $ | 39 | | | 126 | |
| | |
(a) Represents the number of consecutive months that fair value has been less than cost by any amount.
(b) Represents the percentage by which fair value is less than cost at December 31, 2013.2015.
(c) For bonds, represents amortized cost.
(d) The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2013 were2015 was primarily attributable to decreases in the fair value of bonds available for sale. Netfixed maturity securities. For 2015, net unrealized gains related to fixed maturity and equity securities decreased by $13.7$10.2 billion due primarily due to the increaserise in U.S. Treasury rates, partially offset by the narrowingwidening of credit spreads, and the realizationsale of approximately $2.5 billion in gains from sales ofequity securities.
The change in net unrealized gains and losses on investments in 2012 were2014 was primarily attributable to the appreciationincreases in the fair value of bonds available for salefixed maturity securities. For 2014, net unrealized gains related to fixed maturity and equity securities increased by $7.3 billion due to continued improvementsa decrease in financial market conditions and significant narrowing of credit spreadsinterest rates on investment grade fixed maturity securities, partially offset by higher U.S. Treasury rates.the widening of spreads.
See also Note 65, Investments to the Consolidated Financial Statements for further discussion of our investment portfolio.
AIG 2013 Form 10-K
The following section provides discussion of insurance reserves for both the Non-Life Insurance Companies and the Life Insurance Companies, including Eaglestone Reinsurance Company, which is reported in Corporate and Other.
Non-Life Insurance Companies
The following section provides discussion of the consolidated liability for unpaid losses and loss adjustment expenses for the Non-Life Insurance Companies.
The following table presents the components of AIG’s gross loss reserves by major lines of business on a U.S. statutory basis(a):
At December 31, | | |
(in millions) | | 2015 | | 2014(b) |
Other liability occurrence (including asbestos and environmental) | $ | 24,856 | $ | 24,988 |
Workers' compensation (net of discount) | | 14,978 | | 16,014 |
Other liability claims made | | 14,006 | | 13,632 |
Property | | 5,823 | | 6,350 |
Auto liability | | 4,692 | | 4,814 |
Accident and health | | 1,783 | | 1,972 |
Products liability | | 1,681 | | 1,678 |
Medical malpractice | | 1,603 | | 1,520 |
Aircraft | | 1,286 | | 1,340 |
Mortgage guaranty / credit | | 733 | | 1,008 |
Other | | 3,501 | | 3,944 |
Total | $ | 74,942 | $ | 77,260 |
Total U.S. & Canada | $ | 58,890 | $ | 58,729 |
Total International (c) | $ | 16,052 | $ | 18,531 |
(a) Presented by lines of business pursuant to statutory reporting requirements as prescribed by the NAIC.
(b) 2014 reflects the reclassification of International reserves to major lines of business.
(c) The decrease was primarily the effect of foreign exchange on gross reserves, a payment on a large loss, and the net of other claim payments and reserve movements.
TABLE OF CONTENTSTable of Contents
ITEM 7 / ENTERPRISE RISK MANAGEMENT
Item 7 / insurance reserves / NON-LIFE INSURANCE COMPANIES
Gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for IBNR and loss expenses, less estimated salvage and subrogation and applicable discount. The Non-Life Insurance Companies regularly review and update the methods and assumptions used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected in pre‑tax operating income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase prior years’ estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease prior years’ estimates of ultimate cost are referred to as favorable development. See MD&A Critical Accounting Estimates – Details of the Loss Reserving Process.
Net loss reserves represent gross loss reserves reduced by reinsurance recoverable, net of an allowance for unrecoverable reinsurance.
The following table presents the components of net loss reserves:
December 31, | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 |
Gross loss reserves before reinsurance and discount | | | | | | $ | 78,090 | $ | 80,337 |
Less: discount | | | | | | | (3,148) | | (3,077) |
Gross loss reserves, net of discount, before reinsurance | | | | | | | 74,942 | | 77,260 |
Less: reinsurance recoverable* | | | | | | | (14,339) | | (15,648) |
Net liability for unpaid losses and loss adjustment expenses | | | | | | $ | 60,603 | $ | 61,612 |
* Includes $1.8 billion and $1.5 billion of reinsurance recoverable under a retroactive reinsurance agreement at December 31, 2015, and December 31, 2014, respectively.
Gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.6 billion and $12.4 billion at December 31, 2015 and 2014, respectively. These recoverable amounts are related to certain policies with high deductibles (meaning, the policy attachment point is above high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements; each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to deductible portion of the claim the Non-Life Insurance Companies manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 2015 and 2014, the Non-Life Insurance Companies held collateral of approximately $9.6 billion and $9.4 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and assets in trusts.
The following table classifies the components of net loss reserves by business unit:
December 31, | | |
(in millions) | | 2015 | | 2014 |
Commercial Property Casualty: | | | | |
Casualty | $ | 32,620 | $ | 33,065 |
Financial lines | | 9,265 | | 9,538 |
Specialty | | 5,197 | | 5,786 |
Property | | 4,013 | | 4,079 |
Total Commercial Property Casualty | | 51,095 | | 52,468 |
Commercial Mortgage Guaranty | | 713 | | 977 |
Consumer Personal Insurance | | | | |
Personal lines | | 2,661 | | 2,763 |
Accident and health | | 1,662 | | 1,878 |
Total Consumer Personal Insurance | | 4,323 | | 4,641 |
Other run-off insurance lines* | | 4,472 | | 3,526 |
Net liability for unpaid losses and loss adjustment expenses | $ | 60,603 | $ | 61,612 |
* In 2015, $1.2 billion of loss reserves for certain environmental liability, healthcare, casualty, and specialty coverages, previously reported in Commercial Casualty and Specialty lines of business, were transferred to other run-off insurance lines.
Discounting of Reserves
The following table presents the components of loss reserve discount included above:
December 31, | 2015 | | 2014 |
| | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
U.S. workers' compensation: | | | | | | | | | | | | | |
Tabular | $ | 635 | $ | 218 | $ | 853 | | $ | 623 | $ | 229 | $ | 852 |
Non-tabular | | 1,542 | | 746 | | 2,288 | | | 1,525 | | 689 | | 2,214 |
Asbestos | | - | | 7 | | 7 | | | - | | 11 | | 11 |
Total reserve discount | $ | 2,177 | $ | 971 | $ | 3,148 | | $ | 2,148 | $ | 929 | $ | 3,077 |
The following table presents the net reserve discount benefit (charge):
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| | | Run-off | | | | | | | Run-off | | | | | | | Run-off | | |
| | Property | | Insurance | | | | | Property | | Insurance | | | | | Property | | Insurance | | |
(in millions) | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total | | | Casualty | | Lines | | Total |
Current accident year | $ | 182 | $ | - | $ | 182 | | $ | 189 | $ | - | $ | 189 | | $ | 175 | $ | - | $ | 175 |
Accretion and other | | | | | | | | | | | | | | | | | | | | |
adjustments to prior | | | | | | | | | | | | | | | | | | | | |
year discount | | (262) | | (74) | | (336) | | | (145) | | (235) | | (380) | | | (225) | | 102 | | (123) |
Effect of interest rate | | | | | | | | | | | | | | | | | | | | |
changes | | 148 | | 77 | | 225 | | | (225) | | (172) | | (397) | | | (272) | | 529 | | 257 |
Effect of re-pooling | | - | | - | | - | | | 110 | | - | | 110 | | | - | | - | | - |
Net reserve discount | | | | | | | | | | | | | | | | | | | | |
benefit (charge) | | 68 | | 3 | | 71 | | | (71) | | (407) | | (478) | | | (322) | | 631 | | 309 |
Amount transferred to run-off | | | | | | | | | | | | | | | | | | | | |
insurance lines | | (39) | | 39 | | - | | | - | | - | | - | | | - | | - | | - |
Net change in total reserve | | | | | | | | | | | | | | | | | | | | |
discount | $ | 29 | $ | 42 | $ | 71 | | $ | (71) | $ | (407) | $ | (478) | | $ | (322) | $ | 631 | $ | 309 |
Comprised of: | | | | | | | | | | | | | | | | | | | | |
U.S. Workers' | | | | | | | | | | | | | | | | | | | | |
compensation | $ | 29 | $ | 46 | $ | 75 | | $ | (71) | $ | (385) | $ | (456) | | $ | (322) | $ | 649 | $ | 327 |
Asbestos | $ | - | $ | (4) | $ | (4) | | $ | - | $ | (22) | $ | (22) | | $ | - | $ | (18) | $ | (18) |
U.S. Workers’ Compensation
The Non-Life Insurance Companies discount certain workers’ compensation reserves in accordance with practices prescribed or permitted by New York, Pennsylvania and Delaware. New York rules generally do not permit non-tabular discounting on IBNR and prescribe a fixed 5 percent discount rate for application to case reserves. Pennsylvania permits non-tabular discounting of IBNR and, commencing in 2013, approved variable discount rates determined using risk-free rates based on the U.S. Treasury forward yield curve plus a liquidity margin, applicable to IBNR and case reserves. Delaware has permitted discounting on the same basis as the Pennsylvania domiciled companies.
The net increase in workers’ compensation discount in 2015 of $75 million was partially due to the increase in forward yield curve rates used for discounting under the prescribed or permitted practices. The increase in the forward yield curve component of the discount rates resulted in a $225 million increase in the loss reserve discount, as Treasury rates generally increased along the payout pattern horizon in 2015. In addition, the effects of the discount attributable to newly established
reserves for accident year 2015 increased the discount by $182 million in 2015. These increases were partially offset by a $332 million reduction for accident years 2014 and prior, primarily from accretion of discount on reserves during 2015.
On January 1, 2014, the Non-Life Insurance Companies merged their two internal pooling arrangements into one pool, and changed the participation percentages of the pool members resulting in a reallocation of reserves from New York domiciled companies to those domiciled in Pennsylvania and Delaware. As a result of these changes in the participation percentages and domiciliary states of the participants of the combined pool, the Non-Life Insurance Companies recognized a discount benefit of $110 million in the first quarter of 2014.
Annual Reserving Conclusion
AIG net loss reserves represent our best estimate of the liability for net losses and loss adjustment expenses as of December 31, 2015. While we regularly review the adequacy of established loss reserves, there can be no assurance that our recorded loss reserves will not develop adversely in future years and materially exceed our loss reserves as of December 31, 2015. In our opinion, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on our consolidated financial condition, although such events could have a material adverse effect on our consolidated results of operations for an individual reporting period.
The following table presents the rollforward of net loss reserves:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at beginning of year | | | | | | $ | 61,612 | $ | 64,316 | $ | 68,782 |
Foreign exchange effect | | | | | | | (1,429) | | (1,061) | | (617) |
Other, including dispositions | | | | | | | - | | - | | (79) |
Change due to retroactive asbestos reinsurance | | | | | | | 20 | | 141 | | 22 |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | |
Current year, undiscounted | | | | | | | 20,308 | | 21,279 | | 22,171 |
Prior years unfavorable development, undiscounted* | | | | | | | 4,119 | | 703 | | 557 |
Change in discount | | | | | | | (71) | | 478 | | (309) |
Losses and loss adjustment expenses incurred | | | | | | | 24,356 | | 22,460 | | 22,419 |
Losses and loss adjustment expenses paid: | | | | | | | | | | | |
Current year | | | | | | | 5,751 | | 6,358 | | 7,431 |
Prior years | | | | | | | 18,205 | | 17,886 | | 18,780 |
Losses and loss adjustment expenses paid | | | | | | | 23,956 | | 24,244 | | 26,211 |
Net liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | |
at end of year | | | | | | $ | 60,603 | $ | 61,612 | $ | 64,316 |
* See tables below for details of prior year development by business unit, accident year and major class of business.
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years, net of reinsurance, by business unit and major class of business:
Years Ended December 31, | | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | | 2014 | | 2013 |
Prior accident year development by major class of business: | | | | | | | | | | | | | |
Commercial Property Casualty - U.S. & Canada: | | | | | | | | | | | | | |
Excess casualty | | | | | | | $ | 1,529 | | $ | (36) | $ | (144) |
Financial lines including professional liability | | | | | | | | 579 | | | (47) | | (113) |
On-going Environmental | | | | | | | | 108 | | | 137 | | 151 |
Primary casualty: | | | | | | | | | | | | | |
Loss-sensitive (offset by premium adjustments below)(a) | | | | | | | | (49) | | | 105 | | 89 |
Other | | | | | | | | 1,175 | | | 445 | | 409 |
Healthcare | | | | | | | | 207 | | | 109 | | (54) |
Property excluding natural catastrophes | | | | | | | | (117) | | | 50 | | (80) |
Natural catastrophes | | | | | | | | (52) | | | (102) | | 179 |
All other, net | | | | | | | | 6 | | | 72 | | 23 |
Total Commercial Property Casualty - U.S. & Canada | | | | | | | | 3,386 | | | 733 | | 460 |
Commercial Property Casualty International: | | | | | | | | | | | | | |
Excess casualty | | | | | | | | 71 | | | (62) | | (15) |
Primary casualty | | | | | | | | 89 | | | (5) | | (25) |
Financial lines | | | | | | | | 47 | | | 182 | | 74 |
Specialty | | | | | | | | (5) | | | (30) | | (51) |
Property excluding natural catastrophes | | | | | | | | (64) | | | (82) | | (3) |
Natural catastrophes | | | | | | | | (44) | | | (77) | | (71) |
All other, net | | | | | | | | - | | | (4) | | (14) |
Total Commercial Property Casualty - International | | | | | | | | 94 | | | (78) | | (105) |
Total Commercial Property Casualty | | | | | | | | 3,480 | | | 655 | | 355 |
Commercial Mortgage Guaranty | | | | | | | | (69) | | | (104) | | 30 |
Consumer Personal Insurance - U.S. & Canada: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | (12) | | | (8) | | (69) |
All other, net | | | | | | | | (54) | | | (44) | | (46) |
Total Consumer Personal Insurance - U.S. & Canada | | | | | | | | (66) | | | (52) | | (115) |
Consumer Personal Insurance - International: | | | | | | | | | | | | | |
Natural catastrophes | | | | | | | | 2 | | | (8) | | - |
All other, net | | | | | | | | 45 | | | (17) | | (40) |
Total Consumer Personal Insurance - International | | | | | | | | 47 | | | (25) | | (40) |
Total Consumer Personal Insurance | | | | | | | | (19) | | | (77) | | (155) |
Run-off Insurance Lines | | | | | | | | | | | | | |
Asbestos and environmental (1986 and prior) | | | | | | | | 281 | | | 124 | | 67 |
Run-off environmental | | | | | | | | 132 | | | 120 | | 238 |
Run-off healthcare(b) | | | | | | | | 50 | | | - | | - |
Other run-off | | | | | | | | 272 | | | - | | - |
All other, net | | | | | | | | (8) | | | (15) | | 22 |
Total Run-off Insurance Lines | | | | | | | | 727 | | | 229 | | 327 |
Total prior year unfavorable development | | | | | | | $ | 4,119 | | $ | 703 | $ | 557 |
| | | | | | | | | | | | | |
Premium adjustments on primary casualty loss sensitive business | | | | | | | | 49 | | | (105) | | (89) |
Total prior year development, net of premium adjustments | | | | | | | $ | 4,168 | | $ | 598 | $ | 468 |
(a) Represents prior year development on active retrospectively rated components of risk-sharing policies.
(b) In 2015, includes $30 million of non-operating adverse prior year development.
Net Loss Development
In determining the loss development from prior accident years, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes (including challenges and recommendations from our Enterprise Risk Management group) as well as the views of third party actuarial firms. We use these inputs to improve our evaluation techniques, and to analyze and assess the change in estimated ultimate loss for each accident year by class of business. Our analyses produce a range of indications from various methods, from which we select our best estimate.
We analyze and evaluate the change in estimated ultimate loss for each accident year by class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, we examine the indicated effect such emergence would have on the reserves of that class of business. In some cases, the lower or higher than expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the reserves for the class of business. In other cases, the lower or higher than expected emergence may result in a change, either favorable or unfavorable. As appropriate, we make adjustments in response to the difference between the actual and expected loss emergence for each accident year. As part of our reserving process, we also consider notices of claims received with respect to emerging and/or evolving issues, in particular those related to complex, claims-related class action litigation and latent exposure claims. Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratio selected (Commercial: 66.2 points; Consumer: 54.0 points; Mortgage Guaranty: 25.1 points) and the current year’s addition to reserves.
In 2015 and 2014, we recognized $4.1 billion and $703 million of adverse development, respectively, driven in each period by adverse loss development in Commercial Property Casualty and Run-off Insurance Lines partially offset by Consumer Personal Insurance and Mortgage Guaranty business. In 2013, we recognized $557 million of adverse development primarily due to the adverse prior year loss reserve development in Commercial Property Casualty, Mortgage Guaranty business and Run-off Insurance Lines, partially offset by Consumer Personal Insurance.
See Results of Operations — Commercial Insurance and Results of Operations — Consumer Personal Insurance Results herein for further discussion of net loss development.
The following is a discussion of the primary reasons for the development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period. See MD&A — Critical Accounting Estimates for a description of our loss reserving process, basis for selections and sensitivities to certain assumptions.
Commercial Property Casualty
In 2015, the Commercial Property Casualty adverse prior year loss reserve development of $3.5 billion was driven by Excess Casualty, Primary Casualty, Environmental, Financial Lines, Healthcare and International Excess Casualty, partially offset by Property excluding natural catastrophes and Natural catastrophes.
In 2014, the Commercial Property Casualty adverse prior year loss reserve development of $655 million was driven by Primary Casualty, Environmental, International Financial Lines, and Healthcare, partially offset by Natural catastrophes, International Primary Casualty and International Commercial Property.
In 2013, the Commercial Property Casualty adverse prior year loss reserve development of $355 million was driven by Primary Casualty, International Financial Lines, Environmental, and Healthcare, partially offset by Excess Casualty, Financial Lines, and Natural catastrophes.
Excess Casualty – U.S. & Canada
The excess casualty class presents unique challenges for estimating the liability for unpaid losses. Our policies tend to attach at a high layer above underlying policies, usually issued by other insurance companies, which can limit our access to relevant information to help inform our judgments. Our insureds are generally required to provide us with notice of claims that exceed a
threshold, either expressed as a proportion of our coverage attachment point (e.g., 50 percent of the attachment) or for particular types of claims (e.g., death, quadriplegia). This threshold is generally established well below our attachment point, to provide us with a precautionary notice of claims that could potentially reach our excess layer of coverage. This means that the majority of claims reported to us are closed without payment by us because the claims never reach our layer, while the claims that reach our layer and close with payment by us can be large and highly variable. Thus, estimates of unpaid losses carry significant uncertainty.
During 2015, Excess Casualty experienced $1.5 billion of adverse development largely driven by worse than expected loss emergence reported in 2015, including $1.2 billion (primarily for U.S. risks) in the fourth quarter when we completed our scheduled detail valuation review for this class. This increase was largely driven by adverse emergence in both general liability and umbrella auto liability, reflecting worsening trends in the number and nature of high severity losses. Approximately $411 million of the adverse development is related to auto liability. We reacted to the adverse emergence by updating our assumptions about loss severity, loss development patterns and expected loss ratios for the most recent accident years. We have seen an increasing trend in the frequency of high severity claims, especially in the umbrella auto liability portfolio. We also observed deterioration in certain class action claims that have complex coverage uncertainties and high limits characterized by increases in new claims and/or demands reported in 2015 and progress towards potential settlements, which have further informed our actuarial projections of ultimate losses for these types of claims. These types of claim classes have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile. In addition, we also increased losses associated with bad-faith claims by approximately $120 million reflecting an increase in recent settlements. These types of claims have the longest emergence period within the excess casualty class and can impact multiple accident years, and are therefore inherently more volatile.
During 2014, Excess Casualty experienced $36 million of favorable development largely driven by savings on a few large claims. In our Excess Umbrella analysis in 2014, our revised segmentation led to lower 2005 and subsequent accident year estimates for non-mass tort claims where we expect underwriting actions and reductions in policy limits to have a favorable effect on ultimate losses from accident years 2007 to 2013 in particular. This was entirely offset by higher selected ultimate losses for accident years 2004 and prior as a result of updated loss development patterns for mass tort claims which we segmented separately from the non-mass tort claims.
During 2013, Excess Casualty experienced $144 million of favorable development due to favorable outcomes on some large cases from 2010 and lower than expected emergence in high layer Catastrophic Casualty business.
Primary Casualty – U.S. and Canada
Primary Casualty includes Workers’ Compensation, General Liability and Auto Liability lines of business. The business is segmented by industry and where relevant, by geography.
Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. As part of the year end reserve review related to these policies, in addition to reviewing normal development we enhanced our segmentation to better reflect the specified policy features. Based on the analysis, we increased our reserves by $540 million, primarily for accident years 2012 and prior and in the workers’ compensation class, to reflect estimated increased losses and reduced expectations of future recoveriesfrom our insureds through these risk-sharing features.
We also recognized $100 million of adverse prior year development in Workers’ Compensation coverages sold to government contractors in U.S and non-U.S. military installations as a result of adverse loss emergence from several large accounts in the recent accident years. In addition, we reacted to the adverse emergence by increasing our expected loss ratios in recent accident years.
For the remainder of the primary workers’ compensation portfolio our analysis was based on the refined segmentation from 2014, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
For Primary General Liability, we increased our ultimate loss estimates for prior accident years by $146 million largely related to coverage sold to the Construction sectors as we reacted to noteworthy adverse loss emergence throughout the year, by changing our assumptions about loss development and expected loss ratios. For construction, the adverse development was driven by construction defect claims. The construction class is being re-underwritten to reduce New York and U.S. residential exposures.
For Primary Auto liability, we have observed increases in both the frequency and severity of claims occurring since the recovery from the recent U.S. economic downturn, which have significantly outpaced the pricing rate increases implemented during the same period. As a result, we recognized $144 million of adverse development during 2015 as we increased the expected loss ratios for recent accident years to reflect the deteriorating trends.
We also-reassessed the reasonableness of our liability for future claim handling expenses related to existing loss reserves and updated our estimates to reflect the costs from recent investments in claims systems, processes and people with the objective of improving our ability to better manage total loss costs. We increased our reserve estimates by $214 million based on refined analyses, $100 million of which was attributable to U.S. & Canada primary casualty. The balance was distributed among other classes.
During 2014, we continued to refine our segmentation of primary workers’ compensation into guaranteed cost and excess of large deductible business by deductible size group. The net result of the analysis was adverse development of $137 million for the primary workers’ compensation class of business. The key drivers of the adverse development in this class of business were increases for guaranteed cost business in California and New York, and increases for excess of large deductible business, as well as adverse experience in the Construction class. Each of these segments appears to have been impacted by specific structural changes in the portfolio. For California business, our tail factor increases were in response to changing long-term medical development patterns. In New York, there has been a lengthening of the period between the date of accident and the classification of non-scheduled permanent partial injuries. We completed a review of claim emergence and payouts for our top six states in workers’ compensation and concluded that California and New York were the main states where the loss development patterns had materially changed since our last review. For excess of large deductible business across all states, we updated our analyses to consider the impact of changes in the mix of retentions that has occurred over time as the data by retention band was becoming more credible. For the Construction class, we note that the construction sector has experienced a comparatively slow recovery in payroll employment. As a result of the diminished employment opportunities in this industry sector, injured workers may experience limited return-to-work opportunities, which moderate the shortening of claim duration that normally accompanies a labor market recovery. For all other states combined excluding California and New York, we saw favorable emergence in our middle market Specialty Workers’ Compensation segment. The net effect of these revised selections had the greatest adverse effect on the Construction class of business ($140 million adverse development) and the National Accounts class of business ($125 million adverse development). The most significant favorable effect was in the Specialty Workers’ Compensation class of business ($155 million favorable development). Our analysis considers our best estimate expectations of medical inflation and loss costs trends and also reflects the impacts of enhancements in our claim management and loss mitigation activities, such as opioid management, fraud investigation and medical management.
For primary general liability in 2014, we increased our ultimate loss estimates for prior years by $182 million. This was largely driven by the construction segment as a result of several large construction defect claims and increases in the costs of claims in New York associated with New York Labor Law. The construction results in California and New York continue to be the main sources of adverse development in our guaranteed cost primary general liability books although we did experience adverse development from construction defect claims in other states in 2014. Our large account primary non-construction general liability business was adversely impacted by claim activity in the layers excess of large insured retentions and we increased our loss development patterns for these layers to reflect the changes.
For commercial auto in 2014, we reacted to an increase in frequency of large claims in the accident years 2010 to 2013, where the economic recovery has contributed to increased frequency and severity, especially for those claims in excess of a client deductible of $500,000, which generally take several years to emerge and settle. This led to adverse prior year loss reserve development of $156 million for the automobile subset of primary casualty.
During 2013, we continued to refine the segmentation of our analyses of primary workers’ compensation, which indicated that prior year loss reserve development was flat after taking into account the initiatives that our claim function had undertaken to manage high risk claims.
During 2013, for primary general liability, we increased our reserves for prior years by approximately $355 million. Most of the increase was driven by construction related primary general liability claims, especially construction defect claims where we increased our ultimate loss estimates by $219 million to reflect the higher than expected frequency and severity of these claims especially in states that experienced heavy increases in construction activity after the 2004 and 2005 hurricanes and during the housing boom prior to 2007. Due to the subsequent home price declines observed in many of these states, the frequency of reported losses has increased as the losses subsequently represented a larger percentage of the equity values of the affected homes, and homeowners increasingly looked to insurance recoveries as a way to recoup some of that lost value.
Financial Lines – U.S. and Canada
Financial Lines business includes Director and Officer (D&O) and Related Management Liability, various Professional Liability classes of business as well as the Fidelity book of business. The Financial Lines book consists mostly of the D&O class of business.
During 2015, we recognized $579 million of adverse development, primarily as a result of our scheduled annual detailed valuation review conducted in the fourth quarter, driven largely by the adverse loss emergence that we have seen over the last year, especially in D&O and Professional Liability. In particular, we have observed greater than expected loss costs for several claims from accident years 2006 through 2010, driven by unfavorable settlements and deterioration in known claims. We responded to this adverse emergence by updating our loss development factors and expected loss ratio assumptions for all accident years. In addition, we recognized losses associated with bad-faith claims primarily based on actual settlements in the fourth quarter.
During 2014, we recognized $47 million of favorable development driven by the Professional Liability and D&O and Related Management Liability classes of business, somewhat offset by adverse development on the Fidelity book in recent accident years due to the changing economic cycle.
During 2013, we recognized $113 million of favorable development driven somewhat evenly among the Professional Liability, Fidelity and D&O and Related Management Liability classes of business. The year-end 2013 Professional Liability loss reserve actuarial review adopted a refined segmentation for this class of business with the selection of differentiated frequency and severity trends for various Professional Liability classes of business which appear to be behaving differently in the post financial crisis years than when reviewed in total.
Healthcare
During 2015, we recognized $207 million of adverse development driven by deteriorating loss experience in accident years 2008 and subsequent characterized by large claims in various segments including hospitals, nursing homes, and pharmaceutical and medical products liability. We reacted to these large claims by increasing our expected loss ratios for recent accident years and putting physicians and surgeons and pharmaceutical and medical products classes into runoff.
During 2014, we recognized $109 million of adverse development in this class largely driven by three large and relatively unusual claims of $25 million each in relatively recent accident years. While there have not been any significant structural changes to the portfolio, there can be material volatility in loss experience in this class of business where individual claims can be of high severity.
During 2013, this class recognized $54 million of favorable prior year development due to lower than expected loss emergence in many classes such as Excess Hospital Liability.
International Casualty (Excess and Primary Casualty) and Specialty
During 2015, we recognized $155 million of adverse prior year development, primarily due to three large product liability claims in our Casualty and Specialty lines totaling approximately $115 million. Two of these claims arose in Japan, which is unusual for our portfolio in that market.
During 2014 and 2013, we had $97 million and $91 million of favorable development, respectively. The favorable development in each year was due to lower than expected loss emergence in many classes and countries outside the U.S., with the majority from various countries in the EMEA region.
Financial Lines – International
During 2014 we implemented an enhanced claims operating model in Europe and Australasia which has provided our actuaries with more detailed case reserve data and analysis, enabling AIG’s actuaries to react sooner to case development than in prior years.
During 2015, we recognized $47 million of adverse prior year development, driven by increased claims emergence and related updates to the assumptions for loss development factors and expected loss ratios used in the annual detailed valuation review for these reserves, primarily related to Europe and Australasia risks.
During 2014, we recognized $182 million of adverse development in the international Financial Lines segments, driven by large claims emergence in the U.K., Australasia and Europe. Multiple accident years contributed to this total, but it was concentrated most heavily in accident years 2008-2011. The Australasia emergence was due to a number of specific large losses in the Australia and New Zealand D&O business. In Europe, adverse prior year loss reserve development was concentrated in the D&O class of business, where we have observed a greater incidence of severe claims compared with prior years, and the Professional class of business, with large losses from one insured.
During 2013, we recognized $74 million of adverse development, all of which stemmed from losses in the D&O books in Europe, UK and Australasia, with the other segments showing modest favorable development. The development we recognized can be directly linked to a small number of specific claims booked throughout the year.
Natural Catastrophes
During 2015 and 2014, we experienced favorable property catastrophe prior year development of $52 million and $102 million, respectively, in our U.S. and Canada business, primarily due to favorable development from several U.S. events in accident year 2013. We also experienced favorable property catastrophe prior year loss reserve development of $44 million and $77 million from our international property class of business for 2015 and 2014, respectively.
During 2013, we experienced adverse development from Storm Sandy totaling $108 million, or 5.4 percent of the 2012 estimate. This development resulted from higher severities on a small number of large and complex commercial claims driven by a number of factors including the extensive damage caused to properties in the downtown New York metropolitan area.
Mortgage Guaranty business includes domestic first liens (96 percent of total reserves) and run-off books in second liens, student loans and international.
During 2015, we recognized $69 million of favorable prior year loss reserve development driven by lower than expected frequency due to improving cure rates. Post-claim recoveries also contributed to favorable prior year development.
During 2014, we recognized $104 million of favorable prior year loss reserve development driven primarily by the benefit of a settlement with a mortgage lender, steady increases in year-over-year first lien cure rates, a reflection of the improved
economic environment, and in part by favorable frequency trends and recoveries in second lien claims. Partially offsetting these improvements were upward trends in severity, particularly for older (pre-2012) accident periods.
During 2013, we recognized $30 million of adverse prior year loss reserve development due to unfavorable emergence of overturns of prior claim cancellations and increased severity estimates in first liens, partially offset by favorable frequency in student loans and a reduction in the unallocated loss adjustment expense reserve.
Consumer Personal Insurance
During 2015, 2014 and 2013, we recognized $19 million, $77 million, and $155 million of favorable development, respectively.
During 2015 and 2014, we experienced favorable loss reserve development of $10 million and $16 million, respectively, from Natural Catastrophes.
The remaining $61 million of favorable development in 2014 was primarily from Homeowners, International Accident & Health and U.S. Warranty.
The following is a discussion of the primary reasons for the Run-Off Insurance Lines development in 2015, 2014 and 2013 of those classes of business that experienced significant prior accident year development during the three-year period.
Asbestos and Environmental (1986 and prior)
Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos reserves are ceded to National Indemnity Company (NICO) under a retrospective reinsurance arrangement entered into in 2011. However, certain asbestos-related exposures are not subject to the NICO agreement, including asbestos exposures for which we have negotiated fixed payment schedules, and third party reinsurance assumed policies. The reported claim activity on the assumed claims has increased in the last year. As a result, we modified certain of our loss-reserve-related assumptions to better reflect this AIG-specific experience as well as consideration of recent industry-wide trends regarding expanding coverage theories for liability. As a result, we increased our 2015 reserves by $164 million and by $117 million for Asbestos and Environmental, respectively.
Other Run-Off Insurance
During 2015, we transferred approximately $1.2 billion of loss reserves, largely representing coverages we have not written for at least five years, from Commercial Insurance into Run-off insurance lines. We increased the reserves for these coverages by $272 million to reflect updated assumptions about future loss development.
Excess Workers’ Compensation – U.S.
This class of business, which is reported in our run-off unit, has an extremely long tail and is one of the most challenging classes of business from a reserving perspective, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to small changes in assumptions, e.g. — in the rate of medical inflation or the longevity of injured workers, which can have a significant effect on the ultimate reserve estimate.
During 2015, this class of business did not experience significant development in loss reserves. The proactive management of settlement negotiations and other claims mitigation strategies minimized the volatility observed during 2015. The nominal reduction in reserves as a result of commutations and individual claims settlement strategies amounted to $222 million in 2015 compared to $242 million in 2014 and $25 million in 2013.
During 2014, we updated our analyses of Excess Workers compensation using a range of scenarios and methodologies and determined that our carried reserves were adequate after recognizing $20 million of favorable prior year development as a result of claim settlements and commutations of assumed reinsurance business, as well as reflecting changes in estimates in our loss mitigation strategies. We commuted several large assumed reinsurance agreements in 2014 and reduced the reserves faster than was previously expected as a result of our proactive management by the run-off unit.
During 2013, we updated our analysis of Excess Workers’ Compensation reserves and determined that no changes to our carried reserves were needed. We also updated our analysis of underlying claims cost drivers used in 2012 through accident year 2004, discussed in more detail below.
As noted above, we write loss sensitive business within our primary casualty portfolio. We recognized (return) additional premiums on loss sensitive business of $(49) million, $105 million and $89 million in 2015, 2014 and 2013, respectively, which entirely offset development in that business.
For the year ended December 31, 2015, we incurred reinsurance reinstatement premiums of $(4) million, compared to $(2) million and $27 million for 2014 and 2013, respectively.
See MD&A — Critical Accounting Estimates — Liability for Unpaid Losses and Loss Adjustment Expenses for further discussion of our loss reserving process.
See Commercial Insurance and Consumer Personal Insurance Results herein for further discussion of net loss development.
The following table summarizes development, (favorable) or unfavorable, ofincurred losses and loss adjustment expenses for prior years, net of reinsurance, by accident year:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
Prior accident year development by accident year: | | | | | | | | | | | |
Accident Year | | | | | | | | | | | |
2014 | | | | | | $ | 397 | $ | - | $ | - |
2013 | | | | | | | 396 | | (283) | | - |
2012 | | | | | | | 488 | | (59) | | (181) |
2011 | | | | | | | 296 | | 37 | | 217 |
2010 | | | | | | | 277 | | 12 | | (350) |
2009 | | | | | | | 188 | | 31 | | 157 |
2008 | | | | | | | 231 | | 8 | | (1) |
2007 | | | | | | | 48 | | (113) | | - |
2006 | | | | | | | 103 | | 64 | | (75) |
2005 | | | | | | | 90 | | 105 | | 61 |
2004 and prior (see table below) | | | | | | | 1,605 | | 901 | | 729 |
Total prior year unfavorable development | | | | | | $ | 4,119 | $ | 703 | $ | 557 |
Net Loss Development by Accident Year
For 2015, the adverse development in accident years 2011 through 2014 was driven by significantly greater actual versus expected loss emergence for primary and excess Auto Liability, Financial Lines and Healthcare. Individual large claims in the non-Auto Excess Casualty and International Casualty books along with deterioration in specific large accounts in the government contractors workers’ compensation portfolio were concentrated in these most recent accident years. The impact of revised loss expectations based on emergence in earlier accident years also contributed to the adverse development for Excess Casualty and Financial Lines in this period. In addition, our updated assumptions for bad-faith claims and unallocated loss adjustment expenses disproportionately impacted these years. Accident years 2005 through 2010 were largely impacted by updated loss development selections in Financial Lines and revised estimates on expected future recoveries from risk-sharing policies in the Primary Casualty portfolio. For accident years 2004 and prior, the adverse development was driven by
Excess Casualty revised tail factor selections, updated loss development selections for various run-off portfolios, updated industry experience for asbestos and revised estimates on expected future recoveries from risk-sharing policies.
For 2014, the favorable development in accident years 2013 and 2012 was driven by Financial Lines, Commercial Property and other short tailed lines, like Personal Lines. For accident year 2007, the favorable development was driven by U.S. and Canada Financial lines and Excess Casualty. For accident years 2004 and prior, the adverse development was driven by the Excess Casualty results of the a mass-tort resegmentation analysis, the updated primary workers’ compensation loss development selections (principally in California, New York and the excess of deductible segments) as well as the run-off pollution products business (1987-2004) and the asbestos and environmental (1986 and prior) exposure.
For 2013, the favorable development from accident year 2012 was driven primarily by consumer lines and lower losses in domestic commercial property, while the favorable development from accident year 2010 was primarily the result of favorable claims emergence from domestic excess casualty and from liability and financial lines coverage policies that are on a claims-made basis. The adverse development from accident year 2011 was driven by large losses in financial lines and adverse development in primary casualty, including the loss-sensitive business. The adverse development from accident year 2009 was driven by large losses in financial lines and adverse development in primary casualty including loss-sensitive business. The adverse development from accident years 2003 and prior was primarily driven by loss development on toxic tort claims, construction general liability claims and pollution product claims.
For certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to AIG. These reclassifications are shown as development in the respective years in the tables above.
The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment expenses for accident year 2004 and prior by major class of business and driver of development:
Years Ended December 31, | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | 2014 | | 2013 |
2004 and prior accident year development by major class of | | | | | | | | | | | |
business and driver of development: | | | | | | | | | | | |
Excess Casualty - primarily mass torts(a) | | | | | | $ | 388 | $ | 301 | $ | - |
Excess Casualty - all other | | | | | | | 104 | | 53 | | 251 |
Primary Casualty - loss sensitive business | | | | | | | 1 | | 37 | | (24) |
Primary Casualty - all other(b) | | | | | | | 362 | | 196 | | 102 |
Run-off environmental (1987 to 2004)(c) | | | | | | | 74 | | 97 | | 214 |
Asbestos and Environmental (1986 and prior) | | | | | | | 281 | | 124 | | 67 |
Commutations and Arbitrations(d) | | | | | | | 62 | | 63 | | 21 |
All Other | | | | | | | 333 | | 30 | | 98 |
Total prior year unfavorable development | | | | | | $ | 1,605 | $ | 901 | $ | 729 |
(a) Updates of mass tort loss development patterns.
(b) Includes loss development on excess of deductible exposures in workers’ compensation, general liability and commercial auto.
(c) Includes results of comprehensive specific large claim file reviews initiated in 2012 and updated in 2013 and 2014.
(d) The effects of commutations are shown separately from the related classes of business, primarily excess workers’ compensation. Commutations are reflected for the years in which they were contractually binding.
The main sources of unfavorable prior year development for accident years 2004 and prior recorded in 2013 through 2015 are as follows:
•Update of the mass tort loss development patterns and segmentation used for U.S. Excess Casualty, which accounted for $689 million and other loss emergence including specific large loss development totaling $408 million across the three years;
•Loss sensitive business that is entirely offset by premium adjustments accounted for $14 million;
•Update of the loss development patterns used for U.S. Primary Casualty including loss development patterns used in guaranteed cost workers’ compensation for NY and CA construction class of business and updates to the loss development patterns for business written on excess of deductible exposures in workers’ compensation, general liability and the commercial auto classes of business which collectively accounted for approximately $660 million across the three years;
•Update of the Environmental run-off portfolio’s losses following the 2012 comprehensive claims review that provided a more refined approach for the development of actuarial estimates for toxic tort claims (which were found to have a distinctly lengthier loss development pattern than other general liability claims in the environmental portfolio) as well as a more appropriate methodology for incorporating case reserving based estimates of ultimate loss costs for complex claims involving environmental remediation and/or from policies with high policy limits (greater than $5 million per policy). These updates which commenced in 2012 and have been applied in each subsequent year, accounted for approximately $385 million;
•Update of our net retained asbestos and environmental exposure from 1986 and prior which accounted for approximately $472 million ($238 million environmental and $234 million asbestos) across the three years;
•Commutations in the three-year period ending December 31, 2015, accounted for approximately $146 million. These commutations serve to reduce the uncertainty in AIG’s required reserves; and
•Update of the assumptions for future loss development for the run-off insurance lines, primarily for coverages we have not written in at least five years, accounted for approximately $272 million of the All Other total amount of $461 million across the three years.
During the period 2013 to 2015, we completed refinements of our reserving methodologies for U.S. mass tort, toxic tort, retained asbestos, environmental and other specific large losses. We also conducted extensive additional studies to corroborate our judgments for our U.S. primary workers compensation and excess workers’ compensation classes of business. Further, we refined our loss reserving methodologies for our U.S. Excess Casualty class of business and our U.S. Primary Casualty class of business written over excess of deductible exposures where loss development patterns may lengthen if client retentions increase over time. Collectively, the reserves for the aforementioned classes of business or loss exposures account for the majority of the remaining net loss reserves for accident years 2004 and prior.
Asbestos and Environmental Reserves
Loss Reserve Estimates - Asbestos and Environmental
We consider a number of factors and recent experience, in addition to the results of both external and internal analyses, to estimate asbestos and environmental loss reserves. Nonetheless, we believe that significant uncertainty remains as to our ultimate liability for asbestos and environmental claims, which is due to several factors, including:
•the long latency period between asbestos exposure and disease manifestation, leading to the potential for involvement of multiple policy periods for individual claims;
•claims filed under the non‑aggregate premises or operations section of general liability policies;
•the number of insureds seeking bankruptcy protection and the effect of prepackaged bankruptcies;
•diverging legal interpretations; and
•the difficulty in estimating the allocation of remediation cost among various parties with respect to environmental claims.
In 2015, as in prior years, both the retained accounts and retroceded accounts ground-up reviews for asbestos were updated. As a result, we increased gross undiscounted asbestos incurred losses by $13 million and increased net undiscounted asbestos incurred losses by $164 million. The net undiscounted change reflects an increase primarily due to third party assumed reinsurance exposures. With the gross incurred loss increase less than the net incurred loss increase, the resulting ceded incurred losses were reduced. For environmental, we increased gross environmental incurred losses by $214 million and net environmental incurred losses by $117 million as a result of top‑down actuarial analyses performed during the year, as well as development on a large sediment site.
In 2014, both the retained accounts and retroceded accounts ground-up reviews for asbestos were updated. As a result, we decreased gross undiscounted asbestos incurred losses by $6 million and increased net undiscounted asbestos incurred losses by $64 million. The net undiscounted increase reflects a buyout settlement on a retained account as well as a reduction in estimated ceded loss reserves (prior to the retroactive reinsurance retrocession). For environmental, we increased gross environmental incurred losses by $140 million and net environmental incurred losses by $60 million as a result of top‑down actuarial analyses performed during the year as well as development on a number of large accounts.
In 2013, we completed a ground‑up review of all our remaining retained accounts for asbestos. In addition, a subsidiary of the retrocessionaire for our retroactive reinsurance contract completed a ground‑up asbestos study for the largest accounts it assumed. As a result, we increased gross asbestos incurred losses by $169 million and net asbestos incurred losses by $6 million. For environmental, we increased gross environmental incurred losses by $98 million and net environmental incurred losses by $61 million as a result of top‑down actuarial analyses performed during the year as well as development on a number of large accounts.
In addition to the U.S. asbestos and environmental reserve amounts shown in the tables below, the Non - Life Insurance Companiesalso have asbestos reserves relating to foreign risks written by non‑U.S. entities of $121 million gross and $93 million net as of December 31, 2015. The asbestos reserves relating to non‑U.S. risks written by non‑U.S. entities were $132 million gross and $105 million net as of December 31, 2014.
The following table provides a summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims:
As of or for the Years Ended December 31, | | 2015 | | 2014 | | 2013 |
(in millions) | Gross | | Net | | Gross | | Net | | Gross | | Net |
Asbestos: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 4,117 | $ | 388 | $ | 4,720 | $ | 529 | $ | 4,896 | $ | 427 |
Change in net loss reserves due to retroactive reinsurance | | - | | 20 | | - | | 141 | | - | | 22 |
Dispositions | | - | | - | | - | | - | | (12) | | (12) |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | | |
Undiscounted | | 13 | | 164 | | (6) | | 64 | | 169 | | 6 |
Change in discount | | 9 | | 4 | | 39 | | 22 | | 51 | | 18 |
Losses and loss adjustment expenses incurred* | | 22 | | 168 | | 33 | | 86 | | 220 | | 24 |
Losses and loss adjustment expenses paid* | | (544) | | (130) | | (636) | | (368) | | (444) | | (59) |
Other changes | | - | | - | | - | | - | | 60 | | 127 |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 3,595 | $ | 446 | $ | 4,117 | $ | 388 | $ | 4,720 | $ | 529 |
Environmental: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 368 | $ | 185 | $ | 313 | $ | 163 | $ | 309 | $ | 163 |
Dispositions | | - | | - | | - | | - | | (1) | | (1) |
Losses and loss adjustment expenses incurred | | 214 | | 117 | | 140 | | 60 | | 98 | | 61 |
Losses and loss adjustment expenses paid | | (37) | | (32) | | (85) | | (38) | | (93) | | (60) |
Other changes | | - | | 6 | | - | | - | | - | | - |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 545 | $ | 276 | $ | 368 | $ | 185 | $ | 313 | $ | 163 |
Combined: | | | | | | | | | | | | |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at beginning of year | $ | 4,485 | $ | 573 | $ | 5,033 | $ | 692 | $ | 5,205 | $ | 590 |
Change in net loss reserves due to retroactive reinsurance | | - | | 20 | | - | | 141 | | - | | 22 |
Dispositions | | - | | - | | - | | - | | (13) | | (13) |
Losses and loss adjustment expenses incurred: | | | | | | | | | | | | |
Undiscounted | | 227 | | 281 | | 134 | | 124 | | 267 | | 67 |
Change in discount | | 9 | | 4 | | 39 | | 22 | | 51 | | 18 |
Losses and loss adjustment expenses incurred | | 236 | | 285 | | 173 | | 146 | | 318 | | 85 |
Losses and loss adjustment expenses paid | | (581) | | (162) | | (721) | | (406) | | (537) | | (119) |
Other changes | | - | | 6 | | - | | - | | 60 | | 127 |
Liability for unpaid losses and loss adjustment expenses | | | | | | | | | | | | |
at end of year | $ | 4,140 | $ | 722 | $ | 4,485 | $ | 573 | $ | 5,033 | $ | 692 |
* These amounts exclude benefit from retroactive reinsurance.
On June 17, 2011, we completed a transaction under which the bulk of AIG Property Casualty’s net domestic asbestos liabilities were transferred to National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway, Inc. This was part of our ongoing strategy to reduce our overall loss reserve development risk. This transaction covers potentially volatile U.S.-related asbestos exposures. It does not, however, cover asbestos accounts that we believe have already been reserved to their limit of liability or certain other ancillary asbestos exposure assumed by AIG Property Casualty subsidiaries.
Upon the closing of this transaction, but effective as of January 1, 2011, we ceded the bulk of AIG Property Casualty’s net domestic asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Within this aggregate limit, NICO assumed collection risk for existing third-party reinsurance recoverable associated with these liabilities. AIG Property Casualty paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed approximately $1.82 billion of net U.S. asbestos liabilities. As a result of this transaction, AIG Property Casualty recorded a deferred gain of $150 million in the second quarter of 2011, which is being amortized into income over the settlement period of the underlying claims.
Under retroactive reinsurance arrangements any recoveries for development associated with the ceded losses are not recognized immediately; rather this development increases or decreases the deferred gain, which is amortized into income as described above. During 2015, 2014 and 2013, we recognized approximately $233 million, $0 and $72 million, respectively, of adverse loss development that was ceded under this reinsurance arrangement. This development, which is net of the deferred gain amortization, is being reported in Other income/expense, consistent with the way we manage the business and assess performance and is therefore excluded from net losses incurred and our loss ratios to avoid distortion of our ongoing insurance business.
IBNR Loss Reserve Estimates — Asbestos and Environmental
The following table presents the estimate of the gross and net IBNR included in the Liability for unpaid losses and loss adjustment expenses, relating to asbestos and environmental claims:
December 31, | | 2015 | | 2014 | | 2013 |
(in millions) | | Gross | | Net* | | Gross | | Net* | | Gross | | Net* |
Asbestos | $ | 1,680 | $ | 162 | $ | 2,363 | $ | 79 | $ | 3,190 | $ | 16 |
Environmental | | 331 | | 171 | | 157 | | 87 | | 94 | | 51 |
Combined | $ | 2,011 | $ | 333 | $ | 2,520 | $ | 166 | $ | 3,284 | $ | 67 |
* Net IBNR includes the reduction due to the NICO reinsurance transaction of $912 million, $803 million and $1,284 million as of December 31, 2015, 2014 and 2013, respectively.
Claim Counts — Asbestos and Environmental
The following table presents a summary of asbestos and environmental claims count activity:
As of or for the Years | 2015 | | 2014 | | 2013 |
Ended December 31, | Asbestos | Environmental | Combined | | Asbestos | Environmental | Combined | | Asbestos | Environmental | Combined |
Claims at beginning of year | 4,049 | 1,240 | 5,289 | | 4,680 | 1,517 | 6,197 | | 5,230 | 1,614 | 6,844 |
Claims during year: | | | | | | | | | | | |
Opened | 279 | 209 | 488 | | 130 | 126 | 256 | | 83 | 306 | 389 |
Settled | (310) | (182) | (492) | | (216) | (163) | (379) | | (194) | (154) | (348) |
Dismissed or otherwise | | | | | | | | | | | |
resolved | (509) | (350) | (859) | | (545) | (240) | (785) | | (439) | (249) | (688) |
Other | - | - | - | | - | - | - | | - | - | - |
Claims at end of year | 3,509 | 917 | 4,426 | | 4,049 | 1,240 | 5,289 | | 4,680 | 1,517 | 6,197 |
Survival Ratios — Asbestos and Environmental
The following table presents AIG’s survival ratios for asbestos and environmental claims at December 31, 2015, 2014 and 2013. The survival ratio is derived by dividing the current carried loss reserve by the average payments for the three most recent calendar years for these claims. Therefore, the survival ratio is a simplistic measure estimating the number of years it would take before the current ending loss reserves for these claims would be paid off using recent year average payments.
Many factors, such as aggressive settlement procedures, reinsurance commutations, mix of business and level of coverage provided, have a significant effect on the amount of asbestos and environmental reserves and payments and the resulting survival ratio. Additionally, we primarily base our determination of these reserves based on ground-up and top-down analyses, and not on survival ratios. The net Asbestos survival ratio for 2015 was significantly impacted by both the increase in net loss reserves as a result of our ground-up review, as well as the by the large ceded reinsurance commutation executed in the fourth quarter of 2015, the proceeds of which were booked a negative paid loss.
The following table presents survival ratios for asbestos and environmental claims, separately and combined, which were based upon a three-year average payment:
Years Ended December 31, | 2015 | | 2014 | | 2013 |
| Gross | Net* | | Gross | Net* | | Gross | Net* |
Survival ratios: | | | | | | | | |
Asbestos | 6.6 | 15.0 | | 8.3 | 7.6 | | 10.6 | 10.5 |
Environmental | 7.6 | 6.4 | | 5.0 | 4.3 | | 4.6 | 3.9 |
Combined | 6.8 | 13.1 | | 7.9 | 7.1 | | 9.8 | 9.4 |
* Survival ratios are calculated consistent with the basis on historical reserve excluding the effects of the NICO reinsurance transaction.
Life Insurance Companies DAC and Reserves
The following section provides discussion of deferred policy acquisition costs and insurance reserves for Life Insurance Companies.
Update of Actuarial Assumptions
The Life Insurance Companies review and update estimated gross profit assumptions used to amortize DAC and related items for investment-oriented products at least annually. Estimated gross profit assumptions include net investment income and spreads, net realized capital gains and losses, fees, surrender charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change significantly, DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserve) are recalculated using the new assumptions, and any resulting
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Item 7 / Insurance reserves / Life Insurance companies
adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products.
In addition to estimated gross profit assumptions, the update of actuarial assumptions in 2015, 2014 and 2013 included adjustments to reserves for universal life with secondary guarantees, group benefit claim reserves and loss recognition for certain long-term care products. The update of assumptions also included adjustments to the valuation of variable annuity GMWB features that are accounted for as embedded derivatives. Changes in the fair value of such embedded derivatives are recorded in net realized capital gains (losses) and, together with related DAC adjustments, are excluded from pre-tax operating income.
The net increases (decreases) to pre-tax operating income and pre-tax income as a result of the update of actuarial assumptions in 2015, 2014 and 2013 are shown in the following tables.
The following table presents the increase (decrease) in pre-tax operating income resulting from the update of actuarial assumptions for the U.S. Life Insurance Companies, by product line:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Consumer Insurance: | | | | | | |
Retirement | | | | | | |
Fixed Annuities | $ | 92 | $ | 196 | $ | 306 |
Retirement Income Solutions | | - | | 4 | | (28) |
Group Retirement | | 48 | | 46 | | (45) |
Total Retirement | | 140 | | 246 | | 233 |
Life | | (146) | | (119) | | (80) |
Total Consumer Insurance | | (6) | | 127 | | 153 |
Commercial Insurance: | | | | | | |
Institutional Markets | | - | | 2 | | - |
Total increase (decrease) in pre-tax operating income from update of assumptions | | (6) | | 129 | | 153 |
The following table presents the increase (decrease) in pre-tax income resulting from the update of actuarial assumptions of the U.S. Life Insurance Companies, by line item as reported in Results of Operations:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Policy fees | $ | 21 | $ | 27 | $ | 28 |
Interest credited to policyholder account balances | | 74 | | 90 | | 63 |
Amortization of deferred policy acquisition costs | | 79 | | 181 | | 129 |
Policyholder benefits and losses incurred | | (180) | | (169) | | (67) |
Increase (decrease) in pre-tax operating income | | (6) | | 129 | | 153 |
Change in DAC related to net realized capital gains (losses) | | 11 | | (12) | | (21) |
Net realized capital gains (losses) | | (2) | | 51 | | 82 |
Increase in pre-tax income | $ | 3 | $ | 168 | $ | 214 |
In 2015, pre-tax operating income of the Life Insurance Companies in the aggregate was reduced by $6 million as a result of the update of actuarial assumptions. This aggregate net adjustment of $6 million included a net negative adjustment of $146 million in the Life operating segment, which was offset in large part by net positive adjustments in the Retirement operating segment of $92 million in Fixed Annuities and $48 million in Group Retirement. See Update of Actuarial Assumptions by Operating Segment for additional discussion of the adjustments for each segment.
In 2014, pre-tax operating income of the Life Insurance Companies in the aggregate was increased by $129 million as a result of the update of assumptions, primarily due to net positive adjustments related to investment spread assumptions in the Retirement operating segment from the update of estimated gross profit assumptions in Fixed Annuities and Group Retirement, partially offset by loss recognition for certain long-term care business and additions to reserves for universal life with secondary guarantees in the Life operating segment.
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Item 7 / Insurance reserves / Life Insurance companies
In 2013, pre-tax operating income of the Life Insurance Companies in the aggregate increased by a net positive adjustment of $153 million as a result of the update of assumptions, primarily due to a net positive adjustment in Fixed Annuities, partially offset by net negative adjustments in Retirement Income Solutions and Group Retirement and a negative adjustment in Life from the update of mortality assumptions. In Group Retirement, the negative adjustments were partially offset by an increase in the assumption for separate account asset long-term growth rates.
Adjustments related to the update of assumptions for the valuation of variable annuity GMWB features accounted for as embedded derivatives and measured at fair value, which are primarily in the Retirement Income Solutions and Group Retirement product lines, are recorded in net realized capital gains (losses) and excluded from pre-tax operating income. The update of GMWB valuation assumptions in 2015, which included improved mortality, lapse and withdrawal assumptions, resulted in a net decrease in the GMWB liability. After offsets for related adjustments to DAC, this update of GMWB valuation assumptions resulted in a net increase to 2015 pre-tax income of $9 million.
In 2014, improved mortality, lapse and withdrawal assumptions for GMWB embedded derivative liabilities resulted in a net increase to pre-tax income of $39 million, net of DAC. In 2013, the update of GMWB valuation assumptions resulted in a net increase to pre-tax income of $61 million, net of DAC, primarily due to updated mortality assumptions.
A discussion of the adjustments to reflect the update of assumptions for the Retirement and Life operating segments follows.
Update of Actuarial Assumptions by Operating Segment
Retirement
The update of actuarial assumptions resulted in net positive adjustments to pre-tax operating income of the Retirement operating segment of $140 million, $246 million and $233 million in 2015, 2014 and 2013, respectively.
In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $92 million in 2015, which reflected refinements to investment spread assumptions, lower terminations than previously assumed and decreases to expense assumptions. In 2014, a net positive adjustment of $196 million in Fixed Annuities was primarily due to better spreads than previously assumed. In 2013, a net positive adjustment of $306 million in the Fixed Annuities product line was the result of active spread management of crediting rates and higher future investment yields than those previously assumed.
In Retirement Income Solutions, there were offsetting changes to assumed investment fees, modeled expenses, and terminations resulting in no adjustment to pre-tax operating income in 2015, compared to a $4 million net positive adjustment in 2014, due to the update of estimated gross profit assumptions. A net negative adjustment of $28 million in Retirement Income Solutions in 2013 resulted primarily from the update of variable annuity spreads and surrender rates. Adjustments related to the update of assumptions for the valuation of variable annuity GMWB features accounted for as embedded derivatives and measured at fair value, which primarily relate to the Retirement Income Solutions product line, are recorded in net realized capital gains (losses) and excluded from pre-tax operating income. See Update of Actuarial Assumptions above for discussion of these adjustments.
In Group Retirement, a net positive adjustment from the update of estimated gross profit assumptions of $48 million in 2015 was primarily due to revisions to mortality and surrender assumptions, partially offset by decreased spread assumptions. In 2014, a net positive adjustment of $46 million in Group Retirement was primarily due to more favorable assumptions for investment spreads and surrenders than previously assumed. A net negative adjustment of $45 million in Group Retirement in 2013 resulted primarily from the update of variable annuity spreads and surrender rates, partially offset by an increase in the assumption for separate account asset long-term growth rates under our reversion to the mean methodology.
Life
The net negative adjustment of $146 million related to the update of actuarial assumptions, which reduced pre-tax operating income of the Life operating segment in 2015, included additions to reserves for universal life with secondary guarantees due to lower surrender rates (partially offset by better mortality than previously assumed), loss recognition expense for certain long-
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Item 7 / Insurance reserves / Life Insurance companies
term care products primarily due to updated future premium assumptions, and an additional net negative adjustment from the update of estimated gross profit assumptions primarily due to lower investment spread assumptions. These negative adjustments were partially offset by a decrease in certain Group Benefit claim reserves based on updated experience data.
A net negative adjustment of $119 million in the Life operating segment in 2014 was primarily due to loss recognition expense, as discussed below, and also included additions to reserves for universal life with secondary guarantees, primarily due to lower investment spread and mortality assumptions which, while higher than previously assumed, were still within pricing assumptions.
A negative adjustment of $80 million in the Life operating segment in 2013 resulted primarily from the update of mortality assumptions.
The Life operating segment recorded loss recognition expense of $28 million and $87 million to increase reserves for certain long-term care business in 2015 and 2014, respectively, which reduced pre-tax operating income in those periods. Loss recognition expense is included in Other reserve changes in the rollforward table presented in Life Insurance Companies Reserves. The Life loss recognition for both periods was primarily a result of lower future premium increase assumptions and, in 2014, lower yield assumptions. Assumptions related to investment yields, mortality experience and expenses are reviewed periodically and updated as appropriate, which could result in additional loss recognition reserves. While the U.S. Life Insurance Companies do not currently offer standalone long-term care products, these needs are addressed with various benefits and riders in the existing portfolio, such as chronic illness riders.
Variable Annuity Guaranteed Benefit Features and Hedging Program
Our Retirement Income Solutions and Group Retirement businesses offer variable annuity products with riders that provide guaranteed living benefit features, which include GMWB and GMAB. The liabilities for GMWB and GMAB are accounted for as embedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads and market volatility.
In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage market risk from GMWB and GMAB, including exposures to changes in interest rates, equity prices, credit spreads and volatilities. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election. See Enterprise Risk Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Program for additional discussion of market risk management related to these product features.
Impact on Pre-tax Income
Changes in the fair value of the GMWB and GMAB embedded derivatives, and changes in the fair value of related derivative hedging instruments, are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of the fixed maturity securities used in the variable annuity hedging program, for which the fair value option has been elected, are excluded from pre-tax operating income of the Retirement operating segment.
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The following table presents the net increase (decrease) to consolidated pre-tax income from changes in the fair value of the GMWB and GMAB embedded derivatives and related hedges:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Change in fair value of GMWB and GMAB embedded derivatives | $ | 63 | $ | (759) | $ | 1,252 |
Change in fair value of variable annuity hedging portfolio: | | | | | | |
Fixed maturity securities | | (43) | | 260 | | (161) |
Interest rate derivative contracts | | 343 | | 742 | | (468) |
Equity derivative contracts | | (86) | | (230) | | (461) |
Net impact on pre-tax income | $ | 277 | $ | 13 | $ | 162 |
The effect of the changes in the fair value of the GMWB and GMAB embedded derivatives and the related hedging portfolio had a net positive impact on consolidated pre-tax income in 2015, 2014 and 2013. The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to differences between the U.S. GAAP valuation of the embedded derivatives and the economic hedge target, which include a non-performance or “own credit” spread adjustment (NPA) to the rate used to discount projected benefit cash flows. When corporate credit spreads widen, as they did in 2015, the change in the NPA generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA generally increases the fair value of the embedded derivative liabilities, resulting in a loss. See Note 4 to the Consolidated Financial Statements for additional discussion of the fair value measurement of the embedded derivatives under U.S. GAAP and the estimation of the NPA, and see Differences in Valuation of Embedded Derivatives and Economic Hedge Target, below.
In 2015, there was a slight gain from a decline in the fair value of the embedded derivative liabilities, as losses from the decrease in market interest rates were more than offset by gains from a higher NPA, related to widening corporate credit spreads. The losses from the decrease in market interest rates in 2015 were largely offset by interest rate hedges. In 2014, the decrease in market interest rates resulted in losses from a significant increase in the fair value of the embedded derivative liabilities, which was only partially offset by higher equity markets. Since the change in NPA was relatively small in 2014, the loss on the embedded derivatives was primarily offset by hedging. In 2013, there was a significant decline in the embedded derivative liabilities, driven by both higher interest rates and higher equity markets, which was only partially offset by a decline in NPA from spread tightening. The embedded derivative gains due to higher interest rates were offset by interest rate hedging to a lesser extent in 2013, as we had not elected to fully hedge interest rate risk until the second half of 2014.
These changes in the fair value of the embedded derivatives were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:
•Changes in the fair value of fixed maturity securities, for which the fair value option has been elected, that are used as a capital-efficient way to economically hedge interest rate risk. In 2012, we began to use U.S. Treasury bonds in this hedging program to reduce our interest rate risk exposure over time. Effective June 30, 2015, we discontinued the U.S. Treasury bond interest rate hedging program and initiated a corporate bond hedging program, which is intended to provide the same capital efficiency as the previous U.S. Treasury bond hedging program. The 2015 losses from the change in the fair value of fixed maturity securities were primarily due to the impact on the U.S. Treasury position in the first half of the year from increasing market interest rates. The gains in 2014 and losses in 2013 from the change in the fair value of the fixed maturities securities were due to market interest rates, which decreased in 2014 and increased 2013.
•Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions, futures and options, resulted in gains in 2015 and 2014 due to decreasing market interest rates, and losses in 2013 driven by increasing interest rates. Prior to 2014, we had elected to only partially hedge GMWB and GMAB interest rate risk.
•Losses from the change in the fair value of equity derivative contracts, which included futures and options, were relatively smaller in 2015 compared to 2014 and 2013, due to higher equity market returns in those years.
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Differences in Valuation of Embedded Derivatives and Economic Hedge Target
The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic drivers of the embedded derivatives. The economic hedge target differs from the U.S. GAAP valuation of the GMWB and GMAB embedded derivatives due to the following:
•Rider fees are 100 percent included in the economic hedge target present value calculations; the U.S. GAAP valuation reflects those collected fees attributed to the embedded derivative such that the initial value at contract issue equals zero;
•Actuarial assumptions for U.S. GAAP are adjusted to remove explicit risk margins, including margins for policyholder behavior and fund basis risk, and use best estimate assumptions for the economic hedge target; and
•Non-performance adjustment (NPA or “own credit” risk) is excluded from the discount rates used for the economic hedge target.
The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life Insurance Companies have cash and invested assets available to cover future claims payable under these guarantees. The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
•Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
•Realized volatility versus implied volatility;
•Actual versus expected changes in the hedge target related to items not subject to hedging, particularly policyholder behavior; and
•Risk exposures that we have elected not to explicitly or fully hedge, which in 2014 and 2013 included a portion of the interest rate risk.
DAC
The following table summarizes the major components of the changes in Life Insurance Companies DAC, including VOBA:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Balance, beginning of year | $ | 7,258 | $ | 6,920 | $ | 5,815 |
Acquisition costs deferred | | 1,288 | | 1,114 | | 1,034 |
Amortization expense: | | | | | | |
Update of assumptions included in pre-tax operating income | | 79 | | 183 | | 129 |
Related to realized capital gains and losses | | (1) | | (23) | | (23) |
All other operating amortization | | (994) | | (887) | | (780) |
Increase (decrease) in DAC due to foreign exchange | | (34) | | (32) | | (39) |
Other change in DAC | | 23 | | 343 | | - |
Change related to unrealized depreciation (appreciation) of investments | | 848 | | (360) | | 784 |
Balance, end of year* | $ | 8,467 | $ | 7,258 | $ | 6,920 |
* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.1 billion, $8.7 billion, and $8.0 billion at December 31, 2015, 2014 and 2013, respectively.
The net adjustments to DAC amortization from the update of actuarial assumptions for estimated gross profits in 2015 and 2014, including those reported within change in DAC related to net realized capital gains (losses), represented one percent and two percent of the DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments as of December 31, 2015 and 2014, respectively.
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Reversion to the Mean
In 2013, we revised the growth rate assumptions for the five-year reversion to the mean period for the Group Retirement product line in our Retirement segment, because annual growth assumptions indicated for that period had fallen below our floor of zero percent due to the favorable performance of equity markets. This adjustment increased Retirement pre-tax operating income by $35 million in 2013. For variable annuities in the Retirement Income Solutions product line, the assumed annual growth rate has remained above zero percent for the five-year reversion to the mean period and therefore has not met the criteria for adjustment in 2015, 2014 or 2013; however, additional favorable equity market performance in excess of long-term assumptions could result in unlocking in this product line in the future, with a positive effect on pre-tax income in the period of the unlocking. See Critical Accounting Estimates – Estimated Gross Profits for Investment-Oriented Products (Life Insurance Companies) for additional discussion of assumptions related to our reversion to the mean methodology.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC for universal life and investment-type products (collectively, investment-oriented products) is adjusted at each balance sheet date to reflect the change in DAC as if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow DAC). The change in shadow DAC generally moves in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio. In addition, significant unrealized appreciation of investments in a prolonged low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves). Market interest rates increased as a result of widening spreads in 2015. As a result, the Life Insurance Companies’ unrealized appreciation of investments at December 31, 2015 decreased by $7.4 billion compared to December 31, 2014, which resulted in an increase in shadow DAC and a decrease in shadow loss reserves. Shadow loss reserves decreased to $18 million at December 31, 2015 compared to $1.2 billion at December 31, 2014.
Life Insurance Companies Reserves
The following table presents a rollforward of Life Insurance Companies’ insurance reserves, including separate accounts and mutual fund assets under management, by operating segment:
Years Ended December 31, | | | | | | | | | | | | |
(in millions) | | | | | | | | 2015 | | 2014 | | 2013 |
Institutional Markets: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 35,080 | $ | 32,100 | $ | 32,242 |
Premiums and deposits | | | | | | | | 1,782 | | 3,797 | | 991 |
Surrenders and withdrawals | | | | | | | | (674) | | (766) | | (2,620) |
Death and other contract benefits | | | | | | | | (1,628) | | (1,530) | | (1,371) |
Subtotal | | | | | | | | (520) | | 1,501 | | (3,000) |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | 982 | | 1,130 | | 1,156 |
Cost of funds | | | | | | | | 408 | | 410 | | 413 |
Other reserve changes | | | | | | | | (127) | | (61) | | 1,289 |
Balance at end of year | | | | | | | | 35,823 | | 35,080 | | 32,100 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 1,054 | | - |
Reinsurance ceded | | | | | | | | (5) | | (5) | | (5) |
Total insurance reserves | | | | | | | $ | 35,818 | $ | 36,129 | $ | 32,095 |
Retirement: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 204,627 | $ | 195,493 | $ | 173,281 |
Premiums and deposits | | | | | | | | 25,297 | | 24,077 | | 23,788 |
Surrenders and withdrawals | | | | | | | | (18,251) | | (20,504) | | (16,459) |
Death and other contract benefits | | | | | | | | (3,894) | | (3,690) | | (3,353) |
Subtotal | | | | | | | | 3,152 | | (117) | | 3,976 |
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Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (2,255) | | 6,390 | | 14,482 |
Cost of funds | | | | | | | | 2,724 | | 2,781 | | 2,837 |
Other reserve changes | | | | | | | | 85 | | 80 | | 917 |
Balance at end of year | | | | | | | | 208,333 | | 204,627 | | 195,493 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 100 | | - |
Reinsurance ceded | | | | | | | | (361) | | (353) | | (366) |
Total insurance reserves and mutual fund assets under management | | | | | | | $ | 207,972 | $ | 204,374 | $ | 195,127 |
Life: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 33,536 | $ | 32,810 | $ | 32,176 |
Premiums and deposits | | | | | | | | 4,974 | | 4,806 | | 4,862 |
Surrenders and withdrawals | | | | | | | | (759) | | (853) | | (896) |
Death and other contract benefits | | | | | | | | (954) | | (812) | | (772) |
Subtotal | | | | | | | | 3,261 | | 3,141 | | 3,194 |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (802) | | (691) | | (673) |
Cost of funds | | | | | | | | 493 | | 507 | | 541 |
Other reserve changes | | | | | | | | (2,318) | | (2,231) | | (2,428) |
Balance at end of year | | | | | | | | 34,170 | | 33,536 | | 32,810 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | - | | - |
Reinsurance ceded | | | | | | | | (1,395) | | (1,315) | | (1,354) |
Total insurance reserves | | | | | | | $ | 32,775 | $ | 32,221 | $ | 31,456 |
Total Life Insurance Companies: | | | | | | | | | | | | |
Balance at beginning of year, gross | | | | | | | $ | 273,243 | $ | 260,403 | $ | 237,699 |
Premiums and deposits | | | | | | | | 32,053 | | 32,680 | | 29,641 |
Surrenders and withdrawals | | | | | | | | (19,684) | | (22,123) | | (19,975) |
Death and other contract benefits | | | | | | | | (6,476) | | (6,032) | | (5,496) |
Subtotal | | | | | | | | 5,893 | | 4,525 | | 4,170 |
Change in fair value of underlying assets and reserve accretion, net of | | | | | | | | | | | | |
policy fees | | | | | | | | (2,075) | | 6,829 | | 14,965 |
Cost of funds | | | | | | | | 3,625 | | 3,698 | | 3,791 |
Other reserve changes | | | | | | | | (2,360) | | (2,212) | | (222) |
Balance at end of year | | | | | | | | 278,326 | | 273,243 | | 260,403 |
Reserves related to unrealized appreciation of investments | | | | | | | | - | | 1,154 | | - |
Reinsurance ceded | | | | | | | | (1,761) | | (1,673) | | (1,725) |
Total insurance reserves and mutual fund assets under management | | | | | | | $ | 276,565 | $ | 272,724 | $ | 258,678 |
Life Insurance Companies insurance reserves including separate accounts and mutual fund assets under management were comprised of the following balances:
At December 31, | | | | | | |
(in millions) | | | | 2015 | | 2014 |
Future policy benefits* | | | $ | 41,562 | $ | 40,931 |
Policyholder contract deposits | | | | 127,704 | | 124,716 |
Separate account liabilities | | | | 79,564 | | 80,025 |
Total insurance reserves | | | | 248,830 | | 245,672 |
Mutual fund assets under management | | | | 27,735 | | 27,052 |
Total insurance reserves and mutual fund assets under management | | | $ | 276,565 | $ | 272,724 |
* Excludes certain intercompany assumed reinsurance.
Liquidity and Capital Resources |
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity at both AIG Parent and subsidiaries to meet our financial obligations over a twelve-month period under a liquidity stress scenario. See Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement and Enterprise Risk Management — Liquidity Risk Management below for additional information.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy for both AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources as was the case in 2008. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share repurchases.
Liquidity and Capital Resources Activity for 2015 |
Sources •AIG Parent Funding from Subsidiaries During 2015, AIG Parent received $7.8 billion(a) in dividends and loan repayments from subsidiaries. Of this amount, $3.2 billion was dividends in the form of cash and fixed maturity securities from our Non-Life Insurance Companies and $4.6 billion(a) was dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies. The $7.8 billion in dividends and loan repayments included $2.8 billion of dividends that were declared during the fourth quarter of 2014. AIG Parent also received a net amount of $1.4 billion(a) in tax sharing payments from our insurance businesses in 2015, reflecting $102 million(a) that was reimbursed from AIG Parent to our insurance businesses during the fourth quarter of 2015 as a result of adjustments made to prior-year tax sharing payments. The tax sharing payments may continue to be subject to adjustment in future periods. ·Debt Issuances In January 2015, we issued $1.2 billion aggregate principal amount of 3.875% Notes due 2035 and $800 million aggregate principal amount of 4.375% Notes due 2055. In March 2015, we issued $350 million aggregate principal amount of 4.35% Callable Notes due 2045. In July 2015, we issued $1.25 billion aggregate principal amount of 3.750% Notes due 2025, $500 million aggregate principal amount of 4.700% Notes due 2035 and $750 million aggregate principal amount of 4.800% Notes due 2045. In addition, in July 2015, we issued $290 million aggregate principal amount of 4.90% Callable Notes due 2045. In September 2015, we issued $420 million aggregate principal amount of 4.90% Callable Notes due 2045. ·PICC P&C and Springleaf In April 2015, AIG Parent received gross proceeds of approximately $500 million from our sale of 256 million ordinary H shares of PICC P&C by means of a placement to certain institutional investors. In May 2015, AIG Parent received net proceeds of approximately $410 million from the sale of approximately 8.4 million shares of common stock of Springleaf. In December 2015, AIG Parent received gross proceeds of approximately $381 million from our sale of 184 million ordinary H shares of PICC P&C by means of a placement to certain institutional investors. ·AerCap In June 2015, AIG Parent received net proceeds of approximately $3.7 billion from the sale of approximately 86.9 million ordinary shares of AerCap by means of an underwritten public offering of approximately 71.2 million ordinary shares and a private sale of approximately 15.7 million ordinary shares to AerCap. In August 2015, AIG Parent received net proceeds of approximately $500 million from the sale of our remaining approximately 10.7 million ordinary shares of AerCap by means of an underwritten public offering. |
Uses(b) •Debt Reduction In March 2015, we repurchased, through cash tender offers, approximately $1.0 billion aggregate principal amount of certain senior notes issued or guaranteed by AIG for an aggregate purchase price of approximately $1.1 billion. In April 2015, we repurchased, through cash tender offers, (i) approximately $22 million aggregate principal amount of certain senior notes issued or guaranteed by AIG for an aggregate purchase price of approximately $24 million, and (ii) approximately $915 million aggregate principal amount of certain junior subordinated debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $1.25 billion. In July 2015, we repurchased, through cash tender offers, (i) approximately $142 million aggregate principal amount of certain senior notes issued by AIG for an aggregate purchase price of approximately $153 million, and (ii) approximately $3.3 billion aggregate principal amount of certain senior notes and junior subordinated notes issued or guaranteed by AIG for an aggregate purchase price of approximately $3.6 billion. We also made other repurchases and repayments of approximately $4.6 billion during 2015. AIG Parent made interest payments on our debt instruments totaling $1.0 billion during 2015. •Dividend We paid a cash dividend of $0.125 per share on AIG Common Stock during each of the first and second quarters of 2015, and a cash dividend of $0.28 per share during each of the third and fourth quarters of 2015. •Repurchase of Common Stock(c) We repurchased approximately 182 million shares of AIG Common Stock during 2015, for an aggregate purchase price of approximately $10.7 billion. The total number of shares of AIG Common Stock repurchased in 2015 includes (but the aggregate purchase price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an ASR agreement executed in the fourth quarter of 2014. •PICC P&C During 2015, AIG Parent purchased 440 million ordinary H shares of PICC P&C from our Non-Life Insurance Companies for approximately $864 million. |
(a) Presented net of $818 million of tax payments to the Life Insurance Companies, which were returned in the form of dividends.
(b) In January 2016, AIG Parent made a capital contribution of approximately $2.9 billion to our Non-Life Insurance Companies.
(c) Pursuant to Exchange Act Rule 10b5-1 repurchase plans, from January 1 to February 11, 2016, we have repurchased approximately $2.5 billion of additional shares of AIG Common Stock. As of February 11, 2016, approximately $5.8 billion remained under our share repurchase authorization.
Analysis of Sources and Uses of Cash
The following table presents selected data from AIG's Consolidated Statements of Cash Flows:
Years Ended December 31, | | | | | | | | |
(in millions) | | | | 2015 | | 2014* | | 2013 |
Sources: | | | | | | | | |
Net cash provided by operating activities | | | $ | 2,877 | $ | 5,007 | $ | 5,865 |
Net cash provided by changes in restricted cash | | | | 1,457 | | - | | 1,244 |
Net cash provided by other investing activities | | | | 7,005 | | 15,731 | | 5,855 |
Changes in policyholder contract balances | | | | 2,410 | | 1,719 | | - |
Issuance of long-term debt | | | | 6,867 | | 6,687 | | 5,235 |
Total sources | | | | 20,616 | | 29,144 | | 18,199 |
Uses: | | | | | | | | |
Change in restricted cash | | | | - | | (1,447) | | - |
Change in policyholder contract balances | | | | - | | - | | (547) |
Repayments of long-term debt | | | | (9,805) | | (16,160) | | (14,197) |
Purchases of AIG Common Stock | | | | (10,691) | | (4,902) | | (597) |
Net cash used in other financing activities | | | | (210) | | (7,132) | | (1,652) |
Total uses | | | | (20,706) | | (29,641) | | (16,993) |
Effect of exchange rate changes on cash | | | | (39) | | (74) | | (92) |
Increase (decrease) in cash | | | $ | (129) | $ | (571) | $ | 1,114 |
* For 2014, cash decreased by $162 million due to reclassification of $289 million to restricted cash presented in Other assets, partially offset by a $127 million reclassification from Short-term investments, to correct prior period presentation.
The following table presents a summary of AIG’s Consolidated Statement of Cash Flows:
Years Ended December 31, | | | | | | | | | |
(in millions) | | | | | 2015 | | 2014 | | 2013 |
Summary: | | | | | | | | | |
Net cash provided by operating activities | | | | $ | 2,877 | $ | 5,007 | $ | 5,865 |
Net cash provided by investing activities | | | | | 8,462 | | 14,284 | | 7,099 |
Net cash used in financing activities | | | | | (11,429) | | (19,788) | | (11,758) |
Effect of exchange rate changes on cash | | | | | (39) | | (74) | | (92) |
Increase (decrease) in cash | | | | | (129) | | (571) | | 1,114 |
Cash at beginning of year | | | | | 1,758 | | 2,241 | | 1,151 |
Change in cash of businesses held for sale | | | | | - | | 88 | | (24) |
Cash at end of year | | | | $ | 1,629 | $ | 1,758 | $ | 2,241 |
Operating Cash Flow Activities
Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates and operating expenses.
Interest payments totaled $1.4 billion in 2015, compared to $3.4 billion in 2014 and $3.9 billion in 2013. Excluding interest payments, AIG generated positive operating cash flow of $4.2 billion, $8.3 billion and $9.7 billion in 2015, 2014 and 2013, respectively.
Cash provided by operating activities of our Non-Life Insurance Companies was $1.0 billion in 2015, compared to $0.9 billion in 2014 and $0.4 billion in 2013. The increase in 2014 compared to 2013 was primarily due to the timing of the payments related to catastrophe losses for 2013.
Cash provided by operating activities of our Life Insurance Companies was $3.8 billion in 2015, compared to $4.4 billion in 2014 and $4.3 billion in 2013. The decline in 2015 compared to 2014 was primarily due to a greater increase in other assets and liabilities, net.
Cash provided by operating activities of businesses held for sale was $2.9 billion for 2013.
Investing Cash Flow Activities
Net cash provided by investing activities in 2015 included:
•approximately $1.8 billion of cash collateral received in connection with our Life Insurance Companies’ securities lending program; and
•approximately $4.2 billion of net cash proceeds from the sale of ordinary shares of AerCap.
Net cash provided by investing activities in 2014 included:
•a reduction in net investment purchase activity; and
•approximately $2.4 billion of net cash proceeds from the sale of ILFC.
Net cash provided by investing activities for 2013 included an increase in net investment purchase activity.
Financing Cash Flow Activities
Net cash used in financing activities in 2015 included:
•approximately $1.0 billion in the aggregate to pay a dividend of $0.125 per share on AIG Common Stock in each of the first and second quarters of 2015 and $0.28 per share on AIG Common Stock in each of the third and fourth quarters of 2015;
•approximately $10.7 billion to repurchase approximately 182 million shares of AIG Common Stock; and
•approximately $9.9 billion to repay long-term debt.
These items were partially offset by approximately $6.9 billion in proceeds from the issuance of long-term debt.
Net cash used in financing activities for 2014 included:
•approximately $712 million in the aggregate to pay dividends of $0.125 per share on AIG Common Stock in each of the four quarters of 2014;
•approximately $4.9 billion to repurchase approximately 88 million shares of AIG Common Stock;
•approximately $271 million to repay long-term debt of business held-for-sale; and
•approximately $16.2 billion to repay long-term debt.
Net cash used in financing activities for 2013 included:
•approximately $294 million in the aggregate to pay dividends of $0.10 per share on AIG Common Stock in each of the third and fourth quarters of 2013;
•approximately $597 million to repurchase approximately 12 million shares of AIG Common Stock;
•approximately $9.3 billion to repay long term debt; and
approximately $4.9 billion in repayments of long term debt of business held-for-sale.
Liquidity and Capital Resources of AIG Parent and Subsidiaries
AIG Parent
As of December 31, 2015, AIG Parent had approximately $13.7 billion in liquidity sources. AIG Parent’s liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized through sales, repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent liquidity is monitored through the use of various internal liquidity risk measures. AIG Parent’s primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries and credit facilities. AIG Parent’s primary uses of liquidity are for debt service, capital and liability management, operating expenses and subsidiary capital needs.
We generally manage capital flows between AIG Parent and its subsidiaries through internal, Board‑approved policies and standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt markets from time to time to meet funding requirements as needed.
We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or share repurchase authorizations or deploy such capital towards liability management.
In the normal course, it is expected that a portion of the capital released by our insurance operations or through the utilization of AIG’s deferred tax assets may be available for distribution to shareholders. Additionally, it is expected that capital associated with businesses or investments that do not directly support our insurance operations may be available for distribution to shareholders or deployment towards liability management upon its monetization.
In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: the capital resources available to support our insurance operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, as well as regulatory standards for capital and capital distributions.
In January 2016, AIG Parent made a capital contribution of approximately $2.9 billion to our Non-Life Insurance Companies as a result of our fourth quarter reserve strengthening.
The following table presents AIG Parent's liquidity sources:
| As of | As of |
(In millions) | December 31, 2015 | December 31, 2014 |
Cash and short-term investments(a) | $ | 3,497 | $ | 5,085 |
Unencumbered fixed maturity securities(b) | | 5,723 | | 4,727 |
Total AIG Parent liquidity | | 9,220 | | 9,812 |
Available capacity under syndicated credit facility(c) | | 4,500 | | 4,000 |
Available capacity under contingent liquidity facility(d) | | - | | 500 |
Total AIG Parent liquidity sources | $ | 13,720 | $ | 14,312 |
(a) Cash and short-term investments include reverse repurchase agreements totaling $1.5 billion and $1.6 billion as of December 31, 2015 and 2014, respectively.
(b) Unencumbered securities consist of publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
(c) For additional information relating to this syndicated credit facility, see Credit Facilities below.
(d) The contingent liquidity facility expired by its terms on December 15, 2015. For additional information relating to the contingent liquidity facility, see Contingent Liquidity Facilities below.
Non-Life Insurance Companies
We expect that our Non-Life Insurance Companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our Non-Life Insurance Companies’ liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our Non-Life Insurance Companies’ liquidity is monitored through the use of various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income.The primary uses of liquidity are paid losses, reinsurance payments, dividends, expenses, investments and collateral requirements.
Our Non-Life Insurance Companies may require additional funding to meet capital or liquidity needs under certain circumstances. Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non‑renewals or cancellations by policyholders and adversely affect the subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.
Certain Non-Life Insurance Companies are members of the Federal Home Loan Banks (FHLBs) in their respective districts. Borrowings from the FHLBs may be used to supplement liquidity. As of December 31, 2015 and 2014, none of our Non-Life Insurance Companies had FHLB borrowings outstanding.
In April 2015, AIG Parent and Ascot Corporate Name Limited (ACNL), a Non-Life Insurance Company, entered into a new $725 million letter of credit facility, which replaced the prior $625 million letter of credit facility. ACNL, as a member of the Lloyd’s of London insurance syndicate (Lloyd’s), is required to hold capital at Lloyd’s, known as Funds at Lloyds (FAL). Under the new facility, the entire FAL capital requirement of $625 million as of December 31, 2015, which supports the 2015, 2016 and 2017 years of account, was satisfied with a letter of credit in that amount issued under the facility.
AIG generally manages capital between AIG Parent and our Non-Life Insurance Companies through internal, Board-approved policies and guidelines. In addition, AIG Parent is party to a CMA with its Mortgage Guaranty insurance company. Among other things, the CMA provides that AIG Parent will maintain capital and surplus of the Mortgage Guaranty insurance company at or above a specified minimum required capital based on a specified risk-to-capital ratio. In addition, the CMA provides that if capital and surplus of the Mortgage Guaranty insurance company is in excess of that same specified minimum required capital, subject to its board approval and compliance with applicable insurance laws, the Mortgage Guaranty insurance company would declare and pay ordinary dividends to its equity holders up to an amount necessary to reduce projected or actual capital and surplus to a level equal to or not materially greater than such specified minimum required capital. As structured, the CMA contemplates that the specified minimum required capital would be reviewed and agreed upon at least annually. As of December 31, 2015, the minimum required capital for the CMA with the Mortgage Guaranty insurance company is based on a risk-to-capital ratio of 19 to 1.
In 2015, our Non-Life Insurance Companies paid approximately $3.2 billion in dividends in the form of cash and fixed maturity securities to AIG Parent, of which $600 million represented the remainder of dividends that were declared by our Non-Life
Insurance Companies in the fourth quarter of 2014. The fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
Life Insurance Companies
We expect that our Life Insurance Companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our Life Insurance Companies’ liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our Life Insurance Companies’ liquidity is monitored through the use of various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income. The primary uses of liquidity are benefit claims, interest payments, surrenders, withdrawals, dividends, expenses, investments and collateral requirements.
Management believes that because of the size and liquidity of our Life Insurance Companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. However, as we saw in 2008, in times of extreme capital markets disruption, liquidity needs could outpace resources.Furthermore, our Life Insurance Companies’ products contain certain features that mitigate surrender risk, including surrender charges. As part of their risk management framework, our Life Insurance Companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity position and facilitate their ability to maintain a fully invested asset portfolio.
Certain of our U.S. Life Insurance Companies are members of the FHLBs in their respective districts. Borrowings from the FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. Life Insurance Companies had outstanding borrowings from the FHLBs in an aggregate amount of $2 million and $44 million as of December 31, 2015 and 2014, respectively.
Certain of our U.S. Life Insurance Companies have programs, which began in 2012, that lend securities from their investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life Insurance Companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of the loaned securities. Cash collateral received is invested in short-term investments. Additionally, the aggregate amount of securities that a Life Insurance Company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. At December 31, 2015, our U.S. Life Insurance Companies had $1.1 billion of securities subject to these agreements and $1.1 billion of liabilities to borrowers for collateral received. Our U.S. Life Insurance Companies had no securities subject to lending agreements and no collateral liability at December 31, 2014.
AIG generally manages capital between AIG Parent and our Life Insurance Companies through internal, Board-approved policies and guidelines. In addition, AIG Parent is party to a CMA with AGC Life Insurance Company. Among other things, the CMA provides that AIG Parent will maintain the total adjusted capital of AGC Life Insurance Company at or above a specified minimum percentage of its projected NAIC Company Action Level Risk-Based Capital (RBC). As of December 31, 2015, the specified minimum percentage under this CMA was 250 percent.
In 2015, our U.S. Life Insurance Companies paid approximately $4.6 billion to AIG Parent, which included $5.4 billion in dividends and loan repayments in the form of cash and fixed maturity securities, net of an $818 million tax settlement payment received from AIG Parent. The 2015 dividend payments included $2.2 billion that represented the remainder of dividends that were declared in the fourth quarter of 2014. The fixed maturity securities primarily included U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
Credit Facilities
We maintain a committed, revolving syndicated credit facility as a potential source of liquidity for general corporate purposes. On November 5, 2015, we amended and restated the five-year syndicated credit facility that was entered into on June 19, 2014 (the Previous Facility). The amended and restated five-year syndicated facility (the Five-Year Facility) provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion (increased from a $4.0 billion commitment in the Previous Facility) without any limits on the type of borrowings and is scheduled to expire in November 2020 (the Previous Facility was scheduled to expire in June 2019). The increased commitment of $500 million to the Five-Year Facility offsets the effect of the expiration of our $500 million contingent liquidity facility. See Contingent Liquidity Facilities below.
As of December 31, 2015, a total of $4.5 billion remains available under the Five-Year Facility. Our ability to borrow under the Five-Year Facility is not contingent on our credit ratings. However, our ability to borrow under the Five-Year Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Five-Year Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Five-Year Facility would restrict our access to the Five-Year Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to borrow under the Five-Year Facility from time to time, and may use the proceeds for general corporate purposes.
Contingent Liquidity Facilities
AIG Parent had access to a contingent liquidity facility of up to $500 million as a potential source of liquidity for general corporate purposes. Under this facility, we had the unconditional right, prior to December 15, 2015, to issue up to $500 million in senior debt to the counterparty, based on a put option agreement between AIG Parent and the counterparty. The contingent liquidity facility expired by its terms on December 15, 2015. The expiration of the contingent liquidity facility is offset by the effect of the increased commitment of $500 million to our Five-Year Facility. See Credit Facilities above.
Contractual Obligations
The following table summarizes contractual obligations in total, and by remaining maturity:
December 31, 2015 | | | Payments due by Period |
| | Total | | | | 2017 - | | 2019 - | | |
(in millions) | | Payments | | 2016 | | 2018 | | 2020 | | Thereafter |
Insurance operations | | | | | | | | | | |
Loss reserves | $ | 78,090 | $ | 19,035 | $ | 22,202 | $ | 12,243 | $ | 24,610 |
Insurance and investment contract liabilities | | 229,806 | | 15,691 | | 28,322 | | 24,999 | | 160,794 |
Borrowings | | 813 | | - | | - | | 106 | | 707 |
Interest payments on borrowings | | 1,141 | | 54 | | 109 | | 109 | | 869 |
Operating leases | | 986 | | 253 | | 350 | | 197 | | 186 |
Other long-term obligations | | 25 | | 4 | | 11 | | 6 | | 4 |
Total | $ | 310,861 | $ | 35,037 | $ | 50,994 | $ | 37,660 | $ | 187,170 |
Other | | | | | | | | | | |
Borrowings | $ | 23,548 | $ | 1,619 | $ | 3,208 | $ | 2,475 | $ | 16,246 |
Interest payments on borrowings | | 17,142 | | 1,067 | | 1,998 | | 1,759 | | 12,318 |
Operating leases | | 149 | | 51 | | 52 | | 23 | | 24 |
Other long-term obligations | | 107 | | - | | - | | - | | 107 |
Total | $ | 40,946 | $ | 2,737 | $ | 5,258 | $ | 4,257 | $ | 28,695 |
Consolidated | | | | | | | | | | |
Loss reserves | $ | 78,090 | $ | 19,035 | $ | 22,202 | $ | 12,243 | $ | 24,610 |
Insurance and investment contract liabilities | | 229,806 | | 15,691 | | 28,322 | | 24,999 | | 160,794 |
Borrowings | | 24,361 | | 1,619 | | 3,208 | | 2,581 | | 16,953 |
Interest payments on borrowings | | 18,283 | | 1,121 | | 2,107 | | 1,868 | | 13,187 |
Operating leases | | 1,135 | | 304 | | 402 | | 219 | | 210 |
Other long-term obligations(a) | | 132 | | 4 | | 11 | | 6 | | 111 |
Total(b) | $ | 351,807 | $ | 37,774 | $ | 56,252 | $ | 41,916 | $ | 215,865 |
(a) Primarily includes contracts to purchase future services and other capital expenditures.
(b) Does not reflect unrecognized tax benefits of $4.3 billion, the timing of which is uncertain.
Loss Reserves
Loss reserves relate to our Non-Life Insurance Companies and represent future losses and loss adjustment expense payments estimated based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our Non-Life Insurance Companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life Insurance Companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments of a term certain nature. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.
We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.
We believe that our Life Insurance Companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life Insurance Companies maintain significant levels of investment grade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.
Borrowings
Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.
Off-Balance Sheet Arrangements and Commercial Commitments
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:
December 31, 2015 | | | Amount of Commitment Expiring |
| | Total Amounts | | | | 2017 - | | 2019 - | | |
(in millions) | | Committed | | 2016 | | 2018 | | 2020 | | Thereafter |
Insurance operations | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Standby letters of credit | $ | 870 | $ | 180 | $ | 59 | $ | 627 | $ | 4 |
Guarantees of indebtedness | | 128 | | 101 | | 27 | | - | | - |
All other guarantees(a) | | - | | - | | - | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 2,406 | | 1,615 | | 538 | | 247 | | 6 |
Commitments to extend credit | | 2,403 | | 1,171 | | 856 | | 290 | | 86 |
Letters of credit | | 6 | | 6 | | - | | - | | - |
Total(c) | $ | 5,813 | $ | 3,073 | $ | 1,480 | $ | 1,164 | $ | 96 |
Other | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit | | 208 | | 208 | | - | | - | | - |
All other guarantees | | 153 | | 140 | | 13 | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 145 | | 72 | | 1 | | - | | 72 |
Commitments to extend credit(e) | | 500 | | - | | - | | 500 | | - |
Letters of credit | | 25 | | 25 | | - | | - | | - |
Total(c)(f) | $ | 1,105 | $ | 445 | $ | 14 | $ | 500 | $ | 146 |
Consolidated | | | | | | | | | | |
Guarantees: | | | | | | | | | | |
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit | | 1,078 | | 388 | | 59 | | 627 | | 4 |
Guarantees of indebtedness | | 128 | | 101 | | 27 | | - | | - |
All other guarantees(a) | | 153 | | 140 | | 13 | | - | | - |
Commitments: | | | | | | | | | | |
Investment commitments(b) | | 2,551 | | 1,687 | | 539 | | 247 | | 78 |
Commitments to extend credit(e) | | 2,903 | | 1,171 | | 856 | | 790 | | 86 |
Letters of credit | | 31 | | 31 | | - | | - | | - |
Total(c)(f) | $ | 6,918 | $ | 3,518 | $ | 1,494 | $ | 1,664 | $ | 242 |
(a) Includes construction guarantees connected to affordable housing investments by our Life Insurance Companies. Excludes potential amounts for indemnification obligations included in asset sales agreements. See Note 9 to the Consolidated Financial Statements for further information on indemnification obligations.
(b) Includes commitments to invest in private equity funds, hedge funds and mutual funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.
(c) Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.
(d) Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e) Includes a five-year senior unsecured revolving credit facility between AerCap Ireland Capital Limited, as borrower, and AIG Parent, as lender (the AerCap Credit Facility) scheduled to mature in May 2019. The AerCap Credit Facility permits loans for general corporate purposes. In June 2015, upon the receipt by AIG Parent of the $500 million principal amount of 6.50% fixed-to-floating rate junior subordinated notes issued by AerCap Global Aviation Trust, the aggregate commitment under the AerCap Credit Facility was reduced to $500 million from $1.0 billion. At December 31, 2015, no amounts were outstanding under the AerCap Credit Facility.
(f) Excludes commitments with respect to pension plans. The annual pension contribution for 2016 is expected to be approximately $67 million for U.S. and non-U.S. plans.
Arrangements with Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE when we are the primary beneficiary of the entity. For a further discussion of our involvement with VIEs, see Note 9 to the Consolidated Financial Statements.
Indemnification Agreements
We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations. For additional information regarding our indemnification agreements, see Note 15 to the Consolidated Financial Statements.
We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.
Debt
The following table provides the rollforward of AIG’s total debt outstanding:
| | Balance at | | | | Maturities | | Effect of | | | | | Balance at |
Year Ended December 31, 2015 | | December 31, | | | | and | | Foreign | | Other | | December 31, |
(in millions) | | 2014 | | Issuances | Repayments | | Exchange | | Changes | | | 2015 |
Debt issued or guaranteed by AIG: | | | | | | | | | | | | | |
AIG general borrowings: | | | | | | | | | | | | | |
Notes and bonds payable | $ | 15,570 | $ | 5,540 | $ | (3,828) | $ | (156) | $ | 10 | | $ | 17,136 |
Subordinated debt | | 250 | | - | | (250) | | - | | - | | | - |
Junior subordinated debt | | 2,466 | | - | | (1,073) | | (57) | | 1 | | | 1,337 |
AIG Japan Holdings Kabushiki Kaisha | | - | | 110 | | (1) | | (3) | | - | | | 106 |
AIGLH notes and bonds payable | | 284 | | - | | - | | - | | - | | | 284 |
AIGLH junior subordinated debt | | 536 | | - | | (114) | | - | | - | | | 422 |
Total AIG general borrowings | | 19,106 | | 5,650 | | (5,266) | | (216) | | 11 | | | 19,285 |
AIG borrowings supported by assets:(a) | | | | | | | | | | | | | |
MIP notes payable | | 2,870 | | - | | (1,351) | | (143) | | (4) | | | 1,372 |
Series AIGFP matched notes and bonds payable | | 34 | | - | | (2) | | - | | 2 | | | 34 |
GIAs, at fair value | | 4,648 | | 388 | | (1,812) | | - | | 52 | (b) | | 3,276 |
Notes and bonds payable, at fair value | | 818 | | 16 | | (431) | | - | | (9) | (b) | | 394 |
Total AIG borrowings supported by assets | | 8,370 | | 404 | | (3,596) | | (143) | | 41 | | | 5,076 |
Total debt issued or guaranteed by AIG | | 27,476 | | 6,054 | | (8,862) | | (359) | | 52 | | | 24,361 |
Debt not guaranteed by AIG: | | | | | | | | | | | | | |
Other subsidiaries notes, bonds, loans and | | | | | | | | | | | | | |
mortgages payable | | 58 | | 450 | | (505) | | (1) | | - | | | 2 |
Debt of consolidated investments(c) | | 3,683 | | 363 | | (614) | | (1) | | 1,556 | (d) | | 4,987 |
Total debt not guaranteed by AIG | | 3,741 | | 813 | | (1,119) | | (2) | | 1,556 | | | 4,989 |
Total debt | $ | 31,217 | $ | 6,867 | $ | (9,981) | $ | (361) | $ | 1,608 | | $ | 29,350 |
(a) AIG Parent guarantees all such debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $2.4 billion and $3.5 billion at December 31, 2015 and 2014, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
(b) Primarily represents adjustments to the fair value of debt.
(c) At December 31, 2015, includes debt of consolidated investment vehicles related to real estate investments of $2.4 billion, affordable housing partnership investments and securitizations of $2.2 billion and other securitization vehicles and investments of $359 million. At December 31, 2014, includes debt of consolidated investment vehicles related to real estate investments of $2.1 billion, affordable housing partnership investments and securitizations of $853 million, and other securitization vehicles and investments of $728 million.
(d) Includes the effect of consolidating previously unconsolidated partnerships.
Total DEBT OUTSTANDING
(in millions)
Debt Maturities
The following table summarizes maturing debt at December 31, 2015 of AIG (excluding $5.0 billion of borrowings of consolidated investments) for the next four quarters:
| | First | | Second | | Third | | Fourth | | |
| | Quarter | | Quarter | | Quarter | | Quarter | | |
(in millions) | | 2016 | | 2016 | | 2016 | | 2016 | | Total |
AIG general borrowings | $ | - | $ | 684 | $ | - | $ | 308 | $ | 992 |
AIG borrowings supported by assets | | 107 | | 72 | | 83 | | 365 | | 627 |
Total | $ | 107 | $ | 756 | $ | 83 | $ | 673 | $ | 1,619 |
See Note 14 to the Consolidated Financial Statements for additional details for debt outstanding.
Credit Ratings
Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of February 10, 2016. Figures in parentheses indicate the relative ranking of the ratings within the agency’s rating categories; that ranking refers only to the major rating category and not to the modifiers assigned by the rating agencies.
| Short-Term Debt | | Senior Long-Term Debt |
| Moody’s | S&P | | Moody’s(a) | S&P(b) | Fitch(c) |
AIG | P-2 (2nd of 3) | A-2 (2nd of 8) |
| Baa 1 (4th of 9) | A- (3rd of 8) | BBB+ (4th of 9) |
| Stable Outlook |
|
| Stable Outlook | Negative Outlook | Stable Outlook |
AIG Financial Products Corp.(d) | P-2 | A-2 |
| Baa 1 | A- | - |
| Stable Outlook |
|
| Stable Outlook | Negative Outlook |
|
(a) Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.
(b) S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(c) Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d) AIG guarantees all obligations of AIG Financial Products Corp.
These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.
We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.
In the event of adverse actions on our long-term debt ratings by the major rating agencies, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative transactions or could experience termination of the transactions. Such requirements and terminations could adversely affect our business, our consolidated results of operations in a reporting period or our liquidity. In the event of a further downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral, and certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate their contracts early.
The actual amount of collateral that we would be required to post 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 the time of the downgrade.
For a discussion of the effects of downgrades in the financial strength ratings of our insurance companies or our credit ratings, see Note 10 to the Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit.
Regulation and Supervision
For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources, see Item 1. Business — Regulation and Item 1A. Risk Factors — Regulation.
Dividends and Repurchases of AIG Common Stock
On February 12, 2015, our Board of Directors declared a cash dividend on AIG Common Stock of $0.125 per share, payable on March 26, 2015 to shareholders of record on March 12, 2015. On April 30, 2015, our Board of Directors declared a cash dividend on AIG Common Stock of $0.125 per share, payable on June 25, 2015 to shareholders of record on June 11, 2015. On August 3, 2015, our Board of Directors declared a cash dividend on AIG Common Stock of $0.28 per share, payable on September 28, 2015 to shareholders of record on September 14, 2015. On November 2, 2015, our Board of Directors declared a cash dividend on AIG Common Stock of $0.28 per share, payable on December 21, 2015 to shareholders of record on December 7, 2015.
On February 11, 2016, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 28, 2016 to shareholders of record on March 14, 2016. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, including the regulatory framework applicable to us, as discussed further in Note 16 to the Consolidated Financial Statements.
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock through a series of actions. On December 16, 2015, our Board of Directors authorized an additional increase of $3.0 billion to the previous share repurchase authorization.
During 2015, we repurchased approximately 182 million shares of AIG Common Stock for an aggregate purchase price of approximately $10.7 billion pursuant to this authorization. The total number of shares of AIG Common Stock repurchased in 2015 includes (but the aggregate purchase price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an ASR agreement executed in the fourth quarter of 2014. Pursuant to Exchange Act Rule 10b5-1 repurchase plans, from January 1 to February 11, 2016, we have repurchased approximately $2.5 billion of additional shares of AIG Common Stock.
On February 11, 2016, our Board of Directors authorized an additional increase to the repurchase authorization of AIG Common Stock of $5.0 billion, resulting in a remaining authorization on such date of approximately $5.8 billion. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our financial condition, results of operations, liquidity and other factors, including the regulatory framework applicable to us.
Dividend Restrictions
Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities. See Note 18 to the Consolidated Financial Statements for a discussion of restrictions on payments of dividends by our subsidiaries.
Enterprise Risk Management |
Risk management includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing returns. We consider risk management an integral part of managing our core businesses and a key element of our approach to corporate governance.
Overview
| | |
Overview
|
We have an integrated process for managing risks throughout our organization in accordance with our firm-widefirm‑wide risk appetite. Our Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department supervises and integrates the risk management functions in each of our business units, providing senior management with a consolidated view of the firm'sfirm’s major risk positions. Within each business unit, senior leaders and executives approve risk-takingrisk‑taking policies and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management in the embedding of enterprise risk management in our key day-to-day business processes and in identifying, assessing, quantifying, managing, monitoring and reporting, and mitigating the risks taken by us and our businesses. Nevertheless, our risk management efforts may not always be successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition may occur. | |
| Enterprise Risk Management (ERM) |
•
·Our ERM framework provides senior management with a consolidated view of our risk appetite and major risk positions. •
·In each of our business units, senior leaders and executives approve risk-taking policies and targeted risk tolerancetolerances within the ERM framework while working with ERM to mitigate risks across the firm. •
·Risk management is an integral part of how we manage our core businesses. |
|
Risk Governance Structure
Our risk governance structure fosters the development and maintenance of a risk and control culture that encompasses all significant risk categories. Accountability for the implementation and oversight of risk policies is aligned with individual corporate executives, with the risk committees receiving regular reports regarding compliance with each policy to support risk governance at our corporate level as well as in each business unit. We review our governance and committee structure on a regular basis and make changes as appropriate to continue to effectively manage and govern our risks and risk-taking.
Our Board of Directors oversees the management of risk through its FinanceRisk and Risk ManagementCapital Committee (FRMC)(RCC) and Audit Committee. Those committees regularly interact with other committees of the Board.Board of Directors. Our Chief Risk Officer (CRO) reports to both the FRMCRCC and AIG'sour Chief Executive Officer (CEO).
The Group Risk Committee (the GRC)(GRC): The GRC is the senior management group charged with assessing all significant risk issues on a global basis to protect our financial strength, optimize our intrinsic value, and protect our reputation among key stakeholders.reputation. The GRC is chaired by our CRO. Its membership includes our CEO, Chief Financial Officer (CFO), General Counsel, and 15 other executives from across our corporate functions and business units. Our CRO reports periodically on behalf of the GRC to both the FRMCRCC and the Audit Committee of the Board.Board of Directors. Our CRO is also a member of the management strategy committee providing ERM the opportunity to review, monitor and consider the impact of changes in strategy.
Management committees that support the GRC are described below. These committees are comprised of senior executives and experienced business representatives from a range of functions and business units throughout AIG and its subsidiaries. These committees are charged with identifying, analyzing and reviewing specific risk matters within their respective mandates.
Financial Risk Group (FRG): The FRG is responsible for the oversight of financial risks taken by AIGus and itsour subsidiaries. Its mandate includes overseeing our aggregate credit, market, interest rate, capital, liquidity and model risks, as well as asset-liabilityasset-
liability management, derivatives activity, and foreign exchange transactions. Membership of the FRG includes our EVP — Investments, Deputy AIG Chief Investment Officer, as well as our CFO, and other senior executives from Finance and ERM. Our CRO serves as Chair of the FRG.
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Transaction Approval and Business Practices Committee (TABPC): TABPCIt provides the primary corporate-level review function for all proposed transactions and business practices that are significant in size, complex in scope, or that present heightened legal, reputational, accounting or regulatory risks. Our Deputy General Counsel serves as TABPC ChairMembership of the FRG includes our CFO, CRO, Chief Investment Officer and additional members include our CRO and CFO, and other senior executives from Finance, Legal, Treasury, Investments and our business units.Chief Strategy Officer.
Operational Risk Committee (ORC): This committee oversees operational risk management activities across AIG'sour businesses, functions, and geographic locations. The ORC reviews the enterprise-wide identification, escalation and mitigation of operational risks that may arise from inadequate or failed internal processes, people, systems, or external events. The ORC also monitors current and emerging operational risks, as well as management actions taken to reduce risks to acceptable levels. The CommitteeORC approves the Operational Risk Management (ORM) Policy and ORM Framework, which includes the identification, assessment, monitoring and measurement of risks. The CommitteeORC ensures applicable governance structures are established to provide oversight of operational risk at each business unit and corporate function. The ORC also reviews aggregate firm-wide operational risk reports and provides a forum for senior management to assess our operational risk profile and to discuss operational risks that may affect our strategic objectives.
Our Chief Administrative Officer is Chair of the ORC and our Head of Operational Risk Management serves as ORC Secretary. Other ORC members include senior AIG executives with expertise in legal, compliance, technology, human resources, finance and operational risk, as well as business continuity management and the chief risk officersofficer of our business units.
Business Unit Risk and Capital Committees: Each of our major insurance businesses has established a risk and capital committee (BU RCC) that serves as the senior management committee responsible for risk oversight at the individual business unit level. The BU RCCsrisk committees are responsible for the identification, assessment and monitoring of all sources of risk within their respective portfolios. Specific responsibilities include setting risk tolerances, approvingreviewing capital management strategies (including asset allocation and risk financing), insurance portfolio optimization, risk management policies and providing oversight of economic capital models.risk-adjusted metrics. In addition, to its BU RCC, each major insurance business unit has established subordinate committees which identify, assess and monitor the specific operational, transactional and financial risks inherent in its respective business. Together, the BU RCCs and AIG Risk Committeescommittees described above provide comprehensive risk oversight throughout the organization.
Risk oversight activities also continue to be coordinated with ILFC, a held for sale operation, until the pending ILFC sale transaction is closed.
Risk Appetite, Limits, Identification, and Measurement
Risk Appetite Framework
Our Risk Appetite Framework integrates stakeholder interests, strategic business goals and available financial resources. We intend to balance these by takingseeking to take measured risks that are expected to generate repeatable, sustainable earnings and producecreate long-term value for our shareholders. The framework includes a Statement ofour Risk Appetite Statement approved by the Board of Directors or a committee thereof and a set of supporting tools, including risk tolerances, risk limits and policies, which we use to manage our risk profile and financial resources.
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
We articulate our aggregate risk-taking by setting risk tolerances on capital and liquidity measures. These measures are set at the AIG Parent as well as the business unit,legal entity level and cover consolidated and insurance company capital and liquidity ratios. We must comply with standards for capital adequacy and maintain sufficient liquidity to meet all our obligations as they come due in accordance with our internal capital management and liquidity policies. The risk tolerances for our insurance operations inform the requirements for capital adequacy for individual businesses. Our risk tolerances take into consideration regulatory requirements, rating agency expectations, and business needs. The GRC routinely reviews the level of risk taken by the consolidated organization in relation to the established risk tolerances. A consolidated risk report is also presented periodically, as required, to the FRMCRCC by our CRO.
Risk Limits
A key component of our Risk Appetite Framework is settinghaving a process in place that establishes and maintains appropriate limits on the material risks that areidentified for our core to our business. Thebusinesses and facilitates monitoring and reportingmeeting of those risk limits serves as an early warning indicator to us and is designed to provide timely oversight and enforceability to meet both internal and external stakeholders'stakeholder expectations. We also have instituted other control measures, including policiesOur objectives include:
•Monitoring of risks, providing early warning indicators, and related procedures,ensuring timely oversight and enforceability;
•Defining a consistent and transparent approach to governlimits governance from the group-level to regional entities; and
•Alignment with Risk Appetite Statement, where applicable.
To support the monitoring and management of AIG’s and its business practicesunits’ material risks, ERM has an established limits framework that may impactemploys a three-tiered hierarchy:
•Level I Limits are AIG consolidated level limits. They define our aggregate maximum exposures for core risks within the boundaries set by the Risk Appetite Statement, and constrain our concentration in specific risk profile.types. These limits are set to manage key risks identified by ERM and to meet requirements by regulators and rating agencies at a consolidated level. Level 1 Limits are reported to the FRG, GRC and RCC.
•Level II Limits are business unit level limits. They define our appetite for specific, material risk taking activities within business units and corporate functions. These key risks are identified by ERM for the business unit and/or corporate function, and risk limits are developed to meet the specific requirements of regulators and rating agencies. Level II Limits are reported to the business unit RCCs, where applicable.
•Level III Limits monitor risk utilization on the regional or local level and are developed to address any specific requirements by regulators and rating agencies for that region not captured by the Level I and Level II limits. Level III Limits are reported at the local entity risk committee.
All limits are reviewed by the FRG, GRC or relevant business unit RCCs on a periodic basis and revisions, if applicable, are approved by those committees.
The business units are responsible for measuring and monitoring their risk exposures. ERM is responsible for monitoring compliance with limits and providing regular, timely reporting to our senior management and risk committees. Limit breaches
are required to be reported in a timely manner and are documented and escalated in accordance with their level of severity or materiality.
Risk Identification and Measurement
One tool we use to inform our Risk Appetite Framework is risk identification. We conduct risk identification through a number of processes at the business unit and corporate level focused on capturing our material risks and key areas of focus for follow-up risk management actions. In 2013, we initiated a more formal and A key initiative is our integrated bottom-up risk identification and assessment process down to the product-line level.level. These processes are used as a critical input to enhance and develop our analytics for measuring and assessing risks across the organization.
We employ various approaches to measure, monitor, and manage risk exposures, including the utilization of a variety of metrics and early warning indicators. We use a proprietary stress testing framework to measure our quantifiable risks. This framework is built on our existing ERM stress testing methodology for both insurance and non-insurance operations.
The framework measures risk over multiple time horizons and under different levels of stress. We develop a range of stress scenarios based both on internal experience and regulatory guidance. The stress tests are intended to ensure that sufficient resources for our insurance company subsidiaries and the consolidated company are available under both idiosyncratic and systemic market stress conditions.
The stress testing framework assesses our aggregate exposure to our most significant financial and insurance risks, including the risk in each of our key insurance company subsidiaries in relation to its statutory capital needs under stress, risks inherent in our non-insurance company subsidiaries, and risks to AIG consolidated capital. Using our stress testing methodology, we evaluate the capital and earnings impact of potential stresses in relation to the relevant capital constraint of each business operation. We use this information to determine the resources needed at the AIG Parent level to support our subsidiaries and capital resources required to maintain consolidated company target capitalization levels.
We evaluate and manage risk in material topics as shown below. These topics are discussed in more detail in the following pages:
We evaluate and manage risk in material topics as shown below. These topics are discussed in more detail in the following pages: |
| | | |
• Credit Risk Management | | • Liquidity Risk Management | •Insurance Risks |
•Market Risk Management | •Operational Risk Management | Insurance•Other Operations Risks
|
|
Credit Risk Management
• Market Risk Management
| | •
Operational Risk Management
| | •
Other Operations Risks
|
Credit Risk Management
Overview
Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay their contractual obligations when they become due. Credit risk may also result from a downgrade of a counterparty'scounterparty’s credit ratings or a widening of its credit spreads.
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arise from, but are not limited to, fixed income investments, equity securities, deposits, commercial paper investments, reverse repurchase agreements and repurchase agreements, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk arising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties, financial guarantees and letters of credit.
Governance
Our credit risks are managed at the corporate level within ERM.by a team of investment professionals, subject to ERM oversight and various control processes. ERM is assisted by credit functions headed by highly experienced credit officers in the business units, whoseprofessionals. Their primary role is to assure appropriate credit risk management in accordance with our credit policies and procedures and relative to our credit risk parameters. Our Chief Credit Officer (CCO) and credit executives are primarily responsible for the development, implementation and maintenance of thesea risk management framework, which includes the following elements related to our credit risk policies and procedures.risks:
Responsibilities of the CCO and credit executives include:
- •
- developing and implementing our company-wide credit
policies;policies and procedures;
•
•- approving delegated credit authorities to our credit
executives;
•managing the approval process for requests for credit limits, program limitsexecutives and credit transactions above authorities or where concentrations of risk may exist or be incurred;
•aggregating globally all credit exposure data by counterparty, country, sector and industry and reporting risk concentrations regularly to and reviewing with senior management;
•administering regular portfolio credit reviews ofqualified investment derivative and credit risk-incurring business units and recommending corrective actions where required;professionals;
•
•conducting credit research on countries, sectors and asset classes where risk concentrations may exist;
•- developing methodologies for quantification and assessment of credit risks, including the establishment and maintenance of our internal risk rating process;
•managing a system of credit and program limits, as well as the approval process for credit transactions, above limit exposures, and concentrations of risk that may exist or be incurred;
•
- evaluating, monitoring, reviewing and reporting of credit risks and concentrations regularly with senior management; and
•
- approving appropriate credit reserves, credit-related other-than-temporary impairments and corresponding methodologies
infor all credit portfolios.
We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk accumulations, whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require third-partymitigants, such as third‑party guarantees, reinsurance or collateral, such asincluding commercial bank-issued letters of credit and trust collateral accounts. We treat these guarantees, reinsurance recoverables, and letters of credit and trust collateral accounts as credit exposure and include them in our risk concentration exposure data. We identify our aggregate credit exposures to our underlying counterparty risks and report them regularly to senior management for review.also monitor closely the quality of any trust collateral accounts.
See Investments —– Available for Sale Investments herein for further information on our credit concentrations and credit exposures.
Market Risk Management
Market risk is defined as the potential loss arising fromrisk of adverse fluctuationsimpact due to systemic movements in one or more of the following market risk drivers: equity and commodity prices, residential and commercial real estate values, interest rates, credit spreads, foreign currencies,exchange, inflation, and their levels of volatility.
We are engaged in a variety of insurance, investment and other financial services businesses that generate market risk, directly and indirectly. We are exposed to market risks primarily within our insurance and capital markets businesses.activities, on both the asset and liability side of our balance sheet through on and off-balance sheet exposures. The chief risk officer within each such business is responsible for creating a framework to properly identifyingidentify these risks, then ensuring that they are appropriately measured, monitored and managed in accordance with the written risk governance framework established by the Chief Market Risk Officer (CMRO).
The scope and magnitude of our market risk exposures is managed under a robust framework that contains documented risk-taking authorities, defined risk limits and minimum standards for managing market risk in a manner consistent with our Risk Appetite Statement. Our market risk management framework focuses on quantifying the financial repercussions of changes in these broad market observables, distinctas opposed to from the idiosyncratic risks associated with individual assets that are addressed through our credit risk management function.
Risk Identification
Market risk quantifiesfocuses on quantifying the financial repercussions of changes in broad, external, predominantly market observable risks. Financial repercussions can include an adverse impact on us due to broad, systemic movements in one or moreresults of operations, financial condition, liquidity and capital.
Each of the following systemic risks is considered a market risk drivers:risk:
Equity market prices. We are exposed to changes in equity market prices affecting a variety of instruments. These include direct investmentsChanges in equity prices can affect the valuation of publicly-traded equity shares, investments in private equity, hedge funds and mutual funds, exchange-traded funds, and other equity-linked capital market instruments as well as other equity-linked insurance products, including but not limited to equity-indexedindex annuities, variable annuities, universal life insurance and variable universal life insurance.
Residential and commercial real estate values. Our investment portfolios are exposed to the risk of changing values in a variety of residential and commercial real estate investments. Residential investments include residential mortgages, residential mortgage-backed securities and other structured securities with underlying assets that include residential mortgages: trusts that includeChanges in residential/commercial real estate and/orprices can affect the valuation of residential/commercial mortgages, (REITs), and mortgage insurance contracts. Commercial exposures include mortgage loans, residential/commercial mortgage mortgage‑backed securities and other structured securities with underlying assets that include residential/commercial mortgages: trusts REITs,that include residential/commercial real estate and/or mortgages, residential mortgage insurance contracts and othercommercial real estate investments.
Interest rates. Interest rate risk can arise from a mismatch in the interest rate exposure of assets versus liabilities. LowLower interest rates mean lessgenerally result in lower investment income and potentiallymake certain of our product offerings less attractive insurance products.to investors. Conversely, higher interest rates are typically beneficial for the opposite reasons. However, when rates rise quickly, there can be a temporary asymmetric U.S. GAAP accounting effect where the existing securities lose market value, which is largely reported in Other comprehensive income, and the offsetting decrease in the value of related liabilities may not be recognized. Changes in interest rates can affect the valuation of fixed maturity securities, financial liabilities, insurance contracts including but not limited to fixed rate annuities, variable annuities and derivative contracts.
Credit spread or risk premium.spreads. Credit spreads measure an instrument'sinstrument’s risk premium or yield relative to that of a comparable duration, default-freedefault‑free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities, including but not limited to corporate bonds, ABS, mortgage-backed securities, AIG-issued debt obligations, credit derivatives and derivative credit valuation adjustments. Much like higher interest rates, wider credit spreads with unchanged default losses mean more investment income in the long-term.long‑term. In the short term, quickly rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely reported in Other comprehensive income. A precipitous rise in credit spreads may also signal a fundamental weakness in the credit-worthinesscredit‑worthiness of bond obligors, potentially resulting in default losses.
Foreign currency exchange (FX) rates. We are a globally diversified enterprise with significant income, assets and liabilities denominated in, and significant capital deployed in, a variety of currencies.
Commodity Prices. Changes in the value of commoditiesFX rates can affect the valuation of publicly-tradeda broad range of balance sheet and income statement items as well as the settlement of cash flows exchanged in specific transactions.
Commodity Prices. Changes in commodity prices (the value of commodities) can affect the valuation of publicly‑traded commodities, commodity indices and derivatives.derivatives on commodities and commodity indices. We are exposed to commodity prices primarily through their impact on the prices and credit quality of commodity producers’ debt and equity securities in our investment portfolio.
Inflation. Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt obligations, derivatives and other contracts explicitly linked to inflation index returns, derivatives on inflation indices, and insurance contracts where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or wage levels in our primary casualty business.levels.
Governance
Market risk is managedoverseen at the corporate level within ERM through the CMRO, whichwho reports directly to the AIG CRO. The CMRO is supported by a dedicated team of professionals within ERM who work in partnership with the senior management ofERM. Market Risk is managed by our finance, treasury and
investment management corporate functions.functions, collectively, and in partnership with ERM. The CMRO is primarily responsible for the development and maintenance of a risk management framework that includes the following key components:
•
- written policies
standards and procedures that define the rules for our market risk-taking activities and provide clear guidance regarding their execution and management;
•
•- a limit framework that aligns with our Board-approved Risk Appetite Statement;
•
•- independent measurement, monitoring and reporting for line of business, business unit and enterprise-wide market risks; and
•
•- clearly defined authorities for all individuals and committee roles and responsibilities related to market risk management.
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
These components facilitate the CMRO'sCMRO’s identification, measurement, monitoring, reporting and management of our market risks.
Risk Measurement
Our market risk measurement framework was developed with the main objective of communicating the range and scale of our market risk exposures. At the firm-widefirm‑wide level market risk is measured in a manner that is consistent with AIG'sAIG’s Risk Appetite Statement. This is designed to ensure that we remain within our stated risk tolerance levels and can determine how much additional market risk taking capacity we haveis available within our framework. Our risk appetite is currently defined in terms of capital and liquidity levels. At the market risk level, the framework measures our overall exposure to each systemic market risk change.change on an economic basis.
Our risk appetite is currently defined in terms of capital and liquidity levels under specified stress tests. In addition, we continue to developuse enhanced economic, U.S. GAAP accounting and statutory capital-basedcapital‑based risk measures at the market risk level, business-unitbusiness‑unit level and firm-widefirm‑wide levels. This process aims to ensure that we have a comprehensive view of the impact of our market risk exposures.
We use a number of approaches to measure our market risk exposure, including: |
Sensitivity analysis. Sensitivity analysis measures the impact from a unit change in a market risk input. Examples of such sensitivities include a one basis point increase in yield on fixed maturity securities, a one basis point increase in credit spreads of fixed maturity securities, and a one percent increase in prices of equity securities. Scenario analysis.Scenario analysis uses historical, hypothetical, or forward‑looking macroeconomic scenarios to assess and report exposures. Examples of hypothetical scenarios include a 100 basis point parallel shift in the yield curve or a 20 percent immediate and simultaneous decrease in world‑wide equity markets. Scenarios may also utilize a stochastic framework to arrive at a probability distribution of losses. Stress testing.Stress testing is a special form of scenario analysis in which the scenarios are designed to lead to a material adverse outcome. Examples of such scenarios include the stock market crash of October 1987 or the widening of yields or spreads of RMBS or CMBS during 2008. |
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
Market Risk Sensitivities
The following table provides estimates of our sensitivity to changes in yield curves, equity prices and foreign currency exchange rates:
| Balance Sheet Exposure | | | | Balance Sheet Effect |
| December 31, | | December 31, | | | | December 31, | | December 31, |
(dollars in millions) | | 2015 | | | 2014 | | | | | 2015 | | | 2014 |
Sensitivity factor | | | | | | | | | 100 bps parallel increase in all yield curves |
Interest rate sensitive assets: | | | | | | | | | | | | | |
Fixed maturity securities | | 260,689 | | | 273,885 | | | | | (14,549) | | | (15,107) |
Mortgage and other loans receivable | | 18,878 | | | 16,594 | | | | | (1,092) | | | (921) |
Preferred stock | | 20 | | | 19 | | | | | (1) | | | (1) |
Total interest rate sensitive assets | $ | 279,587 | (a) | $ | 290,498 | (a) | | | $ | (15,642) | | $ | (16,029) |
Sensitivity factor | | | | | | | | | 20% decline in stock prices and value of |
| | | | | | | | | alternative investments |
Equity and alternative investments exposure: | | | | | | | | | | | | | |
Hedge funds | | 10,917 | | | 10,798 | | | | | (2,183) | | | (2,160) |
Private equity | | 7,233 | | | 8,858 | | | | | (1,447) | | | (1,772) |
Real estate investments | | 6,579 | | | 3,612 | | | | | (1,316) | | | (722) |
PICC(b) | | 2,239 | | | 3,375 | | | | | (448) | | | (675) |
Common equity | | 1,574 | | | 2,044 | | | | | (315) | | | (409) |
Aircraft asset investments | | 477 | | | 651 | | | | | (95) | | | (130) |
AerCap(c) | | - | | | 4,972 | | | | | - | | | (994) |
Other investments | | 472 | | | 1,331 | | | | | (94) | | | (266) |
Total equity and alternative investments | | | | | | | | | | | | | |
exposure | $ | 29,491 | | $ | 35,641 | | | | $ | (5,898) | | $ | (7,128) |
Sensitivity factor | | | | | | | | | 10% depreciation of all foreign currency |
| | | | | | | | | exchange rates against the U.S. dollar |
Foreign currency-denominated net | | | | | | | | | | | | | |
asset position: | | | | | | | | | | | | | |
Great Britain pound | | 2,158 | | | 3,884 | | | | | (216) | | | (388) |
Hong Kong dollar | | 2,138 | | | 2,875 | | | | | (214) | | | (288) |
Euro | | 2,053 | | | 768 | | | | | (205) | | | (77) |
All other foreign currencies | | 4,310 | | | 4,478 | | | | | (431) | | | (448) |
Total foreign currency-denominated net | | | | | | | | | | | | | |
asset position(d) | $ | 10,659 | | $ | 12,005 | | | | $ | (1,066) | | $ | (1,201) |
| | | | | | | | | | | | | |
| | |
| | Exposure | | Effect | |
|---|
(dollars in millions)
| | December 31,
2013
| | December 31,
2012
| | December 31,
2013
| | December 31,
2012
| |
|---|
| | |
Sensitivity factor | | | | | | | | | 100 bps parallel increase in all
yield curves
|
|
| | |
Interest rate sensitive assets | | $ | 282,878 | (a) | $ | 284,646 | (a)(b) | $ | (15,004 | ) | $ | (15,199 | ) |
| | |
Sensitivity factor | | | | | | | | | 20% decline in stock prices and
value of alternative investments | |
Equity and alternative investments exposure: | | | | | | | | | | | | | |
Hedge funds | | | 9,900 | | | 7,767 | | | (1,980 | ) | | (1,553 | ) |
Private equity | | | 9,810 | | | 11,223 | | | (1,962 | ) | | (2,245 | ) |
Investment real estate | | | 3,113 | | | 3,195 | | | (623 | ) | | (639 | ) |
PICC(c) | | | 2,536 | | | 2,262 | | | (507 | ) | | (452 | ) |
Common equity | | | 1,927 | | | 1,526 | | | (385 | ) | | (305 | ) |
Aircraft asset investments | | | 763 | | | 984 | | | (153 | ) | | (197 | ) |
Mutual funds | | | 85 | | | 128 | | | (17 | ) | | (26 | ) |
Other investments | | | 872 | | | 963 | | | (174 | ) | | (193 | ) |
| | |
Total equity and alternative investments exposure | | $ | 29,006 | | $ | 28,048 | (b) | $ | (5,801 | ) | $ | (5,610 | ) |
| | |
Sensitivity factor | | | | | | | | | 10% depreciation of all foreign
currency exchange rates against
the U.S. dollar
|
|
| | |
Foreign currency denominated net asset position(d) | | $ | 10,350 | | $ | 9,106 | | $ | (1,035 | ) | $ | (911 | ) |
| | |
(a) In 2013,At December 31, 2015, the analysis covers $283covered $279.6 billion of $306$298.7 billion interest-rate sensitive assets. Excluded are $6 billion in DIB assets, $5were $10.7 billion of loans and $4$3.6 billion of investments in life settlements. In addition, $8$4.8 billion of assets across various asset categories were excluded due to modeling and/or data limitations. In 2012,At December 31, 2014, the analysis covers $285covered $290.4 billion of $319$308.9 billion interest-rate sensitive assets. Excluded are $15 billion in DIB assets, $5were $8.4 billion of loans and $4$3.8 billion of investments in life settlements. In addition, $10$6.3 billion of assets across various asset categories were excluded due to modeling and/or data limitations.
(b) Prior period amounts have been revised to conform to the current period presentation.
(c) Includes our investments in PICC Group and PICC P&C.
(c)In September 2015, we sold the remainder of our ordinary shares of AerCap. Our 2014 sensitivity calculation for AerCap was based on our carrying value rather than the stock price as of the applicable date, as we applied the equity method of accounting prior to the sale.
(d)The majority of the foreign currency exposure is reported on a one quarter lag.
Exposures to yield curve movements include fixed maturity securities and loans and exclude consolidated separate account assets and short-term investments. Total interest-rate sensitive assets decreased 0.6 percent or approximately $1.8 billion compared to December 31, 2012, primarily due to a net decrease in fixed maturity securities of $1.0 billion, and a decrease in mortgage and other loans receivable of $0.8 billion.
Exposures to equity and alternative investment prices include investments in common stock, preferred stocks, mutual funds, hedge funds, private equity funds, commercial real estate and real estate funds and exclude consolidated separate account assets, consolidated partnerships and consolidated funds. Total exposure in these areas at December 31, 2013 increased 3.4 percent, or approximately $958 million, compared to exposure at December 31, 2012, primarily due to an increase of $2.1 billion related to hedge fund investments and an increase in common equity securities of $401 million. These increases were partially offset by a decrease in private equity investments of $1.4 billion and a decrease in aircraft asset investments of $221 million.
Foreign currency-denominated net asset position reflects our consolidated non-U.S.non‑U.S. dollar assets less our consolidated non-U.Snon‑U.S dollar liabilities on a U.S. GAAP basis. We use a bottom-up approach in managing our foreign
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
currency exchange rate exposures with the objective of protecting statutory capital at the regulated insurance entity level. We manage cash flow risk on our foreign currency-denominated debt issued by AIG Parent and use a variety of techniques to mitigate this risk, including but not limited to the execution of cross-currency swaps and the issuance of new foreign currency-denominated debt to replace equivalent maturing debt. At the AIG Parent level, we monitor our foreign currency exposures against single currency and
aggregate currency portfolio limits. As a matter of general practice, we do not typically hedge our foreign currency exposures to net investments in subsidiaries. However, we may utilize either cross-currency swaps or our foreign currency- denominated debt as a net investment hedge of our capital in subsidiaries.
At December 31, 2013,2015, our five largest foreign currency net asset positions were denominated in British pounds, Canadian dollars, Euro, Hong Kong dollars and Japanese yen. Foreign currency-denominated net asset position at December 31, 2013 increased 13.7decreased by $1.3 billion, or 11.2 percent, or $1.2 billion, compared to December 31, 2012. This2014. The decrease was primarilymostly due to an increasea $1.7 billion decrease in our British pound position, primarily resulting from the unwinding of a cross-currency swap and a $737 million decrease in our Hong Kong dollar position, of $523 million and $337 million resulting from AIG Life and Retirement's and AIG Property Casualty's investments in PICC Group and PICC P&C, respectively; an increase in our British pound position of $730 million as a result of AIG Parent repurchasing outstanding British pound-denominated debt; an increase in our Japanese yen position of $513 million resulting from AIG Property Casualty Japan's operations and unrealized appreciation of investments; and an increase in our Israeli shekel position of $128 millionprimarily resulting from the increasesale of ordinary shares in our ownership of AIG Israel Insurance Company Limited.PICC P&C. These increasesdecreases were partially offset by a decrease$1.3 billion increase in our British poundeuro position, of $400 millionprimarily resulting from AI Overseas Association (AIOA) IBNR reserves adjustments; a decrease in our Canadian dollar position of $389 million, primarily from the operations of AIG Insurance Company of Canada;debt repurchases and a decrease of $225 million, resulting from the weakening of other currencies against the U.S. dollar.hedging.
For illustrative purposes, we modeled our sensitivities based on a 100 basis point increase in yield curves, a 20 percent decline in equities and alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against the U.S. dollar. ThisThe estimated results presented in the table above should not be taken as a prediction, but only as a demonstration of the potential effects of such events.
The sensitivity factors utilized for 20132015 and presented above were selected based on historical data from 19931995 to 2013,2015, as follows (see the table below):
•
- a 100 basis point parallel shift in the yield curve is consistent with a one standard deviation movement of the benchmark ten-year treasury yield;
•
•- a 20 percent drop for equity and alternative investments is broadly consistent with a one standard deviation movement in the S&P 500; and
•
•- a 10 percent depreciation of foreign currency exchange rates is consistent with a one standard deviation movement in the U.S. dollar (USD)/Great Britain pound (GBP) exchange rate.
| | | | | | | | 2015 Scenario as | 2015 | 2015 as a Multiple | Original 2014 Scenario (based |
| | Period
| | Standard
Deviation
| | Suggested
2013 Scenario
| | 2013 Scenario as
a Multiple of
Standard Deviation
| | 2013
Change/
Return
| | 2013 as a Multiple
of Standard
Deviation
| | Original 2012 Scenario (based
on Standard Deviation for
1992-2012 Period)
| | | Standard | Suggested | a Multiple of | Change/ | of Standard | on Standard Deviation for |
|---|
| | | | Period | Deviation | 2015 Scenario | Standard Deviation | Return | Deviation | 1994-2014 Period) |
10-Year Treasury | | 1993 – 2013 | | 0.01 | | 0.01 | | 0.96 | | 0.01 | | 1.21 | | 0.01 | | 1995-2015 | 0.01 | 0.01 | 1.00 | - | 0.10 | 0.01 |
S&P 500 | | 1993 – 2013 | | 0.19 | | 0.20 | | 1.04 | | 0.30 | | 1.53 | | 0.20 | | 1995-2015 | 0.18 | 0.20 | 1.09 | (0.01) | 0.04 | 0.20 |
USD/GBP | | 1993 – 2013 | | 0.09 | | 0.10 | | 1.07 | | 0.02 | | 0.20 | | 0.10 | | 1995-2015 | 0.09 | 0.10 | 1.06 | (0.05) | 0.57 | 0.10 |
| | | |
Risk Monitoring and Limits
The risk monitoring responsibilities, owned by the business units, include ensuring compliance with market risk limits and escalation and remediation of limit breaches. Such activities must be reported to the ERM Market Risk team by the relevant business unit. This monitoring approach is aligned with our overall risk limits framework.
To control our exposure to market risk, we rely on a three-tiered systemhierarchy of limits that the CMRO closely monitors and reports to our CRO, senior management and risk committees.
Our CRO and CMRO establish market risk limits that are consistent with ourSee Risk Appetite, StatementLimits, Identification, and approved by eachMeasurement – Risk Limits herein for further information on our three-tiered hierarchy of the FRG and the GRC. These limits are tiered to accommodate product line, business unit and enterprise-wide needs and risk profiles. Consolidated company-level limits define our aggregate maximum exposure for the various market risk factors. Business unit limits are designed to control specific, material market risk activities on a more granular level and additional limits are allocated into individual regions, lines of business and portfolios to address idiosyncratic risks not captured by the higher-level limits, as well as to address the requirements oflimits.
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
regulators and rating agencies. All limits are reviewed by the FRG and GRC on a periodic basis and revisions, if applicable, are proposed by our CRO and the CMRO for approval by those committees.
The individual product lines and business units are initially responsible for complying with all market risk limits. The ERM teams and chief risk officers within each business unit monitor such compliance and coordinate with the CMRO to provide regular, timely reporting to our senior management and risk committees. Limit breaches are required to be reported in a timely manner and are documented and escalated in accordance with their level of severity or materiality. Responsibility for addressing and/or remediating any breach rests with individual or individuals within the specific unit that experienced the breach, who must report regularly on their progress to the ERM market risk team.
Liquidity Risk Management
Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to meet our short-term cash, collateral or other financial obligations.
The failure Failure to appropriately manage liquidity risk can result in insolvency, reduced operating flexibility, increased costs, reputational harm and reputational harm. Becauseregulatory action.
AIG and its legal entities seek to maintain sufficient liquidity is critically important, ourduring both the normal course of business and under defined liquidity governance includes a number of liquidity and funding policies and monitoring toolsstress scenarios to address both AIG-specific, broader industry and market related liquidity events.
Sources of Liquidity riskensure that sufficient cash can include, but are not limited to:
•financial market movements — significant changes in interest rates can provide incentives for policyholders to surrender their policies. Changes in markets can impact collateral posting requirements or limit our ability to sell assets at reasonable valuesbe generated to meet liquidity needs due to unfavorable market conditions, inadequate market depth, or other investors seeking to sell the same or similar assets;obligations as they come due.
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•potential reputational events or credit downgrade — changes can have an impact on policyholder cancellations and withdrawals or impact collateral posting requirements; and
���catastrophic events, including natural and man-made disasters, that can increase policyholder claims.The principal objective of our liquidity enterprise risk framework is to protect our liquidity position and identify a diversity of funding sources available to meet actual and contingent liabilities during both normal and stress periods. This framework is guided by the liquidity risk tolerance. management
AIG Parent liquidity risk tolerance levels are established for base and stress scenariosallow it to meet its obligations over a timetwelve month horizon covering a period greater than one year.consistent with its risk appetite. We maintain a target range for required liquidity bufferand minimum coverage ratios designed to ensure that funding needs are met under varying market conditions. If we project that we will breach the tolerance,these tolerances, we will assess and determine appropriate liquidity management actions. However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity sources or a reduction in liquidity requirements.
We strive to manage our liquidity prudently at a legal entity level across AIG Parent and the operating companies. Key components of the framework include effective corporate governance and policy, maintaining diversifiedRisk Identification
The following sources of liquidity contingencyand funding plans,risks could impact our ability to meet short-term financial obligations as they come due.
•Market/Monetization Risk: Assets cannot be readily transformed into cash due to unfavorable market conditions. Market liquidity risk may limit our ability to sell assets at reasonable values to meet liquidity needs.
•Cash Flow Mismatch Risk: Discrete and regular reviewcumulative cash flow mismatches or gaps over short-term horizons under both expected and adverse business conditions may create future liquidity shortfalls.
•Event Funding Risk: Additional funding is required as the result of a trigger event. Event funding risk comes in many forms and may result from a downgrade in credit ratings, a market event, or some other event that creates a funding obligation or limits existing funding options.
•Financing Risk: We are unable to raise additional cash on a secured or unsecured basis due to unfavorable market conditions, AIG-specific issues, or any other issue that impedes access to additional funding.
Governance
Liquidity risk is overseen at the corporate level within ERM through the CMRO, who reports directly to the AIG CRO. The AIG CRO has responsibility for the oversight of the Liquidity Risk Management Framework and delegates the day-to-day implementation of this framework to the AIG Treasurer. Our corporate treasury function manages liquidity metricsrisk, subject to ERM oversight and various control processes.
The Liquidity Risk Management Framework is guided by the liquidity risk tolerance as set forth in the Board-approved Risk Appetite Statement.The principal objective of this framework is to establish minimum liquidity requirements that protect our long-term viability and ability to fund our ongoing business, and to meet short-term financial obligations in a timely manner in both normal and stressed conditions.
Our Liquidity Risk Management Framework includes a number of liquidity and funding policies and monitoring tools to address AIG-specific, broader industry and market related liquidity events.
Risk Measurement
Comprehensive cash flow projections under normal conditions are the primary component for identifying and measuring liquidity risk. We produce comprehensive liquidity projections over varying time horizons that incorporate all relevant liquidity sources and uses and include known and likely cash inflows and outflows. In addition, we perform stress conditions. We viewtesting by identifying liquidity stress scenarios and assessing the effects of these scenarios on our cash flow and liquidity.
We use a number of approaches to measure our liquidity risk exposure, including: |
Target Liquidity Range: Target Liquidity Range specifies the amount of assets required to be maintained in specific liquidity portfolios to meet obligations as they arise over a twelve month horizon under stressed liquidity conditions. Coverage Ratios: Coverage Ratios measure the adequacy of available liquidity sources, including the ability to monetize assets to meet the forecasted cash flows over a specified time horizon. The portfolio of assets is selected based on our ability to convert those assets into cash under the assumed market conditions and within the specified time horizon. Cash Flow Forecasts: Cash Flow Forecasts measure the liquidity needed for a specific legal entity over a specified time horizon. Stress Testing: Coverage Ratios and Asset Ratios are re-measured under defined liquidity stress scenarios that will impact net cash flows, liquid assets and/or other funding sources. |
Relevant liquidity reporting is produced and reported regularly to AIG Parent and business unit risk committees. The frequency, content, and nature of reporting will vary for each component of the framework together to achieve our goal of sound liquiditybusiness unit and legal entity, based on its complexity, risk management.profile, activities and size.
Operational Risk Management
Operational risk is defined as the risk of loss, or other adverse consequences, resulting from inadequate or failed internal processes, people, systems, or from external events. Operational risk includes legal, risk,regulatory and compliance risks, but excludes business and strategy risks.
Operational risk is inherent in each of our business units and corporate functions.units. Operational risks may lead to the following impacts: unintendedcan have many impacts, including but not limited to: unexpected economic losses or gains, reputational harm due to negative publicity, censureregulatory action from supervisory agencies, operational and business disruptions, and/or damage to customer relationships.
Our ORM function, which supports our ORC, has the responsibility to provide an aggregate view of our operational risk profile. Our ORM function oversees the Operational Risk policy and framework, which includes risk identification, assessment, prioritization, measurement, monitoring, and measurement.
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Each business unit is primarily responsible for managing its operational risks and implementing the components of the operational risk management program. In addition, certain corporate control functions have been assigned accountability for enterprise-wide risk management for their respective areas. These control functions include: Sarbanes-Oxley (SOX), Business Continuity Management (BCM), Information Technology Security Risk, Compliance, Model Validation and Vendor Management. Senior business operational risk executives report to their respective business unit CRO and to the Head of our ORM. This reporting structure is designed to enable close alignment with the businesses while ensuring consistent implementation of operational risk management practices.
A strong operational risk management program facilitates the identification and mitigation of operational risk issues. To accomplish this, our operational risk management program is designed to:
•pro-actively address potential operational risk issues;
•create transparency throughout the organization; and
•assign clear ownership and accountability for addressing identified operational risk issues.
risk. As part of the ORM framework, we deploy an integrateda series of operational risk assessment approach which includes top-down risk assessmentsprograms to support our business units with the identification, monitoring and reporting of operational risks. The ORM programs include, but are not limited to, several key components as outlined below:
•The Risk Event Capture process enables each employee to identify, our most significantdocument, and escalate operational risks,risk impacts, with a Riskview to enhancing, processes and Control Self Assessment (RCSA) process to identify key operational risks conducted at the business units and corporate functions and the identification of emerging risks through ourpromoting lessons learned.
•The Vulnerability Identification (VID) process identifies emerging risks, which considerswe consider to be risks that have not yet fully manifested themselves but could become significant over time. Corrective action plans
•The Ordinal Risk Ranking effort provides an ordinal ranking of the firm’s most significant operational risks at the Enterprise, Segment or Regional levels, with the goal of prioritizing assessment and remediation activity.
•The Risk and Control Self-Assessments (RCSAs) allow for the identification and assessment of the key operational risks within our respective business units and a determination as to whether the related controls are developedeffective.
•Scenario Analyses are executed to address identified issues. Businessesidentify the remote, but plausible, potential risks that could result in severe financial losses.
ORM, working together with other key second lines of defense functions (e.g., Model Validation and the Technology Risk office, as well as Compliance, SOX, and Global Business Continuity), provides an independent view of Operational Risk for each business, and works with the business to facilitate implementation of the above programs. This includes coverage of operational risks related to core insurance activities, investing, model risk, technology (including cyber security, access, data
privacy and data security), third-party providers, as well as compliance and regulatory matters. Based on the results of the risk identification and assessment efforts above, business leaders are accountable for tracking and remediating identified issues in line with our risk monitoring procedures. Governance committees support these issues.
Operational risk management reporting to senior managementefforts and operational risk governance committees provides awareness of operational risk exposures, identifies key riskspromote transparency and facilitates management decision making. Reporting includes operational risk mitigation and monitoring, RCSA results and the status of issue resolution to senior management.
Insurance Operations Risks
An integrated risk and control framework facilitates the identification and mitigation of operational risk issues. To accomplish this, our integrated risk and control framework is designed to: |
•ensure first line accountability and ownership of risks and controls; •promote role clarity among the business and risk and control functions; •enhance transparency, risk management governance and culture; •foster greater consistency in identifying and ranking material risks; •pro-actively address potential risk issues and assign clear ownership and accountability for addressing identified risk issues; and •accelerate the development of technology solutions that support objectives above. |
Insurance Risks
Except as described above, we manage our business risk oversight activities through our insurance operations. A primary goal in managing our insurance operations is to achieve an acceptable risk-adjusted return on equity. To achieve this goal, we must be disciplined in risk selection, premium adequacy, and appropriate terms and conditions to cover the risk accepted.
OurWe operate our insurance businesses are conducted on a global basis, and expose uswe are exposed to a wide variety of risks with different time horizons. We manage these risks throughout the organization, both centrally and locally, through a number of procedures:
•
- pre-launch approval of product design, development and distribution;
•
•- underwriting approval processes and authorities;
•
•- exposure limits with ongoing monitoring;
•
- management of relationship between assets and liabilities, including hedging;
•
- enhanced pricing models;
•modeling and reporting of aggregations and limit concentrations at multiple levels (policy, line of business, product group, country, individual/group, correlation and catastrophic risk events);
•
•- compliance with financial reporting and capital and solvency targets;
•
•- use of reinsurance, both internal and third-party; and
•
•- review and establishment of reserves.
We closely manage insurance risk by monitoring and controlling the nature and geographic location of the risks in each line of business underwritten, the terms and conditions of the underwriting and the premiums we charge for taking on the risk. We analyze concentrations of risk using various modeling techniques, including both probability distributions (stochastic) andand/or single-point estimates (deterministic) approaches.
•Property and Casualty (AIG Property Casualty)Non-Life Insurance Companies — risks covered include property, casualty, fidelity/surety, accident and health, aviation, management liability and management liability.mortgage insurance. We manage risks in the general insurance segmentbusiness through aggregations and limitations of concentrations at multiple levels: policy, line of business, geography, industry and legal entity. We manage risks in the mortgage insurance business through geographic classification, risk based pricing, premium adequacy monitoring, and prudent credit policy and underwriting standards.
•
•Life Insurance & Retirement Services (AIG Life and Retirement)Companies — risks include mortality and morbidity in the insurance-oriented products and insufficient cash flows to cover contract liabilities and longevity risk in the retirement savings-oriented products. We manage risks through product design, sound medical and non-medical underwriting, and external traditional reinsurance programs.
•Mortgage Guaranty (United Guaranty Corporation) — We manage risks in the mortgage insurance business through geographic location of the insured properties, the relative economic conditions in the local housing markets, credit attributes of the borrowers, and the loan amount relative to the value of the respective collateral.We purchase reinsurance for our insurance operations.Reinsurance facilitates insurance risk management (retention, volatility, concentrations) and capital planning. We may purchase reinsurance on a pooled basis. Pooling of our reinsurance risks enables us to purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and relationships and manage global catastrophe risks, both for AIG Property Casualtythe Non-Life Insurance Companies and AIGthe Life and Retirement.Insurance Companies.
Governance
Insurance risks are monitored at the business unit level within ERM and overseen by the business unit chief risk officer, who reports directly to our CRO. The framework includes the following key components:
•written policies that define the rules for our insurance risk-taking activities;
•a limit framework focused on key insurance risks that aligns with our Board-approved Risk Appetite Statement; and
•clearly defined authorities for all individuals and committee roles and responsibilities related to insurance risk management.
Risk Measurement, Monitoring and Limits
We use a number of approaches to measure our insurance risk exposure, including: |
Stochastic methods. Stochastic methods are used to measure and monitor risks including natural catastrophe, reserve and premium risk. We develop probabilistic estimates of risk based on our exposures, historical observed volatility or industry-recognized models in the case of catastrophe risk. Scenario analysis.Scenario or deterministic analysis is used to measure and monitor risks such as terrorism or to estimate losses due to man-made catastrophic scenarios. |
In addition, we monitor concentrations of exposure through insurance limits aggregated along dimensions such as geography, industry, or counterparty.
The risk monitoring responsibilities of the business units include ensuring compliance with insurance risk limits and escalation and remediation of limit breaches. Such activities are reported to management by the relevant business unit for informative decision-making on a regular basis. This monitoring approach is aligned with our overall risk limits framework.
Risk limits have a consistent framework used across AIG, Property Casualtyits business units, and legal entities. This includes escalation thresholds in cases where measurement is particularly challenging.
See Risk Appetite, Limits, Identification, and Measurement – Risk Limits herein for further information on our three-tiered hierarchy of limits
Non-Life Insurance Companies Key Insurance Risks
A primary goal in managing our AIG Property Casualty operations is to achieve an acceptable return on equity. To achieve this goal, we must be disciplined in risk selection, premium adequacy, and appropriate terms and conditions to cover the risk accepted.
|
We manage insurance risks through risk review and selection processes, exposure limitations, exclusions, deductibles, self-insured retentions, coverage limits, attachment points, and reinsurance. This management is supported by sound underwriting practices, pricing procedures and the use of actuarial analysis to help determine overall adequacy of provisions for insurance. Underwriting practices and pricing procedures incorporate historical experience, changes in underlying exposure, current regulation and judicial decisions as well as proposed or anticipated regulatory changes.
For AIG Property Casualty,Non-Life Insurance Companies, insurance risks primarily emanate frominclude the following:
•
- Liability for Unpaid
LossLosses and Loss Expense ReservesAdjustment Expenses - — The potential inadequacy of the liabilities we establish for unpaid losses and loss adjustment expenses is a key risk faced by AIG Property Casualty.the Non-Life Insurance Companies. There is significant uncertainty in factors that may drive the ultimate development of losses compared to our estimates of losses and loss adjustment expenses. We manage this uncertainty through internal controls and oversight of the loss reserve setting process, as well as reviews by external experts. See Item 1. Business —– A review of Liability for unpaid claimsUnpaid Losses and claims adjustment expenseLoss Adjustment Expenses herein for further details.information.
•
•- Underwriting -
— The potential inadequacy of premiums charged for future risk periods on risks underwritten in our portfolios can impact AIG Property Casualty's the Non-Life Insurance Companies’ ability to achieve an underwriting profit. We develop pricing based on our estimates of losses and expenses, but factors such as market pressures and the inherent uncertainty and complexity in estimating losses may result in premiums that are inadequate to generate underwriting profit. This may be driven by adverse economic conditions, unanticipated emergence of risks or increase in frequency of claims, worse than expected prepayment of policies, investment results, or unexpected or increased costs or expenses.
•
•- Catastrophe Exposure -
— Our business is exposed to various catastrophic events in which multiple losses can occur and affect multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakes and other catastrophes, have the potential to adversely affect our operating results. Other risks, such as man-made catastrophes or pandemic disease, could also adversely affect our business and operating results to the extent they are covered by our insurance products. Concentration of exposure in certain industries or geographies may cause us to suffer disproportionate losses.
•
- Single Risk Loss Exposure– Our business is exposed to loss events that have the potential to generate losses from a single insured client. Events such as fires or explosions can result in loss activity for our clients. The net risk to us is managed to acceptable limits established by our GRC through a combination of internal underwriting standards and external reinsurance. Furthermore, single risk loss exposure is managed and monitored on both a segregated and aggregated basis.
•
- Reinsurance
— - Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsurance including the unrecoverability of expected payments from reinsurers either due to an inability or unwillingness to pay, contracts that do not respond properly to the event, or that actual reinsurance coverage is different than anticipated.
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The inability or unwillingness to pay is considered credit risk and is monitored through our credit risk management framework.
ITEM 7 / ENTERPRISE RISK MANAGEMENT
Natural Catastrophe Risk
We manage catastrophe exposure with multiple approaches such as setting risk limits based on aggregate Probable Maximum Loss (PML) modeling, monitoring overall exposures and risk accumulations, and purchasing catastrophe reinsurance through both the traditional reinsurance markets and capital markets in addition to other reinsurance protections.
We use third-party catastrophe risk models and other tools to evaluate and simulate frequency and severity of catastrophic events and associated losses to our portfolios of exposures. We apply a proprietary multi-model approach to account for
relative strengths and weaknesses of vendor models, and make adjustments to modeled losses to account for loss adjustment expenses, model biases, data quality and non-modeled risks.
In addition, weWe perform post-catastrophe event studies to identify model weaknesses, underwriting gaps, and lessons, and improvement opportunities. Lessons learned from post-catastrophe event studies are incorporated into the modeling and underwriting processprocesses of risk pricing and selection. The majority of policies exposed to catastrophic risks are one-year contracts which allow us to adjust our underwriting guidelines, pricing and exposuresexposure accumulation in a relatively short period.
We recognize that climate change has implications for insurance industry exposure to natural catastrophe risk. With multiple levels of risk management processes in place, we actively analyze the latest climate science and policy to anticipate potential changes to our risk profile, pricing models and strategic planning. For example, we continually consider changes in climate and weather patterns as an integral part of the underwriting process. In addition, we are committed to providing innovative insurance products and services to help our clients be proactive against the threat of climate change, including expanding natural disaster resilience, promoting adaptation, and reducing greenhouse gas emissions. Our internal product development, underwriting, modeling, and sustainability practices will continue to adapt to and evolve with the developing risk exposures attributed to climate change.
Our natural catastrophe exposure is primarily driven by the U.S. and Japan, though our overall exposure is diversified across multiple countries. For example, we have exposures to additional perils such as European windstorms and flood.floods. Within the U.S., we have significant hurricane exposure in Florida, the Gulf of Mexico, and the Northeast U.S. and mid-Atlantic regions. Events impacting the Northeast U.S. and the mid-Atlantic may result in a higher share of industry losses than other regions primarily due to our relative share of exposure in those regions. Within the U.S., we have significant earthquake exposure in California, and the Pacific Northwest and New Madrid regions. Earthquakes impacting the Pacific Northwest regionand New Madrid regions may result in a higher share of industry losses than other regions primarily due to our relative share of exposure in that region.these regions.
The estimates below are the Occurrence Exceedance Probability (OEP) losses, which reflect losses that may occur in any single yearevent due to the defined peril. The 1-in-100 and 1-in-250 PMLs are the probable maximum losses from a single natural catastrophe event with probability of 1 percent and 0.4 percent in a year, respectively.
The following table presents an overview of OEP modeled losses (OEP) for top perils and countries.
At December 31, 2015 | | | | Net of 2016 | | Net of 2016 | Percent of Total | |
(in millions) | | Gross | | Reinsurance | | Reinsurance, After Tax | Shareholder Equity | |
Exposures: | | | | | | | | |
U.S. Hurricane (1-in-100)(a) | $ | 5,332 | $ | 3,144 | $ | 2,044 | 2.3 | % |
U.S. Earthquake (1-in-250)(b) | | 7,484 | | 3,827 | | 2,487 | 2.8 | |
Japanese Wind (1-in-100) | | 936 | | 523 | | 340 | 0.4 | |
Japanese Earthquake (1-in-250)(c) | $ | 993 | $ | 601 | $ | 391 | 0.4 | % |
| | | | | | | | | | | | | |
| | |
At December 31, 2013
(in millions)
| | Gross
| | Net of 2014
Reinsurance
| | Net of 2014
Reinsurance,
After Tax
| | Percent of Total
Shareholder Equity
| |
|---|
| | |
Exposures: | | | | | | | | | | | | | |
U.S. Hurricane (1-in-100)(a) | | $ | 4,729 | | $ | 2,661 | | $ | 1,730 | | | 1.7 | % |
U.S. Earthquake (1-in-250)(b) | | | 7,480 | | | 3,599 | | | 2,339 | | | 2.3 | |
Japanese Wind (1-in-100) | | | 1,293 | | | 708 | | | 460 | | | 0.5 | |
Japanese Earthquake (1-in-250)(c) | | $ | 942 | | $ | 710 | | $ | 462 | | | 0.5 | % |
| | |
(a)The U.S. hurricane amount includes losses to propertyProperty from hurricane hazards of wind and storm surge.
(b)U.S. earthquake loss estimates represent exposure to Property, Workers'Workers’ Compensation (U.S.) and A&H business lines.
(c)Japan Earthquake represents exposure to propertyProperty and A&H business lines.
The OEP estimates provided above reflect our in-force portfolios at September 30, 2013,2015, for both U.S. exposures, and at June 30, 2013 for Japan exposures. The catastrophe reinsurance program is as of January 1, 2014.2016.
As noted above, AIG, Property Casualty natural catastrophe modeled losses relative to an industry benchmark over different return periods are presented in the chart below. AIG Property Casualty natural catastrophe net modeled losses across all
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perils worldwide are higher than the industry benchmark in the case of more likely events,along with other non-life insurance and lower in the case of tail events.
AIG Property Casualty Natural Catastrophe exposure vs. Industry benchmark*, worldwide net aggregate exceedance probability as a percentage of AIG Property Casualty statutory surplus:
* Benchmark referenced is from the Moody's P&C rating Methodology Update, May 2013.
AIG Property Casualtyreinsurance companies, utilizes industry-recognized catastrophe models and applies itsapply their proprietary modeling processes and assumptions to arrive at loss estimates. The use of different methodologies and assumptions could materially change the projected losses. Since there is no industry standard for assumptions and preparation of insured data for use in these models, modeled losses may not be comparable to estimates made by other companies.
Also, the modeled results are based on the assumption that all reinsurers fulfill their obligations to us under the terms of the reinsurance arrangements.arrangements and all catastrophe bonds attach and pay as modeled. However, reinsurance recoverable may not be fully collectible. In particular, the use of catastrophe bonds may not provide commensurate levels of protection compared to
traditional reinsurance transactions. Some catastrophe bond transactions may be based on an industry loss index rather than on actual losses incurred by us, which would result in residual risk. Therefore, these estimates are inherently uncertain and may not accurately reflect our exposure to these events.
Our 20142016 catastrophe reinsurance program includes coverage for natural catastrophes and some coverage for terrorism events. It consists of a large North American occurrence cover (without reinstatement) to protect against a large U.S. loss,North America losses, and a worldwideJapan occurrence and aggregate covercovers to protect against multiple smaller losses.losses in Japan. The attachment point for this reinsurance program is at $3 billion.billion for the North American cover and varies by line of business for the Japan covers.
Actual results in any period are likely to vary, perhaps materially, from the modeled scenarios. The occurrence of one or more severe events could have a material adverse effect on our financial condition, results of operations and liquidity. See also Item 1A. Risk Factors — Reserves and Exposures for additional information.
Terrorism Risk
We actively monitor terrorism risk and manage exposures to losses from terrorist attacks. We have set risk limits based on modeled losses from certain terrorism attack scenarios. Terrorism risks are modeled using a third-party vendor modelsmodel and various terrorism attack modelsmodes and scenarios. Adjustments are made to account for vendor model gaps and the nature of AIG Property Casualtythe Non-Life Insurance Companies exposures. Examples of modeled scenarios are conventional bombs of different sizes, anthrax attacks and nuclear attacks.
Our largest terrorism exposures are in New York City, and estimated losses are largely driven by the Property and Workers'Workers’ Compensation lines of business. At our largest exposure location, modeled losses for a five-ton bomb attack net of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) and reinsurance recoveries are estimated to be $3.3$3 billion as of September 30, 2013.2015. We also have smaller terrorism exposure in Canadian cities and in London.
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We also have exposure to terrorist attacks due to coverage at airport locations for airline hull, airline and airport property. The exposure is expected to be less than the exposure in New York City to losses from a conventional five-ton bomb attack.
Our exposure to terrorism risk is mitigated by TRIPRA in addition to limited private reinsurance protections. TRIPRA covers terrorist attacks inwithin the United States onlyor U.S. missions and against certain U.S. carriers or vessels and excludes certain lines of business as specified by applicable law. In 2016, TRIPRA covers 8584 percent of insured losses above a deductible.deductible, decreasing by one percent each year to 80 percent in 2020. The current estimate of our deductible is about $2.8approximately $2.7 billion for 2013. TRIPRA is set to expire on December 31, 2014. We are closely monitoring the legislative developments related to TRIPRA renewal or expiration, and developing appropriate business strategies for potential legislation outcomes, including non-renewal of TRIPRA.2015.
We offer terrorism coverage in many other countries through various insurance products and participate in country terrorism pools when applicable. International terrorism exposure is estimated using scenario-based modeling and exposure concentration is monitored routinely. Targeted reinsurance purchases are made for some lines of business to cover potential losses due to terrorist attacks.
Mortgage Risk
For Mortgage Guaranty, the potential exposure to loss is due to borrower default on a first-lien residential mortgage; the primary drivers of this risk are changes in mortgage underwriting standards, home price depreciation, changes in the unemployment rate, changes in mortgage rates, and mortgagee behavior.
Mortgage Guaranty manages the quality of the loans it insures through use of a proprietary risk quality index. Mortgage Guaranty uses this index to determine an insurability threshold as well as to manage the risk distribution of its new business. Along with traditional mortgage underwriting variables, Mortgage Guaranty’s risk-based pricing model uses rating factors such as local housing economic conditions to establish premium rates.
Reinsurance Recoverable
AIG'sAIG’s reinsurance recoverable assets are comprised of:
•Paid losses recoverable —– balances due from reinsurers for losses and loss adjustment expenses paid by our subsidiaries and billed, but not yet collected.
•
•Ceded loss reserves —– ultimate ceded reserves for losses and loss adjustment expenses, including reserves for claims reported but not yet paid and estimates for IBNR.
•
•Ceded reserves for unearned premiums.At December 31, 2013,2015, total reinsurance recoverable assets were $23.8$20.4 billion. These assets include general reinsurance paid losses recoverable of $1.3$1.2 billion, ceded loss reserves of $17.3$14.5 billion including reserves for IBNR, and ceded reserves for unearned premiums of $3.4$3.0 billion, as well as life reinsurance recoverables of $1.8$1.7 billion. The methods used to estimate IBNR and to establish the resulting ultimate losses involve projecting the frequency and severity of losses over multiple years. These methods are continually reviewed and updated by management. Any adjustments are reflected in income. We believe that the amount recorded for ceded loss reserves at December 31, 2013 reflect2015 reflects a reasonable estimate of the ultimate losses recoverable. Actual losses may, however, differ, perhaps materially, from the reserves currently ceded.
The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and condition of current and potential reinsurers, both foreign and domestic. The RCD monitors both the financial condition of reinsurers as well as the total reinsurance recoverable ceded to reinsurers, and set limits with regard to the amount and type or exposure we are willing to take with reinsurers. As part of these assessments, we attempt to identify whether a reinsurer is appropriately licensed, assess its financial capacity and liquidity; and evaluate the local economic and financial environment in which a foreign reinsurer operates. The RCD reviews the nature of the risks ceded and the need for measures, including collateral to mitigate credit risk. For example, in our treaty reinsurance contracts, we frequently include provisions that allow us to require a reinsurer to post collateral or use other measures to reduce exposure when a referenced event occurs. Furthermore, we limit our unsecured exposure to reinsurers through the use of credit triggers such as insurer financial strength rating downgrades, declines in regulatory capital, or specified declines in risk-based capital (RBC) ratios. We also set maximum limits for reinsurance recoverable exposure, which in some cases is the recoverable amount plus an estimate of the maximum potential exposure from unexpected events for a reinsurer. In addition, credit executives within ERM review reinsurer exposures and credit limits and approve reinsurer credit limits above specified levels. Finally, even where we conclude that uncollateralized credit risk is acceptable, we require collateral from active reinsurance counterparties where it is necessary for our subsidiaries to recognize the reinsurance recoverable assets for statutory accounting purposes. At December 31, 2013,2015, we held $7.5$7.4 billion of collateral, in the form of funds withheld, securities in reinsurance trust accounts and/or irrevocable letters of credit, in support of reinsurance recoverable assets from unaffiliated reinsurers. We believe that no exposure to a single reinsurer represents an inappropriate concentration of risk to AIG,us, nor is our business substantially dependent upon any single reinsurance contract.
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The following table presents information for each reinsurer representing in excess of five percent of our total reinsurance recoverable assets:
At December 31, 2015 | | A.M. | | Gross | | Percent of | | | | Uncollateralized |
| S&P | Best | Reinsurance | | Reinsurance | | | Collateral | Reinsurance |
(in millions) | Rating(a) | Rating(a) | | Assets | | Assets(b) | | | Held(c) | | Assets |
Reinsurer: | | | | | | | | | | | |
Swiss Reinsurance Group of Companies | AA- | A+ | $ | 2,553 | | 12.5 | % | $ | 733 | $ | 1,820 |
Berkshire Hathaway Group of Companies | AA+ | A++ | $ | 2,275 | (d) | 11.1 | % | $ | 1,408 | $ | 867 |
Munich Reinsurance Group of Companies | AA- | A+ | $ | 1,637 | | 8.0 | % | $ | 660 | $ | 977 |
| | | | | | | | | | | | | | | | | | | |
| | |
At December 31, 2013
(in millions)
| | S&P
Rating(a)
| | A.M.
Best
Rating(a)
| | Gross
Reinsurance
Assets
| | Percent of
Reinsurance
Assets(b)
| | Collateral
Held(c)
| | Uncollateralized
Reinsurance
Assets
| |
|---|
| | |
Reinsurer: | | | | | | | | | | | | | | | | | | | |
Berkshire Hathaway Group of Companies | | | AA+ | | | A++ | | $ | 2,015 | (d) | | 8.5 | % | $ | 1,383 | | $ | 632 | |
Munich Reinsurance Group of Companies | | | AA- | | | A+ | | $ | 1,474 | | | 6.2 | % | $ | 598 | | $ | 876 | |
Swiss Reinsurance Group of Companies | | | AA- | | | A+ | | $ | 1,454 | | | 6.1 | % | $ | 467 | | $ | 987 | |
| | |
(a) The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of February 11, 2014.5, 2016.
(b) Total reinsurance assets include both AIG Property Casualtythe Non-Life Insurance Companies and AIGthe Life and RetirementInsurance Companies reinsurance recoverable.
(c) Excludes collateral held in excess of applicable treaty balances.
(d) Includes $1.6$1.8 billion recoverable under the 2011 retroactive reinsurance transaction pursuant to which a large portion of AIG Property Casualty'sthe Non-Life Insurance Companies net domestic asbestos liabilities were transferred to NICO. Does not include reinsurance assets ceded to other reinsurers for which NICO has assumed the collection risk. See Liability for Unpaid ClaimsLosses and ClaimLoss Adjustment ExpenseExpenses — Transfer of Domestic Asbestos Liabilities.
At December 31, 2013,2015, we had no significant general reinsurance recoverable due from any individual reinsurer that was financially troubled. Reinsurance underwriting profits in 2013 generally have increased reinsurerReinsurer capital levels and thereforecontinued to increase in 2015, thereby increasing the industry'sindustry’s underwriting capacity. This increased capacity has resulted in increased competition and lower rates for 20142016 renewals. Reduced profitability associated with lower rates could potentially result in reduced capacity or rating downgrades for some reinsurers.
The RCD, in conjunction with the credit executives within ERM, reviews these developments, monitors compliance with credit triggers that may require the reinsurer to post collateral, and seeks to use other appropriate means to mitigate any material risks arising from these developments.developments.
See Item 7. MD&A —– Critical Accounting Estimates —– Reinsurance Assets for further discussion of reinsurance recoverable.
AIG Life and RetirementInsurance Companies Key Insurance Risks
Our Retirement and Life segments manage risk through product design, experience monitoring, pricing actions, risk limitations, reinsurance and active monitoring and management of the relationships between assets and liabilities, including hedging.
For AIGour Retirement and Life and Retirement,products offered by the primaryLife Insurance Companies, key insurance risks areinclude the following:
•
- Mortality risk –
— represents the risk of loss arising from actual mortality rates being higher than expected mortality rates. This risk could arise from pandemics or other events, including longer-term societal changes that cause higher than expected mortality. This risk exists in a number of our product lines, but is most significant for our life insurance products.
•
•- Longevity risk
—– represents the risk of a change in value of a policy arising fromor benefit as a result of actual mortality rates being lower than the expected mortality rates. This risk could arise from longer-term societal health changes as well as other factors. This risk exists in a number of our product lines but is most significant for our retirement, institutional and annuity products.
•
•Client behavioralPolicyholder behavior risk including surrender/lapse risk — there– represents the risk that actual policyholder behavior differs from expected behavior in a manner that has an adverse effect on our results of operations. There are many assumptions made when products are sold, including how long the contracts will persist. Actual experience can vary significantly from these assumptions. This risk is impacted by a number of factors including changes in market conditions, especially interest rate and equity market changes, tax law, regulations and policyholder preferences. This risk exists in the majority of our product lines.
•
•- Interest rate risk
—- represents the potential for loss due to a change in interest rates. Interest rate risk is measured with respect to assets, liabilities (both insurance-related and financial), and derivatives. This risk manifests itself when interest rates move significantly in a short period of time (interesttime. Rapidly rising interest rates create the potential for increased surrenders. Interest rate shock) butrisk can also manifest itself over a longer period of time, such as in a persistent low interest rate environment.
Low long-term interest rates put pressure on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits on certain existing fixed rate products - .
•
- Equity risk
—– represents the potential for loss due to changes in equity prices. It affects equity-linked insurance products, including but not limited to equity-indexedindex annuities, variable annuities (and associated guaranteed living and death benefits)benefits, as discussed below), universal life insurance and variable universal life insurance. It also affects our equity
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investments and equity-related investments. In addition, changes in the volatility of equity prices can affect the valuation of those insurance productsfeatures that are accounted for in a manner similar to equity derivatives.
AIG Lifeas embedded derivatives and Retirement manages these risks through product design, experience monitoring, pricing actions, risk limitations, reinsurance and active monitoring and management of the relationships between assets and liabilities, including hedging. related economic hedges.
The emergence of significant adverse experience compared to the initial assumptions at policy issuance or updated assumption would require an adjustment to DAC and benefit reserves, which could have a material adverse effect on our consolidated results of operations for a particular period. For a furtheradditional discussion of this risk,the impact of actual and expected experience on DAC and benefit reserves, see Critical Accounting Estimates – Future Policy Benefits for Life and Accident and Health (Life Insurance Companies) and Critical Accounting Estimates – Guaranteed Benefit Features of Variable Annuity Products (Life Insurance Companies). For additional discussion of business risks, see Item 1A. Risk Factors — Business and Operations.
Mortgage Guaranty Key Insurance RisksVariable Annuity Risk Management and Hedging Program
Our Retirement Income Solutions and Group Retirement businesses offer variable annuity products with riders that guarantee a certain level of benefits. Certain guaranteed living benefits, which include GMWB and GMAB, are accounted for as
For UGC, risks emanate primarily from the following:TABLE OF CONTENTS
•Mortgage Underwriting risk
Item 7 / — represents the potential exposure to loss due to borrower default on a first-lien residential mortgage; the primary drivers of this enterprise risk are home price depreciation,management
embedded derivatives measured at fair value, with changes in the unemployment rate,fair value recorded in Other realized capital gains (losses). GMWB and GMAB features subject the Life Insurance Companies to market risk, including exposure to changes in mortgageinterest rates, equity prices, credit spreads and market volatility.
Variable annuity product design is the first step in managing our exposure to these market risks. Risk mitigation features of our variable annuity product design include GMWB rider fees indexed to an equity market volatility index, which can provide additional fee assessments in periods of market volatility, required minimum allocations to fixed accounts to reduce overall equity exposure, and the utilization of volatility control funds, which reduce equity exposure in the funds in response to changes in market volatility, even under sudden or extreme market movements.
After reflecting our product risk-mitigating features, we hedge our remaining economic exposure to market risk within GMWB and GMAB features through our variable annuity hedging program, which is designed to offset certain changes in the economic value of these GMWB and GMAB embedded derivatives, within established thresholds. The hedging program is designed to provide additional protection against large and combined movements in interest rates, equity prices, credit spreads and market volatility under multiple scenarios.
Our hedging program utilizes an economic hedge target, which represents our estimate of the underlying economic drivers of these embedded derivatives, based on the present value of the future expected benefit payments for the GMWB and GMAB, less the present value of future rider fees, over numerous stochastic scenarios. This stochastic projection method uses best estimate assumptions for policyholder behavior (including mortality, lapses, withdrawals and benefit utilization) in conjunction with market scenarios calibrated to observable equity and interest rate option prices. Policyholder behaviors are regularly evaluated to compare current assumptions to actual experience and, if appropriate, changes are made to the policyholder behavior assumptions. The risk of changes in policyholder behavior is not explicitly hedged and such differences between expected and actual policyholder behaviors may result in hedge ineffectiveness.
Due to differences between the calculation of the economic hedge target and U.S. GAAP valuation of the embedded derivative, which include differences in the treatment of rider fees and exclusion of certain risk margins and other differences in discount rates, we expect relative movements in the economic hedge target and the U.S. GAAP embedded derivative valuation will vary over time with changes in equity markets, interest rates and a borrower's willingness to pay.
•Pricing risk — representscredit spreads. See Results of Operations – Life Insurance Companies DAC and Reserves - Variable Annuity Guaranteed Benefit Features and Hedging Program for information on the potential exposure to loss if actual policy experience emerges adverselyimpact on our consolidated pre-tax income from the change in comparison to the assumptions made in product pricing. This may be related to adverse economic conditions, prepayment of policies, investment results, and expenses.UGC manages the qualityfair value of the loans it insures through use of a proprietary risk quality index. UGC uses this index to determine an insurability thresholdembedded derivatives and the hedging portfolio, as well as additional discussion of differences between the economic hedge target and the valuation of the embedded derivatives.
In designing our hedging portfolio, we make assumptions and projections about the future performance of the underlying contract holder funds. To project future account value changes, we make assumptions about how each of the underlying funds will perform. We map the contract holder funds to a set of publicly traded indices that we believe best represent the liability to be hedged. Basis risk exists due to the variance between these assumptions and actual fund returns, which may result in variances between changes in the hedging portfolio and changes in the economic hedge target. Net hedge results and the cost of hedging are also impacted by differences between realized volatility and implied volatility.
To manage the capital market exposures embedded within the economic hedge target, we identify and hedge market sensitivities to changes in equity markets, interest rates, volatility and credit spreads. The hedge program purchases derivative instruments or securities having sensitivities that offset those in the economic hedge target, within internally defined threshold levels. Since the relative movements of the hedging portfolio and the economic hedge target vary over time or with market changes, the net exposure can be outside the threshold limits, and adjustments to the hedging portfolio are made periodically to return the net exposure to within threshold limits.
Our hedging program utilizes various derivative instruments, including but not limited to equity options, futures contracts, interest rate swaps and swaption contracts, as well as other hedging instruments. In addition, we purchase certain fixed income securities and elect the fair value option as a capital efficient way to manage interest rate and credit spread exposures. To minimize counterparty credit risk, the majority of our derivative instrument hedges are implemented using exchange-traded futures and options, cleared through global exchanges. Over the counter derivatives are highly collateralized.
The hedging program is monitored on a daily basis to ensure that the economic hedge target and derivative portfolio are within the threshold limits, pursuant to the approved hedge strategy. Daily risk distributionmonitoring verifies that the net risk exposures, as measured through sensitivities to a large set of its new business. Along with traditional mortgage underwriting variables, UGC's risk-based pricing model uses rating factors such as geographymarket shocks, are within the approved net risk exposure threshold limits. In addition, monthly stress tests are performed to determine the program’s effectiveness relative to the applicable limits, under an
array of combined severe market stresses in equity prices, interest rates, volatility and credit spreads. Finally, hedge strategies are reviewed regularly to gauge their effectiveness in managing our market exposures in the historical qualitycontext of a lender's origination process to establish premium rates.our overall risk appetite.
UGC's risk appetite framework establishes various concentration limits on the business UGC insures (for example, geography), and defines underwriting characteristics for which UGC will not insure loans.
Other Operations Risks
Global Capital Markets
GCM actively manages its exposures to limit potential economic losses, and in doing so, GCM must continually manage a variety of exposures including credit, market, liquidity, operational and legal risks. The senior management of AIG defines the policies and establishes general operating parameters for GCM's operations. Our senior management has established various oversight committees to regularly monitor various financial market, operational and credit risks related to GCM's operations. The senior management of GCM reports the results of its operations to and reviews future strategies with AIG's senior management.
GCM Derivative Transactions
A counterparty may default on any obligationWe utilize derivatives principally to enable us including a derivative contract.to hedge exposure to interest rates, currencies, credit, commodities, equities and other risks. Credit risk is a consequence of extending credit and/or carrying trading and investment positions. Credit riskassociated with derivative counterparties exists for a derivative contract when that contract has a positive fair value to AIG.us. The maximum potential exposure will increase or decrease during the life of the derivative commitments as a function of maturity and market conditions. To help manage this risk, GCM'sAll derivative transactions must be transacted within counterparty limits that have been approved by ERM.
We evaluate counterparty credit department operates withinquality by internal analysis consistent with the guidelines set by the credit function within ERM. Transactions that fall outside these pre-established guidelines require the specific approval of ERM. It is also AIG's policy to record credit valuation adjustments for potential counterparty default when necessary.
In addition, GCM utilizesAIG Credit Policy. We utilize various credit enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives, margin agreements and subordination to reduce the credit risk relating to its outstanding financial derivative transactions. GCM requiresWe require credit enhancements in connection with specific transactions based on, among other things, the creditworthiness of the counterparties, and the transaction'stransaction size and maturity. Furthermore, GCM enterswe enter into certain agreements that have the benefit of set-off and close-out netting provisions;provisions, such as ISDA Master Agreements, repurchase agreements and securities lending agreements.Agreements. These provisions provide that, in the case of an early termination of a transaction, GCMwe can set off its receivables from a counterparty against its payables to the same counterparty arising out of all covered transactions. As a result, where a legally
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enforceable netting agreement exists, the fair value of the transaction with the counterparty represents the net sum of estimated fair values.
The fair value of GCM'sour interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward commitments, futures, and forward contracts reported in Derivative assets, at fair value,as a component of Other Assets, was approximately $1.4$1.3 billion at December 31, 20132015 and $3.2$1.6 billion at December 31, 2012.2014. Where applicable, these amounts have been determined in accordance with the respective master netting agreements.
GCM evaluates the counterparty credit quality by reference to ratings from rating agencies or, where such ratings are not available, by internal analysis consistent with the risk rating policies of ERM. In addition, GCM's credit approval process involves pre-set counterparty and country credit exposure limits subject to approval by ERM and, for particularly credit-intensive transactions, requires approval from ERM.
The following table presents the fair value of GCM'sour derivatives portfolios in asset positions by internal counterparty credit rating:
|
| |
| |
| | |
|---|
| | | |
At December 31,
(in millions)
| | 2013
| | 2012
| | |
|---|
| | | |
At December 31, | | | | | |
(in millions) | | | 2015 | | 2014 |
Rating: | | | | | | | | | | | |
AAA | | $ | 129 | | $ | 145 | | $ | 56 | $ | 11 |
AA | | | 156 | | | 168 | | | 103 | | 129 |
A | | | 291 | | | 745 | | | 256 | | 441 |
BBB | | | 687 | | | 1,907 | | | 767 | | 838 |
Below investment grade | | | 114 | | | 199 | | | 127 | | 184 |
| | | |
Total | | $ | 1,377 | | $ | 3,164 | | $ | 1,309 | $ | 1,603 |
| | | |
See Critical Accounting Estimates below and Note 1110 to the Consolidated Financial Statements for additional discussion related to derivative transactions.
Aircraft Leasing
Risks inherent in ILFC's business, which are managed at the business unit level, include the following:
•that there will be no market for the aircraft acquired;
•that aircraft cannot be placed with lessees;
•non-performance by lessees;
•that aircraftAIG Parent and related assets cannot be disposed of at the time and in a manner desired;
•losses on sales or impairment charges and fair value adjustments on older aircraft; and
•an inability of ILFC to access the capital markets to finance operations and meet contractual obligations due to prevailing economic and market conditions.
ILFC uses security deposit requirements, repossession rights and overhaul requirements, while also closely monitoring industry conditions, to manage the risk of nonperformance by its lessees. At December 31, 2013, more than 93 percent of ILFC's lease revenue came from non-U.S. carriers, and its fleet continues to be in high demand from such carriers. Quarterly, ILFC's management evaluates the need to perform a recoverability assessment of aircraft in its fleet, including events and circumstances that may cause impairment of aircraft values, and performs this assessment at least annually for all aircraft in its fleet. Management evaluates aircraft in the fleet as necessary based on these events and circumstances. As new and more fuel-efficient aircraft enter the marketplace and negatively affect the demand for older aircraft, lease rates on older aircraft may deteriorate and ILFC may incur additional losses on sales or record impairment charges and fair value adjustments.
Corporate & Other
The major risk for investments in life settlements is longevity risk, which represents the risk of a change in the carrying value of the contracts arising from actual mortality rates being lower than the expected mortality rates. This risk could arise from longer term societal health changes as well as other factors.
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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
Item 7 / CRITICAL aCCOUNTING eSTIMATES
Critical Accounting Estimates |
The preparation of financial statements in accordance with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment.
The preparation of financial statements in accordance with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment.
The accounting policies that we believe are most dependent on the application of estimates and assumptions, which are critical accounting estimates, are related to the determination of: |
•classification of ILFC as held for sale and related fair value measurement;
•income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset;
•
•liability for unpaid claimslosses and claimsloss adjustment expense;expenses;
•
•reinsurance assets;
•
•valuation of future policy benefit liabilities and timing and extent of loss recognition;
•
•valuation of liabilities for guaranteed benefit features of variable annuity products:products;
•
•estimated gross profits to value deferred acquisition costs for investment-oriented products;
•
•impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets, including investments in life settlements, and goodwill impairment;
•
•liability for legal contingencies; and
•
•fair value measurements of certain financial assets and liabilities.These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.
The major assumptions used to establish each critical accounting estimate are discussed below.
Classification of ILFC as Held for Sale and Related Fair Value Measurement
|
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.
The major assumptions used to establish each critical accounting estimate are discussed below.
Income Taxes
We report a business as held for sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next 12 months, which may require significant judgment, and certain other specified criteria are met. A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized.
On December 9, 2012, AIG Parent, AIG Capital Corporation (Seller), a wholly-owned direct subsidiary of AIG Parent and the sole shareholder of ILFC, and Jumbo Acquisition Limited (Jumbo) entered into a definitive agreement (the Jumbo Share Purchase Agreement) for the sale of 80.1 percent of the common stock of ILFC for approximately $4.2 billion in cash (the ILFC Transaction). Jumbo was granted an option to purchase an additional 9.9 percent of the common stock of ILFC for $522.5 million (the Option). We determined ILFC met the criteria for held for sale and discontinued operations accounting at December 31, 2012 and, consequently, we recorded a $4.4 billion after-tax loss for the year ended December 31, 2012. As of December 15, 2013, the closing of the ILFC Transaction had not occurred and on December 16, 2013, AIG Parent and Seller terminated the amended Jumbo Share Purchase Agreement.
On December 16, 2013, AIG Parent and Seller entered into a definitive agreement with AerCap Holdings N.V. (AerCap) and AerCap Ireland Limited for the sale of 100 percent of the common stock of ILFC (the AerCap Agreement) for consideration consisting of $3.0 billion of cash and approximately 97.6 million newly issued AerCap
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common shares. The consideration has a value of approximately $5.4 billion based on AerCap's pre-announcement closing price per share of $24.93 on December 13, 2013. Upon closing of the transaction, AIG will record the 97.6 million AerCap shares received at their then fair value and adjust the final gain (loss) on sale. The transaction is subject to required regulatory approvals, including all applicable U.S. and foreign regulatory reviews and approvals, as well as other customary closing conditions. The AerCap Transaction was approved by AerCap shareholders on February 13, 2014. We determined ILFC met the criteria for held-for-sale accounting at December 31, 2013. Because we expect to hold approximately 46 percent of the common stock of AerCap upon closing of the transaction, however, ILFC does not qualify for discontinued operations presentation in the Consolidated Statements of Income. Consequently, ILFC's operating results are presented in continuing operations for all periods presented.
Income Taxes
The evaluation of the recoverability of our net deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the net deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.
We consider a number of factors to reliably estimate future taxable income so we can determine the extent of our ability to realize net operating losses (NOLs), foreign tax credits (FTCs), realized capital loss and other carryforwards. These factors include forecasts of future income for each of our businesses and actual and planned business and operational changes, both of which include assumptions about future macroeconomic and AIG‑specific conditions and events. We subject the forecasts to stresses of key assumptions and evaluate the effect on tax attribute utilization. We also apply stresses to our assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. Our income forecasts, coupled with our tax
Recoverability of Net Deferred Tax Asset190
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The evaluation of the recoverability of our net deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the net deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.
We consider a number of factors to reliably estimate future taxable income, so we can determine the extent of our ability to realize net operating losses (NOLs), foreign tax credits (FTCs), capital loss and other carryforwards. These factors include forecasts of future income for each of our businesses and actual and planned business and operational changes, both of which include assumptions about future macroeconomic and AIG-specific conditions and events. We subject the forecasts to stresses of key assumptions and evaluate the effect on tax attribute utilization. We also apply stresses to our assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. Our income forecasts, coupled with our tax planning strategies and stress scenarios, all resulted in sufficient taxable income to achieve realization of the tax attributes (other than capital loss carryforwards) prior to their expiration.
See Note 23 to the Consolidated Financial Statements for a discussion of our framework for assessing the recoverability of our deferred tax asset.
U.S. Income Taxes on Earnings of Certain Foreign Subsidiaries
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planning strategies, all resulted in sufficient taxable income to achieve realization of the U.S. tax attributes prior to their expiration.
We separately assess the recoverability of our net deferred tax asset related to unrealized tax capital losses in the U.S. Life Insurance Companies’ available for sale portfolio. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, as such when assessing its recoverability we consider our ability and intent to hold the underlying securities to recovery. As of December 31, 2015, based on all available evidence, we concluded that a valuation allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized.
See Note 22 to the Consolidated Financial Statements for a discussion of our framework for assessing the recoverability of our deferred tax asset.
Uncertain Tax Positions
The U.S. federal income tax laws applicable to determining the amount of income taxes related to differences between the book carrying values and tax bases of subsidiaries are complex. Determining the amount also requires significant judgment and reliance on reasonable assumptions and estimates.
Insurance Liabilities
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Our accounting for income taxes, including uncertain tax positions, represents management’s best estimate of various events and transactions, and requires judgment. FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) (now incorporated into Accounting Standards Codification, 740, Income Taxes) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. The standard also provides guidance on derecognition, classification, interest and penalties and additional disclosures. We determine whether it is more likely than not that a tax position will be sustained, based on technical merits, upon examination by the relevant taxing authorities before any part of the benefit can be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement.
We classify interest expense and penalties recognized on income taxes as a component of income taxes.
U.S. Income Taxes on Earnings of Certain Foreign Subsidiaries
Liability for Unpaid Claims and Claims Adjustment Expense (AIG Property Casualty and Mortgage Guaranty)
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The U.S. federal income tax laws applicable to determining the amount of income taxes related to differences between the book carrying amounts and tax bases of subsidiaries are complex. Determining the amount also requires significant judgment and reliance on reasonable assumptions and estimates.
Insurance Liabilities
The estimate of the Liability for unpaid claims and claims adjustment expense consists of several key judgments:
•the determination of the actuarial models used as the basis for these estimates;
•the relative weights given to these models by class;
•the underlying assumptions used in these models; and
•the determination of the appropriate groupings of similar classes and, in some cases, the segmentation of dissimilar claims within a class.
We use numerous assumptions in determining the best estimate of reserves for each class of business. The importance of any specific assumption can vary by both class of business and accident year. Because actual experience can differ from key assumptions used in establishing reserves, there is potential for significant variation in
AIG 2013 Form 10-K
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Liability for Unpaid Losses and Loss Adjustment Expenses (Non-Life Insurance Companies)
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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
the development of loss reserves. This is particularly true for long-tail casualty classes of business such as excess casualty, asbestos, D&O, and primary or excess workers' compensation.
All of our methods to calculate net reserves include assumptions about estimated reinsurance recoveries and their collectability. Reinsurance collectability is evaluated independently of the reserving process and appropriate allowances for uncollectible reinsurance are established.
In some of our estimation processes we rely on the claims department estimates of our case reserves as an input to our best estimate of the ultimate loss cost.
Overview of Loss Reserving Process and Methods
AIG Property Casualty loss reserves can generally be categorized into two distinct groups. Short-tail classes of business consist principally of property, personal lines and certain casualty classes. Long-tail casualty classes of business include excess and umbrella liability, D&O, professional liability, medical malpractice, workers' compensation, general liability, products liability and related classes.
Short-Tail Reserves
For operations writing short-tail coverages, such as property coverages, the process of recording quarterly loss reserves is generally geared toward maintaining an appropriate reserve for the outstanding exposure, rather than determining an expected loss ratio for current business. For example, the IBNR reserve required for a class of property business might be expected to approximate 20 percent of the latest year's earned premiums. This level of reserve would generally be maintained regardless of the loss ratio emerging in the current quarter. The 20 percent factor would be adjusted to reflect changes in rate levels, loss reporting patterns, known exposure to unreported losses, or other factors affecting the particular class of business. For some classes, a loss development factor method may be used.
Long-Tail Reserves
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The estimate of the Liability for unpaid losses and loss adjustment expenses consists of several key judgments:
•the determination of the actuarial models used as the basis for these estimates;
•the relative weights given to these models by class;
•the underlying assumptions used in these models; and
•the determination of the appropriate groupings of similar classes and, in some cases, the segmentation of dissimilar claims within a class.
We use numerous assumptions in determining the best estimate of reserves for each class of business. The importance of any specific assumption can vary by both class of business and accident year. Because actual experience can differ from key assumptions used in establishing reserves, there is potential for significant variation in the development of loss reserves. This
is particularly true for long-tail casualty classes of business such as excess casualty, asbestos, D&O, and primary or excess workers’ compensation.
All of our methods to calculate net reserves include assumptions about estimated reinsurance recoveries and their collectability. Reinsurance collectability is evaluated independently of the reserving process and appropriate allowances for uncollectible reinsurance are established.
In some of our estimation processes we rely on the claims department estimates of our case reserves as an input to our best estimate of the ultimate loss cost.
Overview of Loss Reserving Process and Methods
The Non-Life Insurance Companies’ loss reserves can generally be categorized into two distinct groups. Short-tail classes of business consist principally of property, Personal Insurance and certain casualty classes. Long-tail casualty classes of business include excess and umbrella liability, D&O, professional liability, medical malpractice, workers’ compensation, general liability, products liability and related classes.
Short-Tail Reserves
For operations writing short-tail coverages, where the nature of claims is low frequency and high severity such as property, the process for recording non-catastrophe quarterly loss reserves for more recent accident quarters is geared toward maintaining incurred but not reported reserves (IBNR) based on percentages of net earned premiums for that business, rather than projecting ultimate loss ratios based on reported losses. For example, the IBNR reserve required for the latest accident quarter for a class of property business might be approximately 20 percent of the quarter’s earned premiums. This level of reserve would generally be recorded regardless of the actual losses reported in the current quarter. The percent of premium factor reflects both our expectation of the ultimate loss costs associated with the class of business and the expectation of the percentage of ultimate loss costs that have not yet been reported. The expected ultimate loss costs generally reflect the average loss costs from a period of preceding accident quarters that have been adjusted for changes in rate and loss cost levels, mix of business, known exposure to unreported losses, or other factors affecting the particular class of business. The expected percentage of ultimate loss costs that have not yet been reported would be derived from historical loss emergence patterns. For more mature quarters, loss development methods would be used to determine the IBNR. For other classes where the nature of claims is high frequency low severity, methods including loss development, frequency/severity or a multiple of average monthly losses may be used to determine IBNR reserves. IBNR for claims arising from catastrophic events or events of unusual severity would be determined in close collaboration with the claims department, using alternative techniques or expected percentages of ultimate loss cost emergence based on historical loss emergence of similar claim types.
Long-Tail Reserves
Estimation of ultimate net losses and loss adjustment expenses (net losses) for long-tail casualty classes of business is a complex process and depends on a number of factors, including the class and volume of business, as well as estimates of the reinsurance recoverable. Experience in the more recent accident years shows limited statistical credibility in reported net losses on long-tail casualty classes of business. That is because a relatively low proportion of net incurred losses representrepresents reported claims and expenses, and an even smaller percentage representrepresents net losses paid. Therefore, IBNR constitutes a relatively high proportion of net losses. | To estimate net losses for long-tail casualty classes
of business, we
use a variety of actuarial methods and assumptions. |
To estimate net losses for long-tail casualty classes of business, we use a variety of actuarial methods and assumptions and other analytical techniques as described below. A detailed reserve review is generally performed at least once per year to allow for comprehensive actuarial evaluation and collaboration with claims, underwriting, business unit management, risk management and senior management. We generally make a number of actuarial assumptions in the review of reserves for each class of business.
AIG 2013 Form 10-K
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We generally make a number of actuarial assumptions in the review of reserves for each class of business.
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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
For longer-tail classes of business, we generally make actuarial assumptions with respect to the following: |
•Loss cost trend factors which are used to establish expected loss ratios for subsequent accident years based on the projected loss ratios for prior accident years.
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•Expected loss ratios for the latest accident year (i.e., accident year 20132015 for the year-end 20132015 loss reserve analysis) and, in some cases for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of rate changes and other quantifiable factors on the loss ratio. For low-frequency, high-severity classes such as excess casualty, expected loss ratios generally are used for at least the three most recent accident years.
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•Loss development factors which are used to project the reported losses for each accident year to an ultimate basis. Generally, the actual loss development factors observed from prior accident years would be used as a basis to determine the lossloss development factors for the subsequent accident years. |
We record quarterly changes in loss reserves for each of the Non-Life Insurance Companies classes of business. The overall change in our loss reserves is based on the sum of the changes for all classes of business. For most long-tail classes of business, the quarterly loss reserve changes are based on the estimated current loss ratio for each class of coverage less any amounts paid. Also, any change in estimated ultimate losses from prior accident years deemed to be necessary based on the results of our latest reserve studies or large loss analysis, either positive or negative, is reflected in the loss reserve for the current quarter. Differences between actual loss emergence in a given period compared to our expectations may also influence our judgment with respect to reserve adequacy.
We record quarterly changes in loss reserves for each of AIG Property Casualty's classes of business.193
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Item 7 / CRITICAL aCCOUNTING eSTIMATES The overall change in our loss reserves is based on the sum of the changes for all classes of business. For most long-tail classes of business, the quarterly loss reserve changes are based on the estimated current loss ratio for each class of coverage less any amounts paid. Also, any change in estimated ultimate losses from prior accident years deemed to be necessary based on the results of our latest reserve studies or large loss analysis, either positive or negative, is reflected in the loss reserve for the current quarter.
Details of the Loss Reserving Process
The process of determining the current loss ratio for each class of business is based on a variety of factors. These include considerations such as: prior accident year and policy year loss ratios; rate changes; and changes in coverage, reinsurance, or mix of business. Other considerations include actual and anticipated changes in external factors such as trends in loss costs or in the legal and claims environment. The current loss ratio for each class of business is intended to represent our best estimate of the current loss ratio after reflecting all of the relevant factors. At the close of each quarter, the assumptions underlying the loss ratios are reviewed to determine if the loss ratios remain appropriate. This process includes a review of the actual claims experience in the quarter, actual rate changes achieved, actual changes in coverage, reinsurance or mix of business, and changes in other factors that may affect the loss ratio. When this review suggests that the initially determined loss ratio is no longer appropriate, the loss ratio for current business is changed to reflect the revised assumptions.
We conduct a comprehensive loss reserve review at least annually for each AIG Property Casualty subsidiary and class of business. The reserve analysis for each class of business is performed by the actuarial personnel who are most familiar with that class of business. In this process, the actuaries are required to make numerous assumptions, including the selection of loss development factors and loss cost trend factors. They are also required to determine and select the most appropriate actuarial methods for each business class. Additionally, they must determine the segmentation of data that will enable the most suitable test of reserve adequacy. In the course of these detailed reserve reviews an actuarial central estimate of the loss reserve is determined. The sum of these central estimates for each class of business provides an overall actuarial central estimate of the loss reserve for that class.
We continue to consult with third party environmental litigation and engineering specialists, third party toxic tort claims professionals, third party clinical and public health specialists, third party workers' compensation claims adjusters and third party actuarial advisors to help inform our judgments. In 2013, the third party actuarial reviews covered the majority of net reserves held for our Commercial long-tail classes of business, and run-off portfolios reported in Other.
AIG 2013 Form 10-K
Details of the Loss Reserving Process
The process of determining the current loss ratio for each class of business is based on a variety of factors. These include considerations such as: prior accident year and policy year loss ratios; rate changes; and changes in coverage, reinsurance, or mix of business. Other considerations include actual and anticipated changes in external factors such as trends in loss costs, real gross domestic product (GDP) growth, inflation, employment rates or unemployment duration, stock market volatility, corporate bond spreads, or in the legal and claims environment. The current loss ratio for each class of business is intended to represent our best estimate of the current loss ratio after reflecting all of the relevant factors. At the close of each quarter, the assumptions underlying the loss ratios are reviewed to determine if the loss ratios remain appropriate. This process includes a review of the actual claims experience in the quarter, actual rate changes achieved, actual changes in coverage, reinsurance or mix of business, and changes in other factors that may affect the loss ratio. When this review suggests that the initially determined loss ratio is no longer appropriate, the loss ratio for current business is changed to reflect the revised assumptions.
We conduct a comprehensive loss reserve review at least annually for each class of business in accordance with Actuarial Standards of Practice.These standards provide that the unpaid claim estimate may be presented in a variety of ways, such as a point estimate, a range of estimates, a point estimate based on the expected value of several reasonable estimates, or a probability distribution of the unpaid claim amount. Further, the actuarial central estimate represents an expected value using the range of reasonably possible outcomes.
The reserve analysis for each class of business is performed by the actuarial personnel who are most familiar with that class of business. In this process, the actuaries are required to make numerous assumptions, including the selection of loss development factors and loss cost trend factors. They are also required to determine and select the most appropriate actuarial methods for each business class. Additionally, they must determine the segmentation of data that will enable the most suitable test of reserve adequacy. In the course of these detailed reserve reviews an actuarial central estimate of the loss reserve is determined. The sum of these central estimates for each class of business provides an overall actuarial central estimate of the loss reserve for that class.
We selected our central estimate based on point estimates from each method with weights that vary by accident year. In 2015, we began developing our ranges of reasonable estimates for certain classes by evaluating ranges derived from multiple methodologies. We considered the range of reasonable parameter selections (for example, three-year versus ten-year average loss development factors) for each appropriate method and calculated a range of indications for each method. Where we have ranges, we assess the position of the actuarial central estimate in the range to help inform management’s decision making. The range of reasonable estimates are not intended to cover all possibilities or extreme values.
We continue to consult with third party environmental litigation and engineering specialists, third party toxic tort claims professionals, third party clinical and public health specialists, third party workers’ compensation claims adjusters and third party actuarial advisors to help inform our judgments. In 2015, the third party actuarial reviews covered the majority of net reserves held for our Commercial long-tail classes of business, and run-off portfolios reported in Corporate and Other.
A critical component of our detailed valuation reviews is our peer review of our reserving analyses and conclusions, where actuaries independent of the initial review evaluate the reasonableness of assumptions used, methods selected and weightings given to different methods. In addition, each detailed valuation review is subjected to a challenge process by specialists in our Enterprise Risk Management group.
In determining the actual carried reserves, we consider both the internal actuarial centralbest estimate and numerous other internal and external factors, including: |
•an assessment of economic conditions;conditions including real GDP growth, inflation, employment rates or unemployment duration, stock market volatility and changes in corporate bond spreads;
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•changes in the legal, regulatory, judicial and social environment including changes in road safety, public health and cleanup standards;
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•changes in medical cost trends (inflation, intensity and utilization of medical services) and wage inflation trends;trends
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•underlying policy pricing, terms and conditions including attachment points and policy limits;limits
; • claims handling processes and enhancements;enhancements
; • third-party claims reviews that are periodically performed for key classes of claims such as toxic tort, environmental and other complex casualty claims and
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•third-party actuarial reviews that are periodically performed for key classes of business.Loss reserve development can also be affected by commutations of assumed and ceded reinsurance agreements.
Actuarial and Other Methods for Major Classes of Business
In testing the reserves for each class of business, our actuaries determine the most appropriate actuarial methods. This determination is based on a variety of factors including the nature of the claims associated with the class of business, such as the frequency or severity of the claims. Other factors considered include the loss development characteristics associated with the claims, the volume of claim data available for the applicable class, and the applicability of various actuarial methods to the class. In addition to determining the actuarial methods, the actuaries determine the appropriate loss reserve groupings of data. For example, we write many unique subclasses of professional liability. For pricing or other purposes, it is appropriate to evaluate the profitability of each subclass individually. However, for purposes of estimating the loss reserves for many classes of business, we believe it is appropriate to combine the subclasses into larger groups to produce a greater degree of credibility in the claims experience. This determination of data segmentation and actuarial methods is carefully considered for each class of business. The segmentation and actuarial methods chosen are those which together are expected to produce the most robust estimate of the loss reserves.
The actuarial methods we use for most long-tail casualty classes of business include loss development methods, expected loss ratio methods, including "Bornhuetter Ferguson"
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Loss reserve development can also be affected by commutations of assumed and ceded reinsurance agreements.
Actuarial and Other Methods for Major Classes of Business
In testing the reserves for each class of business, our actuaries determine the most appropriate actuarial methods. This determination is based on a variety of factors including the nature of the claims associated with the class of business, such as the frequency or severity of the claims. Other considerations include the loss development characteristics associated with the claims, the volume of claim data available for the applicable class, and the applicability of various actuarial methods to the class. In addition to determining the actuarial methods, the actuaries determine the appropriate loss reserve groupings of data. For example, we write many unique subclasses of professional liability. For pricing or other purposes, it is appropriate to evaluate the profitability of each subclass individually. However, for purposes of estimating the loss reserves for many classes of business, we believe it is appropriate to combine the subclasses into larger groups to produce a greater degree of credibility in the claims experience. This determination of data segmentation and actuarial methods is carefully considered for each class of business. The segmentation and actuarial methods chosen are those which together are expected to produce the most robust central estimate of the loss reserves.
The actuarial methods we use for most long-tail casualty classes of business include loss development methods, expected loss ratio methods, including “Bornhuetter Ferguson” methods described below, and frequency/severity models. Loss development methods utilize the actual loss development patterns from prior accident years to project the reported losses to an ultimate basis for subsequent accident years. Loss development methods generally are most appropriate for classes of business which exhibit a stable pattern of loss development from one accident year to the next, and for which the components of the classes have similar development characteristics. For example, property exposures would generally not be combined into the same class as casualty exposures, and primary casualty exposures would generally not be combined into the same class as excess casualty exposures. In 2015, we continued to refine our loss reserving techniques for the domestic primary casualty classes of business and adopted further segmentations based on our analysis of the differing emerging loss patterns for certain classes of insureds. We generally use expected loss ratio methods in cases where the reported loss data lacks sufficient credibility to utilize loss development methods, such as for new classes of business or for long-tail classes at early stages of loss development. Frequency/severity models may be used where sufficient frequency counts are available to apply such approaches.
Expected loss ratio methods rely on the application of an expected loss ratio to the earned premium for the class of business to determine the loss reserves. For example, an expected loss ratio of 70 percent applied to an earned premium base of $10 million for a class of business would generate an ultimate loss estimate of $7 million. Subtracting any reported paid losses and loss adjustment expenses would result in the indicated loss reserve for this class. Under the “Bornhuetter Ferguson” methods, the expected loss ratio is applied only to the expected unreported portion of the losses. For example, for a
long-tail class of business for which only 10 percent of the losses are expected to be reported at the end of the accident year, the expected loss ratio would be applied to the 90 percent of the losses still unreported. The actual reported losses at the end of the accident year would be added to determine the total ultimate loss estimate for the accident year. Subtracting the reported paid losses and loss adjustment expenses would result in the indicated loss reserve. In the example above, the expected loss ratio of 70 percent would be multiplied by 90 percent. The result of 63 percent would be applied to the earned premium of $10 million resulting in an estimated unreported loss of $6.3 million. Actual reported losses would be added to arrive at the total ultimate losses. If the reported losses were $1 million, the ultimate loss estimate under the “Bornhuetter Ferguson” method would be $7.3 million versus the $7 million amount under the expected loss ratio method described above. Thus, the “Bornhuetter Ferguson” method gives partial credibility to the actual loss experience to date for the class of business. Loss development methods generally give full credibility to the reported loss experience to date. In the example above, loss development methods would typically indicate an ultimate loss estimate of $10 million, as the reported losses of $1 million would be estimated to reflect only 10 percent of the ultimate losses.
A key advantage of loss development methods is that they respond more quickly to any actual changes in loss costs for the class of business. Therefore, if loss experience is unexpectedly deteriorating or improving, the loss development method gives full credibility to the changing experience. Expected loss ratio methods would be slower to respond to the change, as they would continue to give more weight to the expected loss ratio, until enough evidence emerged to modify the expected loss ratio to reflect the changing loss experience. On the other hand, loss development methods have the disadvantage of overreacting to changes in reported losses if the loss experience is not credible. For example, the presence or absence of large losses at the early stages of loss development could cause the loss development method to overreact to the favorable or unfavorable experience by assuming it will continue at later stages of development. In these instances, expected loss ratio methods such as “Bornhuetter Ferguson” have the advantage of recognizing large losses without extrapolating unusual large loss activity onto the unreported portion of the losses for the accident year.
Frequency/severity methods generally rely on the determination of an ultimate number of claims and an average severity for each claim for each accident year. Multiplying the estimated ultimate number of claims for each accident year by the expected average severity of each claim produces the estimated ultimate loss for the accident year. Frequency/severity methods generally require a sufficient volume of claims in order for the average severity to be predictable. Average severity for subsequent accident years is generally determined by applying an estimated annual loss cost trend to the estimated average claim severity from prior accident years. In certain cases, a structural approach may also be used to predict the ultimate loss cost. Frequency/severity methods have the advantage that ultimate claim counts can generally be estimated more quickly and accurately than can ultimate losses. Thus, if the average claim severity can be accurately estimated, these methods can more quickly respond to changes in loss experience than other methods. However, for average severity to be predictable, the class of business must consist of homogeneous types of claims for which loss severity trends from one year to the next are reasonably consistent. Generally these methods work best for high frequency, low severity classes of business such as personal auto.
Structural drivers analytics seek to explain the underlying drivers of frequency/severity. A structural drivers analysis of frequency/severity is particularly useful for understanding the key drivers of uncertainty in the ultimate loss cost. For example, for the excess workers’ compensation class of business, we have attempted to corroborate our judgment by considering the impact on severity of the future propensity for deterioration of an injured worker’s medical condition, the impact of price inflation on the various categories of medical expense and cost of living adjustments on indemnity benefits, the impact of injured worker mortality and claim specific settlement and loss mitigation strategies, etc., using the following:
•Claim by claim reviews to determine the stability and likelihood of settling an injured worker’s indemnity and medical benefits – the claim file review was facilitated by third party specialists experienced in workers’ compensation claims;
•Analysis of the potential for future deterioration in medical condition unlikely to be picked up by a claim file review and associated with potentially costly medical procedures (i.e., increases in both utilization and intensity of medical care) over the course of the injured worker’s lifetime;
• Analysis of the cost of medical price inflation for each category of medical spend (services and devices) and for cost of living adjustments in line with statutory requirements;
•Portfolio specific mortality level and mortality improvement assumptions based on a mortality study conducted for AIG’s primary and excess workers’ compensation portfolios and AIG’s opinion of future longevity trends for the open reported cases;
•Ground-up consideration of the reinsurance recoveries expected for the class of business for reported claims with extrapolation for unreported claims; and
•The effects of various run-off claims management strategies that have been developed by AIG’s run-off unit.
During 2015, we continued to expand our analysis of structural drivers as a means of corroborating our judgments using traditional actuarial techniques. For example, we have considered the impact of changes in economic activity (real GDP growth, which can impact levels of trucking activity) on our emerging experience in the Commercial Auto Liability class of business, particularly business written in excess of a large insured deductible where ground up experience may take several years to reach our layer. Further, we considered the impact of expected levels of future inflation as measured by the Personal Consumption Expenditure (PCE) Deflator (Health Services Component) published by the U.S. Bureau of Economic Analysis on our ultimate loss costs for medical benefits in the primary workers’ compensation class of business. We believe the PCE Deflator provides a more appropriate measure of workers’ compensation medical inflation as it includes medical expenditures made by employers on behalf of their employees. We also tested the sensitivity of our estimates to changes in the future path and level of inflation for this class of business.
Overall, our loss reserve reviews for long-tail classes typically utilize a combination of both loss development and expected loss ratio methods, supplemented by structural drivers analysis of frequency/severity where available.Loss development methods are generally given more weight for accident years and classes of business where the loss experience is highly credible. Expected loss ratio methods are given more weight where the reported loss experience is less credible, or is driven more by large losses. Expected loss ratio methods require sufficient information to determine the appropriate expected loss ratio. This information generally includes the actual loss ratios for prior accident years, and rate changes as well as underwriting or other changes which would affect the loss ratio. Further, an estimate of the loss cost trend or loss ratio trend is required to allow for the effect of inflation and other factors which may increase or otherwise change the loss costs from one accident year to the next.
The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many years ago is subject to greater uncertainty than other types of claims. This is due to inconsistent court decisions, as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the original intent of such policies or have expanded theories of liability. In addition, reinsurance recoverable balances relating to asbestos and environmental loss reserves are subject to greater uncertainty due to the underlying age of the claim, underlying legal issues surrounding the nature of the coverage, and determination of proper policy period. For these reasons, these balances tend to be subject to increased levels of disputes and legal collection activity when actually billed. The insurance industry as a whole is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify these exposures.
We continue to receive claims asserting injuries and damages from toxic waste, hazardous substances, and other environmental pollutants and alleged claims to cover the cleanup costs of hazardous waste dump sites, referred to collectively as environmental claims, and indemnity claims asserting injuries from asbestos. The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior years. Commencing in 1985, standard policies contained absolute exclusions for pollution-related damage and asbestos. The current Non-Life Insurance Companies environmental policies that we specifically price and underwrite for environmental risks on a claims-made basis have been excluded from the analysis.
The majority of our exposures for asbestos and environmental claims are related to excess casualty coverages, not primary coverages. The litigation costs are treated in the same manner as indemnity amounts, with litigation expenses included within the limits of the liability we incur. Individual significant claim liabilities, where future litigation costs are reasonably determinable, are established on a case-by-case basis.
Reserve Estimation for Asbestos and Environmental Claims
Estimation of asbestos and environmental claims loss reserves is a subjective process. Reserves for asbestos and environmental claims cannot be estimated using conventional reserving techniques such as those that rely on historical accident year loss development factors. The methods used to determine asbestos and environmental loss estimates and to establish the resulting reserves are continually reviewed and updated by management.
Various factors contribute to the complexity and difficulty in determining the future development of claims. Significant factors that influence the claims estimation process include court resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage. The current case law can be characterized as still evolving, and there is little likelihood that any firm direction will develop in the near future. Additionally, the exposures for cleanup costs of hazardous waste dump sites involve issues such as allocation of responsibility among potentially responsible parties and the government’s refusal to release parties from liability. Future claims development also will be affected by the changes in Superfund and waste dump site coverage and liability issues.
If the asbestos and environmental reserves develop adversely, resulting deficiencies could have an adverse effect on our future results of operations for an individual reporting period.
With respect to known environmental claims, over two decades ago we established a specialized environmental claims unit, which investigates and adjusts all such environmental claims. This unit evaluates environmental claims utilizing a claim-by-claim approach that involves a detailed review of individual policy terms and exposures. Because each policyholder presents different liability and coverage issues, we generally evaluate exposure on a policy-by-policy basis, considering a variety of factors such as known facts, current law, jurisdiction, policy language and other factors that are unique to each policy. Quantitative techniques must be supplemented by subjective considerations, including management judgment. Each claim is reviewed at least semi-annually utilizing the aforementioned approach and adjusted as necessary to reflect the current information.
The environmental claims unit also actively manages and pursues early resolution with respect to these claims in an attempt to mitigate our exposure to the unpredictable development of these claims. We attempt to mitigate our known long-tail environmental exposures through a combination of proactive claim-resolution techniques, including policy buybacks, complete environmental releases, compromise settlements, and, when appropriate, litigation.
Known asbestos claims are managed in a similar manner. Over two decades ago we established a specialized toxic tort claims unit, which historically investigated and adjusted all such asbestos claims. As part of the above mentioned NICO transaction, effective January 1, 2011, NICO assumed responsibility for claims handling related to the majority of AIG’s domestic asbestos liabilities.
The following is a discussion of actuarial methods applied by major class of business:
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
Excess Casualty |
We generally use a combination of loss development methods, both multiplicative and/or additive, and expected loss ratio methods for excess casualty classes. Frequency/severity methods are generally not used in isolation to determine ultimate loss costs as the vast majority of reported claims do not result in claim payment. (However, frequency/severity methods assist in the regular monitoring of the adequacy of carried reserves to support incurred but not reported claims). In addition, the average severity varies significantly from accident year to accident year due to large losses which characterize this class of business, as well as changing proportions of claims which do not result in a claim payment. To gain more stability in the projection, the claims amenable to loss development methods are analyzed in multiple layers: the layer capped at $1 million, $4 million excess of $1 million, $5 million excess of $5 million, $15 million excess of $10 million, and the layer above $25 million. The expected loss ratios for the layers above $5 million are derived from the expected relationship between the layers, reflecting the attachment point and limit by accident year. In addition, we leverage case reserving based methodologies for complex claims/ latent exposures such as those involving toxic tort and other claims accumulations. | Expected loss ratio methods are generally used for at least the three latest accident years, due to the relatively low credibility of the reported losses. The loss experience is generally reviewed separately for lead umbrella classes and for other excess classes, due to the relatively shorter tail for lead umbrella business. Automobile‑related claims are generally reviewed separately from non-auto claims, due to the shorter-tail nature of the automobile‑related claims. Claims relating to certain latent exposures such as construction defects, exhaustion of underlying product aggregate limits, or mass torts are reviewed separately due to the unique emergence patterns of losses relating to these claims. The expected loss ratios used for recent accident years are based on the projected ultimate loss ratios of prior years, adjusted for rate changes, estimated loss cost trends and all other changes that can be quantified. During 2015, the observed claims deterioration for complex claims/latent exposures impacted the case reserving methodologies which are relied on in determining ultimate loss costs. This deterioration was considered in the expected loss ratio method that we also consider in setting the reserve for mass tort exposures. The provision for the base years of 1986-2000 was increased, which raised the expected loss ratios for the subsequent accident years. |
D&O and Related Management Liability Classes of Business |
We generally use a combination of loss development methods and expected loss ratio methods for D&O and related management liability classes of business. Frequency/severity methods are generally not used in isolation for these classes as the overall losses are driven by large losses more than by claim frequency. Severity trends have varied significantly from accident year to accident year and care is required in analyzing these trends by claim type. We also give weight to claim department ground-up projections of ultimate loss on a claim by claim basis as these may be more predictive of ultimate loss values especially for older accident years. | | These classes of business reflect claims made coverage, and losses are characterized by low frequency and high severity. In general, expected loss ratio methods are given more weight in the more recent accident years, whereas loss development methods are given more weight in more mature accident years. For the year-end 2015 loss reserve review, claims projections for accident years 2014 and prior were used after making adjustments for changing levels of development in these estimates. In the 2015 analysis, for the more mature accident years, we have generally given more weight to the incurred and legal expense loss development methods than in prior years’ reviews. For the more recent accident years, we have made some changes in the weights on certain market segments to give more weight to the claims projections than in the prior years’ reviews. |
| | | |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
Workers’ Compensation | | |
We generally use a combination of loss development methods and expected loss ratio methods for workers’ compensation. We segment the data by state and industry class to the extent that meaningful differences are determined to exist. | | For guaranteed cost business, expected loss ratio methods generally are given significant weight only in the most recent accident year. Workers’ compensation claims are generally characterized by high frequency, low severity, and relatively consistent loss development from one accident year to the next,next. We historically have been a leading writer of workers’ compensation, and for whichthus have sufficient volume of claims experience to use development methods. We generally segregate California (CA) business from other business in evaluating workers’ compensation reserves. Commencing in 2012, we segmented out New York (NY) from the componentsother states to reflect its different development pattern and changing percentage of the mix by state. We also revised our assumptions to reflect changes in our claims management activities. Certain classes have similar development characteristics. For example, property exposures wouldof workers’ compensation, such as construction and business written in excess of a deductible, are also evaluated separately. Expected loss ratio methods for business written in excess of a deductible may be given significant weight in the five or more most recent accident years. Additionally, we write a number of very large accounts which include workers’ compensation coverage. These accounts are generally notindividually priced by our actuaries, and to the extent appropriate, the indicated losses based on the pricing analysis may be combined intoused to record the same class as casualty exposures,initial estimated loss reserves for these accounts. |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
| | |
Many of our primary casualty exposures wouldpolicies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. We generally use premium and expected loss ratio methods for these programs. | | In 2014, we updated our tail factor selections in CA and NY, our loss development factors in the Construction class, and refined our segmentation for excess of a large deductible business. Each of these segments appeared to have been impacted by specific structural changes in the portfolio. For CA business, our tail factor increases were in response to changing long-term medical development patterns. In NY, there has been a lengthening of the period between the date of accident and the classification of non-scheduled permanent partial injuries. We completed a review of claim emergence and payouts for our top six states in workers’ compensation and concluded that NY and CA were the main states where the loss development patterns had materially changed since our last review. For the Construction class, we noted that the construction sector has experienced a comparatively slow recovery in payroll levels. As a result of the diminished employment opportunities in this industry sector, injured workers may experience limited return-to-work opportunities, which moderate the shortening of claim duration that normally accompanies a labor market recovery. Lastly, for excess of large deductible business, we updated our analyses to consider the impact of changes in the mix of retentions that has occurred over time as the data by retention band was becoming more credible. Commencing in 2014, we also enhanced our analysis by considering our best estimate expectations of inflation (principally, the PCE Deflator for Health Care Services) and loss cost trends and we also reflected the impacts of enhancements in our claim management and loss mitigation activities, such as opioid drug management, fraud investigation and medical management. As part of the 2015 reserve review related to these policies, we enhanced our segmentation to better reflect varying policy features. As a result of the improved loss segmentation, we were able to give more weight to loss development methods in addition to premium and expected loss ratio methods. |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
Excess Workers’ Compensation | | |
We historically have used a combination of loss development methods and expected loss ratio methods for excess workers’ compensation. Commencing with the 2014 loss reserve review, our actuaries supplemented the methods used historically by applying a structural drivers approach to inform their judgment of the ultimate loss costs for open reported claims from accident years 2006 and prior and used the refined analysis to help inform their judgment of the ultimate loss cost for claims that have not yet been reported using a frequency/severity approach for these accident years. | | Excess workers’ compensation is an extremely long-tail class of business, with loss emergence extending for decades. The class is highly sensitive to small changes in assumptions — in the rate of medical inflation or the longevity of injured workers, for example — which can have a significant effect on the ultimate reserve estimate. Claims estimates for this line also are highly sensitive to: ·the assumed future rate of inflation and other economic conditions in the United States; ·changes in the legal, regulatory, judicial and social environment; ·the expected impact of recently enacted health care reform on workers’ compensation costs; ·underlying policy pricing, terms and conditions; ·claims settlement trends that can materially alter the mix and ultimate cost of claims; ·changes in claims reporting and management practices of insureds and their third-party administrators; ·the cost of new and additional treatment specialties, such as “pain management”; ·the propensity for severely injured workers’ medical conditions to deteriorate in the future; ·changes in injured worker longevity; and ·territorial experience differences (across states and within regions in a state). Methods based on expected loss ratios are given the greater weight for the more recent accident years. For the 2015 loss reserve review, the structural drivers approach which was applied to open reported claims from accident years 2006 and prior, was deemed to be combined intomost suitable for informing our judgment of the same classultimate loss cost for injured workers whose medical conditions had largely stabilized (i.e., at least 9 to 10 years have elapsed since the date of injury). The reserve for accident years 2007 and subsequent was determined using a Generalized Cape Cod Method, which is similar to a Bornhuetter Ferguson expected loss ratio method. |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
General Liability | | |
We generally use a combination of loss development methods and expected loss ratio methods for primary general liability or products liability classes. We also supplement the standard actuarial techniques by using evaluations of the ultimate losses on unusual claims or claim accumulations by external specialists on those classes of claims. The segmentation of the data reflects state differences, industry classes, deductible/non-deductible programs and type of claim. | | For certain classes of business with sufficient loss volume, loss development methods may be given significant weight for all but the most recent one or two accident years. For smaller or more volatile classes of business and excess of a large deductible business, loss development methods may be given limited weight for the five or more most recent accident years. Expected loss ratio methods are used for the more recent accident years for these classes. The loss experience for primary general liability business is generally reviewed at a level that is believed to provide the most appropriate data for reserve analysis. Additionally, certain sub-classes, such as excess casualty exposures. In 2013,construction defect, are generally reviewed separately from business in other subclasses. For other sub-classes, such as Environmental, we utilize the claim analysts’ claim projections for incurred but not enough reported (IBNER) and actuarial methods to calculate pure IBNR. Commencing in 2014, we continued to refine our loss reserving techniques for the domestic primary casualty classes of business and adopted further segmentations based on our analysis of the differing emerging loss patterns for certain classes of insureds. We generally useDue to the fairly long-tail nature of general liability business, and the many subclasses that are reviewed individually, there is less credibility given to the reported losses and increased reliance on expected loss ratio methods in cases where the reported loss data lacks sufficient credibility to utilizefor recent accident years. |
Commercial Automobile Liability |
|
|
We generally use loss development methods such as for newall but the most recent accident year for commercial automobile liability classes of business or for long-tail classes at early stages of loss development. Frequency/severity models may be used where sufficient frequency counts are available to apply such approaches.business. | | Expected loss ratio methods rely onare generally given significant weight only in the applicationmost recent accident year, except for excess of anlarge deductible business, in which expected loss ratio tomethods may receive weight for several accident years. In 2015, the earned premiumimpact of the increase in frequency of severe claims was projected in the accident years where it was most prevalent. The resulting increase in ultimate loss projections and loss ratios for the class of business to determine thethose years impacted subsequent years through loss reserves. For example, andevelopment factors and prior expected loss ratio assumptions. |
Class of 70 percent applied to an earned premium baseBusiness or Category and Actuarial Method |
| Application of $10 million forActuarial Method |
Healthcare |
|
|
We generally use a class of business would generate an ultimate loss estimate of $7 million. Subtracting any reported paid losses and loss expense would result in the indicated loss reserve for this class. Under the "Bornhuetter Ferguson" methods, the expected loss ratio is applied only to the expected unreported portion of AIG 2013 Form 10-K
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the losses. For example, for a long-tail class of business for which only 10 percent of the losses are expected to be reported at the end of the accident year, the expected loss ratio would be applied to the 90 percent of the losses still unreported. The actual reported losses at the end of the accident year would be added to determine the total ultimate loss estimate for the accident year. Subtracting the reported paid losses and loss expenses would result in the indicated loss reserve. In the example above, the expected loss ratio of 70 percent would be multiplied by 90 percent. The result of 63 percent would be applied to the earned premium of $10 million resulting in an estimated unreported loss of $6.3 million. Actual reported losses would be added to arrive at the total ultimate losses. If the reported losses were $1 million, the ultimate loss estimate under the "Bornhuetter Ferguson" method would be $7.3 million versus the $7 million amount under the expected loss ratio method described above. Thus, the "Bornhuetter Ferguson" method gives partial credibility to the actual loss experience to date for the class of business. Loss development methods generally give full credibility to the reported loss experience to date. In the example above, loss development methods would typically indicate an ultimate loss estimate of $10 million, as the reported losses of $1 million would be estimated to reflect only 10 percent of the ultimate losses.
A key advantagecombination of loss development methods is that they respond quickly to any actual changes in loss costs for the class of business. Therefore, if loss experience is unexpectedly deteriorating or improving, the loss development method gives full credibility to the changing experience. Expected loss ratio methods would be slower to respond to the change, as they would continue to give more weight to the expected loss ratio, until enough evidence emerged to modify the expected loss ratio to reflect the changing loss experience. On the other hand, loss development methods have the disadvantage of overreacting to changes in reported losses if the loss experience is not credible. For example, the presence or absence of large losses at the early stages of loss development could cause the loss development method to overreact to the favorable or unfavorable experience by assuming it will continue at later stages of development. In these instances,and expected loss ratio methods such as "Bornhuetter Ferguson" havefor healthcare classes of business.
Frequency/severity methods are sometimes used for pricing certain healthcare accounts or business. However, for loss reserve adequacy testing, the advantage of recognizing large losses without extrapolating unusual large loss activity ontoneed to ensure sufficient credibility generally results in segmentations that are not sufficiently homogeneous to utilize frequency/severity methods. We also supplement the unreported portionstandard actuarial techniques by using evaluations of the ultimate losses on unusual claims by specialists on those classes of claims. | | The largest component of the healthcare business consists of coverage written for hospitals and other healthcare facilities. We test reserves for excess coverage separately from those for primary coverage. For primary coverages, loss development methods are generally given the majority of the weight for all but the latest three accident years, and are given some weight for all years other than the latest accident year. For excess coverages, expected loss methods are generally given all the weight for the accident year. Frequency/severity methods generally rely on the determination of an ultimate number of claims and an average severity for each claim for each accident year. Multiplying the estimated ultimate number of claims for each accident year by the expected average severity of each claim produces the estimated ultimate loss for the accident year. Frequency/severity methods generally require a sufficient volume of claims in order for the average severity to be predictable. Average severity for subsequentlatest three accident years, is generally determined by applying an estimated annual loss cost trendand are also given considerable weight for accident years prior to the estimated average claim severity from prior accidentlatest three years. In certain cases, a structural approach may also be used to predict the ultimate loss cost. Frequency/severity methods have the advantage that ultimate claim counts can generally be estimated more quickly and accurately than can ultimate losses. Thus, if the average claim severity can be accurately estimated, these methods can more quickly respond to changes in loss experience thanFor other methods. However, for average severity to be predictable, the class of business must consist of homogeneous types of claims for which loss severity trends from one year to the next are reasonably consistent. Generally these methods work best for high frequency, low severity classes of business such as personal auto.
Structural drivers analytics seek to explain the underlying drivers of frequency/severity. A structural drivers analysis of frequency/severity is particularly useful for understanding the key drivers of uncertainty in the ultimate loss cost. For example, for the excess workers' compensation class of business, we have attempted to corroborate our judgment by considering the impact on severity of the future propensity for deterioration ofhealthcare coverage, an injured worker's medical condition, the impact of price inflation on the various categories of medical expense and cost of living adjustments on indemnity benefits, the impact of injured worker mortality and claim specific settlement and loss mitigation strategies, etc., using the following:
•Claim by claim reviews to determine the stability and likelihood of settling an injured worker's indemnity and medical benefits — the claim file review was facilitated by third party specialists experienced in workers' compensation claims;
•Analysis of the potential for future deterioration in medical condition unlikely to be picked up by a claim file review and associated with potentially costly medical procedures (i.e., increases in both utilization and intensity of medical care) over the course of the injured worker's lifetime;
•Analysis of the cost of medical price inflation for each category of medical spend (services and devices) and for cost of living adjustments in line with statutory requirements;
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•Portfolio specific mortality level and mortality improvement assumptions based on a mortality study conducted for AIG's primary and excess workers' compensation portfolios and AIG's opinion of future longevity trends for the open reported cases;
•Ground-up consideration of the reinsurance recoveries expected for the class of business for reported claims with extrapolation for unreported claims;
•The effects of various runoff claims management strategies that have been developed by AIG's run-off unit.
Overall, our loss reserve reviews for long-tail classes typically utilize a combination of bothanalogous weighting between loss development and expected loss ratio methods supplemented by structural drivers analysisis used. The weights assigned to each method are those that are believed to result in the best combination of responsiveness and credibility.
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Professional Liability |
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|
We generally use a combination of loss development methods and expected loss ratio methods for professional liability classes of business. Frequency/severity methods are used in pricing and profitability analyses for some classes of professional liability; however, for loss reserve adequacy testing, the need to ensure sufficient credibility generally results in segmentations that are not sufficiently homogeneous to utilize frequency/severity where available.methods. We also use claim department projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight is given to this method in the more recent accident years. | | Loss development methods are generallyused for the more mature accident years. Greater weight is given to expected loss ratio methods in the more recent accident years. Reserves are tested separately for claims made classes and classes written on occurrence policy forms. Further segmentations are made in a manner believed to provide an appropriate balance between credibility and homogeneity of the data. Commencing in 2015, the claims department projections already used in other financial lines classes were utilized for professional liability and given some weight in the final selection. |
Catastrophic Casualty |
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|
We use expected loss ratio methods for all accident years for catastrophic casualty business. This class of business consists of casualty or financial lines coverage that attach in excess of very high attachment points; thus the claims experience is marked by very low frequency and high severity. Because of the limited number of claims, loss development methods are not relied upon. | | The expected loss ratios and loss development assumptions used are based upon the results of prior accident years for this business as well as for similar classes of business wherewritten above lower attachment points. The business can be written on a claims-made or occurrence basis. We use ground-up claim projections provided by our claims staff to assist in developing the appropriate reserve. |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
Aviation |
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|
We generally use a combination of loss development methods and expected loss ratio methods for aviation exposures. Aviation claims are not very long-tail in nature; however, they are driven by claim severity. Thus a combination of both development and expected loss ratio methods are used for all but the latest accident year to determine the loss experience is highly credible. reserves. Frequency/severity methods are not employed due to the high severity nature of the claims and different mix of claims from year to year. | | Expected loss ratio methods are used to determine the loss reserves for the latest accident year. We also use ground-up claim projections provided by our claims staff to assist in developing the appropriate reserve. |
Personal Auto |
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|
Frequency/severity and loss development methods are utilized for domestic personal auto classes. | | For these classes of business, reliance is placed on frequency/severity methods as claim counts emerge quickly for personal auto. Frequency/severity methods allow for more immediate analysis of resulting loss trends and comparisons to industry and other diagnostic metrics. |
Fidelity/Surety |
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|
We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight is given to this method in the more weight whererecent accident years. For surety exposures, we generally use the reported loss experience is less credible, or is driven more by large losses. same method as for short-tail classes (discussed below). | | Expected loss ratio methods require sufficient informationare also given weight for the more recent accident years. For the latest accident year they may be given 100 percent weight. |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
Mortgage Guaranty |
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|
We test mortgage guaranty reserves using loss development methods, supplemented by an internal claim analysis by actuaries and staff who specialize in the mortgage guaranty business. | | The reserve analysis projects ultimate losses for claims within each of several reserving categories based on actual historical experience, using primarily a frequency/severity loss development approach. Additional reserve tests are also employed, such as tests measuring the trend of losses as a percent of risk in force. Reserves are reviewed separately for each line of business considering the loss development characteristics, volume of claim data available and applicability of various actuarial methods to each line. Reserves for mortgage guaranty insurance losses and loss adjustment expenses are established for reported mortgage loan delinquencies and estimates of delinquencies that have been incurred but have not been reported by loan servicers, based upon historical reporting trends. We establish reserves using a percentage of the contractual liability (for each delinquent loan reported) that is based upon projected claim experience for each category of delinquency, consistent in total with the overall reserve estimate. Mortgage Guaranty losses and loss adjustment expenses have been affected by macroeconomic events, such as improving home prices and decreasing unemployment. Because these macroeconomic events are subject to adverse or favorable change, the determination of the ultimate losses and loss adjustment expenses requires a high degree of judgment. Improving economic conditions have produced higher cure rates of delinquent loans in recent years, a trend that may not continue in 2016. In addition, loans with modifications through government and lender programs may re-default resulting in new losses for Mortgage Guaranty if adverse economic conditions were to return. In addition to improved cure rates, the favorable economic trends have resulted in a decline of newly reported delinquencies. Partially offsetting these favorable frequency trends was a lower incidence of denied and rescinded claims. |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
Other Short-Tail Classes |
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For non-catastrophe business, frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves for short-tail classes such as Commercial Property, Personal Property, and Accident & Health coverages. | | IBNR factor methods are used, when the nature of losses are low frequency/high severity. The IBNR factors, when applied to earned premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy of the IBNR factor being employed. |
International |
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Business written by the Non-Life Insurance Companies internationally includes both long-tail and short-tail classes of business. For long-tail classes of business, the actuarial methods used are comparable to those described above. However, the majority of business written by the Non-Life Insurance Companies internationally is short-tail, high frequency and low severity in nature. For this business, loss development methods are generally employed to test the loss reserves. | | We maintain a database of detailed historical premium and loss transactions in original currency for business written by the Non-Life Insurance Companies internationally. This allows our actuaries to determine the current reserves without any distortion from changes in exchange rates over time. Our actuaries segment the international data by region, country or class of business as appropriate to determine an optimal balance between homogeneity and credibility. The techniques developed by our U.S. actuaries for certain commercial classes of business are increasingly applied to our International portfolios where the experience volume and data segmentation is comparable to that of the U.S. portfolios. Our actuaries work closely with the claims departments in each of our major International locations to determine the most appropriate methodology and assumptions. |
Class of Business or Category and Actuarial Method |
| Application of Actuarial Method |
Loss Adjustment Expenses |
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|
We determine reserves for legal defense and cost containment loss adjustment expenses for each class of business by one or more actuarial or structural driver methods. The methods generally include development methods comparable to those described for loss development methods. The development could be based on either the paid loss adjustment expenses or the ratio of paid loss adjustment expenses to paid losses, or both. Other methods include the utilization of expected ultimate ratios of paid loss ratio. This information generally includes theexpense to paid losses, based on actual loss ratios forexperience from prior accident years or from similar classes of business. We also provide reserves for the estimated future costs of our claims department settling existing reserves. | | We generally determine reserves for adjuster loss adjustment expenses based on calendar year ratios of adjuster expenses paid to losses paid for the particular class of business. We generally determine reserves for other unallocated loss adjustment expenses based on the ratio of the calendar year expenses paid to overall losses paid. This determination is generally done for all classes of business combined, and rate changesuses claim overhead costs as well as underwritinga percent of losses paid. We may supplement our judgments with an analysis of loss and legal expense mix change using predictive models that explicitly represent such mix change and detailed reviews with the claims department on the methods used to allocate the costs of the claims initiatives to new and in-force business and to different classes and sub-classes of business. In 2015, we increased our estimates of our claims department costs to reflect higher expected future costs associated with new technology and operating models. |
Catastrophes and Severe Losses |
| |
In response to major catastrophes and severe losses, special analyses by both Actuarial and Claims are conducted to estimate the gross and net liability for unpaid losses and loss adjustment expenses from such events. | | These analyses may include a combination of approaches, including catastrophe modeling estimates, ground-up claim analysis, loss evaluation reports from on-site field adjusters, and market share estimates. Loss emergence patterns of similar catastrophic events or other changes which would affectaggregated severe losses are used to help determine the reasonableness of ultimate loss ratio. Further,projections and the resulting IBNR need. |
Alternative Loss Cost Trend and Loss Development Factor Assumptions by Class of Business
Two of our most significant assumptions in loss-based methodologies are those for loss cost trends and loss development factors. There is generally some potential for deviation from our selected best estimate assumptions related to loss cost trends and loss development factor assumptions. The classes noted below are considered to have a higher sensitivity to changes in these assumptions than other classes. For example, primary auto liability reserves were impacted by changes in the frequency and severity of losses in recent years which may not be captured by sensitivities of the parameter modeled below.
The sensitivity analysis below addresses each major class of business for which there is a possibility of a material deviation from our overall reserve position as a result of changes in these individual assumptions. The analysis uses a range of potential alternative assumptions for each class based on historical experience. Actual reserve development may not be consistent with either the original or the alternative loss trend or loss development factor assumptions, and other assumptions made in the reserving process may materially affect reserve development for a particular class of business.
It should be noted that there are many other assumptions used in the loss reserving process, and the sensitivities shown below are not intended to be indications of possible loss reserve ranges for the class but merely illustrations of the sensitivity of the reserves to certain alternative assumptions considered individually. The actual reserve range is a function of many factors interacting with each other.
Loss cost trends: The percentage deviations noted in the table below are not considered the highest possible deviations that might be expected, but rather what we consider to reflect a reasonably likely range of potential deviation based on historical loss cost trends. The impacts cited below are only for the years for which we used an expected loss ratio approach. Actual loss cost trends in the early 1990s were negative for several years whereas actual loss cost trends exceeded the figures cited below for 1997 through 2001. These observed variations were considered in establishing the percentage deviations, and result in asymmetrical selections. Loss trends may deviate by more than the amounts noted above and discussed below.
Loss development factors: The percentage deviations noted in the table below are not considered the highest possible deviations that might be expected, but rather what we consider to reflect a reasonably likely range of potential deviation. While multiple scenarios are performed, the assumed loss development factors are a key assumption. Generally, actual historical loss development factors are used to project future loss development. Future loss development patterns may be different from those in the past, or may deviate by more than the amounts noted above and discussed below. Further, there is a greater incidence of these factors increasing, which is reflected in the deviations selected.
A large portion of the loss reserves from the Non-Life Insurance Companies business relates to longer-tail casualty classes of business, such as excess casualty and D&O, which are driven by severity rather than frequency of claims. Using the reserving methodologies described above, our actuaries determine their actuarial central estimates of the loss reserves and advise management on their final recommendation for management’s best estimate of the recorded reserves. Subject matter experts from underwriting and claims play an important part in informing the actuarial assumptions and methods. The governance process over the establishment of loss reserves also ensures robust considerations of the changes in the loss trends, terms and conditions, claims handling practices, and large loss impact when determining the methods, assumptions and the estimations. This multi-disciplinary process engages underwriting, claims, risk management, business unit executives and senior management and involves several iterative levels of feedback and response during the regular reserving process.
The following sensitivity analysis table summarizes the effect on the loss reserve position of using certain alternative loss cost trend (for accident years where we use expected loss ratio methods) or loss development factor assumptions rather than the assumptions actually used in determining our estimates in the year-end loss reserve analyses in 2015.
December 31, 2015 | Effect on | | | Effect on |
(in millions) | Loss Reserves | | | Loss Reserves |
Loss cost trends: | | | | Loss development factors: | | |
Excess casualty: | | | | Excess casualty: | | |
5 percent increase | $ | 1,646 | | 3 percent increase | $ | 945 |
5 percent decrease | | (1,067) | | 4 percent decrease | | (874) |
D&O: | | | | D&O: | | |
31 percent increase | | 1,400 | | 14 percent increase | | 800 |
30 percent decrease | | (950) | | 5 percent decrease | | (300) |
Excess workers' compensation: | | | | Excess workers' compensation: | | |
5 percent increase | | N/A | | Increase(b) | | 1,000 |
5 percent decrease | | N/A | | Decrease (b) | | (250) |
Primary workers' compensation(a): | | | | Primary workers' compensation: | | |
| | | | Increase(b) | | 1,400 |
| | | | Decrease(b) | | (900) |
(a) Loss cost trend assumption does not have a material impact for this line of business.
(b) Percentages not applicable due to extremely long-tailed nature of workers’ compensation.
Class of Business |
| Loss Cost Trend |
| Loss Development Factor |
Excess Casualty |
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| In the analysis we utilize various loss cost trend assumptions for different segments of the portfolio. After evaluating the historical loss cost trends from prior accident years since the early 1990s, in our judgment, it is reasonably likely that actual loss cost trends applicable to the year-end 2015 loss reserve review for excess casualty will range five percent lower or higher than this estimated loss trend. The loss cost trend assumption is critical for the excess casualty class of business due to the long-tail nature of the claims and therefore is applied across many accident years. Thus, there is the potential for the reserves with respect to a number of accident years (the expected loss ratio trendyears) to be significantly affected by changes in loss cost trends that were initially relied upon in setting the reserves. These changes in loss trends could be attributable to changes in inflation or in the judicial environment, or in other social or economic conditions affecting claims. | After evaluating the historical loss development factors from prior accident years since the early 1990s, in our judgment, it is requiredreasonably likely that actual loss development factors will range from approximately 3 percent below those actually utilized in the year-end 2015 reserve review to allowapproximately 3.5 percent above those factors actually utilized. Excess casualty is a long-tail class of business and any deviation in loss development factors might not be discernible for an extendedperiod of time subsequent to the recording of the initial loss reserveestimates for any accident year. Thus, there is the potential for the reserves with respect to a number of accident years to be significantly affected by changes in loss development factors that were initially relied upon in setting the reserves. Similar to loss cost trends, these changes in loss development factors could be attributable to changes in inflation or in the judicial environment, or in other social or economic conditions affecting claims. |
Class of Business |
| Loss Cost Trend |
| Loss Development Factor |
D&O and Related Management Liability Classes of Business |
|
| The assumed loss cost trend was approximately 1 percent. After evaluating the historical loss cost trends from prior accident years since the early 1990s, including the potential effect of inflation and other factors which may increaserecent claims relating to the credit crisis, in our judgment, it is reasonably likely that actual loss cost trends applicable to the year-end 2015 loss reserve review for these classes will range from approximately 30 percent lower or otherwise change31 percent higher than the assumption actually utilized in the year-end 2015 reserve review. Because the D&O class of business has exhibited highly volatile loss coststrends from one accident year to the next. The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many years ago is subject to greater uncertainty than other types of claims. This is due to inconsistent court decisions, as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the original intent of such policies or have expanded theories of liability. In addition, reinsurance recoverable balances relating to asbestos and environmental loss reserves are subject to greater uncertainty due to the underlying age of the claim, underlying legal issues surrounding the nature of the coverage, and determination of proper policy period. For these reasons, these balances tend to be subject to increased levels of disputes and legal collection activity when actually billed. The insurance industry as a whole is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify these exposures.
We continue to receive claims asserting injuries and damages from toxic waste, hazardous substances, and other environmental pollutants and alleged claims to cover the cleanup costs of hazardous waste dump sites, referred to collectively as environmental claims, and indemnity claims asserting injuries from asbestos. The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior years. Commencing in 1985, standard policies contained an absolute exclusion for pollution-related damage. An absolute asbestos exclusion was also implemented. The current AIG Property Casualty Environmental policies that we specifically price and underwrite for environmental risks on a claims-made basis have been excluded from the analysis.
The majority of our exposures for asbestos and environmental claims are excess casualty coverages, not primary coverages. The litigation costs are treated in the same manner as indemnity amounts, with litigation expenses included within the limits of the liability we incur. Individual significant claim liabilities, where future litigation costs are reasonably determinable, are established on a case-by-case basis.
Reserve Estimation for Asbestos and Environmental Claims
Estimation of asbestos and environmental claims loss reserves is a subjective process. Reserves for asbestos and environmental claims cannot be estimated using conventional reserving techniques such as those that rely on historical accident year loss development factors. The methods used to determine asbestos and environmental loss estimates and to establish the resulting reserves are continually reviewed and updated by management.
Various factors contribute to the complexity and difficulty in determining the future development of asbestos and environmental claims. Significant factors that influence the asbestos and environmental claims estimation process include court resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage. The current case law can be characterized as still evolving, andnext, there is little likelihood that any firm direction will develop in the near future. Additionally, the exposures for cleanup costspossibility of hazardous waste dump sites involve issues such as allocation of responsibility among potentially responsible parties and the government's refusal to release parties from liability. Future claims development also will be affected by the changes in Superfund and waste dump site coverage and liability issues.
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If the asbestos and environmental reserves develop deficiently, resulting deficiencies could have an adverse effect on our future results of operations for an individual reporting period.exceptionally high deviation.
With respect to known environmental claims, we established over two decades ago a specialized environmental claims unit, which investigates and adjusts all such environmental claims. This unit evaluates environmental claims utilizing a claim-by-claim approach that involves a detailed review of individual policy terms and exposures. Because each policyholder presents different liability and coverage issues, we generally evaluate exposure on a policy-by-policy basis, considering a variety of factors such as known facts, current law, jurisdiction, policy language and other factors that are unique to each policy. Quantitative techniques must be supplemented by subjective considerations, including management judgment. Each claim is reviewed at least semi-annually utilizing the aforementioned approach and adjusted as necessary to reflect the current information.
| The environmental claims unit also actively manages and pursues early resolution with respect to these claims in an attempt to mitigate its exposure to the unpredictable development of these claims. We attempt to mitigate our known long-tail environmental exposures through a combination of proactive claim-resolution techniques, including policy buybacks, complete environmental releases, compromise settlements, and, when appropriate, litigation. Known asbestos claims are managed in a similar manner. Over two decades ago we established a specialized toxic tort claims unit, which historically investigated and adjusted all such asbestos claims. As part of the above mentioned NICO transaction, effective January 1, 2011, NICO assumed responsibility for claims handling related to the majority of AIG's domestic asbestos liabilities.
The following is a discussion of actuarial methods applied by major class of business:
| | | Class of Business or Category and Actuarial Method
| | Application of Actuarial Method
|
|---|
Excess Casualty |
We generally use a combination of loss development methods and expected loss ratio methods for excess casualty classes.
Frequency/severity methods are generally not used in isolation to determine ultimate loss costs as the vast majority of reported claims do not result in claim payment. (However, frequency/severity methods assist in the regular monitoring of the adequacy of carried reserves to support incurred but not reported claims). In addition, the average severity varies significantly from accident year to accident year due to large losses which characterize this class of business, as well as changing proportions of claims which do not result in a claim payment. To gain more stability in the projection, the claims amenable to loss development methods are analyzed in two layers: the layer capped at $10 million and the layer above $10 million. The expected loss ratio for the layer above $10 million is derived from the expected relationship between the layers, reflecting the attachment point and limit by accident year.
In addition, we leverage case reserving based methodologies for complex claims/ latent exposures such as those involving toxic tort and other claims accumulations. |
|
Expected loss ratio methods are generally used for at least the three latest accident years, due to the relatively low credibility of the reported losses. The loss experience is generally reviewed separately for lead umbrella classes and for other excess classes, due to the relatively shorter tail for lead umbrella business. Automobile-related claims are generally reviewed separately from non-auto claims, due to the shorter-tail nature of the automobile-related claims. Claims relating to certain latent exposures such as construction defects or exhaustion of underlying product aggregate limits are reviewed separately due to the unique emergence patterns of losses relating to these claims. The expected loss ratios used for recent accident years are based on the projected ultimate loss ratios of prior years, adjusted for rate changes, estimated loss cost trends and all other changes that can be quantified.
During 2013, we also completed a third party review of certain insureds exposed to a specific class of toxic tort claims. That review considered the prior claims history for each insured account, AIG's exposed limits and the insured's role with the specific toxicant reviewed as well as a legal analysis of the exposures presented by these claims. |
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| | | Class of Business or Category and Actuarial Method
| | Application of Actuarial Method
|
|---|
D&O and Related Management Liability Classes of Business |
We generally use a combination of loss development methods and expected loss ratio methods for D&O and related management liability classes of business.
Frequency/severity methods are generally not used in isolation for these classes as the overall losses are driven by large losses more than by claim frequency. Severity trends have varied significantly from accident year to accident year and care is required in analyzing these trends by claim type. We also give weight to claim department ground-up projections of ultimate loss on a claim by claim basis as these may be more predictive of ultimate loss values especially for older accident years. |
|
These classes of business reflect claims made coverage, and losses are characterized by low frequency and high severity. Expected loss ratio methods are given more weight in the two most recent accident years, whereas loss development methods are given more weight in more mature accident years. For the year-end 2013 loss reserve review, claims projections for accident years 2012 and prior were used. |
|
Workers' Compensation |
|
|
We generally use a combination of loss development methods and expected loss ratio methods for workers' compensation. We segment the data by state and industry class to the extent that meaningful differences are determined to exist. |
|
Expected loss ratio methods generally are given significant weight only in the most recent accident year. Workers' compensation claims are generally characterized by high frequency, low severity, and relatively consistent loss development from one accident year to the next. We historically have been a leading writer of workers' compensation, and thus have sufficient volume of claims experience to use development methods. We generally segregate California business from other business in evaluating workers' compensation reserves. In 2012, we segmented out New York from the other states to reflect its different development pattern and changing percentage of the mix by state. We also revised our assumptions to reflect changes in our claims management activities. Certain classes of workers' compensation, such as construction, are also evaluated separately. Additionally, we write a number of very large accounts which include workers' compensation coverage. These accounts are generally individually priced by our actuaries, and to the extent appropriate, the indicated losses based on the pricing analysis may be used to record the initial estimated loss reserves for these accounts. |
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| | | Class of Business or Category and Actuarial Method
| | Application of Actuarial Method
|
|---|
Excess Workers' Compensation |
|
|
We historically have used a combination of loss development methods and expected loss ratio methods for excess workers' compensation. For the year-end 2013 loss reserve review, our actuaries supplemented the methods used historically by applying a structural drivers approach to inform their judgment of the ultimate loss costs for open reported claims from accident years 2003 and prior and used the refined analysis to help inform their judgment of the ultimate loss cost for claims that have not yet been reported using a frequency/severity approach for these accident years. |
|
Excess workers' compensation is an extremely long-tail class of business, with loss emergence extending for decades. The class is highly sensitive to small changes in assumptions — in the rate of medical inflation or the longevity of injured workers, for example — which can have a significant effect on the ultimate reserve estimate. Claims estimates for this line also are highly sensitive to:•
the assumed future rate of inflation and other economic conditions in the United States;
•
changes in the legal, regulatory, judicial and social environment;
•
the expected impact of recently enacted health care reform on workers' compensation costs;
•
underlying policy pricing, terms and conditions;
•
claims settlement trends that can materially alter the mix and ultimate cost of claims;
•
changes in claims reporting and management practices of insureds and their third-party administrators;
•
the cost of new and additional treatment specialties, such as "pain management";
•
the propensity for severely injured workers' medical conditions to deteriorate in the future;
•
changes in injured worker longevity; and
•
territorial experience differences (across states and within regions in a state).
|
|
|
Expected loss ratio methods are given the greater weight for the more recent accident years. For the year-end 2013 loss reserve review, the structural drivers approach which was applied to open reported claims from accident years 2003 and prior, was deemed to be most suitable for informing our judgment of the ultimate loss cost for injured workers whose medical conditions had largely stabilized (i.e., at least 9 to 10 years have elapsed since the date of injury). The reserve for accident years 2004 and subsequent was determined using a Bornhuetter Ferguson expected loss ratio method. |
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| | | Class of Business or Category and Actuarial Method
| | Application of Actuarial Method
|
|---|
General Liability |
|
|
We generally use a combination of loss development methods and expected loss ratio methods for primary general liability or products liability classes. We also supplement the standard actuarial techniques by using evaluations of the ultimate losses on unusual claims or claim accumulations by external specialists on those classes of claims. The segmentation of the data reflects state differences, industry classes, deductible/non-deductible programs and type of claim. |
|
For certain classes of business with sufficient loss volume, loss development methods may be given significant weight for all but the most recent one or two accident years. For smaller or more volatile classes of business, loss development methods may be given limited weight for the five or more most recent accident years. Expected loss ratio methods are used for the more recent accident years for these classes. The loss experience for primary general liability business is generally reviewed at a level that is believed to provide the most appropriate data for reserve analysis. Additionally, certain sub-classes, such as construction, are generally reviewed separately from business in other subclasses. In 2013, we continued to refine our loss reserving techniques for the domestic primary casualty classes of business and adopted further segmentations based on our analysis of the differing emerging loss patterns for certain classes of insureds. Due to the fairly long-tail nature of general liability business, and the many subclasses that are reviewed individually, there is less credibility given to the reported losses and increased reliance on expected loss ratio methods for recent accident years. |
|
Commercial Automobile Liability |
|
|
We generally use loss development methods for all but the most recent accident year for commercial automobile liability classes of business. |
|
Expected loss ratio methods are generally given significant weight only in the most recent accident year. |
|
Healthcare |
|
|
We generally use a combination of loss development methods and expected loss ratio methods for healthcare classes of business.
Frequency/severity methods are sometimes used for pricing certain healthcare accounts or business. However, for loss reserve adequacy testing, the need to ensure sufficient credibility generally results in segmentations that are not sufficiently homogenous to utilize frequency/severity methods.
We also supplement the standard actuarial techniques by using evaluations of the ultimate losses on unusual claims by specialists on those classes of claims. |
|
The largest component of the healthcare business consists of coverage written for hospitals and other healthcare facilities. We test reserves for excess coverage separately from those for primary coverage. For primary coverages, loss development methods are generally given the majority of the weight for all but the latest three accident years, and are given some weight for all years other than the latest accident year. For excess coverages, expected loss methods are generally given all the weight for the latest three accident years, and are also given considerable weight for accident years prior to the latest three years. For other classes of healthcare coverage, an analogous weighting between loss development and expected loss ratio methods is used. The weights assigned to each method are those that are believed to result in the best combination of responsiveness and credibility. |
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| | | Class of Business or Category and Actuarial Method
| | Application of Actuarial Method
|
|---|
Professional Liability |
|
|
We generally use a combination of loss development methods and expected loss ratio methods for professional liability classes of business.
Frequency/severity methods are used in pricing and profitability analyses for some classes of professional liability; however, for loss reserve adequacy testing, the need to ensure sufficient credibility generally results in segmentations that are not sufficiently homogenous to utilize frequency/severity methods.
We also use claim department projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches. |
|
Loss development methods are used for the more mature accident years. Greater weight is given to expected loss ratio methods in the more recent accident years. Reserves are tested separately for claims made classes and classes written on occurrence policy forms. Further segmentations are made in a manner believed to provide an appropriate balance between credibility and homogeneity of the data. |
|
Catastrophic Casualty |
|
|
We use expected loss ratio methods for all accident years for catastrophic casualty business. This class of business consists of casualty or financial lines coverage that attach in excess of very high attachment points; thus the claims experience is marked by very low frequency and high severity. Because of the limited number of claims, loss development methods are not relied upon. |
|
The expected loss ratios and loss development assumptions used are based upon the results of prior accident years for this business as well as for similar classes of business written above lower attachment points. The business can be written on a claims-made or occurrence basis. We use ground-up claim projections provided by our claims staff to assist in developing the appropriate reserve. |
|
Aviation |
|
|
We generally use a combination of loss development methods and expected loss ratio methods for aviation exposures. Aviation claims are not very long-tail in nature; however, they are driven by claim severity. Thus a combination of both development and expected loss ratio methods are used for all but the latest accident year to determine the loss reserves.
Frequency/severity methods are not employed due to the high severity nature of the claims and different mix of claims from year to year. |
|
Expected loss ratio methods are used to determine the loss reserves for the latest accident year. We also use ground-up claim projections provided by our claims staff to assist in developing the appropriate reserve. |
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Personal Auto |
|
|
We generally use frequency/severity methods and loss development methods for domestic personal auto classes. |
|
For many classes of business, greater reliance is placed on frequency/severity methods as claim counts emerge quickly for personal auto and allow for more immediate analysis of resulting loss trends and comparisons to industry and other diagnostic metrics. |
|
Fidelity/Surety |
|
|
We generally use loss development methods for fidelity exposures for all but the latest accident year. For surety exposures, we generally use the same method as for short-tail classes (discussed below). |
|
Expected loss ratio methods are also given weight for the more recent accident years. For the latest accident year they may be given 100 percent weight. |
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| | | Class of Business or Category and Actuarial Method
| | Application of Actuarial Method
|
|---|
Mortgage Guaranty |
|
|
We test mortgage guaranty reserves using loss development methods, supplemented by an internal claim analysis by actuaries and staff who specialize in the mortgage guaranty business. |
|
The reserve analysis projects ultimate losses for claims within each of several categories of delinquency based on actual historical experience, using primarily a frequency/severity loss development approach. Additional reserve tests are also employed, such as tests measuring losses as a percent of risk in force. Reserves are reviewed separately for each line of business considering the loss development characteristics, volume of claim data available and applicability of various actuarial methods to each line. |
|
|
Reserves for mortgage guaranty insurance losses and loss adjustment expenses are established for reported mortgage loan delinquencies and estimates of delinquencies that have been incurred but have not been reported by loan servicers, based upon historical reporting trends. We establish reserves using a percentage of the contractual liability (for each delinquent loan reported) that is based upon projected claim experience for each category of delinquency, consistent in total with the overall reserve estimate. |
|
|
Mortgage Guaranty losses and loss adjustment expenses have been affected by macroeconomic events, such as improving home prices and decreasing unemployment. Because these macroeconomic events are subject to adverse or favorable change, the determination of the ultimate losses and loss adjustment expenses requires a high degree of judgment. Responding to previous periods of adverse macroeconomic influences, numerous government and lender loan modification programs have been implemented to mitigate mortgage losses. The loan modification programs along with improving home values and declining unemployment have produced higher cure rates of delinquent loans in 2013, particularly in the most recent accident periods that may not continue in 2014. In addition, these loan modifications may re-default resulting in new losses for Mortgage Guaranty if adverse economic conditions were to return. In addition to improved cure rates, the favorable economic conditions have resulted in a decline of newly reported delinquencies. The declining new delinquencies and improved cure rates have combined to reduce UGC's first-lien delinquency rate to 5.9 percent at year end 2013, which is the lowest level reported since 2007. Offsetting these favorable trends were lender's efforts to overturn previously denied and rescinded claims. |
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|
Occurrences of fraudulent loans, underwriting violations, and other deviations from contractual terms, mostly related to the 2006 and 2007 blocks of business, resulted in historically high levels of claim rescissions and denials (collectively referred to as rescissions) during 2011 and 2012. As a result, many lenders have increased their efforts to provide missing documents or appeal rescissions. The lender's success at tracking down missing loan documents along with the heightened focus on appeals of rescissions have significantly reduced the future rescission rate (net of appeals) assumed in the loss reserves to an immaterial level, particularly on the older accident periods. As a result, UGC experienced some unfavorable loss development on older accident periods during the quarter. We believe we have provided appropriate reserves for currently delinquent loans, consistent with industry practices. |
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| | | Class of Business or Category and Actuarial Method
| | Application of Actuarial Method
|
|---|
Other Short-Tail Classes |
|
|
We generally use either loss development methods or IBNR factor methods to set reserves for short-tail classes such as property coverages. |
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Where a factor is used, it generally represents a percent of earned premium or other exposure measure. The factor is determined based on prior accident year experience. For example, the IBNR for a class of property coverage might be expected to approximate 20 percent of the latest year's earned premium. The factor is continually reevaluated in light of emerging claim experience as well as rate changes or other factors that could affect the adequacy of the IBNR factor being employed. |
|
International |
|
|
Business written by AIG Property Casualty internationally includes both long-tail and short-tail classes of business. For long-tail classes of business, the actuarial methods used are comparable to those described above. However, the majority of business written by AIG Property Casualty internationally is short-tail, high frequency and low severity in nature. For this business, loss development methods are generally employed to test the loss reserves. |
|
We maintain a database of detailed historical premium and loss transactions in original currency for business written by AIG Property Casualty internationally. This allows our actuaries to determine the current reserves without any distortion from changes in exchange rates over time. Our actuaries segment the international data by region, country or class of business as appropriate to determine an optimal balance between homogeneity and credibility. The techniques developed by our U.S. actuaries for certain commercial classes of business are increasingly applied to our International portfolios where the experience volume and data segmentation is comparable to that of the U.S. portfolios. Our actuaries work closely with the claims departments in each of our major International locations to determine the most appropriate methodology and assumptions. |
|
Loss Adjustment Expenses |
|
|
We determine reserves for legal defense and cost containment loss adjustment expenses for each class of business by one or more actuarial or structural driver methods. The methods generally include development methods comparable to those described for loss development methods. The development could be based on either the paid loss adjustment expenses or the ratio of paid loss adjustment expenses to paid losses, or both. Other methods include the utilization of expected ultimate ratios of paid loss expense to paid losses, based on actual experience from prior accident years or from similar classes of business. |
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We generally determine reserves for adjuster loss adjustment expenses based on calendar year ratios of adjuster expenses paid to losses paid for the particular class of business. We generally determine reserves for other unallocated loss adjustment expenses based on the ratio of the calendar year expenses paid to overall losses paid. This determination is generally done for all classes of business combined, and reflects costs of home office claim overhead as a percent of losses paid. We may supplement our judgments with an analysis of loss and legal expense mix change and detailed discussions with the claims department on the methods used to allocate the costs of the claims initiatives to new and in-force business and to different classes and sub-classes of business. |
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Catastrophes and Severe Losses |
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We conduct special analyses in response to major catastrophes and severe losses to estimate our gross and net loss and loss expense liability from those events. |
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These analyses may include a combination of approaches, including modeling estimates, ground-up claim analysis, loss evaluation reports from on-site field adjusters, and market share estimates. |
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Alternative Loss Cost Trend and Loss Development Factor Assumptions by Class of Business
For classes of business other than the classes discussed below, there is generally some potential for deviation in both the loss cost trend and loss development factor assumptions.
The effect of these deviations is expected to be smaller than the effect on the classes noted below
•Loss cost trends: The percentage deviations noted in the table below are not considered the highest possible deviations that might be expected, but rather what we consider to reflect a reasonably likely range of potential deviation. Actual loss cost trends in the early 1990s were negative for several years whereas actual loss cost trends exceeded the figures cited below for several other years. Loss trends may deviate by more than the amounts noted above and discussed below.
•Loss development factors: The percentage deviations noted in the table below are not considered the highest possible deviations that might be expected, but rather what we consider to reflect a reasonably likely range of potential deviation. While multiple scenarios are performed, the assumed loss development factors are also an important assumption but less critical than for excess casualty. Because these classes are written on a key assumption. claims made basis, the loss reporting and development tail is much shorter than for excess casualty. However, the high severity nature of the claims does create the potential for significant deviations in loss development patterns from one year to the next. After evaluating the historical loss development factors for these classes of business for accident years since the early 1990s, in our judgment, it is reasonably likely that actual loss development factors will range from approximately 5 percent lower to approximately 14 percent higher than those factors actually indicated in the year-end 2015 loss reserve review for these classes.
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Primary Workers’ Compensation |
|
| The loss cost trend assumption is not believed to be material with respect to our loss reserves. This is primarily because our actuaries are generally able to use loss development projections for all but the most recent accident year’s reserves, so there is limited need to rely on loss cost trend assumptions for primary workers’ compensation business. | Generally, our actual historical workers’ compensation loss development factors would be expected to provide a reasonably accurate predictor of future loss development. However, workers’ compensation is a long-tail class of business, and our business reflects a very significant volume of losses, particularly in recent accident years. After evaluating the actual historical loss development factors are usedsince the 1980s for this business, in our judgment, it is reasonably likely that actual loss reserves will fall within the range of approximately 7 percent below to projectapproximately 11 percent above those actually indicated in the 2015 loss reserve review. |
Class of Business |
| Loss Cost Trend |
| Loss Development Factor |
| | Based on our sensitivity testing, we also estimate that a 1 percent rise in the future rate of inflation (PCE Deflator for Health Care Services increased by 1 percent at the 30-year time horizon, with increases in the forward rate of inflation assumed to occur proportionally over time (i.e. the zero-year/1-year forward inflation rate would change by 1/30th of 1 percentage point)) would increase our ultimate loss development. Futurecost estimates by approximately $215 million as of December 31, 2015. In 2014, however, we began incorporating three-dimensional loss development patterns may be different from thosemodels incorporating accident year, development year and calendar year trends with our traditional loss development projections. This allows us to consider for example, the effect of changing levels of inflation (specifically the PCE Deflator for Health Care Services) on our ultimate loss costs for medical benefits. These methodologies also facilitate a more quantitative assessment of the uncertainty in our estimates reflecting structural drivers of loss along each dimension. |
Excess Workers’ Compensation (run-off only) |
|
| Loss costs were trended at six percent per annum. After reviewing actual industry loss trends for the past or may deviate by more thanten years, in our judgment, it is reasonably likely that actual loss cost trends applicable to the amounts noted above and discussed below. AIG'syear-end 2015 loss reserve analyses do not generally provide areview for excess workers’ compensation will range offive percent lower or higher than this estimated loss reserve estimates. A large portion oftrend. However, given the loss reserves from AIG Property Casualty business relates to longer-tail casualty classessmall volume of business suchwritten in these years, the range in reserve estimates as excess casualty and D&O, which are driven by severity rather than frequencya result of claims. Using the reserving methodologies described above, our actuaries determine their actuarial central estimates of thevarying these loss reserves and advise management on their final recommendation for management's best estimate of the recorded reserves. Subject matter experts from underwriting and claims play an important part in informing the actuarial assumptions and methods. The governance process over the establishment of loss reserves also ensures robust considerations of the changes in the losscost trends terms and conditions, claims handling practices, and large loss impact when determining the methods, assumptions and the estimations. This multi-disciplinary process engages underwriting, claims, risk management, business unit executives and senior management and involves several iterative levels of feedback and response during the regular reserving process.
The sensitivity analysis below addresses each major class of business for which there is a possibility of a material deviation from our overall reserve position. The analysis uses what we believe is a reasonably likely range of potential deviation for each class. Actual reserve development may not be consistent with either the original or thevery wide.
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adjusted loss trend or loss development factor assumptions, and other assumptions made in the reserving process may materially affect reserve development for a particular class of business.
| | | | | Class of Business
| | Loss Cost Trend
| | Loss Development Factor
|
|---|
Excess Casualty |
|
|
|
|
|
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The assumed loss cost trend was approximately five percent in the 2013 reserve review. After evaluating the historical loss cost trends from prior accident years since the early 1990s, in our judgment, it is reasonably likely that actual loss cost trends applicable to the year-end 2013 loss reserve review for excess casualty will range from 0 percent to positive ten percent. The loss cost trend assumption is critical for the excess casualty class of business due to the long-tail nature of the claims and therefore is applied across many accident years. Thus, there is the potential for the reserves with respect to a number of accident years (the expected loss ratio years) to be significantly affected by changes in loss cost trends that were initially relied upon in setting the reserves. These changes in loss trends could be attributable to changes in inflation or in the judicial environment, or in other social or economic conditions affecting claims. |
|
After evaluating the historical loss development factors from prior accident years since the early 1990s, in our judgment, it is reasonably likely that actual loss development factors will range from approximately 3.4 percent below those actually utilized in the year-end 2013 reserve review to approximately 6.0 percent above those factors actually utilized. Excess casualty is a long-tail class of business and any deviation in loss development factors might not be discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any accident year. Thus, there is the potential for the reserves with respect to a number of accident years to be significantly affected by changes in loss development factors that were initially relied upon in setting the reserves. These changes in loss development factors could be attributable to changes in inflation or in the judicial environment, or in other social or economic conditions affecting claims. |
|
D&O and Related Management Liability Classes of Business |
|
|
The assumed loss cost trend was approximately half of one percent. After evaluating the historical loss cost trends from prior accident years since the early 1990s, including the potential effect of recent claims relating to the credit crisis, in our judgment, it is reasonably likely that actual loss cost trends applicable to the year-end 2013 loss reserve review for these classes will range from approximately 28 percent lower or 25.5 percent higher than the assumption actually utilized in the year-end 2013 reserve review. Because the D&O class of business has exhibited highly volatile loss trends from one accident year to the next, there is the possibility of an exceptionally high deviation. |
|
The assumed loss development factors are also an important assumption but less critical than for excess casualty. Because these classes are written on a claims made basis, the loss reporting and development tail is much shorter than for excess casualty. However, the high severity nature of the claims does create the potential for significant deviations in loss development patterns from one year to the next. After evaluating the historical loss development factors for these classes of business for accident years since the early 1990s, in our judgment, it is reasonably likely that actual loss development factors will range from approximately 8.5 percent lower to 16 percent higher than those factors actually utilized in the year-end 2013 loss reserve review for these classes. |
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| | | | | Class of Business
| | Loss Cost Trend
| | Loss Development Factor
|
|---|
Primary Workers' Compensation |
|
|
The loss cost trend assumption is not believed to be material with respect to our loss reserves. This is primarily because our actuaries are generally able to use loss development projections for all but the most recent accident year's reserves, so there is limited need to rely on loss cost trend assumptions for primary workers' compensation business. |
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Generally, our actual historical workers' compensation loss development factors would be expected to provide a reasonably accurate predictor of future loss development. However, workers' compensation is a long-tail class of business, and our business reflects a very significant volume of losses, particularly in recent accident years. After evaluating the actual historical loss development since the 1980s for this business, in our judgment, it is reasonably likely that actual loss development factors will fall within the range of approximately 4.5 percent below to 6.2 percent above those actually utilized in the year-end 2013 loss reserve review. |
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Excess Workers' Compensation |
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Loss costs were trended at six percent per annum. After reviewing actual industry loss trends for the past ten years, in our judgment, it is reasonably likely that actual loss cost trends applicable to the year-end 2013 loss reserve review for excess workers' compensation will range five percent lower or higher than this estimated loss trend. |
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Excess workers'Excess workers’ compensation is an extremely long-tail class of business, with a much greater than normal uncertainty as to the appropriate loss development factors for the tail of the loss development. After evaluating the historical loss development factors for prior accident years since the 1980s as well as the development over the past several years of the ground up claim projections utilized to help select the loss development factors in the tail for this class of business, in our judgment, it is reasonably likely that actual loss development for excess workers' compensation could increase the current reserves by up to approximately $1.3 billion or decrease them by approximately $850 million. |
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The following sensitivity analysis table summarizes the effect on the loss reserve position of using certain alternative loss cost trend (for accident years where we use expected loss ratio methods) or loss development factor assumptions rather than the assumptions actually used in determining our estimates in the year-end loss reserve analyses in 2013.
| | | | | | | | | | | | | | | December 31, 2013
(in millions)
| | Effect on Loss Reserves
| |
| |
| | Effect on Loss Reserves
| |
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| | | Loss cost trends: | | | | | | | Loss development factors: | | | | | | | | Excess casualty: | | | | | | | Excess casualty: | | | | | 5 percent increase | | $ | 1,350 | | | | 6.0 percent increase | | $ | 1,250 | | 5 percent decrease | | | (1,100 | ) | | | 3.4 percent decrease | | | (750 | ) | D&O: | | | | | | | D&O: | | | | | 25.5 percent increase | | | 1,000 | | | | 16 percent increase | | | 950 | | 28.0 percent decrease | | | (800 | ) | | | 8.5 percent decrease | | | (500 | ) | Excess workers' compensation: | | | | | | | Excess workers' compensation: | | | | | 5 percent increase | | | 400 | | | | Increase(b) | | | 1,350 | | 5 percent decrease | | | (250 | ) | | | Decrease(b) | | | (650 | ) | Primary workers' compensation(a): | | | | | | | Primary workers' compensation: | | | | | | | | | | | | 6.2 percent increase | | | 1,900 | | | | | | | | | 4.5 percent decrease | | | (1,400 | ) | | | |
(a) Loss cost trend assumption does not have a material impact for this line of business.
(b) Percentages not applicable due to extremely long-tailed nature of workers' compensation.
Reinsurance Assets
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid claims and claim adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves.
We assess the collectability of reinsurance recoverable balances through either detailed reviews of the underlying nature of the reinsurance balance or comparisons with historical trends of disputes and credit events. We record adjustments to reflect the results of these assessments through an allowance for uncollectable reinsurance that reduces the carrying value of reinsurance assets in the balance sheet. This estimate requires significant judgment for which key considerations include:
•paid and unpaid amounts recoverable;
•whether the balance is in dispute or subject to legal collection;
•whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction); and
•whether collateral and collateral arrangements exist.
At December 31, 2013, the allowance for estimated unrecoverable reinsurance was $276 million.
See Note 8 to the Consolidated Financial Statements for additional information on reinsurance.
Future Policy Benefits for Life and Accident and Health Insurance Contracts (AIG Life and Retirement)
Long-duration traditional products include whole life insurance, term life insurance, accident and health insurance, long-term care insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our single premium immediate annuities and structured settlements.
For long-duration traditional business, a "lock-in" principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience,
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unless a loss recognition event occurs. The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns. These assumptions are typically consistent with pricing inputs. The assumptions also include margins for adverse deviation, principally for key assumptions such as mortality and interest rates used to discount cash flows, to reflect uncertainty given that actual experience might deviate from these assumptions. Establishing margins at contract inception requires management judgment. The extent of the margin for adverse deviation may vary depending on the uncertainty of the cash flows, which is affected by the volatility of the business and the extent of our experience with the product.
Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. To determine whether loss recognition exists, we determine whether a future loss is expected based on updated current assumptions. If a loss recognition exists, we recognize the loss by first reducing DAC through amortization expense, and, if DAC is depleted, record additional liabilities through a charge to policyholder benefit expense. See Note 9 to the Consolidated Financial Statements for additional information on loss recognition. Because of the long-term nature of many of our liabilities subject to the "lock-in" principle, small changes in certain assumptions may cause large changes in the degree of reserve adequacy. In particular, changes in estimates of future invested asset returns have a large effect on the degree of reserve deficiency.
Groupings for loss recognition testing are consistent with our manner of acquiring and servicing the business and applied by product groupings. We perform separate loss recognition tests for traditional life products, payout annuities, and long-term care insurance. Once loss recognition has been recorded for a block of business, the old assumption set is replaced and the assumption set used for the loss recognition would then be subject to the lock-in principle. Key judgments made in loss recognition tests include the following:
•To determine investment returns used in loss recognition tests, we typically segregate assets that match liabilities and then project future cash flows on those assets. Our projections include a reasonable allowance for investment expenses and expected credit losses over the projection horizon. A critical assumption in the projection of expected investment income is the assumed net rate of investment return at which excess cash flows are to be reinvested. For products in which asset and liability durations are matched relatively well, this is less of a consideration since interest on excess cash flows are not a significant component of future cash flows. For the reinvestment rate assumption, anticipated future changes to the yield curves could have a large effect. Given the interest rate environment applicable at the date of our loss recognition tests, we assumed a modest and gradual increase in long-term interest rates over time.
•For mortality assumptions, key judgments include the extent of industry versus own experience to base future assumptions as well as the extentdevelopment over the past several years of expected mortality improvementsthe ground up claim projections utilized to help select the loss development factors in the future. The lattertail for this class of business, in our judgment, it is based on a combination of historical mortality trends, advice from industry public health and demography specialistsreasonably likely that were consultedactual loss development for excess workers’ compensation could increase the current reserves by AIG's actuaries and published industry information.
•For surrender rates, a key judgment involves the correlation between expected increases/decreases in interest rates and increases/decreases in surrender rates. To support this judgment, we compare crediting rates on our products relativeup to expected rates on competing products under different interest scenarios.
•For in-force long-term care insurance, rate increases are allowed but must be approvedapproximately $1.0 billion or decrease them by state insurance regulators. Consequently, the extent of rate increases that may be assumed requires judgment. In establishing our assumption for rate increases for long-term care insurance, we consider historical experience as to the frequency and level of rate increases approved by state regulators.
approximately $250 million. |
In connection with our program to utilize capital loss carryforwards, we sold investment securities in 2013 and 2012. These and other investment sales with subsequent reinvestment at lower yields triggered recording of loss recognition reserves of $1.5 billion and $1.2 billion, primarily related to certain long-term payout annuity contracts, in 2013 and 2012, respectively.212
Significant unrealized appreciation on investments in a prolonged low interest rate environment may cause DAC to be adjusted and additional future policy benefit liabilities to be recorded through a charge directly to accumulated other comprehensive income ("shadow loss recognition"). These charges are included, net of tax, with the change in net unrealized appreciation of investments. See Note 9 to the Consolidated Financial Statements for additional information on shadow loss recognition. In applying shadow loss recognition, the Company overlays unrealized gains onto loss recognition tests without revising the underlying test. Accordingly, there is limited additional judgment in this process.
AIG 2013 Form 10-K
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Item 7 / CRITICAL aCCOUNTING eSTIMATES
Table of Contents
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
Guaranteed Benefit Features of Variable Annuity Products (AIG Life and Retirement)
Variable annuity products offered by our Retirement Income Solutions and Group Retirement product lines offer guaranteed benefit features. These guaranteed features include guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) that are payable in the event of death, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits include guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum account value benefits (GMAV). See Note 13 to the Consolidated Financial Statements for additional information on these features. At December 31, 2013, variable annuity account values subject to these features included $63 billion with GMDB, $3 billion with GMIB, $28 billion with GMWB and $627 million with GMAV. For GMDB, our most widely offered guaranteed benefit feature, the liabilities included in Future policyholder benefits at December 31, 2013 and 2012 were $355 million and $374 million, respectively.
The liabilities for GMDB and GMIB, which are recorded in Future policyholder benefits, represent the expected value of benefits in excess of the projected account value, with the excess recognized ratably over the accumulation period based on total expected assessments, through Policyholder benefits and claims. The liabilities for GMWB and GMAV, which are recorded in Policyholder contract deposits, are accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in Other realized capital gains (losses).
Our exposure to the guaranteed amounts is equal to the amount by which the contract holder's account balance is below the amount provided by the guaranteed feature. A variable annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder can only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the features are mutually exclusive, so the exposure to the guaranteed amount for each feature is not additive to that of other features. A policyholder cannot purchase more than one living benefit on one contract. Declines in the equity markets, increased volatility and a sustained low interest rate environment increase our exposure to potential benefits under the guaranteed features, leading to an increase in the liabilities for those benefits. See Critical Accounting Estimates — Estimated Gross Profits for Investment-Oriented Products herein for sensitivity analysis which includes the sensitivity of reserves for guaranteed benefit features to changes in the assumptions for equity market returns, volatility and mortality. For a further discussion of the risks related to guaranteed benefit features of variable annuities, our dynamic hedging program and risks of AIG's unhedged exposures, see Item 1A. — Risk Factors — Business and Operations.
AIG 2013 Form 10-K
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Reinsurance Assets
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves.
We assess the collectability of reinsurance recoverable balances through either detailed reviews of the underlying nature of the reinsurance balance or comparisons with historical trends of disputes and credit events. We record adjustments to reflect the results of these assessments through an allowance for uncollectable reinsurance that reduces the carrying amount of reinsurance assets in the balance sheet. This estimate requires significant judgment for which key considerations include:
•paid and unpaid amounts recoverable;
•whether the balance is in dispute or subject to legal collection;
•whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction); and
•whether collateral and collateral arrangements exist.
At December 31, 2015, the allowance for estimated unrecoverable reinsurance was $272 million.
See Note 7 to the Consolidated Financial Statements for additional information on reinsurance.
Future Policy Benefits for Life and Accident and Health Insurance Contracts (Life Insurance Companies)
Long-duration traditional products include whole life insurance, term life insurance, accident and health insurance, long-term care insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our single premium immediate annuities and structured settlements.
For long-duration traditional business, a “lock-in” principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns. These assumptions are typically consistent with pricing inputs. The assumptions also include margins for adverse deviation, principally for key assumptions such as mortality and interest rates used to discount cash flows, to reflect uncertainty given that actual experience might deviate from these assumptions. Establishing margins at contract inception requires management judgment. The extent of the margin for adverse deviation may vary depending on the uncertainty of the cash flows, which is affected by the volatility of the business and the extent of our experience with the product.
Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. To determine whether loss recognition exists, we determine whether a future loss is expected based on updated current assumptions. If loss recognition exists, we recognize the loss by first reducing DAC through amortization expense, and, if DAC is depleted, record additional liabilities through a charge to policyholder benefit expense. See Note 8 to the Consolidated Financial Statements for additional information on loss recognition. Because of the long-term nature of many of our liabilities subject to the “lock-in” principle, small changes in certain assumptions may cause large changes in the degree of reserve adequacy. In particular, changes in estimates of future invested asset returns have a large effect on the degree of reserve deficiency.
Groupings for loss recognition testing are consistent with our manner of acquiring, servicing, and measuring the profitability of the business and applied by product groupings. We perform separate loss recognition tests for traditional life products, payout annuities, and long-term care insurance. Once loss recognition has been recorded for a block of business, the old assumption set is replaced and the assumption set used for the loss recognition would then be subject to the lock-in principle. Key judgments made in loss recognition testing include the following:
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES213
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•To determine investment returns used in loss recognition tests, we typically segregate assets that match the duration of our liabilities with assets of comparable duration, to the extent practicable, and then project future cash flows on those assets. Assets supporting insurance liabilities are primarily comprised of a diversified portfolio of high quality fixed maturity securities, and may also include, to a lesser extent, alternative investments. Our projections include a reasonable allowance for investment expenses and expected credit losses over the projection horizon. A critical assumption in the projection of expected investment income is the assumed net rate of investment return at which excess cash flows are to be reinvested. For products in which asset and liability durations are matched relatively well, this is less of a consideration since interest on excess cash flows are not a significant component of future cash flows. For the reinvestment rate assumption, anticipated future changes to the yield curves could have a large effect. Given the interest rate environment applicable at the date of our most recent loss recognition tests, we assumed a modest and gradual increase in long-term interest rates over time.
•For mortality assumptions, key judgments include the extent of industry versus own experience to base future assumptions as well as the extent of expected mortality improvements in the future. The latter judgment is based on a combination of historical mortality trends and advice from industry, public health and demography specialists that were consulted by AIG’s actuaries and published industry information.
•For surrender rates, a key judgment involves the correlation between expected increases/decreases in interest rates and increases/decreases in surrender rates. To support this judgment, we compare crediting rates on our products relative to expected rates on competing products under different interest rate scenarios.
•For in-force long-term care insurance, rate increases are allowed but must be approved by state insurance regulators. Consequently, the extent of rate increases that may be assumed requires judgment. In establishing our assumption for rate increases for long-term care insurance, we consider historical experience as to the frequency and level of rate increases approved by state regulators.
The Life operating segment recorded loss recognition expense of $28 million in 2015 and $87 million in 2014 to increase reserves for certain discontinued long-term care business due to the update of actuarial assumptions, primarily a result of lower future premium increase assumptions and, in 2014, lower yield assumptions. Sales of investment securities in connection with our program to utilize capital loss carryforwards and other investment sales with subsequent reinvestment at lower yields triggered recording of loss recognition expense of $30 million and $1.5 billion in 2014 and 2013, respectively, primarily related to certain long-term payout annuity contracts in the Institutional Markets and Retirement operating segments.
Significant unrealized appreciation on investments in a prolonged low interest rate environment may cause DAC to be adjusted and additional future policy benefit liabilities to be recorded through a charge directly to accumulated other comprehensive income (“shadow loss recognition”). These charges are included, net of tax, with the change in net unrealized appreciation of investments. See Note 8 to the Consolidated Financial Statements for additional information on shadow loss recognition. In applying shadow loss recognition, the Company overlays unrealized gains onto loss recognition tests without revising the underlying test. Accordingly, there is limited additional judgment in this process.
Guaranteed Benefit Features of Variable Annuity Products (Life Insurance Companies)
Variable annuity products offered by our Retirement Income Solutions and Group Retirement product lines offer guaranteed benefit features. These guaranteed features include guaranteed minimum death benefits (GMDB) that are payable in the event of death or other instances, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits include guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum income benefits (GMIB), and guaranteed minimum accumulation benefits (GMAB). See Note 13 to the Consolidated Financial Statements for additional information on these features.
The liabilities for GMDB and GMIB, which are recorded in Future policyholder benefits, represent the expected value of benefits in excess of the projected account value, with the excess recognized ratably over the accumulation period based on total expected fee assessments, through Policyholder benefits and losses incurred. The liabilities for GMWB and GMAB, which are recorded in Policyholder contract deposits, are accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in Other realized capital gains (losses).
Our exposure to the guaranteed amounts is equal to the amount by which the contract holder’s account balance is below the amount provided by the guaranteed feature. A variable annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder can generally only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the features are mutually exclusive, so the exposure to the guaranteed amount for each feature is independent of the exposure from other features (except a surviving spouse who has a rider to potentially collect both a GMDB upon their spouse’s death and a GMWB during their lifetime). A policyholder cannot purchase more than one living benefit on one contract. Declines in the equity markets, increased volatility and a sustained low interest rate environment increase our exposure to potential benefits under the guaranteed features, leading to an increase in the liabilities for those benefits. See Estimated Gross Profits for Investment-Oriented Products (Life Insurance) below for sensitivity analysis which includes the sensitivity of reserves for guaranteed benefit features to changes in the assumptions for interest rates, equity market returns, volatility, and mortality. For additional discussion of market risk management related to these product features, see Enterprise Risk Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Program.
The reserving methodology and assumptions used to measure the liabilities of our two largest guaranteed benefit features are presented in the following table:
Reserving Methodology | | | Reserving Methodology
| | Assumptions and Accounting Judgments
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GMDB |
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| Assumptions and Accounting Judgments | GMDB | We determine the GMDB liability at each balance sheet date by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected fees. See Note 13 to the Consolidated Financial Statements for additional information on how we reserve for variable annuity products with guaranteed benefit features. | | Key assumptions include:•
Interest rates, which vary by year of issuance and products
•
Mortality rates, which are based upon actual experience modified to allow for variations in policy form
•
Lapse rates, which are based upon actual experience modified to allow for variations in policy form
•
Investment returns, using assumptions from a randomly generated model
•
In applying asset growth assumptions for the valuation of the GMDB liability, we use a "reversion to the mean" methodology, similar to that applied for DAC. For a description of this methodology, see Estimated Gross Profits for Investment-Oriented Products (AIG Life and Retirement) below.
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GMWB |
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| GMWB living benefits are embedded derivatives that are required to be bifurcated from the host contract and carried at fair value. The fair value estimates of the living benefit guarantees include assumptions such as equity market returns, interest rates, market volatility, and policyholder behavior. See Note 13 to the Consolidated Financial Statements for additional information on how we reserve for variable annuity products with guaranteed benefit features, and Note 5 to the Consolidated Financial Statements for information on fair value measurement of these embedded derivatives, including how AIG incorporates its own non-performance risk.
| | The fair value of the embedded derivatives is based on actuarial and capital market assumptions related to projected cash flows over the expected lives of the contracts. Key assumptions include:•
Equity market returns
•
Interest rates
•
Market volatility
•
Benefits and related fees assessed, when applicable
•
Policyholder behavior, including mortality, exercise of guarantees and policy lapses. Estimates of future policyholder behavior are subjective and based primarily on our historical experience.
•
In applying asset growth assumptions for the valuation of GMWBs, we use market-consistent assumptions consistent with fair value measurement.
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Estimated Gross Profits for Investment — Oriented Products (AIG Life and Retirement)
Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts related to universal life and investment-type products (collectively, investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over a period that approximates the estimated lives of the contracts. Estimated gross profits include net investment income and spreads, net realized investment gains and losses, fees, surrender charges, expenses, and mortality gains and losses. In estimating future gross profits, lapse assumptions require
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judgment and can have a material impact on DAC amortization. For fixed deferred annuity contracts, the future spread between investment income and interest credited to policyholders is a significant judgment, particularly in a low interest rate environment.
If the assumptions used for estimated gross profits change significantly, DAC and related reserves, including VOBA, SIA, guaranteed benefit reserves and unearned revenue reserves (URR), are recalculated using the new assumptions, and any resulting adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products. In the third quarter of 2013, we completed our comprehensive annual review and update of estimated gross profit assumptions used to amortize DAC and related items for our investment-oriented products. The result of this review was a $118 million net increase in pre-tax operating income in 2013, which included a $198 million net increase in our Retail operating segment and an $80 million decrease in our Institutional operating segment. The net increase in Retail pre-tax operating income was primarily due to a favorable adjustment in our Fixed Annuities product line from updated spread assumptions due to active management of crediting rates and higher future investment yields than those previously assumed. In the Life Insurance and A&H, Retirement Income Solutions and Group Retirement product lines, the update of assumptions for variable annuity spreads, surrender rates, and life insurance mortality had an unfavorable impact on pre-tax operating income. The life insurance mortality assumptions, while unfavorable compared to the previous assumption set, are still within pricing expectations.
The $118 million increase in pre-tax operating income to reflect updated assumptions was comprised of three favorable developments, a $98 million net decrease in DAC amortization expense, a $61 million decrease in SIA amortization expense within Interest credited to policyholder account balances, and a $28 million increase in unearned revenue amortization within Policy fees; partially offset by a $69 million increase in Future policy benefits for life and health insurance contracts.
In estimating future gross profits for variable annuity products, a long-term annual asset growth assumption of 8.5% (before expenses that reduce the asset base from which future fees are projected) is applied to estimate the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity markets is partially mitigated through the use of a "reversion to the mean" methodology, whereby short-term asset growth above or below the long-term annual rate assumption impact the growth assumption applied to the five-year period subsequent to the current balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth assumptions, while also giving consideration to the effect of actual investment performance. When actual performance significantly deviates from the annual long-term growth assumption, as evidenced by growth assumptions for the five-year reversion to the mean period falling below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or "unlock" the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption applied to subsequent periods. The use of a reversion to the mean assumption is common within the industry; however, the parameters used in the methodology are subject to judgment and vary within the industry.
In the fourth quarter of 2013, we revised the growth rate assumptions for the five-year reversion to the mean period for the Group Retirement product line, because annual growth assumptions indicated for this period had fallen below our floor of zero percent due to the recent favorable performance of equity markets. For this five-year reversion to the mean period, the growth rate assumption was adjusted to a point between the long-term growth rate assumption and zero percent. This adjustment, which increased DAC by $31 million, increased SIA by $2 million and reduced the GMDB liability by $2 million, was recorded as a decrease in current period amortization expense, and increased pre-tax income by $35 million in 2013. Had we readjusted the growth rate assumption for the five-year reversion to the mean period to use the long-term rate assumption of 8.5%, pre-tax income would have been higher by approximately $30 million. Conversely, had the growth rate assumption for the five-year reversion to the mean period been readjusted to a floor of zero percent, pre-tax income would have been lower by approximately $30 million. For variable annuities in our Retirement Income Solutions product line, the assumed annual growth rate remained above zero percent for the five-year reversion to the mean period so it did not meet our criteria for adjustment; however, additional favorable equity market performance in excess of long-term assumptions could also result in "unlocking" in this product line in future periods with a positive effect on pre-tax income in the period of the unlocking.
The following table summarizes the sensitivity of changes in certain assumptions in the amortization of DAC/SIA, guaranteed benefit reserves and unearned revenue liability and the related hypothetical impact on year-end 2013 balances. The effect of changes in net investment spread primarily affects our Fixed Annuities
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product line. Changes in the equity markets and volatility primarily impact individual variable annuities in our Retirement Income Solutions and Group Retirement product lines. The effect of changes in mortality primarily impacts the universal life insurance business.
| | | | | | | | | | | | | | | | | December 31, 2013
(in millions)
| | DAC/SIA
| | Guaranteed
Benefits
Reserve
| | Unearned
Revenue
Liability
| | Net
Pre-Tax
Earnings
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| | | Assumptions: | | | | | | | | | | | | | | Net Investment Spread | | | | | | | | | | | | | | Effect of an increase by 10 basis points | | $ | 139 | | $ | (19 | ) | $ | 8 | | $ | 151 | | Effect of a decrease by 10 basis points | | | (141 | ) | | 19 | | | (7 | ) | | (153 | ) | Equity Return(a) | | | | | | | | | | | | | | Effect of an increase by 1% | | | 60 | | | (22 | ) | | – | | | 82 | | Effect of a decrease by 1% | | | (57 | ) | | 55 | | | – | | | (112 | ) | Volatility(b) | | | | | | | | | | | | | | Effect of an increase by 1% | | | – | | | 11 | | | – | | | (11 | ) | Effect of a decrease by 1% | | | – | | | (11 | ) | | – | | | 11 | | Mortality | | | | | | | | | | | | | | Effect of an increase by 1% | | | (15 | ) | | 21 | | | (6 | ) | | (30 | ) | Effect of a decrease by 1% | | | 9 | | | (21 | ) | | 4 | | | 26 | | | | |
(a) Represents the net impact of 1 percent increase or decrease in long-term equity returns for GMDB and GMIB reserves and negligible net impact of 1 percent increase or decrease in the S&P 500 index for living benefit reserves.
(b) Represents the net impact of 1 percentage point increase or decrease in implied volatility.
The analysis of DAC, guaranteed benefits reserve and unearned revenue liability is a dynamic process that considers all relevant factors and assumptions described above. We estimate each of the above factors individually, without the effect of any correlation among the key assumptions. An assessment of sensitivity associated with changes in any single assumption would not necessarily be an indicator of future results.
Impairment Charges
Other-Than-Temporary Impairments on Available For Sale Securities
At each balance sheet date we evaluate our available for sale securities holdings with unrealized losses.
by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected fee assessments. See the discussion in Note 613 to the Consolidated Financial Statements for additional information on how we reserve for variable annuity products with guaranteed benefit features. | Key assumptions include: •Interest rates, which vary by year of issuance and products •Mortality rates, which are based upon actual experience modified to allow for variations in policy form •Lapse rates, which are based upon actual experience modified to allow for variations in policy form •Investment returns, using assumptions from a randomly generated model •In applying asset growth assumptions for the methodology and significant inputs, by security type, thatvaluation of the GMDB liability, we use a reversion to determine the amountmean methodology, similar to that applied for DAC. For a description of other-than-temporary impairmentthis methodology, see Estimated Gross Profits for Investment-Oriented Products (Life Insurance Companies) below. |
GMWB |
GMWB living benefits are embedded derivatives that are required to be bifurcated from the host contract and carried at fair value. The fair value estimates of the living benefit guarantees include assumptions such as interest rates, equity market returns, market volatility, credit spreads, equity / interest rate correlation and policyholder behavior. See Note 13 to the Consolidated Financial Statements for additional information on fixed maturityhow we reserve for variable annuity products with guaranteed benefit features, and Note 4 to the Consolidated Financial Statements for information on fair value measurement of these embedded derivatives, including how we incorporates our own non-performance risk. | The fair value of the embedded derivatives is based on actuarial and capital market assumptions related to projected cash flows over the expected lives of the contracts. Key assumptions include: •Interest rates •Equity market returns •Market volatility •Credit spreads •Equity / interest rate correlation •Benefits and related fees assessed, when applicable •Policyholder behavior, including mortality, lapses, withdrawals and benefit utilization. Estimates of future policyholder behavior are subjective and based primarily on our historical experience •In applying asset growth assumptions for the valuation of GMWBs, we use market-consistent assumptions consistent with fair value measurement, which are calibrated to observable interest rate and equity securities.option prices •Allocation of fees between the embedded derivative and host contract |
| | | |
Estimated Gross Profits for Investment–Oriented Products (Life Insurance Companies)
Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts related to universal life and investment-type products (collectively, investment-oriented products) are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over a period that approximates the estimated lives of the contracts, except in instances where significant negative gross profits are expected in one or more periods.Estimated gross profits include net investment income and spreads, net realized investment gains and losses, fees, surrender charges, expenses, and mortality gains and losses. In estimating future gross profits, lapse assumptions require judgment and can have a material impact on DAC amortization. For fixed deferred annuity contracts, the future spread between investment income and interest credited to policyholders is a significant judgment, particularly in a low interest rate environment.
If the assumptions used for estimated gross profits change significantly, DAC and related reserves, including VOBA, SIA, guaranteed benefit reserves and URR, are recalculated using the new assumptions, and any resulting adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products.
In estimating future gross profits for variable annuity products, a long-term annual asset growth assumption of 8.5% (before expenses that reduce the asset base from which future fees are projected) is applied to estimate the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity markets is partially mitigated through the use of a reversion to the mean methodology, whereby short-term asset growth above or below the long-term annual rate assumption impacts the growth assumption applied to the five-year period subsequent to the current balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth assumptions, while also giving consideration to the effect of actual investment performance. When actual performance significantly deviates from the annual long-term growth assumption, as evidenced by growth assumptions for the five-year reversion to the mean period falling below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or “unlock” the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption applied to subsequent periods. The use of a reversion to the mean assumption is common within the industry; however, the parameters used in the methodology are subject to judgment and vary within the industry. See Results of Operations – Life Insurance Companies DAC and Reserves – Reversion to the Mean for additional discussion.
The following table summarizes the sensitivity of changes in certain assumptions for DAC and SIA, embedded derivatives and other reserves related to guaranteed benefits and URR, the related hypothetical impact on December 31, 2015 balances and the resulting hypothetical impact on pre-tax income, before hedging. Changes in net investment spread assumptions primarily affect DAC and SIA in our Fixed Annuities product line. Changes in interest
rates, equity returns and volatility primarily impact embedded derivatives and other reserves for guaranteed benefits in our Retirement Income Solutions and Group Retirement product lines, as well as universal life insurance with secondary guarantees. Changes in mortality assumptions primarily impact DAC in our universal life insurance business.
| | | | Other | | | | Embedded | | Net |
| | | | Reserves | | | | Derivatives | | Increase |
| | | | Related to | | Unearned | | Related to | | (Decrease) |
December 31, 2015 | | | | Guaranteed | | Revenue | | Guaranteed | | in Pre-Tax |
(in millions) | | DAC/SIA | | Benefits | | Reserve | | Benefits | | Income |
Assumptions: | | | | | | | | | | |
Net Investment Spread | | | | | | | | | | |
Effect of an increase by 10 basis points | $ | 123 | $ | (7) | $ | 8 | $ | (12) | $ | 135 |
Effect of a decrease by 10 basis points | | (131) | | 14 | | (26) | | 12 | | (130) |
Equity Return(a) | | | | | | | | | | |
Effect of an increase by 1% | | 88 | | (34) | | 1 | | (47) | | 168 |
Effect of a decrease by 1% | | (87) | | 40 | | (1) | | 50 | | (176) |
Volatility (b) | | | | | | | | | | |
Effect of an increase by 1% | | - | | - | | - | | (43) | | 43 |
Effect of a decrease by 1% | | - | | - | | - | | 42 | | (42) |
Interest Rate(c) | | | | | | | | | | |
Effect of an increase by 10 basis points | | - | | - | | - | | (131) | | 131 |
Effect of a decrease by 10 basis points | | - | | - | | - | | 141 | | (141) |
Mortality | | | | | | | | | | |
Effect of an increase by 1% | | (8) | | 23 | | (1) | | (25) | | (4) |
Effect of a decrease by 1% | | 8 | | (23) | | 3 | | 26 | | 3 |
Lapse | | | | | | | | | | |
Effect of an increase by 10% | | (142) | | (42) | | (8) | | (103) | | 11 |
Effect of an decrease by 10% | | 149 | | 43 | | 8 | | 109 | | (11) |
(a) Represents the net impact of a one percent increase or decrease in long-term equity returns for GMDB and GMIB reserves and negligible net impact of a one percent increase or decrease in the S&P 500 index for GMWB and GMAB living benefit reserves.
(b) Represents the net impact of a one percentage point increase or decrease in equity volatility.
(c) Represents the net impact of 10 basis point parallel shift in the yield curve on the reserves for GMWB and GMAB living benefit features. Does not represent interest rate spread compression on investment-oriented products.
The analysis of DAC, embedded derivatives and other reserves related to guaranteed benefits, and unearned revenue reserve is a dynamic process that considers all relevant factors and assumptions described above. We estimate each of the above factors individually, without the effect of any correlation among the key assumptions. An assessment of sensitivity associated with changes in any single assumption would not necessarily be an indicator of future results. The effects on pre-tax income in the sensitivity analysis table above do not reflect the related effects from our economic hedging program, which utilizes derivative and other financial instruments and is designed so that changes in value of those instruments move in the opposite direction of changes in the guaranteed benefit embedded derivative liabilities. For a further discussion on guaranteed benefit features of our variable annuities and the related hedging program, see Enterprise Risk Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Program, Item 1A. — Risk Factors — Business and Operations, and Notes 4 and 13 to the Consolidated Financial Statements.
Impairment Charges
Impairments of Investments
At each balance sheet date, we evaluate our available for sale securities holdings with unrealized losses to determine if an other-than-temporary impairment has occurred. We also evaluate our other invested assets for impairment; these include
equity and cost method investments in private equity funds, hedge funds and other entities as well as investments in life settlements, aircraft and real estate.
See the discussion in Note 5 to the Consolidated Financial Statements for additional information on the methodology and significant inputs, by investment type, that we use to determine the amount of impairment.
Impairments on Investments in Life Settlements
Impairments to investments in life settlements may occur in the future due to the fact that continued payment of premiums required to maintain policies will cause the expected lifetime undiscounted cash flows for some policies to become negative in future reporting periods, even in the absence of future changes to the mortality assumptions. Impairments may also occur due to our future sale or lapse of select policies at a value that is below carrying amount.
For a discussion of impairments on investments in life settlements, see Investments in this MD&A and Note 65 to the Consolidated Financial Statements.
Goodwill Impairment
For a discussion of goodwill impairment, see Note 211 to the Consolidated Financial Statements. In 20132015 and 2012,2014, AIG elected to bypass the qualitative assessment of whether goodwill impairment may exist and, therefore, performed quantitative assessments that supported a conclusion that the fair value of eachall of the two reporting units tested exceeded their book value. In determiningTo determine fair value, we primarily use a discounted expected future cash flow analysis that estimates and discounts projected future distributable earnings. Such analysis is principally based on AIG'sAIG’s business projections that inherently include judgments regarding business trends.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
Liability for Legal Contingencies
We estimate and record a liability for potential losses that may arise from litigation and regulatory proceedings to the extent such losses are probable and can be estimated. Determining a reasonable estimate of the amount of such losses requires significant management judgment. In many cases, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close to resolution. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases that are in the early stages of litigation or in which claimants seek substantial or indeterminate damages, we often cannot predict the outcome or estimate the eventual loss or range of reasonably possible losses related to such matters.
SeeFor more information on legal, regulatory and litigation matters, see Note 15 to the Consolidated Financial Statements.
Fair Value Measurements of Certain Financial Assets and Financial Liabilities
See Note 54 to the Consolidated Financial Statements for additional information about the measurement of fair value of financial assets and financial liabilities and our accounting policy regarding the incorporation of credit risk in fair value measurements.
The following table presents the fair value of fixed maturity and equity securities by source of value determination:
December 31, 2015 | | Fair | Percent | |
(in billions) | | Value | of Total | |
Fair value based on external sources(a) | $ | 250 | 93 | % |
Fair value based on internal sources | | 19 | 7 | |
Total fixed maturity and equity securities(b) | $ | 269 | 100 | % |
| | | | | | | |
| | |
December 31, 2013
(in billions)
| | Fair
Value
| | Percent
of Total
| |
|---|
| | |
Fair value based on external sources(a) | | $ | 268 | | | 94 | % |
Fair value based on internal sources | | | 17 | | | 6 | |
| | |
Total fixed maturity and equity securities(b) | | $ | 285 | | | 100 | % |
| | |
(a) Includes $26.5$26.3 billion for which the primary source is broker quotes.
(b) Includes available for sale and other securities.
Level 3 Assets and Liabilities
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in a hierarchy for disclosure purposes consisting of three "levels"“levels” based on the observability of inputs available in the marketplace used to measure the fair value. See Note 54 to the Consolidated Financial Statements for additional information.
The following table presents the amount of assets and liabilities measured at fair value on a recurring basis and classified as Level 3:
|
| |
| |
| |
| | |
|---|
| | | | | December 31, | Percentage | | | | December 31, | Percentage | |
(in billions)
| | December 31,
2013
| | Percentage
of Total
| | December 31,
2012
| | Percentage
of Total
| | | 2015 | of Total | | | | 2014 | of Total | |
|---|
| | | |
Assets | | $ | 46.7 | | | 8.6 | % | $ | 40.5 | | 7.4 | % | $ | 42.4 | 8.5 | % | | $ | 44.4 | 8.6 | % |
Liabilities | | | 2.3 | | | 0.5 | | | 4.1 | | 0.9 | | | 3.1 | 0.8 | | | 2.9 | 0.7 | |
| | | |
Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available about the assumptions that market participants would use when valuing the asset or liability. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment.
We classify fair value measurements for certain assets and liabilities as Level 3 when they require significant unobservable inputs in their valuation, including contractual terms, prices and rates, yield curves, credit curves, measures of volatility, prepayment rates, default rates, mortality rates and correlations of such inputs.
AIG 2013 Form 10-K
Table of Contents
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
The following paragraphs describe the methods we use to measure fair value on a recurring basis for super senior credit default swaps classified in Level 3. See Note 5 4to the Consolidated Financial Statements for discussion of the valuation methodologies for other assets classified in Level 3, including certain fixed maturity securities and certain other invested assets,liabilities measured at fair value, as well as a discussion of transfers of Level 3 assets and liabilities.
Super Senior Credit Default Swap Portfolio
Certain entities included in GCM wrote credit protection on the super senior risk layer of collateralized loan obligations (CLOs), multi-sector CDOs and diversified portfolios of corporate debt and prime residential mortgages through 2006. In these transactions, we are at risk of credit performance on the super senior risk layer related to such assets.
See Notes 5 and 11 to the Consolidated Financial Statements for information about the regulatory capital, multi-sector CDO, corporate debt/ CLO and other portfolios.
We utilize sensitivity analyses that estimate the effects of using alternative pricing and other key inputs on our calculation of the unrealized market valuation loss related to the super senior credit default swap portfolio. For the purposes of estimating sensitivities for the super senior multi-sector CDO credit default swap portfolio, the change in valuation derived using the Binomial Expansion Technique (BET) model is used to estimate the change in the fair value of the derivative liability. Of the total $3.3 billion net notional amount of CDS written on multi-sector CDOs outstanding at December 31, 2013, a BET value is available for $2.2 billion net notional amount. No BET value is determined for $1.1 billion of CDS written on European multi-sector CDOs because prices on the underlying securities held by these CDOs are not provided by collateral managers; instead these CDS are valued using counterparty prices. Therefore, sensitivities disclosed below apply only to the net notional amount of $2.2 billion.
The following table presents key inputs used in the BET model, and the potential increase (decrease) to the fair value of the derivative liability by ABS category at December 31, 2013 corresponding to changes in these key inputs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| |
| |
| |
| | Increase (Decrease) to Fair Value of Derivative Liability | |
|---|
(dollars in millions)
| | Average
Inputs Used at
December 31, 2013
| | Change
| |
| | Entire
Portfolio
| |
| | RMBS
Prime
| | RMBS
Alt-A
| | RMBS
Subprime
| | CMBS
| | CDOs
| | Other
| |
|---|
| | |
Bond prices | | 50 points | | Increase of 5 points | | | | $ | (99 | ) | | | $ | (2 | ) | $ | (5 | ) | $ | (44 | ) | $ | (32 | ) | $ | (8 | ) | $ | (8 | ) |
| | | | Decrease of 5 points | | | | | 107 | | | | | 2 | | | 5 | | | 41 | | | 39 | | | 8 | | | 12 | |
| | |
Weighted | | | | Increase of 1 year | | | | | 7 | | | | | – | | | – | | | 4 | | | 3 | | | – | | | – | |
average life | | 5.63 years | | Decrease of 1 year | | | | | (8 | ) | | | | – | | | – | | | (5 | ) | | (2 | ) | | – | | | (1 | ) |
| | |
Recovery rates | | 17% | | Increase of 10% | | | | | (7 | ) | | | | – | | | (1 | ) | | (4 | ) | | (1 | ) | | (1 | ) | | – | |
| | | | Decrease of 10% | | | | | 9 | | | | | – | | | 1 | | | 5 | | | 1 | | | 1 | | | 1 | |
| | |
Diversity score(a) | | 13 | | Increase of 5 | | | | | (3 | ) | | | | | | | | | | | | | | | | | | | | |
| | | | Decrease of 5 | | | | | 8 | | | | | | | | | | | | | | | | | | | | | |
| | |
Discount curve(b) | | N/A | | Increase of 100bps | | | | | 2 | | | | | | | | | | | | | | | | | | | | | |
| | |
(a) The diversity score is an input at the CDO level. A calculation of sensitivity to this input by type of security is not possible.
(b) The discount curve is an input at the CDO level. A calculation of sensitivity to this input by type of security is not possible. Furthermore, for this input it is not possible to disclose a weighted average input because a discount curve consists of a series of data points.
These results are calculated by stressing a particular assumption independently of changes in any other assumption. No assurance can be given that the actual levels of the key inputs will not exceed, perhaps significantly, the ranges assumed by us for purposes of the above analysis. No assumption should be made that results calculated from the use of other changes in these key inputs can be interpolated or extrapolated from the results set forth above.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
GLOSSARY
glossary
Glossary
Accident yearThe annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.
Accident year combined ratio, as adjusted theThe combined ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.
Accident year loss ratio, as adjusted theThe loss ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.
Acquisition ratio acquisitionAcquisition costs divided by net premiums earned. Acquisition costs are those costs incurred to acquire new and renewal insurance contracts and also include the amortization of value of business acquired (VOBA)VOBA and deferred policy acquisition costs (DAC).DAC. Acquisition costs vary with sales and include, but are not limited to, commissions, premium taxes, direct marketing costs, certain costs of personnel engaged in sales support activities such as underwriting, and the change in DAC. Acquisition costs that are incremental and directly related to successful sales efforts are deferred and recognized over the coverage periods of related insurance contracts. Acquisition costs that are not incremental and directly related to successful sales efforts are recognized as incurred.underwriting.
Additional premium/Return premiumBase Spread is a premium due either to or from an insured as a result of a change in coverage (e.g. increase or decrease in limits or risk) or cancellation of an existing policy. In addition, certain policies provide for adjustments to the original premium amount charged based on the experience of the policy, e.g. workers' compensation policies and loss sensitive policies where changes to the original premium are based on variances of the loss history against estimates built into the determination of the original premium.
AIG — After-tax operatingNet investment income (loss) attributable to AIG is derived by excluding the following items from net income (loss) attributable to AIG: income (loss) from discontinued operations, net loss (gain) on sale of divested businesses and properties, income from divested businesses, legacy tax adjustments primarily related to certain changes in uncertain tax positionsalternative investments and other tax adjustments, legal reserves (settlements) related to "legacy crisis matters," deferred income tax valuation allowance (releases) charges, changes in fair valueenhancements, less interest credited excluding amortization of AIG Life and Retirement fixed maturity securities designated to hedge living benefit liabilities (net of interest expense), changes in benefit reserves and DAC, VOBA, and sales inducement assets (SIA) related to net realized capital (gains) losses, AIG Property Casualty other (income) expense — net, (gain) loss on extinguishment of debt, net realized capital (gains) losses, non-qualifying derivative hedging activities,assets.
Base Yield Net investment income excluding net realized capital (gains) losses,income from alternative investments and bargain purchase gain. "Legacy crisis matters" include favorable and unfavorable settlements related to events leading up to and resulting from our September 2008 liquidity crisis and legal fees incurred by AIG as the plaintiff in connection with such legal matters.
AIG Life and Retirement — Pre-tax operating income (loss) Pre-tax operating income (loss) is derived by excluding the following items from pre-tax income (loss): legal settlements related to legacy crisis matters, changes in fair values of fixed maturity securities designated to hedge living benefit liabilities (net of interest expense), net realized capital (gains) losses, and changes in benefit reserves and DAC, VOBA, and SIA related to net realized capital (gains) losses.
AIG Life and Retirement — Premiums and deposits includes direct and assumed amounts received on traditional life insurance policies, group benefit policies and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, guaranteed investment contracts and mutual funds.
AIG Life and Retirement — Surrender rate represents annualized surrenders and withdrawalsenhancements, as a percentage of average reserves.
AIG Property Casualty — Net premiums written represent the sales of an insurer, adjustedbase invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period while Net premiums earned are a measure of performance for a coverage period. From the period in which the premiums are written until the period in which they are earned, the amount is presented as Unearned premium reserves in the Consolidated Balance Sheets.fair value option has been elected.
AIG Property Casualty — Pre-tax operating income (loss) includes both underwriting income (loss) and net investment income, but excludes net realized capital (gains) losses, other (income) expense — net, legal settlements
AIG 2013 Form 10-K
Table of Contents
GLOSSARY
related to legacy crisis matters and bargain purchase gain. Underwriting income (loss) is derived by reducing net premiums earned by claims and claims adjustment expenses incurred, acquisition expenses and general operating expenses.
BETBinomial Expansion TechniqueA model that generates expected loss estimates for CDO tranches and derives a credit rating for those tranches.
Book Value Per Common Share, Excluding Accumulated Other Comprehensive Income (loss) (AOCI)AOCIand Book Value Per Common Share Excluding AOCI and DTA is aare non-GAAP measuremeasures and isare used to show the amount of our net worth on a per-share basis. Book Value Per Common Share, Excluding AOCI is derived by dividing Total AIG shareholders'shareholders’ equity, excluding AOCI, by Total common shares outstanding.Book Value Per Common Share, Excluding AOCI and DTA is derived by dividing Total AIG shareholders’ equity, excluding AOCI and DTA, by Total common shares outstanding.
Casualty insurance Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured, and the legal liability imposed on the insured as a result.
Catastrophe losses are generally weather or seismic events having a net impact on AIG Property Casualty in excess of $10 million each.
Combined ratio Sum of the loss ratio and the acquisition and general operating expense ratios.
CSACredit Support Annex A legal document generally associated with an ISDA Master Agreement that provides for collateral postings at variouswhich could vary depending on ratings and threshold levels.
CVACredit Valuation AdjustmentThe CVA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. Also, the CVA reflects the fair value movement in the DIB'sAIGFP's asset portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign exchange rates. Finally, the CVA also accounts for our own credit risk in the fair value measurement of all derivative net derivative liabilitiesliability positions and liabilities where AIG has elected the fair value option, when appropriate.
DACDeferred Policy Acquisition Costs Deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business.
DAC Related to Unrealized Appreciation (Depreciation) of InvestmentsAn adjustment to DAC for investment-oriented products, equal to the change in DAC amortization that would have been recorded if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (also referred to as "shadow DAC"“shadow DAC”). The change in this adjustment, net of tax, is included with the change in net unrealized appreciation (depreciation) of investments that is credited or charged directly to Other comprehensive income (loss).
Deferred Gain on Retroactive ReinsuranceRetroactive reinsurance is a reinsurance contract in which an assuming entity agrees to reimburse a ceding entity for liabilities incurred as a result of past insurable events. If the amount of premium paid by the ceding reinsurer is less than the related ceded loss reserves, the resulting gain is deferred and amortized over the settlement period of the reserves. Any related development on the ceded loss reserves recoverable under the contract would increase the deferred gain if unfavorable, or decrease the deferred gain if favorable.
Expense ratio Sum of acquisition expenses and general operating expenses, divided by net premiums earned.
First-Lien Priority over all other liens or claims on a property in the event of default on a mortgage.
General operating expense ratio generalGeneral operating expenses divided by net premiums earned. General operating expenses are those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel costs, projects and bad debt expenses. General operating expenses exclude claimslosses and loss adjustment expenses incurred, acquisition expenses, and investment expenses.
GIC/GIAGuaranteed Investment Contract/Guaranteed Investment Agreement A contract whereby the seller provides a guaranteed repayment of principal and a fixed or floating interest rate for a predetermined period of time.
G-SIIGlobal Systemically Important Insurer An insurer that is deemed globally systemically important (that is, of such size, market importance and global interconnectedness that the distress or failure of the insurer would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries) by the Financial Stability Board, in consultation with and based on a methodology developed by the International Association of Insurance Supervisors.
AIG 2013 Form 10-K
Table of Contents
GLOSSARY
High loss deductible policies A type of commercial insurance policy where we pay the full claim and then seek reimbursement from the insured for the deductible. Losses are retained by the insured up to a specified deductible amount (usually $25,000 or more per claim, subject to individual state approval) and we insure the claims in excess of the deductible. Generally, the total claims (including the deductible portion) are managed and paid by us as part of a loss control program, and we are reimbursed the deductible amount by the insured. In the case of unpaid claims, we make estimates of the deductible portion of claims reported to us, and reduce our loss reserves accordingly. In most cases, we obtain collateral in the form of cash, letters of credit or other funding arrangements to secure the amounts of uncollected deductibles.
IBNRIncurred But Not Reported Estimates of claims that have been incurred but not reported to us.
ISDA Master Agreement An agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, that generally provides for the net settlement of all or a specified group of these derivative transactions, as well as pledged 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.
LAELoss Adjustment Expenses The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs.
Loss Ratio ClaimsLosses and claimsloss adjustment expenses incurred divided by net premiums earned. ClaimsLoss adjustment expenses are directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster'sadjuster’s fees, and claims department personnel costs.
Loss Recognition Related to Unrealized Appreciation (Depreciation) of Investments An adjustment to DAC and future policy benefits for long-duration traditional products, equal to the adjustments that would be required if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields, and such reinvestment would not be sufficient to recover DAC and meet policyholder obligations (also referred to as "shadow loss recognition"). The change in this adjustment, net of tax, is included with the change in net unrealized appreciation (depreciation) of investments that is credited or charged directly to Other comprehensive income (loss).
Loss reserve development The increase or decrease in incurred claimslosses and claimsloss adjustment expenses as a result of the re-estimation of claimsliability for unpaid losses and claimsloss adjustment expense reservesexpenses at successive valuation dates for a given group of claims.
Loss reserves Liability for unpaid claimslosses and claimsloss adjustment expense.expenses. The estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.
LTVLoan-to-Value Ratio Principal amount of loan amount divided by appraised value of collateral securing the loan.
Master netting agreement An agreement between two counterparties who have multiple derivative contracts with each other that provides for the net settlement of all contracts covered by such agreement, as well as cashpledged collateral, through a single payment, in a single currency, in the event of default on or upon termination of any one such contract.
Net premiums written Represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period. From
Nonbank SIFINonbank Systemically Important Financial Institutions Financial institutions are deemed nonbank systemically important (that is, the period in whichfailure of the premiums are written untilfinancial institution could pose a threat to the period in which they are earned,financial stability of the amount is presented as Unearned premium reserves inUnited States) by the Consolidated Balance Sheets.Financial Stability Oversight Council based on a three-stage analytical process.
Noncontrolling interest The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.
Other Operations — Pre-tax operating income (loss): pre-tax income (loss) excluding certain legal reserves (settlements) related to legacy crisis matters, (gain) loss on extinguishment of debt, Net realized capital (gains) losses, net loss (gain) on sale of divested businesses and properties, change in benefit reserves and DAC, VOBA, and SIA related to net realized capital (gains) losses and income from divested businesses, including Aircraft Leasing.
Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost of issuing a policy, establishing the required records, sending premium notices and other related expenses.
Pool A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each member in accordance with its pool participation percentage. Our members inPrior to January 1, 2014, AIG maintained two pools, the admitted lines pool are licensed to write standard lines of business by the individual state departments of insurance, and the policy forms and rates are regulated by those departments. Our members in the surplus lines pool provide policyholders withpool. Effective January 1, 2014, these two pools were merged into the combined pool.
Premiums and deposits – Institutional Markets include direct and assumed amounts received and earned on group benefit policies and life-contingent payout annuities and deposits received on investment-type annuity contracts, including GICs.
Premiums and deposits – Retirement and – Life include direct and assumed amounts received on traditional life insurance coverage for risks which are generally not available in the standard insurance market. Surplus lines policy formspolicies and rates are not regulated by the insurance departments.group benefit policies, and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts and mutual funds.
Prior year developmentIncrease (referred to as unfavorable or adverse development or reserve strengthening) or decrease (referred to as favorable development) in estimates of losses and loss expenses for prior years that is included in earnings.
RBCRisk-Based Capital A formula designed to measure the adequacy of an insurer'sinsurer’s statutory surplus compared to the risks inherent in its business.
Reinstatement premium Additional premiums payable to reinsurers to restore coverage limits that have been exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.
Reinsurance The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.
Rescission Denial of claims and termination of coverage on loans related to fraudulent or undocumented claims, underwriting guideline violations and other deviations from contractual terms.
Retained Interest Category within AIG's Other Operations that includes the fair value gains or losses, prior to their sale, of the AIA ordinary shares retained following the AIA Group Limited initial public offering and the MetLife, Inc. securities that were received as consideration from the sale of American Life Insurance Company and the fair value gains or losses, prior to the FRBNY liquidation of Maiden Lane III LLC assets in 2012, on the retained interest in Maiden Lane III LLC.
Retroactive Reinsurance See Deferred Gain on Retroactive Reinsurance.
Return on Equity – After-tax Operating Income Excluding AOCI and Return on Equity – After-tax Operating Income Excluding AOCI and DTA are non-GAAP measures andare used to show the rate of return on shareholders’ equity. Return on Equity – After-tax Operating Income Excluding AOCI is derived by dividing actual or annualized after-tax operating income attributable to AIG by average AIG shareholders’ equity, excluding average AOCI. Return on Equity – After-tax Operating Income Excluding AOCI and DTA is derived by dividing actual or annualized after-tax operating income attributable to AIG by average AIG shareholders’ equity, excluding average AOCI and DTA.
SalvageThe amount that can be recovered by us for the sale of damaged goods for which our policyholder has been indemnified (and to which title was transferred to us).
Second-lien Subordinate in ranking to the first-lien holder claims on a property in the event of default on a mortgage.
Severe losses Individual non-catastrophe first party losses and surety losses greater than $10 million, net of related reinsurance.reinsurance and salvage and subrogation. Severe losses include claims related to satellite explosions, plane crashes, and shipwrecks.
SIASales Inducement Asset Represents amounts that are credited to policyholder account balances related to the enhanced crediting rates that a seller offersor bonus payments to contract holders on certain of its annuity products.
SIFISystemically Important Financial Institutions Financial institutions are deemed systemically important (that is,and investment contract products that meet the failurecriteria to be deferred and amortized over the life of the financial institution could pose a threat to the financial stability of the United States) by the Financial Stability Oversight Council (FSOC) based on a three-stage analytical process.contract.
SLHCSavings and Loan Holding Company A company (other than a bank holding company) that controls a savings association or that controls another company that is a savings and loan holding company. Savings and loan holding companies are subject to regulation and supervision by the Board of Governors of the Federal Reserve System.
Solvency II Legislation in the European Union which reforms the insurance industry'sindustry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. The Solvency II Directive (2009/138/EEC), was adopted on November 25, 2009 and is expected to become effective inon January 1, 2016.
SSDMFSocial Security Death Master File A database of deceased individuals, most of whom were issued a social security number during their lifetimes, maintained by the U.S. Social Security Administration.
SubrogationThe amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party'sparty’s insurer.
Surrender charge A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or for the cancellation of the agreement.
Surrender rate represents annualized surrenders and withdrawals as a percentage of average account value.
Unearned premium reserveLiabilities established by insurers and reinsurers to reflect unearned premiums, which are usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.
VOBAValue of Business Acquired Present value of projected future gross profits from in-force policies fromof acquired businesses.businesses.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ACRONYMS
acronyms
Acronyms
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A&HAccident and Health Insurance | GMIB Guaranteed Minimum Income Benefits |
ABSAsset-Backed Securities | GMWB Asset-Backed SecurityGuaranteed Minimum Withdrawal Benefits |
CDOCollateralized Debt ObligationObligations | ISDA International Swaps and Derivatives Association, Inc. |
CDSCredit Default Swap | Moody's Moody's Corporation |
CLOCollateralized Loan Obligations | NAIC National Association of Insurance Commissioners |
CMACapital Maintenance Agreement | NM Not Meaningful |
CMBSCommercial Mortgage-Backed Securities | OTC Over-the-Counter |
EGPs Estimated gross profits | OTTI Other-Than-Temporary Impairment |
FASBFinancial Accounting Standards Board | RMBS Residential Mortgage-Backed Securities |
FRBNYFederal Reserve Bank of New York | S&P Standard & Poor’s Financial Services LLC |
GAAPAccounting principles generally accepted in the United States of America GMAV Guaranteed Minimum Account Value Benefits
GMDB Guaranteed Minimum Death Benefits
GMIB Guaranteed Minimum Income Benefits
| | GMWB Guaranteed Minimum Withdrawal Benefits
IFRS International Financial Reporting Standards
ISDA International Swaps and Derivatives Association, Inc.
NAIC National Association of Insurance Commissioners
NM Not Meaningful
OTC Over-the-Counter
OTTI Other-Than-Temporary Impairment
RMBS Residential Mortgage-Backed Securities
S&P Standard & Poor's Financial Services LLC
SEC Securities and Exchange Commission |
TARPGMAB Guaranteed Minimum Accumulation Benefits
| URR Troubled Asset Relief Program of the Department of the TreasuryUnearned revenue reserve |
GMDB Guaranteed Minimum Death Benefits | VIE Variable Interest Entity |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEM 7AItem 7a / QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A / QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth in the Enterprise Risk Management section of Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / INDEX TO FINANCIAL STATEMENT AND SCHEDULES
ITEM 8 / FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
American International Group, Inc.
Index to Financial Statements and Schedules
AMERICAN INTERNATIONAL GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
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FINANCIAL STATEMENTS | | |
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Report of Independent Registered Public Accounting Firm | | 210229
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Consolidated Balance Sheets at December 31, 20132015 and 20122014 | | 211230
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Consolidated Statements of Income for the years ended December 31, 2013, 20122015, 2014 and 20112013 | | 212231
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Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 20122015, 2014 and 20112013 | | 213232
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Consolidated Statements of Equity for the years ended December 31, 2013, 20122015, 2014 and 20112013 | | 214233
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Consolidated Statements of Cash Flows for the years ended December 31, 2013, 20122015, 2014 and 20112013 | | 215234
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Notes to Consolidated Financial Statements
Schedule I | |
Summary of Investments — Other than Investments in Related Parties at December 31, 20132015 | | 350360
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Schedule II | |
Condensed Financial Information of Registrant at December 31, 20132015 and 20122014 and for the years ended December 31, 2013, 20122015, 2014 and 20112013 | | 351361
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Schedule III | |
Supplementary Insurance Information at December 31, 2013, 20122015, 2014 and 20112013 and for the years then ended | | 355365
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Schedule IV | |
Reinsurance at December 31, 2013, 20122015, 2014 and 20112013 and for the years then ended | | 356366
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Schedule V | |
Valuation and Qualifying Accounts at December 31, 2013, 20122015, 2014 and 20112013 and for the years then ended | | 357367
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AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of American International Group, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of American International Group, Inc. and its subsidiaries (AIG) at December 31, 20132015 and 2012,2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20132015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, AIG maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2015, based on criteria established in the1992 Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AIG'sAIG’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control Over Financial Reporting appearing under Item 9A in the 20132015 Form 10-K. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on AIG'sAIG’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 20, 201419, 2016
AIG 2013 Form 10-K
Table of ContentsTABLE OF CONTENTS
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
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(in millions, except for share data)
| | December 31,
2013
| | December 31,
2012
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Assets: | | | | | | | |
Investments: | | | | | | | |
Fixed maturity securities: | | | | | | | |
Bonds available for sale, at fair value (amortized cost: 2013 – $248,531; 2012 – $246,149) | | $ | 258,274 | | $ | 269,959 | |
Other bond securities, at fair value (See Note 6) | | | 22,623 | | | 24,584 | |
Equity Securities: | | | | | | | |
Common and preferred stock available for sale, at fair value (cost: 2013 – $1,726; 2012 – $1,640) | | | 3,656 | | | 3,212 | |
Other common and preferred stock, at fair value (See Note 6) | | | 834 | | | 662 | |
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2013 – $0; 2012 – $134) | | | 20,765 | | | 19,482 | |
Other invested assets (portion measured at fair value: 2013 – $8,598; 2012 – $7,056) | | | 28,659 | | | 29,117 | |
Short-term investments (portion measured at fair value: 2013 – $6,313; 2012 – $8,056) | | | 21,617 | | | 28,808 | |
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Total investments | | | 356,428 | | | 375,824 | |
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Cash | | | 2,241 | | | 1,151 | |
Accrued investment income | | | 2,905 | | | 3,054 | |
Premiums and other receivables, net of allowance | | | 12,939 | | | 13,989 | |
Reinsurance assets, net of allowance | | | 23,829 | | | 25,595 | |
Deferred income taxes | | | 21,925 | | | 17,466 | |
Deferred policy acquisition costs | | | 9,436 | | | 8,182 | |
Derivative assets, at fair value | | | 1,665 | | | 3,671 | |
Other assets, including restricted cash of $865 in 2013 and $1,878 in 2012 (portion measured at fair value: 2013 – $418; 2012 – $696) | | | 9,366 | | | 10,399 | |
Separate account assets, at fair value | | | 71,059 | | | 57,337 | |
Assets held for sale | | | 29,536 | | | 31,965 | |
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Total assets | | $ | 541,329 | | $ | 548,633 | |
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Liabilities: | | | | | | | |
Liability for unpaid claims and claims adjustment expense | | $ | 81,547 | | $ | 87,991 | |
Unearned premiums | | | 21,953 | | | 22,537 | |
Future policy benefits for life and accident and health insurance contracts | | | 40,653 | | | 40,523 | |
Policyholder contract deposits (portion measured at fair value: 2013 – $384; 2012 – $1,257) | | | 122,016 | | | 122,980 | |
Other policyholder funds | | | 5,083 | | | 6,267 | |
Derivative liabilities, at fair value | | | 2,511 | | | 4,061 | |
Other liabilities (portion measured at fair value: 2013 – $933; 2012 – $1,080) | | | 29,155 | | | 32,068 | |
Long-term debt (portion measured at fair value: 2013 – $6,747; 2012 – $8,055) | | | 41,693 | | | 48,500 | |
Separate account liabilities | | | 71,059 | | | 57,337 | |
Liabilities held for sale | | | 24,548 | | | 27,366 | |
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Total liabilities | | | 440,218 | | | 449,630 | |
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Contingencies, commitments and guarantees (see Note 15) | | | | | | | |
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Redeemable noncontrolling interests (see Note 17) | | | 30 | | | 334 | |
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AIG shareholders' equity: | | | | | | | |
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2013 – 1,906,645,689 and 2012 – 1,906,611,680 | | | 4,766 | | | 4,766 | |
Treasury stock, at cost; 2013 – 442,582,366; 2012 – 430,289,745 shares of common stock | | | (14,520 | ) | | (13,924 | ) |
Additional paid-in capital | | | 80,899 | | | 80,410 | |
Retained earnings | | | 22,965 | | | 14,176 | |
Accumulated other comprehensive income | | | 6,360 | | | 12,574 | |
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Total AIG shareholders' equity | | | 100,470 | | | 98,002 | |
Non-redeemable noncontrolling interests (including $100 associated with businesses held for sale) | | | 611 | | | 667 | |
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Total equity | | | 101,081 | | | 98,669 | |
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Total liabilities and equity | | $ | 541,329 | | $ | 548,633 | |
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American International Group, Inc.
Consolidated Balance SheetS
| December 31, | December 31, |
(in millions, except for share data) | | 2015 | | 2014 |
Assets: | | | | |
Investments: | | | | |
Fixed maturity securities: | | | | |
Bonds available for sale, at fair value (amortized cost: 2015 - $240,968; 2014 - $243,307) | $ | 248,245 | $ | 259,859 |
Other bond securities, at fair value (See Note 5) | | 16,782 | | 19,712 |
Equity Securities: | | | | |
Common and preferred stock available for sale, at fair value (cost: 2015 - $1,379; 2014 - $1,930) | | 2,915 | | 4,395 |
Other common and preferred stock, at fair value (See Note 5) | | 921 | | 1,049 |
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2015 - $11; 2014 - $6) | | 29,565 | | 24,990 |
Other invested assets (portion measured at fair value: 2015 - $8,912; 2014 - $9,394) | | 29,794 | | 34,518 |
Short-term investments (portion measured at fair value: 2015 - $2,591; 2014 - $1,684) | | 10,132 | | 11,243 |
Total investments | | 338,354 | | 355,766 |
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Cash | | 1,629 | | 1,758 |
Accrued investment income | | 2,623 | | 2,712 |
Premiums and other receivables, net of allowance | | 11,451 | | 12,031 |
Reinsurance assets, net of allowance | | 20,413 | | 21,959 |
Deferred income taxes | | 20,394 | | 19,339 |
Deferred policy acquisition costs | | 11,115 | | 9,827 |
Other assets, including restricted cash of $170 in 2015 and $2,025 in 2014 | | 11,390 | | 12,153 |
Separate account assets, at fair value | | 79,574 | | 80,036 |
Total assets | $ | 496,943 | $ | 515,581 |
Liabilities: | | | | |
Liability for unpaid losses and loss adjustment expenses | $ | 74,942 | $ | 77,260 |
Unearned premiums | | 21,318 | | 21,324 |
Future policy benefits for life and accident and health insurance contracts | | 43,585 | | 42,749 |
Policyholder contract deposits (portion measured at fair value: 2015 - $2,325; 2014 - $1,561) | | 127,588 | | 124,613 |
Other policyholder funds (portion measured at fair value: 2015 - $6; 2014 - $8) | | 4,212 | | 4,669 |
Other liabilities (portion measured at fair value: 2015 - $62; 2014 - $350) | | 26,164 | | 26,441 |
Long-term debt (portion measured at fair value: 2015 - $3,670; 2014 - $5,466) | | 29,350 | | 31,217 |
Separate account liabilities | | 79,574 | | 80,036 |
Total liabilities | | 406,733 | | 408,309 |
Contingencies, commitments and guarantees (see Note 15) | | | | |
| | | | |
AIG shareholders’ equity: | | | | |
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2015 - 1,906,671,492 and | | | | |
2014 - 1,906,671,492 | | 4,766 | | 4,766 |
Treasury stock, at cost; 2015 - 712,754,875; 2014 - 530,744,521 shares of common stock | | (30,098) | | (19,218) |
Additional paid-in capital | | 81,510 | | 80,958 |
Retained earnings | | 30,943 | | 29,775 |
Accumulated other comprehensive income | | 2,537 | | 10,617 |
Total AIG shareholders’ equity | | 89,658 | | 106,898 |
Non-redeemable noncontrolling interests | | 552 | | 374 |
Total equity | | 90,210 | | 107,272 |
Total liabilities and equity | $ | 496,943 | $ | 515,581 |
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See accompanying Notes to Consolidated Financial Statements. |
American International Group, Inc.
Consolidated StatementS of INCOME
| | | | | | | | Years Ended December 31, |
(dollars in millions, except per share data) | | | | | | | | | 2015 | | | 2014 | | 2013 |
Revenues: | | | | | | | | | | | | | | |
Premiums | | | | | | | | $ | 36,655 | | $ | 37,254 | $ | 37,499 |
Policy fees | | | | | | | | | 2,755 | | | 2,615 | | 2,340 |
Net investment income | | | | | | | | | 14,053 | | | 16,079 | | 15,810 |
Net realized capital gains: | | | | | | | | | | | | | | |
Total other-than-temporary impairments on available for sale securities | | | (556) | | | (182) | | (165) |
Portion of other-than-temporary impairments on available for sale | | | | | | | | |
fixed maturity securities recognized in Other comprehensive income (loss) | | | (35) | | | (35) | | (22) |
Net other-than-temporary impairments on available for sale | | | | | | | | | | | | | | |
securities recognized in net income | | | | | | | | | (591) | | | (217) | | (187) |
Other realized capital gains | | | | | | | | | 1,367 | | | 956 | | 2,126 |
Total net realized capital gains | | | | | | | | | 776 | | | 739 | | 1,939 |
Aircraft leasing revenue | | | | | | | | | - | | | 1,602 | | 4,420 |
Other income | | | | | | | | | 4,088 | | | 6,117 | | 6,866 |
Total revenues | | | | | | | | | 58,327 | | | 64,406 | | 68,874 |
Benefits, losses and expenses: | | | | | | | | | | | | | | |
Policyholder benefits and losses incurred | | | | | | | | | 31,345 | | | 28,281 | | 29,503 |
Interest credited to policyholder account balances | | | | | | | | | 3,731 | | | 3,768 | | 3,892 |
Amortization of deferred policy acquisition costs | | | | | | | | | 5,236 | | | 5,330 | | 5,157 |
General operating and other expenses | | | | | | | | | 12,686 | | | 13,138 | | 13,564 |
Interest expense | | | | | | | | | 1,281 | | | 1,718 | | 2,142 |
Aircraft leasing expenses | | | | | | | | | - | | | 1,585 | | 4,549 |
Loss on extinguishment of debt | | | | | | | | | 756 | | | 2,282 | | 651 |
Net (gain) loss on sale of properties and divested businesses | | | | | | | | | 11 | | | (2,197) | | 48 |
Total benefits, losses and expenses | | | | | | | | | 55,046 | | | 53,905 | | 59,506 |
Income from continuing operations before income tax expense | | | 3,281 | | | 10,501 | | 9,368 |
Income tax expense: | | | | | | | | | | | | | | |
Current | | | | | | | | | 820 | | | 588 | | 680 |
Deferred | | | | | | | | | 239 | | | 2,339 | | (320) |
Income tax expense | | | | | | | | | 1,059 | | | 2,927 | | 360 |
Income from continuing operations | | | | | | | | | 2,222 | | | 7,574 | | 9,008 |
Income (loss) from discontinued operations, net of income tax expense | | | | | | | | | - | | | (50) | | 84 |
Net income | | | | | | | | | 2,222 | | | 7,524 | | 9,092 |
Less: | | | | | | | | | | | | | | |
Net income (loss) from continuing operations attributable to | | | | | | | | | | | | | | |
noncontrolling interests | | | | | | | | | 26 | | | (5) | | 7 |
Net income attributable to AIG | | | | | | | | $ | 2,196 | | $ | 7,529 | $ | 9,085 |
Net income attributable to AIG common shareholders | | | | | | | | $ | 2,196 | | $ | 7,529 | $ | 9,085 |
| | | | | | | | | | | | | | |
Income per common share attributable to AIG: | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | |
Income from continuing operations | | | | | | | | $ | 1.69 | | $ | 5.31 | $ | 6.11 |
Income (loss) from discontinued operations | | | | | | | | $ | - | | $ | (0.04) | $ | 0.05 |
Net income attributable to AIG | | | | | | | | $ | 1.69 | | $ | 5.27 | $ | 6.16 |
Diluted: | | | | | | | | | | | | | | |
Income from continuing operations | | | | | | | | $ | 1.65 | | $ | 5.24 | $ | 6.08 |
Income (loss) from discontinued operations | | | | | | | | $ | - | | $ | (0.04) | $ | 0.05 |
Net income attributable to AIG | | | | | | | | $ | 1.65 | | $ | 5.20 | $ | 6.13 |
Weighted average shares outstanding: | | | | | | | | | | | | | | |
Basic | | | | | | | | | 1,299,825,350 | | | 1,427,959,799 | | 1,474,171,690 |
Diluted | | | | | | | | | 1,334,464,883 | | | 1,447,553,652 | | 1,481,206,797 |
Dividends declared per common share | | | | | | | | $ | 0.81 | | $ | 0.50 | $ | 0.20 |
| | | | | | | | | | | | | | |
See accompanying Notes to Consolidated Financial Statements. | | | | | | | | | | | |
American International Group, Inc.
Consolidated StatementS of Comprehensive Income (Loss)
| Years Ended December 31, |
(in millions) | | 2015 | | | 2014 | | 2013 |
Net income | $ | 2,222 | | $ | 7,524 | $ | 9,092 |
Other comprehensive income (loss), net of tax | | | | | | | |
Change in unrealized appreciation (depreciation) of fixed maturity securities on | | | | | | | |
which other-than-temporary credit impairments were recognized | | (347) | | | 107 | | 361 |
Change in unrealized appreciation (depreciation) of all other investments | | (6,762) | | | 5,538 | | (6,673) |
Change in foreign currency translation adjustments | | (1,100) | | | (832) | | (556) |
Change in net derivative gains arising from cash flow hedging activities | | - | | | - | | - |
Change in retirement plan liabilities adjustment | | 123 | | | (556) | | 631 |
Other comprehensive income (loss) | | (8,086) | | | 4,257 | | (6,237) |
Comprehensive income (loss) | | (5,864) | | | 11,781 | | 2,855 |
Comprehensive income (loss) attributable to noncontrolling nonvoting, callable, | | | | | | | |
junior and senior preferred interests | | - | | | - | | - |
Comprehensive income (loss) attributable to other noncontrolling interests | | 20 | | | (5) | | (16) |
Total comprehensive income (loss) attributable to noncontrolling interests | | 20 | | | (5) | | (16) |
Comprehensive income (loss) attributable to AIG | $ | (5,884) | | $ | 11,786 | $ | 2,871 |
| | | | | | | |
See accompanying Notes to Consolidated Financial Statements. | | |
American International Group, Inc.
Consolidated StatementS of Equity
| | | | | | | | | | | | | | Non- | | |
| | | | | | | | | | Accumulated | | Total AIG | | redeemable | | |
| | | | | | Additional | | | | Other | | Share- | | Non- | | |
| | Common | | Treasury | | Paid-in | | Retained | Comprehensive | | holders' | | controlling | | Total |
(in millions) | | Stock | | Stock | | Capital | | Earnings | Income | | Equity | | Interests | | Equity |
Balance, January 1, 2013 | $ | 4,766 | $ | (13,924) | $ | 80,410 | $ | 14,176 | $ | 12,574 | $ | 98,002 | $ | 667 | $ | 98,669 |
Purchase of common stock | | - | | (597) | | - | | - | | - | | (597) | | - | | (597) |
Net income attributable to AIG or other | | | | | | | | | | | | | | | | |
noncontrolling interests* | | - | | - | | - | | 9,085 | | - | | 9,085 | | 5 | | 9,090 |
Dividends | | - | | - | | - | | (294) | | - | | (294) | | - | | (294) |
Other comprehensive loss | | - | | - | | - | | - | | (6,214) | | (6,214) | | (5) | | (6,219) |
Deferred income taxes | | - | | - | | 355 | | - | | - | | 355 | | - | | 355 |
Contributions from noncontrolling interests | | - | | - | | - | | - | | - | | - | | 33 | | 33 |
Distributions to noncontrolling interests | | - | | - | | - | | - | | - | | - | | (81) | | (81) |
Other | | - | | 1 | | 134 | | (2) | | - | | 133 | | (8) | | 125 |
Balance, December 31, 2013 | $ | 4,766 | $ | (14,520) | $ | 80,899 | $ | 22,965 | $ | 6,360 | $ | 100,470 | $ | 611 | $ | 101,081 |
Purchase of common stock | | - | | (4,698) | | - | | - | | - | | (4,698) | | - | | (4,698) |
Net income (loss) attributable to AIG or other | | | | | | | | | | | | | | | | |
noncontrolling interests | | - | | - | | - | | 7,529 | | - | | 7,529 | | (5) | | 7,524 |
Dividends | | - | | - | | - | | (712) | | - | | (712) | | - | | (712) |
Other comprehensive income (loss) | | - | | - | | - | | - | | 4,257 | | 4,257 | | - | | 4,257 |
Deferred income taxes | | - | | - | | (10) | | - | | - | | (10) | | - | | (10) |
Net decrease due to deconsolidation | | - | | - | | - | | - | | - | | - | | (99) | | (99) |
Contributions from noncontrolling interests | | - | | - | | - | | - | | - | | - | | 17 | | 17 |
Distributions to noncontrolling interests | | - | | - | | - | | - | | - | | - | | (147) | | (147) |
Other | | - | | - | | 69 | | (7) | | - | | 62 | | (3) | | 59 |
Balance, December 31, 2014 | $ | 4,766 | $ | (19,218) | $ | 80,958 | $ | 29,775 | $ | 10,617 | $ | 106,898 | $ | 374 | $ | 107,272 |
Common stock issued under stock plans | | - | | 13 | | (13) | | - | | - | | - | | - | | - |
Purchase of common stock | | - | | (10,895) | | - | | - | | - | | (10,895) | | - | | (10,895) |
Net income attributable to AIG or | | | | | | | | | | | | | | | | |
noncontrolling interests | | - | | - | | - | | 2,196 | | - | | 2,196 | | 26 | | 2,222 |
Dividends | | - | | - | | - | | (1,028) | | - | | (1,028) | | - | | (1,028) |
Other comprehensive loss | | - | | - | | - | | - | | (8,080) | | (8,080) | | (6) | | (8,086) |
Deferred income taxes | | - | | - | | (9) | | - | | - | | (9) | | - | | (9) |
Net increase due to acquisitions and consolidations | | - | | - | | - | | - | | - | | - | | 231 | | 231 |
Contributions from noncontrolling interests | | - | | - | | - | | - | | - | | - | | 1 | | 1 |
Distributions to noncontrolling interests | | - | | - | | - | | - | | - | | - | | (82) | | (82) |
Other | | - | | 2 | | 574 | | - | | - | | 576 | | 8 | | 584 |
Balance, December 31, 2015 | $ | 4,766 | $ | (30,098) | $ | 81,510 | $ | 30,943 | $ | 2,537 | $ | 89,658 | $ | 552 | $ | 90,210 |
* Excludes gains of $2 million in 2013, attributable to redeemable noncontrolling interests.
See accompanying Notes to Consolidated Financial Statements.
AIG 2013 Form 10-K
Table of ContentsTABLE OF CONTENTS
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
| | Years Ended December 31, | |
|---|
(dollars in millions, except per share data)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Revenues: | | | | | | | | | | |
Premiums | | $ | 37,350 | | $ | 38,047 | | $ | 39,026 | |
Policy fees | | | 2,535 | | | 2,349 | | | 2,309 | |
Net investment income | | | 15,810 | | | 20,343 | | | 14,755 | |
Net realized capital gains: | | | | | | | | | | |
Total other-than-temporary impairments on available for sale securities | | | (165 | ) | | (448 | ) | | (1,216 | ) |
Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Other comprehensive income (loss) | | | (22 | ) | | (381 | ) | | 168 | |
| | |
Net other-than-temporary impairments on available for sale | | | | | | | | | | |
securities recognized in net income | | | (187 | ) | | (829 | ) | | (1,048 | ) |
Other realized capital gains | | | 1,931 | | | 1,759 | | | 1,739 | |
| | |
Total net realized capital gains | | | 1,744 | | | 930 | | | 691 | |
Aircraft leasing revenue | | | 4,420 | | | 4,504 | | | 4,508 | |
Other income | | | 6,819 | | | 4,848 | | | 3,816 | |
| | |
Total revenues | | | 68,678 | | | 71,021 | | | 65,105 | |
| | |
Benefits, claims and expenses: | | | | | | | | | | |
Policyholder benefits and claims incurred | | | 29,503 | | | 32,036 | | | 33,523 | |
Interest credited to policyholder account balances | | | 3,892 | | | 4,340 | | | 4,432 | |
Amortization of deferred policy acquisition costs | | | 5,157 | | | 5,709 | | | 5,486 | |
Other acquisition and insurance expenses | | | 9,166 | | | 9,235 | | | 8,458 | |
Interest expense | | | 2,142 | | | 2,319 | | | 2,444 | |
Aircraft leasing expenses | | | 4,549 | | | 4,138 | | | 5,401 | |
Loss on extinguishment of debt | | | 651 | | | 32 | | | 2,908 | |
Net loss on sale of properties and divested businesses | | | 48 | | | 6,736 | | | 74 | |
Other expenses | | | 4,202 | | | 3,585 | | | 3,280 | |
| | |
Total benefits, claims and expenses | | | 59,310 | | | 68,130 | | | 66,006 | |
| | |
Income (loss) from continuing operations before income tax expense (benefit) | | | 9,368 | | | 2,891 | | | (901 | ) |
Income tax expense (benefit): | | | | | | | | | | |
Current | | | 679 | | | 762 | | | 95 | |
Deferred | | | (319 | ) | | (1,570 | ) | | (19,859 | ) |
| | |
Income tax expense (benefit) | | | 360 | | | (808 | ) | | (19,764 | ) |
| | |
Income from continuing operations | | | 9,008 | | | 3,699 | | | 18,863 | |
Income from discontinued operations, net of income tax expense | | | 84 | | | 1 | | | 2,467 | |
| | |
Net income | | | 9,092 | | | 3,700 | | | 21,330 | |
| | |
Less: | | | | | | | | | | |
Net income from continuing operations attributable to noncontrolling interests: | | | | | | | | | | |
Nonvoting, callable, junior and senior preferred interests | | | – | | | 208 | | | 634 | |
Other | | | 7 | | | 54 | | | 55 | |
| | |
Total net income from continuing operations attributable to noncontrolling interests | | | 7 | | | 262 | | | 689 | |
Net income from discontinued operations attributable to noncontrolling interests | | | – | | | – | | | 19 | |
| | |
Total net income attributable to noncontrolling interests | | | 7 | | | 262 | | | 708 | |
| | |
Net income attributable to AIG | | $ | 9,085 | | $ | 3,438 | | $ | 20,622 | |
| | |
Net income attributable to AIG common shareholders | | $ | 9,085 | | $ | 3,438 | | $ | 19,810 | |
| | |
Income per common share attributable to AIG: | | | | | | | | | | |
Basic: | | | | | | | | | | |
Income from continuing operations | | $ | 6.11 | | $ | 2.04 | | $ | 9.65 | |
Income from discontinued operations | | $ | 0.05 | | $ | – | | $ | 1.36 | |
Net income attributable to AIG | | $ | 6.16 | | $ | 2.04 | | $ | 11.01 | |
| | |
Diluted: | | | | | | | | | | |
Income from continuing operations | | $ | 6.08 | | $ | 2.04 | | $ | 9.65 | |
Income from discontinued operations | | $ | 0.05 | | $ | – | | $ | 1.36 | |
Net income attributable to AIG | | $ | 6.13 | | $ | 2.04 | | $ | 11.01 | |
| | |
Weighted average shares outstanding: | | | | | | | | | | |
Basic | | | 1,474,171,690 | | | 1,687,197,038 | | | 1,799,385,757 | |
Diluted | | | 1,481,206,797 | | | 1,687,226,641 | | | 1,799,458,497 | |
| | |
Dividends declared per common share | | $ | 0.20 | | $ | – | | $ | – | |
| | |
See accompanying Notes to Consolidated Financial Statements.
AIG 2013 Form 10-K
American International Group, Inc.
Consolidated StatementS of Cash Flows
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 2,222 | $ | 7,524 | $ | 9,092 |
(Income) loss from discontinued operations | | - | | 50 | | (84) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Noncash revenues, expenses, gains and losses included in income: | | | | | | |
Net gains on sales of securities available for sale and other assets | | (1,111) | | (764) | | (2,741) |
Net (gains) losses on sales of divested businesses | | 11 | | (2,197) | | 48 |
Net losses on extinguishment of debt | | 756 | | 2,282 | | 651 |
Unrealized gains in earnings – net | | (522) | | (1,239) | | (156) |
Equity in income from equity method investments, net of dividends or distributions | | (481) | | (1,394) | | (1,484) |
Depreciation and other amortization | | 4,629 | | 4,448 | | 4,713 |
Impairments of assets | | 1,500 | | 610 | | 1,332 |
Changes in operating assets and liabilities: | | | | | | |
Insurance reserves | | 1,645 | | (2,281) | | (2,576) |
Premiums and other receivables and payables – net | | (70) | | 820 | | 43 |
Reinsurance assets and funds held under reinsurance treaties | | 1,525 | | 1,872 | | 2,131 |
Capitalization of deferred policy acquisition costs | | (5,808) | | (5,880) | | (5,834) |
Current and deferred income taxes – net | | 548 | | 2,190 | | (437) |
Other, net | | (1,967) | | (1,034) | | 1,167 |
Total adjustments | | 655 | | (2,567) | | (3,143) |
Net cash provided by operating activities | | 2,877 | | 5,007 | | 5,865 |
Cash flows from investing activities: | | | | | | |
Proceeds from (payments for) | | | | | | |
Sales or distribution of: | | | | | | |
Available for sale investments | | 28,721 | | 25,526 | | 36,050 |
Other securities | | 6,055 | | 4,930 | | 5,134 |
Other invested assets | | 8,002 | | 3,884 | | 6,442 |
Divested businesses, net | | - | | 2,348 | | - |
Maturities of fixed maturity securities available for sale | | 24,734 | | 25,560 | | 26,048 |
Principal payments received on and sales of mortgage and other loans receivable | | 5,104 | | 3,856 | | 3,420 |
Purchases of: | | | | | | |
Available for sale investments | | (48,848) | | (45,552) | | (63,339) |
Other securities | | (2,704) | | (472) | | (2,040) |
Other invested assets | | (3,573) | | (4,078) | | (7,242) |
Mortgage and other loans receivable | | (10,140) | | (8,008) | | (5,266) |
Net change in restricted cash | | 1,457 | | (1,447) | | 1,244 |
Net change in short-term investments | | 1,163 | | 8,760 | | 7,842 |
Other, net | | (1,509) | | (1,023) | | (1,194) |
Net cash provided by investing activities | | 8,462 | | 14,284 | | 7,099 |
Cash flows from financing activities: | | | | | | |
Proceeds from (payments for) | | | | | | |
Policyholder contract deposits | | 17,029 | | 16,829 | | 15,772 |
Policyholder contract withdrawals | | (14,619) | | (15,110) | | (16,319) |
Issuance of long-term debt | | 6,867 | | 6,687 | | 5,235 |
Repayments of long-term debt | | (9,805) | | (16,160) | | (14,197) |
Purchase of Common Stock | | (10,691) | | (4,902) | | (597) |
Dividends paid | | (1,028) | | (712) | | (294) |
Other, net | | 818 | | (6,420) | | (1,358) |
Net cash used in financing activities | | (11,429) | | (19,788) | | (11,758) |
Effect of exchange rate changes on cash | | (39) | | (74) | | (92) |
Net increase (decrease) in cash | | (129) | | (571) | | 1,114 |
Cash at beginning of year | | 1,758 | | 2,241 | | 1,151 |
Change in cash of businesses held for sale | | - | | 88 | | (24) |
Cash at end of year | $ | 1,629 | $ | 1,758 | $ | 2,241 |
| | | | | | |
Supplementary Disclosure of Consolidated Cash Flow Information | | | | | | |
Cash paid during the period for: | | | | | | |
Interest | $ | 1,368 | $ | 3,367 | $ | 3,856 |
Taxes | $ | 511 | $ | 737 | $ | 796 |
Non-cash investing/financing activities: | | | | | | |
Interest credited to policyholder contract deposits included in financing activities | $ | 3,676 | $ | 3,904 | $ | 3,987 |
Non-cash consideration received from sale of ILFC | $ | - | $ | 4,586 | $ | - |
Non-cash consideration received from sale of AerCap | $ | 500 | $ | - | $ | - |
See accompanying Notes to Consolidated Financial Statements. | | | | | | |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
| | Years Ended December 31, | |
|---|
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Net income | | $ | 9,092 | | $ | 3,700 | | $ | 21,330 | |
| | |
Other comprehensive income (loss), net of tax | | | | | | | | | | |
Change in unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken | | | 361 | | | 1,286 | | | (74 | ) |
Change in unrealized appreciation (depreciation) of all other investments | | | (6,673 | ) | | 4,880 | | | (1,485 | ) |
Change in foreign currency translation adjustments | | | (556 | ) | | – | | | (992 | ) |
Change in net derivative gains arising from cash flow hedging activities | | | – | | | 17 | | | 17 | |
Change in retirement plan liabilities adjustment | | | 631 | | | (87 | ) | | (70 | ) |
| | |
Other comprehensive income (loss) | | | (6,237 | ) | | 6,096 | | | (2,604 | ) |
| | |
Comprehensive income | | | 2,855 | | | 9,796 | | | 18,726 | |
Comprehensive income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests | | | – | | | 208 | | | 634 | |
Comprehensive income (loss) attributable to other noncontrolling interests | | | (16 | ) | | 57 | | | (47 | ) |
| | |
Total comprehensive income (loss) attributable to noncontrolling interests | | | (16 | ) | | 265 | | | 587 | |
| | |
Comprehensive income attributable to AIG | | $ | 2,871 | | $ | 9,531 | | $ | 18,139 | |
| | |
See accompanying Notes to Consolidated Financial Statements.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
AMERICAN INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(in millions)
| | Preferred
Stock
| | Common
Stock
| | Treasury
Stock
| | Additional
Paid-in
Capital
| | Retained
Earnings
| | Accumulated
Other
Comprehensive
Income
| | Total AIG
Share-
holders'
Equity
| | Non-
redeemable
Non-
controlling
Interests
| | Total
Equity
| |
|---|
| | |
Balance, January 1, 2011 | | $ | 71,983 | | $ | 368 | | $ | (873 | ) | $ | 8,355 | | $ | (9,848 | ) | $ | 8,871 | | $ | 78,856 | | $ | 27,920 | | $ | 106,776 | |
| | |
Series F drawdown | | | 20,292 | | | – | | | – | | | – | | | – | | | – | | | 20,292 | | | – | | | 20,292 | |
Repurchase of SPV preferred interests in connection with Recapitalization(a) | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | (26,432 | ) | | (26,432 | ) |
Exchange of consideration for preferred stock in connection with Recapitalization | | | (92,275 | ) | | 4,138 | | | – | | | 67,460 | | | – | | | – | | | (20,677 | ) | | – | | | (20,677 | ) |
Common stock issued | | | – | | | 250 | | | – | | | 2,636 | | | – | | | – | | | 2,886 | | | – | | | 2,886 | |
Purchase of common stock | | | – | | | – | | | (70 | ) | | – | | | – | | | – | | | (70 | ) | | – | | | (70 | ) |
Settlement of equity unit stock purchase contract | | | – | | | 9 | | | – | | | 2,160 | | | – | | | – | | | 2,169 | | | – | | | 2,169 | |
Net income attributable to AIG or other noncontrolling interests(b) | | | – | | | – | | | – | | | – | | | 20,622 | | | – | | | 20,622 | | | 82 | | | 20,704 | |
Net income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | 74 | | | 74 | |
Other comprehensive loss | | | – | | | – | | | – | | | – | | | – | | | (2,483 | ) | | (2,483 | ) | | (119 | ) | | (2,602 | ) |
Deferred income taxes | | | – | | | – | | | – | | | 2 | | | – | | | – | | | 2 | | | – | | | 2 | |
Acquisition of noncontrolling interest | | | – | | | – | | | – | | | (164 | ) | | – | | | 93 | | | (71 | ) | | (489 | ) | | (560 | ) |
Net decrease due to deconsolidation | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | (123 | ) | | (123 | ) |
Contributions from noncontrolling interests | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | 120 | | | 120 | |
Distributions to noncontrolling interests | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | (128 | ) | | (128 | ) |
Other | | | – | | | 1 | | | 1 | | | 10 | | | – | | | – | | | 12 | | | (50 | ) | | (38 | ) |
| | |
Balance, December 31, 2011 | | $ | – | | $ | 4,766 | | $ | (942 | ) | $ | 80,459 | | $ | 10,774 | | $ | 6,481 | | $ | 101,538 | | $ | 855 | | $ | 102,393 | |
| | |
Common stock issued under stock plans | | | – | | | – | | | 18 | | | (15 | ) | | – | | | – | | | 3 | | | – | | | 3 | |
Purchase of common stock | | | – | | | – | | | (13,000 | ) | | – | | | – | | | – | | | (13,000 | ) | | – | | | (13,000 | ) |
Net income attributable to AIG or other noncontrolling interests(b) | | | – | | | – | | | – | | | – | | | 3,438 | | | – | | | 3,438 | | | 40 | | | 3,478 | |
Other comprehensive income (loss) | | | – | | | – | | | – | | | – | | | – | | | 6,093 | | | 6,093 | | | (1 | ) | | 6,092 | |
Deferred income taxes | | | – | | | – | | | – | | | (9 | ) | | – | | | – | | | (9 | ) | | – | | | (9 | ) |
Net decrease due to deconsolidation | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | (27 | ) | | (27 | ) |
Contributions from noncontrolling interests | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | 80 | | | 80 | |
Distributions to noncontrolling interests | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | (167 | ) | | (167 | ) |
Other | | | – | | | – | | | – | | | (25 | ) | | (36 | ) | | – | | | (61 | ) | | (113 | ) | | (174 | ) |
| | |
Balance, December 31, 2012 | | $ | – | | $ | 4,766 | | $ | (13,924 | ) | $ | 80,410 | | $ | 14,176 | | $ | 12,574 | | $ | 98,002 | | $ | 667 | | $ | 98,669 | |
| | |
Purchase of common stock | | | – | | | – | | | (597 | ) | | – | | | – | | | – | | | (597 | ) | | – | | | (597 | ) |
Net income attributable to AIG or other noncontrolling interests(b) | | | – | | | – | | | – | | | – | | | 9,085 | | | – | | | 9,085 | | | 5 | | | 9,090 | |
Dividends | | | – | | | – | | | – | | | – | | | (294 | ) | | – | | | (294 | ) | | – | | | (294 | ) |
Other comprehensive loss | | | – | | | – | | | – | | | – | | | – | | | (6,214 | ) | | (6,214 | ) | | (5 | ) | | (6,219 | ) |
Deferred income taxes | | | – | | | – | | | – | | | 355 | | | – | | | – | | | 355 | | | – | | | 355 | |
Contributions from noncontrolling interests | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | 33 | | | 33 | |
Distributions to noncontrolling interests | | | – | | | – | | | – | | | – | | | – | | | – | | | – | | | (81 | ) | | (81 | ) |
Other | | | – | | | – | | | 1 | | | 134 | | | (2 | ) | | – | | | 133 | | | (8 | ) | | 125 | |
| | |
Balance, December 31, 2013 | | $ | – | | $ | 4,766 | | $ | (14,520 | ) | $ | 80,899 | | $ | 22,965 | | $ | 6,360 | | $ | 100,470 | | $ | 611 | | $ | 101,081 | |
| | |
(a) See Notes 17 and 24 to Consolidated Financial Statements.
(b) Excludes gains of $2 million, $222 million and $552 million in 2013, 2012 and 2011, respectively, attributable to redeemable noncontrolling interests and net income attributable to noncontrolling nonvoting, callable, junior and senior preferred interests held by the Federal Reserve Bank of New York (FRBNY) of $0, $0 and $74 million in 2013, 2012 and 2011, respectively.
See Accompanying Notes to Consolidated Financial Statements.
AIG 2013 Form 10-K
Table of Contents
AMERICAN INTERNATIONAL GROUP, INC.Item 8 /
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Cash flows from operating activities: | | | | | | | | | | |
Net income | | $ | 9,092 | | $ | 3,700 | | $ | 21,330 | |
Income from discontinued operations | | | (84 | ) | | (1 | ) | | (2,467 | ) |
| | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Noncash revenues, expenses, gains and losses included in income: | | | | | | | | | | |
Net gains on sales of securities available for sale and other assets | | | (2,741 | ) | | (3,219 | ) | | (1,766 | ) |
Net losses on sales of divested businesses | | | 48 | | | 6,736 | | | 74 | |
Net losses on extinguishment of debt | | | 651 | | | 32 | | | 2,908 | |
Unrealized gains in earnings — net | | | (156 | ) | | (6,091 | ) | | (803 | ) |
Equity in income from equity method investments, net of dividends or distributions | | | (1,484 | ) | | (911 | ) | | (637 | ) |
Depreciation and other amortization | | | 4,713 | | | 7,349 | | | 7,372 | |
Amortization of costs and accrued interest and fees related to FRBNY Credit Facility | | | – | | | – | | | 48 | |
Impairments of assets | | | 1,332 | | | 1,747 | | | 3,482 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Property casualty and life insurance reserves | | | (2,576 | ) | | (2,260 | ) | | (202 | ) |
Premiums and other receivables and payables — net | | | 43 | | | 1,678 | | | 1,828 | |
Reinsurance assets and funds held under reinsurance treaties | | | 2,131 | | | 1,407 | | | (1,103 | ) |
Capitalization of deferred policy acquisition costs | | | (5,834 | ) | | (5,613 | ) | | (5,429 | ) |
Current and deferred income taxes — net | | | (437 | ) | | (1,255 | ) | | (20,480 | ) |
Payment of FRBNY Credit Facility accrued compounded interest and fees | | | – | | | – | | | (6,363 | ) |
Other, net | | | 1,167 | | | 377 | | | (1,243 | ) |
| | |
Total adjustments | | | (3,143 | ) | | (23 | ) | | (22,314 | ) |
| | |
Net cash provided by (used in) operating activities — continuing operations | | | 5,865 | | | 3,676 | | | (3,451 | ) |
Net cash provided by operating activities — discontinued operations | | | – | | | – | | | 3,370 | |
| | |
Net cash provided by (used in) operating activities | | | 5,865 | | | 3,676 | | | (81 | ) |
| | |
Cash flows from investing activities: | | | | | | | | | | |
Proceeds from (payments for) | | | | | | | | | | |
Sales or distribution of: | | | | | | | | | | |
Available for sale investments | | | 36,050 | | | 39,818 | | | 43,961 | |
Other securities | | | 5,134 | | | 17,814 | | | 9,867 | |
Other invested assets | | | 6,442 | | | 19,012 | | | 7,936 | |
Divested businesses, net | | | – | | | – | | | 587 | |
Maturities of fixed maturity securities available for sale | | | 26,048 | | | 21,449 | | | 20,062 | |
Principal payments received on and sales of mortgage and other loans receivable | | | 3,420 | | | 3,313 | | | 3,207 | |
Purchases of: | | | | | | | | | | |
Available for sale investments | | | (63,339 | ) | | (53,536 | ) | | (90,627 | ) |
Other securities | | | (2,040 | ) | | (13,373 | ) | | (1,253 | ) |
Other invested assets | | | (7,242 | ) | | (6,402 | ) | | (6,675 | ) |
Mortgage and other loans receivable | | | (5,266 | ) | | (3,256 | ) | | (2,600 | ) |
Net change in restricted cash | | | 1,244 | | | 414 | | | 27,244 | |
Net change in short-term investments | | | 7,842 | | | (8,109 | ) | | 19,988 | |
Other, net | | | (1,194 | ) | | (532 | ) | | 273 | |
| | |
Net cash provided by investing activities — continuing operations | | | 7,099 | | | 16,612 | | | 31,970 | |
Net cash provided by (used in) investing activities — discontinued operations | | | – | | | – | | | 4,478 | |
| | |
Net cash provided by investing activities | | | 7,099 | | | 16,612 | | | 36,448 | |
| | |
Cash flows from financing activities: | | | | | | | | | | |
Proceeds from (payments for) | | | | | | | | | | |
Policyholder contract deposits | | | 15,772 | | | 13,288 | | | 17,903 | |
Policyholder contract withdrawals | | | (16,319 | ) | | (13,978 | ) | | (13,570 | ) |
FRBNY credit facility repayments | | | – | | | – | | | (14,622 | ) |
Issuance of long-term debt | | | 5,235 | | | 8,612 | | | 7,762 | |
Repayments of long-term debt | | | (14,197 | ) | | (11,101 | ) | | (17,810 | ) |
Proceeds from drawdown on the Department of the Treasury Commitment | | | – | | | – | | | 20,292 | |
Repayment of Department of the Treasury SPV Preferred Interests | | | – | | | (8,636 | ) | | (12,425 | ) |
Repayment of FRBNY SPV Preferred Interests | | | – | | | – | | | (26,432 | ) |
Issuance of Common Stock | | | – | | | – | | | 5,055 | |
Purchase of Common Stock | | | (597 | ) | | (13,000 | ) | | (70 | ) |
Dividends paid | | | (294 | ) | | – | | | – | |
Other, net | | | (1,358 | ) | | 4,251 | | | (1,067 | ) |
| | |
Net cash used in financing activities — continuing operations | | | (11,758 | ) | | (20,564 | ) | | (34,984 | ) |
Net cash provided by (used in) financing activities — discontinued operations | | | – | | | – | | | (1,942 | ) |
| | |
Net cash used in financing activities | | | (11,758 | ) | | (20,564 | ) | | (36,926 | ) |
| | |
Effect of exchange rate changes on cash | | | (92 | ) | | 16 | | | 29 | |
| | |
Net increase (decrease) in cash | | | 1,114 | | | (260 | ) | | (530 | ) |
Cash at beginning of year | | | 1,151 | | | 1,474 | | | 1,558 | |
Change in cash of businesses held for sale | | | (24 | ) | | (63 | ) | | 446 | |
| | |
Cash at end of year | | $ | 2,241 | | $ | 1,151 | | $ | 1,474 | |
| | |
| | |
| | | | | | | | | | | |
Supplementary Disclosure of Consolidated Cash Flow Information | |
| | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | |
Interest* | | $ | 3,856 | | $ | 4,037 | | $ | 8,985 | |
Taxes | | $ | 796 | | $ | 447 | | $ | 716 | |
Non-cash investing/financing activities: | | | | | | | | | | |
Interest credited to policyholder contract deposits included in financing activities | | $ | 3,987 | | $ | 4,501 | | $ | 4,750 | |
Exchange of junior subordinated debentures for senior notes | | $ | – | | $ | – | | $ | (2,392 | ) |
Senior notes exchanged for junior subordinated debentures | | $ | – | | $ | – | | $ | 1,843 | |
Debt assumed in acquisition | | $ | – | | $ | – | | $ | 299 | |
| | |
* 2011 includes payment of the FRBNY credit facility accrued compounded interest of $4.7 billion, before the facility was terminated on January 14, 2011 in connection with the Recapitalization.
See accompanying Notes to Consolidated Financial Statements.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE note 1. BASIS OF PRESENTATION
1. BASIS OF PRESENTATION
American International Group, Inc. (AIG) is a leading internationalglobal insurance organization serving customers in more than 130 countries.100 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-casualtyproperty‑casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG) and the Tokyo Stock Exchange. Unless the context indicates otherwise, the terms "AIG," "we," "us"“AIG,” “we,” “us” or "our"“our” mean American International Group, Inc. and its consolidated subsidiaries and the term "AIG Parent"“AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.
The consolidated financial statements include the accounts of AIG Parent, our controlled subsidiaries (generally through a greater than 50 percent ownership of voting rights of aand voting interest entity)interests), and variable interest entities (VIEs) of which we are the primary beneficiary. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence and partnership and partnership-like entities in which we have more than minor influence over the operating and financial policies, are accounted for under the equity method unless we have elected the fair value option.
Certain of our foreign subsidiaries included in the consolidated financial statementsConsolidated Financial Statements report on different annual fiscal year bases, in most cases ending November 30.fiscal-period bases. The effect on our consolidated financial condition and results of operations of all material events occurring at these subsidiaries between such fiscal year end and December 31 for allthrough the date of each of the periods presented in these consolidated financial statementsConsolidated Financial Statements has been recorded.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). All material intercompany accounts and transactions have been eliminated.
Segment changes are discussed in Note 3 herein.
AIG Life and Retirement
Advisory fee income, and the related commissions and advisory fee expenses of AIG Life and Retirement's broker dealer business, are now being presented on a gross basis within Other income and Other expenses, respectively. Previously, these amounts were included on a net basis within Policy fees in AIG's Consolidated Statements of Income and in AIG Life and Retirement's segment results.
In addition, policyholder benefits related to certain payout annuities, primarily with life contingent features, are now being presented in the Consolidated Balance Sheets as Future policy benefits for life and accident and health insurance contracts instead of as Policyholder contract deposits.
Prior period amounts were conformed to the current period presentation. These changes did not affect Income from continuing operations before income tax expense, Net income attributable to AIG or Total liabilities.
Sale of ILFC
On December 16, 2013,May 14, 2014, we entered into a definitive agreement with AerCap Holdings N.V. (AerCap) and AerCap Ireland Limited (Purchaser), a wholly-owned subsidiary of AerCap forcompleted the sale of 100 percent of the common stock of International Lease Finance Corporation (ILFC) to AerCap Ireland Limited, a wholly owned subsidiary of AerCap Holdings N.V. (AerCap), in exchange for total consideration of approximately $7.6 billion, including cash and 97.6 million newly issued AerCap common shares (the AerCap Transaction). Based on the terms of this agreement, notably AIG's interest of 46 percentThe total value of the common sharesconsideration was based in part on AerCap’s closing price per share of AerCap upon consummation$47.01 on May 13, 2014. ILFC’s results of the sale of ILFC to AerCap, we determined ILFC no longer met the criteria at December 31, 2013 to be presented as a discontinued operation. ILFC's resultsoperations are reflected in Aircraft leasing revenue and Aircraft leasing expenses and the loss associated with the 2012 classification of ILFC as held for sale is included in Net loss on sale of properties and divested businesses in the Consolidated Statements of Income. The assetsIncome (Loss) through the date of the completion of the sale.
In June 2015, we sold 86.9 million ordinary shares of AerCap by means of an underwritten public offering of 71.2 million ordinary shares and liabilitiesa private sale of ILFC15.7 million ordinary shares to AerCap. We received cash proceeds of approximately $3.7 billion, reflecting proceeds of approximately $3.4 billion from the underwritten offering and cash proceeds of $250 million from the private sale of shares to AerCap. In connection with the closing of the private sale of shares to AerCap, we also received $500 million of 6.50% fixed-to-floating rate junior subordinated notes issued by AerCap Global Aviation Trust and guaranteed by AerCap and certain of its subsidiaries. These notes, included in Bonds available for sale, mature in 2045 and are classifiedcallable beginning in 2025. We accounted for our interest in AerCap using the equity method of accounting through the date of the June 2015 sale, and as held-for-sale at December 31, 2013available for sale thereafter. In August 2015, we sold our remaining 10.7 million ordinary shares of AerCap by means of an underwritten public offering and 2012 in the Consolidated Balance Sheets. See Note 4 herein for further discussion.received proceeds of approximately $500 million.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 1. BASIS OF PRESENTATION
Use of Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and assumptions are considered our critical accounting estimates and are related to the determination of:
•
classification of ILFC as held for sale and related fair value measurement;
•- income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset;
•liability for unpaid claimslosses and claimsloss adjustment expense;expenses;
•
•reinsurance assets;
•
•valuation of future policy benefit liabilities and timing and extent of loss recognition;
•
•valuation of liabilities for guaranteed benefit features of variable annuity products;
•
•estimated gross profits to value deferred acquisition costs for investment-oriented products;
•
•impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets, including investments in life settlements, and goodwill impairment;
•
•liability for legal contingencies; and
•
•fair value measurements of certain financial assets and liabilities.These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.
Out of Period Adjustments
For the year ended December 31, 2015, we recorded out of period adjustments relating to prior years that decreased Net income attributable to AIG by $156 million, decreased Income from continuing operations before income taxes by $376 million and decreased pre-tax operating income by $235 million. The out of period adjustments are primarily related to impairments of Other invested assets and changes in Liability for unpaid losses and loss adjustment expenses and income tax liabilities. Had these adjustments, which were determined not to be material, been recorded in their appropriate periods, Net Income attributable to AIG for the years ended December 31, 2014 and 2013 would have decreased by $51 million and increased by $78 million, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following table identifies our significant accounting policies presented in other Notes to these Consolidated Financial Statements, with a reference to the Note where a detailed description can be found:
| | |
Note 4.5. | | Held-for-Sale Classification, Divested Businesses and Discontinued OperationsInvestments
|
| | • Held-for-sale classification·
|
| | • Discontinued operations
|
Note 6.
| | Investments
|
| | • Fixed maturity and equity securities
|
| | • ·Other invested assets
|
| | • ·Short-term investments
|
| | • ·Net investment income
|
| | • ·Net realized capital gains (losses)
|
| | • ·Other-than-temporary impairments
|
Note 7.6. | | Lending Activities |
| | • ·Mortgage and other loans receivable – net of allowance
|
Note 8. 7. | | Reinsurance |
| | • ·Reinsurance assets – net of allowance
|
Note 9. 8. | | Deferred Policy Acquisition Costs |
| | • ·Deferred policy acquisition costs
|
| | • ·Amortization of deferred policy acquisition costs
|
Note 11. 10. | | Derivatives and Hedge Accounting |
| | • ·Derivative assets and liabilities, at fair value
|
Note 11. | Goodwill |
AIG 2013 Form 10-K
Note 12. | Insurance Liabilities |
| ·Liability for unpaid losses and loss adjustment expenses ·Discounting of reserves |
| ·Future policy benefits |
| ·Policyholder contract deposits |
| ·Other policyholder funds |
Note 13 | Variable Life and Annuity Contracts |
Note 14. | Debt |
| ·Long-term debt |
Note 15. | Contingencies, Commitments and Guarantees |
| ·Legal contingencies |
Note 17. | Earnings Per Share |
Note 22. | Income Taxes |
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / NOTE note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | |
Note 12.
| | Liability for Unpaid Claims and Claims Adjustment Expense, and Future Policy Benefits for Life and Accident and Health Insurance Contracts, and Policyholder Contract Deposits
|
| | • Liability for unpaid claims and claims adjustment expense
|
| | • Future policy benefits
|
| | • Policyholder contract deposits
|
| | • Interest credited to policyholder account balances
|
Note 14.
| | Debt
|
| | • Long-term debt
|
Note 15.
| | Contingencies, Commitments and Guarantees
|
| | • Legal contingencies
|
Note 17.
| | Noncontrolling Interests
|
Note 18.
| | Earnings Per Share
|
Note 23.
| | Income Taxes
|
Other significant accounting policies
Premiums for short-duration contracts are recorded as written on the inception date of the policy. Premiums are earned primarily on a pro rata basis over the term of the related coverage. Sales of extended services contracts are reflected as premiums written and earned on a pro rata basis over the term of the related coverage. In addition, certain miscellaneous income is included as premiums written and earned. The reserve for unearned premiums includes the portion of premiums written relating to the unexpired terms of coverage. Reinsurance premiums under a reinsurance contract are typically earned over the same period as the underlying policies or risks covered by the contracts.contract. As a result, the earnings pattern of a reinsurance contract may extend up to 24 months, reflecting the inception dates of the underlying policies throughout the year.
Reinsurance premiums ceded are recognized as a reduction in revenues over the period the reinsurance coverage is provided in proportion to the risks to which the premiums relate.
Premiums for long durationlong-duration insurance products and life contingent annuities are recognized as revenues when due. Estimates for premiums due but not yet collected are accrued.
Policy fees represent fees recognized from universal life and investment-type products consisting of policy charges for the cost of insurance, policy administration charges, surrender charges and amortization of unearned revenue reserves.Policy fees are recognized as revenues in the period in which they are assessed against policyholders, unless the fees are designed to compensate AIG for services to be provided in the future. Fees deferred as unearned revenue are amortized in relation to the incidence of expected gross profits to be realized over the estimated lives of the contracts, similar to DAC.
Aircraft leasing revenuefrom flight equipment under operating leases, isthrough May 14, 2014, the date of disposal of ILFC, was recognized over the life of the leases as rental payments becomebecame receivable under the provisions of the leases or, in the case of leases with varying payments, under the straight-line method over the noncancelable term of the leases. In certain cases, leases provideprovided for additional payments contingent on usage. In those cases, rental revenue iswas recognized at the time such usage occurs,occurred, net of estimated future contractual aircraft maintenance reimbursements. Gains on sales of flight equipment arewere recognized when flight equipment iswas sold and the risk of ownership of the equipment is passed to the new owner.
Other incomeincludes unrealized gains and losses on derivatives, including unrealized market valuation gains and losses associated with the Global Capital Markets (GCM) super senior credit default swap (CDS) portfolio, advisory fee income from AIG Life and Retirement'sthe Consumer Insurance broker dealer business, income from the Direct Investment book (DIB), as well as legal settlementsrecoveries of $94 million, $804 million and $1.2 billion and $200 million from legacy crisis and other matters in 20132015, 2014 and 2012,2013, respectively.
Other income from our Corporate and Other Operations category consists of the following:
•
ChangeChanges in fair value relating to financial assets and liabilities for which the fair value option has been elected.
•
•- Interest income and related expenses, including amortization of premiums and accretion of discounts on bonds with changes in the timing and the amount of expected principal and interest cash flows reflected in the yield, as applicable.
•
•- Dividend income from common and preferred stock and earnings distributions from other investments.
•Changes in the fair value of other securities sold but not yet purchased, futures, hybrid financial instruments, securities purchased under agreements to resell, and securities sold under agreements to repurchase.AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES•
•- Income earned on real estate based investments and related realized gains and losses from sales, property level impairments and financing costs.
•
•Exchange gains and losses resulting from foreign currency transactions.
•
•Reductions to the cost basis of securities available for sale for other-than-temporary impairments.
•Earnings from private equity funds and hedge fund investments accounted for under the equity method.
•
Changes in the fair value of derivatives at AIG Financial Products Corp. and related subsidiaries (collectively AIGFP). •
Gains and losses recognized in earnings on derivatives designated as hedges, for the effective portion and their related hedged items.Aircraft leasing expenses consistthrough May 14, 2014, the date of disposal of ILFC, consisted of ILFC interest expense, depreciation expense, impairment charges, fair value adjustments and lease-related charges on aircraft as well as selling, general and administrative expenses and other expenses incurred by ILFC.
Cashrepresents cash on hand and non-interestnon-interest- bearing demand deposits.
Short-term investments consist of interest‑bearing cash equivalents, time deposits, securities purchased under agreements to resell, and investments, such as commercial paper, with original maturities within one year from the date of purchase.
Premiums and other receivables —– net of allowance includesinclude premium balances receivable, amounts due from agents and brokers and policyholders, trade receivables for the DIB and GCM and other receivables. Trade receivables for GCM include cash collateral posted to derivative counterparties that is not eligible to be netted against derivative liabilities. The allowance for doubtful accounts on premiums and other receivables was $554$333 million and $619$428 million at December 31, 20132015 and 2012,2014, respectively.
Other assets consistsconsist of sales inducement assets, prepaid expenses, deposits, other deferred charges, real estate, other fixed assets, capitalized software costs, goodwill, intangible assets other than goodwill, restricted cash and restricted cash.derivative assets.
We offer sales inducements which include enhanced crediting rates or bonus payments to contract holders (bonus interest) on certain annuity and investment contract products. Sales inducements provided to the contract holder are recognized in Policyholder contract deposits in the Consolidated Balance Sheets. Such amounts are deferred and amortized over the life of the contract using the same methodology and assumptions used to amortize DAC (see Note 98 herein). To qualify for such accounting treatment, the bonus interest must be explicitly identified in the contract at inception. We must also demonstrate that such amounts are incremental to amounts we credit on similar contracts without bonus interest, and are higher than the contract'scontract’s expected ongoing crediting rates for periods after the bonus period. The deferred bonus interest and other deferred sales inducement assets totaled $703$845 million and $517$629 million at December 31, 20132015 and 2012,2014, respectively. The amortization expense associated with these assets is reported within Interest credited to policyholder account balances in the Consolidated Statements of Income. Such amortization expense totaled $102$88 million, $162$63 million and $239$102 million for the years ended December 31, 2013, 20122015, 2014 and 2011,2013, respectively.
The cost of buildings and furniture and equipment is depreciated principally on the straight-line basis over their estimated useful lives (maximum of 40 years for buildings and 10 years for furniture and equipment). Expenditures for maintenance and repairs are charged to income as incurred and expenditures for improvements are capitalized and depreciated. We periodically assess the carrying valueamount of our real estate for purposes of determining any asset impairment. Capitalized software costs, which represent costs directly related to obtaining, developing or upgrading internal use software, are capitalized and amortized using the straight-line method over a period generally not exceeding five years. Real estate, fixed assets and other long-lived assets are assessed for impairment when impairment indicators exist.
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. All of our goodwill was associated with and allocated to the AIG Property Casualty's Commercial Insurance and Consumer Insurance operating segments.
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.
AIG 2013 Form 10-K
Table of Contents
TABLE OF CONTENTS
ITEM
Item 8 / NOTE note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 goodwill. The estimate of a reporting unit's fair value involves management judgment and is based on one or a combination of approaches including discounted expected future cash flows, market-based earnings multiples of the unit's peer companies, external appraisals or, in the case of reporting units being considered for sale, third-party indications of fair value, if available. We consider one or more of these estimates when determining the fair value of a reporting unit to be used in the impairment test.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of a reporting unit exceeds its estimated fair value, goodwill associated with that reporting unit potentially is impaired. The amount of impairment, if any, is measured as the excess of the carrying value of the goodwill over the implied fair value of the goodwill. The implied fair value of the goodwill is measured as the excess of the fair value of the reporting unit over the amounts that would be assigned to the reporting unit's assets and liabilities in a hypothetical business combination. An impairment charge is recognized in earnings to the extent of the excess. AIG Property Casualty manages its assets on an aggregate basis and does not allocate its assets, other than goodwill, between its operating segments. Therefore, the carrying value of the reporting units was determined by allocating the carrying value of AIG Property Casualty to those units based on an internal capital allocation model.
At December 31, 2013, we performed our annual goodwill impairment test. Based on the results of the goodwill impairment test, we concluded that the remaining goodwill was not impaired.
The following table presents the changes in goodwill by reportable segment:
| | | | | | | | | | |
| | |
(in millions)
| | AIG Property
Casualty
| | Other
| | Total
| |
|---|
| | |
Balance at December 31, 2011: | | | | | | | | | | |
Goodwill – gross | | $ | 2,546 | | $ | 2,304 | | $ | 4,850 | |
Accumulated impairments | | | (1,196 | ) | | (2,281 | ) | | (3,477 | ) |
| | |
Net goodwill | | | 1,350 | | | 23 | | | 1,373 | |
| | |
Increase (decrease) due to: | | | | | | | | | | |
Acquisition | | | 119 | | | – | | | 119 | |
Goodwill impairments | | | – | | | (23 | ) | | (23 | ) |
| | |
Balance at December 31, 2012: | | | | | | | | | | |
Goodwill – gross | | $ | 2,665 | | $ | 2,281 | | $ | 4,946 | |
Accumulated impairments | | | (1,196 | ) | | (2,281 | ) | | (3,477 | ) |
| | |
Net goodwill | | $ | 1,469 | | $ | – | | $ | 1,469 | |
| | |
Increase (decrease) due to: | | | | | | | | | | |
Other | | | 6 | | | – | | | 6 | |
| | |
Balance at December 31, 2013: | | | | | | | | | | |
Goodwill – gross | | $ | 2,671 | | $ | 2,281 | | $ | 4,952 | |
Accumulated impairments | | | (1,196 | ) | | (2,281 | ) | | (3,477 | ) |
| | |
Net goodwill | | $ | 1,475 | | $ | – | | $ | 1,475 | |
| | |
Separate accountsrepresent funds for which investment income and investment gains and losses accrue directly to the policyholders who bear the investment risk. Each account has specific investment objectives and the assets are carried at fair value. The assets of each account are legally segregated and are not subject to claims that arise from any of our other businesses. The liabilities for these accounts are equal to the account assets. For a more detailed discussion of separate accounts, see Note 13 herein.
Other policyholder funds are reported at cost and include any policyholder funds on deposit that encompass premium deposits and similar items, including liabilities for dividends arising out of participating business, reserves for experience-rated group products and unearned revenue reserves (URR). URR consist of front end loads on interest-sensitive contracts, representing those policy loads that are non-level and typically higher in initial policy years than in later policy years. URR for interest-sensitive life insurance policies are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits (EGPs) for investment-oriented products to be realized
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
over the estimated lives of the contracts and are subject to the same adjustments due to changes in the assumptions underlying EGPs as DAC.
Other liabilitiesconsist of other funds on deposit, other payables, securities sold under agreements to repurchase, and securities sold but not yet purchased.purchased and derivative liabilities. We have entered into certain insurance and reinsurance contracts, primarily in our AIG Property CasualtyNon-Life Insurance Companies segment, that do not contain sufficient insurance risk to be accounted for as insurance or reinsurance. Accordingly, the premiums received on such contracts, after deduction for certain related expenses, are recorded as deposits within Other liabilities in the Consolidated Balance Sheets. Net proceeds of these deposits are invested and generate Net investment income. As amounts are paid, consistent with the underlying contracts, the deposit liability is reduced. Also included in Other liabilities are trade payables for the DIB and GCM, which include option premiums received and payables to counterparties that relate to unrealized gains and losses on futures, forwards, and options and balances due to clearing brokers and exchanges. Trade payables for GCM also include cash collateral received from derivative counterparties that contractually cannot be netted against derivative assets.
Securities sold but not yet purchased represent sales of securities not owned at the time of sale. The obligations arising from such transactions are recorded on a trade-date basis and carried at fair value. Fair values of securities sold but not yet purchased are based on current market prices.
Foreign currency: Financial statement accounts expressed in foreign currencies are translated into U.S. dollars. Functional currency assets and liabilities are translated into U.S. dollars generally using rates of exchange prevailing at the balance sheet date of each respective subsidiary and the related translation adjustments are recorded as a separate component of Accumulated other comprehensive income, net of any related taxes, in Total AIG shareholders'shareholders’ equity. Income statement accounts expressed in functional currencies are translated using average exchange rates during the period. Functional currencies are generally the currencies of the local operating environment. Financial statement accounts expressed in currencies other than the functional currency of a consolidated entity are translatedremeasured into that entity'sentity’s functional currency. Income statement accounts expressedcurrency resulting in functional currencies are translated using average exchange rates during the period.gains or losses recorded in income. The adjustments resulting from translation of financial statements of foreign entities operating in highly inflationary economies are recorded in income. Exchange gains and losses resulting from foreign currency transactions are recorded
Non-redeemablenoncontrolling interest is the portion of equity (net assets) in income.a subsidiary not attributable, directly or indirectly, to a parent.
Accounting Standards Adopted During 20132015
Testing Indefinite-Lived Intangible Assets for Impairment
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In July 2012,January 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard that allowsclarifies that a company, ascreditor is considered to have received physical possession of residential real estate property collateralizing a first stepconsumer mortgage loan, so that the loan is derecognized and the real estate property is recognized, when either (i) the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveys all interest in an impairment review,the residential real estate property to assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired. We are not requiredthe creditor to calculatesatisfy the fair valueloan through completion of an indefinite-lived intangible asset and perform a quantitative impairment test unless we determine, based on the resultsdeed in lieu of the qualitative assessment, that it is more likely than not the asset is impaired.foreclosure or through a similar legal agreement.
The standard became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We adopted the standard on its required effective date of January 1, 2013.2015. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.
Reporting Discontinued Operations
In April 2014, the FASB issued an accounting standard that changes the requirements for presenting a component or group of components of an entity as a discontinued operation and requires new disclosures. Under the standard, the disposal of a component or group of components of an entity should be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Disposals of equity method investments, or those reported as held-for-sale, must be presented as a discontinued operation if they meet the new definition. The standard also requires entities to provide disclosures about the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation.
We adopted the standard on its required effective date of January 1, 2015 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.
Inclusion of the Federal Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting PurposesRepurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
In July 2013,June 2014, the FASB issued an accounting standard that permitschanges the Federal Funds Effective Swap Rate (or Overnight Index Swap Rate) toaccounting for repurchase-to-maturity transactions and repurchase financing arrangements. It also requires additional disclosures about repurchase agreements and other similar transactions. The standard aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements such that they all will be usedaccounted for as secured borrowings. The standard eliminates sale accounting for repurchase-to-maturity transactions and supersedes the standard under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a U.S. benchmark interest rate for hedge accounting purposes in addition to U.S. Treasury rates and LIBOR. The standard also removes the prohibition on the use of differing benchmark rates when entering into similar hedging relationships.forward agreement.
The standard became effective on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 to the extent the Federal Funds Effective Swap Rate is used as a U.S. benchmark interest rate for hedge accounting purposes. We adopted the standard on its required effective date of July 17, 2013.January 1, 2015 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Future Application of Accounting Standards
Certain Obligations Resulting from Joint and Several Liability Arrangements
Revenue Recognition
In February 2013,May 2014, the FASB issued an accounting standard that requires us to measure obligations resultingsupersedes most existing revenue recognition guidance. The standard excludes from jointits scope the accounting for insurance contracts, leases, financial instruments, and several liability arrangementscertain other agreements that are governed under other GAAP guidance, but could affect the revenue recognition for which the total amount of the obligation is fixed at the reporting date as the sum of (i) the amount we agreed to pay on the basiscertain of our arrangement among our co-obligors and (ii) any additional amount we expect to pay on behalf of our co-obligors.other activities.
The standard is effective for fiscal yearsinterim and interimannual reporting periods beginning after December 15, 2013, but earlier adoption is permitted. Upon adoption, the standard should2017 and may be applied retrospectively or through a cumulative effect adjustment to all priorretained earnings at the date of adoption. Early adoption is permitted only as of annual reporting periods presented.beginning after December 15, 2016, including interim periods within that reporting period. We plan to adopt the standard on its required effective date of January 1, 2018 and are assessing the impact of the standard on our consolidated financial condition, results of operations and cash flows.
Accounting for Share-Based Payments with Performance Targets
In June 2014, the FASB issued an accounting standard that clarifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.
The standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The standard may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations and cash flows.
Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity
In August 2014, the FASB issued an accounting standard that allows a reporting entity to measure the financial assets and financial liabilities of a qualifying consolidated collateralized financing entity using the fair value of either its financial assets or financial liabilities, whichever is more observable.
The standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The standard may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations and cash flows.
Consolidation: Amendments to the Consolidation Analysis
In February 2015, the FASB issued an accounting standard that affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; eliminate the presumption that a general partner should consolidate a limited partnership; affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
The standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The standard may be applied retrospectively or through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations and cash flows.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued an accounting standard that provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change generally accepted accounting principles applicable to a customer's accounting for service contracts. Consequently, all software licenses will be accounted for consistent with other licenses of intangible assets.
The standard is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The standard may be adopted prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.flows.
Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of an Investment within a Foreign Entity or of an Investment in a Foreign Entity
Simplifying the Presentation of Debt Issuance Costs
In March 2013,April 2015, the FASB issued an accounting standard addressing whether consolidationthat amends the guidance or foreign currency guidance appliesfor debt issuance costs by requiring such costs to be presented as a deduction to the release of the cumulative translation adjustment into net income when a parent sells all or a part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or net assets that are a business (othercorresponding debt liability, rather than a sale of in-substance real estate) within a foreign entity. The guidance also resolves the diversity in practiceas an asset, and for the cumulative translation adjustment treatment in business combinations achieved in stages involving foreign entities.
Under this standard,amortization of such costs to be reported as interest expense. The amendments are intended to simplify the entire amountpresentation of the cumulative translation adjustment associateddebt issuance costs and make it consistent with the foreign entity should be released into earnings when there has been: (i) a salepresentation of a subsidiarydebt discounts or group of net assets within a foreign entitypremiums. The amendments, however, do not change the recognition and the sale represents a complete or substantially complete liquidation of the foreign entity in which the subsidiary or the net assets had resided; (ii) a loss of a controlling financial interest in an investment in a foreign entity; or (iii) a change in accounting method from applying the equity methodmeasurement guidance applicable to an investment in a foreign entity to consolidating the foreign entity.debt issuance costs.
The standard is effective for fiscal yearsinterim and interimannual periods beginning after December 15, 2013, and will2015. Early adoption is permitted. The standard must be applied prospectively.retrospectively to all prior periods presented. We plan to adopt the standard on January 1, 2016, its required effective datedate. Because the new standard does not affect accounting recognition or measurement of January 1, 2014 and do not expectdebt issuance costs, the adoption of the standard towill have not have a material effect on our consolidated financial condition, results of operations, or cash flows.
Investment Company GuidanceShort Duration Insurance Contracts
In June 2013,May 2015, the FASB issued an accounting standard that amendsrequires additional disclosures (including accident year information) for short-duration insurance contracts. New disclosures about the criteria a company must meet to qualify as an investment company, clarifies the measurement guidance,liability for unpaid losses and requires new disclosuresloss adjustment expenses will be required of public business entities for investment companies. An entity that is regulated by the Securities and Exchange Commission under the Investment Company Act of 1940 (the 1940 Act) qualifies as an investment company. Entities that are not regulated under the 1940 Act must have certain fundamental characteristics and must consider other characteristics to determine whether they qualify as investment companies. An entity's purpose and design must be considered when making the assessment.
The standard is effective for fiscal years and interimannual periods beginning after December 15, 2013. Earlier adoption is prohibited. An entity that no longer meets2015. The annual disclosures by accident year include: disaggregated net incurred and paid claims development tables segregated by business type (not required to exceed 10 years), reconciliation of total net reserves included in development tables to the requirementsreported liability for unpaid losses and loss adjustment expenses, incurred but not reported (IBNR) information, quantitative information and a qualitative description about claim frequency, and the average annual percentage payout of incurred claims. Further, the new standard requires, when applicable, disclosures about discounting liabilities for unpaid losses and loss adjustment expenses and significant changes and reasons for changes in methodologies and assumptions used to be an investment company as a result of this standard should presentdetermine unpaid losses and loss adjustment expenses. In addition, the change in its status as a cumulative-effect adjustment to retained earnings asroll forward of the liability for unpaid losses and loss adjustment expenses currently disclosed in annual financial statements will be required for interim periods beginning in the first quarter of 2017. Early adoption of the period of adoption. An entity thatnew annual and interim disclosures is an investment company should apply the guidance prospectively as an adjustment to opening net assets as of the effective date. The adjustment to net assets represents both the difference between the fair value and the carrying amount of the entity's investments and any amount previously recognized in Accumulated other comprehensive income. permitted.
We plan to adopt the standard on its required effective date of January 1, 2014 and dodate. Because the new standard does not expectaffect accounting recognition or measurement, the adoption of the standard towill have a materialno effect on our consolidated financial condition, results of operations, or cash flows.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PresentationRecognition and Measurement of Unrecognized Tax BenefitsFinancial Assets and Financial Liabilities
In July 2013,January 2016, the FASB issued an accounting standard that affects the recognition, measurement, presentation, and disclosure of financial instruments. Specifically, under the new standard, equity investments (other than those accounted for using the equity method of accounting or those subject to consolidation) will be measured at fair value with changes in fair value recognized in earnings. Also, for those financial liabilities for which fair value option accounting has been elected, the new standard requires a liability relatedchanges in fair value due to unrecognized tax benefitsinstrument-specific credit risk to be presented as a reduction to the related deferred tax assetseparately in other comprehensive income. The standard updates certain fair value disclosure requirements for a net operating loss carryforward or a tax credit carryforward. When the carryforwards are not availablefinancial instruments carried at the reporting date under the tax law of the applicable jurisdiction or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset.amortized cost.
The standard is effective for fiscal yearsinterim and interimannual reporting periods beginning after December 15, 2013, but earlier2017. Early adoption is permitted. Upon adoption, the standard should be applied prospectively to unrecognized tax benefits that existed at the effective date. Retrospective applicationof certain provisions is permitted. We plan to adoptare assessing the standard prospectively on its required effective date of January 1, 2014 and do not expect the adoptionimpact of the standard to have a material effect on our consolidated financial condition, results of operations orand cash flows.
3. SEGMENT INFORMATION
We report theour results of our operations consistent with the manner in which AIG'sour chief operating decision makers review the business to assess performance and to allocate resources through two reportable segments: AIG Property CasualtyCommercial Insurance and AIG LifeConsumer Insurance as well as a Corporate and Retirement. Other category. The Corporate and Other category consists of businesses and items not allocated to our reportable segments.
We evaluate performance based on revenues and pre-taxpre‑tax operating income (loss),. Pre-tax operating income (loss) is derived by excluding resultscertain items from discontinued operations, because we believe this provides more meaningful information on how our operations are performing. Priornet income (loss) attributable to AIG. See the fourth quarter of 2012, we also presented Aircraft Leasing as a reportable segment, which includedtable below for the results of ILFC. As a result of the proposed sale of ILFC discussed in Note 4, Aircraft Leasing is no longer presented as a reportable segment in all periods presented.
In the fourth quarter of 2013, to reduce investment concentration, we transferred the holdings of investments in life settlementsitems excluded from AIG Property Casualty operations to AIG's Other Operations. AIG Property Casualty has retained debt instruments associated with the investments in life settlements, repayment of which is expected to result from cash flows from the investments in life settlements. To align our segment reporting with this change, the results of the investments in life settlements, including investment income and impairment losses, were reclassified to AIG's Other Operations for all periods presented.
AIG Property Casualty
The AIG Property Casualty segment is presented as twopre-tax operating segments — Commercial Insurance and Consumer Insurance, in addition to an AIG Property Casualty Other category.
Our property and casualty operations are conducted through multiple-line companies writing substantially all commercial and consumer lines both domestically and abroad. AIG Property Casualty offers its products through a diverse, multi-channel distribution network that includes agents, wholesalers, global and local brokers, and direct-to-consumer platforms.income.
Investment income of the Non-Life Insurance Companies is allocated tobetween the Commercial InsuranceProperty Casualty and ConsumerPersonal Insurance operating segments based on an internal investment income allocation model. The model estimates investable funds based primarily on loss reserves and allocated capital. Commencing inInvestment income of the first quarter of 2013, AIG Property Casualty began applying similar duration and risk-free yields (plus a liquidity premium)Life Insurance Companies is attributed to the Retirement, Life and Institutional Markets operating segments based on invested assets in product line portfolios; income from invested assets in excess of liabilities is allocated to product lines based on internal capital ofestimates.
The Commercial and Consumer reportable segments are each presented as three operating segments:
Commercial Insurance
The Commercial Insurance and Consumer Insurancesegment is presented as is applied to reserves.
AIG Life and Retirement
In 2012, AIG Life and Retirement announced several key organizational structure and management changes intended to better serve the organization's distribution partners and customers. Key aspects of the new structure include distinct product manufacturing divisions, shared annuity and life operations platforms and a unified all-channel distribution organization with access to all AIG Life and Retirement products.
AIG 2013 Form 10-K
ITEM 8 / NOTE 3. SEGMENT INFORMATION
AIG Life and Retirement fully implemented these changes during the first quarter of 2013 and now presents its operating results in the following twothree operating segments:
Retail•Property Casualty —– consists of Casualty, Property, Specialty, and Financial product lines include Life Insurance and Accident and Health (A&H), Fixed Annuities, Retirement Income Solutions (including variable and index annuities), Brokerage Services and Retail Mutual Funds.lines.
Institutional• — product lines include Group Retirement, Group BenefitsMortgage Guaranty – Mortgage insurance protects mortgage lenders and Institutional Markets. The investors against the increased risk of borrower default related to high loan-to-value mortgages.
•Institutional Markets product line – consists ofstable value wrap products, structured settlement and terminal funding annuities, high net worth products, guaranteed investment contracts (GICs), and corporate- and bank-owned life insurance.insurance and guaranteed investment contracts (GICs).
Prior period amounts have been revisedProperty Casualty products are primarily distributed through a network of independent retail and wholesale brokers, and through an independent agency network. Mortgage Guaranty products and services are provided to reflect the new structure, which did not affect previously reported pre-tax income from continuing operations for AIG Lifemortgage lenders including mortgage banks, credit unions and Retirement. Prior to the first quarter of 2013, AIG Lifefinance agencies. Institutional Markets products are marketed primarily through specialized marketing and Retirement wasconsulting firms and structured settlement brokers.
Consumer Insurance
The Consumer Insurance segment is presented as twothree operating segments:
•Retirement – consists of Fixed Annuities, Retirement Income Solutions, Group Retirement, and Retail Mutual Funds product lines.
•Life – primary products in the U.S. include term life and universal life insurance. International products include term and whole life insurance, supplemental health, cancer and critical illness insurance.
•Personal Insurance – consists of Personal Lines and Accident & Health product lines.
Retirement products are distributed through affiliated career financial advisors and through non-affiliated channels, which include banks, wirehouses, regional and independent broker-dealers, independent marketing organizations and independent insurance agents. Life products in the U.S. are primarily distributed through independent marking organizations, independent insurance agents, financial advisors and direct marketing. International life products are sold through non-affiliated
independent agents and direct marketing. Personal insurance products are distributed primarily through agents and brokers, as well as through direct marketing and partner organizations.
Corporate and Other
Our Corporate and Other consists of:
•Income from assets held by AIG Parent and other corporate subsidiaries;
•General operating expenses not attributable to specific reporting segments;
•Interest expense; and
•Run-off insurance lines.
Certain of our management activities, such as investment management, enterprise risk management, liquidity management and capital management, and our balance sheet reporting, are conducted on a legal entity basis. We group our insurance-related legal entities into two categories: Non-Life Insurance Companies, and Life Insurance Companies.
Non-Life Insurance Companies include the following major property casualty and Retirement Services.mortgage guaranty companies: National Union Fire Insurance Company of Pittsburgh, Pa.(National Union); American Home Assurance Company (American Home); Lexington Insurance Company (Lexington); Fuji Fire and Marine Insurance Company Limited (Fuji Fire); American Home Assurance Company, Ltd. (American Home Japan); AIG Asia Pacific Insurance, Pte, Ltd.; AIG Europe Limited and United Guaranty Residential Insurance Company (UGRIC).
AIG Other Operations
Our Other OperationsLife Insurance Companies include results from:
•Mortgage Guaranty;
•Global Capital Markets;
•Direct Investment book;
•Retained Interests, which represents the fair value gains or losses, prior to their sale in 2012, of the AIA Group Limited (AIA) ordinary shares retained following the AIA initial public offering, the MetLife, Inc. (MetLife) securities that were received as consideration from the sale ofmajor operating companies: American General Life Insurance Company (ALICO),(American General Life); The Variable Annuity Life Insurance Company (VALIC); The United States Life Insurance Company in the City of New York (U.S. Life) and the fair value gains or losses, prior to the FRBNY liquidation of Maiden Lane III LLC (ML III) assets, on the retained interest in ML III;
•Corporate & Other; and
•Aircraft Leasing.
AIG 2013 Form 10-KFuji Life Insurance Company Limited (Fuji Life).
The following table presents AIG'sAIG’s continuing operations by reportable segment:
| | | | Net | | | | Depreciation | | | Pre-Tax |
| | Total | | Investment | | Interest | | and | | | Operating |
(in millions) | | Revenues | | Income | | Expense | | Amortization | | | Income (Loss) |
2015 | | | | | | | | | | | |
Commercial Insurance | | | | | | | | | | | |
Property Casualty | $ | 23,625 | $ | 3,596 | $ | 12 | $ | 2,255 | | $ | 593 |
Mortgage Guaranty | | 1,051 | | 139 | | - | | 64 | | | 644 |
Institutional Markets | | 3,518 | | 1,739 | | 11 | | (177) | | | 415 |
Total Commercial Insurance | | 28,194 | | 5,474 | | 23 | | 2,142 | | | 1,652 |
Consumer Insurance | | | | | | | | | | | |
Retirement | | 9,298 | | 6,002 | | 39 | | (98) | | | 2,839 |
Life | | 6,393 | | 2,100 | | 14 | | 205 | | | 465 |
Personal Insurance | | 11,378 | | 220 | | 1 | | 1,944 | | | 74 |
Total Consumer Insurance | | 27,069 | | 8,322 | | 54 | | 2,051 | | | 3,378 |
Corporate and Other | | 2,901 | | 617 | | 1,313 | | 426 | | | (883) |
AIG Consolidation and elimination | | (573) | | (317) | | (109) | | 10 | | | (92) |
Total AIG Consolidated pre-tax operating income | $ | 57,591 | $ | 14,096 | $ | 1,281 | $ | 4,629 | | $ | 4,055 |
Reconciling Items from pre-tax operating income to pre-tax income: | | | | | | | | | | | |
Changes in fair value of securities used to hedge guaranteed | | | | | | | | | | | |
living benefits | | (43) | | (43) | | - | | - | | | (43) |
Changes in benefit reserves and DAC, VOBA and SIA related to | | | | | | | | | | | |
net realized capital gains | | - | | - | | - | | - | | | (15) |
Other income (expense) - net | | - | | - | | - | | - | | | (233) |
Loss on extinguishment of debt | | - | | - | | - | | - | | | (756) |
Net realized capital gains | | 776 | | - | | - | | - | | | 776 |
Income from divested businesses | | (48) | | - | | - | | - | | | (59) |
Non-operating litigation reserves and settlements | | 94 | | - | | - | | - | | | 82 |
Reserve development related to non-operating run-off insurance | | | | | | | | | | | |
business | | - | | - | | - | | - | | | (30) |
Restructuring and other costs | | - | | - | | - | | - | | | (496) |
Other | | (43) | | - | | - | | - | | | - |
Pre-tax income | $ | 58,327 | $ | 14,053 | $ | 1,281 | $ | 4,629 | | $ | 3,281 |
2014 | | | | | | | | | | | |
Commercial Insurance | | | | | | | | | | | |
Property Casualty | $ | 25,183 | $ | 4,298 | $ | - | $ | 2,445 | | $ | 4,248 |
Mortgage Guaranty | | 1,042 | | 138 | | - | | 56 | | | 592 |
Institutional Markets | | 2,576 | | 1,957 | | 7 | | (215) | | | 670 |
Total Commercial Insurance | | 28,801 | | 6,393 | | 7 | | 2,286 | | | 5,510 |
Consumer Insurance | | | | | | | | | | | |
Retirement | | 9,784 | | 6,489 | | 23 | | (231) | | | 3,495 |
Life | | 6,321 | | 2,199 | | 7 | | 130 | | | 580 |
Personal Insurance | | 12,364 | | 394 | | 2 | | 2,067 | | | 399 |
Total Consumer Insurance | | 28,469 | | 9,082 | | 32 | | 1,966 | | | 4,474 |
Corporate and Other | | 4,206 | | 700 | | 1,805 | | 346 | | | (379) |
AIG Consolidation and elimination | | (475) | | (356) | | (126) | | (181) | | | (31) |
Total AIG Consolidated pre-tax operating income | $ | 61,001 | $ | 15,819 | $ | 1,718 | $ | 4,417 | | $ | 9,574 |
Reconciling Items from pre-tax operating income to pre-tax income: | | | | | | | | | | | |
Changes in fair value of securities used to hedge guaranteed | | | | | | | | | | | |
living benefits | | 260 | | 260 | | - | | - | | | 260 |
Changes in benefit reserves and DAC, VOBA and SIA related to | | | | | | | | | | | |
net realized capital gains | | - | | - | | - | | - | | | (217) |
Other income (expense) - net | | - | | - | | - | | - | | | - |
Loss on extinguishment of debt | | - | | - | | - | | - | | | (2,282) |
Net realized capital gains | | 739 | | - | | - | | - | | | 739 |
Loss from divested businesses | | 1,602 | | - | | - | | 31 | | | 2,169 |
Non-operating litigation reserves and settlements | | 804 | | - | | - | | - | | | 258 |
Reserve development related to non-operating run-off insurance | | | | | | | | | | | |
business | | - | | - | | - | | - | | | - |
Restructuring and other costs | | - | | - | | - | | - | | | - |
Other | | - | | - | | - | | - | | | - |
Pre-tax income | $ | 64,406 | $ | 16,079 | $ | 1,718 | $ | 4,448 | | $ | 10,501 |
2013 | | | | | | | | | | | |
Commercial Insurance | | | | | | | | | | | |
Property Casualty | $ | 25,108 | $ | 4,431 | $ | 8 | $ | 2,393 | | $ | 4,095 |
Mortgage Guaranty | | 941 | | 132 | | - | | 50 | | | 205 |
| | | | | | | | | | | | | | | | | | | |
| | |
(in millions)
| | Total Revenues
| | Other-Than-
Temporary
Impairment
Charges*
| | Net
Loss on Sale
of Properties
and Divested
Businesses
| | Interest
Expense
| | Depreciation
and
Amortization
| | Pre-Tax
Income (Loss)
from Continuing
Operations
| |
|---|
| | |
2013 | | | | | | | | | | | | | | | | | | | |
AIG Property Casualty | | | | | | | | | | | | | | | | | | | |
Commercial Insurance | | $ | 23,137 | | $ | – | | $ | – | | $ | 7 | | $ | 2,393 | | $ | 2,398 | |
Consumer Insurance | | | 13,601 | | | – | | | – | | | 6 | | | 2,133 | | | 317 | |
Other | | | 2,971 | | | 53 | | | – | | | 1 | | | 1 | | | 2,418 | |
| | |
Total AIG Property Casualty | | | 39,709 | | | 53 | | | – | | | 14 | | | 4,527 | | | 5,133 | |
| | |
AIG Life and Retirement | | | | | | | | | | | | | | | | | | | |
Retail | | | 12,715 | | | 130 | | | – | | | 3 | | | (76 | ) | | 4,363 | |
Institutional | | | 7,875 | | | 142 | | | – | | | 2 | | | (58 | ) | | 2,142 | |
| | |
Total AIG Life and Retirement | | | 20,590 | | | 272 | | | – | | | 5 | | | (134 | ) | | 6,505 | |
| | |
Other Operations | | | | | | | | | | | | | | | | | | | |
Mortgage Guaranty | | | 949 | | | – | | | – | | | – | | | 50 | | | 213 | |
Global Capital Markets | | | 833 | | | – | | | – | | | – | | | – | | | 625 | |
Direct Investment book | | | 1,937 | | | 3 | | | – | | | 353 | | | (80 | ) | | 1,544 | |
Corporate & Other | | | 792 | | | (1 | ) | | 48 | | | 2,112 | | | 300 | | | (4,706 | ) |
Aircraft Leasing | | | 4,420 | | | – | | | – | | | – | | | 76 | | | (129 | ) |
Consolidation and elimination | | | (38 | ) | | – | | | – | | | (14 | ) | | – | | | 4 | |
| | |
Total Other Operations | | | 8,893 | | | 2 | | | 48 | | | 2,451 | | | 346 | | | (2,449 | ) |
| | |
AIG Consolidation and elimination | | | (514 | ) | | – | | | – | | | (328 | ) | | (26 | ) | | 179 | |
| | |
Total AIG Consolidated | | $ | 68,678 | | $ | 327 | | $ | 48 | | $ | 2,142 | | $ | 4,713 | | $ | 9,368 | |
| | |
2012 | | | | | | | | | | | | | | | | | | | |
AIG Property Casualty | | | | | | | | | | | | | | | | | | | |
Commercial Insurance | | $ | 23,569 | | $ | – | | $ | – | | $ | 5 | | $ | 2,736 | | $ | 877 | |
Consumer Insurance | | | 14,403 | | | – | | | – | | | 4 | | | 2,121 | | | 292 | |
Other | | | 1,982 | | | 378 | | | – | | | 1 | | | (1 | ) | | 854 | |
| | |
Total AIG Property Casualty | | | 39,954 | | | 378 | | | – | | | 10 | | | 4,856 | | | 2,023 | |
| | |
AIG Life and Retirement | | | | | | | | | | | | | | | | | | | |
Retail | | | 10,471 | | | 469 | | | – | | | – | | | 159 | | | 2,068 | |
Institutional | | | 7,174 | | | 255 | | | – | | | – | | | 54 | | | 1,712 | |
| | |
Total AIG Life and Retirement | | | 17,645 | | | 724 | | | – | | | – | | | 213 | | | 3,780 | |
| | |
Other Operations | | | | | | | | | | | | | | | | | | | |
Mortgage Guaranty | | | 867 | | | – | | | – | | | – | | | 44 | | | 15 | |
Global Capital Markets | | | 745 | | | – | | | – | | | – | | | – | | | 553 | |
Direct Investment book | | | 2,024 | | | 60 | | | – | | | 369 | | | (121 | ) | | 1,632 | |
Retained Interests | | | 4,957 | | | – | | | – | | | – | | | – | | | 4,957 | |
Corporate & Other | | | 1,522 | | | 5 | | | 6,717 | | | 2,264 | | | 317 | | | (10,186 | ) |
Aircraft Leasing | | | 4,500 | | | – | | | – | | | – | | | 2,042 | | | 339 | |
Consolidation and elimination | | | (52 | ) | | – | | | – | | | (27 | ) | | – | | | – | |
| | |
Total Other Operations | | | 14,563 | | | 65 | | | 6,717 | | | 2,606 | | | 2,282 | | | (2,690 | ) |
| | |
AIG Consolidation and elimination | | | (1,141 | ) | | – | | | 19 | | | (297 | ) | | (2 | ) | | (222 | ) |
| | |
Total AIG Consolidated | | $ | 71,021 | | $ | 1,167 | | $ | 6,736 | | $ | 2,319 | | $ | 7,349 | | $ | 2,891 | |
| | |
2011 | | | | | | | | | | | | | | | | | | | |
AIG Property Casualty | | | | | | | | | | | | | | | | | | | |
Commercial Insurance | | $ | 24,921 | | $ | – | | $ | – | | $ | 3 | | $ | 2,865 | | $ | 1,269 | |
Consumer Insurance | | | 14,109 | | | – | | | – | | | 4 | | | 1,836 | | | (44 | ) |
Other | | | 1,947 | | | 274 | | | – | | | – | | | – | | | 875 | |
| | |
Total AIG Property Casualty | | | 40,977 | | | 274 | | | – | | | 7 | | | 4,701 | | | 2,100 | |
| | |
AIG Life and Retirement | | | | | | | | | | | | | | | | | | | |
Retail | | | 10,079 | | | 612 | | | – | | | – | | | 515 | | | 1,382 | |
Institutional | | | 6,084 | | | 365 | | | – | | | – | | | 176 | | | 1,574 | |
| | |
Total AIG Life and Retirement | | | 16,163 | | | 977 | | | – | | | – | | | 691 | | | 2,956 | |
| | |
Other Operations | | | | | | | | | | | | | | | | | | | |
Mortgage Guaranty | | | 944 | | | – | | | – | | | – | | | 44 | | | (77 | ) |
Global Capital Markets | | | 266 | | | – | | | – | | | – | | | – | | | (7 | ) |
Direct Investment book | | | 1,004 | | | 25 | | | – | | | 367 | | | (218 | ) | | 622 | |
Retained Interests | | | 486 | | | – | | | – | | | – | | | – | | | 486 | |
Corporate & Other | | | 1,405 | | | 4 | | | 74 | | | 2,388 | | | 206 | | | (6,007 | ) |
Aircraft Leasing | | | 4,457 | | | – | | | – | | | – | | | 1,948 | | | (1,005 | ) |
Consolidation and elimination | | | (36 | ) | | – | | | – | | | (20 | ) | | – | | | – | |
| | |
Total Other Operations | | | 8,526 | | | 29 | | | 74 | | | 2,735 | | | 1,980 | | | (5,988 | ) |
| | |
AIG Consolidation and elimination | | | (561 | ) | | – | | | – | | | (298 | ) | | – | | | 31 | |
| | |
Total AIG Consolidated | | $ | 65,105 | | $ | 1,280 | | $ | 74 | | $ | 2,444 | | $ | 7,372 | | $ | (901 | ) |
| | |
* Included in Total revenues presented above.
AIG 2013 Form 10-K
TABLE OF CONTENTSITEM
Item 8 / NOTE note 3. SEGMENT INFORMATION
Institutional Markets | | 2,813 | | 2,090 | | 1 | | (160) | | | 680 |
Total Commercial Insurance | | 28,862 | | 6,653 | | 9 | | 2,283 | | | 4,980 |
Consumer Insurance | | | | | | | | | | | |
Retirement | | 9,431 | | 6,628 | | 3 | | (165) | | | 3,490 |
Life | | 6,397 | | 2,269 | | 4 | | 214 | | | 806 |
Personal Insurance | | 12,832 | | 455 | | 3 | | 2,110 | | | 268 |
Total Consumer Insurance | | 28,660 | | 9,352 | | 10 | | 2,159 | | | 4,564 |
Corporate and Other | | 4,073 | | 309 | | 2,451 | | 221 | | | (265) |
AIG Consolidation and elimination | | (71) | | (343) | | (328) | | (26) | | | 111 |
Total AIG Consolidated pre-tax operating income | $ | 61,524 | $ | 15,971 | $ | 2,142 | $ | 4,637 | | $ | 9,390 |
Reconciling Items from pre-tax operating income to pre-tax income: | | | | | | | | | | | |
Changes in fair value of securities used to hedge guaranteed | | | | | | | | | | | |
living benefits | | (161) | | (161) | | - | | - | | | (161) |
Changes in benefit reserves and DAC, VOBA and SIA related to | | | | | | | | | | | |
net realized capital gains | | - | | - | | - | | - | | | (1,608) |
Other income (expense) - net | | - | | - | | - | | - | | | (72) |
Loss on extinguishment of debt | | - | | - | | - | | - | | | (651) |
Net realized capital gains | | 1,939 | | - | | - | | - | | | 1,939 |
Loss from divested businesses | | 4,420 | | - | | - | | 76 | | | (177) |
Non-operating litigation reserves and settlements | | 1,152 | | - | | - | | - | | | 708 |
Reserve development related to non-operating run-off insurance | | | | | | | | | | | |
business | | - | | - | | - | | - | | | - |
Restructuring and other costs | | - | | - | | - | | - | | | - |
Other | | - | | - | | - | | - | | | - |
Pre-tax income | $ | 68,874 | $ | 15,810 | $ | 2,142 | $ | 4,713 | | $ | 9,368 |
The following table presents AIG'sAIG’s year-end identifiable assets and capital expenditures by reportable segment:legal entity category:
| | | | | | | | | | | | | |
| |
| |
| |
| |
| |
|---|
| | |
| | Year-End Identifiable Assets | | Capital Expenditures | |
|---|
(in millions)
| | 2013
| | 2012
| | 2013
| | 2012
| |
|---|
| | |
AIG Property Casualty | | | | | | | | | | | | | |
Commercial Insurance | | $ | | (a) | $ | | (a) | $ | | (a) | $ | | (a) |
Consumer Insurance | | | | (a) | | | (a) | | | (a) | | | (a) |
Other | | | | (a) | | | (a) | | | (a) | | | (a) |
| | |
Total AIG Property Casualty | | $ | 167,874 | | $ | 178,726 | | $ | 349 | | $ | 321 | |
| | |
AIG Life and Retirement | | | | | | | | | | | | | |
Retail | | | 161,098 | | | 157,855 | | | 35 | | | 45 | |
Institutional | | | 123,952 | | | 124,588 | | | 27 | | | 15 | |
Consolidation and Elimination | | | (1,593 | ) | | (6,769 | ) | | – | | | – | |
| | |
Total AIG Life and Retirement | | $ | 283,457 | | $ | 275,674 | | $ | 62 | | $ | 60 | |
| | |
Other Operations | | | | | | | | | | | | | |
Mortgage Guaranty | | | 4,361 | | | 5,270 | | | 25 | | | 11 | |
Global Capital Markets | | | 6,406 | | | 7,050 | | | – | | | – | |
Direct Investment book | | | 23,541 | | | 28,528 | | | – | | | – | |
Corporate & Other | | | 88,270 | | | 91,772 | | | 413 | | | 680 | |
Aircraft Leasing(b) | | | 39,313 | | | 39,812 | | | 1,883 | | | 1,779 | |
Consolidation and Elimination | | | 33,992 | | | 23,431 | | | – | | | – | |
| | |
Total Other Operations | | $ | 195,883 | | $ | 195,863 | | $ | 2,321 | | $ | 2,470 | |
| | |
AIG Consolidation and Elimination | | | (105,885 | ) | | (101,630 | ) | | – | | | – | |
| | |
Total Assets | | $ | 541,329 | | $ | 548,633 | | $ | 2,732 | | $ | 2,851 | |
| | |
(a) AIG Property Casualty manages its assets on an aggregate basis and does not allocate its assets, other than goodwill, between its operating segments.
(b) 2013 and 2012 include Aircraft Leasing assets classified as assets held-for-sale on the Consolidated Balance Sheets.
| Year-End Identifiable Assets | | Capital Expenditures |
(in millions) | | 2015 | | 2014 | | | 2015 | | 2014 |
Total Non-Life Insurance Companies | $ | 150,368 | $ | 164,299 | | $ | 991 | $ | 697 |
Total Life Insurance Companies | | 297,499 | | 301,295 | | | 102 | | 114 |
Total Corporate and Other | | 141,648 | | 159,394 | | | 629 | | 1,021 |
AIG Consolidation and Elimination | | (92,572) | | (109,407) | | | - | | - |
Total Assets | $ | 496,943 | $ | 515,581 | | $ | 1,722 | $ | 1,832 |
The following table presents AIG'sAIG’s consolidated operationstotal revenues and long-livedreal estate and other fixed assets, net of accumulated depreciation, by major geographic area:
| | | | | | | | Real Estate and Other Fixed Assets, |
| Total Revenues* | | Net of Accumulated Depreciation |
(in millions) | | 2015 | | 2014 | | 2013 | | | 2015 | | 2014 | | 2013 |
U.S. | $ | 42,366 | $ | 44,274 | $ | 46,078 | | $ | 2,213 | $ | 1,886 | $ | 1,606 |
Asia Pacific | | 5,942 | | 7,523 | | 8,804 | | | 602 | | 521 | | 448 |
Other Foreign | | 10,019 | | 12,609 | | 13,992 | | | 320 | | 293 | | 261 |
Consolidated | $ | 58,327 | $ | 64,406 | $ | 68,874 | | $ | 3,135 | $ | 2,700 | $ | 2,315 |
| | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
|---|
| | |
| | Total Revenues* | | Real Estate and Other Fixed Assets,
Net of Accumulated Depreciation | |
|---|
(in millions)
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
U.S. | | $ | 46,031 | | $ | 47,354 | | $ | 41,082 | | $ | 1,606 | | $ | 1,391 | | $ | 1,330 | |
Asia Pacific | | | 8,742 | | | 9,429 | | | 8,119 | | | 448 | | | 516 | | | 591 | |
Other Foreign | | | 13,905 | | | 14,238 | | | 15,904 | | | 261 | | | 306 | | | 386 | |
| | |
Consolidated | | $ | 68,678 | | $ | 71,021 | | $ | 65,105 | | $ | 2,315 | | $ | 2,213 | | $ | 2,307 | |
| | |
* Revenues are generally reported according to the geographic location of the reporting unit.
4. HELD-FOR-SALE CLASSIFICATION, DIVESTED BUSINESSES AND DISCONTINUED OPERATIONS
Held-For-Sale Classification
We report a business as held for sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next 12 months and certain other specified criteria are met. A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation and amortization expense is not recorded on assets of a business after it is classified as held for sale. Assets and liabilities related to a business classified as held for sale are segregated in the Consolidated Balance Sheets in the period in which the business is classified as held for sale.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 4. HELD-FOR-SALE CLASSIFICATION, DIVESTED BUSINESSES AND DISCONTINUED OPERATIONS
The following table summarizes the components of ILFC assets and liabilities held-for-sale on the Consolidated Balance Sheets as of December 31, 2013 and 2012:
| | | | | | | |
| |
| |
| |
|---|
| | |
(in millions)
| | December 31,
2013
| | December 31,
2012
| |
|---|
| | |
Assets: | | | | | | | |
Equity securities | | $ | 3 | | $ | 1 | |
Mortgage and other loans receivable, net | | | 229 | | | 117 | |
Flight equipment primarily under operating leases, net of accumulated depreciation | | | 35,508 | | | 34,468 | |
Short-term investments | | | 658 | | | 1,861 | |
Cash | | | 88 | | | 63 | |
Premiums and other receivables, net of allowance | | | 318 | | | 308 | |
Other assets | | | 2,066 | | | 1,864 | |
| | |
Assets held for sale | | | 38,870 | | | 38,682 | |
| | |
Less: Loss accrual | | | (9,334 | ) | | (6,717 | ) |
| | |
Total assets held for sale | | $ | 29,536 | | $ | 31,965 | |
| | |
Liabilities: | | | | | | | |
Other liabilities | | $ | 3,127 | | $ | 3,043 | |
Long-term debt | | | 21,421 | | | 24,323 | |
| | |
Total liabilities held for sale | | $ | 24,548 | | $ | 27,366 | |
| | |
International Lease Finance Corporation
On December 9, 2012, we entered into a definitive agreement (the Share Purchase Agreement) with Jumbo Acquisition Limited (Jumbo) for the sale of 80.1 percent of the common stock of ILFC for approximately $4.2 billion in cash. We determined ILFC met the criteria for held for sale and discontinued operations accounting at December 31, 2012 and, consequently, we recorded a $6.7 billion pre-tax loss and a $4.4 billion after tax loss for the year ended December 31, 2012. ILFC's operating results do not include depreciation and amortization expense because depreciation and amortization expense is not recorded on the assets of a business after the business is classified as held for sale. As of December 15, 2013, the sale of ILFC to Jumbo had not closed and on December 16, 2013, we terminated the amended Share Purchase Agreement with Jumbo.
On December 16, 2013 we entered into a definitive agreement with AerCap and AerCap Ireland Limited (AerCap Ireland), a wholly-owned subsidiary of AerCap, for the sale of 100 percent of the common stock of ILFC (the AerCap Agreement) for consideration consisting of $3.0 billion of cash, a portion of which will be funded by a special dividend of $600 million to be paid by ILFC to AIG upon consummation of the transaction, and approximately 97.6 million newly-issued AerCap common shares. The consideration has a value of approximately $5.4 billion based on AerCap's pre-announcement closing price per share of $24.93 on December 13, 2013. In connection with the AerCap Agreement, we entered into a credit agreement for a senior unsecured revolving credit facility between AerCap Ireland as borrower and AIG as lender (the Revolving Credit Facility). The Revolving Credit Facility provides for an aggregate commitment of $1 billion and permits loans for general corporate purposes after the closing of the AerCap Transaction. The transaction is subject to required regulatory approvals, including all applicable U.S. and foreign regulatory reviews and approvals, as well as other customary closing conditions. The AerCap Transaction was approved by AerCap shareholders on February 13, 2014. We determined ILFC met the criteria for held-for-sale accounting at December 31, 2013. Because we expect to hold approximately 46 percent of the common stock of combined company upon closing of the transaction, ILFC no longer qualifies for discontinued operations presentation in the Consolidated Statements of Income. Consequently, ILFC's results are presented in continuing operations for all periods presented.
ILFC recognized a $1.1 billion impairment charge related to flight equipment held for use in its separate-company financial statements in the third quarter of 2013. ILFC concluded the net book values of certain four-engine widebody aircraft in its fleet were no longer supportable based on the latest cash flow estimates because the estimated holding period was not likely to be as long as previously anticipated. Sustained high fuel prices, the introduction of more
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 4. HELD-FOR-SALE CLASSIFICATION, DIVESTED BUSINESSES AND DISCONTINUED OPERATIONS
fuel-efficient aircraft, and the success of competing aircraft models resulted in a contracting operator base for these aircraft types. These factors, together with the latest updates to airline fleet plans and efforts to remarket these aircraft resulted in the impairment charge. Approximately $1.0 billion of the $1.1 billion impairment charge related to the four-engine widebody aircraft and, in particular, the Airbus A340-600s. This had no effect on our consolidated financial condition, results of operations, or cash flows as a result of the loss on sale of ILFC we recognized for the year ended December 31, 2012.
Discontinued Operations
We report the results of operations of a business as discontinued operations if the business is classified as held for sale, the operations and cash flows of the business have been or will be eliminated from our ongoing operations as a result of a disposal transaction and we will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in Discontinued Operations in the Consolidated Statements of Income for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell.
The results of operations for the following businesses are presented as discontinued operations in our Consolidated Statements of Income.
Nan Shan Sale
On January 12, 2011, we entered into an agreement to sell our 97.57 percent interest in Nan Shan Life Insurance Company, Ltd. (Nan Shan) to a Taiwan-based consortium. The transaction was consummated on August 18, 2011 for net proceeds of $2.15 billion in cash. We recorded a pre-tax loss of $1.0 billion for the year ended December 31, 2011 largely offsetting Nan Shan operating results for the period, which is reflected in Income (loss) from discontinued operations in the Consolidated Statements of Income. The net proceeds from the transaction were used to pay down a portion of the liquidation preference of the Department of the Treasury's preferred interests (AIA SPV Preferred Interests) in the special purpose vehicle holding the proceeds of the AIA initial public offering (the AIA SPV).
AIG Star and AIG Edison Sale
On September 30, 2010, we entered into a definitive agreement with Prudential Financial, Inc. for the sale of our Japan-based insurance subsidiaries, AIG Star Life Insurance Co., Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG Edison), for total consideration of $4.8 billion, including the assumption of certain outstanding debt totaling $0.6 billion owed by AIG Star and AIG Edison. The transaction closed on February 1, 2011 and we recognized a pre-tax gain of $3.5 billion on the sale that is reflected in Income (loss) from discontinued operations in the Consolidated Statements of Income.
Nan Shan, AIG Star and AIG Edison previously were components of the AIG Life and Retirement reportable segment. Results from discontinued operations for 2011 include the results of Nan Shan, AIG Star and AIG Edison through the date of disposition.
Certain other sales completed during the periods presented were not classified as discontinued operations because we continued to generate significant direct revenue-producing or cost-generating cash flows from the businesses or because associated assets, liabilities and results of operations were not material, individually or in the aggregate, to our consolidated financial position or results of operations for any period presented.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 4. HELD-FOR-SALE CLASSIFICATION, DIVESTED BUSINESSES AND DISCONTINUED OPERATIONS
The following table presents the components of income from discontinued operations:
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Revenues: | | | | | | | | | | |
Premiums | | $ | – | | $ | – | | $ | 5,012 | |
Net investment income | | | – | | | – | | | 1,632 | |
Net realized capital gains | | | – | | | – | | | 844 | |
Other income | | | – | | | – | | | 5 | |
| | |
Total revenues | | | – | | | – | | | 7,493 | |
| | |
Benefits, claims and expenses | | | – | | | – | | | 6,324 | |
Interest expense allocation | | | – | | | – | | | 2 | |
| | |
Income from discontinued operations | | | – | | | – | | | 1,167 | |
| | |
Gain on sale | | | 150 | | | 1 | | | 2,338 | |
| | |
Income from discontinued operations, before income tax expense | | | 150 | | | 1 | | | 3,505 | |
| | |
Income tax expense | | | 66 | | | – | | | 1,038 | |
| | |
Income from discontinued operations, net of income tax expense | | $ | 84 | | $ | 1 | | $ | 2,467 | |
| | |
5. FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
We carry certain of our financial instruments at fair value. We define the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions.
The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions.
Fair Value Hierarchy
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three "levels"“levels” based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:valuation inputs:
•
- Level 1: Fair value measurements
that are based on quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.
•
•- Level 2:Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS•
•- Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the levels discussed above, and it is the observability of the inputs used that determines the appropriate level in the fair value hierarchy for the respective asset or liability.
Valuation Methodologies of Financial Instruments Measured at Fair Value
Incorporation of Credit Risk in Fair Value Measurements
- •
- Our Own Credit Risk. Fair value measurements for certain liabilities incorporate our own credit risk by determining the explicit cost for each counterparty to protect against its net credit exposure to us at the balance sheet date by reference to observable AIG CDS or cash bond spreads. We calculate the effect of credit spread changes using discounted cash flow techniques that incorporate current market interest rates. A derivative
counterparty'scounterparty’s net credit exposure to us is determined based on master netting agreements, when applicable, which take into consideration all derivative positions with us, as well as collateral we post with the counterparty at the balance sheet date. We calculateFor a description of how we incorporate our own credit risk in the effectvaluation of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates.embedded derivatives related to certain annuity and life insurance products, see Embedded Derivatives within Policyholder Contract Deposits, below.
•
•- Counterparty Credit Risk. Fair value measurements for freestanding derivatives incorporate counterparty credit by determining the explicit cost for us to protect against our net credit exposure to each counterparty at the balance sheet date by reference to observable counterparty CDS spreads, when available. When not available, other directly or indirectly observable credit spreads will be used to derive the best estimates of the counterparty spreads. Our net credit exposure to
a counterparty is determined based on master netting agreements, which take into consideration all derivative positions with the counterparty, as well as collateral posted by the counterparty at the balance sheet date.
Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly incorporate counterparty credit risk. Fair values for fixed maturity securities based on internal models incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information.
TheFor fair values measured based on internal models, the cost of credit protection is determined under a discounted present value approach considering the market levels for single name CDS spreads for each specific counterparty, the mid marketmid-market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to us by an independent third party. We utilize an interest rate based on the benchmark London Interbank Offered Rate (LIBOR) curve to derive our discount rates.
While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, we believe this approach provides a reasonable estimate of the fair value of the assets and liabilities, including consideration of the impact of non-performance risk.
Fixed Maturity Securities
Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure fixed maturity securities at fair value. Market price data is generally obtained from dealer markets.
We employ independent third-party valuation service providers to gather, analyze, and interpret market information to derive fair value estimates for individual investments, based upon market-accepted methodologies and assumptions. The methodologies used by these independent third-party valuation servicesservice providers are reviewed and understood by management, through periodic discussion with and information provided by the independent third-party valuation services.service providers. In addition, as
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
discussed further below, control processes are applied to the fair values received from independent third-party valuation servicesservice providers to ensure the accuracy of these values.
Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of market-accepted valuation methodologies, which may utilize matrix pricing, financial models, accompanying model inputs and various assumptions, provide a single fair value measurement for individual securities. The inputs used by the valuation service providers include, but are not limited to, market prices from completed transactions for identical securities and transactions for comparable securities, benchmark yields, interest rate yield curves, credit spreads, prepayment rates, default rates, recovery assumptions, currency rates, quoted prices for similar securities and other market-observable information, as applicable. If fair value is determined using financial models, these models generally take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.
We have control processes designed to ensure that the fair values received from third partyindependent third-party valuation servicesservice providers are accurately recorded, that their data inputs and valuation techniques are appropriate and consistently applied and that the assumptions used appear reasonable and consistent with the objective of determining fair value. We assess the reasonableness of individual security values received from independent third-party valuation service providers through various analytical techniques, and have procedures to escalate related questions internally and to the third partyindependent third-party valuation servicesservice providers for resolution. To assess the degree of pricing consensus among various valuation servicesservice providers for specific asset types, we have conductedconduct comparisons of prices received from available sources. We have useduse these comparisons to establish a hierarchy for the fair values received from third partyindependent third-party valuation servicesservice providers to be used for particular security classes. We also validate prices for selected securities through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.
When our independent third-party valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a price quote, which is generally non-binding, or by employing market accepted valuation models. Broker prices may be based on an income approach, which converts expected future cash flows to a single present value amount, with specific consideration of inputs relevant to particular security types. For structured securities, such inputs may include ratings, collateral types, geographic concentrations, underlying loan vintages, loan delinquencies and defaults, loss severity assumptions, prepayments, and weighted average coupons and maturities. When the volume or level of market activity for a security is limited, certain inputs used to determine fair value may not be observable in the market. Broker prices may also be based on a market approach that considers recent transactions involving identical or similar securities. Fair values provided by brokers are subject to similar control processes to those noted above for fair values from third partyindependent third-party valuation services,service providers, including management reviews. For those corporate debt instruments (for example, private placements) that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and non-transferability, and such adjustments generally are based on available market evidence. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of comparable securities, adjusted for illiquidity and structure. Fair values determined internally are also subject to management review to ensure that valuation models and related inputs are reasonable.
The methodology above is relevant for all fixed maturity securities including residential mortgage backed securities (RMBS), commercial mortgage backed securities (CMBS), collateralized debt obligations (CDO), other asset-backedasset‑backed securities (ABS) and fixed maturity securities issued by government sponsored entities and corporate entities.
Equity Securities Traded in Active Markets
Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure equity securities at fair value. Market price data is generally obtained from exchange or dealer markets.
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ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Mortgage and Other Loans Receivable
We estimate the fair value of mortgage and other loans receivable that are measured at fair value by using dealer quotations, discounted cash flow analyses and/or internal valuation models. The determination of fair value considers inputs such as interest rate, maturity, the borrower'sborrower’s creditworthiness, collateral, subordination, guarantees, past-due status, yield curves, credit curves, prepayment rates, market pricing for comparable loans and other relevant factors.
Other Invested Assets
We initially estimate the fair value of investments in certain hedge funds, private equity funds and other investment partnerships by reference to the transaction price. Subsequently, we generally obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are generally audited annually. We consider observable market data and perform certain control procedures to validate the appropriateness of using the net asset value as a fair value measurement. The fair values of other investments carried at fair value, such as direct private equity holdings, are initially determined based on transaction price and are subsequently estimated based on available evidence such as market transactions in similar instruments, other financing transactions of the issuer and other available financial information for the issuer, with adjustments made to reflect illiquidity as appropriate.
Short-term Investments
For short-term investments that are measured at fair value,amortized cost, the carrying valuesamounts of these assets approximate fair values because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk. Securities purchased under agreements to resell (reverse repurchase agreements) are generally treated as collateralized
receivables. We report certain receivables arising from securities purchased under agreements to resell as Short-term investments in the Consolidated Balance Sheets. WeWhen these receivables are measured at fair value, we use market-observable interest rates for receivables measured atto determine fair value. This methodology considers such factors as the coupon rate and yield curves.
Separate Account Assets
Separate account assets are composed primarily of registered and unregistered open-end mutual funds that generally trade daily and are measured at fair value in the manner discussed above for equity securities traded in active markets.
Freestanding Derivatives
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). We generally value exchange-traded derivatives such as futures and options using quoted prices in active markets for identical derivatives at the balance sheet date.
OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. We generally use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.
For certain OTC derivatives that trade in less liquid markets, where we generally do not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, the transaction price may provide the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument,
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ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
the model is adjusted so the model value at inception equals the transaction price. We will update valuation inputs in these models only when corroborated by evidence such as similar market transactions, third party pricing servicesindependent third-party valuation service providers and/or broker or dealer quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management'smanagement’s best estimate is used.
We value our super senior credit default swap portfolio using prices obtained from vendors and/or counterparties. The valuation of the super senior credit derivatives is complex because of the limited availability of market observable information due to the lack of trading and price transparency in certain structured finance markets. Our valuation methodologies for the super senior CDS portfolio have evolved over time in response to market conditions and the availability of market observable information. We have sought to calibrate the methodologies to available market information and to review the assumptions of the methodologies on a regular basis.
Embedded Policy Derivatives within Policyholder Contract Deposits
Certain variable annuity and equity-indexed annuity and life contracts contain embedded policy derivatives that we bifurcate from the host contracts and account for separately at fair value, with changes in fair value recognized in earnings. These embedded derivatives are classified within Policyholder contract deposits. We have concluded these contracts contain either (i) a written option that guarantees ona minimum accumulation value at maturity, (ii) a serieswritten option that guarantees annual withdrawals regardless of written options that guarantee withdrawals from the highest anniversary value withinunderlying market performance for a specific period or for life, or (iii) equity-indexed written options that meet the criteria of derivatives thatand must be bifurcated.
The fair value of embedded policy derivatives contained in certain variable annuity and equity-indexed annuity and life contracts is measured based on actuarial and capital market assumptions related to projected cash flows over the expected lives of the contracts. These discounted cash flow estimatesprojections primarily include benefits and related fees assessed, when applicable,applicable. In some instances, the projected cash flows from fees may exceed projected cash flows related to benefit payments and therefore, at a point in time, the carrying value of the embedded derivative may be in a net asset position. The projected cash flows incorporate expectations aboutbest estimate assumptions for policyholder behavior (including mortality, lapses, withdrawals and benefit utilization), along with an explicit risk margin to reflect a market participant’s estimates of projected cash flows and policyholder behavior. Estimates of future policyholder behavior are subjective and based primarily on our historical experience.
With respect to embedded policy derivatives in our variable annuity contracts, becauseBecause of the dynamic and complex nature of the expectedprojected cash flows with respect to embedded derivatives in our variable annuity contracts, risk neutral valuations are used.used which are calibrated to observable interest rate and equity option prices. Estimating the underlying cash flows for these products involves judgments regarding expected market rates of return, market volatility, credit spreads, correlations of certain market index returns to funds,variables, fund performance, discount rates and policyholder behavior. The portion of fees attributable to the fair value of expected benefit payments are included within the fair value measurement of these embedded derivatives and related fees are classified in net realized gain/loss as earned, consistent with other changes in the fair value of these embedded policy derivatives. Any portion of the fees not attributed to the embedded derivative are excluded from the fair value measurement and classified in policy fees as earned.
With respect to embedded policy derivatives in our equity-indexed annuity and life contracts, option pricing models are used to estimate fair value, taking into account assumptions for future equity index growth rates, volatility of the equity index, future interest rates, and determinations on adjusting the participation rate and the cap on equity-indexed credited rates in light of market conditions and policyholder behavior assumptions. These methodologies incorporate an explicit risk margin to take into consideration market participant estimates of projected
Projected cash flows and policyholder behavior.
We also incorporate our own risk of non-performance in the valuation of the embedded policy derivatives associated with variable annuity and equity-indexed annuity and life contracts. Historically, the expected cash flows wereare discounted using the interest rate swap curve (swap curve), which is commonly viewed as being consistent with the credit spreads for highly-ratedhighly‑rated financial institutions (S&P AA-rated or above). A swap curve shows the fixed-rate leg of a non-complex swap against the floating rate (for example, LIBOR) leg of a related tenor. The swap curve was adjusted, as necessary, for anomalies between the swap curve and the U.S. Treasury yield curve.
Super Senior Credit Default Swap Portfolio
We value CDS transactions written on the super senioralso incorporate our own risk layers of designated pools of debt securities or loans using internal valuation models, third-party price estimates and market indices. The principal market was determined to be the marketnon-performance in which super senior credit default swaps of this type and size would be transacted, or have been transacted, with the greatest volume or level of activity. We have determined that the principal market participants, therefore, would consist of other large financial institutions who participate in sophisticated over-the-counter derivatives markets. The specific valuation methodologies vary based on the nature of the referenced obligations and availability of market prices.
The valuation of the super senior credit derivatives is complex because of the limited availability of market observable information due to the lack of trading and price transparency in certain structured finance markets. These market conditions have increased the reliance on management estimates and judgments in arriving at an estimate of fair value for financial reporting purposes. Further, disparities in the valuation methodologies employed by market participants and the varying judgments reached by such participants when assessing volatile markets have increased the likelihood that the various parties to these instruments may arrive at significantly different estimates as to their fair values.
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ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Our valuation methodologies for the super senior credit default swap portfolio have evolved over time in response to market conditions and the availability of market observable information. We have sought to calibrate the methodologies to available market information and to review the assumptions of the methodologies on a regular basis.
Multi-sector CDO portfolios: We use a modified version of the Binomial Expansion Technique (BET) model to value our credit default swap portfolio written on super senior tranches of multi-sector CDOs of ABS. The BET model was developed in 1996 by a major rating agency to generate expected loss estimates for CDO tranches and derive a credit rating for those tranches, and remains widely used.
We have adapted the BET model to estimate the price of the super senior risk layer or tranche of the CDO. We modified the BET model to imply default probabilities from market prices for the underlying securities and not from rating agency assumptions. To generate the estimate, the model uses the price estimates for the securities comprising the portfolio of a CDO as an input and converts those estimates to credit spreads over current LIBOR-based interest rates. These credit spreads are used to determine implied probabilities of default and expected losses on the underlying securities. This data is then aggregated and used to estimate the expected cash flows of the super senior tranche of the CDO.
Prices for the individual securities held by a CDO are obtained in most cases from the CDO collateral managers, to the extent available. CDO collateral managers provided market prices for 46 percent and 59 percent of the underlying securities used in the valuation at December 31, 2013 and 2012. When a price for an individual security is not provided by a CDO collateral manager, we derive the price through a pricing matrix using prices from CDO collateral managers for similar securities. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the relationship of the security to other benchmark quoted securities. Substantially all of the CDO collateral managers who provided prices used dealer prices for all or part of the underlying securities, in some cases supplemented by third-party pricing services.
The BET model also uses diversity scores, weighted average lives, recovery rates and discount rates. We employ a Monte Carlo simulation to assist in quantifying the effect on the valuation of the CDOembedded derivatives associated with variable annuity and equity-indexed annuity and life contracts. The non-performance risk adjustment reflects a market participant’s view of our claims-paying ability by incorporating an additional spread to the unique aspects of the CDO's structure such as triggers that divertswap curve used to discount projected benefit cash flows to the most senior part of the capital structure. The Monte Carlo simulation is used to determine whether an underlying security defaults in a given simulation scenario and, if it does, the security's implied random default time and expected loss. This information is used to project cash flow streams and to determine the expected losses of the portfolio.
In addition to calculating an estimate of the fair value of the super senior CDO security referenced in the credit default swaps using our internal model, we also consider the price estimates for the super senior CDO securities providedvaluation of these embedded derivatives. The non-performance risk adjustment is calculated by third parties, including counterparties to these transactions, to validate the resultsconstructing forward rates based on a weighted average of the model and to determine the best available estimate of fair value. In determining the fair value of the super senior CDO security referenced in the credit default swaps, we use a consistent process that considers all available pricing data points and eliminates the use of outlying data points. When pricing data points are within a reasonable range an averaging technique is applied.
Corporate debt/Collateralized loan obligation (CLO) portfolios: For credit default swaps written on portfolios of investment-gradeobservable corporate debt, we use a mathematical model that produces results that are closely aligned with prices received from third parties. This methodology uses the current market credit spreads of the names in the portfolios along with the base correlations implied by the current market prices of comparable tranches of the relevant market traded credit indices as inputs.
We estimateto approximate the fair valueclaims-paying ability rating of our obligations resulting from credit default swaps written on CLOs to be equivalent to the par value less the current market value of the referenced obligation. Accordingly, the value is determined by obtaining third-party quotations on the underlying super senior tranches referenced under the credit default swap contract.
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ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Policyholder Contract Deposits
Policyholder contract deposits accounted for at fair value are measured using an earnings approach by taking into consideration the following factors:
•Current policyholder account values and related surrender charges;
•The present value of estimated future cash inflows (policy fees) and outflows (benefits and maintenance expenses) associated with the product using risk neutral valuations, incorporating expectations about policyholder behavior, market returns and other factors; and
•A risk margin that market participants would require for a market return and the uncertainty inherent in the model inputs.
The change in fair value of these policyholder contract deposits is recorded as Policyholder benefits and claims incurred in the Consolidated Statements of Income.
Long-Term Debt
The fair value of non-structured liabilities is generally determined by using market prices from exchange or dealer markets, when available, or discounting expected cash flows using the appropriate discount rate for the applicable maturity. We determine the fair value of structured liabilities and hybrid financial instruments (where performance is linked to structured interest rates, inflation or currency risks) using the appropriate derivative valuation methodology (described above) given the nature of the embedded risk profile. In addition, adjustments are made to the valuations of both non-structured and structured liabilities to reflect our own creditworthiness based on the methodology described under the caption "Incorporation“Incorporation of Credit Risk in Fair Value Measurements —– Our Own Credit Risk"Risk” above.
Borrowings under obligations of guaranteed investment agreements (GIAs), which are guaranteed by us, are recorded at fair value using discounted cash flow calculations based on interest rates currently being offered for similar contracts and our current market observable implicit credit spread rates with maturities consistent with those remaining for the contracts being valued. Obligations may be called at various times prior to maturity at the option of the counterparty. Interest rates on these borrowings are primarily fixed, vary by maturity and range up to 9.87.62 percent.
Other Liabilities
Other liabilities measured at fair value include certain securities sold under agreements to repurchase and certain securities sold but not yet purchased. Liabilities arising from securities sold under agreements to repurchase are generally treated as collateralized borrowings. We estimate the fair value of liabilities arising under these agreements by using market-observable interest rates. This methodology considers such factors as the coupon rate, yield curves and other relevant factors. Fair values for securities sold but not yet purchased are based on current market prices.
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ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:
December 31, 2015 | | | | | | | Counterparty | Cash | |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting* | Collateral | | Total |
Assets: | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | |
U.S. government and government sponsored entities | $ | - | $ | 1,844 | $ | - | $ | - | $ | - | $ | 1,844 |
Obligations of states, municipalities and political subdivisions | | - | | 25,199 | | 2,124 | | - | | - | | 27,323 |
Non-U.S. governments | | 683 | | 17,480 | | 32 | | - | | - | | 18,195 |
Corporate debt | | - | | 134,618 | | 1,370 | | - | | - | | 135,988 |
RMBS | | - | | 19,690 | | 16,537 | | - | | - | | 36,227 |
CMBS | | - | | 10,986 | | 2,585 | | - | | - | | 13,571 |
CDO/ABS | | - | | 8,928 | | 6,169 | | - | | - | | 15,097 |
Total bonds available for sale | | 683 | | 218,745 | | 28,817 | | - | | - | | 248,245 |
Other bond securities: | | | | | | | | | | | | |
U.S. government and government sponsored entities | | - | | 3,369 | | - | | - | | - | | 3,369 |
Obligations of states, municipalities and political subdivisions | | - | | 75 | | - | | - | | - | | 75 |
Non-U.S. governments | | - | | 50 | | - | | - | | - | | 50 |
Corporate debt | | - | | 2,018 | | 17 | | - | | - | | 2,035 |
RMBS | | - | | 649 | | 1,581 | | - | | - | | 2,230 |
CMBS | | - | | 557 | | 193 | | - | | - | | 750 |
CDO/ABS | | - | | 1,218 | | 7,055 | | - | | - | | 8,273 |
Total other bond securities | | - | | 7,936 | | 8,846 | | - | | - | | 16,782 |
Equity securities available for sale: | | | | | | | | | | | | |
Common stock | | 2,401 | | - | | - | | - | | - | | 2,401 |
Preferred stock | | 22 | | - | | - | | - | | - | | 22 |
Mutual funds | | 491 | | 1 | | - | | - | | - | | 492 |
Total equity securities available for sale | | 2,914 | | 1 | | - | | - | | - | | 2,915 |
Other equity securities | | 906 | | 1 | | 14 | | - | | - | | 921 |
Mortgage and other loans receivable | | - | | - | | 11 | | - | | - | | 11 |
Other invested assets | | 2 | | 4,256 | | 4,654 | | - | | - | | 8,912 |
Derivative assets: | | | | | | | | | | | | |
Interest rate contracts | | - | | 3,150 | | 12 | | - | | - | | 3,162 |
Foreign exchange contracts | | - | | 766 | | - | | - | | - | | 766 |
Equity contracts | | 91 | | 32 | | 54 | | - | | - | | 177 |
Commodity contracts | | - | | - | | - | | - | | - | | - |
Credit contracts | | - | | - | | 3 | | - | | - | | 3 |
Other contracts | | - | | 2 | | 21 | | - | | - | | 23 |
Counterparty netting and cash collateral | | - | | - | | - | | (1,268) | | (1,554) | | (2,822) |
Total derivative assets | | 91 | | 3,950 | | 90 | | (1,268) | | (1,554) | | 1,309 |
Short-term investments | | 1,416 | | 1,175 | | - | | - | | - | | 2,591 |
Separate account assets | | 73,699 | | 5,875 | | - | | - | | - | | 79,574 |
| | | | | | | | | | | | | | | | | | | |
| | |
December 31, 2013
(in millions)
| | Level 1
| | Level 2
| | Level 3
| | Counterparty
Netting(a)
| | Cash
Collateral(b)
| | Total
| |
|---|
| | |
Assets: | | | | | | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 133 | | $ | 3,062 | | $ | – | | $ | – | | $ | – | | $ | 3,195 | |
Obligations of states, municipalities and political subdivisions | | | – | | | 28,300 | | | 1,080 | | | – | | | – | | | 29,380 | |
Non-U.S. governments | | | 508 | | | 21,985 | | | 16 | | | – | | | – | | | 22,509 | |
Corporate debt | | | – | | | 143,297 | | | 1,255 | | | – | | | – | | | 144,552 | |
RMBS | | | – | | | 21,207 | | | 14,941 | | | – | | | – | | | 36,148 | |
CMBS | | | – | | | 5,747 | | | 5,735 | | | – | | | – | | | 11,482 | |
CDO/ABS | | | – | | | 4,034 | | | 6,974 | | | – | | | – | | | 11,008 | |
| | |
Total bonds available for sale | | | 641 | | | 227,632 | | | 30,001 | | | – | | | – | | | 258,274 | |
| | |
Other bond securities: | | | | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | | 78 | | | 5,645 | | | – | | | – | | | – | | | 5,723 | |
Obligations of states, municipalities and political subdivisions | | | – | | | 121 | | | – | | | – | | | – | | | 121 | |
Non-U.S. governments | | | – | | | 2 | | | – | | | – | | | – | | | 2 | |
Corporate debt | | | – | | | 1,169 | | | – | | | – | | | – | | | 1,169 | |
RMBS | | | – | | | 1,326 | | | 937 | | | – | | | – | | | 2,263 | |
CMBS | | | – | | | 509 | | | 844 | | | – | | | – | | | 1,353 | |
CDO/ABS | | | – | | | 3,158 | | | 8,834 | | | – | | | – | | | 11,992 | |
| | |
Total other bond securities | | | 78 | | | 11,930 | | | 10,615 | | | – | | | – | | | 22,623 | |
| | |
Equity securities available for sale: | | | | | | | | | | | | | | | | | | | |
Common stock | | | 3,218 | | | – | | | 1 | | | – | | | – | | | 3,219 | |
Preferred stock | | | – | | | 27 | | | – | | | – | | | – | | | 27 | |
Mutual funds | | | 408 | | | 2 | | | – | | | – | | | – | | | 410 | |
| | |
Total equity securities available for sale | | | 3,626 | | | 29 | | | 1 | | | – | | | – | | | 3,656 | |
| | |
Other equity securities | | | 750 | | | 84 | | | – | | | – | | | – | | | 834 | |
Mortgage and other loans receivable | | | – | | | – | | | – | | | – | | | – | | | – | |
Other invested assets | | | 1 | | | 2,667 | | | 5,930 | | | – | | | – | | | 8,598 | |
Derivative assets: | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | 14 | | | 3,716 | | | 41 | | | – | | | – | | | 3,771 | |
Foreign exchange contracts | | | – | | | 52 | | | – | | | – | | | – | | | 52 | |
Equity contracts | | | 151 | | | 106 | | | 49 | | | – | | | – | | | 306 | |
Commodity contracts | | | – | | | – | | | 1 | | | – | | | – | | | 1 | |
Credit contracts | | | – | | | – | | | 55 | | | – | | | – | | | 55 | |
Other contracts | | | – | | | 1 | | | 33 | | | – | | | – | | | 34 | |
Counterparty netting and cash collateral | | | – | | | – | | | – | | | (1,734 | ) | | (820 | ) | | (2,554 | ) |
| | |
Total derivative assets | | | 165 | | | 3,875 | | | 179 | | | (1,734 | ) | | (820 | ) | | 1,665 | |
| | |
Short-term investments | | | 332 | | | 5,981 | | | – | | | – | | | – | | | 6,313 | |
Separate account assets | | | 67,708 | | | 3,351 | | | – | | | – | | | – | | | 71,059 | |
Other assets | | | – | | | 418 | | | – | | | – | | | – | | | 418 | |
| | |
Total | | $ | 73,301 | | $ | 255,967 | | $ | 46,726 | | $ | (1,734 | ) | $ | (820 | ) | $ | 373,440 | |
| | |
Liabilities: | | | | | | | | | | | | | | | | | | | |
Policyholder contract deposits | | $ | – | | $ | 72 | | $ | 312 | | $ | – | | $ | – | | $ | 384 | |
Derivative liabilities: | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | – | | | 3,661 | | | 141 | | | – | | | – | | | 3,802 | |
Foreign exchange contracts | | | – | | | 319 | | | – | | | – | | | – | | | 319 | |
Equity contracts | | | – | | | 101 | | | – | | | – | | | – | | | 101 | |
Commodity contracts | | | – | | | 5 | | | – | | | – | | | – | | | 5 | |
Credit contracts | | | – | | | – | | | 1,335 | | | – | | | – | | | 1,335 | |
Other contracts | | | – | | | 25 | | | 142 | | | – | | | – | | | 167 | |
Counterparty netting and cash collateral | | | – | | | – | | | – | | | (1,734 | ) | | (1,484 | ) | | (3,218 | ) |
| | |
Total derivative liabilities | | | – | | | 4,111 | | | 1,618 | | | (1,734 | ) | | (1,484 | ) | | 2,511 | |
| | |
Long-term debt | | | – | | | 6,377 | | | 370 | | | – | | | – | | | 6,747 | |
Other liabilities | | | 42 | | | 891 | | | – | | | – | | | – | | | 933 | |
| | |
Total | | $ | 42 | | $ | 11,451 | | $ | 2,300 | | $ | (1,734 | ) | $ | (1,484 | ) | $ | 10,575 | |
| | |
AIG 2013 Form 10-K
Total | $ | 79,711 | $ | 241,939 | $ | 42,432 | $ | (1,268) | $ | (1,554) | $ | 361,260 |
Liabilities: | | | | | | | | | | | | |
Policyholder contract deposits | $ | - | $ | 36 | $ | 2,289 | $ | - | $ | - | $ | 2,325 |
Other policyholder funds | | 6 | | - | | - | | - | | - | | 6 |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate contracts | | - | | 2,137 | | 62 | | - | | - | | 2,199 |
Foreign exchange contracts | | - | | 1,197 | | 7 | | - | | - | | 1,204 |
Equity contracts | | - | | 68 | | - | | - | | - | | 68 |
Commodity contracts | | - | | - | | - | | - | | - | | - |
Credit contracts | | - | | - | | 508 | | - | | - | | 508 |
Other contracts | | - | | - | | 69 | | - | | - | | 69 |
Counterparty netting and cash collateral | | - | | - | | - | | (1,268) | | (760) | | (2,028) |
Total derivative liabilities | | - | | 3,402 | | 646 | | (1,268) | | (760) | | 2,020 |
Long-term debt | | - | | 3,487 | | 183 | | - | | - | | 3,670 |
Other liabilities | | - | | 62 | | - | | - | | - | | 62 |
Total | $ | 6 | $ | 6,987 | $ | 3,118 | $ | (1,268) | $ | (760) | $ | 8,083 |
December 31, 2014 | | | | | | | Counterparty | Cash | |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting* | Collateral | | Total |
Assets: | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | |
U.S. government and government sponsored entities | $ | 322 | $ | 2,670 | $ | - | $ | - | $ | - | $ | 2,992 |
Obligations of states, municipalities and political subdivisions | | - | | 25,500 | | 2,159 | | - | | - | | 27,659 |
Non-U.S. governments | | 742 | | 20,323 | | 30 | | - | | - | | 21,095 |
Corporate debt | | - | | 142,550 | | 1,883 | | - | | - | | 144,433 |
RMBS | | - | | 20,715 | | 16,805 | | - | | - | | 37,520 |
CMBS | | - | | 10,189 | | 2,696 | | - | | - | | 12,885 |
CDO/ABS | | - | | 7,165 | | 6,110 | | - | | - | | 13,275 |
Total bonds available for sale | | 1,064 | | 229,112 | | 29,683 | | - | | - | | 259,859 |
Other bond securities: | | | | | | | | | | | | |
U.S. government and government sponsored entities | | 130 | | 5,368 | | - | | - | | - | | 5,498 |
Obligations of states, municipalities and political subdivisions | | - | | 122 | | - | | - | | - | | 122 |
Non-U.S. governments | | - | | 2 | | - | | - | | - | | 2 |
Corporate debt | | - | | 719 | | - | | - | | - | | 719 |
RMBS | | - | | 989 | | 1,105 | | - | | - | | 2,094 |
CMBS | | - | | 708 | | 369 | | - | | - | | 1,077 |
CDO/ABS | | - | | 2,751 | | 7,449 | | - | | - | | 10,200 |
Total other bond securities | | 130 | | 10,659 | | 8,923 | | - | | - | | 19,712 |
Equity securities available for sale: | | | | | | | | | | | | |
Common stock | | 3,626 | | 2 | | 1 | | - | | - | | 3,629 |
Preferred stock | | 25 | | - | | - | | - | | - | | 25 |
Mutual funds | | 738 | | 3 | | - | | - | | - | | 741 |
Total equity securities available for sale | | 4,389 | | 5 | | 1 | | - | | - | | 4,395 |
Other equity securities | | 1,024 | | 25 | | - | | - | | - | | 1,049 |
Mortgage and other loans receivable | | - | | - | | 6 | | - | | - | | 6 |
Other invested assets | | 2 | | 3,742 | | 5,650 | | - | | - | | 9,394 |
Derivative assets: | | | | | | | | | | | | |
Interest rate contracts | | 2 | | 3,729 | | 12 | | - | | - | | 3,743 |
Foreign exchange contracts | | - | | 839 | | 1 | | - | | - | | 840 |
Equity contracts | | 98 | | 58 | | 51 | | - | | - | | 207 |
Commodity contracts | | - | | - | | - | | - | | - | | - |
Credit contracts | | - | | - | | 4 | | - | | - | | 4 |
Other contracts | | - | | - | | 31 | | - | | - | | 31 |
Counterparty netting and cash collateral | | - | | - | | - | | (2,102) | | (1,119) | | (3,221) |
Total derivative assets | | 100 | | 4,626 | | 99 | | (2,102) | | (1,119) | | 1,604 |
Short-term investments | | 584 | | 1,100 | | - | | - | | - | | 1,684 |
Separate account assets | | 73,939 | | 6,097 | | - | | - | | - | | 80,036 |
Total | $ | 81,232 | $ | 255,366 | $ | 44,362 | $ | (2,102) | $ | (1,119) | $ | 377,739 |
Liabilities: | | | | | | | | | | | | |
Policyholder contract deposits | $ | - | $ | 52 | $ | 1,509 | $ | - | $ | - | $ | 1,561 |
Other policyholder funds | | - | | 8 | | - | | - | | - | | 8 |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate contracts | | - | | 3,047 | | 86 | | - | | - | | 3,133 |
Foreign exchange contracts | | - | | 1,482 | | 9 | | - | | - | | 1,491 |
Equity contracts | | - | | 98 | | 4 | | - | | - | | 102 |
Commodity contracts | | - | | 6 | | - | | - | | - | | 6 |
Credit contracts | | - | | - | | 982 | | - | | - | | 982 |
Other contracts | | - | | - | | 90 | | - | | - | | 90 |
Counterparty netting and cash collateral | | - | | - | | - | | (2,102) | | (1,429) | | (3,531) |
Total derivative liabilities | | - | | 4,633 | | 1,171 | | (2,102) | | (1,429) | | 2,273 |
Long-term debt | | - | | 5,253 | | 213 | | - | | - | | 5,466 |
Other liabilities | | 34 | | 316 | | - | | - | | - | | 350 |
Total | $ | 34 | $ | 10,262 | $ | 2,893 | $ | (2,102) | $ | (1,429) | $ | 9,658 |
| | | | | | | | | | | | | | | | | | | |
| | |
December 31, 2012
(in millions)
| | Level 1
| | Level 2
| | Level 3
| | Counterparty
Netting(a)
| | Cash
Collateral(b)
| | Total
| |
|---|
| | |
Assets: | | | | | | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | – | | $ | 3,483 | | $ | – | | $ | – | | $ | – | | $ | 3,483 | |
Obligations of states, municipalities and political subdivisions | | | – | | | 34,681 | | | 1,024 | | | – | | | – | | | 35,705 | |
Non-U.S. governments | | | 1,004 | | | 25,782 | | | 14 | | | – | | | – | | | 26,800 | |
Corporate debt | | | – | | | 149,625 | | | 1,487 | | | – | | | – | | | 151,112 | |
RMBS | | | – | | | 22,730 | | | 11,662 | | | – | | | – | | | 34,392 | |
CMBS | | | – | | | 5,010 | | | 4,905 | | | – | | | – | | | 9,915 | |
CDO/ABS | | | – | | | 3,492 | | | 5,060 | | | – | | | – | | | 8,552 | |
| | |
Total bonds available for sale | | | 1,004 | | | 244,803 | | | 24,152 | | | – | | | – | | | 269,959 | |
| | |
Other bond securities: | | | | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | | 266 | | | 6,528 | | | – | | | – | | | – | | | 6,794 | |
Non-U.S. governments | | | – | | | 2 | | | – | | | – | | | – | | | 2 | |
Corporate debt | | | – | | | 1,320 | | | – | | | – | | | – | | | 1,320 | |
RMBS | | | – | | | 1,331 | | | 396 | | | – | | | – | | | 1,727 | |
CMBS | | | – | | | 1,424 | | | 803 | | | – | | | – | | | 2,227 | |
CDO/ABS | | | – | | | 3,969 | | | 8,545 | | | – | | | – | | | 12,514 | |
| | |
Total other bond securities | | | 266 | | | 14,574 | | | 9,744 | | | – | | | – | | | 24,584 | |
| | |
Equity securities available for sale: | | | | | | | | | | | | | | | | | | | |
Common stock | | | 3,002 | | | 3 | | | 24 | | | – | | | – | | | 3,029 | |
Preferred stock | | | – | | | 34 | | | 44 | | | – | | | – | | | 78 | |
Mutual funds | | | 83 | | | 22 | | | – | | | – | | | – | | | 105 | |
| | |
Total equity securities available for sale | | | 3,085 | | | 59 | | | 68 | | | – | | | – | | | 3,212 | |
| | |
Other equity securities | | | 578 | | | 84 | | | – | | | – | | | – | | | 662 | |
Mortgage and other loans receivable | | | – | | | 134 | | | – | | | – | | | – | | | 134 | |
Other invested assets | | | 125 | | | 1,542 | | | 5,389 | | | – | | | – | | | 7,056 | |
Derivative assets: | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | 2 | | | 5,521 | | | 956 | | | – | | | – | | | 6,479 | |
Foreign exchange contracts | | | – | | | 104 | | | – | | | – | | | – | | | 104 | |
Equity contracts | | | 104 | | | 63 | | | 54 | | | – | | | – | | | 221 | |
Commodity contracts | | | – | | | 144 | | | 1 | | | – | | | – | | | 145 | |
Credit contracts | | | – | | | – | | | 60 | | | – | | | – | | | 60 | |
Other contracts | | | – | | | – | | | 38 | | | – | | | – | | | 38 | |
Counterparty netting and cash collateral | | | – | | | – | | | – | | | (2,467 | ) | | (909 | ) | | (3,376 | ) |
| | |
Total derivative assets | | | 106 | | | 5,832 | | | 1,109 | | | (2,467 | ) | | (909 | ) | | 3,671 | |
| | |
Short-term investments | | | 285 | | | 7,771 | | | – | | | – | | | – | | | 8,056 | |
Separate account assets | | | 54,430 | | | 2,907 | | | – | | | – | | | – | | | 57,337 | |
Other assets | | | – | | | 696 | | | – | | | – | | | – | | | 696 | |
| | |
Total | | $ | 59,879 | | $ | 278,402 | | $ | 40,462 | | $ | (2,467 | ) | $ | (909 | ) | $ | 375,367 | |
| | |
Liabilities: | | | | | | | | | | | | | | | | | | | |
Policyholder contract deposits | | $ | – | | $ | – | | $ | 1,257 | | $ | – | | $ | – | | $ | 1,257 | |
Derivative liabilities: | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | – | | | 5,582 | | | 224 | | | – | | | – | | | 5,806 | |
Foreign exchange contracts | | | – | | | 174 | | | – | | | – | | | – | | | 174 | |
Equity contracts | | | – | | | 114 | | | 7 | | | – | | | – | | | 121 | |
Commodity contracts | | | – | | | 146 | | | – | | | – | | | – | | | 146 | |
Credit contracts | | | – | | | – | | | 2,051 | | | – | | | – | | | 2,051 | |
Other contracts | | | – | | | 6 | | | 200 | | | – | | | – | | | 206 | |
Counterparty netting and cash collateral | | | – | | | – | | | – | | | (2,467 | ) | | (1,976 | ) | | (4,443 | ) |
| | |
Total derivative liabilities | | | – | | | 6,022 | | | 2,482 | | | (2,467 | ) | | (1,976 | ) | | 4,061 | |
| | |
Long-term debt | | | – | | | 7,711 | | | 344 | | | – | | | – | | | 8,055 | |
Other liabilities | | | 30 | | | 1,050 | | | – | | | – | | | – | | | 1,080 | |
| | |
Total | | $ | 30 | | $ | 14,783 | | $ | 4,083 | | $ | (2,467 | ) | $ | (1,976 | ) | $ | 14,453 | |
| | |
(a)* Represents netting of derivative exposures covered by qualifying master netting agreements.
(b) Represents cash collateral posted and received. Securities collateral posted for derivative transactions that is reflected in Fixed maturity securities in the Consolidated Balance Sheet, and collateral received, not reflected in the Consolidated Balance Sheet, was $1.3 billion and $120 million, respectively, at December 31, 2013 and $1.9 billion and $299 million, respectively, at December 31, 2012.
Transfers of Level 1 and Level 2 Assets and Liabilities
Our policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. During the years ended December 31, 20132015 and 2012,2014, we transferred $944$695 million and $464$590 million,
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
respectively, of securities issued by Non-U.S. government entities from Level 1 to Level 2, because they are no longer considered actively traded. For similar reasons, during the years ended December 31, 20132015 and 2012,2014, we transferred $356$181 million and $888$107 million, respectively, of securities issued by the U.S. government and government-sponsoredgovernment‑sponsored entities from Level 1 to Level 2. We hadThere were no material transfers from Level 2 to Level 1 during the years ended December 31, 20132015 and 2012.2014.
Changes in Level 3 Recurring Fair Value Measurements
The following tables present changes during the years ended December 31, 20132015 and 20122014 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities in the Consolidated Balance Sheets at December 31, 20132015 and 2012:2014:
| | | | Net | | | | | | | | | | | | Changes in |
| | | | Realized and | | | | | | | | | | | | Unrealized Gains |
| | | | Unrealized | | | | Purchases, | | | | | | | | (Losses) Included |
| | Fair Value | | Gains (Losses) | | Other | | Sales, | | Gross | | Gross | | Fair Value | | in Income on |
| | Beginning | | Included | | Comprehensive | | Issues and | | Transfers | | Transfers | | End | | Instruments Held |
(in millions) | | of Year | | in Income | | Income (Loss) | | Settlements, Net | | In | | Out | | of Year | | at End of Year |
December 31, 2015 | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | |
Obligations of states, municipalities | | | | | | | | | | | | | | | | |
and political subdivisions | $ | 2,159 | $ | 1 | $ | (85) | $ | 154 | $ | - | $ | (105) | $ | 2,124 | $ | - |
Non-U.S. governments | | 30 | | - | | (7) | | 10 | | - | | (1) | | 32 | | - |
Corporate debt | | 1,883 | | 15 | | (109) | | (210) | | 1,515 | | (1,724) | | 1,370 | | - |
RMBS | | 16,805 | | 1,052 | | (512) | | (808) | | - | | - | | 16,537 | | - |
CMBS | | 2,696 | | 77 | | (95) | | 118 | | - | | (211) | | 2,585 | | - |
CDO/ABS | | 6,110 | | 149 | | (258) | | 300 | | 7 | | (139) | | 6,169 | | - |
Total bonds available for sale | | 29,683 | | 1,294 | | (1,066) | | (436) | | 1,522 | | (2,180) | | 28,817 | | - |
Other bond securities: | | | | | | | | | | | | | | | | |
Corporate debt | | - | | - | | - | | 1 | | 16 | | - | | 17 | | - |
RMBS | | 1,105 | | 32 | | - | | 460 | | 43 | | (59) | | 1,581 | | (27) |
CMBS | | 369 | | (3) | | - | | (177) | | 4 | | - | | 193 | | (13) |
CDO/ABS | | 7,449 | | 646 | | - | | (1,658) | | 698 | | (80) | | 7,055 | | (87) |
Total other bond securities | | 8,923 | | 675 | | - | | (1,374) | | 761 | | (139) | | 8,846 | | (127) |
Equity securities available for sale: | | | | | | | | | | | | | | | | |
Common stock | | 1 | | 2 | | - | | (3) | | - | | - | | - | | - |
Preferred stock | | - | | - | | - | | - | | - | | - | | - | | - |
Total equity securities available for sale | | 1 | | 2 | | - | | (3) | | - | | - | | - | | - |
Other equity securities | | - | | (1) | | - | | (7) | | 22 | | - | | 14 | | (2) |
Mortgage and other loans receivable | | 6 | | - | | - | | 5 | | - | | - | | 11 | | - |
Other invested assets | | 5,650 | | 435 | | (789) | | (530) | | 117 | | (229) | | 4,654 | | - |
Total | $ | 44,263 | $ | 2,405 | $ | (1,855) | $ | (2,345) | $ | 2,422 | $ | (2,548) | $ | 42,342 | $ | (129) |
Liabilities: | | | | | | | | | | | | | | | | |
Policyholder contract deposits | $ | (1,509) | $ | (315) | $ | - | $ | (465) | $ | - | $ | - | $ | (2,289) | $ | 64 |
Derivative liabilities, net: | | | | | | | | | | | | | | | | |
Interest rate contracts | | (74) | | - | | - | | 24 | | - | | - | | (50) | | (1) |
Foreign exchange contracts | | (8) | | 1 | | - | | - | | - | | - | | (7) | | 1 |
Equity contracts | | 47 | | 2 | | - | | 5 | | - | | - | | 54 | | (3) |
Commodity contracts | | - | | - | | - | | - | | - | | - | | - | | - |
Credit contracts | | (978) | | 186 | | - | | 287 | | - | | - | | (505) | | 95 |
Other contracts | | (59) | | 79 | | - | | (68) | | - | | - | | (48) | | 76 |
Total derivative liabilities, net(a) | | (1,072) | | 268 | | - | | 248 | | - | | - | | (556) | | 168 |
Long-term debt(b) | | (213) | | 10 | | - | | 20 | | - | | - | | (183) | | 17 |
Total | $ | (2,794) | $ | (37) | $ | - | $ | (197) | $ | - | $ | - | $ | (3,028) | $ | 249 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(in millions)
| | Fair Value
Beginning of
Year(a)
| | Net
Realized and
Unrealized
Gains (Losses)
Included
in Income
| | Other
Comprehensive
Income (Loss)
| | Purchases,
Sales,
Issues and
Settlements, Net
| | Gross
Transfers
In
| | Gross
Transfers
Out
| | Fair Value
End
of Year
| | Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Year
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of states, municipalities and political subdivisions | | $ | 1,024 | | $ | 29 | | $ | (175 | ) | $ | 403 | | $ | – | | $ | (201 | ) | $ | 1,080 | | $ | – | |
Non-U.S. governments | | | 14 | | | – | | | (1 | ) | | 3 | | | 1 | | | (1 | ) | | 16 | | | – | |
Corporate debt | | | 1,487 | | | 8 | | | (19 | ) | | (176 | ) | | 450 | | | (495 | ) | | 1,255 | | | – | |
RMBS | | | 11,662 | | | 867 | | | 466 | | | 1,818 | | | 186 | | | (58 | ) | | 14,941 | | | – | |
CMBS | | | 5,124 | | | 24 | | | 100 | | | 375 | | | 161 | | | (49 | ) | | 5,735 | | | – | |
CDO/ABS | | | 4,841 | | | 161 | | | 9 | | | 1,946 | | | 901 | | | (884 | ) | | 6,974 | | | – | |
| | |
Total bonds available for sale | | | 24,152 | | | 1,089 | | | 380 | | | 4,369 | | | 1,699 | | | (1,688 | ) | | 30,001 | | | – | |
| | |
Other bond securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
RMBS | | | 396 | | | 66 | | | – | | | 208 | | | 267 | | | – | | | 937 | | | (2 | ) |
CMBS | | | 812 | | | 67 | | | – | | | (200 | ) | | 279 | | | (114 | ) | | 844 | | | 29 | |
CDO/ABS | | | 8,536 | | | 1,527 | | | – | | | (2,044 | ) | | 843 | | | (28 | ) | | 8,834 | | | 681 | |
| | |
Total other bond securities | | | 9,744 | | | 1,660 | | | – | | | (2,036 | ) | | 1,389 | | | (142 | ) | | 10,615 | | | 708 | |
| | |
Equity securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock | | | 24 | | | 7 | | | (8 | ) | | (22 | ) | | – | | | – | | | 1 | | | – | |
Preferred stock | | | 44 | | | – | | | 3 | | | (47 | ) | | – | | | – | | | – | | | – | |
| | |
Total equity securities available for sale | | | 68 | | | 7 | | | (5 | ) | | (69 | ) | | – | | | – | | | 1 | | | – | |
| | |
Other invested assets | | | 5,389 | | | 208 | | | 237 | | | 64 | | | 344 | | | (312 | ) | | 5,930 | | | – | |
| | |
Total | | $ | 39,353 | | $ | 2,964 | | $ | 612 | | $ | 2,328 | | $ | 3,432 | | $ | (2,142 | ) | $ | 46,547 | | $ | 708 | |
| | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Policyholder contract deposits | | $ | (1,257 | ) | $ | 744 | | $ | (1 | ) | $ | 202 | | $ | – | | $ | – | | $ | (312 | ) | $ | 104 | |
Derivative liabilities, net: | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | | 732 | | | 19 | | | – | | | (851 | ) | | – | | | – | | | (100 | ) | | 35 | |
Equity contracts | | | 47 | | | 74 | | | – | | | (20 | ) | | 1 | | | (53 | ) | | 49 | | | 30 | |
Commodity contracts | | | 1 | | | – | | | – | | | – | | | – | | | – | | | 1 | | | (1 | ) |
Credit contracts | | | (1,991 | ) | | 567 | | | – | | | 144 | | | – | | | – | | | (1,280 | ) | | 711 | |
Other contracts | | | (162 | ) | | 42 | | | 15 | | | (2 | ) | | (2 | ) | | – | | | (109 | ) | | 7 | |
| | |
Total derivative liabilities, net | | | (1,373 | ) | | 702 | | | 15 | | | (729 | ) | | (1 | ) | | (53 | ) | | (1,439 | ) | | 782 | |
| | |
Long-term debt | | | (344 | ) | | (137 | ) | | – | | | 38 | | | (2 | ) | | 75 | | | (370 | ) | | (30 | ) |
| | |
Total | | $ | (2,974 | ) | $ | 1,309 | | $ | 14 | | $ | (489 | ) | $ | (3 | ) | $ | 22 | | $ | (2,121 | ) | $ | 856 | |
| | |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / NOTE 5. note 4. FAIR VALUE MEASUREMENTS
| | | | | Net | | | | | | | | | | | | Changes in |
| | | | | Realized and | | | | | | | | | | | | Unrealized Gains |
| | | | | Unrealized | | | | Purchases, | | | | | | | | (Losses) Included |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value | | Gains (Losses) | | Other | | Sales, | | Gross | | Gross | | Fair Value | | in Income on |
| | | | | Beginning | | Included | | Comprehensive | | Issues and | | Transfers | | Transfers | | End | | Instruments Held |
(in millions)
| | Fair Value
Beginning
of Year*
| | Net
Realized and
Unrealized
Gains (Losses)
Included
in Income
| | Other
Comprehensive
Income (Loss)
| | Purchases,
Sales,
Issues and
Settlements, Net
| | Gross
Transfers
In
| | Gross
Transfers
Out
| | Fair Value
End
of Year
| | Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Year
| | | of Year | | in Income | | Income (Loss) | | Settlements, Net | | In | | Out | | of Year | | at End of Year |
|---|
| | | |
December 31, 2012 | | |
December 31, 2014 | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | | |
Obligations of states, municipalities and political subdivisions | | $ | 960 | | $ | 48 | | $ | 12 | | $ | 84 | | $ | 70 | | $ | (150 | ) | $ | 1,024 | | $ | – | | |
Obligations of states, municipalities | | | | | | | | | | | | | | | | | |
and political subdivisions(c) | | $ | 1,080 | $ | - | $ | 233 | $ | 914 | $ | 119 | $ | (187) | $ | 2,159 | $ | - |
Non-U.S. governments | | 9 | | 1 | | (1 | ) | | 1 | | 4 | | – | | 14 | | – | | | 16 | | 1 | | (1) | | 9 | | 8 | | (3) | | 30 | | - |
Corporate debt | | 1,935 | | (44 | ) | | 145 | | 24 | | 664 | | (1,237 | ) | | 1,487 | | – | | | 1,255 | | 12 | | 19 | | (257) | | 1,363 | | (509) | | 1,883 | | - |
RMBS | | 10,877 | | 522 | | 2,121 | | (316 | ) | | 952 | | (2,494 | ) | | 11,662 | | – | | | 14,941 | | 1,012 | | 53 | | 796 | | 120 | | (117) | | 16,805 | | - |
CMBS | | 3,955 | | (135 | ) | | 786 | | 636 | | 44 | | (162 | ) | | 5,124 | | – | | | 5,735 | | 69 | | 243 | | 85 | | 83 | | (3,519) | | 2,696 | | - |
CDO/ABS | | 4,220 | | 334 | | 289 | | 10 | | 691 | | (703 | ) | | 4,841 | | – | | | 6,974 | | 86 | | (38) | | 1,545 | | 2,488 | | (4,945) | | 6,110 | | - |
| | | |
Total bonds available for sale | | 21,956 | | 726 | | 3,352 | | 439 | | 2,425 | | (4,746 | ) | | 24,152 | | – | | | 30,001 | | 1,180 | | 509 | | 3,092 | | 4,181 | | (9,280) | | 29,683 | | - |
| | | |
Other bond securities: | | | | | | | | | | | | | | | | | |
Corporate debt | | 7 | | – | | – | | (7 | ) | | – | | – | | – | | – | | | - | | - | | - | | - | | - | | - | | - | | - |
RMBS | | 303 | | 76 | | 2 | | (109 | ) | | 128 | | (4 | ) | | 396 | | 42 | | | 937 | | 40 | | - | | 97 | | 51 | | (20) | | 1,105 | | (13) |
CMBS | | 554 | | 70 | | 2 | | (159 | ) | | 446 | | (101 | ) | | 812 | | 87 | | | 844 | | (6) | | - | | (141) | | 124 | | (452) | | 369 | | (7) |
CDO/ABS | | 8,432 | | 3,683 | | 3 | | (3,968 | ) | | 386 | | – | | 8,536 | | 2,547 | | | 8,834 | | 1,098 | | - | | (1,805) | | 271 | | (949) | | 7,449 | | 318 |
| | | |
Total other bond securities | | 9,296 | | 3,829 | | 7 | | (4,243 | ) | | 960 | | (105 | ) | | 9,744 | | 2,676 | | | 10,615 | | 1,132 | | - | | (1,849) | | 446 | | (1,421) | | 8,923 | | 298 |
| | | |
Equity securities available for sale: | | | | | | | | | | | | | | | | | |
Common stock | | 57 | | 22 | | (28 | ) | | (33 | ) | | 6 | | – | | 24 | | – | | | 1 | | - | | - | | (1) | | 2 | | (1) | | 1 | | - |
Preferred stock | | 99 | | 17 | | (35 | ) | | (36 | ) | | 11 | | (12 | ) | | 44 | | – | | | - | | - | | - | | - | | - | | - | | - | | - |
| | | |
Mutual funds | | | - | | - | | - | | - | | 1 | | (1) | | - | | - |
Total equity securities available for sale | | 156 | | 39 | | (63 | ) | | (69 | ) | | 17 | | (12 | ) | | 68 | | – | | | 1 | | - | | - | | (1) | | 3 | | (2) | | 1 | | - |
| | | |
Mortgage and other loans receivable | | 1 | | – | | – | | (1 | ) | | – | | – | | – | | – | | | - | | - | | - | | 6 | | - | | - | | 6 | | - |
Other invested assets | | 6,618 | | (95 | ) | | 290 | | (257 | ) | | 1,204 | | (2,371 | ) | | 5,389 | | – | | | 5,930 | | 150 | | 398 | | (83) | | 167 | | (912) | | 5,650 | | - |
| | | |
Total | | $ | 38,027 | | $ | 4,499 | | $ | 3,586 | | $ | (4,131 | ) | $ | 4,606 | | $ | (7,234 | ) | $ | 39,353 | | $ | 2,676 | | $ | 46,547 | $ | 2,462 | $ | 907 | $ | 1,165 | $ | 4,797 | $ | (11,615) | $ | 44,263 | $ | 298 |
| | | |
Liabilities: | | | | | | | | | | | | | | | | | |
Policyholder contract deposits | | $ | (918 | ) | $ | (275 | ) | $ | (72 | ) | $ | 8 | | $ | – | | $ | – | | $ | (1,257 | ) | $ | (276 | ) | $ | (312) | $ | (1,127) | $ | (54) | $ | (16) | $ | - | $ | - | $ | (1,509) | $ | (218) |
Derivative liabilities, net: | | | | | | | | | | | | | | | | | |
Interest rate contracts | | 785 | | (11 | ) | | – | | (42 | ) | | – | | – | | 732 | | (56 | ) | | (100) | | (10) | | - | | 39 | | - | | (3) | | (74) | | (10) |
Foreign exchange contracts | | 2 | | – | | – | | (2 | ) | | – | | – | | – | | – | | | - | | 2 | | - | | (10) | | - | | - | | (8) | | 3 |
Equity contracts | | 28 | | 10 | | – | | 12 | | (3 | ) | | – | | 47 | | 10 | | | 49 | | 21 | | - | | (18) | | 48 | | (53) | | 47 | | 13 |
Commodity contracts | | 2 | | 5 | | – | | (6 | ) | | – | | – | | 1 | | 6 | | | 1 | | (1) | | - | | - | | - | | - | | - | | (1) |
Credit contracts | | (3,273 | ) | | 638 | | – | | 644 | | – | | – | | (1,991 | ) | | 1,172 | | | (1,280) | | 263 | | - | | 39 | | - | | - | | (978) | | 268 |
Other contracts | | 33 | | (76 | ) | | (18 | ) | | 15 | | (116 | ) | | – | | (162 | ) | | (46 | ) | | (109) | | 99 | | 53 | | (103) | | 1 | | - | | (59) | | 82 |
| | | |
Total derivatives liabilities, net | | (2,423 | ) | | 566 | | (18 | ) | | 621 | | (119 | ) | | – | | (1,373 | ) | | 1,086 | | |
| | | |
Long-term debt | | (508 | ) | | (411 | ) | | (77 | ) | | 242 | | (14 | ) | | 424 | | (344 | ) | | (105 | ) | |
| | | |
Total derivatives liabilities, net(a) | | | (1,439) | | 374 | | 53 | | (53) | | 49 | | (56) | | (1,072) | | 355 |
Long-term debt(b) | | | (370) | | 94 | | - | | 37 | | (70) | | 96 | | (213) | | 15 |
Total | | $ | (3,849 | ) | $ | (120 | ) | $ | (167 | ) | $ | 871 | | $ | (133 | ) | $ | 424 | | $ | (2,974 | ) | $ | 705 | | $ | (2,121) | $ | (659) | $ | (1) | $ | (32) | $ | (21) | $ | 40 | $ | (2,794) | $ | 152 |
| | | |
*(a) Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.
(b) Includes guaranteed investment agreements (GIAs), notes, bonds, loans and mortgages payable.
(c) Purchases, Sales, Issues and Settlements, Net primarily reflect the effect of consolidating previously unconsolidated securitization vehicles.
Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above are reported in the Consolidated Statements of Income as follows:
| | | | | | | | | | | | | | | Net | | Net Realized | | | | |
| | | | | Investment | | Capital | | Other | | |
(in millions)
| | Net
Investment
Income
| | Net Realized
Capital
Gains (Losses)
| | Other
Income
| | Total
| | | Income | Gains (Losses) | | Income | | Total |
|---|
| | | |
December 31, 2013 | | |
December 31, 2015 | | | | | | | | | |
Bonds available for sale | | $ | 1,227 | $ | (49) | $ | 116 | $ | 1,294 |
Other bond securities | | | 44 | | 3 | | 628 | | 675 |
Equity securities available for sale | | | - | | 2 | | - | | 2 |
Other equity securities | | | - | | - | | (1) | | (1) |
Other invested assets | | | 45 | | 324 | | 66 | | 435 |
Policyholder contract deposits | | | - | | (315) | | - | | (315) |
Derivative liabilities, net | | | - | | (1) | | 269 | | 268 |
Long-term debt | | | - | | - | | 10 | | 10 |
December 31, 2014 | | | | | | | | | |
Bonds available for sale | | $ | 997 | | $ | (17 | ) | $ | 109 | | $ | 1,089 | | $ | 1,236 | $ | (107) | $ | 51 | $ | 1,180 |
Other bond securities | | 187 | | 9 | | 1,464 | | 1,660 | | | 95 | | - | | 1,037 | | 1,132 |
Equity securities available for sale | | – | | 7 | | – | | 7 | | | - | | - | | - | | - |
Other invested assets | | 210 | | (42 | ) | | 40 | | 208 | | | 175 | | (28) | | 3 | | 150 |
Policyholder contract deposits | | – | | 744 | | – | | 744 | | | - | | (1,127) | | - | | (1,127) |
Derivative liabilities, net | | 39 | | 43 | | 620 | | 702 | | | 68 | | 8 | | 298 | | 374 |
Long-term debt | | – | | – | | (137 | ) | | (137 | ) | | - | | - | | 94 | | 94 |
| | | |
December 31, 2012 | | |
Bonds available for sale | | $ | 906 | | $ | (395 | ) | $ | 215 | | $ | 726 | | |
Other bond securities | | 3,303 | | – | | 526 | | 3,829 | | |
Equity securities available for sale | | – | | 39 | | – | | 39 | | |
Other invested assets | | 54 | | (210 | ) | | 61 | | (95 | ) | |
Policyholder contract deposits | | – | | (275 | ) | | – | | (275 | ) | |
Derivative liabilities, net | | 3 | | 26 | | 537 | | 566 | | |
Long-term debt | | – | | – | | (411 | ) | | (411 | ) | |
| | | |
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
The following table presents the gross components of purchases, sales, issues and settlements, net, shown above:
| | | | | | | | Purchases, |
| | | | | | | | Sales, Issues and |
(in millions) | | Purchases | | Sales | | Settlements | | Settlements, Net(a) |
December 31, 2015 | | | | | | | | |
Assets: | | | | | | | | |
Bonds available for sale: | | | | | | | | |
Obligations of states, municipalities and political subdivisions | $ | 279 | $ | (37) | $ | (88) | $ | 154 |
Non-U.S. governments | | 18 | | (1) | | (7) | | 10 |
Corporate debt | | 221 | | (60) | | (371) | | (210) |
RMBS | | 2,215 | | (194) | | (2,829) | | (808) |
CMBS | | 273 | | (28) | | (127) | | 118 |
CDO/ABS | | 1,400 | | (210) | | (890) | | 300 |
Total bonds available for sale | | 4,406 | | (530) | | (4,312) | | (436) |
Other bond securities: | | | | | | | | |
Corporate debt | | - | | - | | 1 | | 1 |
RMBS | | 655 | | (22) | | (173) | | 460 |
CMBS | | - | | (79) | | (98) | | (177) |
CDO/ABS | | 242 | | (380) | | (1,520) | | (1,658) |
Total other bond securities | | 897 | | (481) | | (1,790) | | (1,374) |
Equity securities available for sale | | - | | (2) | | (1) | | (3) |
Other equity securities | | - | | - | | (7) | | (7) |
Mortgage and other loans receivable | | 5 | | - | | - | | 5 |
Other invested assets | | 682 | | (587) | | (625) | | (530) |
Total assets | $ | 5,990 | $ | (1,600) | $ | (6,735) | $ | (2,345) |
Liabilities: | | | | | | | | |
Policyholder contract deposits | $ | - | $ | (442) | $ | (23) | $ | (465) |
Derivative liabilities, net | | 19 | | - | | 229 | | 248 |
Long-term debt(b) | | - | | - | | 20 | | 20 |
Total liabilities | $ | 19 | $ | (442) | $ | 226 | $ | (197) |
| | | | |
(in millions)
| | Purchases
| | Sales
| | Settlements
| | Purchases,
Sales, Issues and
Settlements, Net(a)
| | |
|---|
| | | |
December 31, 2013 | | |
December 31, 2014 | | | | | | | | | |
Assets: | | | | | | | | | |
Bonds available for sale: | | | | | | | | | |
Obligations of states, municipalities and political subdivisions | | $ | 541 | | $ | (138 | ) | $ | – | | $ | 403 | | |
Obligations of states, municipalities and political subdivisions(c) | | $ | 1,041 | $ | (35) | $ | (92) | $ | 914 |
Non-U.S. governments | | 9 | | – | | (6 | ) | | 3 | | | 12 | | - | | (3) | | 9 |
Corporate debt | | 487 | | (114 | ) | | (549 | ) | | (176 | ) | | 148 | | (8) | | (397) | | (257) |
RMBS | | 4,424 | | (266 | ) | | (2,340 | ) | | 1,818 | | | 3,301 | | (124) | | (2,381) | | 796 |
CMBS | | 1,023 | | (188 | ) | | (460 | ) | | 375 | | | 368 | | (224) | | (59) | | 85 |
CDO/ABS | | 2,662 | | (159 | ) | | (557 | ) | | 1,946 | | | 2,760 | | (70) | | (1,145) | | 1,545 |
| | | |
Total bonds available for sale | | 9,146 | | (865 | ) | | (3,912 | ) | | 4,369 | | | 7,630 | | (461) | | (4,077) | | 3,092 |
| | | |
Other bond securities: | | | | | | | | | |
RMBS | | 350 | | (12 | ) | | (130 | ) | | 208 | | |
CMBS | | 24 | | (71 | ) | | (153 | ) | | (200 | ) | |
CDO/ABS | | 353 | | (72 | ) | | (2,325 | ) | | (2,044 | ) | |
| | | |
Total other bond securities | | 727 | | (155 | ) | | (2,608 | ) | | (2,036 | ) | |
| | | |
Equity securities available for sale | | 58 | | (12 | ) | | (115 | ) | | (69 | ) | |
Other invested assets | | 882 | | (9 | ) | | (809 | ) | | 64 | | |
| | | |
Total assets | | $ | 10,813 | | $ | (1,041 | ) | $ | (7,444 | ) | $ | 2,328 | | |
| | | |
Liabilities: | | |
Policyholder contract deposits | | $ | – | | $ | (26 | ) | $ | 228 | | $ | 202 | | |
Derivative liabilities, net | | 10 | | (1 | ) | | (738 | ) | | (729 | ) | |
Long-term debt(c) | | – | | – | | 38 | | 38 | | |
| | | |
Total liabilities | | $ | 10 | | $ | (27 | ) | $ | (472 | ) | $ | (489 | ) | |
| | | |
December 31, 2012 | | |
Assets: | | |
Bonds available for sale: | | |
Obligations of states, municipalities and political subdivisions | | $ | 477 | | $ | (219 | ) | $ | (174 | ) | $ | 84 | | |
Non-U.S. governments | | 5 | | (3 | ) | | (1 | ) | | 1 | | |
Corporate debt | | 283 | | (75 | ) | | (184 | ) | | 24 | | | - | | - | | - | | - |
RMBS | | 2,308 | | (723 | ) | | (1,901 | ) | | (316 | ) | | 211 | | (31) | | (83) | | 97 |
CMBS | | 1,137 | | (318 | ) | | (183 | ) | | 636 | | | - | | (16) | | (125) | | (141) |
CDO/ABS | | 1,120 | | (4 | ) | | (1,106 | ) | | 10 | | | 55 | | (21) | | (1,839) | | (1,805) |
| | | |
Total bonds available for sale | | 5,330 | | (1,342 | ) | | (3,549 | ) | | 439 | | |
| | | |
Other bond securities: | | |
Corporate debt | | – | | – | | (7 | ) | | (7 | ) | |
RMBS | | – | | (45 | ) | | (64 | ) | | (109 | ) | |
CMBS | | 225 | | (106 | ) | | (278 | ) | | (159 | ) | |
CDO/ABS(b) | | 7,382 | | (21 | ) | | (11,329 | ) | | (3,968 | ) | |
| | | |
Total other bond securities | | 7,607 | | (172 | ) | | (11,678 | ) | | (4,243 | ) | | 266 | | (68) | | (2,047) | | (1,849) |
| | | |
Equity securities available for sale | | 67 | | (56 | ) | | (80 | ) | | (69 | ) | | - | | - | | (1) | | (1) |
Mortgage and other loans receivable | | – | | – | | (1 | ) | | (1 | ) | | 6 | | - | | - | | 6 |
Other invested assets | | 900 | | (100 | ) | | (1,057 | ) | | (257 | ) | | 776 | | (25) | | (834) | | (83) |
| | | |
Total assets | | $ | 13,904 | | $ | (1,670 | ) | $ | (16,365 | ) | $ | (4,131 | ) | $ | 8,678 | $ | (554) | $ | (6,959) | $ | 1,165 |
| | | |
Liabilities: | | | | | | | | | |
Policyholder contract deposits | | $ | – | | $ | (25 | ) | $ | 33 | | $ | 8 | | $ | - | $ | (149) | $ | 133 | $ | (16) |
Derivative liabilities, net | | 11 | | (2 | ) | | 612 | | 621 | | | 2 | | (3) | | (52) | | (53) |
Long-term debt(c) | | – | | – | | 242 | | 242 | | |
| | | |
Long-term debt(b) | | | - | | - | | 37 | | 37 |
Total liabilities | | $ | 11 | | $ | (27 | ) | $ | 887 | | $ | 871 | | $ | 2 | $ | (152) | $ | 118 | $ | (32) |
| | | |
(a) There were no issuances during yearthe years ended December 31, 20132015 and 2012.2014.
(b) Includes $7.1 billion of securities purchased through the FRBNY's auction of ML III assets.
(c) Includes GIAs, notes, bonds, loans and mortgages payable.
AIG 2013 Form 10-K(c) Purchases primarily reflect the effect of consolidating previously unconsolidated securitization vehicles.
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at December 31, 20132015 and 20122014 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities) inputs..
Transfers of Level 3 Assets and Liabilities
We record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. As a result, theThe Net realized and unrealized gains (losses) included in income (loss) or otherOther comprehensive income (loss) and as shown in the table above excludes $15 million and $143$2 million of net losses and $22 million of net gains related to assets and liabilities transferred into Level 3 during 20132015 and 2012,2014, respectively, and includes $44$36 million of net losses and $92$62 million of net gains related to assets and liabilities transferred out of Level 3 during 20132015 and 2012,2014, respectively.
Transfers of Level 3 Assets
During the years ended December 31, 20132015 and 2012,2014, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS, CDO, CDO/ABS, and investments in hedge funds and private equity funds.
•The transfer of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to decreases in market transparency and liquidity for individual security types.
•- Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity. The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to decreases in market transparency and liquidity for individual
security types. Certain investments in hedge funds were transferred into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.
•Certain private equity fund investments were transferred into Level 3 due to these investments now being carried at fair value and no longer being accounted for using the equity method of accounting.Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may beaccounting due to a significant increasechange in percentage ownership, or as a result of limited market activity for the asset, a specific event, one or more significant input(s) becoming observable or a long-term interest rate significantdue to a valuation becoming short-term and thus observable. In addition, transfers out of Level 3 assets also occur when investments are no longer carried at fair value as the result of a change in the applicable accounting methodology, given changes in the nature and extent of our ownership interest.fund-imposed redemption restrictions.
During the years ended December 31, 20132015 and 2012,2014, transfers out of Level 3 assets primarily related toincluded CMBS, CDO/ABS, RMBS, certain investments in municipal securities, private placement and other corporate debt, RMBS, CMBS, CDO/ABS, and investments in hedge funds and private equity funds.
•- Transfers of certain investments in municipal securities, corporate debt, RMBS, CMBS
CDO and certain CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments.
•- Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.
•- The
removal or easing of fund-imposed redemption restrictions, as well as certain fund investments becoming subject to the equity method of accounting resulted in the transfertransfers of certain hedge fund and private equity fund investments out of Level 3 assets.
AIG 2013 Form 10-K
Tableassets were primarily the result of Contents
easing of certain fund-imposed redemption restrictions.
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Transfers of Level 3 Liabilities
There were no significant transfers of derivative or other liabilities into or out of Level 3 for the yearyears ended December 31, 2013.2015 and 2014.
Because we present carrying values of our derivative positions on a net basis in the table above, transfers into Level 3 liabilities for the year ended December 31, 2012 primarily related to certain derivative assets transferred out of Level 3 because of the presence of observable inputs on certain forward commitments and options. During the year ended December 31, 2012, certain notes payable were transferred out of Level 3 liabilities because input parameters for the pricing of these liabilities became more observable as a result of market movements and portfolio aging. There were no significant transfers of derivative liabilities out of Level 3 for the year ended December 31, 2012.
We use various hedging techniques to manage risks associated with certain positions, including those classified within Level 3. Such techniques may include the purchase or sale of financial instruments that are classified within Level 1 and/or Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities classified within Level 3 presented in the table above do not reflect the related realized or unrealized gains (losses) on hedging instruments that are classified within Level 1 and/or Level 2.
Quantitative Information about Level 3 Fair Value Measurements
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:
| | Fair Value at | | | |
| | December 31, | Valuation | | Range |
(in millions) | | 2015 | Technique | Unobservable Input(b) | (Weighted Average ) |
Assets: | | | | | |
| | | | | |
Obligations of states, | $ | 1,217 | Discounted cash flow | Yield | 4.32% - 5.10% (4.71%) |
municipalities and | | | | | |
political subdivisions | | | | | |
| | | | | |
Corporate debt | | 642 | Discounted cash flow | Yield | 5.63% - 12.45% (9.04%) |
| | | | | |
| | | | | |
RMBS(a) | | 17,280 | Discounted cash flow | Constant prepayment rate | 0.99% - 8.95% (4.97%) |
| | | | Loss severity | 47.21% - 79.50% (63.35%) |
| | | | Constant default rate | 3.49% - 9.04% (6.26%) |
| | | | Yield | 3.13% - 6.14% (4.63%) |
| | | | | |
CDO/ABS(a) | | 3,338 | Discounted cash flow | Yield | 3.41% - 4.98% (4.19%) |
| | | | | |
CMBS | | 2,388 | Discounted cash flow | Yield | 0.00% - 17.65% (6.62%) |
| | | | | |
Liabilities: | | | | | |
| | | | | |
Embedded derivatives | | | | | |
within Policyholder | | | | | |
| | | | | | | | | |
| |
(in millions)
| | Fair Value at
December 31,
2013
| | Valuation
Technique
| | Unobservable Input(a)
| | Range
(Weighted Average)(a)
|
|---|
| |
Assets: | | | | | | | | | |
| | | | | | | | | | |
Corporate debt | | $ | 788 | | Discounted cash flow | | Yield(b) | | 0.00% – 14.29% (6.64%) |
| | | | | | | | | | |
RMBS | | | 14,419 | | Discounted cash flow | | Constant prepayment rate(c) | | 0.00% – 10.35% (4.97%) |
| | | | | | | Loss severity(c) | | 42.60% – 79.07% (60.84%) |
| | | | | | | Constant default rate(c) | | 3.98% – 12.22% (8.10%) |
| | | | | | | Yield(c) | | 2.54% – 7.40% (4.97%) |
| | | | | | | | | | |
Certain CDO/ABS | | | 5,414 | | Discounted cash flow | | Constant prepayment rate(c) | | 5.20% – 10.80% (8.20%) |
| | | | | | | Loss severity(c) | | 48.60% – 63.40% (56.40%) |
| | | | | | | Constant default rate(c) | | 3.20% – 16.20% (9.00%) |
| | | | | | | Yield(c) | | 5.20% – 11.50% (9.40%) |
| | | | | | | | | | |
CMBS | | | 5,847 | | Discounted cash flow | | Yield(b) | | 0.00% – 14.69% (5.58%) |
| | | | | | | | | | |
CDO/ABS – Direct | | | | | Binomial Expansion | | Recovery rate(b) | | 6.00% – 63.00% (25.00%) |
Investment Book | | | 557 | | Technique (BET) | | Diversity score(b) | | 5 – 35 (12) |
| | | | | | | Weighted average life(b) | | 1.07 – 9.47 years (4.86 years) |
| |
Liabilities: | | | | | | | | | |
| | | | | | | | | | |
Policyholder contract deposits – GMWB | | | 312 | | Discounted cash flow | | Equity implied volatility(b) | | 6.00% – 39.00% |
| | | | | | | Base lapse rate(b) | | 1.00% – 40.00% |
| | | | | | | Dynamic lapse rate(b) | | 0.20% – 60.00% |
| | | | | | | Mortality rate(b) | | 0.50% – 40.00% |
| | | | | | | Utilization rate(b) | | 0.50% – 25.00% |
| | | | | | | | | | |
Derivative Liabilities – Credit contracts | | | 996 | | BET | | Recovery rate(b) | | 5.00% – 34.00% (17.00%) |
| | | | | | | Diversity score(b) | | 9 – 32 (13) |
| | | | | | | Weighted average life(b) | | 4.50 – 9.47 years (5.63 years) |
| |
AIG 2013 Form 10-K
contract deposits: | | | | | |
| | | | | |
GMWB and GMAB | | 1,234 | Discounted cash flow | Equity volatility | 15.00% - 50.00% |
| | | | Base lapse rate | 1.00% - 17.00% |
| | | | Dynamic lapse rate | 0.20% - 25.50% |
| | | | Mortality multiplier(c) | 80.00% - 104.27% |
| | | | Utilization rate | 0.00% - 70.00% |
| | | | Equity / interest-rate correlation(d) | 20.00% - 40.00% |
| | | | | |
Index Annuities | | 715 | Discounted cash flow | Lapse rate | 0.75% - 66.00% |
| | | | Mortality multiplier(c) | 50.00% - 75.00% |
| | | | | |
Indexed Life | | 332 | Discounted cash flow | Equity volatility | 13.25% to 22.00% |
| | | | Base lapse rate | 2.00% to 19.00% |
| | | | Mortality rate | 0.00% to 40.00% |
| | | | | |
| | | | | |
| | Fair Value at | | | |
| | December 31, | Valuation | | Range |
(in millions) | | 2014 | Technique | Unobservable Input(b) | (Weighted Average) |
Assets: | | | | | |
| | | | | |
Obligations of states, | $ | 1,178 | Discounted cash flow | Yield | 3.9% - 4.62% (4.26%) |
municipalities and | | | | | |
political subdivisions | | | | | |
| | | | | |
Corporate debt | | 1,145 | Discounted cash flow | Yield | 3.46% - 8.75% (6.10%) |
| | | | | |
| | | | | |
RMBS(a) | | 17,353 | Discounted cash flow | Constant prepayment rate | 0.59% - 9.35% (4.97%) |
| | | | Loss severity | 46.04% - 79.56% (62.80%) |
| | | | Constant default rate | 3.67% - 9.96% (6.82%) |
| | | | Yield | 2.67% - 6.64% (4.65%) |
| | | | | |
CDO/ABS(a) | | 5,282 | Discounted cash flow | Yield | 4.70% - 9.70% (7.10%) |
| | | | | |
CMBS | | 2,687 | Discounted cash flow | Yield | 0.00% - 17.29% (6.06%) |
| | | | | |
Liabilities: | | | | | |
| | | | | |
Embedded derivatives | | | | | |
within Policyholder | | | | | |
contract deposits: | | | | | |
| | | | | |
GMWB and GMAB | | 957 | Discounted cash flow | Equity volatility | 6.00% - 39.00% |
| | | | Base lapse rate | 1.00% - 28.00% |
| | | | Dynamic lapse rate | 0.20% - 42.00% |
| | | | Mortality rate | 0.10% - 35.00% |
| | | | Utilization rate | 0.50% - 30.00% |
| | | | | |
Index Annuities | | 294 | Discounted cash flow | Lapse rate | 0.75% - 66.00% |
| | | | Mortality rate | 0.02% - 44.06% |
| | | | | |
Indexed Life | | 259 | Discounted cash flow | Equity volatility | 10.00% to 25.00% |
| | | | Base lapse rate | 2.00% to 19.00% |
| | | | Mortality rate | 0.00% to 20.00% |
Derivative liabilities - | | | | | |
credit contracts(e) | | 791 | BET | Recovery rate | 5.00% - 23.00% (13.00%) |
| | | | Diversity score | 8 - 25 (13) |
| | | | Weighted average life | 2.67 - 10.49 years (4.65 years) |
| | | | | | | | | |
(in millions)
| | Fair Value at
December 31,
2012
| | Valuation
Technique
| | Unobservable Input(a)
| | Range
(Weighted Average)(a)
|
|---|
| |
Assets: | | | | | | | | | |
| | | | | | | | | | |
Corporate debt | | $ | 775 | | Discounted cash flow | | Yield(b) | | 0.08% – 6.55% (3.31%) |
| | | | | | | | | | |
RMBS | | | 10,650 | | Discounted cash flow | | Constant prepayment rate(c) | | 0.00% – 10.76% (5.03%) |
| | | | | | | Loss severity(c) | | 43.70% – 78.72% (61.21%) |
| | | | | | | Constant default rate(c) | | 4.21% – 13.30% (8.75%) |
| | | | | | | Yield(c) | | 2.23% – 9.42% (5.82%) |
| | | | | | | | | | |
Certain CDO/ABS(d) | | | 7,844 | | Discounted cash flow | | Constant prepayment rate(c) | | 0.00% – 32.25% (11.82%) |
| | | | | | | Loss severity(c) | | 0.00% – 29.38% (6.36%) |
| | | | | | | Constant default rate(c) | | 0.00% – 4.05% (1.18%) |
| | | | | | | Yield(c) | | 5.41% – 10.67% (8.04%) |
| | | | | | | | | | |
CMBS | | | 3,251 | | Discounted cash flow | | Yield(b) | | 0.00% – 19.95% (7.76%) |
| | | | | | | | | | |
CDO/ABS – Direct | | | | | Binomial Expansion | | Recovery rate(b) | | 3.00% – 63.00% (27.00%) |
Investment Book | | | 1,205 | | Technique (BET) | | Diversity score(b) | | 4 – 44 (13) |
| | | | | | | Weighted average life(b) | | 1.27 – 9.11 years (4.91 years) |
| |
Liabilities: | | | | | | | | | |
| | | | | | | | | | |
Policyholder contract deposits – GMWB | | | 1,257 | | Discounted cash flow | | Equity implied volatility(b) | | 6.00% – 39.00% |
| | | | | | | Base lapse rate(b) | | 1.00% – 40.00% |
| | | | | | | Dynamic lapse rate(b) | | 0.20% – 60.00% |
| | | | | | | Mortality rate(b) | | 0.50% – 40.00% |
| | | | | | | Utilization rate(b) | | 0.50% – 25.00% |
| | | | | | | | | | |
Derivative Liabilities – Credit contracts | | | 1,436 | | BET | | Recovery rate(b) | | 3.00% – 37.00% (17.00%) |
| | | | | | | Diversity score(b) | | 9 – 38 (14) |
| | | | | | | Weighted average life(b) | | 5.10 – 8.45 years (5.75 years) |
| |
(a) Information received from third-party valuation service providers. The ranges of the unobservable inputs and ranges for the constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us, because there are other factors relevant to the fair values of specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.
(b) Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities.
(c) Information received from third-party valuation service providers.Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table for GMWB and GMAB, and the 1975-1980 Modified Basic Table for index annuities.
(d) YieldAn equity / interest rate correlation factor was added to the only input available for $6.6 billionvaluation model in the fourth quarter of total fair value at December 31, 2012.2015.
(e) Beginning in the third quarter of 2015, we began valuing these instruments using prices obtained from vendors and/or counterparties and discontinued use of the BET model.
The ranges of reported inputs for Obligations of states, municipalities and political subdivisions, Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of plus/minus one standard deviation in either direction from the value-weightedvalue‑weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these investments.Level 3 assets and liabilities.
Sensitivity to Changes in Unobservable Inputs
We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following isparagraphs provide a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply.
AIG 2013 Form 10-KObligations of States, Municipalities and Political Subdivisions
The significant unobservable input used in the fair value measurement of certain investments in obligations of states, municipalities and political subdivisions is yield. In general, increases in the yield would decrease the fair value of investments in obligations of states, municipalities and political subdivisions.
Corporate Debt
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Corporate Debt
Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-tradedpublicly‑traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield.
The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the security. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt.
RMBS and Certain CDO/ABS
The significant unobservable inputs used in fair value measurements of RMBS and certain CDO/ABS valued by third-partythird‑party valuation service providers are constant prepayment rates (CPR), loss severity, constant default rates (CDR), and yield. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in CPR, loss severity, CDR and yield, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.
CMBS
CMBS
The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS.
CDO/ABS — Direct Investment book
The significant unobservable inputs used for certain CDO/ABS securities valued using the BET are recovery rates, diversity score, and the weighted average life of the portfolio. An increase in recovery rates and diversity score will increase the fair value of the portfolio. An increase in the weighted average life will decrease the fair value.
Policyholder contract deposits
Embedded derivatives within Policyholder contract deposits relate to
Embedded derivatives reported within Policyholder contract deposits include guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum accumulation benefits (GMAB) within variable annuity products, and certain enhancements to interest crediting rates based on market indices within equity-indexedindex annuities, indexed life and guaranteed investment contracts (GICs). GMWB represents our largest exposureFor any given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of thesevaluing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives althoughmeasured at fair value:
·Long-term equity volatilities represent equity volatility beyond the carryingperiod for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments. Therefore, the net change in the fair value of the liability fluctuates basedmay either decrease or increase, depending on the performancerelative changes in projected rider fees and projected benefit payments. In 2015, the calculations used to measure equity volatilities for the GMWB and GMAB were updated to provide greater emphasis on current expected market-based volatilities versus historical market volatilities. The implementation of this change reduced the fair value of the GMWB and GMAB liabilities, net of related adjustments to DAC, by approximately $143 million at December 31, 2015, which was more than offset by the addition of an equity / interest rate correlation factor to the valuation model in 2015, as described below. Long-term equity volatility and equity / interest rate correlation are both key inputs in our economic scenario modeling used to value the embedded derivatives.
·Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB and GMAB embedded derivatives. In general, a higher positive correlation assumes that equity markets and therefore, atinterest rates move in a point in time, can be low relativemore correlated fashion, which generally increases the fair value of the liability. Prior to 2015, an assumption of zero correlation was used based on historical data that was mixed as to the exposure. The principal unobservable input used for GMWBsdirection of this correlation over a long period of time. In 2015, we added a positive correlation factor based on current market conditions and embedded derivatives in equity-indexed annuities measured atexpected views of market participants. This change increased the GMWB and GMAB fair value isliabilities, net of related adjustments to DAC, by approximately $155 million at December 31, 2015, which was largely offset by an update to equity implied volatility. For GMWBs, other significant unobservable inputs include basevolatility assumptions, as described above.
·Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value is worth more than their underlying account value). Lapse rates mortalityare also generally assumed to be lower in periods when a surrender charge applies. Increases in assumed lapse rates and utilization rates. Lapse, mortality, and utilizationwill generally decrease the fair value of the liability, as fewer policyholders would persist to collect guaranteed withdrawal amounts, but in certain scenarios, increases in assumed lapse rates may vary significantly depending upon age groups and duration. In general, increases in volatility and utilization rates will increase the fair value of the liability associated with GMWB, while increasesliability.
·Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement assumption. Increases in lapse rates andassumed mortality rates will decrease the fair value of the liability. Significant unobservable inputs usedliability, while lower mortality rate assumptions will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.
·Utilization rate assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the age of the policyholder. Utilization rate assumptions are based on company experience, which includes partial withdrawal behavior. Increases in valuing embedded derivatives within GICs include long-term forward interestassumed utilization rates and foreign exchange rates. Generally,will generally increase the embedded derivative liability for GICs will increase as interest rates decrease or iffair value of the U.S. dollar weakens compared to the euro.
AIG 2013 Form 10-K
Table of Contents
liability.
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
Derivative liabilities —– credit contracts
The significant unobservable inputs used for DerivativesDerivative liabilities —– credit contracts are recovery rates, diversity scores, and the weighted average life of the portfolio. AIG non-performance risk is also considered in the measurement of the liability.
An increase in recovery rates and diversity score will decrease the fair value of the liability. An increase in the weighted average life will increase the fair value measurement of the liability.
Investments in Certain Entities Carried at Fair Value Using Net Asset Value perPer Share
The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share as a practical expedient to measure fair value.
| | December 31, 2015 | | December 31, 2014 |
| | | Fair Value Using Net Asset Value Per Share (or its equivalent) | | | | | Fair Value Using Net Asset Value Per Share (or its equivalent) | | |
| | | | | | | | |
| | | | Unfunded | | | | Unfunded |
(in millions) | Investment Category Includes | | | Commitments | | | | Commitments |
Investment Category | | | | | | | | | | |
Private equity funds: | | | | | | | | | | |
Leveraged buyout | Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage | $ | 1,774 | $ | 436 | | $ | 2,275 | $ | 450 |
| | | | | | | | | | |
Real Estate / Infrastructure | Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities | | 306 | | 213 | | | 384 | | 227 |
| | | | | | | | | | |
Venture capital | Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company | | 107 | | 41 | | | 121 | | 26 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | |
| |
| |
| | December 31, 2013 | | December 31, 2012 | |
|---|
| | (in millions)
| | Investment Category Includes
| | Fair Value
Using Net
Asset Value
Per Share (or
its equivalent)
| | Unfunded
Commitments
| | Fair Value
Using Net
Asset Value
Per Share (or
its equivalent)
| | Unfunded
Commitments
| |
|---|
| | | |
| | Investment Category | | | | | | | | | | | | | | | |
| | Private equity funds: | | | | | | | | | | | | | | | |
| | Leveraged buyout | | Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage | | $ | 2,544 | | $ | 578 | | $ | 2,529 | | $ | 669 | |
| | | | | | | | | | | | | | | | | |
| | Real Estate / Infrastructure | | Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities | | | 346 | | | 86 | | | 251 | | | 52 | |
| | | | | | | | | | | | | | | | | |
| | Venture capital | | Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company | | | 140 | | | 13 | | | 157 | | | 16 | |
| | | | | | | | | | | | | | | | | |
| | Distressed | | Securities of companies that are in default, under bankruptcy protection, or troubled | | | 183 | | | 34 | | | 184 | | | 36 | |
| | | | | | | | | | | | | | | | | |
| | Other | | Includes multi-strategy and mezzanine strategies | | | 134 | | | 238 | | | 112 | | | 100 | |
| | |
| | Total private equity funds | | | | | 3,347 | | | 949 | | | 3,233 | | | 873 | |
| | |
| | Hedge funds: | | | | | | | | | | | | | | | |
| | Event-driven | | Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations | | | 976 | | | 2 | | | 788 | | | 2 | |
| | | | | | | | | | | | | | | | | |
| | Long-short | | Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk | | | 1,759 | | | 11 | | | 1,318 | | | – | |
| | | | | | | | | | | | | | | | | |
| | Macro | | Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions | | | 612 | | | – | | | 320 | | | – | |
| | | | | | | | | | | | | | | | | |
| | Distressed | | Securities of companies that are in default, under bankruptcy protection or troubled | | | 594 | | | 15 | | | 316 | | | – | |
| | | | | | | | | | | | | | | | | |
| | Emerging markets | | Investments in the financial markets of developing countries | | | 287 | | | – | | | – | | | – | |
| | | | | | | | | | | | | | | | | |
| | Other | | Includes multi-strategy and relative value strategies | | | 157 | | | – | | | 66 | | | – | |
| | |
| | Total hedge funds | | | | | 4,385 | | | 28 | | | 2,808 | | | 2 | |
| | |
| | Total | | | | $ | 7,732 | | $ | 977 | | $ | 6,041 | | $ | 875 | |
| | |
Distressed | Securities of companies that are in default, under bankruptcy protection, or troubled | | 146 | | 41 | | | 164 | | 43 |
| | | | | | | | | | |
Other | Includes multi-strategy, mezzanine, and other strategies | | 298 | | 239 | | | 216 | | 234 |
Total private equity funds | | | 2,631 | | 970 | | | 3,160 | | 980 |
Hedge funds: | | | | | | | | | | |
Event-driven | Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations | | 1,194 | | - | | | 1,109 | | - |
| | | | | | | | | | |
Long-short | Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk | | 2,978 | | 25 | | | 2,428 | | 1 |
| | | | | | | | | | |
Macro | Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions | | 555 | | - | | | 498 | | - |
| | | | | | | | | | |
Distressed | Securities of companies that are in default, under bankruptcy protection or troubled | | 699 | | 8 | | | 731 | | 5 |
| | | | | | | | | | |
Emerging markets | Investments in the financial markets of developing countries | | 353 | | - | | | 308 | | - |
| | | | | | | | | | |
Other | Includes multi-strategy, relative value, and other strategies | | 167 | | - | | | 125 | | - |
Total hedge funds | | | 5,946 | | 33 | | | 5,199 | | 6 |
Total | | $ | 8,577 | $ | 1,003 | | $ | 8,359 | $ | 986 |
Private equity fund investments included above are not redeemable, asbecause distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager'smanager’s discretion, typically in one or two-year
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
increments. At December 31, 2013,2015, assuming average original expected lives of 10 years for the funds, 6278 percent of the total fair value using net asset value per share (or its equivalent) presented above would have expected remaining lives of three years or less, 346 percent between four and six years and 416 percent between seven and 10 years.
The hedge fund investments included above are generally redeemable monthly (14 percent), quarterly (44(47 percent), semi-annually (22(14 percent) and annually (20(25 percent), with redemption notices ranging from one day to 180 days. At December 31, 2013,2015, however, investments representing approximately 5746 percent of the total fair value of the hedge fund investments cannot be redeemed, either in whole or in part, because the investments include various contractual restrictions. The majority of these contractual restrictions, which may have been put in place at the fund'sfund’s inception or thereafter, have pre-defined end dates and are generally expected to be lifted by the end of 2015.2016. The fund investments for which redemption is restricted only in part generally relate to certain hedge funds that hold at least one investment that the fund manager deems to be illiquid.
Fair Value Option
Under the fair value option, we may elect to measure at fair value financial assets and financial liabilities that are not otherwise required to be carried at fair value. Subsequent changes in fair value for designated items are reported in earnings. We elect the fair value option for certain hybrid securities given the complexity of bifurcating the economic components associated with the embedded derivatives. Refer to Note 1110 for additional information related to embedded derivatives.
Additionally, beginning in the third quarter of 2012 we electedelect the fair value option for investments in certain private equity funds, hedge funds and other alternative investments when such investments are eligible for this election. We believe this measurement basis is consistent with the applicable accounting guidance used by the respective investment company funds themselves. Refer to Note 65 herein for additional information.
The following table presents the gains or losses recorded related to the eligible instruments for which we elected the fair value option:
Years Ended December 31, | Gain (Loss) |
(in millions) | | 2015 | | 2014 | | 2013 |
Assets: | | | | | | |
Mortgage and other loans receivable | $ | - | $ | - | $ | 3 |
Bond and equity securities | | 616 | | 2,099 | | 1,667 |
Alternative investments(a) | | 36 | | 313 | | 360 |
Other, including Short-term investments | | 2 | | 10 | | 11 |
Liabilities: | | | | | | |
Long-term debt(b) | | (38) | | (269) | | 327 |
Other liabilities | | (3) | | (13) | | (15) |
Total gain | $ | 613 | $ | 2,140 | $ | 2,353 |
| | | | | | | | | | |
| | |
| | Gain (Loss) | |
|---|
Years Ended December 31,
(in millions)
| |
|---|
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Assets: | | | | | | | | | | |
Mortgage and other loans receivable | | $ | 3 | | $ | 47 | | $ | 11 | |
Bond and equity securities | | | 1,667 | | | 2,339 | | | 1,273 | |
Other securities – ML II interest | | | – | | | 246 | | | 42 | |
Other securities – ML III interest | | | – | | | 2,888 | | | (646 | ) |
Retained interest in AIA | | | – | | | 2,069 | | | 1,289 | |
Alternative investments(a) | | | 360 | | | 36 | | | 2 | |
Other, including Short-term investments | | | 11 | | | 20 | | | 33 | |
| | |
Liabilities: | | | | | | | | | | |
Long-term debt(b) | | | 327 | | | (681 | ) | | (966 | ) |
Other liabilities | | | (15 | ) | | (33 | ) | | (67 | ) |
| | |
Total gain | | $ | 2,353 | | $ | 6,931 | | $ | 971 | |
| | |
(a) Includes certain hedge funds, private equity funds and other investment partnerships.
(b) Includes GIAs, notes, bonds and mortgagemortgages payable.
Interest income and dividend income on assets measured under the fair value option are recognized and included in Net investment income in the Consolidated Statements of Income with the exception of activity within AIG'sAIG’s Corporate and Other Operations,category, which is included in Other income. Interest expense on liabilities measured under the fair value option is recognizedreported in interest expenseOther Income in the Consolidated Statements of Income. See Note 6 5 herein for additional information about our policies for recognition, measurement, and disclosure of interest and dividend income and interest expense.
AIG 2013 Form 10-K
Table of Contents
income.
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
During 2015, 2014 and2013 2012 and 2011,, we recognized losses of $54$4 million, losses of $641$32 million and gains of $420$54 million, respectively, attributable to the observable effect of changes in credit spreads on our own liabilities for which the fair value option was elected. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.
The following table presents the difference between fair values and the aggregate contractual principal amounts of mortgage and other loans receivable and long-term borrowings for which the fair value option was elected:
| December 31, 2015 | | December 31, 2014 |
| | | Outstanding | | | | | | Outstanding | | |
(in millions) | Fair Value | Principal Amount | Difference | | Fair Value | Principal Amount | Difference |
Assets: | | | | | | | | | | | | | |
Mortgage and other loans receivable | $ | 11 | $ | 9 | $ | 2 | | $ | 6 | $ | 4 | $ | 2 |
Liabilities: | | | | | | | | | | | | | |
Long-term debt* | $ | 3,670 | $ | 2,675 | $ | 995 | | $ | 5,466 | $ | 4,101 | $ | 1,365 |
| | | | | | | | | | | | | | | | | | | |
| | |
| | December 31, 2013 | | December 31, 2012 | |
|---|
(in millions)
| | Fair Value
| | Outstanding
Principal Amount
| | Difference
| | Fair Value
| | Outstanding
Principal Amount
| | Difference
| |
|---|
| | |
Assets: | | | | | | | | | | | | | | | | | | | |
Mortgage and other loans receivable | | $ | – | | $ | – | | $ | – | | $ | 134 | | $ | 141 | | $ | (7 | ) |
Liabilities: | | | | | | | | | | | | | | | | | | | |
Long-term debt* | | $ | 6,747 | | $ | 5,231 | | $ | 1,516 | | $ | 8,055 | | $ | 5,705 | | $ | 2,350 | |
| | |
* Includes GIAs, notes, bonds, loans and mortgages payable.
There were no mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due or in non-accrual status at December 31, 2013 and 2012.2015 or 2014.
FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS
We measure the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include cost and equity-method investments, commercial mortgage loans, investments in life settlements, collateral securing foreclosed loans andinvestments in real estate and other fixed assets, goodwill and other intangible assets. See NoteNotes 5 and 6 herein for additional information about how we test various asset classes for impairment.
Information regarding the estimation of fair value for financial instruments measured at fair value on a non-recurring basis is discussed below:
•Impairments for Other investments primarily relate to certain investments in affordable housing partnerships, the fair values of which are determined based on remaining tax credits and other residual benefits due from the respective partnerships. Residual benefits include consideration of the fair value of underlying real estate properties, which is determined based on market-appropriate capitalization rates applied to net operating income of the properties. Impairments for Other investments also relate to certain investments in aircraft, the fair values of which are determined based on third party independent appraisals that use industry specific appraisal standards and methodologies.
•Impairments of Investments in Life Settlements are measured using their fair values as determined using a discounted cash flow methodology that incorporates the best available market assumptions for mortality as well as market yields based on reported transactions. Effective December 31, 2015, AIG adopted the Society of Actuaries 2015 Valuation Basic Table (VBT) as the market mortality assumption used to measure fair value of impaired policies.
The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:
|
| |
| |
| |
| | |
|---|
| | | |
| | Assets at Fair Value | | Impairment Charges | | | Assets at Fair Value | | Impairment Charges |
|---|
| | Non-Recurring Basis | | December 31, | | | Non-Recurring Basis | | December 31, |
|---|
(in millions)
| | Level 1
| | Level 2
| | Level 3
| | Total
| | 2013
| | 2012
| | 2011
| | | Level 1 | | Level 2 | | Level 3 | | Total | | | 2015 | | 2014 | | 2013 |
|---|
| | | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | |
Investment real estate | | $ | – | | $ | – | | $ | – | | $ | – | | $ | – | | $ | – | | $ | 18 | | |
December 31, 2015 | | | | | | | | | | | | | | | | |
Other investments | | | – | | | – | | | 1,615 | | | 1,615 | | | 112 | | | 151 | | 327 | | $ | - | $ | - | $ | 1,117 | $ | 1,117 | | $ | 189 | $ | 134 | $ | 112 |
Investments in life settlements | | | – | | | – | | | 896 | | | 896 | | | 971 | | | 309 | | 312 | | | - | | - | | 828 | | 828 | | | 540 | | 201 | | 971 |
Other assets | | | – | | | 11 | | | 48 | | | 59 | | | 31 | | | 11 | | 3 | | | - | | - | | 129 | | 129 | | | 80 | | 7 | | 31 |
| | | |
Total | | $ | – | | $ | 11 | | $ | 2,559 | | $ | 2,570 | | $ | 1,114 | | $ | 471 | | $ | 660 | | $ | - | $ | - | $ | 2,074 | $ | 2,074 | | $ | 809 | $ | 342 | $ | 1,114 |
| | | |
December 31, 2012 | | |
December 31, 2014 | | | | | | | | | | | | | | | | |
Other investments | | $ | – | | $ | – | | $ | 1,930 | | $ | 1,930 | | | | | | | | | | $ | - | $ | - | $ | 790 | $ | 790 | | | | | | | |
Investments in life settlements | | | – | | | – | | | 120 | | | 120 | | | | | | | | | | | - | | - | | 537 | | 537 | | | | | | | |
Other assets | | | – | | | 3 | | | 18 | | | 21 | | | | | | | | | | | - | | - | | 1 | | 1 | | | | | | | |
| | | | | |
Total | | $ | – | | $ | 3 | | $ | 2,068 | | $ | 2,071 | | | | | | | | | | $ | - | $ | - | $ | 1,328 | $ | 1,328 | | | | | | | |
| | | | | |
FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE
Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding insurance contracts and lease contracts) is discussed below:
•
- Mortgage and other loans receivable: Fair values of loans on commercial real estate and other loans receivable
wereare estimated for disclosure purposes using discounted cash flow calculations based on discount rates that we believe market participants would use in determining the price that they would pay for such assets. For certain loans, our current incremental lending rates for similar types of loans are used as the discount rates, because we believe this
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 5. FAIR VALUE MEASUREMENTS
rate approximates the rates market participants would use. Fair values of residential mortgage loans are generally determined based on market prices, using market based adjustments for credit and servicing as appropriate. The fair values of policy loans are generally estimated based on unpaid principal amount as of each reporting date or, in some cases, based on the present value of the loans using a discounted cash flow model.date. No consideration is given to credit risk because policy loans are effectively collateralized by the cash surrender value of the policies.
•Other invested assets: The majority of Other invested assets that are not measured at fair value represent investments in life settlements. The fair value of investments in life settlements is determined using a discounted cash flow methodology that incorporates the best available market assumptions for longevity as well as market yields based on reported transactions. Due to the individual life nature of each investment in life settlements and the illiquidity of the existing market, significant inputs to the fair value are unobservable.
•
•- Cash and short-term investments: The carrying
valuesamounts of these assets approximate fair values because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk.
•
•- Policyholder contract deposits associated with investment-type contracts: Fair values for policyholder contract deposits associated with investment-type contracts not accounted for at fair value
wereare estimated using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those of the contracts being valued. When no similar contracts are being offered, the discount rate is the appropriate swap rate (if available) or current risk-free interest rate consistent with the currency in which the cash flows are denominated. To determine fair value, other factors include current policyholder account values and related surrender charges and other assumptions include expectations about policyholder behavior and an appropriate risk margin.
•
•- Other liabilities: The majority of Other liabilities that are financial instruments not measured at fair value represent secured financing arrangements, including repurchase agreements. The carrying
valuesamounts of these liabilities approximate fair value, because the financing arrangements are short-term and are secured by cash or other liquid collateral.
•
•- Long-term debt: Fair values of these obligations were determined by reference to quoted market prices, when available and appropriate, or discounted cash flow calculations based upon our current
market-observable implicit-credit-spreadmarket‑observable implicit‑credit‑spread rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued. The following table presents the carrying valuesamounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:
| Estimated Fair Value | | Carrying |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | Value |
December 31, 2015 | | | | | | | | | | |
Assets: | | | | | | | | | | |
Mortgage and other loans receivable | $ | - | $ | 198 | $ | 30,147 | $ | 30,345 | $ | 29,554 |
Other invested assets | | - | | 563 | | 2,880 | | 3,443 | | 4,169 |
Short-term investments | | - | | 7,541 | | - | | 7,541 | | 7,541 |
Cash | | 1,629 | | - | | - | | 1,629 | | 1,629 |
Liabilities: | | | | | | | | | | |
Policyholder contract deposits associated | | | | | | | | | | |
with investment-type contracts | | - | | 309 | | 117,537 | | 117,846 | | 108,788 |
Other liabilities | | - | | 2,852 | | - | | 2,852 | | 2,852 |
Long-term debt | | - | | 21,686 | | 4,528 | | 26,214 | | 25,680 |
December 31, 2014 | | | | | | | | | | |
Assets: | | | | | | | | | | |
Mortgage and other loans receivable | $ | - | $ | 449 | $ | 26,157 | $ | 26,606 | $ | 24,984 |
Other invested assets | | - | | 593 | | 2,882 | | 3,475 | | 4,352 |
Short-term investments | | - | | 9,559 | | - | | 9,559 | | 9,559 |
Cash | | 1,758 | | - | | - | | 1,758 | | 1,758 |
Liabilities: | | | | | | | | | | |
Policyholder contract deposits associated | | | | | | | | | | |
with investment-type contracts | | - | | 244 | | 119,268 | | 119,512 | | 106,395 |
Other liabilities | | - | | 1,120 | | - | | 1,120 | | 1,120 |
Long-term debt | | - | | 24,749 | | 2,932 | | 27,681 | | 25,751 |
| | | | | | | | | | | | | | | | |
| | |
| | Estimated Fair Value | |
| |
|---|
| | Carrying
Value
| |
|---|
(in millions)
| | Level 1
| | Level 2
| | Level 3
| | Total
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Mortgage and other loans receivable | | $ | – | | $ | 219 | | $ | 21,418 | | $ | 21,637 | | $ | 20,765 | |
Other invested assets | | | – | | | 529 | | | 2,705 | | | 3,234 | | | 4,194 | |
Short-term investments | | | – | | | 15,304 | | | – | | | 15,304 | | | 15,304 | |
Cash | | | 2,241 | | | – | | | – | | | 2,241 | | | 2,241 | |
Liabilities: | | | | | | | | | | | | | | | | |
Policyholder contract deposits associated with investment-type contracts | | | – | | | 199 | | | 114,361 | | | 114,560 | | | 105,093 | |
Other liabilities | | | – | | | 4,869 | | | 1 | | | 4,870 | | | 4,869 | |
Long-term debt | | | – | | | 36,239 | | | 2,394 | | | 38,633 | | | 34,946 | |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Mortgage and other loans receivable | | $ | – | | $ | 823 | | $ | 19,396 | | $ | 20,219 | | $ | 19,348 | |
Other invested assets | | | – | | | 237 | | | 3,521 | | | 3,758 | | | 4,932 | |
Short-term investments | | | – | | | 20,752 | | | – | | | 20,752 | | | 20,752 | |
Cash | | | 1,151 | | | – | | | – | | | 1,151 | | | 1,151 | |
Liabilities: | | | | | | | | | | | | | | | | |
Policyholder contract deposits associated with investment-type contracts | | | – | | | 245 | | | 123,860 | | | 124,105 | | | 105,979 | |
Other liabilities | | | – | | | 3,981 | | | 818 | | | 4,799 | | | 4,800 | |
Long-term debt | | | – | | | 43,966 | | | 1,925 | | | 45,891 | | | 40,445 | |
| | |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEM 8 / NOTE 6. INVESTMENTS
6.Item 8 / note 5. INVESTMENTS
Fixed Maturity and Equity Securities
Bonds held to maturity are carried at amortized cost when we have the ability and positive intent to hold these securities until maturity. When we do not have the ability or positive intent to hold bonds until maturity, these securities are classified as available for sale or are measured at fair value at our election. None of our fixed maturity securities met the criteria for held to maturity classification at December 31, 20132015 or 2012.2014.
Fixed maturity and equity securities classified as available for sale are carried at fair value. Unrealized gains and losses from available for sale investments in fixed maturity and equity securities are reported as a separate component of Accumulated other comprehensive income, net of deferred policy acquisition costs and deferred income taxes, in shareholders'shareholders’ equity. Realized and unrealized gains and losses from fixed maturity and equity securities measured at fair value at our election are reflected in Net investment income (for insurance subsidiaries) or Other income (for Other Operations)Corporate and Other). Investments in fixed maturity and equity securities are recorded on a trade-date basis.
Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certain RMBS, CMBS and CDO/ABS, (collectively, structured securities), recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For structured securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes in expected undiscounted future cash flows. For purchased credit impaired (PCI) securities, at acquisition, the difference between the undiscounted expected future cash flows and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over the securities'securities’ remaining lives on a level-yieldlevel‑yield basis. Subsequently, effective yields recognized on PCI securities are recalculated and adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to reasons other than interest rate changes.
AIG 2013 Form 10-K
Securities Available for Sale
The following table presents the amortized cost or cost and fair value of our available for sale securities:
| | | | | | | | | | Other-Than- |
| | Amortized | | Gross | | Gross | | | | Temporary |
| | Cost or | | Unrealized | | Unrealized | | Fair | | Impairments |
(in millions) | | Cost | | Gains | | Losses | | Value | | in AOCI(a) |
December 31, 2015 | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | |
U.S. government and government sponsored entities | $ | 1,698 | $ | 155 | $ | (9) | $ | 1,844 | $ | - |
Obligations of states, municipalities and political subdivisions | | 26,003 | | 1,424 | | (104) | | 27,323 | | 19 |
Non-U.S. governments | | 17,752 | | 805 | | (362) | | 18,195 | | - |
Corporate debt | | 133,513 | | 6,462 | | (3,987) | | 135,988 | | (87) |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | |
RMBS | | 33,878 | | 2,760 | | (411) | | 36,227 | | 1,326 |
CMBS | | 13,139 | | 561 | | (129) | | 13,571 | | 185 |
CDO/ABS | | 14,985 | | 360 | | (248) | | 15,097 | | 39 |
Total mortgage-backed, asset-backed and collateralized | | 62,002 | | 3,681 | | (788) | | 64,895 | | 1,550 |
Total bonds available for sale(b) | | 240,968 | | 12,527 | | (5,250) | | 248,245 | | 1,482 |
Equity securities available for sale: | | | | | | | | | | |
Common stock | | 913 | | 1,504 | | (16) | | 2,401 | | - |
Preferred stock | | 19 | | 3 | | - | | 22 | | - |
Mutual funds | | 447 | | 53 | | (8) | | 492 | | - |
Total equity securities available for sale | | 1,379 | | 1,560 | | (24) | | 2,915 | | - |
Total | $ | 242,347 | $ | 14,087 | $ | (5,274) | $ | 251,160 | $ | 1,482 |
December 31, 2014 | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | |
U.S. government and government sponsored entities | $ | 2,806 | $ | 204 | $ | (18) | $ | 2,992 | $ | - |
Obligations of states, municipalities and political subdivisions | | 25,979 | | 1,729 | | (49) | | 27,659 | | (13) |
Non-U.S. governments | | 20,280 | | 966 | | (151) | | 21,095 | | - |
Corporate debt | | 134,961 | | 10,594 | | (1,122) | | 144,433 | | 64 |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | |
RMBS | | 34,377 | | 3,435 | | (292) | | 37,520 | | 1,767 |
CMBS | | 12,129 | | 815 | | (59) | | 12,885 | | 215 |
CDO/ABS | | 12,775 | | 628 | | (128) | | 13,275 | | 47 |
Total mortgage-backed, asset-backed and collateralized | | 59,281 | | 4,878 | | (479) | | 63,680 | | 2,029 |
Total bonds available for sale(b) | | 243,307 | | 18,371 | | (1,819) | | 259,859 | | 2,080 |
Equity securities available for sale: | | | | | | | | | | |
Common stock | | 1,185 | | 2,461 | | (17) | | 3,629 | | - |
Preferred stock | | 21 | | 4 | | - | | 25 | | - |
Mutual funds | | 724 | | 54 | | (37) | | 741 | | - |
Total equity securities available for sale | | 1,930 | | 2,519 | | (54) | | 4,395 | | - |
Total | $ | 245,237 | $ | 20,890 | $ | (1,873) | $ | 264,254 | $ | 2,080 |
| | | | | | | | | | | | | | | | |
| | |
(in millions)
| | Amortized
Cost or
Cost
| | Gross
Unrealized
Gains
| | Gross
Unrealized
Losses
| | Fair
Value
| | Other-Than-
Temporary
Impairments
in AOCI(a)
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 3,084 | | $ | 150 | | $ | (39 | ) | $ | 3,195 | | $ | – | |
Obligations of states, municipalities and political subdivisions | | | 28,704 | | | 1,122 | | | (446 | ) | | 29,380 | | | (15 | ) |
Non-U.S. governments | | | 22,045 | | | 822 | | | (358 | ) | | 22,509 | | | – | |
Corporate debt | | | 139,461 | | | 7,989 | | | (2,898 | ) | | 144,552 | | | 74 | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | | | | | | | |
RMBS | | | 33,520 | | | 3,101 | | | (473 | ) | | 36,148 | | | 1,670 | |
CMBS | | | 11,216 | | | 558 | | | (292 | ) | | 11,482 | | | 125 | |
CDO/ABS | | | 10,501 | | | 649 | | | (142 | ) | | 11,008 | | | 62 | |
| | |
Total mortgage-backed, asset-backed and collateralized | | | 55,237 | | | 4,308 | | | (907 | ) | | 58,638 | | | 1,857 | |
| | |
Total bonds available for sale(b) | | | 248,531 | | | 14,391 | | | (4,648 | ) | | 258,274 | | | 1,916 | |
| | |
Equity securities available for sale: | | | | | | | | | | | | | | | | |
Common stock | | | 1,280 | | | 1,953 | | | (14 | ) | | 3,219 | | | – | |
Preferred stock | | | 24 | | | 4 | | | (1 | ) | | 27 | | | – | |
Mutual funds | | | 422 | | | 12 | | | (24 | ) | | 410 | | | – | |
| | |
Total equity securities available for sale | | | 1,726 | | | 1,969 | | | (39 | ) | | 3,656 | | | – | |
| | |
Total | | $ | 250,257 | | $ | 16,360 | | $ | (4,687 | ) | $ | 261,930 | | $ | 1,916 | |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 3,161 | | $ | 323 | | $ | (1 | ) | $ | 3,483 | | $ | – | |
Obligations of states, municipalities and political subdivisions | | | 33,042 | | | 2,685 | | | (22 | ) | | 35,705 | | | 2 | |
Non-U.S. governments | | | 25,449 | | | 1,395 | | | (44 | ) | | 26,800 | | | – | |
Corporate debt | | | 135,728 | | | 15,848 | | | (464 | ) | | 151,112 | | | 115 | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | | | | | | | |
RMBS | | | 31,330 | | | 3,379 | | | (317 | ) | | 34,392 | | | 1,330 | |
CMBS | | | 9,449 | | | 770 | | | (304 | ) | | 9,915 | | | (79 | ) |
CDO/ABS | | | 7,990 | | | 806 | | | (244 | ) | | 8,552 | | | 82 | |
| | |
Total mortgage-backed, asset-backed and collateralized | | | 48,769 | | | 4,955 | | | (865 | ) | | 52,859 | | | 1,333 | |
| | |
Total bonds available for sale(b) | | | 246,149 | | | 25,206 | | | (1,396 | ) | | 269,959 | | | 1,450 | |
| | |
Equity securities available for sale: | | | | | | | | | | | | | | | | |
Common stock | | | 1,492 | | | 1,574 | | | (37 | ) | | 3,029 | | | – | |
Preferred stock | | | 55 | | | 23 | | | – | | | 78 | | | – | |
Mutual funds | | | 93 | | | 12 | | | – | | | 105 | | | – | |
| | |
Total equity securities available for sale | | | 1,640 | | | 1,609 | | | (37 | ) | | 3,212 | | | – | |
| | |
Total | | $ | 247,789 | | $ | 26,815 | | $ | (1,433 | ) | $ | 273,171 | | $ | 1,450 | |
| | |
(a) Represents the amount of other-than-temporary impairment lossesimpairments recognized in Accumulated other comprehensive income. Amount includes unrealized gains and losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.
(b) At December 31, 20132015 and 2012,2014, bonds available for sale held by us that were below investment grade or not rated totaled $32.6$34.9 billion and $29.6$35.1 billion, respectively.
AIG 2013 Form 10-K
Securities Available for Sale in a Loss Position
The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | Less than 12 Months | | 12 Months or More | | Total |
| | | | | | | Gross | | | | | Gross | | | | | Gross |
| | Less than 12 Months | | 12 Months or More | | Total | | | Fair | | Unrealized | | Fair | | Unrealized | | | Fair | | Unrealized |
|---|
(in millions)
| | Fair
Value
| | Gross
Unrealized
Losses
| | Fair
Value
| | Gross
Unrealized
Losses
| | Fair
Value
| | Gross
Unrealized
Losses
| | | Value | | Losses | | Value | | Losses | | | Value | | Losses |
|---|
| | | |
December 31, 2013 | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 1,101 | | $ | 34 | | $ | 42 | | $ | 5 | | $ | 1,143 | | $ | 39 | | $ | 483 | $ | 9 | | $ | 1 | $ | - | | $ | 484 | $ | 9 |
Obligations of states, municipalities and political subdivisions | | 6,134 | | 379 | | 376 | | 67 | | 6,510 | | 446 | | |
Obligations of states, municipalities and political | | | | | | | | | | | | | | |
subdivisions | | | 2,382 | | 87 | | 268 | | 17 | | | 2,650 | | 104 |
Non-U.S. governments | | 4,102 | | 217 | | 710 | | 141 | | 4,812 | | 358 | | | 4,327 | | 203 | | 832 | | 159 | | | 5,159 | | 362 |
Corporate debt | | 38,495 | | 2,251 | | 4,926 | | 647 | | 43,421 | | 2,898 | | | 41,317 | | 2,514 | | 5,428 | | 1,473 | | | 46,745 | | 3,987 |
RMBS | | 8,543 | | 349 | | 1,217 | | 124 | | 9,760 | | 473 | | | 7,215 | | 133 | | 4,318 | | 278 | | | 11,533 | | 411 |
CMBS | | 3,191 | | 176 | | 1,215 | | 116 | | 4,406 | | 292 | | | 4,138 | | 108 | | 573 | | 21 | | | 4,711 | | 129 |
CDO/ABS | | 2,845 | | 62 | | 915 | | 80 | | 3,760 | | 142 | | | 7,064 | | 104 | | 2,175 | | 144 | | | 9,239 | | 248 |
| | | |
Total bonds available for sale | | 64,411 | | 3,468 | | 9,401 | | 1,180 | | 73,812 | | 4,648 | | | 66,926 | | 3,158 | | 13,595 | | 2,092 | | | 80,521 | | 5,250 |
| | | |
Equity securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock | | 96 | | 14 | | – | | – | | 96 | | 14 | | | 91 | | 16 | | - | | - | | | 91 | | 16 |
Preferred stock | | 5 | | 1 | | – | | – | | 5 | | 1 | | |
Mutual funds | | 369 | | 24 | | – | | – | | 369 | | 24 | | | 200 | | 8 | | - | | - | | | 200 | | 8 |
| | | |
Total equity securities available for sale | | 470 | | 39 | | – | | – | | 470 | | 39 | | | 291 | | 24 | | - | | - | | | 291 | | 24 |
| | | |
Total | | $ | 64,881 | | $ | 3,507 | | $ | 9,401 | | $ | 1,180 | | $ | 74,282 | | $ | 4,687 | | $ | 67,217 | $ | 3,182 | | $ | 13,595 | $ | 2,092 | | $ | 80,812 | $ | 5,274 |
| | | |
December 31, 2012 | | |
December 31, 2014 | | | | | | | | | | | | | | |
Bonds available for sale: | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 153 | | $ | 1 | | $ | – | | $ | – | | $ | 153 | | $ | 1 | | $ | 526 | $ | 5 | | $ | 281 | $ | 13 | | $ | 807 | $ | 18 |
Obligations of states, municipalities and political subdivisions | | 692 | | 11 | | 114 | | 11 | | 806 | | 22 | | |
Obligations of states, municipalities and political | | | | | | | | | | | | | | |
subdivisions | | | 495 | | 9 | | 794 | | 40 | | | 1,289 | | 49 |
Non-U.S. governments | | 1,555 | | 19 | | 442 | | 25 | | 1,997 | | 44 | | | 1,606 | | 42 | | 1,690 | | 109 | | | 3,296 | | 151 |
Corporate debt | | 8,483 | | 201 | | 3,229 | | 263 | | 11,712 | | 464 | | | 12,132 | | 450 | | 11,570 | | 672 | | | 23,702 | | 1,122 |
RMBS | | 597 | | 28 | | 1,661 | | 289 | | 2,258 | | 317 | | | 4,621 | | 109 | | 3,996 | | 183 | | | 8,617 | | 292 |
CMBS | | 404 | | 8 | | 1,481 | | 296 | | 1,885 | | 304 | | | 220 | | 1 | | 2,087 | | 58 | | | 2,307 | | 59 |
CDO/ABS | | 393 | | 3 | | 1,624 | | 241 | | 2,017 | | 244 | | | 3,857 | | 50 | | 1,860 | | 78 | | | 5,717 | | 128 |
| | | |
Total bonds available for sale | | 12,277 | | 271 | | 8,551 | | 1,125 | | 20,828 | | 1,396 | | | 23,457 | | 666 | | 22,278 | | 1,153 | | | 45,735 | | 1,819 |
| | | |
Equity securities available for sale: | | | | | | | | | | | | | | |
Common stock | | 247 | | 36 | | 18 | | 1 | | 265 | | 37 | | | 88 | | 16 | | 2 | | 1 | | | 90 | | 17 |
Mutual funds | | 3 | | – | | – | | – | | 3 | | – | | | 280 | | 37 | | 64 | | - | | | 344 | | 37 |
| | | |
Total equity securities available for sale | | 250 | | 36 | | 18 | | 1 | | 268 | | 37 | | | 368 | | 53 | | 66 | | 1 | | | 434 | | 54 |
| | | |
Total | | $ | 12,527 | | $ | 307 | | $ | 8,569 | | $ | 1,126 | | $ | 21,096 | | $ | 1,433 | | $ | 23,825 | $ | 719 | | $ | 22,344 | $ | 1,154 | | $ | 46,169 | $ | 1,873 |
| | | |
At December 31, 2013,2015, we held 7,65214,972 and 126174 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 8482,176 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months.months or more. We did not recognize the unrealized losses in earnings on these fixed maturity securities at December 31, 2013,2015 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analysisanalyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.
AIG 2013 Form 10-K
Contractual Maturities of Fixed Maturity Securities Available for Sale
The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:
| | | | | | | | | | | | | | Total Fixed Maturity Securities | | Fixed Maturity Securities Available |
| | | |
| | Total Fixed Maturity
Securities Available for Sale | | Fixed Maturity Securities
Available for Sale
in a Loss Position | | |
|---|
December 31, 2013
(in millions)
| | |
|---|
| | Amortized Cost
| | Fair Value
| | Amortized Cost
| | Fair Value
| | |
|---|
| | | |
December 31, 2015 | | Available for Sale | | for Sale in a Loss Position |
(in millions) | | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 10,470 | | $ | 10,678 | | $ | 739 | | $ | 726 | | $ | 9,176 | $ | 9,277 | | $ | 1,122 | $ | 1,103 |
Due after one year through five years | | 50,698 | | 53,410 | | 7,620 | | 7,471 | | | 47,230 | | 49,196 | | 9,847 | | 9,494 |
Due after five years through ten years | | 70,096 | | 72,386 | | 22,534 | | 21,445 | | | 54,120 | | 54,459 | | 22,296 | | 20,686 |
Due after ten years | | 62,030 | | 63,162 | | 28,734 | | 26,244 | | | 68,440 | | 70,418 | | 26,235 | | 23,755 |
Mortgage-backed, asset-backed and collateralized | | 55,237 | | 58,638 | | 18,833 | | 17,926 | | | 62,002 | | 64,895 | | 26,271 | | 25,483 |
| | | |
Total | | $ | 248,531 | | $ | 258,274 | | $ | 78,460 | | $ | 73,812 | | $ | 240,968 | $ | 248,245 | | $ | 85,771 | $ | 80,521 |
| | | |
December 31, 2014 | | | | | | | | | |
Due in one year or less | | $ | 9,821 | $ | 9,975 | | $ | 637 | $ | 620 |
Due after one year through five years | | | 48,352 | | 50,873 | | 6,669 | | 6,529 |
Due after five years through ten years | | | 62,685 | | 65,889 | | 12,873 | | 12,338 |
Due after ten years | | | 63,168 | | 69,442 | | 10,255 | | 9,607 |
Mortgage-backed, asset-backed and collateralized | | | 59,281 | | 63,680 | | 17,120 | | 16,641 |
Total | | $ | 243,307 | $ | 259,859 | | $ | 47,554 | $ | 45,735 |
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:
|
| |
| |
| |
| |
| |
| | Years Ended December 31, |
|---|
| | | | | 2015 | | 2014 | | 2013 |
| | Years Ended December 31, | | | Gross | | Gross | | Gross | | Gross | Gross | Gross |
|---|
| | 2013 | | 2012 | | 2011 | | Realized | Realized | Realized | Realized |
|---|
(in millions)
| | Gross
Realized
Gains
| | Gross
Realized
Losses
| | Gross
Realized
Gains
| | Gross
Realized
Losses
| | Gross
Gains
| | Gross
Realized
Losses
| | | Gains | | Losses | | Gains | | Losses | Gains | Losses |
|---|
| | | |
Fixed maturity securities | | $ | 2,634 | | $ | 202 | | $ | 2,778 | | $ | 171 | | $ | 2,042 | | $ | 129 | | $ | 517 | $ | 423 | $ | 703 | $ | 118 | $ | 2,634 | $ | 202 |
Equity securities | | | 130 | | | 19 | | | 515 | | 31 | | 199 | | 35 | | | 1,060 | | 28 | | 135 | | 24 | | 130 | | 19 |
| | | |
Total | | $ | 2,764 | | $ | 221 | | $ | 3,293 | | $ | 202 | | $ | 2,241 | | $ | 164 | | $ | 1,577 | $ | 451 | $ | 838 | $ | 142 | $ | 2,764 | $ | 221 |
| | | |
For the yearyears ended December 31, 2013, 20122015, 2014 and 2011,2013, the aggregate fair value of available for sale securities sold was $35.9$28.7 billion, $40.3$25.3 billion and $44.0$35.9 billion, which resulted in net realized capital gains of $1.1 billion, $0.7 billion and $2.5 billion, $3.1 billion and $2.1 billion, respectively.
AIG 2013 Form 10-K
Other Securities Measured at Fair Value
The following table presents the fair value of other securities measured at fair value based on our election of the fair value option:
| | December 31, 2015 | | | | December 31, 2014 | |
| | Fair | Percent | | | | Fair | Percent | |
(in millions) | | Value | of Total | | | | Value | of Total | |
Fixed maturity securities: | | | | | | | | | |
U.S. government and government sponsored entities | $ | 3,369 | 19 | % | | $ | 5,498 | 27 | % |
Obligations of states, municipalities and political subdivisions | | 75 | - | | | | 122 | 1 | |
Non-U.S. governments | | 50 | - | | | | 2 | - | |
Corporate debt | | 2,035 | 12 | | | | 719 | 3 | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | |
RMBS | | 2,230 | 13 | | | | 2,094 | 10 | |
CMBS | | 750 | 4 | | | | 1,077 | 5 | |
CDO/ABS and other collateralized* | | 8,273 | 47 | | | | 10,200 | 49 | |
Total mortgage-backed, asset-backed and collateralized | | 11,253 | 64 | | | | 13,371 | 64 | |
Total fixed maturity securities | | 16,782 | 95 | | | | 19,712 | 95 | |
Equity securities | | 921 | 5 | | | | 1,049 | 5 | |
Total | $ | 17,703 | 100 | % | | $ | 20,761 | 100 | % |
| | | | | | | | | | | | | |
| | |
| | December 31, 2013 | | December 31, 2012 | |
|---|
(in millions)
| | Fair
Value
| | Percent
of Total
| | Fair
Value
| | Percent
of Total
| |
|---|
| | |
Fixed maturity securities: | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 5,723 | | | 24 | % | $ | 6,794 | | | 27 | % |
Obligations of states, territories and political subdivisions | | | 121 | | | 1 | | | – | | | – | |
Non-U.S. governments | | | 2 | | | – | | | 2 | | | – | |
Corporate debt | | | 1,169 | | | 5 | | | 1,320 | | | 5 | |
Mortgage-backed, asset-backed and collateralized: | | | | | | | | | | | | | |
RMBS | | | 2,263 | | | 10 | | | 1,727 | | | 7 | |
CMBS | | | 1,353 | | | 6 | | | 2,227 | | | 9 | |
CDO/ABS and other collateralized* | | | 11,985 | | | 51 | | | 12,506 | | | 50 | |
| | |
Total mortgage-backed, asset-backed and collateralized | | | 15,601 | | | 67 | | | 16,460 | | | 66 | |
Other | | | 7 | | | – | | | 8 | | | – | |
| | |
Total fixed maturity securities | | | 22,623 | | | 97 | | | 24,584 | | | 98 | |
| | |
Equity securities | | | 834 | | | 3 | | | 662 | | | 2 | |
| | |
Total | | $ | 23,457 | | | 100 | % | $ | 25,246 | | | 100 | % |
| | |
* Includes $1.0 billion$712 million and $0.9 billion$859 million of U.S. Government agency backed ABS at December 31, 20132015 and 2012,2014, respectively.
Other Invested Assets
The following table summarizes the carrying valuesamounts of other invested assets:
December 31, | | | | |
(in millions) | | 2015 | | 2014 |
Alternative investments(a) | $ | 18,150 | $ | 19,656 |
Investment real estate(b) | | 6,579 | | 3,612 |
Aircraft asset investments(c) | | 477 | | 651 |
Investments in life settlements | | 3,606 | | 3,753 |
Investment in AerCap | | - | | 4,972 |
All other investments | | 982 | | 1,874 |
Total | $ | 29,794 | $ | 34,518 |
| | | | | | | |
| |
| |
| |
|---|
| | |
December 31,
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
Alternative investments(a) | | $ | 19,709 | | $ | 18,990 | |
Mutual funds | | | 85 | | | 128 | |
Investment real estate(b) | | | 3,113 | | | 3,195 | |
Aircraft asset investments(c) | | | 763 | | | 984 | |
Investments in life settlements | | | 3,601 | | | 4,357 | |
All other investments | | | 1,388 | | | 1,463 | |
| | |
Total | | $ | 28,659 | | $ | 29,117 | |
| | |
(a) Includes hedge funds, private equity funds, affordable housing partnerships, investments in life settlements and other investment partnerships.
(b) Net of accumulated depreciation of $513$668 million and $469$315 million in 20132015 and 2012,2014, respectively.
(c) Consist primarilyConsists of AIG Life and Retirement investments in aircraft equipment held in consolidated trusts.
Other Invested Assets Carried at Fair Value
Certain hedge funds, private equity funds, affordable housing partnerships and other investment partnerships for which we have elected the fair value option are reported at fair value with changes in fair value recognized in Net investment income with the exception of investments of AIG'sAIG’s Corporate and Other Operations,category, for which such changes are reported in Other income. Other investments in hedge funds, private equity funds, affordable housing partnerships and other investment partnerships in which our insurance operations do not hold aggregate interests sufficient to exercise more than minor influence over the respective partnerships are reported at fair value with changes in fair value recognized as a component of Accumulated other comprehensive income. These investments are subject to other-than-temporary impairment evaluations (see discussion below on evaluating equity investments for other-than-temporary impairment). The gross unrealized loss recorded in Other comprehensive income on such
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 6. INVESTMENTS
investments was $15$33 million and $68$56 million at December 31, 20132015 and 2012,
2014, respectively, the majority of which pertains to investments in private equity funds and hedge funds that have been in continuous unrealized loss positions for less than 12 months.
Other Invested Assets —– Equity Method Investments
We account for hedge funds, private equity funds, affordable housing partnerships and other investment partnerships using the equity method of accounting unless our interest is so minor that we may have virtually no influence over partnership operating and financial policies, or we have elected the fair value option. Under the equity method of accounting, our carrying valueamount generally is our share of the net asset value of the funds or the partnerships, and changes in our share of the net asset values are recorded in Net investment income with the exception of investments of AIG'sAIG’s Corporate and Other Operations,category, for which such changes are reported in Other income. In applying the equity method of accounting, we consistently use the most recently available financial information provided by the general partner or manager of each of these investments, which is one to three months prior to the end of our reporting period. The financial statements of these investees are generally audited annually.
Direct private equity investments entered into for strategic purposes and not solely for capital appreciation or for income generation are also accounted for under the equity method. Dividends received from our other strategic investments were $80 million, $8 million and $17 million for the years ended December 31, 2013, 2012, and 2011, respectively. The undistributed earnings of other strategic investments in which our ownership interest is less than 50 percent were $17 million, $51 million and $9 million at December 31, 2013, 2012, and 2011, respectively.
On October 29, 2010, we completed an IPO of 8.08 billion ordinary shares of AIA for aggregate gross proceeds of approximately $20.5 billion. Upon completion of the IPO, we owned 33 percent of AIA's outstanding shares. Accordingly, we deconsolidated AIA and recorded a pre-tax gain of $16.3 billion in 2010. On March 7, 2012, we sold approximately 1.72 billion ordinary shares of AIA for gross proceeds of approximately $6.0 billion. On September 11, 2012, we sold approximately 600 million ordinary shares of AIA for gross proceeds of approximately $2.0 billion. On December 20, 2012, we sold approximately 1.65 billion ordinary shares of AIA for gross proceeds of approximately $6.5 billion. As a result of these sales, we retained no interest in AIA as of December 31, 2012. We accounted for our investment in AIA under the fair value option with gains and losses recorded in Net investment income. We recorded fair value option gains from our investment in AIA of $2.1 billion and $1.3 billion for the years ended December 31, 2012 and 2011.
Summarized Financial Information of AIA
The following is summarized financial information of AIA:
| | | | |
| | |
Year Ended December 31,
(in millions)
| | 2011
| |
|---|
| | |
Operating results: | | | | |
Total revenues | | $ | 13,802 | |
Total expenses | | | (12,436 | ) |
| | |
Net income | | $ | 1,366 | |
| | |
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 6. INVESTMENTS
Summarized Financial Information of Other Equity Method Investees
The following is the aggregated summarized financial information of our equity method investees, including those for which the fair value option has been elected:
|
| |
| |
| |
| | |
|---|
| | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | | |
(in millions) | | | | 2015 | | 2014 | | 2013 |
Operating results: | | | | | | | | | | | | | | | | |
Total revenues | | $ | 19,181 | | $ | 9,438 | | $ | 12,749 | | | $ | 22,055 | $ | 29,579 | $ | 19,181 |
Total expenses | | | (5,515 | ) | | (5,183 | ) | | (3,530 | ) | | | (3,898) | | (7,828) | | (5,515) |
| | | |
Net income | | $ | 13,666 | | $ | 4,255 | | $ | 9,219 | | | $ | 18,157 | $ | 21,751 | $ | 13,666 |
| | | |
At December 31, | | | | | | | | |
(in millions) | | | | | | 2015 | | 2014 |
Balance sheet: | | | | | | | | |
Total assets | | | | | $ | 201,007 | $ | 207,994 |
Total liabilities | | | | | $ | (33,424) | $ | (67,346) |
| | | | | | | |
| |
| |
| |
|---|
| | |
At December 31,
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
Balance sheet: | | | | | | | |
Total assets | | $ | 150,586 | | $ | 139,681 | |
Total liabilities | | $ | (25,134 | ) | $ | (26,529 | ) |
| | |
The following table presents the carrying valueamount and ownership percentage of equity method investments:investments at December 31, 2015 and 2014:
| | | | |
| | 2013
| | 2012
| | | 2015 | | | 2014 | |
|---|
| | | | | Carrying | | Ownership | | | Carrying | | Ownership | |
|---|
(in millions, except percentages)
| | Carrying
Value
| | Ownership
Percentage
| | Carrying
Value
| | Ownership
Percentage
| | | Value | | Percentage | | | Value | | Percentage | |
|---|
| | | |
All other equity method investments | | $ | 12,921 | | Various | | $ | 11,544 | | Various | | |
| | | |
Equity method investments | | $ | 14,259 | | Various | | $ | 18,951 | | Various | |
Summarized financial information for these equity method investees may be presented on a lag, due to the unavailability of information for the investees at theour respective balance sheet date,dates, and is included for the periods in which we held an equity method ownership interest.
Other Investments
Also included in Other invested assets are real estate held for investment and investments in aircraft asset investmentsequipment held by non-Aircraft Leasing subsidiaries.in consolidated trusts. These investments are reported at cost, less depreciation and are subject to impairment review, as discussed below.
Investments in Life Settlements
Investments in life settlements are accounted for under the investment method. Under the investment method, we recognize our initial investment in life settlements at the transaction price plus all initial direct external costs. Continuing costs to keep the policy in force, primarily life insurance premiums, increase the carrying valueamount of the investment. We recognize income on individual investments in life settlements when the insured dies, at an amount equal to the excess of the investment proceeds over the carrying amount of the investment at that time. These investments are subject to impairment review, as discussed below.
During 2013, 20122015, 2014 and 2011,2013, income recognized on investments in life settlements was $334$332 million, $253$407 million and $320$334 million, respectively, and is included in Net investment income in the Consolidated Statements of Income.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 6. INVESTMENTS
The following table presents further information regarding investments in life settlements:
| | | | | December 31, 2015 |
| | December 31, 2013 | | Number of | | Carrying | Face Value |
|---|
(dollars in millions)
| | Number of
Contracts
| | Carrying
Value
| | Face Value
(Death Benefits)
| | Contracts | | Value | (Death Benefits) |
|---|
| | | |
Remaining Life Expectancy of Insureds: | | | | | | |
0 – 1 year | | 1 | | $ | – | | $ | – | | 1 | $ | - | $ | - |
1 – 2 years | | 9 | | 5 | | 10 | | 9 | | 9 | | 17 |
2 – 3 years | | 26 | | 14 | | 29 | | 16 | | 10 | | 20 |
3 – 4 years | | 72 | | 41 | | 84 | | 72 | | 50 | | 113 |
4 – 5 years | | 138 | | 119 | | 289 | | 156 | | 235 | | 485 |
Thereafter | | 5,030 | | 3,422 | | 16,328 | | 4,300 | | 3,302 | | 14,233 |
| | | |
Total | | 5,276 | | $ | 3,601 | | $ | 16,740 | | 4,554 | $ | 3,606 | $ | 14,868 |
| | | |
Remaining life expectancy for year 0-1 references policies whose current life expectancy is less than 12 months as of the valuation date. Remaining life expectancy is not an indication of expected maturity. Actual maturity dates in any category may vary significantly (either earlier or later) from the remaining life expectancies reported above.
At December 31, 2013, management's2015, management’s best estimate of the life insurance premiums required to keep the investments in life settlements in force, payable in the 12 months ending December 31, 20142016 and the four succeeding years ending December 31, 20182020 are $549$530 million, $575$553 million, $590$579 million, $613$598 million and $638$607 million, respectively.
Net Investment Income
Net investment income represents income primarily from the following sources:
•
- Interest income and related expenses, including amortization of premiums and accretion of discounts
on bonds with changes in the timing and the amount of expected principal and interest cash flows reflected in the yield, as applicable.
•
•- Dividend income from common and preferred
stockstocks and earnings distributions from other investments.
•
•- Realized and unrealized gains and losses from investments in other securities and investments for which we elected the fair value option.
•
•- Earnings from
private equity funds and hedge fund investments accounted for under the equity method.alternative investments.
•
•- The difference between the carrying amount of an investment in life settlements and the life insurance proceeds of the underlying life insurance policy recorded in income upon the death of the insured.
•Changes in the fair values of our interests in ML II, AIA and MetLife securities prior to sale and change in the fair value of our interests in ML III prior to the FRBNY liquidation of ML III assets.
AIG 2013 Form 10-K
The following table presents the components of Net investment income:
Years Ended December 31, | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Fixed maturity securities, including short-term investments | $ | 11,332 | $ | 12,322 | $ | 12,044 |
Equity securities | | 99 | | 221 | | 178 |
Interest on mortgage and other loans | | 1,417 | | 1,272 | | 1,144 |
Alternative investments* | | 1,476 | | 2,624 | | 2,803 |
Real estate | | 181 | | 110 | | 128 |
Other investments | | 76 | | 47 | | 61 |
Total investment income | | 14,581 | | 16,596 | | 16,358 |
Investment expenses | | 528 | | 517 | | 548 |
Net investment income | $ | 14,053 | $ | 16,079 | $ | 15,810 |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Fixed maturity securities, including short-term investments | | $ | 12,044 | | $ | 12,592 | | $ | 11,814 | |
Change in fair value of ML II | | | – | | | 246 | | | 42 | |
Change in fair value of ML III | | | – | | | 2,888 | | | (646 | ) |
Change in fair value of AIA securities including realized gain | | | – | | | 2,069 | | | 1,289 | |
Change in the fair value of MetLife securities prior to their sale | | | – | | | – | | | (157 | ) |
Equity securities | | | 178 | | | 162 | | | 92 | |
Interest on mortgage and other loans | | | 1,144 | | | 1,083 | | | 1,065 | |
Alternative investments* | | | 2,803 | | | 1,769 | | | 1,622 | |
Real estate | | | 128 | | | 127 | | | 107 | |
Other investments | | | 61 | | | 11 | | | 36 | |
| | |
Total investment income | | | 16,358 | | | 20,947 | | | 15,264 | |
Investment expenses | | | 548 | | | 604 | | | 509 | |
| | |
Net investment income | | $ | 15,810 | | $ | 20,343 | | $ | 14,755 | |
| | |
* Includes hedge funds, private equity funds, affordable housing partnerships, investments in life settlements and other investment partnerships.
Net Realized Capital Gains and Losses
Net realized capital gains and losses are determined by specific identification. The net realized capital gains and losses are generated primarily from the following sources:
•
- Sales or full redemptions of available for sale fixed maturity securities, available for sale equity securities, real estate and
real estate.other alternative investments.
•
•- Reductions to the cost basis of available for sale fixed maturity securities, available for sale equity securities and certain other invested assets for other-than-temporary impairments.
•
•- Impairments on investments in life settlements.
•
•- Changes in fair value of derivatives except for (1) those
instrumentsderivatives at AIGFP that are not intermediated on behalf of other AIG subsidiaries and (2) those instruments that are designated as hedging instruments when the change in the fair value of the hedged item is not reported in Net realized capital gains (losses).
•
•- Exchange gains and losses resulting from foreign currency transactions.
The following table presents the components of Net realized capital gains (losses):
Years Ended December 31, | | | | | | | | | | | | |
(in millions) | | | | | | | 2015 | | | 2014 | | 2013 |
Sales of fixed maturity securities | | | | | | $ | 94 | | $ | 585 | $ | 2,432 |
Sales of equity securities(a) | | | | | | | 1,032 | | | 111 | | 111 |
Other-than-temporary impairments: | | | | | | | | | | | | |
Severity | | | | | | | (13) | | | (3) | | (6) |
Change in intent | | | | | | | (233) | | | (40) | | (48) |
Foreign currency declines | | | | | | | (57) | | | (19) | | (1) |
Issuer-specific credit events | | | | | | | (348) | | | (169) | | (170) |
Adverse projected cash flows | | | | | | | (20) | | | (16) | | (7) |
Provision for loan losses | | | | | | | (58) | | | (1) | | (26) |
Foreign exchange transactions | | | | | | | 416 | | | 598 | | 151 |
Derivative instruments | | | | | | | 341 | | | (177) | | 287 |
Impairments on investments in life settlements | | | | | | | (540) | | | (201) | | (971) |
Other | | | | | | | 162 | (b) | | 71 | | 187 |
Net realized capital gains | | | | | | $ | 776 | | $ | 739 | $ | 1,939 |
(a) Includes realized gains on the sale of our equity interests in PICC.
(b) Includes realized gains due to the sale of Class B shares of Prudential Financial, Inc. and common shares of Springleaf Holdings, Inc. and realized losses on the sale of ordinary shares of AerCap.
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Item 8 / note 5. INVESTMENTS
| | | | | | | | | | |
| |
| |
| |
| |
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Sales of fixed maturity securities | | $ | 2,432 | | $ | 2,607 | | $ | 1,913 | |
Sales of equity securities | | | 111 | | | 484 | | | 164 | |
Other-than-temporary impairments: | | | | | | | | | | |
Severity | | | (6 | ) | | (44 | ) | | (51 | ) |
Change in intent | | | (48 | ) | | (62 | ) | | (12 | ) |
Foreign currency declines | | | (1 | ) | | (8 | ) | | (32 | ) |
Issuer-specific credit events | | | (265 | ) | | (1,048 | ) | | (1,165 | ) |
Adverse projected cash flows | | | (7 | ) | | (5 | ) | | (20 | ) |
Provision for loan losses | | | (26 | ) | | 104 | | | 48 | |
Change in the fair value of MetLife securities prior to their sale | | | – | | | – | | | (191 | ) |
Foreign exchange transactions | | | 151 | | | (233 | ) | | (96 | ) |
Derivative instruments | | | 92 | | | (685 | ) | | 447 | |
Impairments of investments in life settlements | | | (971 | ) | | (309 | ) | | (312 | ) |
Other | | | 282 | | | 129 | | | (2 | ) |
| | |
Net realized capital gains | | $ | 1,744 | | $ | 930 | | $ | 691 | |
| | |
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 6. INVESTMENTS
Change in Unrealized Appreciation (Depreciation) of Investments
The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale securities and other investments:
| | | | | | | |
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| | |
| | Years Ended
December 31, | |
|---|
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
Increase (decrease) in unrealized appreciation (depreciation) of investments: | | | | | | | |
Fixed maturities | | $ | (14,066 | ) | $ | 10,599 | |
Equity securities | | | 360 | | | (232 | ) |
Other investments | | | 101 | | | 343 | |
| | |
Total increase (decrease) in unrealized appreciation (depreciation) of investments* | | $ | (13,605 | ) | $ | 10,710 | |
| | |
* Excludes net unrealized gains attributable to businesses held for sale.
| | | Years Ended |
| | | December 31, |
(in millions) | | | | | | | 2015 | | 2014 |
Increase (decrease) in unrealized appreciation (depreciation) of investments: | | | | | | | | | |
Fixed maturity securities | | | | | | $ | (9,275) | $ | 6,809 |
Equity securities | | | | | | | (929) | | 535 |
Other investments | | | | | | | (803) | | 376 |
Total increase (decrease) in unrealized appreciation (depreciation) of investments | | | | | | $ | (11,007) | $ | 7,720 |
Evaluating Investments for Other-Than-Temporary Impairments
Fixed Maturity Securities
If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing.
For fixed maturity securities for which a credit impairment has occurred, the amortized cost is written down to the estimated recoveryrecoverable value with a corresponding charge to realized capital losses. The estimated recoveryrecoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not related to a credit impairment is recognizedpresented in unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were takenrecognized (a separate component of accumulated other comprehensive income).
When estimating future cash flows for structured fixed maturity securities (e.g., RMBS, CMBS, CDO, ABS) management considers historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by asset class:
•
- Current delinquency rates;
•
•- Expected default rates and the timing of such defaults;
•
•- Loss severity and the timing of any recovery; and
•
•- Expected prepayment speeds.
For corporate, municipal and sovereign fixed maturity securities determined to be credit impaired, management considers the fair value as the recoveryrecoverable value when available information does not indicate that another value is more relevant or reliable. When management identifies information that supports a recoveryrecoverable value other than the fair value, the determination of a recoveryrecoverable value considers scenarios specific to the issuer and the security, and may be based upon estimates of outcomes of corporate restructurings, political and macroeconomic factors, stability and financial strength of the issuer, the value of any secondary sources of repayment and the disposition of assets.
We consider severe price declines in our assessment of potential credit impairments. We may also modify our model inputs when we determine that price movements in certain sectors are indicative of factors not captured by the cash flow models.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 6. INVESTMENTS
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign exchange related, we prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoveryrecoverable value over the remaining expected holding period of the security.
Credit Impairments
The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Balance, beginning of year | $ | 2,659 | $ | 3,872 | $ | 5,164 |
Increases due to: | | | | | | |
Credit impairments on new securities subject to impairment losses | | 111 | | 49 | | 47 |
Additional credit impairments on previously impaired securities | | 109 | | 85 | | 78 |
Reductions due to: | | | | | | |
Credit impaired securities fully disposed for which there was no | | | | | | |
prior intent or requirement to sell | | (399) | | (613) | | (643) |
Credit impaired securities for which there is a current intent or | | | | | | |
anticipated requirement to sell | | 2 | | - | | - |
Accretion on securities previously impaired due to credit* | | (735) | | (725) | | (774) |
Other | | - | | (9) | | - |
Balance, end of year | $ | 1,747 | $ | 2,659 | $ | 3,872 |
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Balance, beginning of year | | $ | 5,164 | | $ | 6,504 | | $ | 6,786 | |
Increases due to: | | | | | | | | | | |
Credit impairments on new securities subject to impairment losses | | | 47 | | | 194 | | | 235 | |
Additional credit impairments on previously impaired securities | | | 78 | | | 483 | | | 735 | |
Reductions due to: | | | | | | | | | | |
Credit impaired securities fully disposed for which there was no prior intent or requirement to sell | | | (643 | ) | | (1,105 | ) | | (529 | ) |
Credit impaired securities for which there is a current intent or anticipated requirement to sell | | | – | | | (5 | ) | | – | |
Accretion on securities previously impaired due to credit* | | | (774 | ) | | (915 | ) | | (544 | ) |
Hybrid securities with embedded credit derivatives reclassified to other bond securities | | | – | | | – | | | (179 | ) |
Other | | | – | | | 8 | | | – | |
| | |
Balance, end of year | | $ | 3,872 | | $ | 5,164 | | $ | 6,504 | |
| | |
* Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time.
Equity Securities
We evaluate our available for sale equity securities equity method and cost method investments for impairment by considering such securities as candidates for other-than-temporary impairment if they meet any of the following criteria:
•
- The security has traded at a significant (25 percent or more) discount to cost for an extended period of time (nine consecutive months or longer);
•
•- A discrete credit event has occurred resulting in (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for court-supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or
•
•- We have concluded that we may not realize a full recovery on our investment, regardless of the occurrence of one of the foregoing events.
The determination that an equity security is other-than-temporarily impaired requires the judgment of management and consideration of the fundamental condition of the issuer, its near-term prospects and all the relevant facts and circumstances. In addition to the above criteria, all equity securities that have been in a continuous decline in value below cost over twelve months are impaired. We also consider circumstances of a rapid and severe market valuation decline (50 percent or more) discount to cost, in which we could not reasonably assert that the impairment period would be temporary (severity losses).
Other Invested Assets
Our equity and cost method investments in private equity funds, and hedge funds and other entities are evaluated for impairment similar to the evaluation of equity securities for impairments as discussed above. Such evaluation considers market conditions,
events and
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 6. INVESTMENTS
volatility that may impact the recoverability of the underlying investments within these private equity funds and hedge funds and is based on the nature of the underlying investments and specific inherent risks. Such risks may evolve based on the nature of the underlying investments.
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds from the investment in life settlements would not be sufficient to recover our estimated future carrying amount, of the investment in life settlements, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market longevitymortality assumptions and market yields.
In general, fair value estimates for the investments in life settlements are calculated using cash flows based on medical underwriting ratings of the policies from a third-party underwriter, applied to an industry mortality table. Our new mortality assumptions are based on an industry table that wasas supplemented with proprietary data on the older age mortality of U.S. insured lives. In addition, mortalityMortality improvement factors wereare applied to our newthese assumptions based on our view of future mortality improvements likely to apply to the U.S. insured lives population. These mortality improvement assumptions were based on our analysis of various public industry sources and proprietary research. Using these newOur mortality assumptions coupled with the adopted future mortality improvement rates we revisedare used in our estimate of future net cash flows from theinvestments in life settlements. This resulted in a significant increase in the number of investments in life settlements identified as impaired as of December 31, 2013.
Our investments in aircraft assets and real estate are periodically evaluated for recoverability whenever changes in circumstances indicate the carrying amount of an asset may be impaired. When impairment indicators are present, we compare expected investment cash flows to carrying value.amount. When the expected cash flows are less than the carrying value,amount, the investments are written down to fair value with a corresponding charge to earnings.
Purchased Credit Impaired (PCI) Securities
We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determine, based on our expectations as to the timing and amount of cash flows expected to be received, whether it is probable at acquisition that we will not collect all contractually required payments for these PCI securities, including both principal and interest after considering the effects of prepayments. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security is determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is accreted into Net investment income over their remaining lives on a level-yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.
On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 6. INVESTMENTS
The following tables present information on our PCI securities, which are included in bonds available for sale:
(in millions) | At Date of Acquisition |
Contractually required payments (principal and interest) | $ | 33,191 |
Cash flows expected to be collected* | | 26,882 |
Recorded investment in acquired securities | | 17,955 |
| | | | |
| | |
(in millions)
| | At Date of Acquisition
| |
|---|
| | |
Contractually required payments (principal and interest) | | $ | 25,374 | |
Cash flows expected to be collected* | | | 20,037 | |
Recorded investment in acquired securities | | | 13,077 | |
| | |
* Represents undiscounted expected cash flows, including both principal and interest.
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| | | | | December 31, | | December 31, |
(in millions)
| | December 31, 2013
| | December 31, 2012
| | | 2015 | | 2014 |
|---|
| | | |
Outstanding principal balance | | $ | 14,741 | | $ | 11,791 | | $ | 16,871 | $ | 16,962 |
Amortized cost | | | 10,110 | | | 7,718 | | | 12,303 | | 12,216 |
Fair value | | | 11,338 | | | 8,823 | | | 13,164 | | 13,462 |
| | | |
The following table presents activity for the accretable yield on PCI securities:
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Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | |
|---|
| | | |
Years Ended December 31, | | | | | |
(in millions) | | | 2015 | | 2014 |
Balance, beginning of year | | $ | 4,766 | | $ | 4,135 | | $ | 6,865 | $ | 6,940 |
Newly purchased PCI securities | | | 1,773 | | | 1,620 | | | 696 | | 1,289 |
Disposals | | | (60 | ) | | (298 | ) | | (13) | | - |
Accretion | | | (719 | ) | | (672 | ) | | (879) | | (880) |
Effect of changes in interest rate indices | | | 302 | | | (213 | ) | | (251) | | (542) |
Net reclassification from non-accretable difference, including effects of prepayments | | | 878 | | | 194 | | |
| | | |
Net reclassification from (to) non-accretable difference, | | | | | |
including effects of prepayments | | | 428 | | 58 |
Balance, end of year | | $ | 6,940 | | $ | 4,766 | | $ | 6,846 | $ | 6,865 |
| | | |
Pledged Investments
Secured Financing and Similar Arrangements
We enter into secured financing transactions whereby certain securities are transferred to financial institutions in exchange for cash or other liquid collateral. Securities transferred by us under these financing transactions may be sold or repledged by the counterparties. As collateral for the securities transferred by us, counterparties transfer assets to us, such as cash or high quality fixed maturity securities. Collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the transferred securities during the life of the transactions. Where we receive fixed maturity securities as collateral, we do not have the right to sell or repledge this collateral unless an event of default occurs by the counterparties. At the termination of the transactions, we and our counterparties are obligated to return the collateral provided and the securities transferred, respectively. We treat these transactions as secured financing arrangements.
Secured financing transactions also include securities sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. At December 31, 2015, our secured financing transactions also include those that involve the transfer of securities to financial institutions in exchange for cash (securities lending agreements). In the majorityall of these repurchase agreements,secured financing transactions, the securities transferred by us (pledged collateral) may be sold or repledged by the counterparties. Repurchase agreements entered into by the DIB are carried at fair value based on market-observable interest rates. All other repurchaseThese agreements are recorded at their contracted repurchase amounts plus accrued interest.interest, other than those that are accounted for at fair value.
Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transactions. In the event of a decline in the fair value of the pledged collateral under these secured financing transactions, we may be required to transfer cash or additional securities as pledged collateral under these agreements. At the termination of the transactions, we and our counterparties are obligated to return the amounts borrowed and the securities transferred, respectively.
The following table presents the fair value of securities pledged to counterparties under secured financing transactions:transactions, including repurchase and securities lending agreements:
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(in millions)
| | December 31, 2013
| | December 31, 2012
| |
|---|
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Securities available for sale | | $ | 3,907 | | $ | 8,180 | |
Other securities | | | 2,766 | | | 2,985 | |
| | |
(in millions) | | December 31, 2015 | | December 31, 2014 |
Fixed maturity securities available for sale | $ | 1,145 | $ | - |
Other bond securities, at fair value | | 1,740 | | 2,122 |
AIG 2013 Form 10-K
Table of Contents
At December 31, 2015, amounts borrowed under repurchase and securities lending agreements totaled $2.9 billion.
ITEM 8 / NOTE 6. INVESTMENTS
Prior to January 1, 2012, in the case ofAt December 31, 2015, repurchase agreements where we did not obtain collateral sufficient to fund substantially allwith remaining contractual maturities of the cost of purchasing identical replacement91 - 364 days were collateralized by Non-U.S. government securities, during the term of the contract (generally less than 90 percent of the security value), we accounted for the transaction as a sale of the security and reported the obligation to repurchase the security as a derivative contract. Theat fair value, of $49million. Repurchase agreements with remaining contractual maturities of up to 30 days, 31 - 90 days and 91 - 364 days were collateralized by Corporate debt securities, transferred under repurchaseat fair value, of $33 million, $332 million and $1,326 million, respectively. Repurchase agreements accountedwith remaining contractual maturities of up to 30 days were collateralized by Non-U.S. government securities, available for as sales was $2.1 billion atsale, of $50 million.
At December 31, 2011. Effective January 1, 2012, the level2015, securities lending agreements with remaining contractual maturities of collateral received31 - 90 days were collateralized by the transferor in a repurchase agreement or similar arrangement is no longer relevant in determining whether the transaction should be accounted$914 million of Corporate debt securities and $57 million of Non-U.S. government securities, all classified as available for sale. Securities lending agreements with remaining contractual maturities of 91 - 364 days were collateralized by $124 million of RMBS, classified as aavailable for sale. There were no repurchase agreements accounted for as sales as of December 31, 2013.
We also enter into agreements in which securities are purchased by us under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. Such agreements entered into by the DIB are carried at fair value based on market observable interest rates. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge this collateral received.
The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:
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(in millions)
| | December 31, 2013
| | December 31, 2012
| | | December 31, 2015 | | December 31, 2014 |
|---|
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Securities collateral pledged to us | | $ | 8,878 | | $ | 11,039 | | $ | 1,742 | $ | 2,506 |
Amount repledged by us | | | 71 | | | 33 | | |
| | | |
Amount sold or repledged by us | | | - | | 131 |
Insurance —– Statutory and Other Deposits
Total carrying values of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance agreements,treaties, were $6.7$4.9 billion and $8.9$5.9 billion at December 31, 20132015 and 2012,2014, respectively.
Other Pledges and Restrictions
Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $57$47 million and $84$44 million of stock in FHLBs at December 31, 20132015 and December 31, 2012,2014, respectively. To the extent an AIG subsidiary borrows from the FHLB, its ownership interest in the stock of FHLBs will be pledged to the FHLB. In addition, our subsidiaries have pledged securities available for sale with a fair value of $80 million$1.2 billion and $341 million$0.5 billion at December 31, 20132015 and 2012,2014, respectively, associated with advances from the FHLBs.
Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations approximated $4.2was approximately $2.4 billion and $4.4$3.5 billion at December 31, 20132015 and December 31, 2012,2014, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
AIG 2013 Form 10-K
Table of Contents
At December 31, 2015, $439 million of short-term investments were held in escrow accounts or were otherwise subject to restriction as to their use.
ITEM 8 / NOTE 7.6. LENDING ACTIVITIES
7. LENDING ACTIVITIES
Mortgage and other loans receivable include commercial mortgages, residential mortgages, life insurance policy loans, commercial loans, and other loans and notes receivable. Commercial mortgages, residential mortgages, commercial loans, and other loans and notes receivable are carried at unpaid principal balances less allowance for credit allowanceslosses and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.
Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to earnings using the interest method. Premiums and discounts on purchased residential mortgages are also amortized to income as an adjustment to earnings using the interest method.
Life insurance policy loans are carried at unpaid principal amount.balances. There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy.
The following table presents the composition of MortgagesMortgage and other loans receivable:receivable, net:
| December 31, | | December 31, |
(in millions) | | 2015 | | 2014 |
Commercial mortgages* | $ | 22,067 | $ | 18,909 |
Residential mortgages | | 2,758 | | 1,007 |
Life insurance policy loans | | 2,597 | | 2,710 |
Commercial loans, other loans and notes receivable | | 2,451 | | 2,635 |
Total mortgage and other loans receivable | | 29,873 | | 25,261 |
Allowance for credit losses | | (308) | | (271) |
Mortgage and other loans receivable, net | $ | 29,565 | $ | 24,990 |
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(in millions)
| | December 31, 2013
| | December 31, 2012
| |
|---|
| | |
Commercial mortgages* | | $ | 16,195 | | $ | 13,788 | |
Life insurance policy loans | | | 2,830 | | | 2,952 | |
Commercial loans, other loans and notes receivable | | | 2,052 | | | 3,147 | |
| | |
Total mortgage and other loans receivable | | | 21,077 | | | 19,887 | |
Allowance for losses | | | (312 | ) | | (405 | ) |
| | |
Mortgage and other loans receivable, net | | $ | 20,765 | | $ | 19,482 | |
| | |
* Commercial mortgages primarily represent loans for office,offices, retail and industrial properties,apartments, with exposures in CaliforniaNew York and New YorkCalifornia representing the largest geographic concentrations (18(aggregating approximately 22 percent and 1712 percent, respectively, at December 31, 20132015, and 2218 percent and 1514 percent, respectively, at December 31, 2012)2014).
Nonperforming loans are generally those loans where payment of contractual principal or interest is more than 90 days past due. Nonperforming mortgages were not significant for all periods presented.
The following table presents the credit quality indicators for commercial mortgage loans:mortgages:
| Number | | | | | | | | | | | | | | | | Percent | |
December 31, 2015 | of | | Class | | | of | |
(dollars in millions) | Loans | | Apartments | | Offices | | Retail | Industrial | | Hotel | | Others | | Total(c) | Total $ | |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | |
In good standing | 830 | | $ | 3,916 | $ | 7,484 | $ | 4,809 | $ | 1,902 | $ | 2,082 | $ | 1,435 | $ | 21,628 | 98 | % |
Restructured(a) | 9 | | | - | | 156 | | 25 | | 6 | | 16 | | 6 | | 209 | 1 | |
90 days or less delinquent | 1 | | | - | | - | | 4 | | - | | - | | - | | 4 | - | |
>90 days delinquent or in | | | | | | | | | | | | | | | | | | |
process of foreclosure | 9 | | | 3 | | 205 | | - | | 6 | | - | | 12 | | 226 | 1 | |
Total(b) | 849 | | $ | 3,919 | $ | 7,845 | $ | 4,838 | $ | 1,914 | $ | 2,098 | $ | 1,453 | $ | 22,067 | 100 | % |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
Specific | | | | - | | 16 | | 1 | | 6 | | 1 | | - | | 24 | - | % |
General | | | | 35 | | 47 | | 29 | | 8 | | 15 | | 13 | | 147 | 1 | |
Total allowance for credit losses | | | $ | 35 | $ | 63 | $ | 30 | $ | 14 | $ | 16 | $ | 13 | $ | 171 | 1 | % |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | | | | | | | | | | | | |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | |
In good standing | 1,007 | | $ | 3,384 | $ | 6,100 | $ | 3,807 | $ | 1,689 | $ | 1,660 | $ | 1,812 | $ | 18,452 | 98 | % |
Restructured(a) | 7 | | | - | | 343 | | 7 | | - | | 17 | | - | | 367 | 2 | |
90 days or less delinquent | 6 | | | - | | - | | 10 | | - | | - | | 5 | | 15 | - | |
>90 days delinquent or in | | | | | | | | | | | | | | | | | | |
process of foreclosure | 4 | | | - | | 75 | | - | | - | | - | | - | | 75 | - | |
Total(b) | 1,024 | | $ | 3,384 | $ | 6,518 | $ | 3,824 | $ | 1,689 | $ | 1,677 | $ | 1,817 | $ | 18,909 | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Number
of
Loans
| | Class | |
| |
| |
|---|
December 31, 2013
(dollars in millions)
| |
| | Percent
of Total $
| |
|---|
| | Apartments
| | Offices
| | Retail
| | Industrial
| | Hotel
| | Others
| | Total(c)
| |
|---|
| | |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In good standing | | | 978 | | $ | 2,786 | | $ | 4,636 | | $ | 3,364 | | $ | 1,607 | | $ | 1,431 | | $ | 1,970 | | $ | 15,794 | | | 98 | % |
Restructured(a) | | | 9 | | | 53 | | | 210 | | | 6 | | | – | | | – | | | 85 | | | 354 | | | 2 | |
90 days or less delinquent | | | 2 | | | – | | | – | | | 5 | | | – | | | – | | | – | | | 5 | | | – | |
>90 days delinquent or in process of foreclosure | | | 6 | | | – | | | 42 | | | – | | | – | | | – | | | – | | | 42 | | | – | |
| | |
Total(b) | | | 995 | | $ | 2,839 | | $ | 4,888 | | $ | 3,375 | | $ | 1,607 | | $ | 1,431 | | $ | 2,055 | | $ | 16,195 | | | 100 | % |
| | |
Allowance for losses | | | | | $ | 10 | | $ | 109 | | $ | 9 | | $ | 19 | | $ | 3 | | $ | 51 | | $ | 201 | | | 1 | % |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In good standing | | | 998 | | $ | 1,549 | | $ | 4,698 | | $ | 2,640 | | $ | 1,654 | | $ | 1,153 | | $ | 1,671 | | $ | 13,365 | | | 97 | % |
Restructured(a) | | | 8 | | | 50 | | | 207 | | | 7 | | | 2 | | | – | | | 22 | | | 288 | | | 2 | |
90 days or less delinquent | | | 4 | | | – | | | 17 | | | – | | | – | | | – | | | – | | | 17 | | | – | |
>90 days delinquent or in process of foreclosure | | | 6 | | | – | | | 13 | | | 26 | | | – | | | – | | | 79 | | | 118 | | | 1 | |
| | |
Total(b) | | | 1,016 | | $ | 1,599 | | $ | 4,935 | | $ | 2,673 | | $ | 1,656 | | $ | 1,153 | | $ | 1,772 | | $ | 13,788 | | | 100 | % |
| | |
Allowance for losses | | | | | $ | 5 | | $ | 74 | | $ | 19 | | $ | 19 | | $ | 1 | | $ | 41 | | $ | 159 | | | 1 | % |
| | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
Specific | | | $ | - | $ | 27 | $ | 3 | $ | 13 | $ | 3 | $ | 9 | $ | 55 | - | % |
General | | | | 3 | | 59 | | 25 | | 9 | | 3 | | 5 | | 104 | 1 | |
Total allowance for credit losses | | | $ | 3 | $ | 86 | $ | 28 | $ | 22 | $ | 6 | $ | 14 | $ | 159 | 1 | % |
(a) Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. See discussion of troubled debt restructurings below.
(b) Does not reflect allowance for credit losses.
(c) Approximately 99 percent of the commercial mortgages held at such respective dates were current as to payments of principal and interest.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 7. LENDING ACTIVITIES
Methodology Used to Estimate the Allowance for Credit Losses
Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not probable. For commercial mortgage loans in particular, the impairmentImpairment is measured based on the fair value of underlying collateral, which is determined based on the present value of expected net future cash flows of the collateral, less estimated costs to sell. For other loans, the impairment may be measured based onusing either i) the present value of expected future cash flows discounted at the loan'sloan’s effective interest rate, or based onii) the loan'sloan’s observable market price, where available.if available, or iii) the fair value of the collateral if the loan is collateral dependent. Impairment of commercial mortgages is typically determined using the fair value of collateral while impairment of other loans is typically determined using the present value of cash flows or the loan’s observable market price. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on the analysis of internal risk ratings and current loan values. Internal risk ratings are assigned based on the consideration of risk factors includingstatistical models primarily driven by past due status, debt service coverage, loan-to-value ratio, or the ratio of theproperty type and location, loan balance to the estimated value of the property, property occupancy,term, profile of the borrower and of the major property tenants, economic trends in the market where the property is located, and condition of the property. These factors and the resulting risk ratings also provide a basis for determining the level of monitoring performed at both the individual loan and the portfolio level.seasoning. When all or a portion of a commercial mortgage loan is deemed uncollectible, the uncollectible portion of the carrying valueamount of the loan is charged off against the allowance.
Interest income is not accrued when payment of contractual principal and interest is not expected. Any cash received on impaired loans is recognizedgenerally recorded as casha reduction of the current carrying amount of the loan. Accrual of interest income is received.generally resumed when delinquent contractual principal and interest is repaid or when a portion of the delinquent contractual payments are made and the ongoing required contractual payments have been made for an appropriate period.
A significant majority of commercial mortgage loansmortgages in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.
The following table presents a rollforward of the changes in the allowance for credit losses on Mortgage and other loans receivable:
| | 2015 | | 2014 | | 2013 |
Years Ended December 31, | | | Commercial | | Other | | | | | Commercial | | Other | | | | | Commercial | | Other | | |
(in millions) | | | Mortgages | | Loans | | Total | | | Mortgages | | Loans | | Total | | | Mortgages | | Loans | | Total |
Allowance, beginning of year | | $ | 159 | $ | 112 | $ | 271 | | $ | 201 | $ | 111 | $ | 312 | | $ | 159 | $ | 246 | $ | 405 |
Loans charged off | | | (23) | | (6) | | (29) | | | (29) | | (39) | | (68) | | | (12) | | (104) | | (116) |
Recoveries of loans previously | | | | | | | | | | | | | | | | | | | | | |
charged off | | | 4 | | 1 | | 5 | | | 18 | | 16 | | 34 | | | 3 | | 6 | | 9 |
Net charge-offs | | | (19) | | (5) | | (24) | | | (11) | | (23) | | (34) | | | (9) | | (98) | | (107) |
Provision for loan losses | | | 31 | | 27 | | 58 | | | (31) | | 23 | | (8) | | | 52 | | (32) | | 20 |
Other | | | - | | 3 | | 3 | | | - | | 1 | | 1 | | | (1) | | (5) | | (6) |
Allowance, end of year | | $ | 171 * | $ | 137 | $ | 308 | | $ | 159 * | $ | 112 | $ | 271 | | $ | 201 * | $ | 111 | $ | 312 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
|---|
| | |
| | 2013 | | 2012 | | 2011 | |
|---|
Years Ended December 31,
(in millions)
| | Commercial
Mortgages
| | Other
Loans
| | Total
| | Commercial
Mortgages
| | Other
Loans
| | Total
| | Commercial
Mortgages
| | Other
Loans
| | Total
| |
|---|
| | |
Allowance, beginning of year | | $ | 159 | | $ | 246 | | $ | 405 | | $ | 305 | | $ | 435 | | $ | 740 | | $ | 470 | | $ | 408 | | $ | 878 | |
Loans charged off | | | (12 | ) | | (104 | ) | | (116 | ) | | (23 | ) | | (21 | ) | | (44 | ) | | (78 | ) | | (47 | ) | | (125 | ) |
Recoveries of loans previously charged off | | | 3 | | | 6 | | | 9 | | | 13 | | | 4 | | | 17 | | | 37 | | | 1 | | | 38 | |
| | |
Net charge-offs | | | (9 | ) | | (98 | ) | | (107 | ) | | (10 | ) | | (17 | ) | | (27 | ) | | (41 | ) | | (46 | ) | | (87 | ) |
Provision for loan losses | | | 52 | | | (32 | ) | | 20 | | | (136 | ) | | 33 | | | (103 | ) | | (69 | ) | | 51 | | | (18 | ) |
Other | | | (1 | ) | | (5 | ) | | (6 | ) | | – | | | – | | | – | | | (55 | ) | | – | | | (55 | ) |
Activity of discontinued operations | | | – | | | – | | | – | | | – | | | (205 | ) | | (205 | ) | | – | | | 22 | | | 22 | |
| | |
Allowance, end of year | | $ | 201* | | $ | 111 | | $ | 312 | | $ | 159* | | $ | 246 | | $ | 405 | | $ | 305* | | $ | 435 | | $ | 740 | |
| | |
* Of the total allowance at the end of the year, $93$24 million and $47$55 million relates to individually assessed credit losses on $264$507 million and $286$192 million of commercial mortgage loansmortgages as of December 31, 20132015 and 2012,2014, respectively.
Troubled Debt Restructurings
We modify loans to optimize their returns and improve their collectability, among other things. When we undertake such a modification with a borrower that is experiencing financial difficulty and the modification involves us granting a concession to
the troubled debtor, the modification is a troubled debt restructuring (TDR). We assess whether a borrower is experiencing financial difficulty based on a variety of factors, including the borrower'sborrower’s current default on any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the modification, the insufficiency of the borrower'sborrower’s forecasted cash flows to service any of its outstanding debt (including both principal and interest), and the borrower'sborrower’s inability to access alternative third-party financing at an interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal or interest forgiveness, payment deferrals and easing of loan covenants.
AsDuring 2015 and 2014, loans with a carrying value of December 31, 2013$36 million and 2012, we held no significant loans that had been$218 million were modified in a TDR during those respective years.
AIG 2013 Form 10-K
TDRs, respectively.Table of Contents
ITEM 8 / NOTE 8.7. REINSURANCE
8. REINSURANCE
In the ordinary course of business, our insurance companies may use both treaty and facultative reinsurance to minimize their net loss exposure to any single catastrophic loss event or to an accumulation of losses from a number of smaller events or to provide greater diversification of our businesses. In addition, our general insurance subsidiaries assume reinsurance from other insurance companies. We determine the portion of the incurred but not reported (IBNR) loss that will be recoverable under our reinsurance contracts by reference to the terms of the reinsurance protection purchased. This determination is necessarily based on the estimate of IBNR and accordingly, is subject to the same uncertainties as the estimate of IBNR. Reinsurance assets include the balances due from reinsurance and insurance companies under the terms of our reinsurance agreements for paid and unpaid losses and loss adjustment expenses incurred, ceded unearned premiums and ceded future policy benefits for life and accident and health insurance contracts and benefits paid and unpaid. Amounts related to paid and unpaid losses and benefits and loss expenses with respect to these reinsurance agreements are substantially collateralized. We remain liable to the extent that our reinsurers do not meet their obligation under the reinsurance contracts, and as such, we regularly evaluate the financial condition of our reinsurers and monitor concentration of our credit risk. The estimation of the allowance for doubtful accounts requires judgment for which key inputs typically include historical trends regarding uncollectible balances, disputes and credit events as well as specific reviews of balances in dispute or subject to credit impairment. The allowance for doubtful accounts on reinsurance assets was $276$272 million and $338$258 million at December 31, 20132015 and 2012,2014, respectively. Changes in the allowance for doubtful accounts on reinsurance assets are reflected in Policyholder benefits and claimslosses incurred within the Consolidated Statements of Income.
The following table provides supplemental information for loss and benefit reserves, gross and net of ceded reinsurance:
At December 31, | | 2015 | | | 2014 |
| | As | | Net of | | | As | | Net of |
(in millions) | | Reported | Reinsurance | | | Reported | Reinsurance |
Liability for unpaid losses and loss adjustment expenses(a) | $ | (74,942) | $ | (60,603) | | $ | (77,260) | $ | (61,612) |
Future policy benefits for life and accident and health insurance contracts | | (43,585) | | (42,506) | | | (42,749) | | (41,767) |
Reserve for unearned premiums | | (21,318) | | (18,380) | | | (21,324) | | (18,278) |
Reinsurance assets(b) | | 18,356 | | | | | 19,676 | | |
| | | | | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
| | 2013 | | 2012 | |
|---|
At December 31,
(in millions)
| | As
Reported
| | Net of
Reinsurance
| | As
Reported
| | Net of
Reinsurance
| |
|---|
| | |
Liability for unpaid claims and claims adjustment expense(a) | | $ | (81,547 | ) | $ | (64,316 | ) | $ | (87,991 | ) | $ | (68,782 | ) |
Future policy benefits for life and accident and health insurance contracts | | | (40,653 | ) | | (39,619 | ) | | (40,523 | ) | | (39,591 | ) |
Reserve for unearned premiums | | | (21,953 | ) | | (18,532 | ) | | (22,537 | ) | | (18,934 | ) |
Reinsurance assets(b) | | | 21,686 | | | – | | | 23,744 | | | – | |
| | |
(a) In both 20132015 and 2012,2014, the Net of Reinsurance amount reflects the cession under the June 17, 2011 transaction with National Indemnity Company (NICO) of $1.6 billion.$1.8 billion and $1.5 billion, respectively.
(b) Represents gross reinsurance assets, excluding allowances and reinsurance recoverable on paid losses.
Short-Duration Reinsurance
Short-duration reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain of these reinsurance arrangements consist of excess of loss contracts that protect us against losses above stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums and are recognized as a reduction of premiums earned over the contract period in proportion to the protection received. Amounts recoverable from reinsurers on short-duration contracts are estimated in a manner consistent with the claims liabilities associated with the reinsurance and presented as a component of Reinsurance assets. Assumed reinsurance premiums are earned primarily on a pro-rata basis over the terms of the
reinsurance contracts and the portion of premiums relating to the unexpired terms of coverage is included in the reserve for unearned premiums. For both ceded and assumed reinsurance, risk transfer requirements must be met for reinsurance accounting to apply. If risk transfer requirements are not met, the contract is accounted for as a deposit, resulting in the recognition of cash flows under the contract through a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Similar risk transfer criteria are used to determine whether directly written insurance contracts should be accounted for as insurance or as a deposit.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 8. REINSURANCE
The following table presents short-duration insurance premiums written and earned:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | Non-Life Insurance Companies |
|---|
| | | |
| | AIG Property Casualty | | Mortgage Guaranty | | Eliminations | | Total | | |
|---|
Years Ended December 31,
(in millions)
| | |
|---|
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
(in millions) | | | 2015 | | 2014 | | 2013 |
Premiums written: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct | | $ | 39,545 | | $ | 40,428 | | $ | 41,710 | | $ | 1,099 | | $ | 938 | | $ | 898 | | $ | – | | $ | – | | $ | – | | $ | 40,644 | | $ | 41,366 | | $ | 42,608 | | $ | 37,698 | $ | 39,375 | $ | 39,833 |
Assumed | | | 3,659 | | | 3,428 | | 3,031 | | | (13 | ) | | (10 | ) | | – | | | 3 | | | 7 | | 2 | | | 3,649 | | | 3,425 | | 3,033 | | | 2,972 | | 3,399 | | 4,306 |
Ceded | | | (8,816 | ) | | (9,420 | ) | | (9,901 | ) | | (38 | ) | | (70 | ) | | (97 | ) | | (3 | ) | | (7 | ) | | (2 | ) | | (8,857 | ) | | (9,497 | ) | | (10,000 | ) | | (7,604) | | (8,318) | | (9,514) |
| | | |
Net | | $ | 34,388 | | $ | 34,436 | | $ | 34,840 | | $ | 1,048 | | $ | 858 | | $ | 801 | | $ | – | | $ | – | | $ | – | | $ | 35,436 | | $ | 35,294 | | $ | 35,641 | | $ | 33,066 | $ | 34,456 | $ | 34,625 |
| | | |
Premiums earned: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct | | $ | 38,996 | | $ | 40,954 | | $ | 42,878 | | $ | 840 | | $ | 754 | | $ | 835 | | $ | – | | $ | – | | $ | – | | $ | 39,836 | | $ | 41,708 | | $ | 43,713 | | $ | 37,105 | $ | 38,707 | $ | 39,018 |
Assumed | | | 3,521 | | | 3,254 | | 3,294 | | | 7 | | | 31 | | 55 | | | (18 | ) | | (30 | ) | | (46 | ) | | 3,510 | | | 3,255 | | 3,303 | | | 2,659 | | 3,258 | | 3,516 |
Ceded | | | (8,564 | ) | | (9,335 | ) | | (10,483 | ) | | (38 | ) | | (70 | ) | | (98 | ) | | 18 | | | 30 | | 46 | | | (8,584 | ) | | (9,375 | ) | | (10,535 | ) | | (7,593) | | (8,140) | | (8,585) |
| | | |
Net | | $ | 33,953 | | $ | 34,873 | | $ | 35,689 | | $ | 809 | | $ | 715 | | $ | 792 | | $ | — | | $ | – | | $ | – | | $ | 34,762 | | $ | 35,588 | | $ | 36,481 | | $ | 32,171 | $ | 33,825 | $ | 33,949 |
| | | |
For the years ended December 31, 2013, 20122015, 2014 and 2011,2013, reinsurance recoveries, which reduced losslosses and loss adjustment expenses incurred, amounted to $4.1 billion, $2.6 billion and $3.3 billion, $4.5 billion and $6.1 billion, respectively.
Long-Duration Reinsurance
Long-duration reinsurance is effected principally under yearly renewable term treaties. The premiums with respect to these treaties are earned over the contract period in proportion to the protection provided. Amounts recoverable from reinsurers on long-duration contracts are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented as a component of Reinsurance assets.
The following table presents premiums for our long-duration insurance and retirement services operations:
|
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | |
|---|
| | | |
| | AIG Life and Retirement | | Divested Businesses | | Total | | |
|---|
Years Ended December 31,
(in millions)
| | |
|---|
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended | | | | | | |
December 31, | | Life Insurance Companies | | Run-off insurance lines | | Total |
(in millions) | | | 2015 | | 2014 | | 2013 | | | 2015 | | 2014 | | 2013 | | | 2015 | | 2014 | | 2013 |
Gross premiums | | $ | 3,269 | | $ | 3,066 | | $ | 3,140 | | $ | 9 | | $ | 11 | | $ | 17 | | $ | 3,278 | | $ | 3,077 | | $ | 3,157 | | $ | 5,234 | $ | 4,059 | $ | 4,155 | | $ | 6 | $ | 11 | $ | 9 | | $ | 5,240 | $ | 4,070 | $ | 4,164 |
Ceded premiums | | | (673 | ) | | (602 | ) | | (591 | ) | | – | | | – | | (6 | ) | | (673 | ) | | (602 | ) | | (597 | ) | | (756) | | (661) | | (620) | | | - | | - | | - | | | (756) | | (661) | | (620) |
| | | |
Net | | $ | 2,596 | | $ | 2,464 | | $ | 2,549 | | $ | 9 | | $ | 11 | | $ | 11 | | $ | 2,605 | | $ | 2,475 | | $ | 2,560 | | $ | 4,478 | $ | 3,398 | $ | 3,535 | | $ | 6 | $ | 11 | $ | 9 | | $ | 4,484 | $ | 3,409 | $ | 3,544 |
| | | |
Long-duration reinsurance recoveries, which reduced Policyholder benefits and claimslosses incurred, were approximately $714 million, $758$1.0 billion, $731 million and $611$714 million, respectively, for the years ended December 31, 2013, 20122015, 2014 and 2011.2013.
The following table presents long-duration insurance in forcein-force ceded to other insurance companies:
At December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013* |
Long-duration insurance in force ceded | $ | 177,025 | $ | 180,178 | $ | 122,012 |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
At December 31,
(in millions)
| | 2013
| | 2012
| | 2011*
| |
|---|
| | |
Long-duration insurance in force ceded | | $ | 122,012 | | $ | 129,159 | | $ | 140,156 | |
| | |
* Excludes amounts related to held-for-sale entities.
Long-duration insurance in forcein-force assumed represented 0.050.04 percent of gross long-duration insurance in forcein-force at December 31, 2013,2015, 0.04 percent at December 31, 2014 and 0.05 percent at December 31, 2012 and 0.07 percent at December 31, 2011,2013, and premiums assumed by AIGthe Life and RetirementInsurance Companies represented 0.40.1 percent, 0.60.5 percent and 0.70.3 percent of gross premiums for the years ended December 31, 2013, 20122015, 2014 and 2011,2013, respectively.
AIGThe U.S. Life and Retirement utilizesInsurance Companies utilize internal and third-party reinsurance relationships to manage insurance risks and to facilitate capital management strategies. As a result of these reinsurance arrangements, AIG Life and Retirement is ablestrategies, which allows them to minimize the use of letters of credit and utilize capital more efficiently. Pools of highly-rated third-party reinsurers are utilized to manage net amounts at risk in excess of retention limits.
AIGThe U.S. Life and Retirement managesInsurance Companies manage the capital impact on its insurance subsidiaries oftheir statutory reserve requirements under the NAIC Model Regulation XXX“Valuation of Life Insurance Policies” (Regulation XXX) and NAIC Actuarial Guideline AXXX38 (Guideline AXXX) through intercompany reinsurance transactions. Under GAAP, these intercompany reinsurance transactions are eliminated in consolidation. Under one arrangement, one of these intercompany arrangements, AIGthe U.S. Life and RetirementInsurance Companies obtains letters of credit to support statutory recognition of the ceded reinsurance. As of December 31, 2013, AIG2015, the U.S. Life and RetirementInsurance Companies had obtained for this purpose a $260 million syndicated letter of credit facility and a $190 million bilateral letter of credit. As of December 31, 2013, all of the $450 million of letters of credit were due to mature on December 31, 2015. On February 7, 2014, these letters of
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 8. REINSURANCE
credit were replaced with two new, renegotiated bilateral letters of credit totaling $450 million. These new letters of creditmillion with AIG entities, which were issued on February 7, 2014 and expire on February 7, 2018,2019, but will be automatically extended without amendment by one year on each anniversary of the issuance date, unless the issuer provides notice of non-renewal. See Note 1918 for additional information on the use of affiliated reinsurance for Regulation XXX and Guideline AXXX reserves.
Reinsurance Security
Our third-party reinsurance arrangements do not relieve us from our direct obligations to our beneficiaries. Thus, a credit exposure exists with respect to both short-duration and long-duration reinsurance ceded to the extent that any reinsurer fails to meet the obligations assumed under any reinsurance agreement. We hold substantial collateral as security under related reinsurance agreements in the form of funds, securities, and/or letters of credit. A provision has been recorded for estimated unrecoverable reinsurance. We believe that no exposure to a single reinsurer represents an inappropriate concentration of credit risk to AIG. Gross reinsurance assets with our three largest reinsurers aggregate to approximately $6.5 billion and $6.2 billion at December 31, 2015 and 2014, respectively, of which approximately $3.7 billion and $3.3 billion at December 31, 2015 and 2014, respectively, was not secured by collateral.
9.8. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs (DAC) represent those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such deferred policy acquisition costs generally include agent or broker commissions and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. We partially defer costs, including certain commissions, when we do not believe that the entire cost is directly related to the acquisition or renewal of insurance contracts.
We also defer a portion of employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for each distribution channel and/or cost center from which the cost originates.
Short-duration insurance contracts: Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally 12 months. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of DAC. We assess the recoverability of DAC on an annual basis or more frequently if circumstances indicate an impairment may have occurred. This assessment is performed by comparing recorded net unearned premiums and anticipated investment income on in-force
business to the sum of expected claims, claimslosses and loss adjustment expenses incurred, unamortized DAC and maintenance costs. If the sum of these costs exceeds the amount of recorded net unearned premiums and anticipated investment income, the excess is recognized as an offset against the asset established for DAC. This offset is referred to as a premium deficiency charge. Increases in expected claimslosses and claimsloss adjustment expenses incurred can have a significant impact on the likelihood and amount of a premium deficiency charge.
Long-duration insurance contracts: Policy acquisition costs for participating life, traditional life and accident and health insurance products are generally deferred and amortized, with interest, over the premium paying period. The assumptions used to calculate the benefit liabilities and DAC for these traditional products are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. These "locked-in"“locked-in” assumptions include mortality, morbidity, persistency, maintenance expenses and investment returns, and include margins for adverse deviation to reflect uncertainty given that actual experience might deviate from these assumptions. LossA loss recognition existsevent occurs when there is a shortfall between the carrying amountsamount of future policy benefit liabilities, net of DAC, and the amountwhat the future policy benefit liabilities, net of DAC, would be when applying updated current assumptions. When we determine a loss recognition exists,event has occurred, we first reduce any DAC related to that block of business through amortization of acquisition expense, and after DAC is depleted, we record additional liabilities through a charge to Policyholder benefits and claimslosses incurred. Groupings for loss recognition testing are consistent with our manner of acquiring, servicing and servicingmeasuring the profitability of the business and applied by product groupings. We perform separate loss recognition tests for traditional life products, payout annuities and long-term care products. Once loss recognition has been recorded for a block of business, the old assumption set is replaced and the assumption set used for the loss recognition would then be subject to the lock-in principle.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 9. DEFERRED POLICY ACQUISITION COSTS
Investment-oriented contracts:Policy acquisition costs and policy issuance costs related to universal life and investment-type products (collectively, investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the contracts. Estimated gross profits include net investment income and spreads, net realized investment gains and losses, fees, surrender charges, expenses, and mortality gains and losses. In each reporting period, current period amortization expense is adjusted to reflect actual gross profits. If estimated gross profits change significantly, DAC is recalculated using the new assumptions, and any resulting adjustment is included in income. If the new assumptions indicate that future estimated gross profits are higher than previously estimated, DAC will be increased resulting in a decrease in amortization expense and increase in income in the current period; if future estimated gross profits are lower than previously estimated, DAC will be decreased resulting in an increase in amortization expense and decrease in income in the current period. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the current and projected future profitability of the underlying insurance contracts.
To estimate future estimated gross profits for variable annuity products, a long-term annual asset growth assumption is applied to determine the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity markets is partially mitigated through the use of a "reversion“reversion to the mean"mean” methodology whereby short-term asset growth above or below long-term annual rate assumptions impact the growth assumption applied to the five-year period subsequent to the current balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth assumptions, while also giving consideration to the effect of actual investment performance. When actual performance significantly deviates from the annual long-term growth assumption, as evidenced by growth assumptions in the five-year reversion to the mean period falling below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or "unlock"“unlock” the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption applied to subsequent periods.
Shadow DAC and Shadow Loss Recognition: DAC held forrelated to investment-oriented products is also adjusted to reflect the effect of unrealized gains or losses on fixed maturity and equity securities available for sale on estimated gross profits, with related changes recognized through Other comprehensive income (shadow DAC). The adjustment is made at each balance sheet date, as if the securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. Similarly, for long-duration traditional insurance contracts, if the assets supporting the liabilities maintain a temporary net unrealized gain position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by reflecting the impact of reinvestment rates on future yields. If a future loss is anticipated under this basis, any additional shortfall indicated by loss recognition tests is recognized as a reduction in accumulated other
comprehensive income (shadow loss recognition). Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in liabilities for future policy benefits. The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to Other comprehensive income.
Internal Replacements of Long-duration and Investment-oriented Products: For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. If the modification does not substantially change the contract, we do not change the accounting and amortization of existing DAC and related actuarial balances. If an internal replacement represents a substantial change, the original contract is considered to be extinguished and any related DAC or other policy balances are charged or credited to income, whereasand any new deferrable costs associated with the replacement contract are deferred.
Value of Business Acquired (VOBA) is determined at the time of acquisition and is reported in the Consolidated Balance Sheets with DAC. This value is based on the present value of future pre-tax profits discounted at yields applicable at the time of purchase. For participating life, traditional life and accident and health insurance products, VOBA is amortized over the life of the business in a manner similar to that for DAC based on the assumptions at purchase. For investment-oriented products, VOBA is amortized in relation to estimated gross profits and adjusted for the effect of unrealized gains or losses on fixed maturity and equity securities available for sale in a manner similar to DAC.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 9. DEFERRED POLICY ACQUISITION COSTS
The following table presents a rollforward of DAC:DAC and VOBA:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Non-Life Insurance Companies: | | | | | | |
Balance, beginning of year | $ | 2,551 | $ | 2,493 | $ | 2,342 |
Acquisition costs deferred | | 4,537 | | 4,805 | | 4,803 |
Amortization expense | | (4,313) | | (4,599) | | (4,481) |
Other | | (144) | | (148) | | (171) |
Balance, end of year | $ | 2,631 | $ | 2,551 | $ | 2,493 |
Life Insurance Companies: | | | | | | |
Balance, beginning of year | $ | 7,258 | $ | 6,920 | $ | 5,815 |
Acquisition costs deferred | | 1,288 | | 1,114 | | 1,034 |
Amortization expense | | (916) | | (727) | | (674) |
Change in net unrealized gains (losses) on securities | | 848 | | (360) | | 784 |
Decrease due to foreign exchange | | (34) | | (32) | | (39) |
Other | | 23 | | 343 | | - |
Balance, end of year | $ | 8,467 | $ | 7,258 | $ | 6,920 |
Consolidation and eliminations | | 17 | | 18 | | 23 |
Total deferred policy acquisition costs* | $ | 11,115 | $ | 9,827 | $ | 9,436 |
Supplemental Information: | | | | | | |
VOBA amortization expense included in Life Insurance Companies DAC amortization | | 64 | | 17 | | 23 |
VOBA, end of year included in Life Insurance Companies DAC balance | | 453 | | 510 | | 373 |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
AIG Property Casualty: | | | | | | | | | | |
Balance, beginning of year | | $ | 2,441 | | $ | 2,375 | | $ | 2,099 | |
| | |
Acquisition costs deferred | | | 4,866 | | | 4,861 | | | 4,548 | |
Amortization expense | | | (4,479 | ) | | (4,761 | ) | | (4,324 | ) |
Increase (decrease) due to foreign exchange and other | | | (168 | ) | | (34 | ) | | 52 | |
AIG Property Casualty other | | | (37 | ) | | – | | | – | |
| | |
Balance, end of year | | $ | 2,623 | | $ | 2,441 | | $ | 2,375 | |
| | |
AIG Life and Retirement: | | | | | | | | | | |
Balance, beginning of year | | $ | 5,672 | | $ | 6,502 | | $ | 7,258 | |
| | |
Acquisition costs deferred | | | 930 | | | 724 | | | 869 | |
Amortization expense | | | (658 | ) | | (931 | ) | | (1,142 | ) |
Change in net unrealized gains (losses) on securities | | | 787 | | | (621 | ) | | (486 | ) |
Increase (decrease) due to foreign exchange | | | (5 | ) | | (2 | ) | | 3 | |
Other | | | (3 | ) | | – | | | – | |
| | |
Balance, end of year | | $ | 6,723 | | $ | 5,672 | | $ | 6,502 | |
| | |
Mortgage Guaranty: | | | | | | | | | | |
Balance, beginning of year | | $ | 44 | | $ | 25 | | $ | 32 | |
| | |
Acquisition costs deferred | | | 42 | | | 36 | | | 14 | |
Amortization expense | | | (20 | ) | | (17 | ) | | (20 | ) |
Increase (decrease) due to foreign exchange | | | – | | | – | | | 1 | |
Other | | | 1 | | | – | | | (2 | ) |
| | |
Balance, end of year | | $ | 67 | | $ | 44 | | $ | 25 | |
| | |
Consolidation and eliminations | | | 23 | | | 25 | | | 35 | |
| | |
Total deferred policy acquisition costs* | | $ | 9,436 | | $ | 8,182 | | $ | 8,937 | |
| | |
* IncludesNet of reductions in DAC of $583 million, $1.4 billion, and $1.1 billion $1.8 billion, and $1.4 billion for AIG Life and RetirementInsurance Companies at December 31, 2015, 2014 and 2013, 2012 and 2011, respectively, and $34 million for Divested businesses at December 31, 2011, related to the effect of net unrealized gains and losses on available for sale securities.securities (shadow DAC).
VOBA amortization expense included in the table above was $21 million, $53 million and $34 million in 2013, 2012 and 2011, respectively, while the unamortized balance of VOBA was $351 million, $339 million and $430 million at December 31, 2013, 2012 and 2011, respectively. The percentage of the unamortized balance of VOBA at December 31, 20132015 expected to be amortized in 20142016 through 20182020 by year is: 4.68.4 percent, 6.37.6 percent, 5.67.1 percent, 5.36.9 percent and 5.36.5 percent, respectively, with 72.863.5 percent being amortized after five years. These projections are based on current estimates for investment income and spreads, persistency, mortality and morbidity assumptions. The DAC amortization expense charged to income includes the increase or decrease of amortization related to Net realized capital gains (losses), primarily in AIG Life and Retirement. In 2013, 2012 and 2011, amortization expense related to Net realized capital gains (losses) increased by $23 million, $119 million and $274 million, respectively.
DAC, VOBA and SIA for insurance-orientedinsurance‑oriented and investment-orientedinvestment‑oriented products are reviewed for recoverability, which involves estimating the future profitability of current business. This review involves significant management judgment. If actual future
profitability is substantially lower than estimated, AIG'sAIG’s DAC, VOBA and SIA may be subject to an impairment charge and AIG'sAIG’s results of operations could be significantly affected in future periods.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 10.9. VARIABLE INTEREST ENTITIES
10. VARIABLE INTEREST ENTITIES
A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity'sentity’s operations through voting rights or do not substantively participate in the gains and losses of the entity. Consolidation of a VIE by its primary beneficiary is not based on majority voting interest, but is based on other criteria discussed below.
We enter into various arrangements with VIEs in the normal course of business and consolidate the VIEVIEs when we determine we are the primary beneficiary. This analysis includes a review of the VIE'sVIE’s capital structure, related contractual relationships and terms, nature of the VIE'sVIE’s operations and purpose, nature of the VIE'sVIE’s interests issued and our involvement with the entity. When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the entity was designed to expose the variable interest holders to.
For VIEs with attributes consistent with that of an investment company or a money market fund, the primary beneficiary is the party or group of related parties that absorbs a majority of the expected losses of the VIE, receives the majority of the expected residual returns of the VIE, or both.
For all other VIEs, the primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity'sentity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of our decision-making ability and our ability to influence activities that significantly affect the economic performance of the VIE.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 10. VARIABLE INTEREST ENTITIES
Balance Sheet Classification and Exposure to Loss
The following table presents the total assets and total liabilities associated with our variable interests in consolidated VIEs, as classified in the Consolidated Balance Sheets:
(in millions) | | Real Estate and Investment Entities(d) | | Securitization Vehicles | | Structured Investment Vehicle | | Affordable Housing Partnerships | | Other | | Total |
December 31, 2015 | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Bonds available for sale | $ | - | $ | 10,309 | $ | - | $ | - | $ | 15 | $ | 10,324 |
Other bond securities | | - | | 5,756 | | 387 | | - | | 24 | | 6,167 |
Mortgage and other loans receivable | | 1 | | 1,960 | | - | | - | | 132 | | 2,093 |
Other invested assets | | 489 | | 477 | | - | | 2,608 | | 24 | | 3,598 |
Other(a) | | 29 | | 1,349 | | 94 | | 293 | | 159 | | 1,924 |
Total assets(b)(e) | $ | 519 | $ | 19,851 | $ | 481 | $ | 2,901 | $ | 354 | $ | 24,106 |
Liabilities: | | | | | | | | | | | | |
Long-term debt | $ | - | $ | 1,025 | $ | 53 | $ | 1,513 | $ | 6 | $ | 2,597 |
Other(c) | | 34 | | 236 | | 1 | | 214 | | 71 | | 556 |
Total liabilities(e) | $ | 34 | $ | 1,261 | $ | 54 | $ | 1,727 | $ | 77 | $ | 3,153 |
| | | | |
(in millions)
| | Real Estate
and
Investment
Funds(c)
| | Securitization
Vehicles
| | Structured
Investment
Vehicles
| | Affordable
Housing
Partnerships
| | Other
| | Total
| | |
|---|
| | | |
December 31, 2013 | | |
December 31, 2014 | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Bonds available for sale | | $ | – | | $ | 11,028 | | $ | – | | $ | – | | $ | 70 | | $ | 11,098 | | $ | - | $ | 11,459 | $ | - | $ | - | $ | 35 | $ | 11,494 |
Other bond securities | | – | | 7,449 | | 748 | | – | | 113 | | 8,310 | | | - | | 7,251 | | 615 | | - | | 40 | | 7,906 |
Mortgage and other loans receivable | | – | | 1,508 | | – | | – | | 189 | | 1,697 | | | - | | 2,398 | | - | | - | | 162 | | 2,560 |
Other invested assets | | 849 | | – | | – | | 1,986 | | 793 | | 3,628 | | | 577 | | 651 | | - | | 1,684 | | 29 | | 2,941 |
Other assets | | 49 | | 481 | | 93 | | 41 | | 615 | | 1,279 | | |
| | | |
Total assets(a)(b) | | $ | 898 | | $ | 20,466 | | $ | 841 | | $ | 2,027 | | $ | 1,780 | | $ | 26,012 | | |
| | | |
Other(a) | | | 40 | | 1,447 | | 140 | | 49 | | 76 | | 1,752 |
Total assets(b) | | $ | 617 | $ | 23,206 | $ | 755 | $ | 1,733 | $ | 342 | $ | 26,653 |
Liabilities: | | | | | | | | | | | | | |
Long-term debt | | $ | 71 | | $ | 494 | | $ | 87 | | $ | 188 | | $ | 154 | | $ | 994 | | $ | 69 | $ | 1,370 | $ | 52 | $ | 199 | $ | 7 | $ | 1,697 |
Other liabilities | | 31 | | 74 | | – | | 83 | | 367 | | 555 | | |
| | | |
Other(c) | | | 32 | | 276 | | - | | 101 | | 37 | | 446 |
Total liabilities | | $ | 102 | | $ | 568 | | $ | 87 | | $ | 271 | | $ | 521 | | $ | 1,549 | | $ | 101 | $ | 1,646 | $ | 52 | $ | 300 | $ | 44 | $ | 2,143 |
| | | |
December 31, 2012 | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | |
Bonds available for sale | | $ | 198 | | $ | 2,422 | | $ | – | | $ | – | | $ | 324 | | $ | 2,944 | | |
Other bond securities | | 15 | | 8,406 | | 792 | | – | | 204 | | 9,417 | | |
Mortgage and other loans receivable | | – | | – | | – | | – | | 398 | | 398 | | |
Other invested assets | | 1,122 | | – | | – | | 2,230 | | 1,023 | | 4,375 | | |
Other assets | | 59 | | 719 | | 183 | | 33 | | 2,013 | | 3,007 | | |
| | | |
Total assets(a)(b) | | $ | 1,394 | | $ | 11,547 | | $ | 975 | | $ | 2,263 | | $ | 3,962 | | $ | 20,141 | | |
| | | |
Liabilities: | | | | | | | | | | | | | | |
Long-term debt | | $ | 157 | | $ | 25 | | $ | 9 | | $ | 133 | | $ | 424 | | $ | 748 | | |
Other liabilities | | 20 | | 43 | | – | | 68 | | 1,044 | | 1,175 | | |
| | | |
Total liabilities | | $ | 177 | | $ | 68 | | $ | 9 | | $ | 201 | | $ | 1,468 | | $ | 1,923 | | |
| | | |
(a) Comprised primarily of Short-term investments, Premiums and other receivables or Other assets at December 31, 2015 and 2014.
(b) The assets of each VIE can be used only to settle specific obligations of that VIE.
(b)(c) Comprised primarily of Other liabilities and Derivative liabilities, at fair value, at both December 31, 2015 and 2014.
(d) At December 31, 20132015 and 2012, includes approximately $21.4 billion and $12.8 billion, respectively, of investment-grade debt securities, loans and other assets held by certain securitization vehicles that issued beneficial interests in these investments. The majority of the beneficial interests issued are held by AIG.
(c) At December 31, 2013 and 2012,2014, off-balance sheet exposure primarily consisting of commitments to real estate and investments fundsinvestment entities was $50.8$131.2 million and $48.7$56.4 million, respectively.
(e) Includes the effect of consolidating previously unconsolidated partnerships.
We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to us, except in limited circumstances when we have provided a guarantee to the VIE'sVIE’s interest holders.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 10. VARIABLE INTEREST ENTITIES
The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:
| | | | Maximum Exposure to Loss |
| | Total VIE | | | On-Balance | | Off-Balance | | | |
(in millions) | | Assets | | | Sheet(a) | | Sheet | | | Total |
December 31, 2015 | | | | | | | | | | |
Real estate and investment entities | $ | 21,951 | | $ | 3,072 | $ | 398 | | $ | 3,470 |
Affordable housing partnerships | | 5,255 | | | 774 | | - | | | 774 |
Other | | 1,110 | | | 215 | | 1,000 | | | 1,215 |
Total | $ | 28,316 | | $ | 4,061 | $ | 1,398 | | $ | 5,459 |
December 31, 2014 | | | | | | | | | | |
Real estate and investment entities | $ | 19,949 | | $ | 2,785 | $ | 454 | | $ | 3,239 |
Affordable housing partnerships | | 7,911 | | | 425 | | - | | | 425 |
Other(c) | | 1,959 | | | 304 | | 992 | (b) | | 1,296 |
Total | $ | 29,819 | | $ | 3,514 | $ | 1,446 | | $ | 4,960 |
| | | | | | | | | | | | | |
| | |
| |
| | Maximum Exposure to Loss | |
|---|
(in millions)
| | Total VIE
Assets
| | On-Balance
Sheet*
| | Off-Balance
Sheet
| | Total
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | |
Real estate and investment funds | | $ | 17,572 | | $ | 2,343 | | $ | 289 | | $ | 2,632 | |
Affordable housing partnerships | | | 478 | | | 477 | | | – | | | 477 | |
Other | | | 708 | | | 37 | | | – | | | 37 | |
| | |
Total | | $ | 18,758 | | $ | 2,857 | | $ | 289 | | $ | 3,146 | |
| | |
December 31, 2012 | | | | | | | | | | | | | |
Real estate and investment funds | | $ | 16,662 | | $ | 1,881 | | $ | 169 | | $ | 2,050 | |
Affordable housing partnerships | | | 498 | | | 498 | | | – | | | 498 | |
Other | | | 1,018 | | | 79 | | | – | | | 79 | |
| | |
Total | | $ | 18,178 | | $ | 2,458 | | $ | 169 | | $ | 2,627 | |
| | |
* (a) At December 31, 20132015 and 2012, $2.82014, $3.8 billion and $2.5$3.2 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.
(b) These amounts represent our estimate of the maximum exposure to loss under certain insurance policies issued to VIEs if a hypothetical loss occurred to the extent of the full amount of the insured value. Our insurance policies cover defined risks and our estimate of liability is included in our insurance reserves on the balance sheet.
(c) The On-Balance and Off-Balance sheet amounts have been revised from $32 million and $0 to $304 million and $992 million, respectively, to correct the Maximum Exposure to Loss as of December 31, 2014, which are not considered material to previously issued financial statements.
Real Estate and Investment FundsEntities
Through our insurance operations and AIG Global Real Estate, we are an investor in various real estate investment entities, some of which are VIEs. These investments are typically with unaffiliated third-party developers via a partnership or limited liability company structure. The VIEs'VIEs’ activities consist of the development or redevelopment of commercial, industrial and
residential real estate. Our involvement varies from being a passive equity investor or finance provider to actively managing the activities of the VIEs.
Our insurance operations participate as passive investors in the equity issued by certain third-party-managed hedge and private equity funds that are VIEs. Our insurance operations typically are not involved in the design or establishment of these VIEs, nor do they actively participate in the management of the VIEs.
Securitization Vehicles
We created certain VIEs that hold investments, primarily in investment-grade debt securities and loans, and issued beneficial interests in these investments. The majority of these beneficial interests are owned by our insurance operations and we maintain the power to direct the activities of the VIEs that most significantly impactsimpact their economic performance and bear the obligation to absorb losses or receive benefits from the entities that could potentially be significant to the entities. Accordingly, we consolidate these entities and those beneficial interests issued to third-parties are reported as Long-term debt.
Structured Investment VehiclesVehicle
Through DIB, weWe sponsor Nightingale Finance Ltd,Ltd., a structured investment vehicle (SIV), which is a VIE. Nightingale Finance Ltd. primarily invests in variable rate, investment-grade debt securities, the majority of which are ABS. We have no equity interest in the SIV, but we maintain the power to direct the activities of the SIV that most significantly impact the entity'sentity’s economic performance and bear the obligation to absorb economic losses that could potentially be significant to the SIV. We are the primary beneficiary and consolidate the assets of the SIV, which were approximately $0.8 billion and $1.0 billion as of December 31, 2013 and 2012, respectively. Related liabilities have increased during 2013 and totaled close to $0.1 billion.SIV.
Affordable Housing Partnerships
SunAmerica Affordable Housing Partners, Inc. (SAAHP) organizesorganized and investsinvested in limited partnerships that develop and operate affordable housing qualifying for federal, state, and historic tax credits, in addition to a few market rate properties across the United States. The general partners in the operating partnerships are VIEs, whose debt is generally non-recourse in nature, and the general partners of which are mostly unaffiliated third-party developers.
AIG 2013 Form 10-K
Table We account for our investments in operating partnerships using the equity method of Contents
ITEM 8 / NOTE 10. VARIABLE INTEREST ENTITIES
accounting, unless they are required to be consolidated. We do not consolidate an operating partnership if the general partner is an unaffiliated entity. Through approximately 1,000 partnerships, SAAHP has investments in developments with approximately 130,000 apartment units nationwide, and as of December 31, 2013, has syndicated approximately $7.7 billion in partnership equityaffiliated entity or we otherwise have the power to other investors who will receive, among other benefits, tax credits under certain sections ofdirect activities that most significantly impact the Internal Revenue Code.entities’ economic performance. The pre-tax income of SAAHP is reported along with other AIG Life and Retirement partnership income, as a component of the AIG Life and RetirementConsumer Insurance segment.
Other
Aircraft Trusts
We created two VIEs for the purpose of acquiring, owning, leasing, maintaining, operating and selling aircraft. Our subsidiaries hold beneficial interests, including all the equity interests in these entities. These beneficial interests include passive investments by our insurance operations in non-voting preferred equity interests and in the majority of the debt issued by these entities. We maintain the power to direct the activities of the VIEs that most significantly impact the entities' economic performance, and bear the obligation to absorb economic losses or receive economic benefits that could potentially be significant to the VIEs. As a result, we have determined that we are the primary beneficiary and we consolidate the assets and liabilities of these entities, which totaled $0.9 billion and $0.2 billion, respectively at December 31, 2013 and $1.2 billion and $0.3 billion at December 31, 2012, respectively. The debt of these entities is not an obligation of, or guaranteed by, us or any of our subsidiaries. Under a servicing agreement, ILFC acts as servicer for the aircraft owned by these entities.
Commercial Loans Vehicles
We sponsor one VIE that has issued a variable funding note backed by a commercial loan collateralized by individual life insurance assets. As of December 31, 2013, total consolidated assets and liabilities for this entity were $360 million and $117 million, respectively; our maximum exposure, representing the carrying value of the consumer loan, was $330 million. As of December 31, 2012, total consolidated assets and liabilities for this entity were $412 million and $188 million, respectively; our maximum exposure, representing the carrying value of the consumer loan, was $389 million.
RMBS, CMBS, Other ABS and CDOSCDOs
ThroughPrimarily through our insurance operations, we are a passive investor in RMBS, CMBS, other ABS and CDOs, primarilythe majority of which are issued by domestic special-purposespecial purpose entities. We generally do not sponsor or transfer assets to, or act as the servicer to these asset-backed structures, and were not involved in the design of these entities.
Through the DIB, we also invest in CDOs and similar structures, which can be cash-based or synthetic and are managed by third parties. The role of DIB is generally limited to that of a passive investor in structures we do not manage.
Our maximum exposure in these types of structures is limited to our investment in securities issued by these entities. Based on the nature of our investments and our passive involvement in these types of structures, we have determined that we are not the primary beneficiary of these entities. We have not included these entities in the above tables; however, the fair values of our investments in these structures are reported in Notes 4 and 5 and 6 herein.
Variable Interest Entities of Business Held for Sale
Financing Vehicles
ILFC created wholly-owned subsidiaries for the purpose of purchasing aircraft and obtaining financing secured by such aircraft. A portion of the secured debt has been guaranteed by the European Export Credit Agencies and the Export-Import Bank of the United States. These entities are VIEs because they do not have sufficient equity to operate without ILFC's subordinated financial support in the form of intercompany notes which serve as equity. ILFC fully consolidates the entities, controls all the activities of the entities and guarantees the activities of the entities. AIG has not included these entities in the above table as they are wholly-owned and there are no other variable interests other than those of ILFC and the lenders.
AIG 2013 Form 10-K
Table of ContentsTABLE OF CONTENTS
ITEM 8 / NOTE 10. VARIABLE INTEREST ENTITIES
Leasing Entities
ILFC created wholly-owned subsidiaries for the purpose of facilitating aircraft leases with airlines. The entities are VIEs because they do not have sufficient equity to operate without ILFC's subordinated financial support in the form of intercompany notes which serve as equity. ILFC consolidates the entities, controls all the activities of the entities and fully guarantees the activities of the entities. AIG has not included these entities in the above table as they are wholly owned and there are no other variable interests in the entities other than those of ILFC.
11.
Item 8 / note 10. DERIVATIVES AND HEDGE ACCOUNTING
10. 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 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 swaps and forwards) 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 as a part of our investment operations, which may include, among other things, CDSs and purchases of investments with embedded derivatives, such as equity‑linked notes and convertible bonds.
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,Effective July 1, 2015, we reclassified derivatives, with the exception of bifurcated embedded derivatives, are reflected in the Consolidated Balance Sheets infrom Derivative assets, at fair value and Derivative liabilities, at fair value to Other assets and Other liabilities, respectively. This change had no effect on the measurement of these derivatives, which continue to be measured at fair value. Embedded derivatives continue to be generally presented with the host contract in the Consolidated Balance Sheets. 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 5Notes 4 and 13 herein for additional information on embedded policy derivatives.
The following table presents the notional amounts and fair values of our derivatives and the fair value of derivative instruments:assets and liabilities in the Consolidated Balance Sheets:
| December 31, 2015 | | December 31, 2014 |
| Gross Derivative Assets | | Gross Derivative Liabilities | | Gross Derivative Assets | | Gross Derivative Liabilities |
| | Notional | | Fair | | | Notional | | Fair | | | Notional | | Fair | | | Notional | | Fair |
(in millions) | | Amount | | Value | | | Amount | | Value | | | Amount | | Value | | | Amount | | Value |
Derivatives designated as | | | | | | | | | | | | | | | | | | | |
hedging instruments:(a) | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | $ | 301 | $ | 1 | | $ | 725 | $ | 2 | | $ | 155 | $ | - | | $ | 25 | $ | 2 |
Foreign exchange contracts | | 2,903 | | 207 | | | 914 | | 56 | | | 611 | | 25 | | | 1,794 | | 239 |
Equity contracts | | - | | - | | | 121 | | 23 | | | 7 | | 1 | | | 104 | | 13 |
Derivatives not designated | | | | | | | | | | | | | | | | | | | |
as hedging instruments:(a) | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | 45,846 | | 3,161 | | | 65,733 | | 2,197 | | | 65,070 | | 3,743 | | | 45,104 | | 3,131 |
Foreign exchange contracts | | 9,472 | | 559 | | | 8,900 | | 1,148 | | | 13,667 | | 815 | | | 8,516 | | 1,251 |
Equity contracts | | 6,656 | | 177 | | | 5,028 | | 45 | | | 7,565 | | 206 | | | 3,049 | | 90 |
Commodity contracts | | - | | - | | | - | | - | | | 15 | | - | | | 11 | | 6 |
Credit contracts(b) | | 4 | | 3 | | | 1,289 | | 508 | | | 5 | | 4 | | | 5,288 | | 982 |
Other contracts(c) | | 37,586 | | 23 | | | 203 | | 69 | | | 36,155 | | 31 | | | 538 | | 90 |
Total derivatives, gross | $ | 102,768 | $ | 4,131 | | $ | 82,913 | $ | 4,048 | | $ | 123,250 | $ | 4,825 | | $ | 64,429 | $ | 5,804 |
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(in millions)
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Amount
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Value(a)
| | Notional
Amount
| | Fair
Value(a)
| | Notional
Amount
| | Fair
Value(a)
| | Notional
Amount
| | Fair
Value(a)
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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 | |
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Total derivatives not designated as hedging instruments | | | 114,494 | | | 4,326 | | | 90,094 | | | 6,009 | | | 97,922 | | | 7,047 | | | 117,630 | | | 9,760 | |
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Total derivatives, gross | | $ | 114,494 | | $ | 4,326 | | $ | 92,063 | | $ | 6,214 | | $ | 97,922 | | $ | 7,047 | | $ | 117,630 | | $ | 9,760 | |
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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) Includes cross currency swaps.(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) Notional amountConsists 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 fairliabilities are recorded in Other Assets and Liabilities, respectively. 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 assetsEmbedded derivatives was zero at both December 31, 2012. Notional amount2015 and December 31, 2014. Fair value of derivative liabilities and fair values of derivative liabilities include $6.7related to bifurcated Embedded derivatives was $2.3 billion and $424 million, respectively, at December 31, 2013 and $23 billion and $1.3$1.6 billion, respectively, at December 31, 2012 related to bifurcated embedded derivatives.2015 and December 31, 2014. A bifurcated embeddedEmbedded derivative is generally presented with the host contract in the Consolidated Balance Sheets.
(d) Consist Embedded derivatives are primarily of contracts with multiple underlying exposures.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
The following table presents the fair values of derivative assets and liabilitiesrelated to guarantee features in the Consolidated Balance Sheets:
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(in millions)
| | Notional
Amount
| | Fair
Value
| | Notional
Amount
| | Fair
Value
| | Notional
Amount
| | Fair
Value
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Amount
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Value
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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 | |
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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 | |
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Total derivatives, gross | | $ | 114,494 | | | 4,326 | | $ | 92,063 | | | 6,214 | | $ | 97,922 | | | 7,047 | | $ | 117,630 | | | 9,760 | |
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Counterparty netting(b) | | | | | | (1,734 | ) | | | | | (1,734 | ) | | | | | (2,467 | ) | | | | | (2,467 | ) |
Cash collateral(c) | | | | | | (820 | ) | | | | | (1,484 | ) | | | | | (909 | ) | | | | | (1,976 | ) |
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Total derivatives, net | | | | | | 1,772 | | | | | | 2,996 | | | | | | 3,671 | | | | | | 5,317 | |
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Less: Bifurcated embedded derivatives | | | | | | 107 | | | | | | 485 | | | | | | – | | | | | | 1,256 | |
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Total derivatives on consolidated balance sheet | | | | | $ | 1,665 | | | | | $ | 2,511 | | | | | $ | 3,671 | | | | | $ | 4,061 | |
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(a) Represents derivatives used to hedge the foreign currencyvariable annuity products, which include equity 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.components.
(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.Master Agreements. Many of the ISDA agreementsMaster Agreements also include Credit Support Annex (CSA) provisions, which generally 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 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-termlong‑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-termlong‑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$3.0 billion and $4.5$3.3 billion at December 31, 20132015 and December 31, 2012,2014, 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$1.6 billion and $1.4$1.3 billion at December 31, 20132015 and December 31, 2012,2014, respectively. We generally can repledge or resell this collateral to the extent it is posted under derivative transactions that are not subject to clearing.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 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 havegoverning multiple derivative transactions with each other governed by such agreement, and suchbetween 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 cashtransferred collateral, through a single payment, and in a single currency, as applicable. The net settlement provisions apply in the event
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.transactions governed by the ISDA Master Agreement.
Hedge Accounting
We designated certain derivatives entered into by GCM with third parties as fair value hedges of available-for-saleavailable 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-saleavailable for sale securities attributable to changes in foreign exchange rates. We previouslyalso designated certain interest rate swaps entered into by GCM with third parties as cash flowfair value hedges of certain floatingfixed rate debt issued by ILFC, specifically to hedge the changes in cash flows on floating rate debtGICs 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.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. WeFor net investment hedge relationships where issued debt is used as a hedging instrument, we assess the hedge effectiveness and measure the amount of ineffectiveness for these hedge relationships based on changes in spot exchangerates. 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, 2013, 2012,2015, 2014, and 20112013 we recognized lossesgains of $38 million, $74$90 million and $13$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) |
Other income | | - | | 23 | | | - | | - | | 23 |
Gain/(Loss) on extinguishment of debt | | - | | 2 | | | - | | - | | 2 |
Equity contracts: | | | | | | | | | | | |
Realized capital gains/(losses) | | (23) | | 22 | | | - | | (1) | | - |
Year ended December 31, 2013 | | | | | | | | | | | |
Interest rate contracts: | | | | | | | | | | | |
Realized capital gains/(losses) | $ | (5) | $ | 5 | | $ | - | $ | - | $ | - |
Interest credited to policyholder | | | | | | | | | | | |
account balances | | - | | (2) | | | - | | - | | (2) |
Other income | | - | | 99 | | | - | | - | | 99 |
Foreign exchange contracts: | | | | | | | | | | | |
Realized capital gains/(losses) | | (187) | | 204 | | | - | | 17 | | - |
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(in millions)
| | 2013
| | 2012
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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 | | | – | | | – | |
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(a) Includes $1 million gain recorded in Interest creditedThe amounts presented do not include the periodic net coupon settlements of the derivative contract or the coupon income (expense) related to policyholder account balances and $6 million loss recorded in Net realized capital gains (losses).the hedged item.
(b) Includes gains of $99 million, $124 million and $149 million for the years ended December 31, 2013, 2012 and 2011, respectively, representing the Represents accretion/amortization of debtopening fair value of the hedged item at inception of hedge relationship, amortization of basis adjustment recorded in Other income and Net realized capital gains (losses)on hedged item following the discontinuation of hedge accounting. Includes a $2 million loss, foraccounting, and the year ended December 31, 2013, recorded in Interest credited to policyholder account balances, representingrelease of debt basis adjustment following the accretion on GIC contractsrepurchase of issued debt that had awas part of previously-discontinued 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).Derivatives Not Designated as Hedging Instruments
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
The following table presents the effect of our derivative instruments in cash flow hedging relationships in the Consolidated Statements of Income:
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(in millions)
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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 | |
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(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) |
Years Ended December 31, | Recognized in Earnings |
(in millions) | | 2015 | | 2014 | | 2013 |
By Derivative Type: | | | | | | |
Interest rate contracts | $ | 339 | $ | 851 | $ | (259) |
Foreign exchange contracts | | 416 | | 309 | | 41 |
Equity contracts | | (182) | | (274) | | (507) |
Commodity contracts | | (1) | | (1) | | (4) |
Credit contracts | | 186 | | 263 | | 567 |
Other contracts | | 69 | | 192 | | 85 |
Embedded derivatives | | 49 | | (841) | | 1,099 |
Total | $ | 876 | $ | 499 | $ | 1,022 |
By Classification: | | | | | | |
Policy fees | $ | 78 | $ | - | $ | - |
Net investment income | | 26 | | 102 | | 28 |
Net realized capital gains (losses) | | 365 | | (219) | | 257 |
Other income | | 401 | | 599 | | 750 |
Policyholder benefits and claims incurred | | 6 | | 17 | | (13) |
Total | $ | 876 | $ | 499 | $ | 1,022 |
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| | 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.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
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
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
$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, 20132015 and 2012,2014, was approximately $2.6$2.0 billion and $3.9$2.5 billion, respectively. The aggregate fair value of assets posted as collateral under these contracts at December 31, 20132015 and 2012,2014, was 3.1$2.1 billion and $4.3$2.7 billion, respectively.
We estimate that at December 31, 2013,2015, based on our outstanding financial derivative transactions, a one-notch downgrade of our long-term senior debt ratings to BBB+ by Standard & Poor'sPoor’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'Moody’s Investors’ Service, Inc. (Moody's)(Moody’s) and an additional one-notch downgrade to BBB by S&P would result in approximately $65$44 million in additional collateral postings and termination payments, and a further one-notch downgrade to Baa3 by Moody'sMoody’s and BBB-BBB– by S&P would result in approximately $111$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, 2013.2015. 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.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
Hybrid Securities with Embedded Credit Derivatives
We invest in hybrid securities (such as credit-linkedcredit‑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$5.7 billion and $6.7$6.1 billion at December 31, 20132015 and 2012,2014, respectively. These securities have par amounts of $13.4$11.2 billion and $15$12.3 billion at December 31, 20132015 and 2012,2014, respectively, and both have remaining stated maturity dates that extend to 2052.2055.
11. GOODWILL
Goodwillrepresents 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
TABLE OF CONTENTS
12. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS
Item 8 / note 11. GOODWILL
goodwill. The estimate of a reporting unit’s fair value involves management judgment and is based on one or a combination of approaches including discounted expected future cash flows, market‑based earnings multiples of the unit’s peer companies, external appraisals or, in the case of reporting units being considered for sale, third‑party indications of fair value, if available. We consider one or more of these estimates when determining the fair value of a reporting unit to be used in the impairment test.
If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill is not impaired. If the carrying value of a reporting unit exceeds its estimated fair value, goodwill associated with that reporting unit potentially is impaired. The amount of impairment, if any, is measured as the excess of the carrying value of the goodwill over the implied fair value of the goodwill. The implied fair value of the goodwill is measured as the excess of the fair value of the reporting unit over the amounts that would be assigned to the reporting unit’s assets and liabilities in a hypothetical business combination. An impairment charge is recognized in earnings to the extent of the excess of carrying value over fair value.
Goodwill was not impaired at December 31, 2015 based on the results of the goodwill impairment test.
The following table presents the changes in goodwill by reportable segment:
| | | | | | |
(in millions) | Commercial | Consumer | Other | | Total |
Balance at January 1, 2013: | | | | | | | | |
Goodwill - gross | $ | 2,444 | $ | 2,502 | $ | - | $ | 4,946 |
Accumulated impairments | | (1,266) | | (2,211) | | - | | (3,477) |
Net goodwill | | 1,178 | | 291 | | - | | 1,469 |
Increase (decrease) due to: | | | | | | | | |
Other | | 6 | | - | | - | | 6 |
Balance at December 31, 2013: | | | | | | | | |
Goodwill - gross | | 2,450 | | 2,502 | | - | | 4,952 |
Accumulated impairments | | (1,266) | | (2,211) | | - | | (3,477) |
Net goodwill | | 1,184 | | 291 | | - | | 1,475 |
Increase (decrease) due to: | | | | | | | | |
Acquisition | | - | | 28 | | - | | 28 |
Other | | (49) | | - | | - | | (49) |
Balance at December 31, 2014: | | | | | | | | |
Goodwill - gross | | 2,401 | | 2,530 | | - | | 4,931 |
Accumulated impairments | | (1,266) | | (2,211) | | - | | (3,477) |
Net goodwill | | 1,135 | | 319 | | - | | 1,454 |
Increase (decrease) due to: | | | | | | | | |
Acquisition | | 96 | | 82 | | 30 | | 208 |
Other | | (50) | | 1 | | - | | (49) |
Balance at December 31, 2015: | | | | | | | | |
Goodwill - gross | | 2,447 | | 2,613 | | 30 | | 5,090 |
Accumulated impairments | | (1,266) | | (2,211) | | - | | (3,477) |
Net goodwill | $ | 1,181 | $ | 402 | $ | 30 | $ | 1,613 |
12. INSURANCE LIABILITIES
Liability for Unpaid ClaimsLosses and ClaimsLoss Adjustment ExpenseExpenses
The liability for unpaid claimslosses and claimsloss adjustment expenseexpenses represents the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and claim adjustments expenses, less applicable discount for future investment income. We continually review and update the methods used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected currently in pre-tax income. Because these
estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.
Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.0$12.6 billion and $11.7$12.4 billion at December 31, 20132015 and 2012,2014, respectively. These recoverable amounts are related to certain policies with high deductibles (primarily(in excess of high dollar amounts retained by the insured through self-insured retentions or deductibles each referred to generically as “deductibles”), primarily for U.S. commercial casualty business) where webusiness. With respect to the deductible portion of the claim, the Non-life Insurance Companies manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 20132015 and 2012,2014, we held collateral totaling $9.0of approximately $9.6 billion and $8.3$9.4 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and trust agreements.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 12. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS
The following table presents the reconciliation of activity in the Liability for unpaid claims and claims adjustment expense:
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Liability for unpaid claims and claims adjustment expense, beginning of year | | $ | 87,991 | | $ | 91,145 | | $ | 91,151 | |
Reinsurance recoverable | | | (19,209 | ) | | (20,320 | ) | | (19,644 | ) |
| | |
Net liability for unpaid claims and claims adjustment expense, beginning of year | | | 68,782 | | | 70,825 | | | 71,507 | |
| | |
Foreign exchange effect(a) | | | (617 | ) | | (90 | ) | | 353 | |
Dispositions | | | (79 | ) | | (11 | ) | | – | |
Changes in net loss reserves due to retroactive asbestos reinsurance transaction | | | 22 | | | 90 | | | (1,703 | ) |
| | |
Total | | | 68,108 | | | 70,814 | | | 70,157 | |
| | |
Losses and loss expenses incurred: | | | | | | | | | | |
Current year | | | 22,171 | | | 25,385 | | | 27,931 | |
Prior years, other than accretion of discount(b) | | | 557 | | | 421 | | | 195 | |
Prior years, accretion of discount | | | (309 | ) | | (63 | ) | | 34 | |
| | |
Total | | | 22,419 | | | 25,743 | | | 28,160 | |
| | |
Losses and loss expenses paid(c): | | | | | | | | | | |
Current year | | | 7,431 | | | 8,450 | | | 11,534 | |
Prior years | | | 18,780 | | | 19,325 | | | 15,958 | |
| | |
Total | | | 26,211 | | | 27,775 | | | 27,492 | |
| | |
Balance, end of year: | | | | | | | | | | |
Net liability for unpaid claims and claims adjustment expense | | | 64,316 | | | 68,782 | | | 70,825 | |
Reinsurance recoverable | | | 17,231 | | | 19,209 | | | 20,320 | |
| | |
Total | | $ | 81,547 | | $ | 87,991 | | $ | 91,145 | |
| | |
(a) For the 2012 amounts, $847 million was reclassified from "Foreign exchange effect" to "Losseslosses and loss expenses paid (current year)". The impact of this reclassification was a decrease of $847 million for foreign exchange and loss expenses paid (current year), with no income statement or balance sheet impact.adjustment expenses:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Liability for unpaid losses and loss adjustment expenses, beginning of year | $ | 77,260 | $ | 81,547 | $ | 87,991 |
Reinsurance recoverable | | (15,648) | | (17,231) | | (19,209) |
Net liability for unpaid losses and loss adjustment expenses, beginning of year | | 61,612 | | 64,316 | | 68,782 |
Foreign exchange effect | | (1,429) | | (1,061) | | (617) |
Dispositions | | - | | - | | (79) |
Changes in net loss reserves due to retroactive asbestos reinsurance transaction | | 20 | | 141 | | 22 |
Total | | 60,203 | | 63,396 | | 68,108 |
Losses and loss adjustment expenses incurred: | | | | | | |
Current year | | 20,308 | | 21,279 | | 22,171 |
Prior years, excluding discount | | 4,119 | | 703 | | 557 |
Prior years, discount charge (benefit) | | (71) | | 478 | | (309) |
Total | | 24,356 | | 22,460 | | 22,419 |
Losses and loss adjustment expenses paid*: | | | | | | |
Current year | | 5,751 | | 6,358 | | 7,431 |
Prior years | | 18,205 | | 17,886 | | 18,780 |
Total | | 23,956 | | 24,244 | | 26,211 |
Balance, end of year: | | | | | | |
Net liability for unpaid losses and loss adjustment expenses | | 60,603 | | 61,612 | | 64,316 |
Reinsurance recoverable | | 14,339 | | 15,648 | | 17,231 |
Total | $ | 74,942 | $ | 77,260 | $ | 81,547 |
(b) In 2013, includes $144 million, $269 million, $498 million and $54 million related to excess casualty, environmental and pollution, primary casualty and healthcare, respectively. In 2012, includes $157 million, $200 million, $531 million and $68 million related to excess casualty, environmental and pollution, primary casualty and healthcare, respectively. In 2011, includes $(588) million, $385 million, $686 million and $45 million related to excess casualty, environmental and pollution, primary casualty and healthcare, respectively
(c)* Includes amounts related to dispositions through the date of disposition.
The net adverse development includes loss-sensitive business, for which we recognized $89(return) additional premiums on loss sensitive business of $(49) million, $54$105 million and $172$89 million loss-sensitive premium adjustments for the years ended December 31, 2015, 2014and 2013, 2012respectively.
Each quarter, we conduct a series of actuarial reviews to reassess the reasonableness of our carried reserves. These reviews are conducted for each class of business, and 2011,consist of hundreds of individual analyses. We consider data and information arising since the prior review and adjust, as appropriate, the methods and assumptions used in the latest actuarial reviews. Our analyses produce a range of indications from various methods, from which we select our best estimate.
For 2015, the adverse development of prior year losses is primarily a result of the following:
·Excess Casualty – U.S. & Canada experienced $1.5 billion of adverse development largely driven by worse than expected loss emergence reported in 2015, reflecting worsening trends in the number and nature of high severity losses in both
general liability and umbrella auto liability, primarily for U.S. risks. We reacted to the adverse emergence by updating our assumptions about loss severity, loss development patterns, and expected loss ratios for the most recent accident years.
·Primary Casualty – U.S. & Canada experienced $1.1 billion of adverse development. $540 million related to workers’ compensation policies with risk sharing features to reflect estimated increased losses and reduced expectations of future recoveries from our insureds through these risk-sharing features. Risk-sharing features, include high deductibles, self-insured retentions or retrospective rating features. We also experienced adverse development of $146 million in primary general liability due to adverse emergence of claims in the construction sector; $144 million in primary auto liability due to observed increases in both the frequency and severity of claims; $100 million for future claim handling expenses related to existing loss reserves, and $100 million in workers’ compensation for coverages sold to government contractors in U.S. and non U.S. military installations as a result of adverse loss emergence in recent accident years.
·Financial Lines – U.S. & Canada experienced $579 million of adverse development related to development of several reported claims above expectations, in D&O and professional liability principally related to accident years 2006 through 2010.
·Run-off insurance lines experienced $727 million of adverse development largely driven by $281 million in asbestos and environmental for accident years 1986 & prior and $272 million of other run-off. Reasons for this development are as follows:
·Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos reserves are ceded to National Indemnity Company (NICO) under a retrospective reinsurance arrangement entered into in 2011. However, certain asbestos-related exposures are not subject to the NICO agreement, including asbestos exposures for which we have negotiated fixed payment schedules, and third party reinsurance assumed policies. The reported claim activity on the assumed claims has increased in the last year. As a result, we modified certain of our loss-reserve-related assumptions to better reflect this AIG-specific experience as well as consideration of recent industry-wide trends regarding expanding coverage theories for liability. As a result, we increased our 2015 reserves by $164 million and by $117 million for Asbestos and Environmental, respectively.
·Run-off lines experienced $272 million of adverse development based on updated assumptions about future loss development.
In 2014, the increase in prior years’ loss reserves of $703 million included $550 million, $124 million, $182 million, $109 million, and $(102) million related to Primary Casualty – U.S. & Canada, Asbestos and environmental (1986 and prior), Financial Lines – International, Healthcare, and Natural Catastrophes – U.S. & Canada, respectively.
In 2013, the increase in prior years’ loss reserves of $557 million includes $498 million, $238 million, $(144) million, and $(54) million related to Primary Casualty – U.S. & Canada, Asbestos and environmental (1986 and prior), Excess Casualty – U.S. & Canada, and Healthcare, respectively.
Asbestos and Environmental Run-off Reserves
At December 31, 2015 and 2014, our net liability for unpaid loss and loss adjustment expenses included $722 million and $573 million, respectively, for asbestos and environmental-related claims (net of reinsurance, including retroactive reinsurance). We cede the bulk of AIG Property Casualty’s net domestic asbestos liabilities under a 2011 retroactive reinsurance agreement with National Indemnity Company (NICO) with an aggregate limit of $3.5 billion. Reinsurance recoverables related to this agreement are $1.8 billion and $1.5 billion, respectively, at December 31, 2015 and 2014, respectively. Under retroactive reinsurance accounting, contractual gains are deferred and amortized into income over the settlement period of the underlying reinsured claims. During 2015, 2014 and 2013, we recognized approximately $233 million, $0 and $72 million, respectively, of additional recoveries under the NICO agreement for which the income statement benefit was deferred. The expense related to this increase in the deferred gain liability is reported in Other income/expense and is therefore excluded from net losses incurred.
Reserves for asbestos and environmental claims cannot be estimated using conventional reserving techniques such as those that rely on historical accident year loss development factors. The methods used to determine asbestos and environmental loss estimates and to establish the resulting reserves are continually reviewed and updated by management.
Various factors contribute to the complexity and difficulty in determining the future development of claims such as court resolutions and judicial interpretations which broaden the intent of the policies and scope of coverage.
We primarily base our determination of these reserves on a combination of ground-up and top-down analyses of historical claims and available insurance coverages. We consider a number of factors and recent experience, in addition to the results of both external and internal analyses, to estimate asbestos and environmental loss reserves.
Discounting of Reserves
At December 31, 2013,2015, the liability for unpaid claimslosses and claimsloss adjustment expenseexpenses reflects a net loss reserve discount of $3.6$3.1 billion, including tabular and non-tabular calculations based upon the following assumptions:
•·Certain asbestos business that was written by AIG Property CasualtyNon-Life Insurance Companies is discounted, when allowed by the regulator and when payments are fixed and determinable, based on the investment yields of the companies and the payout pattern for this business.
·
•- The tabular
workers'workers’ compensation discount is calculated usingbased on a 3.5 percent interest rate and the 1979 – 81 Decennial Mortalitymortality table used in the 2007 U.S. Life Table.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 12. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS·
•- The non-tabular
workers'workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or approved)permitted) for each state. For New York companies, the discount is based on a five percent interest rate and the companies'companies’ own payout patterns. In 2012, for·Our Delaware and Pennsylvania companies, the statute has specified discount factors for accident years 2001 and prior, which are based on a six percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.
•Effective for the fourth quarter of 2013, our Pennsylvania regulatorregulators approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers'workers’ compensation reserves in our Pennsylvania-domiciled companies domiciled in those states, as well as our use of updated payout patterns specific to our primary and excess workers'workers compensation portfolios. Prior·In the fourth quarter of 2015, our Pennsylvania and Delaware regulators approved an updated discount rate that we applied to this change, workers'our workers’ compensation reserves held by a Pennsylvania-domiciled insurer were discounted as follows: i) For loss reserves associated with accident year 2001 and prior accident years, a prescribed discount factor based on a rate of 6 percent and industry payout patterns, were applied, ii) For loss reserves associated with accident year 2002 and subsequent accident years, a rate of 4.25 percent and our own payout patterns were applied; and iii) For a portion of loss reserves comprising excess workers' compensation reserves that were assumed into a Pennsylvania-domiciled insurer from New York-domiciled insurers during 2011, we applied New York discounting rules, which include a prescribed rate of 5 percent on case reserves only (no discounting of IBNR reserves). As a result of these changes,for the total net discount increased by $427 million.
legal entities domiciled in those states.The discount consists of the following: $798$853 million of tabular discount for workers'workers’ compensation, in the domestic operations of AIG Property Casualty and $2.7$2.3 billion of non-tabular discount for workers'workers’ compensation in the domestic operations of AIG Property Casualty;operations; and $33$7 million — non-tabularnon‑tabular discount for asbestos for AIG Property Casualty.asbestos.
Future Policy Benefits
Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of the present value of future benefits less the present value of future net premiums. Included in Future policy benefits are liabilities for annuities issued in structured settlement arrangements whereby a claimant has agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinable period of time with a life contingency feature.
Future policy benefits also include certain guaranteed benefits of variable annuity products that are not considered embedded derivatives, primarily guaranteed minimum death benefits. See Note 13 for additional information on liabilities for guaranteed benefits included in Future policyminimum death benefits.
The liability for long durationlong-duration future policy benefits has been established on the basis of the following assumptions:
•Interestincluding assumptions for interest rates (exclusive of immediate/terminal funding annuities), which vary by year of issuance and products,product, and range from 3.0approximately 3 percent to 10.0 percent within the first 20 years. Interest rates on immediate/terminal funding annuities are at a maximum of 13.5 percent and grade to not less than zero14 percent.
•- Mortality and surrender
ratesrate assumptions are generally based on actual experience when the liability is established.
Policyholder Contract Deposits
The liability for Policyholder contract deposits is primarily recorded at accumulated value (deposits received and net transfers from separate accounts, plus accrued interest credited at rates ranging from 0.2 percent to 9.0 percent at December 31, 2015, less withdrawals and assessed fees). Deposits collected on investment-oriented products are not reflected as revenues, because they are recorded directly to Policyholder contract deposits upon receipt. PolicyholderAmounts assessed against the contract holders for mortality, administrative, and other services are included in revenues.
In addition to liabilities for universal life, fixed annuities, fixed options within variable annuities, annuities without life contingencies, funding agreements and GICs, policyholder contract deposits also include our liability for (a) certain guaranteed benefits and indexed features accounted for as embedded derivatives at fair value, (b) annuities issued in a structured settlement arrangement with no life contingency and (c) certain contracts we have elected to account for at fair value. See Note 13 herein for additional information on guaranteed benefits accounted for as embedded derivatives.
AIG 2013 Form 10-KFor universal life policies with secondary guarantees, we recognize certain liabilities in addition to policyholder account balances. For universal life policies with secondary guarantees, as well as other universal life policies for which profits followed by losses are expected at contract inception, a liability is recognized based on a benefit ratio of (a) the present value of total expected payments, in excess of the account value, over the life of the contract, divided by (b) the present value of total expected assessments over the life of the contract. For universal life policies without secondary guarantees, for which profits followed by losses are first expected after contract inception, we establish a liability, in addition to policyholder account balances, so that expected future losses are recognized in proportion to the emergence of profits in the earlier (profitable) years. Universal life account balances as well as these additional liabilities related to universal life products are reported within policyholder contract deposits in the Consolidated Balance Sheet.
TableUnder a funding agreement-backed notes issuance program, an unaffiliated, non-consolidated statutory trust issues medium-term notes to investors, which are secured by GICs issued to the trust by one of Contents
our Life Insurance Companies through our Institutional Markets operating segment.
ITEM 8 / NOTE 12. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND POLICYHOLDER CONTRACT DEPOSITS
The following table presents Policyholder contract deposits of the U.S. Life Insurance Companies by product type:line:
At December 31, | | | | |
(in millions) | | 2015 | | 2014 |
Policyholder contract deposits: | | | | |
Fixed Annuities | $ | 52,397 | $ | 53,370 |
Group Retirement | | 37,865 | | 37,693 |
Life | | 14,028 | | 13,717 |
Retirement Income Solutions | | 13,927 | | 10,040 |
Institutional Markets | | 9,371 | | 9,793 |
Total Policyholder contract deposits | $ | 127,588 | $ | 124,613 |
Other Policyholder Funds
| | | | | | | |
| |
| |
| |
|---|
| | |
At December 31,
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
Policyholder contract deposits: | | | | | | | |
Life Insurance and A&H | | $ | 13,081 | | $ | 12,201 | |
Fixed Annuities | | | 54,515 | | | 55,985 | |
Retirement Income Solutions | | | 6,729 | | | 5,451 | |
Group Retirement | | | 37,694 | | | 36,778 | |
Institutional Markets | | | 9,433 | | | 12,056 | |
All other Institutional | | | 564 | | | 509 | |
| | |
Total Policyholder contract deposits | | $ | 122,016 | | $ | 122,980 | |
| | |
The productsOther policyholder funds include unearned revenue reserves (URR). URR consist of front-end loads on investment-oriented contracts, representing those policy loads that are non-level and typically higher in initial policy years than in later policy years. URR for which reserves are included in Policyholder contract deposits at December 31, 2013 had the following characteristics:
•Interest rates credited on deferred annuities, which vary by year of issuance, range from 1.0 percent to, including bonuses, 8.4 percent. Current declared interest ratesinvestment-oriented contracts are generally guaranteeddeferred and amortized, with interest, in relation to remain in effect for a periodthe incidence of one year though some are guaranteed for longer periods. Withdrawal charges generally range from zero percentestimated gross profits (EGPs) to 15 percent grading to zerobe realized over a periodthe estimated lives of zero to 20 years.
•Guaranteed investmentthe contracts (GICs) have market value withdrawal provisions for any funds withdrawn other than benefit responsive payments. Interest rates credited generally range from 0.3 percent to 8.3 percent. The majority of these GICs mature within seven years.
•Interest rates on corporate life insurance products are guaranteed at 3.0 percent and the weighted average rate credited in 2013 was 4.4 percent.
•The universal life products have credited interest rates of 1.0 percent to 8.0 percent and guarantees ranging from 1.0 percent to 5.5 percent depending on the year of issue. Additionally, universal life funds are subject to surrender charges that amountthe same adjustments due to 8.7 percentchanges in the assumptions underlying EGPs as DAC. Amortization of the aggregate fund balance grading to zero over a period not longer than 20 years.
•For variable products and investment contracts, policy values are expressedURR is recorded in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. The current liability at any time is the sum of the current unit value of all investment units plus any liabilities for guaranteed minimum death or guaranteed minimum withdrawal benefits.
Policy fees.
Other Policyholder Funds
Other policyholder funds also include provisions for future dividends to participating policyholders, accrued in accordance with all applicable regulatory or contractual provisions. Participating life business represented approximately 2.12.2 percent of the gross insurance in force at December 31, 20132015 and 3.72.4 percent of gross Premiumsdomestic premiums and other considerations in 2013.2015. The amount of annual dividends to be paid is approved locally by the boards of directors of the insurance companies. Life Insurance Companies.
Provisions for future dividend payments are computed by jurisdiction, reflecting local regulations. The portions of current and prior net income and of current unrealized appreciation of investments that can inure to our benefit are restricted in some cases by the insurance contracts and by the local insurance regulations of the jurisdictions in which the policies are in force.
Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts, accident and health insurance contracts/riders attached to life policies and, to a limited extent, reinsurance agreements with other direct insurers. Ultimate premiums from these contracts are estimated and recognized as revenue andwith the unearned portions of the premiums recorded as liabilities.liabilities in Other policyholder funds. Experience adjustments vary according to the type of contract and the territory in which the policy is in force and are subject to local regulatory guidance.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 13. VARIABLE LIFE AND ANNUITY CONTRACTS
13. VARIABLE LIFE AND ANNUITY CONTRACTS
We report variable contracts within the separate accounts when investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder and the separate account meets additional accounting criteria to qualify for separate account treatment. The assets supporting the variable portion of variable annuity and variable universal life contracts that qualify for separate account treatment are carried at fair value and reported as separateSeparate account assets, with an equivalent summary total reported as separateSeparate account liabilities.
Policy values for variable products and investment contracts are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. The current liability at any time is the sum of the current unit value of all investment units in the separate accounts, plus any liabilities for guaranteed minimum death benefits or guaranteed minimum withdrawal benefits included in Future policy benefits or Policyholder contract deposits, respectively.
Amounts assessed against the contract holders for mortality, administrative and other services are included in revenue. Net investment income, net investment gains and losses, changes in fair value of assets, and policyholder account deposits and withdrawals related to separate accounts are excluded from the Consolidated Statements of Income, Comprehensive Income (Loss) and Cash Flows.
Variable annuity contracts may include certain contractually guaranteed benefits to the contract holder. These guaranteed features include guaranteed minimum death benefits (GMDB) that are payable in the event of death, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits include guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum account valueaccumulation benefits (GMAV)(GMAB). A variable annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder can only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the features are mutually exclusive.exclusive, so the exposure to the guaranteed amount for each feature is independent of the exposure from other features (except a surviving spouse who has a rider to potentially collect both a GMDB upon their spouse’s death and a GMWB during their lifetime). A policyholder cannot purchase more than one living benefit on one contract. The net amount at risk for each feature is calculated irrespective of the existence of other features; as a result, the net amount at risk for each feature is not additive to that of other features.
Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:
At December 31, | | | | |
(in millions) | | 2015 | | 2014 |
Equity funds | $ | 39,284 | $ | 40,811 |
Bond funds | | 7,261 | | 7,566 |
Balanced funds | | 24,849 | | 22,354 |
Money market funds | | 826 | | 797 |
Total | $ | 72,220 | $ | 71,528 |
GMDB and GMIB
Depending on the contract, the GMDB feature may provide a death benefit of either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in rare instances, no minimum return) or (b) the highest contract value attained, typically on any anniversary date minus any subsequent withdrawals following the contract anniversary. GMIB guarantees a minimum level of periodic income payments upon annuitization. GMDB is our most widely offered benefit; our contractsbenefit. Our account values subject to guarantees also include GMIB to a lesser extent.extent, which is no longer offered.
The liabilities for GMDB and GMIB, which are recorded in Future policyholderpolicy benefits, represent the expected value of benefits in excess of the projected account value, with the excess recognized ratably over the accumulation period based on total expected assessments, through Policyholder benefits and claimslosses incurred. The net amount at risk for GMDB represents the amount of benefits in excess of account value if death claims were filed on all contracts on the balance sheet date.
The following table presents details concerning our GMDB exposures, by benefit type:type:
At December 31, | | 2015 | | 2014 |
| | | | | | | | | | | | | | | Net Deposits | | | | | Net Deposits | | |
| |
| |
| |
| | | Plus a Minimum | | Highest Contract | | Plus a Minimum | | Highest Contract |
|---|
| | | |
| | 2013 | | 2012 | | |
|---|
| | Net Deposits
Plus a Minimum
Return
| |
Highest Contract
Value Attained
| | Net Deposits
Plus a Minimum
Return
| |
| | |
|---|
At December 31,
| | Highest Contract
Value Attained
| | |
|---|
(dollars in billions)
| | | Return | | Value Attained | | Return | | Value Attained |
|---|
| | | |
Account value | | $ | 78 | | $ | 15 | | $ | 64 | | $ | 13 | | $ | 87 | $ | 16 | | $ | 85 | $ | 17 |
Net amount at risk | | | 1 | | | 1 | | | 2 | | 1 | | | 2 | | 1 | | | 1 | | 1 |
Average attained age of contract holders by product | | | 60 – 72 years | | | 65 – 75 years | | | 59 – 73 years | | 66 – 75 years | | | 63 | | 69 | | | 62 | | 68 |
| | | |
Range of guaranteed minimum return rates | | | 3 – 10% | | | | | | 3 – 10% | | | | | 0-4.5% | | | | | 0%-5% | | |
| | | |
The following summarizes GMDB and GMIB liabilities related to variable annuity contracts:contracts, excluding assumed reinsurance:
|
| |
| |
| | |
|---|
| | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | |
(in millions) | | | 2015 | | 2014 | | 2013 |
Balance, beginning of year | | $ | 413 | | $ | 445 | | $ | 420 | $ | 394 | $ | 413 |
Reserve increase | | | 32 | | | 43 | | | 127 | | 93 | | 32 |
Benefits paid | | | (51 | ) | | (75 | ) | | (56) | | (67) | | (51) |
| | | |
Balance, end of year | | $ | 394 | | $ | 413 | | $ | 491 | $ | 420 | $ | 394 |
| | | |
AIG 2013 Form 10-K
TableAssumptions used to determine the GMDB and GMIB liability include interest rates, which vary by year of Contents
ITEM 8 / NOTE 13. VARIABLE LIFE AND ANNUITY CONTRACTSissuance and products; mortality rates, which are based upon actual experience modified to allow for variations in policy form; lapse rates, which are based upon actual experience modified to allow for variations in policy form; investment returns, using assumptions from a randomly generated model; and asset growth assumptions, which include a reversion to the mean methodology, similar to that applied for DAC.
We regularly evaluate estimates used to determine the GMDB liability and adjust the additional liability balance, with a related charge or credit to Policyholder benefits and claimslosses incurred, if actual experience or other evidence suggests that earlier assumptions should be revised.
The following assumptions and methodology were used to determine the GMDB liability at December 31, 2013:
•Data used was up to 1,000 stochastically generated investment performance scenarios.
•Mean investment performance assumptions ranged from three percent to approximately ten percent depending on the block of business.
•Volatility assumption was 16 percent.
•Mortality was assumed to be between 50 percent and 88 percent of the 1994 variable annuity minimum guaranteed death benefit table for recent experience.
•Lapse rates vary by contract type and duration and ranged from zero percent to 37 percent.
•The discount rate ranged from 3.75 percent to 10 percent and is based on the growth rate assumption for the underlying contracts in effect at the time of policy issuance.
GMWB and GMAVGMAB
Certain of our variable annuity contracts offercontain optional GMWB benefits and, GMAV benefits. Theto a lesser extent, GMAB benefits, which are not currently offered. With a GMWB, the contract holder can monetize the excess of the guaranteed amount over the account value of the contract only through a series of withdrawals that do not exceed a specific percentage per year of the guaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder will receive a series of annuity payments equal to the remaining guaranteed amount, and, for lifetime GMWB products, the annuity payments continue as long as the covered person(s) is living. With a GMAB benefit, the contract holder can continue beyond the guaranteed amount. The account value can also fluctuate with equity market returns on a daily basis resulting in increases or decreases inmonetize the excess of the guaranteed amount over the account value.value of the contract, provided the contract holder persists until the maturity date.
The liabilities for GMWB and GMAV,GMAB, which are recorded in Policyholder contract deposits, are accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in Other net realized capital gains (losses). The fair value of these embedded derivatives was a net assetliability of $37$1.2 billion and $957 million at December 31, 20132015 and a net liability of $997 million at December 31, 2012.2014, respectively. See Note 5 herein4 for discussion of the fair value measurement of guaranteed benefits that are accounted for as embedded derivatives. We had account values subject to GMWB and GMAVGMAB that totaled $28.6$38 billion and $19.8$35 billion at December 31, 20132015 and 2012,2014, respectively. The net amount at risk for GMWB represents the present value of minimum guaranteed withdrawal payments, in accordance with contract terms, in excess of account value.value, assuming no lapses. The net amount at risk for GMAVGMAB represents the present value of minimum guaranteed account value in excess of the current account balance, assuming no lapses. TheIn aggregate, the net amount at risk related to thesethe GMWB and GMAB guarantees was $63$640 million and $753$414 million at December 31, 20132015 and 2012,2014, respectively. We use derivative instruments and other financial instruments to mitigate a portion of our exposure that arises from GMWB and GMAVGMAB benefits.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 14. DEBT
14. DEBT
AIG'sOur long-term debt is denominated in various currencies, with both fixed and variable interest rates. Long-term debt is carried at the principal amount borrowed, including unamortized discounts, hedge accounting valuation adjustments and fair value adjustments, wherewhen applicable. The interest rates presented in the following table reflect the range of contractual rates in effect at year end,December 31, 2015, including fixed and variable rate issuances.
The following table lists our total debt outstanding at December 31, 20132015 and 2012.2014. The interest rates presented in the following table are the range of contractual rates in effect at year end,December 31, 2015, including fixed and variable-rates:
| | | | | Balance at | | | Balance at |
At December 31, 2015 | Range of | Maturity | | December 31, | | | December 31, |
(in millions) | Interest Rate(s) | Date(s) | | | 2015 | | | | 2014 |
Debt issued or guaranteed by AIG: | | | | | | | | | | |
AIG general borrowings: | | | | | | | | | | |
Notes and bonds payable | 2.30% - 8.13% | | 2016 - 2097 | | $ | 17,136 | | | $ | 15,570 |
Subordinated debt | 2.38% | | 2015 | | | - | | | | 250 |
Junior subordinated debt | 4.88% - 8.63% | | 2037 - 2058 | | | 1,337 | | | | 2,466 |
AIG Japan Holdings Kabushiki Kaisha | 0.44% - 1.25% | | 2016 - 2019 | | | 106 | | | | - |
AIGLH notes and bonds payable | 6.63% - 7.50% | | 2025 - 2029 | | | 284 | | | | 284 |
AIGLH junior subordinated debt | 7.57% - 8.50% | | 2030 - 2046 | | | 422 | | | | 536 |
Total AIG general borrowings | | | | | | 19,285 | | | | 19,106 |
AIG borrowings supported by assets:(a) | | | | | | | | | | |
MIP notes payable | 2.28% - 8.59% | | 2016 - 2018 | | | 1,372 | | | | 2,870 |
Series AIGFP matched notes and bonds payable | 0.16% - 7.50% | | 2017 - 2047 | | | 34 | | | | 34 |
GIAs, at fair value | 0.02% - 7.62% | | 2016 - 2047 | | | 3,276 | | | | 4,648 |
Notes and bonds payable, at fair value | 0.12% - 10.37% | | 2016 - 2047 | | | 394 | | | | 818 |
Total AIG borrowings supported by assets | | | | | | 5,076 | | | | 8,370 |
Total debt issued or guaranteed by AIG | | | | | | 24,361 | | | | 27,476 |
Debt not guaranteed by AIG: | | | | | | | | | | |
Other subsidiaries notes, bonds, loans and | | | | | | | | | | |
mortgages payable | 0.06% | | 2017 | | | 2 | | | | 58 |
Debt of consolidated investments(b) | 0.00% - 6.6% | | 2016 - 2062 | | | 4,987 | | | | 3,683 |
Total debt not guaranteed by AIG | | | | | | 4,989 | | | | 3,741 |
Total long term debt | | | | | $ | 29,350 | | | $ | 31,217 |
| | | | | | | | | | | | |
| |
| |
| |
| |
| |
|---|
| | |
At December 31, 2013
(in millions)
| | Range of
Interest Rate(s)
| | Maturity
Date(s)
| | Balance at
December 31,
2013
| | Balance at
December 31,
2012
| |
|---|
| | |
Debt issued or guaranteed by AIG: | | | | | | | | | | | | |
AIG General borrowings: | | | | | | | | | | | | |
Notes and bonds payable | | 1.24% – 8.13% | | | 2015 – 2097 | | $ | 14,062 | | $ | 14,084 | |
Subordinated debt | | 2.38% | | | 2015 | | | 250 | | | 250 | |
Junior subordinated debt | | 4.88% – 8.63% | | | 2037 – 2058 | | | 5,533 | | | 9,416 | |
Loans and mortgages payable | | 9.00% | | | 2015 | | | 1 | | | 79 | |
AIGLH notes and bonds payable | | 6.63% – 7.50% | | | 2025 – 2029 | | | 299 | | | 298 | |
AIGLH junior subordinated debt(a) | | 7.57% – 8.50% | | | 2030 – 2046 | | | 1,054 | | | 1,339 | |
| | |
Total AIG general borrowings | | – | | | – | | | 21,199 | | | 25,466 | |
| | |
AIG/DIB borrowings supported by assets:(b) | | | | | | | | | | | | |
MIP notes payable | | 2.28% – 8.59% | | | 2014 – 2018 | | | 7,963 | | | 9,296 | |
Series AIGFP matched notes and bonds payable | | 0.01% – 8.25% | | | 2014 – 2047 | | | 3,219 | | | 3,544 | |
GIAs, at fair value | | 3.00% – 9.80% | | | 2014 – 2047 | | | 5,530 | | | 6,501 | |
Notes and bonds payable, at fair value | | 0.18% – 10.00% | | | 2014 – 2047 | | | 1,217 | | | 1,554 | |
| | |
Total AIG/DIB borrowings supported by assets | | – | | | – | | | 17,929 | | | 20,895 | |
| | |
Total debt issued or guaranteed by AIG | | – | | | – | | | 39,128 | | | 46,361 | |
| | |
Debt not guaranteed by AIG: | | | | | | | | | | | | |
| | |
Other subsidiaries notes, bonds, loans and mortgages payable | | 0.20% – 8.29% | | | 2014 – 2060 | | | 656 | | | 325 | |
| | |
Debt of consolidated investments(c) | | 0.03% – 10.00% | | | 2014 – 2052 | | | 1,909 | | | 1,814 | |
| | |
Total debt not guaranteed by AIG | | – | | | – | | | 2,565 | | | 2,139 | |
| | |
Total long term debt(d) | | – | | | – | | $ | 41,693 | | $ | 48,500 | |
| | |
(a) On July 11, 2013. AIGLH junior subordinated debentures with the same terms as the trust preferred securities were distributed to holders of the trust preferred securities, and the trust preferred securities were cancelled.
(b) AIG Parent guarantees all DIBsuch debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations toof AIG Parent. Collateral posted to third parties was $2.4 billion and $3.5 billion at December 31, 2015 and December 31, 2014, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
(c)(b) At December 31, 2013,2015, includes debt of consolidated investment vehicles related to real estate investments held through AIG Global Real Estate Investment Corp., AIG Credit Corp., AIG Lifeof $2.4 billion, affordable housing partnership investments and Retirement and AIG Property Casualty U.S.securitizations of $1.5 billion, $111 million, $201$2.2 million, and $58other securitization vehicles and investments of $359 million, respectively. At December 31, 2012,2014, includes debt of consolidated investment vehicles related to real estate investments held through AIG Global Real Estate Investment Corp., AIG Credit Corp.of $2.1 billion, affordable housing partnership investments and AIG Life and Retirementsecuritizations of $1.5 billion, $176$853 million, and $133other securitization vehicles and investments of $728 million, respectively.
(d) Excludes $21.4 billion and $24.3 billion related to ILFC as it is classified as a held-for-sale business at December 31, 2013 and 2012, respectively.
AIG 2013 Form 10-K
The following table presents maturities of long-term debt (including(including unamortized original issue discount, hedge accounting valuation adjustments and fair value adjustments, when applicable), excluding $1.9$5 billion in borrowings of debt of consolidated investments:
| | | | |
| |
| | Year Ending | | |
|---|
December 31, 2013
(in millions)
| |
| | |
|---|
| | Total
| | 2014
| | 2015
| | 2016
| | 2017
| | 2018
| | Thereafter
| | |
|---|
| | | |
General borrowings: | | |
December 31, 2015 | | | | | Year Ending |
(in millions) | | | | Total | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter |
Debt issued or guaranteed by AIG: | | | | | | | | | | | | | | | | |
AIG general borrowings: | | | | | | | | | | | | | | | | |
Notes and bonds payable | | $ | 14,062 | | $ | – | | $ | 999 | | $ | 1,781 | | $ | 1,374 | | $ | 2,494 | | $ | 7,414 | | | $ | 17,136 | $ | 992 | $ | 192 | $ | 1,106 | $ | 999 | $ | 1,345 | $ | 12,502 |
Subordinated debt | | 250 | | – | | 250 | | – | | – | | – | | – | | | | - | | - | | - | | - | | - | | - | | - |
Junior subordinated debt | | 5,533 | | – | | – | | – | | – | | – | | 5,533 | | | | 1,337 | | - | | - | | - | | - | | - | | 1,337 |
Loans and mortgages payable | | 1 | | – | | 1 | | – | | – | | – | | – | | |
AIG Japan Holdings Kabushiki Kaisha | | | | 106 | | - | | - | | - | | 106 | | - | | - |
AIGLH notes and bonds payable | | 299 | | – | | – | | – | | – | | – | | 299 | | | | 284 | | - | | - | | - | | - | | - | | 284 |
AIGLH junior subordinated debt | | 1,054 | | – | | – | | – | | – | | – | | 1,054 | | | | 422 | | - | | - | | - | | - | | - | | 422 |
| | | |
AIG general borrowings | | $ | 21,199 | | $ | – | | $ | 1,250 | | $ | 1,781 | | $ | 1,374 | | $ | 2,494 | | $ | 14,300 | | |
| | | |
AIG/DIB borrowings supported by assets: | | |
Total AIG general borrowings | | | | 19,285 | | 992 | | 192 | | 1,106 | | 1,105 | | 1,345 | | 14,545 |
AIG borrowings supported by assets: | | | | | | | | | | | | | | | | |
MIP notes payable | | 7,963 | | 1,575 | | 900 | | 1,215 | | 3,866 | | 407 | | – | | | | 1,372 | | 245 | | 781 | | 346 | | - | | - | | - |
Series AIGFP matched notes and
bonds payable | | 3,219 | | 1,000 | | – | | – | | 10 | | 1,983 | | 226 | | |
Series AIGFP matched notes and | | | | | | | | | | | | | | | | |
bonds payable | | | | 34 | | - | | 10 | | - | | - | | - | | 24 |
GIAs, at fair value | | 5,530 | | 632 | | 597 | | 311 | | 249 | | 655 | | 3,086 | | | | 3,276 | | 190 | | 176 | | 464 | | 90 | | 41 | | 2,315 |
Notes and bonds payable, at fair value | | 1,217 | | 116 | | 223 | | 220 | | 141 | | 164 | | 353 | | | | 394 | | 192 | | 10 | | 123 | | - | | - | | 69 |
| | | |
AIG/DIB borrowings supported by assets | | 17,929 | | 3,323 | | 1,720 | | 1,746 | | 4,266 | | 3,209 | | 3,665 | | |
| | | |
Other subsidiaries notes, bonds, loans and mortgages payable | | 656 | | 7 | | 44 | | 3 | | 5 | | 3 | | 594 | | |
| | | |
Total AIG borrowings supported by assets | | Total AIG borrowings supported by assets | | 5,076 | | 627 | | 977 | | 933 | | 90 | | 41 | | 2,408 |
Total debt issued or guaranteed by AIG | | | | 24,361 | | 1,619 | | 1,169 | | 2,039 | | 1,195 | | 1,386 | | 16,953 |
Other subsidiaries notes, bonds, loans | | | | | | | | | | | | | | | | |
and mortgages payable | | | | 2 | | - | | 2 | | - | | - | | - | | - |
Total | | $ | 39,784 | | $ | 3,330 | | $ | 3,014 | | $ | 3,530 | | $ | 5,645 | | $ | 5,706 | | $ | 18,559 | | | $ | 24,363 | $ | 1,619 | $ | 1,171 | $ | 2,039 | $ | 1,195 | $ | 1,386 | $ | 16,953 |
| | | |
Uncollateralized and collateralized notes, bonds, loans and mortgages payable consisted of the following:
| | Uncollateralized | | Collateralized | | |
At December 31, 2015 | | Notes/Bonds/Loans | | Loans and | | |
(in millions) | | Payable | | Mortgages Payable | | Total |
AIG general borrowings | $ | - | $ | 106 | $ | 106 |
Other subsidiaries notes, bonds, loans and mortgages payable* | | - | | 2 | | 2 |
Total | $ | - | $ | 108 | $ | 108 |
| | | | | | | | | | |
| | |
At December 31, 2013
(in millions)
| | Uncollateralized
Notes/Bonds/Loans
Payable
| | Collateralized
Loans and
Mortgages Payable
| | Total
| |
|---|
| | |
AIG general borrowings | | $ | 1 | | $ | – | | $ | 1 | |
Other subsidiaries notes, bonds, loans and mortgages payable* | | | 83 | | | 573 | | | 656 | |
| | |
Total | | $ | 84 | | $ | 573 | | $ | 657 | |
| | |
* AIG does not guarantee any of these borrowings.
Junior Subordinated Debt
During 2007 and 2008, we issued an aggregate of $12.5 billion of junior subordinated debentures denominated in U.S. dollars, British pounds and euros in eight series of securities. In November 2011, we exchanged certain of our outstanding U.S. dollar, British pound and euro junior subordinated debentures for newly issued senior notes in equivalent currencies pursuant to an exchange offer. This exchange resulted in a pre-tax gain on extinguishment of debt of approximately $484 million, which is reflected in Loss on extinguishment of debt in the Consolidated Statements of Income and a deferred gain of $65 million, which is being amortized as a reduction to future interest expense.
In connection with the issuance of the eight series of junior subordinated debentures, we had entered into replacement capital covenants (the Original RCCs) for the benefit of the holders of "covered debt" (a designated series of our notes). The Original RCCs provided that we would not repay, redeem, or purchase the applicable series of junior subordinated debentures on or before a specified date, unless we issued certain replacement capital securities. In August 2012, we issued an aggregate of $250 million of 2.375% Subordinated Notes due 2015 (the Subordinated Notes), which upon their issuance became the "covered debt" under the Original RCCs. The holders of the newly issued Subordinated Notes, as the holders of the "covered debt" under the Original RCCs, consented to
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 14. DEBT
amendments to each of those Original RCCs that deleted all of the covenants that restricted our ability to repay, redeem or purchase the applicable series of the junior subordinated debentures.
We also entered into new replacement capital covenants (the New RCCs) for the initial benefit of the holders of theour 2.375% Subordinated Notes due 2015 (the Subordinated Notes), in connection with our 5.75% Series A-2 Junior Subordinated Debentures and our 4.875% Series A-3 Junior Subordinated Debentures. We covenanted in each New RCC that, subject to certain exceptions, we would not repay, redeem or purchase, and that none of our subsidiaries would purchase, the applicable series of junior subordinated debentures prior to the scheduled termination date of that New RCC, unless since the date 360 days prior to the date of that repayment, redemption or purchase, we have received a specified amount of net cash proceeds from the sale of common stock or certain other qualifying securities that have certain characteristics that are at least as equity-like as the applicable characteristics of the applicable series of junior subordinated debentures, or we or our subsidiaries have issued a specified amount of common stock in connection with the conversion or exchange of certain convertible or exchangeable securities. In the first quarter of 2013, our obligations under the newNew RCCs were effectively terminated because one of the termination provisions set forth in the newNew RCCs was triggered when it was determined that neither series of junior subordinated debentures received equity credit any longer for rating agency purposes.
In 2013,2015, we redeemed $1.1 billion aggregate principal amount of our 7.70% Series A-5 Junior Subordinated Debentures and $750repurchased approximately $588 million aggregate principal amount of our 6.45%8.175% Series A-4A-6 Junior Subordinated Debentures, in each case for a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest.Debentures.
AIGLH Junior Subordinated Debentures (Formerly, Liabilities Connected To Trust Preferred Stock)
In connection with our acquisition of AIG Life Holdings, Inc. (AIGLH) in 2001, we entered into arrangements with AIGLH with respect to outstanding AIGLH capital securities. In 1996, AIGLH issued capital securities through a trust to institutional investors and funded the trust with AIGLH junior subordinated debentures issued to the trust with the same terms as the capital securities. AIG Parent guaranteed the debentures pursuant to a guarantee that is expressly subordinated to certain AIGLH senior debt securities. Under the AIG Parent guarantee, AIG Parent was not required to make any payments in respect of the debentures if such payment would be prohibited by the subordination provisions of the debentures. As a result, AIG Parent would never be required to make a payment under its guarantee of the debentures for so long as AIGLH was prohibited from making a payment on the debentures.
On July 11, 2013, the AIGLH junior subordinated debentures were distributed to holders of the capital securities, the capital securities were cancelled and the trusts were dissolved. At December 31, 2013,2015, the junior subordinated debentures outstanding consisted of $300$116 million of 8.5 percent junior subordinated debentures due July 2030, $500$227 million of 8.125 percent junior subordinated debentures due March 2046 and $500$79 million of 7.57 percent junior subordinated debentures due December 2045, each guaranteed by AIG Parent as described above.Parent.
Credit Facilities
The four-yearOn November 5, 2015, we amended and restated the five-year syndicated credit facility that we entered into on October 5, 2012June 19, 2014 (the Four-YearPrevious Facility). The amended and restated five-year syndicated facility (the Five-Year Facility) provides for $4.0 billion ofaggregate commitments by the bank syndicate to provide unsecured revolving loans which includes a $2.0 billion letterand/or standby letters of credit sublimit. As of December 31, 2013,up to $4.5 billion (increased from a total of approximately $3.9$4.0 billion remains available undercommitment in the Four-Year Facility, of which approximately $1.9 billion remains available for letters of credit. We expect that we may draw downPrevious Facility) without any limits on the Four-Yeartype of borrowings and is scheduled to expire in November 2020 (the Previous Facility from timewas scheduled to time, and may useexpire in June 2019). The increased commitment of $500 million to the proceeds for general corporate purposes. The Four YearFive-Year Facility also provides foroffsets the issuanceeffect of lettersthe expiration of credit. The Four-Year Facility is summarized in the following table.
| | | | | | | | | | |
| |
At December 31, 2013
(in millions)
| | Size
| | Available
Amount
| | Expiration
| | Effective
Date
| |
|---|
| | |
Four-Year Syndicated Credit Facility | | $ | 4,000 | | $ | 3,947 | | October 2016 | | 10/5/2012 | |
| |
AIG 2013 Form 10-K
our $500 million contingent liquidity facility.
At December 31, 2015 | | | | | Available | | Effective |
(in millions) | | Size | | | Amount | Expiration | Date |
Five-Year Syndicated Credit Facility | $ | 4,500 | | $ | 4,500 | November 2020 | 11/5/2015 |
ITEM 8 / NOTE 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
In the normal course of business, various contingent liabilities and commitments are entered into by AIG and our subsidiaries. In addition, AIG Parent guarantees various obligations of certain subsidiaries.
Although AIG cannot currently quantify its ultimate liability for unresolved litigation and investigation matters, including those referred to below, it is possible that such liability could have a material adverse effect on AIG'sAIG’s consolidated financial condition or its consolidated results of operations or consolidated cash flows for an individual reporting period.
Legal Contingencies
Overview.In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services industries in general, subject to litigation, including claims for punitive damages. In our insurance and mortgage guaranty operations, litigation arising from claims settlement activities is generally considered in the establishment of our liability for unpaid claimslosses and claimsloss adjustment expense.expenses. However, the potential for increasing jury awards and settlements makes it difficult to assess the ultimate outcome of such litigation. AIG is also subject to derivative, class action and other claims asserted by its shareholders and others alleging, among other things, breach of fiduciary duties by its directors and officers and violations of insurance laws and regulations, as well as federal and state securities laws. In the case of any derivative action brought on behalf of AIG, any recovery would accrue to the benefit of AIG.
Various regulatory and governmental agencies have been reviewing certain transactions and practices of AIG and our subsidiaries in connection with industry-wide and other inquiries into, among other matters, certain business practices of current and former operating insurance subsidiaries. We have cooperated, and will continue to cooperate, in producing documents and other information in response to subpoenas and other requests.
AIG'sAIG’s Subprime Exposure, AIGFP Credit Default Swap Portfolio and Related Matters
AIG, AIGFPAIG Financial Products Corp. and related subsidiaries (collectively AIGFP), and certain directors and officers of AIG, AIGFP and other AIG subsidiaries have been named in various actions relating to our exposure to the U.S. residential subprime mortgage market, unrealized market valuation losses on AIGFP'sAIGFP’s super senior credit default swap portfolio, losses and liquidity constraints relating to our securities lending program and related disclosure and other matters (Subprime Exposure Issues).
Consolidated 2008 Securities Litigation. BetweenOn May 21, 2008 and January 15,19, 2009, a consolidated class action complaint, resulting from the consolidation of eight purported securities class action complaints wereactions filed between May 2008 and January 2009, was filed against AIG and certain directors and officers of AIG and AIGFP, AIG'sAIG’s outside auditors, and the underwriters of various securities offerings in the United States District Court for the Southern District of New York (the Southern District of New York) in In re American International Group, Inc. 2008 Securities Litigation (the Consolidated 2008 Securities Litigation), allegingasserting claims under the Securities Exchange Act of 1934, as amended (the Exchange Act), orand claims under the Securities Act of 1933, as amended (the Securities Act). On March 20, 2009, the Court consolidated all eight of the purported securities class actions as In re American International Group, Inc. 2008 Securities Litigation (the Consolidated 2008 Securities Litigation).
On May 19, 2009, the lead plaintiff in the Consolidated 2008 Securities Litigation filed a consolidated complaint on behalf of purchasers of AIG Common Stock during the alleged class period of March 16, 2006 through September 16, 2008, and on behalf of purchasers of various AIG securities offered pursuant to AIG's shelf registration statements. The consolidated complaint alleges that defendants made statements during the class period in press releases, AIG's quarterly and year-end filings, during conference calls, and in various registration statements and prospectuses in connection with the various offerings that were, for allegedly materially false and misleading and that artificially inflated the price of AIG Common Stock. The alleged false and misleading statements relatein AIG’s public disclosures from March 16, 2006 to September 16, 2008 relating to, among other things, the Subprime Exposure Issues. The consolidated complaint alleges violations
On July 15, 2014 and August 1, 2014, lead plaintiff, AIG and AIG’s outside auditor accepted mediators’ proposals to settle the Consolidated 2008 Securities Litigation against all defendants. On October 22, 2014, AIG made a cash payment of Sections 10(b) and 20(a) of the Exchange Act and Sections 11, 12(a)(2), and 15 of the Securities Act.$960 million, which is being held in escrow until all funds are distributed. On August 5, 2009, defendants filed motions to dismiss the consolidated complaint, and on September 27, 2010,March 20, 2015, the Court deniedissued an Order and Final Judgment approving the motionsclass settlement and dismissing the action with prejudice, and the AIG settlement became final on June 29, 2015.
Individual Securities Litigations. Between November 18, 2011 and February 9, 2015, eleven separate, though similar, securities actions (Individual Securities Litigations) were filed asserting claims substantially similar to dismiss.
On April 1, 2011, the lead plaintiffthose in the Consolidated 2008 Securities Litigation filed a motion to certify a class of plaintiffs. On November 2, 2011, the Court terminated the motion without prejudice to an application for restoration. On March 30, 2012, the lead plaintiff filed a renewed motion to certify a class of plaintiffs.
AIG 2013 Form 10-K
ITEM 8 / NOTE 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
On April 26, 2013, the Court granted a motion for judgment on the pleadings brought by the defendants. The Court's order dismissed all claims against the outside auditors in their entirety, and it also reduced the scope of the Securities Act claims against AIG and defendants other than the outside auditors.
On September 23, 2013, at the request of the parties, the Court terminated lead plaintiff's motion for class certification without prejudice to reinstatement.
On January 30, 2014, the Court stayed proceedings in the Consolidated 2008 Securities Litigation pending a decision inHalliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (U.S. Nov. 15, 2013), in which the U.S. Supreme Court will consider the validity of, and what is needed to invoke or rebut, the fraud-on-the-market presumption of reliance necessary for certification of a class of claims under Section 10(b) of the Exchange Act. We have accrued our current estimate of probable loss with respect to this litigation.
Individual Securities Litigations. On November 18, 2011, January 20, 2012, June 11, 2012, August 8, 2012 and May 17, 2013, September 13, 2013, and September 16, 2013, seven separate, though similar, securities actions were filed in the Southern District of New York by the Kuwait Investment Authority, various Oppenheimer Funds, eight foreign funds and investment entities led by the British Coal Staff Superannuation Scheme, Pacific Life Funds and Pacific Select Fund, the Teachers Retirement System of the State of Illinois, 12 foreign funds and management companies, and GIC Private Limited against AIG and certain directors and officers of AIG and AIGFP (the(one such action by the British Coal Staff Superannuation Scheme also names as defendants AIG'sa defendant AIG’s outside auditorsauditor and two such actions also name as defendants the underwriters of various securities offerings;offerings). Two of the actions were voluntarily dismissed. On September 10, 2015, the Southern District of New York granted AIG’s motion to dismiss some of the claims in the Individual Securities Litigations in whole or in part. AIG has settled seven of the nine remaining actions.
On March 27, 2015, an additional securities action by GIC Private Limited only nameswas filed in state court in Orange County, California asserting a claim against AIG as a defendant). The parties have agreedpursuant to stay discovery in these actions untilSection 11 of the earlier of (i) the Court deciding the motion for class certification pendingSecurities Act (the California Action) that is substantially similar to those in the Consolidated 2008 Securities Litigation following 30 days' notice from any party in their respective action, (ii)and the preliminary approval of any settlementtwo remaining Individual Securities Litigations pending in the Consolidated 2008 Securities Litigation, (iii) February 27, 2014, or (iv) such earlier or other date asSouthern District of New York. On July 10, 2015, AIG filed a motion to stay the Court may order.
California Action. On August 6, 2013, two separate, though similar, securities actions were brought by 25 funds (collectively,September 18, 2015, the Dow 30SM plaintiffs) andcourt denied AIG’s motion to stay the RegentsCalifornia Action. On October 23, 2015, AIG filed an appeal of the University ofcourt’s denial. On January 28, 2016, the California againstappellate court summarily denied AIG’s appeal. On February 8, 2016, AIG and certain officers of AIG and AIGFP. The Dow 30SM action was filed a petition for review in the Northern District of Illinois and the actionCalifornia Supreme Court.
On April 29, 2015, AIG filed by the Regents of the University of California was fileda complaint for declaratory relief in the Northern District of California. On February 18, 2014, the parties in each case filed stipulations to transfer the Dow 30SM and the Regents of the University of California actions to the Southern District of New York which transfersseeking a declaration that the Section 11 claims filed in the California Action are pending court approval. time-barred (the SDNY Action). On July 10, 2015, AIG filed a motion for summary judgment and the plaintiff in the California Action cross moved to dismiss the SDNY Action.
We have accrued our current estimate of probable loss with respect to these litigations.
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ERISA Actions — Southern District of New York. Between June 25, 2008, and November 25, 2008, AIG, certain directors and officers of AIG, and members of AIG's Retirement Board and Investment Committee were named as defendants in eight purported class action complaints asserting claims on behalf of participants in certain pension plans sponsored by AIG or its subsidiaries. The Court subsequently consolidated these eight actions as In re American International Group, Inc. ERISA Litigation II. On September 4, 2012, lead plaintiffs' counsel filed a second consolidated amended complaint. The action purports to be brought as a class action under the Employee Retirement Income Security Act of 1974, as amended (ERISA), on behalf of all participants in or beneficiaries of certain benefit plans of AIG and its subsidiaries that offered shares of AIG Common Stock. In the second consolidated amended complaint, plaintiffs allege, among other things, that the defendants breached their fiduciary responsibilities to plan participants and their beneficiaries under ERISA, by continuing to offer the AIG Stock Fund as an investment option in the plans after it allegedly became imprudent to do so. The alleged ERISA violations relate to, among other things, the defendants' purported failure to monitor and/or disclose certain matters, including the Subprime Exposure Issues.
On November 20, 2012, defendants filed motions to dismiss the second consolidated amended complaint. On May 24, 2013, the parties informed the Court of a mediation scheduled for August 21-22, 2013, and requested that the Court defer consideration of defendants' motions pending the outcome of the mediation. On the same day, the Court granted the parties' request, terminating defendants' motions without prejudice to reinstatement on request following the August mediation, if necessary. On August 26, 2013, the parties informed the Court that the mediation did not result in a resolution of the action, and defendants requested that the Court reinstate their motions to dismiss. On September 4, 2013, the Court reinstated defendants' motions to dismiss.
AIG 2013 Form 10-K
ITEMItem 8 / NOTE note 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
As of February 20, 2014, discovery is ongoing, and the Court has not determined if a class action is appropriate or the size or scope of any class. As a result, we are unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.
Canadian Securities Class Action — Ontario Superior Court of Justice. On November 12, 2008, an application was filed in the Ontario Superior Court of Justice for leave to bring a purported class action against AIG, AIGFP, certain directors and officers of AIG and Joseph Cassano, the former Chief Executive Officer of AIGFP, pursuant to the Ontario Securities Act. If the Court grants the application, a class plaintiff will be permitted to file a statement of claim against defendants. The proposed statement of claim would assert a class period of March 16, 2006 through September 16, 2008 and would allege that during this period defendants made false and misleading statements and omissions in quarterly and annual reports and during oral presentations in violation of the Ontario Securities Act.
On April 17, 2009, defendants filed a motion record in support of their motion to stay or dismiss for lack of jurisdiction and forum non conveniens. On July 12, 2010, the Court adjourned a hearing on the motion pending a decision by the Supreme Court of Canada in a pair of actions captioned Club Resorts Ltd. v. Van Breda 2012 SCC 17 (Van Breda). On April 18, 2012, the Supreme Court of Canada clarified the standard for determining jurisdiction over foreign and out-of-province defendants, such as AIG, by holding that a defendant must have some form of "actual," as opposed to a merely "virtual," presence to be deemed to be "doing business" in the jurisdiction. The Supreme Court of Canada also suggested that in future cases, defendants may contest jurisdiction even when they are found to be doing business in a Canadian jurisdiction if their business activities in the jurisdiction are unrelated to the subject matter of the litigation. The matter has been stayed pending further developments in the Consolidated 2008 Securities Litigation.
In plaintiff's proposed statement of claim, plaintiff alleged general and special damages of $500 million and punitive damages of $50 million plus prejudgment interest or such other sums as the Court finds appropriate. As of February 20, 2014, the Court has not determined whether it has jurisdiction or granted plaintiff's application to file a statement of claim, no merits discovery has occurred and the action has been stayed. As a result, we are unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.
Starr International Litigation
On November 21, 2011, Starr International Company, Inc. (SICO) filed a complaint against the United States in the United States Court of Federal Claims (the Court of Federal Claims), bringing claims, both individually and on behalf of the classes defined below and derivatively on behalf of AIG (the SICO Treasury Action). The complaint challenges the government'sgovernment’s assistance of AIG, pursuant to which AIG entered into a credit facility with the Federal Reserve Bank of New York (the FRBNY, and such credit facility, the FRBNY Credit Facility) and the United States received an approximately 80 percent ownership in AIG. The complaint alleges that the interest rate imposed on AIG and the appropriation of approximately 80 percent of AIG'sAIG’s equity was discriminatory, unprecedented, and inconsistent with liquidity assistance offered by the government to other comparable firms at the time and violated the Equal Protection, Due Process, and Takings Clauses of the U.S. Constitution.
On November 21, 2011, SICO also filed a second complaint in the Southern District of New York against the FRBNY bringing claims, both individually and on behalf of all others similarly situated and derivatively on behalf of AIG (the SICO New York Action). This complaint also challenges the government's assistance of AIG, pursuant to which AIG entered into the FRBNY Credit Facility and the United States received an approximately 80 percent ownership in AIG. The complaint alleges that the FRBNY owed fiduciary duties to AIG as our controlling shareholder, and that the FRBNY breached these fiduciary duties by "divert[ing] the rights and assets of AIG and its shareholders to itself and favored third parties" through transactions involving Maiden Lane III LLC (ML III), an entity controlled by the FRBNY, and by "participating in, and causing AIG's officers and directors to participate in, the evasion of AIG's existing Common Stock shareholders' right to approve the massive issuance of the new Common Shares required to complete the government's taking of a nearly 80 percent interest in the Common Stock of AIG." SICO also alleges that the "FRBNY has asserted that in exercising its control over, and acting on behalf of, AIG it did not act in an official, governmental capacity or at the direction of the Department of Treasury," but that "[t]o the extent the proof at or prior to trial shows that the FRBNY did in fact act in a governmental capacity, or at the direction of the Department of Treasury, the improper conduct . . . constitutes the discriminatory takings of the property and property rights of AIG without due process or just compensation."
AIG 2013 Form 10-K
ITEM 8 / NOTE 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
On January 31, 2012 and February 1, 2012, amended complaints were filed in the Court of Federal Claims and the Southern District of New York, respectively.
In rulings dated July 2, 2012 and September 17, 2012, the Court of Federal Claims largely denied the United States' motion to dismiss in the SICO Treasury Action. Discovery is proceeding.
On November 19, 2012, the Southern District of New York granted the FRBNY's motion to dismiss the SICO New York Action. On December 21, 2012, SICO filed a notice of appeal in the United States Court of Appeals for the Second Circuit. On January 29, 2014, the Second Circuit affirmed the Southern District of New York's dismissal of the SICO New York Action.
In both of the actions commenced by SICO,Action, the only claims naming AIG as a party (as a nominal defendant) are derivative claims on behalf of AIG. On September 21, 2012, SICO made a pre-litigationpre‑litigation demand on our Board demanding that we pursue the derivative claims in both actions or allow SICO to pursue the claims on our behalf. On January 9, 2013, our Board unanimously refused SICO'sSICO’s demand in its entirety and on January 23, 2013, counsel for the Board sent a letter to counsel for SICO describing the process by which our Board considered and refused SICO'sSICO’s demand and stating the reasons for our Board'sBoard’s determination.
On March 11, 2013, SICO filed a second amended complaint in the SICO Treasury Action alleging that its demand was wrongfully refused. On June 26, 2013, the Court of Federal Claims granted AIG'sAIG’s and the United States'States’ motions to dismiss SICO'sSICO’s derivative claims in the SICO Treasury Action due to our Board’s refusal of SICO’s demand and denied the United States'States’ motion to dismiss SICO'sSICO’s direct, non-derivative claims.
On March 11, 2013, the Court of Federal Claims in the SICO Treasury Action granted SICO'sSICO’s motion for class certification of two classes with respect to SICO's non-derivativeSICO’s non‑derivative claims: (1) persons and entities who held shares of AIG Common Stock on or before September 16, 2008 and who owned those shares on September 22, 2008;2008 (the Credit Agreement Shareholder Class); and (2) persons and entities who owned shares of AIG Common Stock on June 30, 2009 and were eligible to vote those shares at AIG'sAIG’s June 30, 2009 annual meeting of shareholders.shareholders (the Reverse Stock Split Shareholder Class). SICO has provided notice of class certification to potential members of the classes, who, pursuant to a court order issued on April 25, 2013, had to return opt-inopt‑in consent forms by September 16, 2013 to participate in either class. On November 15, 2013, SICO informed the Court that 286,892286,908 holders of AIG Common Stock during the two class periods hadhave opted into the classes.
WhileOn June 15, 2015, the Court of Federal Claims issued its opinion and order in the SICO Treasury Action. The Court found that the United States exceeded its statutory authority by exacting approximately 80 percent of AIG’s equity in exchange for the FRBNY Credit Facility, but that AIG shareholders suffered no longerdamages as a partyresult. SICO argued during trial that the two classes are entitled to these actions, AIG understandsa total of approximately $40 billion in damages, plus interest. The Court also found that the United States was not liable to the Reverse Stock Split Class in connection with the reverse stock split vote at the June 30, 2009 annual meeting of shareholders.
On June 17, 2015, the Court of Federal Claims entered judgment stating that “the Credit Agreement Shareholder Class shall prevail on liability due to the Government's illegal exaction, but shall recover zero damages, and that the Reverse Stock Split Shareholder Class shall not prevail on liability or damages.” SICO is seeking significant damages.filed a notice of appeal of the July 2, 2012 dismissal of SICO’s unconstitutional conditions claim, the June 26, 2013 dismissal of SICO’s derivative claims, the Court’s June 15, 2015 opinion and order, and the Court’s June 17, 2015 judgment to the United States Court of Appeals for the Federal Circuit. The United States filed a notice of cross appeal of the Court’s July 2, 2012 opinion and order denying in part its motion to dismiss, the Court’s June 26, 2013 opinion and order denying its motion to dismiss SICO’s direct claims, the Court’s June 15, 2015 opinion and order, and the Court’s June 17, 2015 judgment to the United States Court of Appeals for the Federal Circuit.
TheOn August 25, 2015, SICO filed its appellate brief, in which it stated SICO does not appeal the dismissal of the derivative claims it asserted on behalf of AIG. On December 7, 2015, the United States filed its principal and response brief.
In the Court of Federal Claims, the United States has alleged, as an affirmative defense in its answer, that AIG is obligated to indemnify the FRBNY and its representatives, including the Federal Reserve Board of Governors and the United States (as the FRBNY'sFRBNY’s principal), for any recovery in the SICO Treasury Action, and seeks a contingent offset or recoupment for the value of net operating loss benefits the United States alleges that we received as a result of the government's assistance. On NovemberAction.
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Item 8 2013, the Court denied a motion by SICO to strike the United States' affirmative defenses of indemnification and contingent offset or recoupment.
The FRBNY has also requested indemnification in connection with the SICO New York Action from AIG under the FRBNY Credit Facility and from ML III under the Master Investment and Credit Agreement and the Amended and Restated Limited Liability Company Agreement of ML III.
Employment Litigation against AIG and AIG Global Real Estate Investment Corporation
On December 9, 2009, AIG Global Real Estate Investment Corporation's (AIGGRE) former President, Kevin P. Fitzpatrick, several entities he controls, and various other single purpose entities (the SPEs) filed a complaint in the Supreme Court of the State of New York, New York County against AIG and AIGGRE (the Defendants). The case was removed to the Southern District of New York, and an amended complaint was filed on March 8, 2010. The amended complaint asserted that the Defendants violated fiduciary duties to Fitzpatrick and his controlled entities and breached Fitzpatrick's employment agreement and agreements of SPEs that purportedly entitled him to carried interest arising out of the sale or disposition of certain real estate. Fitzpatrick has also brought derivative claims on behalf of the SPEs, purporting to allege that the Defendants breached contractual and fiduciary duties in failing to fund the SPEs with various amounts allegedly due under the SPE agreements. Fitzpatrick also requested injunctive relief, an accounting, and that a receiver be appointed to manage the affairs of the SPEs. He further alleged that the SPEs were subject to a constructive trust. Fitzpatrick also alleged a violation of ERISA relating to retirement benefits purportedly due. Fitzpatrick claimed that he was owed damages totaling approximately $274 million (inclusive of
AIG 2013 Form 10-K
/ITEM 8 / NOTE note 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
interest as
AIG believes that any indemnification obligation would arise only if: (a) SICO prevails on its appeal and ultimately receives an award of September 3, 2013). Fitzpatrick also sought a declaratory judgment that he would be entitleddamages; (b) the United States then commences an action against AIG seeking indemnification; and (c) the United States is successful in such an action through any appellate process. If SICO prevails on its claims and the United States seeks indemnification from AIG, AIG intends to unspecified profit interests whenever AIG sold eight buildings (oneassert defenses thereto. A reversal of which AIG contends it never owned and another of which AIG has already sold). In addition, Fitzpatrick claimed punitive damages for the alleged breaches of fiduciary duties, and he applied to the Court on August 15, 2013 for attorneys' fees in light of discovery sanctionsFederal Claim’s June 17, 2015 decision and judgment and a final determination that the Court ordered againstUnited States is liable for damages, together with a final determination that AIG in May.
On November 21, 2013,is obligated to indemnify the parties executedUnited States for any such damages, could have a definitivematerial adverse effect on our business, consolidated financial condition and final settlement agreement. The matter was dismissed with prejudice effective December 5, 2013. AIG has made or accrued for payments required under the settlement agreement.results of operations.
False Claims Act Complaint
On February 25, 2010, a complaint was filed in the United States District Court for the Southern District of California by two individuals (Relators) seeking to assert claims on behalf of the United States against AIG and certain other defendants, including Goldman Sachs and Deutsche Bank, under the False Claims Act. Relators filed a first amended complaint on September 30, 2010, adding certain additional defendants, including Bank of America and Société Générale. The first amended complaint alleged that defendants engaged in fraudulent business practices in respect of their activities in the over-the-counter market for collateralized debt obligations, and submitted false claims to the United States in connection with the FRBNY Credit Facility and Maiden Lane II LLC (ML II) and MLMaiden Lane III LLC entities (the Maiden Lane Interests) through, among other things, misrepresenting AIG'sAIG’s ability and intent to repay amounts drawn on the FRBNY Credit Facility, and misrepresenting the value of the securities that the Maiden Lane Interests acquired from AIG and certain of its counterparties. The first amended complaint sought unspecified damages pursuant to the False Claims Act in the amount of three times the damages allegedly sustained by the United States as well as interest, attorneys'attorneys’ fees, costs and expenses. The complaint and the first amended complaint were initially filed and maintained under seal while the United States considered whether to intervene in the action. On or about April 28, 2011, after the United States declined to intervene, the District Court lifted the seal, and Relators served the first amended complaint on AIG on July 11, 2011. On April 19, 2013, the Court granted AIG'sAIG’s motion to dismiss, dismissing the first amended complaint in its entirety, without prejudice, giving the Relators the opportunity to file a second amended complaint. On May 24, 2013, the Relators filed a second amended complaint, which attempted to plead the same claims as the prior complaints and did not specify an amount of alleged damages. AIG and its co-defendants filed motions to dismiss the second amended complaint on August 9, 2013. AsOn March 29, 2014, the Court dismissed the second amended complaint with prejudice. On April 30, 2014, the Relators filed a resultNotice of Appeal to the absence of a statement of damages and the early stage of this litigation, weNinth Circuit. We are unable to reasonably estimate the possible loss or range of losses, if any, arising from thethis litigation.
Litigation Matters Relating to AIG'sAIG’s Insurance Operations
Caremark.AIG and certain of its subsidiaries have been named defendants in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). The plaintiffs in the second-filedsecond‑filed action intervened in the first-filedfirst‑filed action, and the second-filedsecond‑filed action was dismissed. An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage.
The complaints filed by the plaintiffs and the intervenors request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. Plaintiffs have now reduced the amount of compensatory damages they are seeking at trial to $1.1 billion. AIG and its subsidiaries deny the allegations of fraud and suppression, assert that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement, that the claims are barred by the statute of limitations, and that the statute cannot be tolled in light of the public disclosure of the excess coverage. The plaintiffs and intervenors, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations.
On August 15, 2012, the trial court entered an order granting plaintiffs'plaintiffs’ motion for class certification.certification, and on September 12, 2014, the Alabama Supreme Court affirmed that order. AIG and the other defendants have appealeddefendants’ petition for rehearing of that order to the Alabama Supreme Court, and the case in the trial court will be
AIG 2013 Form 10-Kdecision
TABLE OF CONTENTS
ITEM
Item 8 / NOTE note 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
was denied on February 27, 2015. The matter has been remanded to the trial court for general discovery and adjudication of the merits. On November 24, 2015, the trial court ruled that the defendants had a duty to disclose the amount of insurance available at the settlement approval hearings and that the defendants breached that duty. AIG intends to appeal this ruling in the event of an adverse judgment at trial. Trial is expected to commence on February 22, 2016. In 2015, we accrued our current estimate of loss with respect to this litigation.
stayed until that appeal is resolved. General discovery has not commenced and AIG is unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.
Regulatory and Related Matters
Our life insurance companies have receivedIn April 2007, the National Association of Insurance Commissioners (NAIC) formed a Settlement Review Working Group, directed by the State of Indiana, to review the Workers’ Compensation Residual Market Assessment portion of the settlement between AIG, the Office of the New York Attorney General, and responded to industry-wide regulatory inquiries, includingthe New York State Department of Insurance. In late 2007, the Settlement Review Working Group, under the direction of Indiana, Minnesota and Rhode Island, recommended that a multi-state audit andtargeted market conduct examination covering compliance with unclaimed property laws and a directive fromfocusing on workers’ compensation insurance be commenced under the New York Insurance Department regarding claims settlement practices and other related state regulatory inquiries. The inquiries concern the usedirection of the Social Security Death Master File (SSDMF) to identify potential claims not yet presented to us in the normal course of business. In connection with the resolutionNAIC’s Market Analysis Working Group. AIG was informed of the multi-state targeted market conduct examination relating to these mattersin January 2008. The lead states in the third quartermulti-state examination were Delaware, Florida, Indiana, Massachusetts, Minnesota, New York, Pennsylvania and Rhode Island. All other states (and the District of 2012, we paidColumbia) agreed to participate in the multi-state examination. The examination focused on legacy issues related to certain AIG entities’ writing and reporting of workers compensation insurance between 1985 and 1996.
On December 17, 2010, AIG and the lead states reached an $11 millionagreement to settle all regulatory assessment toliabilities arising out of the various state insurance departments that are parties tosubjects of the multistate examination. This regulatory settlement agreement, which was agreed to defray costsby all 50 states and the District of their examinationsColumbia, included, among other terms, (i) AIG’s payment of $100 million in regulatory fines and monitoring. Although we have enhanced our claims practicespenalties; (ii) AIG’s payment of $46.5 million in outstanding premium taxes and assessments; (iii) AIG’s agreement to include useenter into a compliance plan describing agreed-upon specific steps and standards for evaluating AIG’s ongoing compliance with state regulations governing the setting of workers’ compensation insurance premium rates and the reporting of workers’ compensation premiums; and (iv) AIG’s agreement to pay up to $150 million in contingent fines in the event that AIG fails to comply substantially with the compliance plan requirements. In furtherance of the SSDMF, it is possible thatcompliance plan, the settlement remediation requirements, remaining inquiries, other regulatory activity or litigation could result inagreement provided for a monitoring period from May 29, 2012 to May 29, 2014 leading up to a compliance plan examination. After the paymentclose of additional amounts. AIG has also received a demand letter from a purported AIG shareholder requesting that the Boardmonitoring period, as part of Directors investigate these matters, and bring appropriate legal proceedings against any person identified by the investigation as engaging in misconduct. On January 8, 2014, the independent members of our Board unanimously refused the demand in its entirety, and on February 19, 2014, counselpreparation for the Board sent a letteractual conduct of the compliance plan examination, on or about October 1, 2014, AIG and the lead states agreed upon corrective action plans to counsel foraddress particular issues identified during the purported AIG shareholder describing the process by which our Board considered and refused its demand. AIG believes it has adequately reserved for such claims, but theremonitoring period. The compliance plan examination is ongoing. There can be no assurance that the ultimate costresult of the compliance plan examination will not vary, perhaps materially, from its estimate.result in a fine, have a material adverse effect on AIG’s ongoing operations or lead to civil litigation.
In connection with the previously disclosed multi-statea multi‑state examination of certain accident and health products, including travel products, issued by National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), AIG Property Casualty Inc. (formerly Chartis Inc.), on behalf of itself, National Union, and certain of ChartisAIG Property Casualty Inc.'s’s insurance and non-insurancenon‑insurance companies (collectively, the ChartisAIG PC parties) entered into a Regulatory Settlement Agreement with regulators from 50 U.S. jurisdictions effective November 29, 2012. Under the agreement, and without admitting any liability for the issues raised in the examination, the ChartisAIG PC parties (i) paid a civil penalty of $50 million, (ii) entered into a corrective action plan describing agreed-uponagreed‑upon specific steps and standards for evaluating the Chartis parties'AIG PC parties’ ongoing compliance with laws and regulations governing the issues identified in the examination, and (iii) agreed to pay a contingent fine in the event that the ChartisAIG PC parties fail to satisfy certain terms of the corrective action plan. National Union and other AIG companies are also currently subject to civil litigation relating to the conduct of their accident and health business, and may be subject to additional litigation relating to the conduct of such business from time to time in the ordinary course. There can be no assurance that any regulatory action resulting from the issues identified will not have a material adverse effect on our ongoing operations of the business subject to the agreement, or on similar business written by other AIG carriers.
Industry-wide examinations conducted by the Minnesota DepartmentLegal Reserves
We recorded increases in our legal reserve liability of Insurance$25 million and the Department of Housing and Urban Development (HUD) on captive reinsurance practices by lenders and mortgage insurance companies, including UGC, have been ongoing for several years. In 2011, the Consumer Financial Protection Bureau (CFPB) assumed responsibility for violations of the Real Estate Settlement Procedures Act from HUD, and assumed HUD's aforementioned ongoing investigation. In June 2012, the CFPB issued a Civil Investigative Demand (CID) to UGC and other mortgage insurance companies, requesting the production of documents and answers to written questions. The CFPB agreed to toll the deadlines associated with the CID pending discussions that could resolve the investigation. UGC and the CFPB reached a settlement, entered on April 8, 2013 by the United States District Court for the Southern District of Florida, where UGC consented to discontinue its remaining captive reinsurance practices and to pay a civil monetary penalty of $4.5$507 million to the CFPB. The settlement includes a release for all liability related to UGC's captive reinsurance practices and resolves the CFPB's investigation. UGC has received a proposed consent order from the Minnesota Commissioner of Commerce (the MN Commissioner) which alleges that UGC violated the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act and other state and federal laws in connection with its practices with captive reinsurance companies owned by lenders. UGC is engaged in discussions with the MN Commissioner with respect to the terms of the proposed consent order. UGC cannot predict if or when a consent order may be entered into or, if entered into, what the terms of the final consent order will be. UGC is also currently subject to civil litigation relating to its placement of reinsurance with captives owned by lenders, and may be subject to additional litigation relating to the conduct of such business from time to time in the ordinary course.years ended December 31, 2015 and 2014, respectively.
AIG 2013 Form 10-K
TABLE OF CONTENTS
ITEM
Item 8 / NOTE note 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
AIG is responding to requests for information and documents by the New York Department of Financial Services (NYDFS), the Manhattan District Attorney's Office, and other governmental authorities relating to AIG's formerly wholly owned subsidiaries, ALICO and Delaware American Life Insurance Company (DelAm), and other related business units, which were sold by AIG to MetLife in November 2010. The inquiries relate to whether ALICO, DelAm and their representatives conducted insurance business in New York over an extended period of time without a license, and whether certain representations by ALICO concerning its activities in New York were accurate. See Guarantees — Asset Dispositions — ALICO Sale below.
Other Contingencies
Liability for unpaid claims and claims adjustment expense
Although we regularly review the adequacy of the established Liability for unpaid claims and claims adjustment expense, there can be no assurance that our loss reserves will not develop adversely and have a material adverse effect on our results of operations. Estimation of ultimate net losses, loss expenses and loss reserves is a complex process, particularly for long-tail casualty lines of business, which include, but are not limited to, general liability, commercial automobile liability, environmental, workers' compensation, excess casualty and crisis management coverages, insurance and risk management programs for large corporate customers and other customized structured insurance products, as well as excess and umbrella liability, directors and officers and products liability. Generally, actual historical loss development factors are used to project future loss development. However, there can be no assurance that future loss development patterns will be the same as in the past. Moreover, any deviation in loss cost trends or in loss development factors might not be identified for an extended period of time subsequent to the recording of the initial loss reserve estimates for any accident year. There is the potential for reserves with respect to a number of years to be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves. These changes in loss cost trends or loss development factors could be attributable to changes in global economic conditions, changes in the legal, regulatory, judicial and social environment, changes in medical cost trends (inflation, intensity and utilization of medical services), underlying policy pricing, terms and conditions, and claims handling practices.
Commitments
We occupy leased space in many locations under various long-term leases and have entered into various leases covering the long-term use of data processing equipment.
The following table presents the future minimum lease payments under operating leases:leases at December 31, 2015:
| | | | |
(in millions)
| |
| | (in millions) | |
|---|
| | | |
2014 | | $ | 348 | | |
2015 | | 264 | | |
2016 | | 217 | | $ | 304 |
2017 | | 176 | | | 234 |
2018 | | 127 | | | 168 |
Remaining years after 2018 | | 345 | | |
| | | |
2019 | | | 126 |
2020 | | | 93 |
Remaining years after 2020 | | | 210 |
Total | | $ | 1,477 | | $ | 1,135 |
| | | |
Rent expense was $414$327 million, $445$471 million and $482$414 million for the years ended December 31, 2015, 2014 and 2013, 2012 and 2011, respectively. These amounts include $15 million, $16 million and $13 million attributable to businesses held for sale for the years ended December 31, 2013, 2012 and 2011, respectively. The year ended December 31, 2011 includes $24 million for discontinued operations.
Flight Equipment Related to Business Held for Sale
At December 31, 2013, ILFC had committed to purchase 335 new aircraft with aggregate estimated total remaining payments of approximately $21.7 billion, which includes 12 aircraft through sale-leaseback transactions with airlines, deliverable from 2014 through 2022. ILFC had also committed to purchase one used aircraft and nine new spare engines. ILFC will be required to find lessees for any aircraft acquired and to arrange financing for a substantial
AIG 2013 Form 10-K
ITEM 8 / NOTE 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
portion of the purchase price. These commitments are related to businesses held for sale. See Note 4 for a discussion of the ILFC transaction.
The following table presents the minimum future rental income on noncancelable operating leases of flight equipment that has been delivered:
| | | | |
| | |
(in millions)
| |
| |
|---|
| | |
2014 | | $ | 3,648 | |
2015 | | | 3,034 | |
2016 | | | 2,474 | |
2017 | | | 1,857 | |
2018 | | | 1,194 | |
Remaining years after 2018 | | | 2,328 | |
| | |
Total | | $ | 14,535 | |
| | |
Flight equipment is leased under operating leases with remaining terms ranging from one to thirteen years.
Other Commitments
In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $2.4$2.6 billion at December 31, 2013.2015.
Guarantees
Subsidiaries
We have issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP)AIGFP and of AIG Markets Inc. (AIG Markets) arising from transactions entered into by AIG Markets.
In connection with AIGFP'sAIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at December 31, 20132015 was $240$208 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of scheduled payments to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor'sinvestor’s rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay without reimbursement.
Asset Dispositions
General
General
We are subject to financial guarantees and indemnity arrangements in connection with the completed sales of businesses pursuant to our asset disposition plan. The various arrangements may be triggered by, among other things, declines in asset values, the occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or are not applicable.
AIG 2013 Form 10-K
ITEM 8 / NOTE 15. CONTINGENCIES, COMMITMENTS AND GUARANTEES
We are unable to develop a reasonable estimate of the maximum potential payout under certain of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments related to completed sales under these arrangements, and no material liabilities related to these arrangements have been recorded in the Consolidated Balance Sheets. See Note 4 herein for additional information on sales of businesses and asset dispositions.
ALICO Sale
Pursuant to the terms of the ALICO stock purchase agreement, we agreed to provide MetLife with certain indemnities. The most significant remaining indemnities include indemnifications related to specific product, investment, litigation and other matters that are excluded from the general representations and warranties indemnity. These indemnifications provide for various deductible amounts, which in certain cases are zero, and maximum exposures, which in certain cases are unlimited, and may extend for various periods after the completion of the sale.
In connection with the indemnity obligations described above, approximately $19 million of proceeds from the sale of ALICO remained in escrow as of December 31, 2013.
Other
•- ·See Note
109 to the Consolidated Financial Statements for additional discussion on commitments and guarantees associated with VIEs.
·
•- See Note
1110 to the Consolidated Financial Statements for additional disclosures about derivatives.
·
•- See Note
2624 to the Consolidated Financial Statements for additional disclosures about guarantees of outstanding debt.
16. EQUITY
16. Equity
Shares Outstanding
The following table presents a rollforward of outstanding shares:
| Common | Treasury | Common Stock |
| Stock Issued | Stock | Outstanding |
Year Ended December 31, 2013 | | | |
Shares, beginning of year | 1,906,611,680 | (430,289,745) | 1,476,321,935 |
Shares issued | 34,009 | 24,778 | 58,787 |
Shares repurchased | - | (12,317,399) | (12,317,399) |
Shares, end of year | 1,906,645,689 | (442,582,366) | 1,464,063,323 |
Year Ended December 31, 2014 | | | |
Shares, beginning of year | 1,906,645,689 | (442,582,366) | 1,464,063,323 |
Shares issued | 25,803 | 15,748 | 41,551 |
Shares repurchased | - | (88,177,903) | (88,177,903) |
Shares, end of year | 1,906,671,492 | (530,744,521) | 1,375,926,971 |
Year Ended December 31, 2015 | | | |
Shares, beginning of year | 1,906,671,492 | (530,744,521) | 1,375,926,971 |
Shares issued | - | 371,806 | 371,806 |
Shares repurchased | - | (182,382,160) | (182,382,160) |
Shares, end of year | 1,906,671,492 | (712,754,875) | 1,193,916,617 |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Preferred Stock | |
| |
| |
| |
|---|
| | Common
Stock Issued
| | Treasury
Stock
| | Common Stock
Outstanding
| |
|---|
| | AIG Series E
| | AIG Series F
| | AIG Series C
| | AIG Series G
| |
|---|
| | |
Year Ended December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | |
Shares, beginning of year | | | 400,000 | | | 300,000 | | | 100,000 | | | – | | | 147,124,067 | | | (6,660,908 | ) | | 140,463,159 | |
Issuances | | | – | | | – | | | – | | | 20,000 | | | 100,799,653 | | | – | | | 100,799,653 | |
Settlement of equity unit stock purchase contracts | | | – | | | – | | | – | | | – | | | 3,606,417 | | | – | | | 3,606,417 | |
Shares exchanged | | | (400,000 | ) | | (300,000 | ) | | (100,000 | ) | | – | | | 1,655,037,962 | | | (11,678 | ) | | 1,655,026,284 | |
Shares purchased | | | – | | | – | | | – | | | – | | | – | | | (3,074,031 | ) | | (3,074,031 | ) |
Shares cancelled | | | – | | | – | | | – | | | (20,000 | ) | | – | | | – | | | – | |
| | |
Shares, end of year | | | – | | | – | | | – | | | – | | | 1,906,568,099 | | | (9,746,617 | ) | | 1,896,821,482 | |
| | |
Year Ended December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | |
Shares, beginning of year | | | | | | | | | | | | | | | 1,906,568,099 | | | (9,746,617 | ) | | 1,896,821,482 | |
Issuances | | | | | | | | | | | | | | | 43,581 | | | 685,727 | | | 729,308 | |
Shares purchased | | | | | | | | | | | | | | | – | | | (421,228,855 | ) | | (421,228,855 | ) |
| | |
Shares, end of year | | | | | | | | | | | | | | | 1,906,611,680 | | | (430,289,745 | ) | | 1,476,321,935 | |
| | |
Year Ended December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | |
Shares, beginning of year | | | | | | | | | | | | | | | 1,906,611,680 | | | (430,289,745 | ) | | 1,476,321,935 | |
Shares issued | | | | | | | | | | | | | | | 34,009 | | | 24,778 | | | 58,787 | |
Shares repurchased | | | | | | | | | | | | | | | – | | | (12,317,399 | ) | | (12,317,399 | ) |
| | |
Shares, end of year | | | | | | | | | | | | | | | 1,906,645,689 | | | (442,582,366 | ) | | 1,464,063,323 | |
| | |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / NOTE note 16. EQUITY
Preferred Stock and Recapitalization
On January 14, 2011, we completed the Recapitalization in which the Series C Perpetual, Convertible, Participating Preferred Stock, par value $5.00 per share (the Series C Preferred Stock), Series E Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share (the Series E Preferred Stock) and the Series F Preferred Stock were exchanged for AIG Common Stock and the Series G Cumulative Mandatory Convertible Preferred Stock, par value $5.00 per share (the Series G Preferred Stock) was issued. In connection with the Recapitalization, we repaid all amounts outstanding under the FRBNY Credit Facility. In connection with the May 2011 AIG Common Stock Offering (described below under AIG Common Stock Offerings by the Department of the Treasury and AIG Purchases of AIG Common Stock in 2012), the Series G Preferred Stock was cancelled.
The following table presents the principal Consolidated Balance Sheet line items affected by the Recapitalization on January 14, 2011, further described in Note 24 herein:
| | | | | | | | | | | | | |
| | |
| | Effect of Recapitalization | |
| |
|---|
Increase (Decrease)
(in millions)
| | Repayment
and
Termination
of FRBNY
Credit Facility(a)
| | Repurchase
and Exchange
of SPV
Preferred
Interests
| | Exchange
of Preferred
Stock for
Common
Stock(c)
| | Total Effect of
Recapitalization
| |
|---|
| | |
Other assets | | $ | (24,297 | ) | $ | (6,140 | )(b) | $ | – | | $ | (30,437 | ) |
Other liabilities | | | (325 | ) | | – | | | – | | | (325 | ) |
Federal Reserve Bank of New York credit facility | | | (20,689 | ) | | – | | | – | | | (20,689 | ) |
Redeemable noncontrolling nonvoting, callable, junior preferred interests held by Department of Treasury | | | – | | |
20,292 | | | – | | |
20,292 | |
AIG shareholders' equity: | | | | | | | | | | | | | |
Preferred stock | | | | | | | | | | | | | |
Series C preferred stock | | | – | | | – | | | (23,000 | ) | | (23,000 | ) |
Series E preferred stock | | | – | | | – | | | (41,605 | ) | | (41,605 | ) |
Series F preferred stock | | | – | | | 20,292 | | | (7,378 | ) | | (7,378 | ) |
| | | | | | (20,292 | ) | | | | | | |
Series G preferred stock; 20,000 shares issued; liquidation value $0(d) | | | – | | | – | | | – | | | – | |
Common stock | | | – | | | – | | | 4,138 | | | 4,138 | |
Additional paid-in capital | | | – | | | – | | | 67,845 | | | 67,845 | |
Retained Earnings | | | (3,283 | ) | | – | | | – | | | (3,283 | ) |
Noncontrolling nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York | | | – | | | (26,432 | ) | | – | | | (26,432 | ) |
Shares outstanding | | | | | | | | | 1,655,037,962 | | | 1,655,037,962 | |
| | |
(a) Repayment and Termination of the FRBNY Credit Facility — Funds held in escrow and included in Other assets from the AIA IPO and the ALICO sale were used to repay the FRBNY Credit Facility. The adjustments to Other assets and Accumulated deficit reflects the write-off of the unamortized portion of the net prepaid commitment fee asset.
(b) Repurchase and Exchange of SPV Preferred Interests — We used remaining net cash proceeds from the AIA IPO and the ALICO sale to pay down a portion of the liquidation preference on the SPV Preferred Interests held by the FRBNY and drew down approximately $20.3 billion under the Department of the Treasury Commitment (Series F) to repurchase the FRBNY's remaining SPV Preferred Interests, which we then transferred to the Department of the Treasury as part of the consideration for the exchange of the Series F Preferred Stock.
(c) Exchange of our Series C, E and F Preferred Stock for AIG Common Stock. The adjustments represent the exchange of Series C Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock for AIG Common Stock. As a result of the Recapitalization, the Department of the Treasury acquired 1,655,037,962 shares of newly issued AIG Common Stock.
(d) In connection with the May 2011 AIG Common Stock offering and sale, the Series G Preferred Stock was cancelled.
AIG 2013 Form 10-KDividends
Table of Contents
ITEM 8 / NOTE 16. EQUITY
The following table presents a rollforward of preferred stock:
| | | | | | | | | | | | | |
| | |
(in millions)
| | AIG Series E
| | AIG Series F
| | AIG Series C
| | Total
Preferred
Stock
| |
|---|
| | |
Balance, January 1, 2011 | | $ | 41,605 | | $ | 7,378 | | $ | 23,000 | | $ | 71,983 | |
Shares Exchanged | | | (41,605 | ) | | (7,378 | ) | | (23,000 | ) | | (71,983 | ) |
| | |
Balance, December 31, 2011 | | $ | – | | $ | – | | $ | – | | $ | – | |
| | |
Dividends and Repurchase of AIG Common Stock
Payment of future dividends to our shareholders and repurchases of AIG Common Stock depends in part on the regulatory framework that we are currently subject to and that will ultimately be applicable to us, including as a savings and loan holding company, anonbank systemically important financial institution under the Dodd-FrankDodd‑Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)(Dodd‑Frank) and a global systemically important insurer. In addition, dividends are payable on AIG Common Stock only when, as and if declared by our Board of Directors in its discretion, from funds legally available therefor.for this purpose. In considering whether to pay a dividend or purchase shares of AIG Common Stock, our Board of Directors considers such matters asa number of factors, including, but not limited to: the performance ofcapital resources available to support our businesses, our consolidated financial condition, results ofinsurance operations and liquidity, availablebusiness strategies, AIG’s funding capacity and capital the existence of investment opportunities, contractual, legal and regulatory restrictions on the payment of dividends by our subsidiaries,resources in comparison to internal benchmarks, expectations for capital generation, rating agency considerations, including the potential effect on our debt ratings,expectations for capital, regulatory standards for capital and capital distributions, and such other factors as our Board of Directors may deem relevant.
On March 26, 2015, AIG paid a dividend of $0.10$0.125 per share on AIG Common Stock to shareholders of record on eachMarch 12, 2015. On June 25, 2015, AIG paid a dividend of $0.125 per share on AIG Common Stock to shareholders of record on June 11, 2015. On September 26, 2013 and28, 2015, AIG paid a dividend of $0.28 per share on AIG Common Stock to shareholders of record on September 14, 2015. On December 19, 2013.21, 2015, AIG paid a dividend of $0.28 per share on AIG Common Stock to shareholders of record on December 7, 2015.
On August 1, 2013, ourRepurchase of AIG Common Stock
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock withthrough a series of actions. On December 16, 2015, our Board of Directors authorized an additional increase of $3.0 billion to its previous share repurchase authorization, resulting in an aggregate purchase priceremaining authorization on such date of up to $1.0approximately $4.1 billion. As of December 31, 2015, approximately $3.3 billion remained under our share repurchase authorization. Sharesmay be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise. The timingotherwise (including through the purchase of suchwarrants). Certain of our share repurchases will depend on market conditions, our financial condition, results of operations, liquidityhave been and other factors. may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.
For the year ended December 31, 2013, we repurchased approximately 12 million shares of AIG Common Stock for an aggregate purchase price of approximately $597 million pursuant to this authorization.million.
Share Issuances and Purchases
AIG Common Stock Offerings byFor the Department of the Treasury and AIG Purchases of AIG Common Stock in 2012
Through registered public offerings, the Department of the Treasury has disposed of all of its ownership of AIG Common Stock as ofyear ended December 31, 2012, from ownership of2014, we repurchased approximately 92 percent (1.7 billion shares) prior to the completion of the first registered public offering initiated by the Department of the Treasury as selling shareholder in May 2011. During 2012, the Department of the Treasury, as selling shareholder, completed registered public offerings of AIG Common Stock on March 13 (the March Offering), May 10 (the May Offering), August 8 (the August Offering), September 14 (the September Offering) and December 14 (the December Offering). We participated as a purchaser in the first four 2012 offerings. Each of these purchases was authorized by our Board of Directors.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 16. EQUITY
The following table presents certain information relating to these offerings:
| | | | | | | | | | | | | | | | |
| | |
| |
| | U.S. Treasury | | AIG* | |
|---|
(dollars in millions, except share-price data)
| | Price
| | Shares Sold
| | Amount
| | Shares Purchased
| | Amount
| |
|---|
| | |
May 2011 Offering | | $ | 29.00 | | | 200,000,000 | | $ | 5,800 | | | – | | $ | – | |
2012 Offerings: | | | | | | | | | | | | | | | | |
March Offering | | | 29.00 | | | 206,896,552 | | | 6,000 | | | 103,448,276 | | | 3,000 | |
May Offering | | | 30.50 | | | 188,524,589 | | | 5,750 | | | 65,573,770 | | | 2,000 | |
August Offering | | | 30.50 | | | 188,524,590 | | | 5,750 | | | 98,360,656 | | | 3,000 | |
September Offering | | | 32.50 | | | 636,923,075 | | | 20,700 | | | 153,846,153 | | | 5,000 | |
December Offering | | | 32.50 | | | 234,169,156 | | | 7,610 | | | – | | | – | |
| | |
| | | | | | 1,655,037,962 | | $ | 51,610 | | | 421,228,855 | | $ | 13,000 | |
| | |
* Shares purchased by us in each of the 2012 offerings were purchased pursuant to AIG Board of Directors authorization. In connection with the May 2011 Offering, AIG issued and sold 10088 million shares of AIG Common Stock for aggregate net proceeds of approximately $2.9 billion.
AIG Common Stock Purchases in 2011
In November 2011, our Board of Directors authorized the purchase of shares of AIG Common Stock, with an aggregate purchase amountprice of up to $1 billion from time to time in the open market, through derivative or automatic purchase contracts or otherwise. This authorization replaced all prior AIG Common Stock purchase authorizations. We purchased a total of 3,074,031 shares of AIG Common Stock for approximately $70 million in 2011.
Equity Units
$4.9 billion.
In 2011,the second, third and fourth quarters of 2014, we remarketed the three series of debentures (the Series B-1, B-2 and B-3 junior subordinated debentures) included in the Equity Units.executed five accelerated stock repurchase (ASR) agreements with third-party financial institutions. The Equity Units also included a stock purchase contract obligating the holder of an Equity Unit to purchase, and obligating AIG to sell, a variabletotal number of shares of AIG Common Stock for $25 per sharerepurchased in cash. We purchasedthe twelve-month period ended December 31, 2014, and retired allthe aggregate purchase price of the Series B-1, B-2 and B-3 junior subordinated debentures representing $2.2those shares, each as set forth above, reflect our payment of approximately $3.1 billion in the aggregate principalunder the ASR agreements and asthe receipt of December 31, 2011, we had issued approximately 1.8 billion53 million shares of AIG Common Stock in connection withthe aggregate, including the initial receipt of 70 percent of the total notional share equivalent, or approximately 9.2 million shares of AIG Common Stock, under an ASR agreement executed in December 2014. That ASR agreement settled in January 2015, at which time we received approximately 3.5 million additional shares of AIG Common Stock based on a formula specified by the terms of the ASR agreement.
For the year ended December 31, 2015, we repurchased approximately 182 million shares of AIG Common Stock for an aggregate purchase price of approximately $10.7 billion.
The total number of shares of AIG Common Stock repurchased for the year ended December 31, 2015 includes (but the aggregate purchase price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an accelerated share repurchase agreement executed in the stock purchase contracts underlying the Equity Units.fourth quarter of 2014.
TableThe timing of Contentsany future repurchases will depend on market conditions, our financial condition, results of operations, liquidity and other factors.
ITEM 8 / NOTE 16. EQUITY
Accumulated Other Comprehensive Income
The following table presents a rollforward of Accumulated other comprehensive income:
| Unrealized Appreciation | | | | | | | | |
| (Depreciation) of Fixed | | | | | | | | |
| Maturity Investments | | Unrealized | | | | | | |
| on Which Other-Than- | | Appreciation | | Foreign | | Retirement | | |
| Temporary Credit | | (Depreciation) | | Currency | | Plan | | |
| Impairments | | of All Other | | Translation | | Liabilities | | |
(in millions) | Were Taken | | Investments | | Adjustments | | Adjustment | | Total |
Balance, January 1, 2013, net of tax | $ | 575 | $ | 13,446 | $ | (403) | $ | (1,044) | $ | 12,574 |
Change in unrealized | | | | | | | | | | |
appreciation (depreciation) of investments | | 464 | | (14,069) | | - | | - | | (13,605) |
Change in deferred policy | | | | | | | | | | |
acquisition costs adjustment and other | | (127) | | 1,000 | | - | | - | | 873 |
Change in future policy benefits | | 79 | | 2,658 | | - | | - | | 2,737 |
Change in foreign currency | | | | | | | | | | |
translation adjustments | | - | | - | | (454) | | - | | (454) |
Net actuarial gain | | - | | - | | - | | 1,012 | | 1,012 |
Prior service credit | | - | | - | | - | | (51) | | (51) |
Change in deferred tax asset (liability) | | (55) | | 3,738 | | (102) | | (330) | | 3,251 |
Total other comprehensive income (loss) | | 361 | | (6,673) | | (556) | | 631 | | (6,237) |
Noncontrolling interests | | - | | (16) | | (7) | | - | | (23) |
Balance, December 31, 2013, net of tax | $ | 936 | $ | 6,789 | $ | (952) | $ | (413) | $ | 6,360 |
Change in unrealized | | | | | | | | | | |
appreciation of investments | | 156 | | 7,564 | | - | | - | | 7,720 |
Change in deferred policy | | | | | | | | | | |
acquisition costs adjustment and other | | 68 | | (495) | | - | | - | | (427) |
Change in future policy benefits | | (133) | | (1,113) | | - | | - | | (1,246) |
Change in foreign currency | | | | | | | | | | |
translation adjustments | | - | | - | | (833) | | - | | (833) |
Net actuarial loss | | - | | - | | - | | (815) | | (815) |
Prior service credit | | - | | - | | - | | (49) | | (49) |
Change in deferred tax asset (liability) | | 16 | | (418) | | 1 | | 308 | | (93) |
Total other comprehensive income (loss) | | 107 | | 5,538 | | (832) | | (556) | | 4,257 |
Noncontrolling interests | | - | | - | | - | | - | | - |
Balance, December 31, 2014, net of tax | $ | 1,043 | $ | 12,327 | $ | (1,784) | $ | (969) | $ | 10,617 |
Change in unrealized | | | | | | | | | | |
depreciation of investments | | (488) | | (10,519) | | - | | - | | (11,007) |
Change in deferred policy | | | | | | | | | | |
acquisition costs adjustment and other | | (146) | | 1,265 | | - | | - | | 1,119 |
Change in future policy benefits | | 92 | | 1,112 | | - | | - | | 1,204 |
Change in foreign currency | | | | | | | | | | |
translation adjustments | | - | | - | | (1,129) | | - | | (1,129) |
Net actuarial gain | | - | | - | | - | | 413 | | 413 |
Prior service credit | | - | | - | | - | | (239) | | (239) |
Change in deferred tax asset (liability) | | 195 | | 1,380 | | 29 | | (51) | | 1,553 |
Total other comprehensive income (loss) | | (347) | | (6,762) | | (1,100) | | 123 | | (8,086) |
| | | | | | | | | | | | | | | | | | | |
| | |
(in millions)
| | Unrealized Appreciation
(Depreciation) of Fixed
Maturity Investments
on Which Other-Than-
Temporary Credit
Impairments
Were Recognized
| | Unrealized
Appreciation
(Depreciation)
of All Other
Investments
| | Foreign
Currency
Translation
Adjustments
| | Net Derivative
Gains (Losses)
Arising from
Cash Flow
Hedging
Activities
| | Change in
Retirement
Plan
Liabilities
Adjustment
| | Total
| |
|---|
| | |
Balance, January 1, 2011 | | $ | (634 | ) | $ | 9,855 | | $ | 553 | | $ | (34 | ) | $ | (869 | ) | $ | 8,871 | |
Change in unrealized appreciation of investments | | | 55 | | | 5,463 | | | – | | | – | | | – | | | 5,518 | |
Change in deferred policy acquisition costs adjustment and other | | | 11 | | | (641 | ) | | – | | | – | | | – | | | (630 | ) |
Change in future policy benefits* | | | – | | | (2,302 | ) | | – | | | – | | | – | | | (2,302 | ) |
Change in foreign currency translation adjustments | | | – | | | – | | | (97 | ) | | – | | | – | | | (97 | ) |
Change in net derivative gains arising from cash flow hedging activities | | | – | | | – | | | – | | | 51 | | | – | | | 51 | |
Net actuarial loss | | | – | | | – | | | – | | | – | | | (752 | ) | | (752 | ) |
Prior service credit | | | – | | | – | | | – | | | – | | | 387 | | | 387 | |
Change attributable to divestitures and deconsolidations | | | 23 | | | (3,643 | ) | | (1,681 | ) | | – | | | 260 | | | (5,041 | ) |
Deferred tax asset (liability) | | | (163 | ) | | (362 | ) | | 786 | | | (34 | ) | | 35 | | | 262 | |
| | |
Total other comprehensive income (loss) | | | (74 | ) | | (1,485 | ) | | (992 | ) | | 17 | | | (70 | ) | | (2,604 | ) |
| | |
Acquisition of noncontrolling interests | | | – | | | 45 | | | 66 | | | – | | | (18 | ) | | 93 | |
Noncontrolling interests | | | 3 | | | (160 | ) | | 36 | | | – | | | – | | | (121 | ) |
| | |
Balance, December 31, 2011 | | $ | (711 | ) | $ | 8,575 | | $ | (409 | ) | $ | (17 | ) | $ | (957 | ) | $ | 6,481 | |
| | |
Change in unrealized appreciation of investments | | | 2,306 | | | 8,404 | | | – | | | – | | | – | | | 10,710 | |
Change in deferred policy acquisition costs adjustment and other | | | (49 | ) | | (840 | ) | | – | | | – | | | – | | | (889 | ) |
Change in future policy benefits | | | (85 | ) | | (432 | ) | | – | | | – | | | – | | | (517 | ) |
Change in foreign currency translation adjustments | | | – | | | – | | | (33 | ) | | – | | | – | | | (33 | ) |
Change in net derivative gains arising from cash flow hedging activities | | | – | | | – | | | – | | | 33 | | | – | | | 33 | |
Net actuarial loss | | | – | | | – | | | – | | | – | | | (273 | ) | | (273 | ) |
Prior service credit | | | – | | | – | | | – | | | – | | | (46 | ) | | (46 | ) |
Deferred tax asset (liability) | | | (886 | ) | | (2,252 | ) | | 33 | | | (16 | ) | | 232 | | | (2,889 | ) |
| | |
Total other comprehensive income (loss) | | | 1,286 | | | 4,880 | | | – | | | 17 | | | (87 | ) | | 6,096 | |
Noncontrolling interests | | | – | | | 9 | | | (6 | ) | | – | | | – | | | 3 | |
| | |
Balance, December 31, 2012 | | $ | 575 | | $ | 13,446 | | $ | (403 | ) | $ | – | | $ | (1,044 | ) | $ | 12,574 | |
| | |
Change in unrealized appreciation (depreciation) of investments | | | 464 | | | (14,069 | ) | | – | | | – | | | – | | | (13,605 | ) |
Change in deferred policy acquisition costs adjustment and other | | | (127 | ) | | 1,000 | | | – | | | – | | | – | | | 873 | |
Change in future policy benefits | | | 79 | | | 2,658 | | | – | | | – | | | – | | | 2,737 | |
Change in foreign currency translation adjustments | | | – | | | – | | | (454 | ) | | – | | | – | | | (454 | ) |
Net actuarial gain | | | – | | | – | | | – | | | – | | | 1,012 | | | 1,012 | |
Prior service cost | | | – | | | – | | | – | | | – | | | (51 | ) | | (51 | ) |
Deferred tax asset (liability) | | | (55 | ) | | 3,738 | | | (102 | ) | | – | | | (330 | ) | | 3,251 | |
| | |
Total other comprehensive income (loss) | | | 361 | | | (6,673 | ) | | (556 | ) | | – | | | 631 | | | (6,237 | ) |
Noncontrolling interests | | | – | | | (16 | ) | | (7 | ) | | – | | | – | | | (23 | ) |
| | |
Balance, December 31, 2013 | | $ | 936 | | $ | 6,789 | | $ | (952 | ) | $ | – | | $ | (413 | ) | $ | 6,360 | |
| | |
* The adjustment to policyholder benefit reserves assumes that the unrealized appreciation on available for sale securities is actually realized and that the proceeds are reinvested at lower yields.
AIG 2013 Form 10-K
Noncontrolling interests | | - | | (1) | | (5) | | - | | (6) |
Balance, December 31, 2015, net of tax | $ | 696 | $ | 5,566 | $ | (2,879) | $ | (846) | $ | 2,537 |
The following table presents the other comprehensive income (loss) reclassification adjustments for the years ended December 31, 2013, 20122015, 2014 and 2011:2013:
| | | | | | | | | | | | | | | | | | | |
| | |
(in millions)
| | Unrealized Appreciation
(Depreciation) of Fixed
Maturity Investments
on Which Other-Than-
Temporary Credit
Impairments Were
Recognized
| | Unrealized
Appreciation
(Depreciation)
of All Other
Investments
| | Foreign
Currency
Translation
Adjustments
| | Net Derivative
Gains (Losses)
Arising from
Cash Flow
Hedging
Activities
| | Change in
Retirement
Plan
Liabilities
Adjustment
| | Total
| |
|---|
| | |
December 31, 2011 | | | | | | | | | | | | | | | | | | | |
Unrealized change arising during period | | $ | 84 | | $ | 4,222 | | $ | (97 | ) | $ | (5 | ) | $ | (440 | ) | $ | 3,764 | |
Less: Reclassification adjustments included in net income | | | (5 | ) | | 5,345 | | | 1,681 | | | (56 | ) | | (335 | ) | | 6,630 | |
| | |
Total other comprehensive income
(loss), before income tax expense (benefit) | | | 89 | | | (1,123 | ) | | (1,778 | ) | | 51 | | | (105 | ) | | (2,866 | ) |
Less: Income tax expense (benefit) | | | 163 | | | 362 | | | (786 | ) | | 34 | | | (35 | ) | | (262 | ) |
| | |
Total other comprehensive income (loss), net of income tax expense (benefit) | | $ | (74 | ) | $ | (1,485 | ) | $ | (992 | ) | $ | 17 | | $ | (70 | ) | $ | (2,604 | ) |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | |
Unrealized change arising during period | | $ | 2,236 | | $ | 8,896 | | $ | (33 | ) | $ | (2 | ) | $ | (406 | ) | $ | 10,691 | |
Less: Reclassification adjustments included in net income | | | 64 | | | 1,764 | | | – | | | (35 | ) | | (87 | ) | | 1,706 | |
| | |
Total other comprehensive income (loss), before income tax expense (benefit) | | | 2,172 | | | 7,132 | | | (33 | ) | | 33 | | | (319 | ) | | 8,985 | |
Less: Income tax expense (benefit) | | | 886 | | | 2,252 | | | (33 | ) | | 16 | | | (232 | ) | | 2,889 | |
| | |
Total other comprehensive income (loss), net of income tax expense (benefit) | | $ | 1,286 | | $ | 4,880 | | $ | – | | $ | 17 | | $ | (87 | ) | $ | 6,096 | |
| | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | |
Unrealized change arising during period | | $ | 507 | | $ | (9,556 | ) | $ | (454 | ) | $ | – | | $ | 851 | | $ | (8,652 | ) |
Less: Reclassification adjustments included in net income | | | 91 | | | 855 | | | – | | | – | | | (110 | ) | | 836 | |
| | |
Total other comprehensive income (loss), before income tax expense (benefit) | | | 416 | | | (10,411 | ) | | (454 | ) | | – | | | 961 | | | (9,488 | ) |
Less: Income tax expense (benefit) | | | 55 | | | (3,738 | ) | | 102 | | | – | | | 330 | | | (3,251 | ) |
| | |
Total other comprehensive income (loss), net of income tax expense (benefit) | | $ | 361 | | $ | (6,673 | ) | $ | (556 | ) | $ | – | | $ | 631 | | $ | (6,237 | ) |
| | |
| | Unrealized Appreciation | | | | | | | | |
| | (Depreciation) of Fixed | | | | | | | | |
| | Maturity Securities | | Unrealized | | | | | | |
| | on Which Other-Than- | | Appreciation | | Foreign | | Retirement | | |
| | Temporary Credit | | (Depreciation) | | Currency | | Plan | | |
| | Impairments Were | | of All Other | | Translation | | Liabilities | | |
(in millions) | | Recognized | | Investments | | Adjustments | | Adjustment | | Total |
December 31, 2013 | | | | | | | | | | |
Unrealized change arising during period | $ | 507 | $ | (9,556) | $ | (454) | $ | 851 | $ | (8,652) |
Less: Reclassification adjustments | | | | | | | | | | |
included in net income | | 91 | | 855 | | - | | (110) | | 836 |
Total other comprehensive income (loss), | | | | | | | | | | |
before income tax expense (benefit) | | 416 | | (10,411) | | (454) | | 961 | | (9,488) |
Less: Income tax expense (benefit) | | 55 | | (3,738) | | 102 | | 330 | | (3,251) |
Total other comprehensive income (loss), | | | | | | | | | | |
net of income tax expense (benefit) | $ | 361 | $ | (6,673) | $ | (556) | $ | 631 | $ | (6,237) |
| | | | | | | | | | |
December 31, 2014 | | | | | | | | | | |
Unrealized change arising during period | $ | 119 | $ | 6,488 | $ | (833) | $ | (866) | $ | 4,908 |
Less: Reclassification adjustments | | | | | | | | | | |
included in net income | | 28 | | 532 | | - | | (2) | | 558 |
Total other comprehensive income (loss), | | | | | | | | | | |
before income tax expense (benefit) | | 91 | | 5,956 | | (833) | | (864) | | 4,350 |
Less: Income tax expense (benefit) | | (16) | | 418 | | (1) | | (308) | | 93 |
Total other comprehensive income (loss), | | | | | | | | | | |
net of income tax expense (benefit) | $ | 107 | $ | 5,538 | $ | (832) | $ | (556) | $ | 4,257 |
| | | | | | | | | | |
December 31, 2015 | | | | | | | | | | |
Unrealized change arising during period | $ | (471) | $ | (7,068) | $ | (1,129) | $ | 285 | $ | (8,383) |
Less: Reclassification adjustments | | | | | | | | | | |
included in net income | | 71 | | 1,074 | | - | | 111 | | 1,256 |
Total other comprehensive income (loss), | | | | | | | | | | |
before income tax expense (benefit) | | (542) | | (8,142) | | (1,129) | | 174 | | (9,639) |
Less: Income tax expense (benefit) | | (195) | | (1,380) | | (29) | | 51 | | (1,553) |
Total other comprehensive income (loss), | | | | | | | | | | |
net of income tax expense (benefit) | $ | (347) | $ | (6,762) | $ | (1,100) | $ | 123 | $ | (8,086) |
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 16. EQUITY
The following table presents the effect of the reclassification of significant items out of Accumulated other comprehensive income on the respective line items in the Consolidated Statements of Income:
| Amount Reclassified | |
| from Accumulated Other | |
Years Ended December 31, | Comprehensive Income | Affected Line Item in the |
(in millions) | 2015 | | 2014 | | 2013 | | Consolidated Statements of Income |
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were recognized | | | | | | | | |
| | | | | | | |
Investments | $ | 71 | $ | 28 | $ | 91 | | Other realized capital gains |
| | | | |
| | Amount Reclassified
from Accumulated Other
Comprehensive Income | |
| | |
|---|
(in millions)
| | Year Ended
December 31, 2013
| | Affected Line Item in the
Consolidated Statements of Income
| | |
|---|
| | | |
Unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were recognized | | | | |
Investments | | $ | 91 | | Other realized capital gains | | |
| | |
Total | | 91 | | | | 71 | | 28 | | 91 | | |
| | |
Unrealized appreciation (depreciation) of all other investments | | | | | | | | | | | |
Investments | | 2,452 | | Other realized capital gains | | | 1,054 | | 669 | | 2,452 | | Other realized capital gains |
Deferred acquisition costs adjustment | | (28 | ) | Amortization of deferred acquisition costs | | | 3 | | (20) | | (28) | | Amortization of deferred policy acquisition costs |
Future policy benefits | | (1,569 | ) | Policyholder benefits and claims incurred | | | 17 | | (117) | | (1,569) | | Policyholder benefits and losses incurred |
| | |
Total | | 855 | | | | 1,074 | | 532 | | 855 | | |
| | |
Change in retirement plan liabilities adjustment | | | | | | | | | | | |
Prior-service costs | | 47 | | * | | | 214 | | 47 | | 47 | | * |
Actuarial gains/(losses) | | (157 | ) | * | | | (103) | | (49) | | (157) | | * |
| | |
Total | | (110 | ) | | | | 111 | | (2) | | (110) | | |
| | |
Deferred tax asset (liability) | | – | | | |
| | |
Total reclassifications for the period | | $ | 836 | | | $ | 1,256 | $ | 558 | $ | 836 | | |
| | |
* These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 2120 to the Consolidated Financial Statements.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 17. NONCONTROLLING INTERESTS
17. NONCONTROLLING INTERESTS
The following table presents a rollforward of noncontrolling interests:
| | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | Redeemable
Noncontrolling interests | | Non-redeemable
Noncontrolling interests | |
|---|
(in millions)
| | Held by
Department
of Treasury
| | Other
| | Total
| | Held by
FRBNY
| | Other
| | Total
| |
|---|
| | |
Year Ended December 31, 2013 | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | – | | $ | 334 | | $ | 334 | | $ | – | | $ | 667 | | $ | 667 | |
| | |
Contributions from noncontrolling interests | | | – | | | 48 | | | 48 | | | – | | | 33 | | | 33 | |
Distributions to noncontrolling interests | | | – | | | (167 | ) | | (167 | ) | | – | | | (81 | ) | | (81 | ) |
Consolidation (deconsolidation) | | | – | | | (169 | ) | | (169 | ) | | – | | | – | | | – | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | |
Net income | | | – | | | 2 | | | 2 | | | – | | | 5 | | | 5 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | |
Unrealized losses on investments | | | – | | | (16 | ) | | (16 | ) | | – | | | – | | | – | |
Foreign currency translation adjustments | | | – | | | (2 | ) | | (2 | ) | | – | | | (5 | ) | | (5 | ) |
| | |
Total other comprehensive income (loss), net of tax | | | – | | | (18 | ) | | (18 | ) | | – | | | (5 | ) | | (5 | ) |
| | |
Total comprehensive income (loss) | | | – | | | (16 | ) | | (16 | ) | | – | | | – | | | – | |
| | |
Other | | | – | | | – | | | – | | | – | | | (8 | ) | | (8 | ) |
| | |
Balance, end of year | | $ | – | | $ | 30 | | $ | 30 | | $ | – | | $ | 611 | | $ | 611 | |
| | |
Year Ended December 31, 2012 | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | 8,427 | | $ | 96 | | $ | 8,523 | | $ | – | | $ | 855 | | $ | 855 | |
| | |
Repayment to Department of the Treasury | | | (8,635 | ) | | – | | | (8,635 | ) | | – | | | – | | | – | |
Contributions from noncontrolling interests | | | – | | | 36 | | | 36 | | | – | | | (87 | ) | | (87 | ) |
Distributions to noncontrolling interests | | | – | | | 68 | | | 68 | | | – | | | (27 | ) | | (27 | ) |
Consolidation (deconsolidation) | | | – | | | – | | | – | | | – | | | – | | | – | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | |
Net income | | | 208 | | | 14 | | | 222 | | | – | | | 40 | | | 40 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | |
Unrealized gains on investments | | | – | | | 4 | | | 4 | | | – | | | 5 | | | 5 | |
Foreign currency translation adjustments | | | – | | | – | | | – | | | – | | | (6 | ) | | (6 | ) |
| | |
Total other comprehensive income (loss), net of tax | | | – | | | 4 | | | 4 | | | – | | | (1 | ) | | (1 | ) |
| | |
Total comprehensive income | | | 208 | | | 18 | | | 226 | | | – | | | 39 | | | 39 | |
| | |
Other | | | – | | | 116 | | | 116 | | | – | | | (113 | ) | | (113 | ) |
| | |
Balance, end of year | | $ | – | | $ | 334 | | $ | 334 | | $ | – | | $ | 667 | | $ | 667 | |
| | |
Year Ended December 31, 2011 | | | | | | | | | | | | | | | | | | | |
Balance, beginning of year | | $ | – | | $ | 434 | | $ | 434 | | $ | 26,358 | | $ | 1,562 | | $ | 27,920 | |
| | |
Repurchase of SPV preferred interests in connection with Recapitalization | | | – | | | – | | | – | | | (26,432 | ) | | – | | | (26,432 | ) |
Exchange of consideration for preferred stock in connection with Recapitalization | | | 20,292 | | | – | | | 20,292 | | | – | | | – | | | – | |
Repayment to Department of the Treasury | | | (12,425 | ) | | – | | | (12,425 | ) | | – | | | – | | | – | |
Contributions from noncontrolling interests | | | – | | | – | | | – | | | – | | | – | | | – | |
Distributions to noncontrolling interests | | | – | | | (21 | ) | | (21 | ) | | – | | | (8 | ) | | (8 | ) |
Deconsolidation | | | – | | | (307 | ) | | (307 | ) | | – | | | (123 | ) | | (123 | ) |
Acquisition of noncontrolling interest | | | – | | | – | | | – | | | – | | | (489 | ) | | (489 | ) |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | 560 | | | (8 | ) | | 552 | | | 74 | | | 82 | | | 156 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | |
Unrealized losses on investments | | | – | | | (2 | ) | | (2 | ) | | – | | | (155 | ) | | (155 | ) |
Foreign currency translation adjustments | | | – | | | – | | | – | | | – | | | 36 | | | 36 | |
| | |
Total other comprehensive income (loss), net of tax | | | – | | | (2 | ) | | (2 | ) | | – | | | (119 | ) | | (119 | ) |
| | |
Total comprehensive income (loss) | | | 560 | | | (10 | ) | | 550 | | | 74 | | | (37 | ) | | 37 | |
| | |
Other | | | – | | | – | | | – | | | – | | | (50 | ) | | (50 | ) |
| | |
Balance, end of year | | $ | 8,427 | | $ | 96 | | $ | 8,523 | | $ | – | | $ | 855 | | $ | 855 | |
| | |
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 17. NONCONTROLLING INTERESTS
Redeemable noncontrolling interest
Nonvoting, callable, junior preferred interests held by the Department of Treasury represented preferred interests in the AIA SPV and ALICO SPV. In connection with the execution of our orderly asset disposition plan, as well as the repayment of the FRBNY Credit Facility, we transferred two of our wholly-owned businesses, AIA and ALICO, to two newly created SPVs in exchange for all the common and preferred interests (the SPV Preferred Interests) of those SPVs. On December 1, 2009, AIG transferred the SPV Preferred Interests to the FRBNY in consideration for a $25 billion reduction of the outstanding loan balance and of the maximum amount of credit available under the FRBNY Credit Facility and amended the terms of the FRBNY Credit Facility. As part of the closing of the Recapitalization, the remaining SPV Preferred Interests, with an aggregate liquidation preference of approximately $20.3 billion at January 14, 2011, were purchased from the FRBNY by AIG and transferred to the Department of the Treasury as part of the consideration for the exchange of Series F Preferred Stock.
The common interests, which we retained, entitled us to 100 percent of the voting power of the SPVs. The voting power allowed us to elect the boards of managers of the SPVs, who oversaw the management and operation of the SPVs. Primarily due to the substantive participation rights of the SPV Preferred Interests, the SPVs were determined to be VIEs. As the primary beneficiary of the SPVs, we consolidated the SPVs.
As a result of the closing of the Recapitalization on January 14, 2011, the SPV Preferred Interests held by the Department of the Treasury were no longer considered permanent equity on our Consolidated Balance Sheets, and were classified as redeemable noncontrolling interests. As part of the Recapitalization, we used approximately $6.1 billion of the cash proceeds from the sale of ALICO to pay down a portion of the liquidation preference of the SPV Preferred Interests. The liquidation preference of the SPV Preferred Interests was further reduced by approximately $12.4 billion using proceeds from the sale of AIG Star, AIG Edison, Nan Shan, and MetLife securities received in the sale of ALICO. During the first quarter of 2011, the remaining liquidation preference of the ALICO SPV Preferred Interests was paid in full.
The SPV Preferred Interests were measured at fair value on their issuance date. The SPV Preferred Interests initially had a liquidation preference of $25 billion and had a preferred return of five percent per year compounded quarterly through September 22, 2013 and nine percent thereafter. The preferred return is reflected in Net income from continuing operations attributable to noncontrolling interests — Nonvoting, callable, junior and senior preferred interests in the Consolidated Statements of Income. The difference between the SPV Preferred Interests' fair value and the initial liquidation preference was amortized and included in Net income from continuing operations attributable to noncontrolling interests — Nonvoting, callable, junior and senior preferred interests.
During the first quarter of 2012, the liquidation preference of the AIA SPV Preferred Interests was paid down in full.
Non-redeemable noncontrolling interests
Non-redeemable noncontrolling interests include the equity interests of third-party shareholders in our consolidated subsidiaries and includes the preferred shareholders' equity in outstanding preferred stock of ILFC, a wholly-owned subsidiary that is held for sale at December 31, 2013 and 2012. The preferred stock in ILFC consists of 1,000 shares of market auction preferred stock (MAPS) in two series (Series A and B) of 500 shares each. Each of the MAPS shares has a liquidation value of $100,000 per share and is not convertible. Dividends on the MAPS are accounted for as a reduction of the noncontrolling interest. The dividend rate, other than the initial rate, for each dividend period for each series is reset approximately every seven weeks (49 days) on the basis of orders placed in an auction, provided such auctions are able to occur. At December 31, 2013, there is no ability to conduct such auctions; therefore, the MAPS certificate of determination dictates that a maximum applicable rate, as defined in the certificate of determination, be paid on the MAPS. At December 31, 2013, the dividend rate for each of the Series A and Series B MAPS was 0.50 percent and 0.36 percent respectively.
For the years ended December 31, 2013 and 2012, the Noncontrolling interests balance declined by $56 million and $188 million, respectively, primarily caused by distributions to noncontrolling interest and, in 2012, an adjustment for the reclassification of noncontrolling interest from permanent to temporary and acquisitions of noncontrolling interests. In 2011, the decline in noncontrolling interest balance was primarily due to the acquisition of Fuji's noncontrolling interest.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 18.17. EARNINGS PER SHARE (EPS)
18. EARNINGS PER SHARE (EPS)
The basic EPS computation is based on the weighted average number of common shares outstanding, adjusted to reflect all stock dividends and stock splits. The diluted EPS computation is based on those shares used in the basic EPS computation plus shares that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding and adjusted to reflect all stock dividends and stock splits.
In connection with the issuance of the Series C Preferred Stock, we applied the two-class method for calculating EPS. The two-class method is an earnings allocation method for computing EPS when a company's capital structure includes either two or more classes of common stock or common stock and participating securities. This method determines EPS based on dividends declared on common stock and participating securities (i.e., distributed earnings), as well as participation rights of participating securities in any undistributed earnings. The Series C Preferred Stock was retired as part of the Recapitalization on January 14, 2011. Subsequent to January 14, 2011, we have not had any outstanding participating securities that would subject us to the two-class method.
The following table presents the computation of basic and diluted EPS:
Years Ended December 31, | | | | | | |
(dollars in millions, except per share data) | | 2015 | | 2014 | | 2013 |
Numerator for EPS: | | | | | | |
Income from continuing operations | $ | 2,222 | $ | 7,574 | $ | 9,008 |
Less: Net income (loss) from continuing operations attributable to noncontrolling interests | | 26 | | (5) | | 7 |
Income attributable to AIG common shareholders from continuing operations | | 2,196 | | 7,579 | | 9,001 |
Income (loss) from discontinued operations | | - | | (50) | | 84 |
Net income attributable to AIG common shareholders | $ | 2,196 | $ | 7,529 | $ | 9,085 |
Denominator for EPS: | | | | | | |
Weighted average shares outstanding — basic | | 1,299,825,350 | | 1,427,959,799 | | 1,474,171,690 |
Dilutive shares | | 34,639,533 | | 19,593,853 | | 7,035,107 |
Weighted average shares outstanding — diluted* | | 1,334,464,883 | | 1,447,553,652 | | 1,481,206,797 |
Income per common share attributable to AIG: | | | | | | |
Basic: | | | | | | |
Income from continuing operations | $ | 1.69 | $ | 5.31 | $ | 6.11 |
Income from discontinued operations | $ | - | $ | (0.04) | $ | 0.05 |
Net Income attributable to AIG | $ | 1.69 | $ | 5.27 | $ | 6.16 |
Diluted: | | | | | | |
Income from continuing operations | $ | 1.65 | $ | 5.24 | $ | 6.08 |
Income from discontinued operations | $ | - | $ | (0.04) | $ | 0.05 |
Net Income attributable to AIG | $ | 1.65 | $ | 5.20 | $ | 6.13 |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(dollars in millions, except per share data)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Numerator for EPS: | | | | | | | | | | |
Income from continuing operations | | $ | 9,008 | | $ | 3,699 | | $ | 18,863 | |
Less: Net income from continuing operations attributable to noncontrolling interests: | | | | | | | | | | |
Nonvoting, callable, junior and senior preferred interests | | | – | | | 208 | | | 634 | |
Other | | | 7 | | | 54 | | | 55 | |
| | |
Total net income from continuing operations attributable to noncontrolling interests | | | 7 | | | 262 | | | 689 | |
| | |
Deemed dividends to AIG Series E and F Preferred Stock | | | – | | | – | | | (812 | ) |
| | |
Income attributable to AIG common shareholders from continuing operations | | | 9,001 | | | 3,437 | | | 17,362 | |
| | |
Income from discontinued operations | | | 84 | | | 1 | | | 2,467 | |
Less: Net income from discontinued operations attributable to noncontrolling interests | | | – | | | – | | | 19 | |
| | |
Income attributable to AIG common shareholders from discontinued operations | | | 84 | | | 1 | | | 2,448 | |
| | |
Net income attributable to AIG common shareholders | | $ | 9,085 | | $ | 3,438 | | $ | 19,810 | |
| | |
Denominator for EPS: | | | | | | | | | | |
Weighted average shares outstanding – basic | | | 1,474,171,690 | | | 1,687,197,038 | | | 1,799,385,757 | |
Dilutive shares | | | 7,035,107 | | | 29,603 | | | 72,740 | |
| | |
Weighted average shares outstanding – diluted* | | | 1,481,206,797 | | | 1,687,226,641 | | | 1,799,458,497 | |
| | |
Income per common share attributable to AIG: | | | | | | | | | | |
Basic: | | | | | | | | | | |
Income from continuing operations | | $ | 6.11 | | $ | 2.04 | | $ | 9.65 | |
Income from discontinued operations | | $ | 0.05 | | $ | – | | $ | 1.36 | |
Net Income attributable to AIG | | $ | 6.16 | | $ | 2.04 | | $ | 11.01 | |
| | |
Diluted: | | | | | | | | | | |
Income from continuing operations | | $ | 6.08 | | $ | 2.04 | | $ | 9.65 | |
Income from discontinued operations | | $ | 0.05 | | $ | – | | $ | 1.36 | |
Net Income attributable to AIG | | $ | 6.13 | | $ | 2.04 | | $ | 11.01 | |
| | |
* Dilutive shares are calculated using the treasury stock method and include dilutive sharesprimarily result from share-based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of the recapitalization in January 2011 and a weighted average portion of the warrants issued to the Department of the Treasury in 2009 that we repurchased in the first quarter of 2013.2011. The number of shares excluded from diluted shares outstanding were 380.2 million, 780.3 million and 7638 million for the years ended December 31, 2013, 20122015, 2014 and 2011,2013, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.
Deemed dividends resulted from the Recapitalization and represent the excess of:
•the fair value of the consideration transferred to the Department of the Treasury, which consisted of 1,092,169,866 shares of AIG Common Stock, $20.2 billion of AIA SPV Preferred Interests and ALICO SPV Preferred Interests, and a liability for a commitment by us to pay the Department of the Treasury's costs to dispose of all of its shares, over
•the carrying value of the Series E Preferred Stock and Series F Preferred Stock.
AIG 2013 Form 10-K
TABLE OF CONTENTS
ITEMItem 8 / NOTE 19. note 18. STATUTORY FINANCIAL DATA AND RESTRICTIONS
19.
18. STATUTORY FINANCIAL DATA AND RESTRICTIONS
The following table presents statutory net income (loss) and capital and surplus and net income for our AIG Property CasualtyNon-Life Insurance Companies and AIGour Life and Retirement operationsInsurance Companies in accordance with statutory accounting practices:
(in millions) | | 2015 | | 2014 | | 2013 |
Years Ended December 31, | | | | | | |
Statutory net income (loss)(a)(b)(c)(d)(e): | | | | | | |
Non-Life Insurance Companies: | | | | | | |
Domestic(d)(e) | $ | 1,202 | $ | 3,265 | $ | 11,440 |
Foreign | | 521 | | 1,252 | | 842 |
Total Non-Life Insurance Companies | | 1,723 | | 4,517 | | 12,282 |
Life Insurance Companies: | | | | | | |
Domestic | | 2,672 | | 2,865 | | 5,047 |
Foreign | | (16) | | (9) | | (9) |
Total Life Insurance Companies | | 2,656 | | 2,856 | | 5,038 |
At December 31, | | | | | | |
Statutory capital and surplus(a)(c)(d)(e): | | | | | | |
Non-Life Insurance Companies: | | | | | | |
Domestic(d)(e) | $ | 24,358 | $ | 27,621 | | |
Foreign | | 11,465 | | 12,183 | | |
Total Non-Life Insurance Companies | | 35,823 | | 39,804 | | |
Life Insurance Companies: | | | | | | |
Domestic | | 8,287 | | 9,879 | | |
Foreign | | 422 | | 437 | | |
Total Life Insurance Companies | | 8,709 | | 10,316 | | |
Aggregate minimum required statutory capital and surplus: | | | | | | |
Non-Life Insurance Companies(f): | | | | | | |
Domestic(f) | $ | 6,493 | $ | 7,540 | | |
Foreign | | 7,554 | | 8,210 | | |
Total Non-Life Insurance Companies | | 14,047 | | 15,750 | | |
Life Insurance Companies: | | | | | | |
Domestic | | 3,658 | | 3,674 | | |
Foreign | | 45 | | 46 | | |
Total Life Insurance Companies | | 3,703 | | 3,720 | | |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Years Ended December 31, | | | | | | | | | | |
Statutory net income(a)(b)(c): | | | | | | | | | | |
Property Casualty | | $ | 12,441 | | $ | 4,792 | | | 2,330 | |
Life and Retirement | | | 3,741 | | | 3,827 | | | 797 | |
| | |
At December 31, | | | | | | | | | | |
Statutory capital and surplus(a)(b): | | | | | | | | | | |
Property Casualty | | $ | 39,988 | | $ | 42,208 | | | | |
Life and Retirement | | | 14,329 | | | 14,683 | | | | |
| | |
Aggregate minimum required statutory capital and surplus(b): | | | | | | | | | | |
Domestic Property Casualty | | $ | 5,425 | | $ | 5,800 | | | | |
Foreign Property Casualty | | | 8,821 | | | 10,100 | | | | |
Life and Retirement | | | 4,336 | | | 4,276 | | | | |
| | |
(a) Excludes discontinued operations and other divested businesses. Statutory capital and surplus and net income (loss) with respect to foreign operations are as of November 30.
(b) TheNon-Life Insurance Companies did not recognize material statutory gains related to legal entity simplification (restructuring) in 2015. Non-Life Insurance Companies include $0 and approximately $8.0 billion of recognized statutory gains related to legal entity simplification (restructuring) in 2014 and 2013, amounts are subjectrespectively. These recognized gains were largely offset by reductions in unrealized gains; therefore, there was no material impact to change based on final statutory filings. The 2012 Property Casualtytotal surplus.
(c) In aggregate, the 2014 Non-Life Insurance Companies and Life Insurance Companies statutory net income (loss) and statutory capital and surplus amounts increased by $937$115 million and $2.1 billion,$303 million, respectively, compared to the amounts previously reported in our Annual Report on Form 10-K for the year ended December 31, 2012,2014, due to finalization of statutory filings.
(c) Property Casualty includes approximately $8.0 billion and $3.0(d) Non-Life Insurance Companies recognized $2.75 billion of recognizedcapital contributions from AIG Parent in their statutory gainsfinancial statements as of December 31, 2015, related to legal entity simplification (restructuring)the reserve strengthening in 2013the fourth quarter of 2015. These capital contributions were received in January 2016.
(e) For the year ended December 31, 2015, excluded Eaglestone Reinsurance Company (Eaglestone), a reinsurer of run-off lines of business from affiliates within Non-Life Insurance Companies, which was transferred from the Non-Life Insurance Companies to Corporate and 2012,Other. The statutory net income and statutory capital and surplus of Eaglestone at December 31, 2015 were $22.8 million and $1.9 billion, respectively. These recognized gains were largely offset by reductionsThe statutory surplus included $150 million of capital contribution received from AIG Parent in unrealized gains; therefore, there was no material impact to total surplus.January 2016.
(f) For the year ended December 31, 2015, excluded $274 million for Eaglestone.
Our insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by domestic and foreign insurance regulatory authorities. The principal differences between statutory financial statements and financial statements prepared in accordance with U.S. GAAP for domestic companies are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, investment impairments are determined in accordance with statutory accounting practices, assets and liabilities are presented net of reinsurance, policyholder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted.
At December 31, 2013 and 2012, the aggregate minimum required statutory capital and surplus of our domestic AIG Property Casualty insurance subsidiaries was approximately $5.4 billion and $5.8 billion, respectively. At December 31, 2013 and 2012, the aggregate minimum required statutory (or equivalent) capital and surplus of our foreign AIG Property Casualty foreign insurance subsidiaries was approximately $8.8 billion and $10.1 billion, respectively. Capital and surplus requirements of our foreign subsidiaries differ from those prescribed in the U.S., and can vary significantly by jurisdiction. At both December 31, 2013 and 2012, the aggregate minimum required statutory capital and surplus of our AIG Life and Retirement insurance subsidiaries was approximately $4.3 billion. For domestic insurance subsidiaries, aggregate minimum required statutory capital and surplus is based on the greater of the RBC level that would trigger regulatory action or minimum requirements per state insurance regulation. Capital and surplus requirements of our foreign subsidiaries differ from those prescribed in the U.S., and can vary significantly by jurisdiction. At both December 31, 20132015 and 2012,2014, all domestic and foreign insurance subsidiaries individually exceeded the minimum required statutory capital and surplus requirements and all domestic insurance subsidiaries individually exceeded RBC minimum required levels.
At December 31, 20132015 and 2012,2014, with the exception of one permitted practice adopted by one domestic life insurance subsidiary in 2015, described below, the use of prescribed or permitted statutory accounting practices by our AIG Property Casualtydomestic and AIG Life and Retirementforeign insurance subsidiaries did not result in reported statutory surplus or risk-based capital that is significantly different from the statutory surplus or risk-based capital that would have been reported had National Association of Insurance Commissioners'NAIC statutory accounting practices or the prescribed regulatory accounting practices of their respective foreign regulatory authority been followed in all respects for domestic and foreign insurance entities. As described further in Note 12, our domestic Property Casualty insurance subsidiaries domiciled in New York and Pennsylvania discount non tabular workers'non-tabular workers’ compensation reserves based on the prescribed or approved regulations in each of those states. While these practices differ from applicable National Association of Insurance Commissioners' statutory accounting practices, such practices doThis practice did not have a material impact on AIG Property Casualty'sour statutory surplus, and statutory net income (loss), or risk-based capital. In 2015, a domestic life insurance subsidiary domiciled in Texas adopted a permitted statutory accounting practice to report derivatives used to hedge interest rate risk based capital.
AIG 2013 Form 10-K
Tableon product-related embedded derivatives at amortized cost instead of Contents
fair value. The initial adoption of the permitted practice resulted in a reduction to the statutory surplus of our subsidiary of $366 million at December 31, 2015.
ITEM 8 / NOTE 19. STATUTORY FINANCIAL DATA AND RESTRICTIONS
The NAIC Model Regulation "Valuation“Valuation of Life Insurance Policies"Policies” (Regulation XXX) requires U.S. life insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). In addition, NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs.
On September 11, 2013, the NYDFS announced it would no longer implement a modified principles-based reserving approach for certain in-force ULSGs, which had been developed by a Joint Working Group of the NAIC. As a result, New York-licensed insurers are required to record additional reserves on a statutory basis for ULSG products issued between July 1, 2005 and December 31, 2012. The decision from the NYDFS does not affect reserves for products issued on or after January 1, 2013. AIG Life and Retirement does not currently offer individual level term life insurance or ULSGs in the state of New York. AIG Life and Retirement recorded approximately $200 million of additional reserves on a statutory basis at December 31, 2013 to fully comply with the NYDFS decision. Our AIG Life and RetirementDomestic insurance subsidiaries including our New York-domiciled insurance subsidiary, continue to maintain capital well in excess of regulatory minimum required capital and surplus levels. In 2013, our AIG Life and Retirement New York-domiciled insurance subsidiary paid dividends totaling $404 million, which were ultimately distributed to AIG Parent.
AIG Life and Retirement managesmanage the capital impact on its life insurers of statutory reserve requirements under Regulation XXX and Guideline AXXX through intercompany reinsurance transactions. The affiliated life insurers providing reinsurance capacity to AIG Life and Retirementfor such transactions are fully licensed insurance companies and are not formed under captive insurance laws. Under one of these intercompany reinsurance arrangements, certain Regulation XXX and Guideline AXXX reserves related to new and in-force business are ceded to an affiliated U.S. life insurer, which is a licensed life insurer in the state of Missouri and an accredited reinsurer in the state of Texas. As an accredited reinsurer, this affiliated life insurer is not required to post any collateral such as letters of credit or assets in trust.
Under the other intercompany reinsurance arrangement, certain Regulation XXX and Guideline AXXX reserves related to a closed block of in-force business are ceded to an affiliated off-shore life insurer, which is licensed as a class E insurer under Bermuda law. Bermuda law permits the off-shore life insurer to record an asset that effectively reduces the statutory reserves for the assumed reinsurance to the level that would be required under U.S. GAAP. Letters of credit are used to support the credit for reinsurance provided by the affiliated off-shore life insurer. The letters of credit are subject to reimbursement by AIG Parent in the event of a drawdown. See Note 87 for additional information regarding these letters of credit.
Subsidiary Dividend Restrictions
Payments of dividends to us by our insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities. With respect to our domestic insurance subsidiaries, the payment of any dividend requires formal notice to the insurance department in which the particular insurance subsidiary is domiciled. For example, unless permitted by the Superintendent of Financial Services, property casualty companies domiciled in New York generally may not pay dividends to shareholders that,
in any 12-month12‑month period, exceed the lesser of 10 percent of such company'scompany’s statutory policyholders'policyholders’ surplus or 100 percent of its "adjusted“adjusted net investment income,"” for the previous year, as defined. Generally, less severe restrictions applicable to both property casualty and life insurance companies exist in most of the other states in which our insurance subsidiaries are domiciled. Under the laws of many states, an insurer may pay a dividend without prior approval of the insurance regulator when the amount of the dividend is below certain regulatory thresholds. Other foreign jurisdictions may restrict the ability of our foreign insurance subsidiaries to pay dividends. Various other regulatory restrictions also limit cash loans and advances to us by our subsidiaries.
Largely as a result of these restrictions, approximately $47.6$41.6 billion of the statutory capital and surplus of our consolidated insurance subsidiaries were restricted from transfer to AIG Parent without prior approval of state insurance regulators at December 31, 2013.2015.
To our knowledge, no AIG insurance company is currently on any regulatory or similar "watch list"“watch list” with regard to solvency.
Parent Company Dividend Restrictions
OurAt December 31, 2015, our ability to pay dividends hasis not been subject to any significant contractual restrictions, since the cancellation of our Series G Preferred Stock in May 2011.but remains subject to regulatory restrictions. See Note 16 herein for additional information about our ability to pay dividends to our shareholders.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 20.19. SHARE-BASED AND OTHER COMPENSATION PLANS
20. SHARE-BASED AND OTHER COMPENSATION PLANS
The following table presents our share-basedshare‑based compensation expense:
Years Ended December 31, | | | | | | | |
(in millions) | | | 2015 | | 2014 | | 2013 |
Share-based compensation expense - pre-tax* | | $ | 365 | $ | 349 | $ | 457 |
Share-based compensation expense - after tax | | | 237 | | 227 | | 297 |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Share-based compensation expense – pre-tax* | | $ | 457 | | $ | 286 | | $ | (16 | ) |
Share-based compensation expense – after tax | | | 297 | | | 186 | | | (10 | ) |
| | |
* For the yearyears ended December 31, 2015, 2014 and 2013, $19 million, $86 million and $315 million, respectively, of pre-tax compensation expense and substantially all of prior years' compensation expense werewas attributed to unsettled liability-classified awards, the values of which are based on our share price at the reporting date. Our share price was $51.05, $35.30$61.97, $56.01 and $23.20$51.05 at December 31, 2015, 2014 and 2013, 2012respectively. In addition, we recognized $147 million, $120 million and 2011, respectively,$101 million for immediately vested stock-settled awards issued to retirement eligible employees in 2015, 2014 and is the primary driver of the volatility in share-based compensation expense.2013, respectively.
Employee Plans
During 2013, our employees were issuedThe Company grants annual Long Term Incentive (LTI) awards under the AIG 2010 Stock2013 Long Term Incentive Plan as amended (2010 Plan)(2013 LTIP), andwhich is governed by the AIG 2013 Omnibus Incentive Plan (2013 Plan). The 2013 Plan replaced the AIG 2010 Stock Incentive Plan (2010 Plan) as of May 15, 2013 but does not affect the terms orand conditions of any award issued under the 2010 Plan. The 2013 Plan and is currently the only plan under which share-basedshare-settled awards can be made.
As of December 31, 2013,2015, the Starr International Company Inc. Deferred Compensation Profit Participation Plans (the SICO Plans) are the only legacy plans for which awards remain unvested.
Our share-settled awards are settled with newly-issuedpreviously acquired shares of AIG Common Stock.held in AIG’s treasury. Share awards made by SICO are settled by SICO.
AIG 2013 Omnibus Incentive Plan
The 2013 Plan was adopted at the 2013 Annual Meeting of Shareholders and provides for the grants of share-based awards to our employees and non-employee directors. The total number of shares that may be granted under the 2013 Plan (the reserve) is the sum of 1) 45 million shares of AIG Common Stock, plus 2) the number of authorized shares that remained available for issuance under the 2010 Plan when the 2013 Plan became effective, plus 3) the number of shares of AIG
Common Stock relating to outstanding awards under the 2010 Plan at the time the 2013 Plan became effective that subsequently are forfeited, expired, terminated or otherwise lapse or are settled in cash. Each share-based unit granted under the 2013 Plan reduces the number of shares available for future grants by one share. However, shares with respect to awards that are forfeited, expired or settled for cash, and shares withheld for taxes on awards (other than options and stock appreciation rights (SARs) awards) are returned to the reserve.
During 2013,2015, performance share units (PSUs) and deferred stock units (DSUs) were granted under the 2013 Plan and 55,618,61745,670,678 shares are available for future grants as of December 31, 2013.2015. PSUs were issued to employees as part of our long-term incentive program in March 2015 and are also issued for off cycleoff-cycle grants, which are made from time to time during the year as sign-on awards to new hires or as a result of a change in employee status.
AIG 2010 Stock Incentive Plan
The 2010 Plan was adopted at the 2010 Annual Meeting of Shareholders. The total number of shares of AIG Common Stock that could be granted under the 2010 Plan was 60 million. During 2013, 2012 and 2011, we granted PSUs, DSUs and restricted stock units (RSUs), restricted stock and SARs under the 2010 Plan. Each PSU, DSU RSU, SAR and restricted stockRSU awarded reduced the number of shares available for future grants by one share. Subsequent to the adoption of the 2013 Plan in May 2013, no additional grants were made under the 2010 Plan.
Share-settledShare-settled Awards
AIG 2013 Long Term Incentive Plan
The 2013 Long Term Incentive Plan (2013 LTIP), adopted in March 2013,LTIP provides for the annual grant of performance share unitsPSUs to certain employees, including our senior executive officers and other highly compensated employees. Each recipient of an award is granted a number of PSUs (the target) that provides the opportunity to earnreceive shares of
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 20. SHARE-BASED AND OTHER COMPENSATION PLANS
AIG Common Stock based on AIG achieving specified performance measuresgoals at the end of thea three-year performance period. These performance measuresgoals are based on AIG's total shareholder return (TSR)pre-established by AIG’s Compensation and growth in tangible book value per share (TBVPS) (excluding Accumulated other comprehensive income) relativeManagement Resources Committee for each annual grant and may differ from year to a specified peer group, and are weighted at 50 percent each.year. The actual number of PSUs earned can vary from zero to 150 percent of the target depending on AIG'sAIG’s performance relative to thea specified peer group. Vesting occurs in three equal installments beginning on January 1 of the year immediately following the end of thea performance period and January 1 of each of the next two years, resulting in a graded vesting schedule of up to five years. Dividends do not accrue on awards until the shares are delivered. Recipients must be employed at each vesting date to be entitled to share delivery, except upon the occurrence of an accelerated vesting event, such as an involuntary termination without cause, disability, retirement or retirement eligibilitydeath during the vesting period. Awards made
LTI awards granted in 2015 accrue dividend equivalent units (DEUs) in the form of additional PSUs whenever a cash dividend is declared on shares of AIG Common Stock; the DEUs are subject to the same vesting terms and conditions as the underlying PSUs. Neither dividends nor DEUs accrue on unvested PSUs or the shares underlying the PSUs for LTI awards granted in 2014 and 2013.
Performance Share Unit Goals and Valuation
The performance goals used to measure LTI awards granted in 2015 and 2014 pertain to AIG’s total shareholder return (TSR) and credit default swap (CDS) spread, weighted 75 percent and 25 percent, respectively, in each case relative to a specified peer group. The goals for the 2013 awards are AIG’s growth in tangible book value per common share (TBVPS) (excluding accumulated other comprehensive income) and TSR weighted 50 percent each, in each case relative to a specified peer group. The fair value of PSUs to be earned based on AIG’s TBVPS and CDS spreads was based on the closing price of AIG Common Stock on the grant date. However, PSUs granted in 2014 and 2013 that vest based on these goals were discounted by the present value of estimated dividends to be paid during the respective vesting periods as these awards do not accrue dividends or DEUs. The fair value of PSUs to be earned based on AIG’s TSR relative to a specified peer group was determined on the grant date using a Monte Carlo simulation.
The following table presents the assumptions used to estimate the fair value of PSUs that vest based on AIG’s TSR:
| 2015 | | 2014 | | 2013 | |
Expected dividend yield(a) | 1.78 | % | 1.13 | % | 0.38 | % |
Expected volatility(b) | 22.71 | % | 23.66 | % | 30.79 | % |
Risk-free interest rate(c) | 1.01 | % | 0.76 | % | 0.50 | % |
(a) The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.
(b) The expected volatility is based on the implied volatilities of actively traded stock options from the valuation date through the end of the PSU performance period as estimated by Bloomberg Professional service.
(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and the end of the performance period that is assumed to be constant and equal to the interpolated value between the closest data points on the U.S. dollar LIBOR-swap curve as of the valuation date.
The following table summarizes outstanding share-settled LTI awards(a):
| | | | | | Weighted Average |
As of or for the Year | Number of PSUs(b) | | Grant-Date Fair Value |
Ended December 31, 2015 | 2015 LTI | 2014 LTI | | 2013 LTI | | | 2015 LTI | | | 2014 LTI | | 2013 LTI |
Unvested, beginning of year | - | 4,036,527 | | 4,066,182 | | $ | - | | $ | 48.72 | $ | 37.09 |
Granted | 6,445,639 | 10,225 | | - | | | 54.55 | | | 52.83 | | - |
Vested | (3,212,976) | (1,270,263) | | (1,593,595) | | | 54.09 | | | 48.56 | | 37.09 |
Forfeited | (185,705) | (217,130) | | (222,478) | | | 53.66 | | | 48.78 | | 37.38 |
Unvested, end of year | 3,046,958 | 2,559,359 | | 2,250,109 | | $ | 55.08 | | $ | 48.82 | $ | 37.07 |
(a) Excludes SICO awards, DSUs and options, which are discussed under the SICO Plans, Non-Employee Plans and Stock Options sections, respectively.
(b) Represents target number of PSUs granted, and does not reflect potential increases or decreases that could result from the final outcome of the performance goals to be determined after the applicable performance period ends. The performance period for 2013 LTIP prior to May 2013 were issued underLTI awards ended December 31, 2015; the 2010 Plan; awards made subsequently were issued undernumber of earned PSUs based on the results of the 2013 Plan.performance goals will be adjudicated in March 2016 by the Compensation and Management Resources Committee.
At December 31, 2015, the total unrecognized compensation cost (net of expected forfeitures) for the unvested PSUs was $190 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 1.29 years and 4 years.
SICO Plans
The SICO Plans, which have been closed to new participants since 2004, provide that shares of AIG Common Stock currently held by SICO are set aside for the benefit of the participantparticipants and distributed upon retirement. The SICO Board of Directors currently may permit an early payout of shares under certain circumstances. Prior to payout, the participant is not entitled to vote, dispose of or receive dividends with respect to such shares, and shares are subject to forfeiture under certain conditions, including but not limited to the participant'sparticipant’s termination of employment with us prior to normal retirement age. A significant portion of the awards under the SICO Plans vest the year after the participant reaches age 65, provided that the participant remains employed by us through age 65. The portion of the awards for which early payout is available vests on the applicable payout date.
SICO Plan awards issued in the form of restricted stock were valued based on the closing price of AIG'sAIG’s Common Stock on the grant date. Although none of the costs of the various benefits provided under the SICO Plans have been paid by us, we have recorded compensation expense for the deferred compensation amounts payable to our employees by SICO, with an offsetting amount credited to Additional paid-in capital reflecting amounts deemed contributed by SICO.
Non-Employee Plans
Our non-employee directors, who serve on AIG's Board As of Directors, receive share-based compensation inDecember 31, 2015, 31,964 shares of restricted stock remain unvested; the form of deferred stock units (DSUs) with delivery deferred until retirement from the Board. In 2013, we granted to non-employee directors 25,735 DSUs under the 2013 Plan, and in 2012 and 2011, we granted 19,434 and 21,203 DSUs, respectively, under the 2010 Plan.
Performance Share Unit Valuation
The fair value of a PSU that will be earned based on AIG's achieving growth in TBVPS relative to a specified peer group was based on the closing price of AIG Common Stock on the grant date; off cycle grants issued after August 1, 2013 were discounted because PSUs are not entitled to dividends during the vesting periods. The fair value of a PSU that will be earned based on AIG's TSR relative to a specified peer group was determined on the grant date using a Monte Carlo simulation.
The following table presents the assumptions used to estimate the fair value of PSUs based on AIG's TSR:
| | | | |
| |
| | 2013
| |
|---|
| |
Expected dividend yield(a)
| | | 0.38 | % |
Expected volatility(b)
| | | 30.79 | % |
Risk-free interest rate(c)
| | | 0.50 | % |
| |
(a) The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.
(b) The expected volatility is equal to the interpolated value between the implied volatilities of actively traded stock options with maturities that are closest to the PSU term to maturity.
(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and maturity date that is assumed to be constant and equal to the interpolated value between the closest data points on the U.S. dollar LIBOR-swap curve as of the valuation date.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 20. SHARE-BASED AND OTHER COMPENSATION PLANS
The following table summarizes outstanding share-settled awards*:
| | | | | | | | | | | | | |
| | |
| | Number of PSUs/Shares | | Weighted Average
Grant-Date Fair Value | |
|---|
As of or for the Year
Ended December 31, 2013
| | AIG
Plans
| | SICO
Plans
| | AIG
Plans
| | SICO
Plans
| |
|---|
| | |
Unvested, beginning of year | | | 39,249 | | | 119,944 | | $ | 48.29 | | $ | 1,197.96 | |
Granted | | | 8,451,368 | | | – | | | 36.50 | | | – | |
Vested | | | (2,910,475 | ) | | (17,977 | ) | | 36.00 | | | 524.12 | |
Forfeited | | | (384,734 | ) | | (16,018 | ) | | 35.73 | | | 1,178.71 | |
| | |
Unvested, end of year | | | 5,195,408 | | | 85,949 | | $ | 36.92 | | $ | 1,195.05 | |
| | |
* Excludes DSUs and options, which are discussed under the Non-Employee Plans and Stock Options sections, respectively.
The total unrecognized compensation cost (net of expected forfeitures) for the unvested PSUs and unvested restricted stock were $121is $10 million and $30 million, respectively, and the weighted-averageweighted average and expected period of years over which those costs are expected to be recognized are 1.385.28 years and 4 21years, for the PSUs, and 5.17 years and 26 years for the restricted stock, respectively.
Non-Employee Plans
Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested deferred stock units (DSUs) with delivery deferred until retirement from the Board. DSUs granted in 2015, 2014 and 2013 accrue DEUs equal to the amount of any regular quarterly dividend that would have been paid by AIG if the shares of AIG Common Stock underlying the DSUs had been outstanding. In 2015, 2014 and 2013, we granted to non-employee directors 32,342, 28,477 and 25,735 DSUs, respectively, under the 2013 Plan, and recognized expense of $1.9 million, $1.5 million and $1.2 million, respectively.
Stock Options
Options granted under the AIG 2007 Stock Incentive Plan and the 1999 Stock Option Plan generally vested over four years (25 percent vesting per year) and expire 10 years from the date of grant. All outstanding options are vested and out of the money at December 31, 2013.2015. There were no stock options granted since 2008 and no shares were issued in 2013 in connection with previous exercises of options with delivery deferred until 2013.2008. The aggregate intrinsic value for all unexercised options is zero.
The following table provides a roll forward of stock option activity:
| | | | | | | | | | | | | | | Weighted |
| | | | | | | | Average |
As of or for the Year Ended December 31, 2013
| | Shares
| | Weighted Average
Exercise Price
| | Weighted
Average
Remaining
Contractual
Life
| | |
|---|
| | | | | | | | Remaining |
| | | Weighted Average | Contractual |
As of or for the Year Ended December 31, 2015 | | Shares | Exercise Price | Life |
Options: | | | | | | |
Exercisable at beginning of year | | 514,245 | | $ | 1,129.42 | | 2.49 | | 202,275 | | $ | 1,037.74 | 2.17 |
Expired | | (224,455 | ) | $ | 1,149.34 | | | | (108,763) | | $ | 1,261.25 | |
| | | |
Exercisable at end of year | | 289,790 | | $ | 1,113.99 | | 2.58 | | 93,512 | | $ | 777.78 | 2.16 |
| | | |
Cash-settled Awards
During the period we were subject to Troubled Asset Relief Program (TARP) restrictions (under the purview of the Special Master), we issued various cash-settled share-based grants, including RSUs, linked to AIG Common Stock, to certain of our most highly compensated employees and executive officers. After the repayment of our TARP obligations in December 2012, we no longer issue awards under these plans.
|
Share-based cash-settled awards are recorded as liabilities until the final payout is made or the award is replaced with a stock-settled award. Compensation expense is recognized over the vesting periods, unless the award is fully vested on the grant date in which case the entire award value is immediately recognized as expense.
Unlike stock-settled awards, which generally have a fixed grant-date fair value (unless the award is subsequently modified), the fair value of unsettled or unvested cash-settled awards is remeasured at the end of each reporting period based on the change in fair value of one share of AIG Common Stock. The liability and corresponding expense are adjusted accordingly until the award is settled.
AIG 2013 Form 10-K
TableDuring the period we were subject to Troubled Asset Relief Program (TARP) restrictions, we issued various cash-settled share-based grants, including Stock Salary, TARP RSU awards, and other cash-settled RSU awards, to certain of Contents
our most highly compensated employees and executive officers in the form of restricted stock units that were either fully vested with payment deferred, or subject to specified service and performance conditions. After the repayment of our TARP obligations in December 2012, all performance conditions were satisfied; as a result, we no longer issue awards that are subject to TARP restrictions.
ITEM 8 / NOTE 20. SHARE-BASED AND OTHER COMPENSATION PLANS
Restricted Stock Units
Stock Salary Awards
In 2009, we established a program of regular grants of vested stock or units that is generally referred to as "Stock Salary." Stock Salary is determined as a dollar amount through the date that salary iswas earned and accrued at the same time or times as the salary would otherwise be paid in cash. Stock Salary was granted to any individual qualifying as a senior executive officer or one of our next twenty most highly compensated employees (the Top 25). Stock Salary for a Top 25 employee (other than our CEO)cash and is generally settled in three equal installments on the first, second and third anniversary of grant. Stock Salary was also granted to individuals qualifying as an executive officer or one of our next 75 most highly compensated employees (Top 26-100), and is generally settled on either the first or third anniversary of grant in accordance with the terms of an employee'semployee’s award. Stock Salary grants were generally issued in the form of immediatelyfully vested RSUs and the number of units awarded was based on the value of AIG Common Stock on the grant date.
RSUs are settled in cash based on the value of AIG
Common Stock on the applicable settlement date. During 2013, 20122015, 2014 and 2011,2013, we paid $180$42 million, $111$89 million and $35$180 million, respectively, to settle awards. For those awards that were vested and unsettled at the end of each year, we recognized charges of $73$2 million, $7 million and $173$73 million in compensation expense for the years ended December 31, 20132015, 2014 and 2012,2013, respectively, to reflect fluctuations in the value of AIG Common Stock. At December 31, 2013,2015, the number of vested but unsettled RSUs totaled 2,433,501.
TARP RSUs
TARP RSUs awarded require the achievement24,405, all of objective performance metrics as a condition to entitlement. When vested and transferable, an award would bewhich were settled in 25 percent installments in proportion to the settlement of our TARP obligations. Prior to December 2011, TARP RSUs granted to the Top 25 (other than our CEO) vested on the third anniversary of grant, while TARP RSUs granted to the Top 26-100 vested on the second anniversary of grant and are subject to transferability restrictions for an additional year after vesting. TARP RSUs granted December 2011 and thereafter vest in two 50 percent installments on the second and third anniversary of the date of grant. With the repayment of our TARP obligations in December 2012, 100 percent of outstanding TARP RSUs will vest when the service requirements are satisfied.
Other RSUsJanuary 2016.
Fully-vested performance-based RSUs were issued to certain employees in the Top 26-100 in March 2011. The RSUs will beIn addition, other TARP-related cash-settled three years after the date of issuance based on the value of AIG Common Stock on each settlement date. For the vested and unsettled awards at year-end, we recognized charges of $3 million, $2 million, and a reduction of $2 million in compensation expense for the years ended December 31, 2013, 2012, 2011, respectively, to reflect fluctuations in the value of AIG Common Stock.
During 2013 and 2012, cash-settled performance-based RSUsRSU granted and issued in March 2013 and 2012 to certain highly compensated employeesremained unvested as follows:
| | Number of Units |
Year Ended December 31, 2015 | | RSUs* |
Unvested, beginning of year | | 1,404,645 |
Granted | | - |
Vested | | (975,715) |
Forfeited | | (15,972) |
Unvested, end of year | | 412,958 |
Net compensation expense for the year (in millions) | $ | 17 |
* Total unrecognized compensation as of December 31, 2015 is $1 million; the unvested RSUs will vest and settle in two 50 percent installments on the second and third anniversary of the date of grant.March 2016.
Long Term Incentive Plans
Certain employees were offeredprovided the opportunity to receive additional compensation in the form of cash and cash-settled SARs forunder the 2009, 2010 and 2011 LTIP award or 100 percent cash for the 2012 LTIP award if certain performance measures were met. The ultimate value of these awards was contingent on AIG achieving performance measures over a two-year performance period and such value could range from zero to twice the target amount. Subsequent to the performance period, the earned awards arewere subject to an additional time-vesting period. This resultsresulted in a graded vesting schedule for the cash portion of up to two years, while the SARs portion cliff-vests two years after the end of performance period ends.period.
The cash portion of the awards expensed in 2013, 20122015, 2014 and 20112013 totaled approximately $19 million, $57 million and $249 million, $189 million, and $199 million, respectively.
AIG 2013 Form 10-K
All payments remaining under these awards were made in January 2016.Table of Contents
ITEM 8 / NOTE 20. SHARE-BASED AND OTHER COMPENSATION PLANSEMPLOYEE BENEFITS
The following table presents a roll forward of SARs and cash-settled RSUs (excluding stock salary) as well as the related expenses:
| | | | | | | | | | |
| | |
| | Number of Units | |
|---|
Year Ended December 31, 2013
| | Other RSUs
| | TARP RSUs
| | SARs
| |
|---|
| | |
Unvested, beginning of year | | | 686,290 | | | 1,889,434 | | | 12,356,573 | |
Granted(a) | | | 1,149,626 | | | – | | | 1,738,691 | |
Vested(b) | | | (149,346 | ) | | (824,098 | ) | | (4,400,053 | ) |
Forfeited | | | (122,883 | ) | | (207,757 | ) | | (728,965 | ) |
| | |
Unvested, end of year(c) | | | 1,563,687 | | | 857,579 | | | 8,966,246 | |
| | |
Net compensation expense for the year (in millions) | | $ | 43 | | $ | 37 | | $ | 154 | |
| | |
(a) Represents additional SARs earned as a result of the completion of the performance period for the 2011 LTIP.
(b) Also includes SARs for which vesting was accelerated for employees who became retirement eligible or were deceased.
(c) Includes 4,773,976 SARs from the 2010 LTIP that vested on January 1, 2014.
The total unrecognized compensation cost (net of expected forfeitures) related to unvested SARs and cash-settled RSUs (excluding stock salary) and the weighted-average periods over which those costs are expected to be recognized are as follows:
| | | | | | | | | | |
| | |
At December 31, 2013
(in millions)
| | Unrecognized
Compensation
Cost
| | Weighted-
Average Period
(years)
| | Expected
Period
(years)
| |
|---|
| | |
SARs | | $ | 14 | | | 0.62 | | | 1 | |
TARP RSUs | | | 15 | | | 0.76 | | | 2 | |
RSUs | | | 41 | | | 0.95 | | | 2 | |
| | |
Stock Appreciation Rights Valuation
We use a Monte Carlo simulation approach, which incorporates a range of input parameters that is consistently applied, to determine the fair value of SARs at each reporting period.
The table below presents the assumptions used to estimate the fair value of SARs:
| | | | |
| |
| | 2013
| |
|---|
| |
Expected dividend yield(a)
| | | 1.08 | % |
Expected volatility(b)
| | | 29.45 – 49.22 | % |
Weighted-average volatility
| | | 30.04 | % |
Risk-free interest rate(c)
| | | 0.31 | % |
Expected term(d)
| | | 1.0 year | |
| |
(a) The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.
(b) The expected volatilities are the implied volatilities with the nearest maturity and strike price as of the valuation date from actively traded stock options on AIG Common Stock.
(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and maturity date that is assumed to be constant and equal to the interpolated value between the closest data points on the U.S. dollar LIBOR-swap curve as of the valuation date.
(d) The term to maturity is specified in the agreement for each SAR grant.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 21. EMPLOYEE BENEFITS
21. EMPLOYEE BENEFITS
Pension Plans
We offer various defined benefit plans to eligible employees.
The U.S. AIG Retirement Plan (the qualified plan) is a noncontributory defined benefit plan whichthat is subject to the provisions of ERISA. U.S. salaried employees who are employed by a participating company and who have completed 12 months of continuous service are eligible to participate in the plan. Effective April 1, 2012, the qualified plan was converted to a cash balance formula comprised of pay credits based on six percent of a plan participant'sparticipant’s annual compensation (subject to IRS limitations) and annual interest credits. In addition, employees can take their vested benefits when they leave AIG as a lump sum or an annuity option after completing at least three years of service. However, employees satisfying certain age and service requirements (i.e. grandfathered employees) remain covered under the old plan formula, which is based upon a percentage of final average compensation multiplied by years of credited service, up to 44 years. Grandfathered employees will receive the higher of the benefits under the cash balance or final average pay formula at retirement. Non-U.S. defined benefit plans are generally either based on the employee'semployee’s years of credited service and compensation in the years preceding retirement or on points accumulated based on the employee'semployee’s job grade and other factors during each year of service.
In the U.S. we also sponsor several non-qualified unfunded defined benefit plans for certain employees, including key executives, designed to supplement pension benefits provided by the qualified plan. These include the AIG Non-Qualified Retirement Income Plan (AIG NQRIP), which provides a benefit equal to the reduction in benefits under the qualified plan as a result of federal tax limitations on compensation and benefits payable, and the Supplemental Executive Retirement Plan (Supplemental)(SERP), which provides additional retirement benefits to designated executives. Under the Supplemental Plan,SERP, an annual benefit accrues at a percentage of final average pay multiplied by each year of credited service, not greater than 60 percent of final average pay, reduced by any benefits from the current and any predecessor retirement plans (including the AIG NQRIP Plan)NQRIP), Social Security, and any benefits accrued under a Company sponsored foreign deferred compensation plan.
Plan Freeze
On August 27, 2015, we amended the qualified plan, the AIG NQRIP and the SERP, to freeze benefit accruals effective January 1, 2016. Consequently, these plans were closed to new participants and current participants ceased earning additional benefits as of December 31, 2015. However, interest credits continue to accrue on the existing cash balance accounts and participants are continuing to accrue years of service for purposes of vesting and early retirement eligibility and subsidies as they continue to be employed by AIG.
Postretirement Plans
We also provide postretirement medical care and life insurance benefits in the U.S. and in certain non-U.S. countries. Eligibility in the various plans is generally based upon completion of a specified period of eligible service and attaining a specified age. Overseas, benefits vary by geographic location.
U.S. postretirement medical and life insurance benefits are based upon the employee attaining the age of 55 and having a minimum of ten years of service. Eligible employees who have medical coverage can enroll in retiree medical upon termination.termination of employment. Medical benefits are contributory, while the life insurance benefits are generally non-contributory. Retiree medical contributions vary from none for pre-1989 retirees to actual premium payments reduced by certain subsidies for post-1992 retirees. These contributions are subject to adjustment annually. Other cost sharing features of the medical plan include deductibles, coinsurance and Medicare coordination. Effective April 1, 2012, the retiree medical employer subsidy for the AIG Postretirement plan was eliminated for employees who were not grandfathered. Additionally, new employees hired after December 31, 2012 are not eligible for retiree life insurance.
The following table presents the funded status of the plans reconciled to the amount reported in the Consolidated Balance Sheets. The measurement date for most of the non-U.S. defined benefit pension and
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 21. EMPLOYEE BENEFITS
postretirement plans is November 30, consistent with the fiscal year end of the sponsoring companies. For all other plans, measurement occurs as of December 31.
As of or for the Years Ended | | Pension | | Postretirement(a) |
December 31, | | U.S. Plans(b) | | Non-U.S. Plans(b) | | U.S. Plans | | Non-U.S. Plans |
(in millions) | | 2015 | | 2014 | | | 2015 | | 2014 | | 2015 | | 2014 | | | 2015 | | 2014 |
Change in projected benefit obligation: | | | | | | | | | | | | | | | | | | |
Benefit obligation, beginning of year | $ | 5,769 | $ | 4,882 | | $ | 1,099 | $ | 1,072 | $ | 229 | $ | 217 | | $ | 64 | $ | 52 |
Service cost | | 192 | | 173 | | | 43 | | 42 | | 5 | | 4 | | | 3 | | 2 |
Interest cost | | 220 | | 228 | | | 25 | | 29 | | 8 | | 9 | | | 3 | | 2 |
Actuarial (gain) loss | | (423) | | 780 | | | (16) | | 114 | | (23) | | 10 | | | 9 | | 11 |
Benefits paid: | | | | | | | | | | | | | | | | | | |
AIG assets | | (17) | | (15) | | | (9) | | (15) | | (11) | | (11) | | | (1) | | (1) |
Plan assets | | (285) | | (279) | | | (24) | | (24) | | - | | - | | | - | | - |
Plan amendment | | (132) | | - | | | 24 | | (1) | | - | | - | | | - | | - |
Settlements | | - | | - | | | (15) | | (9) | | - | | - | | | - | | - |
Foreign exchange effect | | - | | - | | | (67) | | (107) | | - | | - | | | (3) | | (2) |
Acquisitions | | - | | - | | | 72 | | - | | - | | - | | | - | | - |
Other | | - | | - | | | 14 | | (2) | | - | | - | | | - | | - |
Projected benefit obligation, end of year | $ | 5,324 | $ | 5,769 | | $ | 1,146 | $ | 1,099 | $ | 208 | $ | 229 | | $ | 75 | $ | 64 |
Change in plan assets: | | | | | | | | | | | | | | | | | | |
Fair value of plan assets, beginning | | | | | | | | | | | | | | | | | | |
of year | $ | 4,111 | $ | 4,024 | | $ | 708 | $ | 738 | $ | - | $ | - | | $ | - | $ | - |
Actual return on plan assets, net of expenses | | (8) | | 266 | | | 47 | | 71 | | - | | - | | | - | | - |
AIG contributions | | 558 | | 115 | | | 62 | | 67 | | 11 | | 11 | | | 1 | | 1 |
Benefits paid: | | | | | | | | | | | | | | | | | | |
AIG assets | | (17) | | (15) | | | (9) | | (15) | | (11) | | (11) | | | (1) | | (1) |
Plan assets | | (285) | | (279) | | | (24) | | (24) | | - | | - | | | - | | - |
Settlements | | - | | - | | | (15) | | (8) | | - | | - | | | - | | - |
Foreign exchange effect | | - | | - | | | (44) | | (75) | | - | | - | | | - | | - |
Acquisitions | | - | | - | | | 35 | | - | | - | | - | | | - | | - |
Other | | - | | - | | | 13 | | (46) | | - | | - | | | - | | - |
Fair value of plan assets, end of year | $ | 4,359 | $ | 4,111 | | $ | 773 | $ | 708 | $ | - | $ | - | | $ | - | $ | - |
Funded status, end of year | $ | (965) | $ | (1,658) | | $ | (373) | $ | (391) | $ | (208) | $ | (229) | | $ | (75) | $ | (64) |
Amounts recognized in the balance | | | | | | | | | | | | | | | | | | |
sheet: | | | | | | | | | | | | | | | | | | |
Assets | $ | - | $ | - | | $ | 46 | $ | 46 | $ | - | $ | - | | $ | - | $ | - |
Liabilities | | (965) | | (1,658) | | | (419) | | (437) | | (208) | | (229) | | | (75) | | (64) |
Total amounts recognized | $ | (965) | $ | (1,658) | | $ | (373) | $ | (391) | $ | (208) | $ | (229) | | $ | (75) | $ | (64) |
Pre-tax amounts recognized in Accumulated | | | | | | | | | | | | | | | | | | |
other comprehensive income: | | | | | | | | | | | | | | | | | | |
Net gain (loss) | $ | (1,324) | $ | (1,667) | | $ | (161) | $ | (227) | $ | 13 | $ | (9) | | $ | (16) | $ | (8) |
Prior service (cost) credit | | - | | 200 | | | (16) | | 11 | | 13 | | 24 | | | - | | 1 |
Total amounts recognized | $ | (1,324) | $ | (1,467) | | $ | (177) | $ | (216) | $ | 26 | $ | 15 | | $ | (16) | $ | (7) |
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| | Pension | | Postretirement(a) | |
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| | U.S. Plans(b) | | Non-U.S. Plans(b) | | U.S. Plans | | Non-U.S. Plans | |
|---|
As of or for the Years Ended December 31,
(in millions)
| |
|---|
| | 2013
| | 2012
| | 2013
| | 2012
| | 2013
| | 2012
| | 2013
| | 2012
| |
|---|
| | |
Change in projected benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation, beginning of year | | $ | 5,161 | | $ | 4,438 | | $ | 1,205 | | $ | 1,137 | | $ | 255 | | $ | 236 | | $ | 66 | | $ | 52 | |
Service cost | | | 205 | | | 154 | | | 47 | | | 53 | | | 5 | | | 5 | | | 3 | | | 3 | |
Interest cost | | | 201 | | | 200 | | | 29 | | | 34 | | | 8 | | | 11 | | | 2 | | | 2 | |
Actuarial (gain) loss | | | (454 | ) | | 536 | | | 13 | | | 69 | | | (41 | ) | | 22 | | | (15 | ) | | 11 | |
Benefits paid: | | | | | | | | | | | | | | | | | | | | | | | | | |
AIG assets | | | (14 | ) | | (12 | ) | | (13 | ) | | (7 | ) | | (10 | ) | | (11 | ) | | (1 | ) | | (1 | ) |
Plan assets | | | (217 | ) | | (150 | ) | | (27 | ) | | (35 | ) | | – | | | – | | | – | | | – | |
Plan amendment | | | – | | | – | | | – | | | 4 | | | – | | | (8 | ) | | – | | | – | |
Curtailments | | | – | | | (5 | ) | | (1 | ) | | (3 | ) | | – | | | – | | | (3 | ) | | (1 | ) |
Settlements | | | – | | | – | | | (35 | ) | | (20 | ) | | – | | | – | | | – | | | – | |
Foreign exchange effect | | | – | | | – | | | (126 | ) | | (32 | ) | | – | | | – | | | (1 | ) | | – | |
Other | | | – | | | – | | | (20 | ) | | 5 | | | – | | | – | | | 1 | | | – | |
| | |
Projected benefit obligation, end of year | | $ | 4,882 | | $ | 5,161 | | $ | 1,072 | | $ | 1,205 | | $ | 217 | | $ | 255 | | $ | 52 | | $ | 66 | |
| | |
Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets, beginning of year | | $ | 3,720 | | $ | 3,432 | | $ | 727 | | $ | 683 | | $ | – | | $ | – | | $ | – | | $ | – | |
Actual return on plan assets, net of expenses | | | 520 | | | 438 | | | 92 | | | 34 | | | – | | | – | | | – | | | – | |
AIG contributions | | | 15 | | | 12 | | | 87 | | | 86 | | | 10 | | | 11 | | | 1 | | | 1 | |
Benefits paid: | | | | | | | | | | | | | | | | | | | | | | | | | |
AIG assets | | | (14 | ) | | (12 | ) | | (13 | ) | | (7 | ) | | (10 | ) | | (11 | ) | | (1 | ) | | (1 | ) |
Plan assets | | | (217 | ) | | (150 | ) | | (27 | ) | | (35 | ) | | – | | | – | | | – | | | – | |
Settlements | | | – | | | – | | | (35 | ) | | (20 | ) | | – | | | – | | | – | | | – | |
Foreign exchange effect | | | – | | | – | | | (93 | ) | | (15 | ) | | – | | | – | | | – | | | – | |
Other | | | – | | | – | | | – | | | 1 | | | – | | | – | | | – | | | – | |
| | |
Fair value of plan assets, end of year | | $ | 4,024 | | $ | 3,720 | | $ | 738 | | $ | 727 | | $ | – | | $ | – | | $ | – | | $ | – | |
| | |
Funded status, end of year | | $ | (858 | ) | $ | (1,441 | ) | $ | (334 | ) | $ | (478 | ) | $ | (217 | ) | $ | (255 | ) | $ | (52 | ) | $ | (66 | ) |
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Amounts recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Assets | | $ | – | | $ | – | | $ | 91 | | $ | 65 | | $ | – | | $ | – | | $ | – | | $ | – | |
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Liabilities | | | (858 | ) | | (1,441 | ) | | (425 | ) | | (543 | ) | | (217 | ) | | (255 | ) | | (52 | ) | | (66 | ) |
| | |
Total amounts recognized | | $ | (858 | ) | $ | (1,441 | ) | $ | (334 | ) | $ | (478 | ) | $ | (217 | ) | $ | (255 | ) | $ | (52 | ) | $ | (66 | ) |
| | |
Pre-tax amounts recognized in Accumulated other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Net gain (loss) | | $ | (908 | ) | | (1,764 | ) | $ | (204 | ) | $ | (302 | ) | $ | 1 | | $ | (40 | ) | $ | 3 | | $ | (13 | ) |
| | |
Prior service (cost) credit | | | 234 | | | 267 | | | 14 | | | 21 | | | 35 | | | 46 | | | 1 | | | 1 | |
| | |
Total amounts recognized | | $ | (674 | ) | $ | (1,497 | ) | $ | (190 | ) | $ | (281 | ) | $ | 36 | | $ | 6 | | $ | 4 | | $ | (12 | ) |
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(a) We do not currently fund postretirement benefits.
(b) Includes non-qualified unfunded plans of which the aggregate projected benefit obligation was $276$299 million and $238$325 million for the U.S. and $265$199 million and $299$295 million for the non-U.S. at December 31, 20132015 and 2012,2014, respectively.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 21. EMPLOYEE BENEFITS
The following table presents the accumulated benefit obligations for U.S. and non-U.S. pension benefit plans:
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At December 31,
(in millions)
| | 2013
| | 2012
| | |
|---|
| | | |
At December 31, | | | | | |
(in millions) | | | 2015 | | 2014 |
U.S. pension benefit plans | | $ | 4,683 | | $ | 4,827 | | $ | 5,324 | $ | 5,601 |
Non-U.S. pension benefit plans | | $ | 1,000 | | $ | 1,125 | | $ | 1,109 | $ | 1,040 |
| | | |
Defined benefit pension plan obligations in which the projected benefit obligation was in excess of the related plan assets and the accumulated benefit obligation was in excess of the related plan assets were as follows:
At December 31, | PBO Exceeds Fair Value of Plan Assets | ABO Exceeds Fair Value of Plan Assets |
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
(in millions) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Projected benefit obligation | $ | 5,324 | $ | 5,769 | $ | 999 | $ | 843 | $ | 5,324 | $ | 5,769 | $ | 912 | $ | 757 |
Accumulated benefit obligation | | 5,324 | | 5,601 | | 896 | | 746 | | 5,324 | | 5,601 | | 889 | | 740 |
Fair value of plan assets | | 4,359 | | 4,111 | | 506 | | 342 | | 4,359 | | 4,111 | | 497 | | 329 |
TABLE OF CONTENTS
Item 8 / note 20. EMPLOYEE BENEFITS
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| | PBO Exceeds Fair Value of Plan Assets | | ABO Exceeds Fair Value of Plan Assets | |
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| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | |
|---|
At December 31,
(in millions)
| |
|---|
| | 2013
| | 2012
| | 2013
| | 2012
| | 2013
| | 2012
| | 2013
| | 2012
| |
|---|
| | |
Projected benefit obligation | | $ | 4,882 | | $ | 5,161 | | $ | 806 | | $ | 1,028 | | $ | 4,882 | | $ | 5,161 | | $ | 752 | | $ | 1,018 | |
Accumulated benefit obligation | | | 4,683 | | | 4,827 | | | 704 | | | 964 | | | 4,683 | | | 4,827 | | | 703 | | | 959 | |
Fair value of plan assets | | | 4,024 | | | 3,720 | | | 330 | | | 485 | | | 4,024 | | | 3,720 | | | 327 | | | 478 | |
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The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement benefits:
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| | Pension | | Postretirement | | Pension | | Postretirement |
|---|
| | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans | | U.S. Plans | | Non-U.S. Plans |
|---|
(in millions)
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | 2013
| | 2012
| | 2011
| | | 2015 | | 2014 | | 2013 | | | 2015 | | 2014 | | 2013 | | | 2015 | | 2014 | | 2013 | | | 2015 | | 2014 | | 2013 |
|---|
| | | |
Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 205 | | $ | 154 | | $ | 150 | | $ | 47 | | $ | 53 | | $ | 66 | | $ | 5 | | $ | 5 | | $ | 8 | | $ | 3 | | $ | 3 | | $ | 4 | | $ | 192 | $ | 173 | $ | 205 | | $ | 43 | $ | 42 | $ | 47 | | $ | 5 | $ | 4 | $ | 5 | | $ | 3 | $ | 2 | $ | 3 |
Interest cost | | | 201 | | | 200 | | 207 | | | 29 | | | 34 | | 37 | | | 8 | | | 11 | | 13 | | | 2 | | | 2 | | 2 | | | 220 | | 228 | | 201 | | | 25 | | 29 | | 29 | | | 8 | | 9 | | 8 | | | 3 | | 2 | | 2 |
Expected return on assets | | | (257 | ) | | (240 | ) | | (250 | ) | | (19 | ) | | (20 | ) | | (25 | ) | | – | | | – | | – | | | – | | | – | | – | | | (295) | | (288) | | (257) | | | (25) | | (22) | | (19) | | | - | | - | | - | | | - | | - | | - |
Amortization of prior service credit | | | (33 | ) | | (33 | ) | | (7 | ) | | (3 | ) | | (4 | ) | | (4 | ) | | (11 | ) | | (10 | ) | | (2 | ) | | – | | | – | | – | | | (22) | | (33) | | (33) | | | (2) | | (3) | | (3) | | | (11) | | (11) | | (11) | | | (1) | | - | | - |
Amortization of net loss | | | 138 | | | 118 | | 65 | | | 13 | | | 13 | | 15 | | | 1 | | | – | | – | | | – | | | – | | – | | | 92 | | 42 | | 138 | | | 9 | | 7 | | 13 | | | - | | - | | 1 | | | - | | - | | - |
Curtailment (gain) loss | | | – | | | (2 | ) | | – | | | (1 | ) | | 1 | | – | | | – | | | – | | – | | | (2 | ) | | (1 | ) | | – | | | (179) | | - | | - | | | (1) | | 1 | | (1) | | | - | | - | | - | | | - | | - | | (2) |
Settlement loss | | | – | | | – | | – | | | 5 | | | 4 | | 8 | | | – | | | – | | – | | | – | | | – | | – | | | - | | - | | - | | | 1 | | - | | 5 | | | - | | - | | - | | | - | | - | | - |
Other | | | – | | | – | | – | | | 1 | | | – | | – | | | – | | | – | | – | | | – | | | – | | – | | | - | | - | | - | | | - | | - | | 1 | | | - | | - | | - | | | - | | - | | - |
| | | |
Net periodic benefit cost | | $ | 254 | | $ | 197 | | $ | 165 | | $ | 72 | | $ | 81 | | $ | 97 | | $ | 3 | | $ | 6 | | $ | 19 | | $ | 3 | | $ | 4 | | $ | 6 | | $ | 8 | $ | 122 | $ | 254 | | $ | 50 | $ | 54 | $ | 72 | | $ | 2 | $ | 2 | $ | 3 | | $ | 5 | $ | 4 | $ | 3 |
| | | |
Total recognized in Accumulated other comprehensive income (loss) | | $ | 823 | | $ | (250 | ) | $ | (396 | ) | $ | 103 | | $ | (36 | ) | $ | 261 | | $ | 30 | | $ | (23 | ) | $ | 56 | | $ | 16 | | $ | (11 | ) | $ | (6 | ) | $ | 143 | $ | (793) | $ | 823 | | $ | 38 | $ | (40) | $ | 103 | | $ | 12 | $ | (21) | $ | 30 | | $ | (9) | $ | (11) | $ | 16 |
| | | |
Total recognized in net periodic benefit cost and other comprehensive income (loss) | | $ | 569 | | $ | (447 | ) | $ | (561 | ) | $ | 31 | | $ | (117 | ) | $ | 164 | | $ | 27 | | $ | (29 | ) | $ | 37 | | $ | 13 | | $ | (15 | ) | $ | (12 | ) | $ | 135 | $ | (915) | $ | 569 | | $ | (12) | $ | (94) | $ | 31 | | $ | 10 | $ | (23) | $ | 27 | | $ | (14) | $ | (15) | $ | 13 |
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The estimated net loss and prior service credit that will be amortized from Accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $51$32 million and $36$1 million, respectively, for our combined defined benefit pension plans. For the defined benefit postretirement plans, the estimated amortization from Accumulated other comprehensive income for net gainloss and prior service credit that will be amortized into net periodic benefit cost over the next fiscal year will be less than $11is a $9 million credit in the aggregate.
At the end of 2015, we changed the method used to measure interest costs for pension and postretirement benefits for our U.S. plans and largest non-U.S. plans. Previously, we measured interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations. For 2016, interest costs will be measured by applying the specific spot rates along the yield curve to the plans’ corresponding discounted cash flows that comprise the obligation (i.e., the Spot Rate Approach). The annualnew method provides a more precise measurement of interest costs by aligning the timing of the plans’ discounted cash flows to the corresponding spot rates on the yield curve; the measurement of our pension and postretirement benefit obligations is not affected. We have accounted for this change as a change in accounting estimate, which is applied prospectively. Consequently, combined estimated 2016 pension expense in 2014 for the AIG U.S. and non-U.S. defined benefit pension plans under the Spot Rate Approach is expectedapproximately $86 million, which is a $52 million reduction when compared to be approximately $194 million.the prior approach.
A 100 basis point increase in the discount rate or expected long-term rate of return would decrease the 20142016 expense by approximately $60$56 million and $46$45 million, respectively, with all other items remaining the same. Conversely, a 100 basis point decrease in the discount rate or expected long-term rate of return would increase the 20142016 expense by approximately $92$71 million and $46$45 million, respectively, with all other items remaining the same.
AIG 2013 Form 10-K
Assumptions
The following table summarizes the weighted average assumptions used to determine the benefit obligations:
| Pension | | Postretirement | |
| U.S. Plans | | | Non-U.S. Plans(a) | | U.S. Plans | | Non-U.S. Plans(a) | |
December 31, 2015 | | | | | | | | | | | | | |
Discount rate | 4.32 | % | | | | 2.17 | % | 4.21 | % | | | 4.09 | % |
Rate of compensation increase | N/A | % | (b) | | | 2.64 | % | N/A | | | | 3.43 | % |
December 31, 2014 | | | | | | | | | | | | | |
Discount rate | 3.94 | % | | | | 2.33 | % | 3.78 | % | | | 4.04 | % |
Rate of compensation increase | 3.40 | % | | | | 2.89 | % | N/A | | | | 3.29 | % |
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| | Pension | | Postretirement | |
|---|
| | U.S. Plans
| | Non-U.S. Plans*
| | U.S. Plans
| | Non-U.S. Plans*
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | |
Discount rate | | | 4.83 | % | | 2.77 | % | | 4.59 | % | | 4.77 | % |
Rate of compensation increase | | | 3.50 | % | | 2.89 | % | | N/A | | | 3.34 | % |
| | |
December 31, 2012 | | | | | | | | | | | | | |
Discount rate | | | 3.93 | % | | 2.62 | % | | 3.67 | % | | 3.45 | % |
Rate of compensation increase | | | 4.00 | % | | 2.86 | % | | N/A | | | 3.55 | % |
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*(a) The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of each of the subsidiaries providing such benefits.
(b) Compensation increases are no longer applicable due to the plan freeze that became effective 1/1/2016.
The following table summarizes assumed health care cost trend rates for the U.S. plans:
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At December 31,
| | 2013
| | 2012
| | 2015 | 2014 |
|---|
| | | |
Following year: | | | | | | | | | |
Medical (before age 65) | | | 7.21 | % | | 7.39 | % | 6.79% | 7.07% |
Medical (age 65 and older) | | | 6.80 | % | | 6.82 | % | 6.64% | 6.75% |
| | | |
Ultimate rate to which cost increase is assumed to decline | | | 4.50 | % | | 4.50 | % | 4.50% | 4.50% |
| | | |
Year in which the ultimate trend rate is reached: | | | | | | | | | |
Medical (before age 65) | | | 2027 | | | 2027 | | 2027 | 2027 |
Medical (age 65 and older) | | | 2027 | | | 2027 | | 2027 | 2027 |
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A one percent point change in the assumed healthcare cost trend rate would have the following effect on our postretirement benefit obligations:
| | | | | | | | | | | | | | | One Percent | | One Percent |
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| | One Percent
Increase | | One Percent
Decrease | | |
|---|
At December 31,
(in millions)
| | |
|---|
| | 2013
| | 2012
| | 2013
| | 2012
| | |
|---|
| | | |
At December 31, | | | Increase | | Decrease |
(in millions) | | | 2015 | | 2014 | | 2015 | | 2014 |
U.S. plans | | $ | 6 | | $ | 5 | | $ | (3 | ) | $ | (4 | ) | $ | 6 | $ | 5 | $ | (4) | $ | (5) |
Non-U.S. plans | | $ | 11 | | $ | 15 | | $ | (7 | ) | $ | (11 | ) | $ | 17 | $ | 12 | $ | (12) | $ | (12) |
| | | |
Our postretirement plans provide benefits primarily in the form of defined employer contributions rather than defined employer benefits. Changes in the assumed healthcare cost trend rate have a minimal impact for U.S. plans because for post-1992 retirees, benefits are fixed dollar amounts based on service at retirement. Our non-U.S. postretirement plans are not subject to caps.
AIG 2013 Form 10-K
The following table presents the weighted average assumptions used to determine the net periodic benefit costs:
| Pension | | | Postretirement | |
At December 31, | U.S. Plans | | Non-U.S. Plans* | | | U.S. Plans | | Non-U.S. Plans* | |
2015 | | | | | | | | | | | | | |
Discount rate | 3.94 | % | | | 2.33 | % | | 3.77 | % | | | 4.04 | % |
Rate of compensation increase | 3.40 | % | | | 2.89 | % | | N/A | | | | 3.29 | % |
Expected return on assets | 7.25 | % | | | 3.33 | % | | N/A | | | | N/A | |
2014 | | | | | | | | | | | | | |
Discount rate | 4.83 | % | | | 2.77 | % | | 4.59 | % | | | 4.77 | % |
Rate of compensation increase | 3.50 | % | | | 2.89 | % | | N/A | | | | 3.34 | % |
Expected return on assets | 7.25 | % | | | 2.93 | % | | N/A | | | | N/A | |
2013 | | | | | | | | | | | | | |
Discount rate | 3.93 | % | | | 2.62 | % | | 3.67 | % | | | 3.45 | % |
Rate of compensation increase | 4.00 | % | | | 2.86 | % | | N/A | | | | 3.55 | % |
Expected return on assets | 7.25 | % | | | 2.60 | % | | N/A | | | | N/A | |
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| | Pension | | Postretirement | |
|---|
At December 31,
| | U.S. Plans
| | Non-U.S. Plans*
| | U.S. Plans
| | Non-U.S. Plans*
| |
|---|
| | |
2013 | | | | | | | | | | | | | |
Discount rate | | | 3.93 | % | | 2.62 | % | | 3.67 | % | | 3.45 | % |
Rate of compensation increase | | | 4.00 | % | | 2.86 | % | | N/A | | | 3.55 | % |
Expected return on assets | | | 7.25 | % | | 2.60 | % | | N/A | | | N/A | |
| | |
2012 | | | | | | | | | | | | | |
Discount rate | | | 4.62 | % | | 3.02 | % | | 4.51 | % | | 4.19 | % |
Rate of compensation increase | | | 4.00 | % | | 2.94 | % | | N/A | | | 3.61 | % |
Expected return on assets | | | 7.25 | % | | 2.91 | % | | N/A | | | N/A | |
| | |
2011 | | | | | | | | | | | | | |
Discount rate | | | 5.50 | % | | 2.25 | % | | 5.25 | % | | 4.00 | % |
Rate of compensation increase | | | 4.00 | % | | 3.00 | % | | N/A | | | 3.00 | % |
Expected return on assets | | | 7.50 | % | | 3.14 | % | | N/A | | | N/A | |
| | |
* The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of the subsidiaries providing such benefits.
Discount Rate Methodology
The projected benefit cash flows under the U.S. AIG Retirement planPlan were discounted using the spot rates derived from the Mercer US Pension Discount Yield Curve at December 31, 20132015 and 2012,2014, which resulted in a single discount rate that would produce the same liability at the respective measurement dates. The discount rates were 4.844.32 percent at December 31, 20132015 and 3.943.95 percent at December 31, 2012.2014. The methodology was consistently applied for the respective years in determining the discount rates for the other U.S. plans.
In general, the discount rates for non-U.S. pension plans were developed based on the duration of liabilities on a plan by plan basis and were selected by reference to high quality corporate bonds in developed markets or local government bonds where developed markets are not as robust or are nonexistent.
The projected benefit obligation for Japan represents approximately 5150 percent and 5747 percent of the total projected benefit obligations for our non-U.S. pension plans at December 31, 20132015 and 2012,2014, respectively. The weighted average discount rate of 1.39 percent and 1.540.99 percent at December 31, 2013 and 2012 respectively2015 was selected by reference to the Mercer Yield Curve (Japan) based on the duration of the plans’ liabilities. The weighted average discount rate of 1.22 percent at December 31, 2014 for Japan was selected by reference to the AA rated corporate bonds reported by Rating and Investment Information, Inc. based on the duration of the plans'plans’ liabilities.
Plan Assets
The investment strategy with respect to assets relating to our U.S. and non-U.S. pension plans is designed to achieve investment returns that will (a) provide for the benefit obligations of the plans over the long term, (b) limit the risk of short-term funding shortfalls and (c) maintain liquidity sufficient to address cash needs. Accordingly, the asset allocation strategy is designed to maximize the investment rate of return while managing various risk factors, including but not limited to, volatility relative to the benefit obligations, diversification and concentration, and the risk and rewards profile applicable to each asset class. The assessment of the expected rate of return for all our plans is long-term and thus is not expected to change annually; however, significant changes in investment strategy or economic conditions may warrant such a change.
There were no shares of AIG Common Stock included in the U.S. and non-U.S. pension plans assets at December 31, 20132015 or 2012.2014.
U.S. Pension Plan
The assets of the qualified plan are monitored by the investment committee and actively managed by the investment managers, and involves allocating the plan’s assets among approved asset classes within ranges as permitted by the strategic allocation. The long-term strategic asset allocation ishistorically has been reviewed and revised approximately every three years. The plan's assets are monitored byBeginning in 2016, the investment committee of our Retirement Boardstrategy will focus on de-risking the Plan via regular monitoring. This will be implemented through liability driven investing and the investment managers, which includes allocatingadoption of the plan'sglide path approach, where the glide path defines the target allocation for the “Return-Seeking” portion of the portfolio (i.e., growth assets) based on the funded ratio. Under this approach, the allocation to growth assets among approved asset classes within pre-approved ranges permitted byis reduced and the strategic allocation.allocation to liability-hedging assets is increased as the Plan’s funded ratio increases in accordance with the defined glide path.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 21. EMPLOYEE BENEFITS
The following table presents the asset allocation percentage by major asset class for the U.S. qualified plan and the target allocation:allocation for 2016 based on the plan’s funded status at December 31, 2015:
|
| |
| |
| |
| | |
|---|
| | | | Target | | Actual | | Actual | |
At December 31,
| | Target
2014
| | Actual
2013
| | Actual
2012
| | 2016 | | 2015 | | 2014 | |
|---|
| | | |
Asset class: | | | | | | | | | | | | | | | |
Equity securities | | 43 | % | | 56 | % | | 52 | % | 35 | % | 35 | % | 55 | % |
Fixed maturity securities | | 28 | % | | 25 | % | | 26 | % | 45 | % | 41 | % | 28 | % |
Other investments | | 29 | % | | 19 | % | | 22 | % | 20 | % | 24 | % | 17 | % |
| | | |
Total | | 100 | % | | 100 | % | | 100 | % | 100 | % | 100 | % | 100 | % |
| | | |
TheFor both 2015 and 2014, the expected long-term rate of return for the plan was 7.25 percent for both 2013 and 2012.percent. The expected rate of return is an aggregation of expected returns within each asset class category, and incorporatesweighted for the current and target asset allocations.investment mix of the assets. The combination of the expected asset return and any contributions made by us are expected to maintain the plan'splan’s ability to meet all required benefit obligations. The expected asset return for each asset class was developed based on an approach that considers key fundamental drivers of the asset class returns in addition to historical returns, current market conditions, asset volatility and the expectations for future market returns.
Non-U.S. Pension Plans
The assets of the non-U.S. pension plans are held in various trusts in multiple countries and are invested primarily in equities and fixed maturity securities to maximize the long-term return on assets for a given level of risk.
The following table presents the asset allocation percentage by major asset class for Non-U.S. pension plans and the target allocation:
|
| |
| |
| |
| | |
|---|
| | | | Target | | Actual | | Actual | |
At December 31,
| | Target
2014
| | Actual
2013
| | Actual
2012
| | 2016 | | 2015 | | 2014 | |
|---|
| | | |
Asset class: | | | | | | | | | | | | | |
Equity securities | | 34 | % | | 45 | % | | 36 | % | 32 | % | 45 | % | 50 | % |
Fixed maturity securities | | 44 | % | | 37 | % | | 43 | % | 48 | % | 35 | % | 35 | % |
Other investments | | 11 | % | | 6 | % | | 6 | % | 18 | % | 13 | % | 8 | % |
Cash and cash equivalents | | 11 | % | | 12 | % | | 15 | % | 2 | % | 7 | % | 7 | % |
| | | |
Total | | 100 | % | | 100 | % | | 100 | % | 100 | % | 100 | % | 100 | % |
| | | |
The assets of AIG'sAIG’s Japan pension plans represent approximately 6054 percent and 6655 percent of total non-U.S. assets at December 31, 20132015 and 20122014 respectively. The expected long term rate of return was 1.151.71 percent and 1.761.24 percent, for 20132015 and 2012,2014, respectively, and is evaluated by the Japanese Pension Investment Committee on a quarterly and annuallyannual basis along with various investment managers, and is revised to achieve the optimal allocation to meet targeted funding levels if necessary. In addition, the funding policy is revised in accordance with local regulation every five years.
The expected weighted average long-term rate of return for all our non-U.S. pension plans was 2.603.33 percent and 2.912.93 percent for the years ended December 31, 20132015 and 2012,2014, respectively. It is an aggregation of expected returns within each asset class that was generally developed based on the building block approach that considers historical returns, current market conditions, asset volatility and the expectations for future market returns.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 21. EMPLOYEE BENEFITS
Assets Measured at Fair Value
The following table presents information about our plan assets and indicates the level of the fair value measurement based on the observability of the inputs used. The inputs and methodology used in determining the fair value of these assets are consistent with those used to measure our assets as noteddiscussed in Note 54 herein.
| U.S. Plans | Non-U.S. Plans | |
(in millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |
At December 31, 2015 | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 239 | $ | - | $ | - | $ | 239 | $ | 49 | $ | - | $ | - | $ | 49 | |
Equity securities: | | | | | | | | | | | | | | | | | |
U.S.(a) | | 924 | | 388 | | - | | 1,312 | | 35 | | - | | - | | 35 | |
International(b) | | 262 | | 1 | | - | | 263 | | 248 | | 67 | | - | | 315 | |
Fixed maturity securities: | | | | | | | | | | | | | | | | | |
U.S. investment grade(c) | | - | | 1,452 | | 9 | | 1,461 | | - | | - | | - | | - | |
International investment grade(c) | | - | | - | | - | | - | | - | | 190 | | - | | 190 | |
U.S. and international high yield(d) | | - | | 322 | | - | | 322 | | - | | 66 | | - | | 66 | |
Mortgage and other asset-backed | | | | | | | | | | | | | | | | | |
securities(e) | | - | | 7 | | - | | 7 | | - | | - | | - | | - | |
Other fixed maturity securities | | - | | - | | - | | - | | - | | 12 | | - | | 12 | |
Other investment types: | | | | | | | | | | | | | | | | | |
Hedge funds(f) | | - | | 469 | | 31 | | 500 | | - | | - | | - | | - | |
Futures | | 2 | | - | | - | | 2 | | - | | - | | - | | - | |
Real Estate | | - | | - | | - | | - | | 11 | | - | | - | | 11 | |
Private equity(g) | | - | | - | | 230 | | 230 | | - | | - | | - | | - | |
Insurance contracts | | - | | 23 | | - | | 23 | | - | | - | | 95 | | 95 | |
Total | $ | 1,427 | $ | 2,662 | $ | 270 | $ | 4,359 | $ | 343 | $ | 335 | $ | 95 | $ | 773 | |
At December 31, 2014 | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 80 | $ | - | $ | - | $ | 80 | $ | 50 | $ | - | $ | - | $ | 50 | |
Equity securities: | | | | | | | | | | | | | | | | | |
U.S.(a) | | 1,244 | | 239 | | - | | 1,483 | | 30 | | - | | - | | 30 | |
International(b) | | 787 | | 1 | | - | | 788 | | 274 | | 48 | | - | | 322 | |
Fixed maturity securities: | | | | | | | | | | | | | | | | | |
U.S. investment grade(c) | | - | | 768 | | 8 | | 776 | | - | | - | | - | | - | |
International investment grade(c) | | - | | - | | - | | - | | 2 | | 160 | | - | | 162 | |
U.S. and international high yield(d) | | - | | 347 | | - | | 347 | | - | | 61 | | - | | 61 | |
Mortgage and other asset-backed | | | | | | | | | | | | | | | | | |
securities(e) | | - | | 6 | | - | | 6 | | - | | - | | - | | - | |
Other fixed maturity securities | | - | | - | | - | | - | | - | | 10 | | 17 | | 27 | |
Other investment types: | | | | | | | | | | | | | | | | | |
Hedge funds(f) | | - | | 337 | | 36 | | 373 | | - | | - | | - | | - | |
Futures | | 4 | | - | | - | | 4 | | - | | - | | - | | - | |
Private equity(g) | | - | | - | | 228 | | 228 | | - | | - | | - | | - | |
Insurance contracts | | - | | 26 | | - | | 26 | | - | | - | | 56 | | 56 | |
Total | $ | 2,115 | $ | 1,724 | $ | 272 | $ | 4,111 | $ | 356 | $ | 279 | $ | 73 | $ | 708 | |
TABLE OF CONTENTS
Item 8 / note 20. EMPLOYEE BENEFITS
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | U.S. Plans | | Non-U.S. Plans | |
|---|
(in millions)
| | Level 1
| | Level 2
| | Level 3
| | Total
| | Level 1
| | Level 2
| | Level 3
| | Total
| |
|---|
| | |
At December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 137 | | $ | – | | $ | – | | $ | 137 | | $ | 92 | | $ | – | | $ | – | | $ | 92 | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S.(a) | | | 1,840 | | | 220 | | | – | | | 2,060 | | | 26 | | | – | | | – | | | 26 | |
International(b) | | | 189 | | | 18 | | | – | | | 207 | | | 254 | | | 47 | | | – | | | 301 | |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. investment grade(c) | | | – | | | 702 | | | 9 | | | 711 | | | – | | | – | | | – | | | – | |
International investment grade(c) | | | – | | | – | | | – | | | – | | | 1 | | | 163 | | | – | | | 164 | |
U.S. and international high yield(d) | | | – | | | 281 | | | – | | | 281 | | | – | | | 82 | | | – | | | 82 | |
Mortgage and other asset-backed securities(e) | | | – | | | 7 | | | – | | | 7 | | | – | | | – | | | – | | | – | |
Other fixed maturity securities | | | – | | | – | | | – | | | – | | | – | | | 10 | | | 19 | | | 29 | |
Other investment types: | | | | | | | | | | | | | | | | | | | | | | | | | |
Hedge funds(f) | | | – | | | 297 | | | 35 | | | 332 | | | – | | | – | | | – | | | – | |
Futures | | | 14 | | | – | | | – | | | 14 | | | – | | | – | | | – | | | – | |
Private equity(g) | | | – | | | – | | | 248 | | | 248 | | | – | | | – | | | – | | | – | |
Insurance contracts | | | – | | | 27 | | | – | | | 27 | | | – | | | – | | | 44 | | | 44 | |
| | |
Total | | $ | 2,180 | | $ | 1,552 | | $ | 292 | | $ | 4,024 | | $ | 373 | | $ | 302 | | $ | 63 | | $ | 738 | |
| | |
At December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 229 | | $ | – | | $ | – | | $ | 229 | | $ | 113 | | $ | – | | $ | – | | $ | 113 | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S.(a) | | | 1,597 | | | 31 | | | – | | | 1,628 | | | 21 | | | 1 | | | – | | | 22 | |
International(b) | | | 290 | | | 18 | | | – | | | 308 | | | 240 | | | – | | | – | | | 240 | |
Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. investment grade(c) | | | – | | | 763 | | | 11 | | | 774 | | | – | | | – | | | – | | | – | |
International investment grade(c) | | | – | | | – | | | – | | | – | | | – | | | 169 | | | – | | | 169 | |
U.S. and international high yield(d) | | | – | | | 134 | | | – | | | 134 | | | – | | | 96 | | | – | | | 96 | |
Mortgage and other asset-backed securities(e) | | | – | | | 59 | | | – | | | 59 | | | – | | | – | | | – | | | – | |
Other fixed maturity securities | | | – | | | – | | | – | | | – | | | – | | | 17 | | | 27 | | | 44 | |
Other investment types: | | | | | | | | | | | | | | | | | | | | | | | | | |
Hedge funds(f) | | | – | | | 334 | | | – | | | 334 | | | – | | | – | | | – | | | – | |
Private equity(g) | | | – | | | – | | | 225 | | | 225 | | | – | | | – | | | – | | | – | |
Insurance contracts | | | – | | | 29 | | | – | | | 29 | | | – | | | – | | | 43 | | | 43 | |
| | |
Total | | $ | 2,116 | | $ | 1,368 | | $ | 236 | | $ | 3,720 | | $ | 374 | | $ | 283 | | $ | 70 | | $ | 727 | |
| | |
(a) Includes index funds that primarily track several indices including S&P 500 and S&P Small Cap 600 as well as other actively managed accounts composed of investments in large cap companies.
(b) Includes investments in companies in emerging and developed markets.
(c) Represents investments in U.S. and non-U.S. government issued bonds, U.S. government agency or sponsored agency bonds, and investment grade corporate bonds.
(d) Consists primarily of investments in securities or debt obligations that have a rating below investment grade.
(e) Comprised primarily of investments in U.S. government agency or U.S. government sponsored agency bonds.
(f) Includes funds composed of macro, event driven, long/short equity, and controlled risk hedge fund strategies and a separately managed controlled risk strategy.
(g) Includes funds that are diverse by geography, investment strategy, sector and vintage year.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 21. EMPLOYEE BENEFITS
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Based on our investment strategy, we had no significant concentrations of risks at December 31, 2013.2015.
The U.S. pension plan holds a group annuity contract with U.S. Life, one of our subsidiaries, which totaled $27$23 million and $29$26 million at December 31, 20132015 and 2012,2014, respectively.
Changes in Level 3 fair value measurements
The following table presents changes in our U.S. and non-U.S. Level 3 plan assets measured at fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Changes in |
| | | | | | | Net | | | | | | | | | | | | | | | | Unrealized Gains |
At December 31, 2013
(in millions)
| | Balance
Beginning
of year
| | Net
Realized and
Unrealized
Gains
(Losses)
| | Purchases
| | Sales
| | Issuances
| | Settlements
| | Transfers
In
| | Transfers
Out
| | Balance
at End
of year
| | Changes in
Unrealized
Gains
(Losses) on
Instruments
Held at
End of year
| | |
|---|
| | | | | Balance | | Realized and | | | | | | | | | | | | | | Balance | | (Losses) on |
At December 31, 2015 | | | Beginning | | Unrealized | | | | | | | | | | Transfers | | Transfers | | at End | | Instruments Held |
(in millions) | | | of year | | Gains (Losses) | | Purchases | | Sales | | Issuances | | Settlements | | In | | Out | | of year | | at End of year |
U.S. Plan Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. investment grade | | $ | 11 | | $ | (2 | ) | $ | 2 | | $ | (2 | ) | $ | – | | $ | – | | $ | – | | $ | – | | $ | 9 | | $ | (3 | ) | $ | 8 | $ | (1) | $ | 17 | $ | (15) | $ | - | $ | - | $ | - | $ | - | $ | 9 | $ | (1) |
Hedge funds | | – | | – | | – | | – | | – | | – | | 35 | | – | | 35 | | – | | | 36 | | 1 | | 11 | | (10) | | - | | - | | 8 | | (15) | | 31 | | (1) |
Private equity | | 225 | | 7 | | 44 | | (26 | ) | | – | | (2 | ) | | – | | – | | 248 | | (14 | ) | | 228 | | (1) | | 86 | | (83) | | - | | - | | - | | - | | 230 | | 5 |
| | | |
Total | | $ | 236 | | $ | 5 | | $ | 46 | | $ | (28 | ) | $ | – | | $ | (2 | ) | $ | 35 | | $ | – | | $ | 292 | | $ | (17 | ) | $ | 272 | $ | (1) | $ | 114 | $ | (108) | $ | - | $ | - | $ | 8 | $ | (15) | $ | 270 | $ | 3 |
| | | |
Non-U.S. Plan Assets: | | | | | | | | | | | | | | | | | | | | | |
Other fixed maturity securities | | $ | 27 | | $ | 1 | | $ | – | | $ | (8 | ) | $ | – | | $ | – | | $ | – | | $ | (1 | ) | $ | 19 | | $ | – | | $ | 17 | $ | (1) | $ | - | $ | - | $ | - | $ | - | $ | - | $ | (16) | $ | - | $ | - |
Insurance contracts | | 43 | | 3 | | 1 | | (1 | ) | | – | | – | | – | | (2 | ) | | 44 | | – | | | 56 | | (7) | | 1 | | - | | - | | - | | 53 | | (8) | | 95 | | - |
| | | |
Total | | $ | 70 | | $ | 4 | | $ | 1 | | $ | (9 | ) | $ | – | | $ | – | | $ | – | | $ | (3 | ) | $ | 63 | | $ | – | | $ | 73 | $ | (8) | $ | 1 | $ | - | $ | - | $ | - | $ | 53 | $ | (24) | $ | 95 | $ | - |
| | | |
| | | | | | | | | | | | | | | | | | | | Changes in |
| | | | Net | | | | | | | | | | | | | | | | Unrealized Gains |
| | Balance | | Realized and | | | | | | | | | | | | | | Balance | | (Losses) on |
At December 31, 2014 | | Beginning | | Unrealized | | | | | | | | | | Transfers | | Transfers | | at End | | Instruments Held |
(in millions) | | of year | | Gains (Losses) | | Purchases | | Sales | | Issuances | | Settlements | | In | | Out | | of year | | at End of year |
U.S. Plan Assets: | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | |
U.S. investment grade | $ | 9 | $ | 2 | $ | 18 | $ | (21) | $ | - | $ | - | $ | - | $ | - | $ | 8 | $ | 1 |
Hedge funds | | 35 | | 3 | | 15 | | (32) | | - | | - | | 15 | | - | | 36 | | (1) |
Private equity | | 248 | | 11 | | 73 | | (104) | | - | | - | | - | | - | | 228 | | 10 |
Total | $ | 292 | $ | 16 | $ | 106 | $ | (157) | $ | - | $ | - | $ | 15 | $ | - | $ | 272 | $ | 10 |
Non-U.S. Plan Assets: | | | | | | | | | | | | | | | | | | | | |
Other fixed maturity securities | $ | 19 | $ | - | $ | - | $ | (2) | $ | - | $ | - | $ | - | $ | - | $ | 17 | $ | - |
Insurance contracts | | 44 | | 9 | | 3 | | - | | - | | - | | - | | - | | 56 | | - |
Total | $ | 63 | $ | 9 | $ | 3 | $ | (2) | $ | - | $ | - | $ | - | $ | - | $ | 73 | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
At December 31, 2012
(in millions)
| | Balance
Beginning
of year
| | Net
Realized and
Unrealized
Gains
(Losses)
| | Purchases
| | Sales
| | Issuances
| | Settlements
| | Transfers
In
| | Transfers
Out
| | Balance
at End
of year
| | Changes in
Unrealized
Gains
(Losses) on
Instruments
Held at
End of year
| |
|---|
| | |
U.S. Plan Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. investment grade | | $ | 1 | | $ | 5 | | $ | 9 | | $ | (29 | ) | $ | – | | $ | (10 | ) | $ | 36 | | $ | (1 | ) | $ | 11 | | $ | 1 | |
Mortgage and other asset- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
backed securities | | | 36 | | | – | | | – | | | – | | | – | | | – | | | – | | | (36 | ) | | – | | | – | |
Private equity | | | 223 | | | 9 | | | 23 | | | (26 | ) | | – | | | – | | | 4 | | | (8 | ) | | 225 | | | (14 | ) |
| | |
Total | | $ | 260 | | $ | 14 | | $ | 32 | | $ | (55 | ) | $ | – | | $ | (10 | ) | $ | 40 | | $ | (45 | ) | $ | 236 | | $ | (13 | ) |
| | |
Non-U.S. Plan Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other fixed maturity securities | | $ | 1 | | $ | – | | $ | – | | $ | (1 | ) | $ | – | | $ | – | | $ | 27 | | $ | – | | $ | 27 | | $ | – | |
Insurance contracts | | | 39 | | | 2 | | | 2 | | | – | | | – | | | – | | | – | | | – | | | 43 | | | – | |
| | |
Total | | $ | 40 | | $ | 2 | | $ | 2 | | $ | (1 | ) | $ | – | | $ | – | | $ | 27 | | $ | – | | $ | 70 | | $ | – | |
| | |
Transfers of Level 1 and Level 2 Assets
Our policy is to record transfers of assets between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. We had no material transfers between Level 1 and Level 2 during the years ended December 31, 20132015 and 2012.2014.
Transfers of Level 3 Assets
We record transfers of assets into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. During the year ended December 31, 2013,2015, we transferred
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 21. EMPLOYEE BENEFITS
certain investments in hedge funds into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions. During the year ended December 31, 2012, transfers of assets into Level 3 included certain other fixed maturity securities. These transfers were due to a decrease in market transparency, downward credit migration and an overall increase in price disparity.
Expected Cash Flows
Funding for the U.S. pension plan ranges from the minimum amount required by ERISA to the maximum amount that would be deductible for U.S. tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible under the Internal Revenue Code. There are no minimum required cash contributions in 2016 for the AIG Retirement Plan in 2014. Supplemental Plan, orPlan. SERP, AIG NQRIP, and postretirement plan payments are deductible when paid.paid to participants.
Our annual pension contribution in 20142016 is expected to be approximately $177$67 million for our U.S. and non-U.S. plans. Included in this amount is $100 million in contributions to the AIG Retirement Plan. These estimates are subject to change, since contribution decisions are affected by various factors including our liquidity, market performance and management'smanagement’s discretion.
The expected future benefit payments, net of participants'participants’ contributions, with respect to the defined benefit pension plans and other postretirement benefit plans, are as follows:
| | | | | | Pension | | Postretirement |
| | Pension | | Postretirement | | | U.S. | | Non-U.S. | | | U.S. | | Non-U.S. |
|---|
(in millions)
| | U.S.
Plans
| | Non-U.S.
Plans
| | U.S.
Plans
| | Non-U.S.
Plans
| | | Plans | | Plans | | | Plans | | Plans |
|---|
| | | |
2014 | | $ | 311 | | $ | 41 | | $ | 15 | | $ | 1 | | |
2015 | | 320 | | 40 | | 16 | | 1 | | |
2016 | | 330 | | 40 | | 16 | | 1 | | $ | 759 | $ | 36 | | $ | 14 | $ | 1 |
2017 | | 348 | | 44 | | 17 | | 2 | | | 310 | | 38 | | 15 | | 1 |
2018 | | 350 | | 49 | | 18 | | 2 | | | 323 | | 40 | | 15 | | 2 |
2019 – 2023 | | 1,871 | | 260 | | 99 | | 11 | | |
| | | |
2019 | | | 319 | | 46 | | 15 | | 2 |
2020 | | | 313 | | 45 | | 16 | | 2 |
2021-2025 | | | 1,487 | | 282 | | 83 | | 12 |
Defined Contribution Plans
We sponsor several defined contribution plans for U.S. employees that provide for pre-tax salary reduction contributions by employees. The most significant plan is the AIG Incentive Savings Plan, for which the Company'sCompany’s matching contribution is 100 percent of the first six percent of a participant'sparticipant’s contributions, subject to the IRS-imposed limitations. In 2011, company contributions of up to seven percent of annual salary were made depending on the employee's years of service subject to certain compensation limits. Our pre-tax expenses associated with these plans were $166 million, $156 million and $155 million $133 millionin 2015, 2014 and $99 million2013 respectively. Effective January 1, 2016, we provide participants in 2013, 2012the AIG Incentive Savings Plan an additional fully vested, non-elective, non-discretionary Company contribution equal to 3 percent of the participant’s annual base compensation for the plan year, paid each pay period regardless of whether the participant currently contributes to the plan, and 2011 respectively.subject to the IRS-imposed limitations.
TABLE OF CONTENTS
22. OWNERSHIP
Item 8 / note 21. OWNERSHIP
Through registered public offerings and AIG repurchase transactions, the Department of the Treasury disposed of all of its ownership of AIG Common Stock during 2012 and 2011. In the first quarter of 2013, we paid approximately $25 million to purchase two series of warrants issued in 2008 and 2009 to the Department of the Treasury. For discussion of the Recapitalization, see Note 24 herein.
21. OWNERSHIP
A Schedule 13G/A filed on February 14, 201410, 2016 reports aggregate ownership of 104,002,19580,762,613 shares, or approximately 6.9 percent (based on the AIG Common Stock outstanding, as adjusted to reflect the warrants owned), of AIG Common Stock and warrants (79,752,186 shares plus 24,250,009 warrants) as of December 31, 2013, including securities beneficially owned by The Fairholme Fund and other funds and investment vehicles managed by Fairholme Capital Management and securities owned by Mr. Bruce Berkowitz personally. A Schedule 13G filed on February 12, 2014 reports aggregate ownership of 84,112,893 shares, or approximately 5.76.5 percent (based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2013,2015, by various subsidiaries of Blackrock, Inc.
A Schedule 13G/A filed on February 10, 2016 reports aggregate ownership of 67,605,730 shares, or approximately 5.5 percent (based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2015, by The Vanguard Group, Inc. and various subsidiaries thereof.
The calculation of ownership interest for purposes of the AIG Tax Asset Protection Plan and Article 13 of our Restated Certificate of Incorporation is different than beneficial ownership for Schedule 13G.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 23.22. INCOME TAXES
23. INCOME TAXES
The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and foreign location in which such pre-tax income (loss) was earned or incurred.
|
| |
| |
| |
| | |
|---|
| | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | |
(in millions) | | | 2015 | | 2014 | | 2013 |
U.S. | | $ | 8,058 | | $ | (948 | ) | $ | (1,626 | ) | $ | 1,950 | $ | 8,250 | $ | 8,058 |
Foreign | | | 1,310 | | | 3,839 | | 725 | | | 1,331 | | 2,251 | | 1,310 |
| | | |
Total | | $ | 9,368 | | $ | 2,891 | | $ | (901 | ) | $ | 3,281 | $ | 10,501 | $ | 9,368 |
| | | |
The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Foreign and U.S. components of actual income tax expense: | | | | | | |
Foreign: | | | | | | |
Current | $ | 391 | $ | 473 | $ | 549 |
Deferred | | (95) | | 154 | | (442) |
U.S.: | | | | | | |
Current | | 429 | | 115 | | 131 |
Deferred | | 334 | | 2,185 | | 122 |
Total | $ | 1,059 | $ | 2,927 | $ | 360 |
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Foreign and U.S. components of actual income tax expense: | | | | | | | | | | |
Foreign: | | | | | | | | | | |
Current | | $ | 548 | | $ | 484 | | $ | 303 | |
Deferred | | | (442 | ) | | (275 | ) | | 48 | |
U.S.: | | | | | | | | | | |
Current | | | 131 | | | 278 | | | (208 | ) |
Deferred | | | 123 | | | (1,295 | ) | | (19,907 | ) |
| | |
Total | | $ | 360 | | $ | (808 | ) | $ | (19,764 | ) |
| | |
Our actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal income tax rate due to the following:
| 2015 | | 2014 | | 2013 |
| | Pre-Tax | | Tax | | Percent of | | | | Pre-Tax | | Tax | | Percent of | | | | | | Tax | | Percent of | |
Years Ended December 31, | | Income | | Expense/ | | Pre-Tax | | | | Income | | Expense/ | | Pre-Tax | | | | Pre-Tax | | Expense/ | | Pre-Tax | |
(dollars in millions) | | (Loss) | | (Benefit) | | Income (Loss) | | | | (Loss) | | (Benefit) | Income (Loss) | | | | Income | | (Benefit) | | Income | |
U.S. federal income tax at statutory rate | $ | 3,281 | $ | 1,148 | | 35.0 | % | | $ | 10,524 | $ | 3,683 | | 35.0 | % | | $ | 9,518 | $ | 3,331 | | 35.0 | % |
Adjustments: | | | | | | | | | | | | | | | | | | | | | | | |
Tax exempt interest | | | | (195) | | (5.9) | | | | | | (236) | | (2.2) | | | | | | (298) | | (3.1) | |
Uncertain tax positions | | | | 195 | | 5.9 | | | | | | (81) | | (0.8) | | | | | | 632 | | 6.6 | |
Reclassifications from accumulated | | | | | | | | | | | | | | | | | | | | | | | |
other comprehensive income | | | | (127) | | (3.9) | | | | | | (61) | | (0.6) | | | | | | - | | - | |
Non-deductible transfer pricing | | | | | | | | | | | | | | | | | | | | | | | |
charges | | | | 97 | | 3.0 | | | | | | 86 | | 0.8 | | | | | | - | | - | |
Dividends received deduction | | | | (72) | | (2.2) | | | | | | (62) | | (0.6) | | | | | | (75) | | (0.8) | |
Effect of foreign operations | | | | (58) | | (1.8) | | | | | | (68) | | (0.6) | | | | | | (5) | | (0.1) | |
State income taxes | | | | 34 | | 1.0 | | | | | | 39 | | 0.4 | | | | | | (21) | | (0.2) | |
Other | | | | (73) | | (2.2) | | | | | | (184) | | (1.7) | | | | | | 13 | | 0.1 | |
Effect of discontinued operations | | | | - | | - | | | | | | 65 | | 0.6 | | | | | | 14 | | 0.1 | |
Valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | | 110 | | 3.4 | | | | | | (181) | | (1.7) | | | | | | (3,165) | | (33.3) | |
Consolidated total amounts | | 3,281 | | 1,059 | | 32.3 | | | | 10,524 | | 3,000 | | 28.5 | | | | 9,518 | | 426 | | 4.5 | |
Amounts attributable to discontinued | | | | | | | | | | | | | | | | | | | | | | | |
operations | | - | | - | | - | | | | 23 | | 73 | | 317.4 | | | | 150 | | 66 | | 44.3 | |
Amounts attributable to continuing | | | | | | | | | | | | | | | | | | | | | | | |
operations | $ | 3,281 | $ | 1,059 | | 32.3 | % | | $ | 10,501 | $ | 2,927 | | 27.9 | % | | $ | 9,368 | $ | 360 | | 3.8 | % |
For the year ended December 31, 2015, the effective tax rate on income from continuing operations was 32.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $195 million associated with tax exempt interest income, $127 million related to reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, $58 million associated with the effect of foreign operations, and $109 million related to the partial completion of the Internal Revenue Service examination covering tax year 2006, partially offset by $324 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, and $110 million related to increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions.
For the year ended December 31, 2015, our repatriation assumptionsrelated to certain European operations changed, and related foreign earnings are now considered to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active non-U.S. business operations. Further, we do not intend torepatriate these earnings to fund U.S. operations. As a result, U.S. deferred taxes have not been provided on $1.8 billion of accumulated earnings, including accumulated other comprehensive income, of these non-U.S. affiliates. Potential U.S. income tax liabilities related to such earnings would be offset, in whole or in part, by allowable foreign tax credits resulting from foreign taxes paid to foreign jurisdictions in which such operations are located. As a result, we currently believe that any incremental U.S. income tax liabilities relating to indefinitely reinvested foreign earnings would not be significant. Deferred taxes have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
For the year ended December 31, 2014, the effective tax rate on income from continuing operations was 27.9 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $236 million associated with tax exempt interest income, $209 million related to a decrease in the U.S. Life Insurance Companies’ capital loss carryforward valuation allowance, $182 million of income excludible from gross income related to the global resolution of certain residential mortgage-related disputes and $68 million associated with the effect of foreign operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | 2013 | | 2012 | | 2011 | |
|---|
Years Ended December 31,
(dollars in millions)
| | Pre-Tax
Income
(Loss)
| | Tax
Expense/
(Benefit)
| | Percent of
Pre-Tax
Income
(Loss)
| | Pre-Tax
Income
(Loss)
| | Tax
Expense/
(Benefit)
| | Percent of
Pre-Tax
Income
(Loss)
| | Pre-Tax
Income
| | Tax
Expense/
(Benefit)
| | Percent of
Pre-Tax
Income
| |
|---|
| | |
U.S. federal income tax at statutory rate adjustments: | | $ | 9,518 | | $ | 3,331 | | | 35.0 | % | $ | 2,891 | | $ | 1,012 | | | 35.0 | % | $ | 2,604 | | $ | 911 | | | 35.0 | % |
Tax exempt interest | | | | | | (298 | ) | | (3.1 | ) | | | | | (302 | ) | | (10.4 | ) | | | | | (454 | ) | | (17.4 | ) |
Investment in subsidiaries and partnerships | | | | | | – | | | – | | | | | | (26 | ) | | (0.9 | ) | | | | | (224 | ) | | (8.6 | ) |
Uncertain tax positions | | | | | | 632 | | | 6.6 | | | | | | 446 | | | 15.4 | | | | | | (25 | ) | | (1.0 | ) |
Dividends received deduction | | | | | | (75 | ) | | (0.8 | ) | | | | | (58 | ) | | (2.0 | ) | | | | | (52 | ) | | (2.0 | ) |
Effect of foreign operations | | | | | | (5 | ) | | – | | | | | | 171 | | | 5.9 | | | | | | (386 | ) | | (14.8 | ) |
State income taxes | | | | | | (21 | ) | | (0.2 | ) | | | | | (48 | ) | | (1.7 | ) | | | | | (87 | ) | | (3.3 | ) |
Other | | | | | | 13 | | | 0.1 | | | | | | (96 | ) | | (3.3 | ) | | | | | 88 | | | 5.0 | |
Effect of discontinued operations | | | | | | 14 | | | 0.2 | | | | | | – | | | – | | | | | | (190 | ) | | (7.3 | ) |
Valuation allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | | | | (3,165 | ) | | (33.3 | ) | | | | | (1,907 | ) | | (65.9 | ) | | | | | (18,307 | ) | | NM | |
| | |
Consolidated total amounts | | | 9,518 | | | 426 | | | 4.5 | | | 2,891 | | | (808 | ) | | (27.9 | ) | | 2,604 | | | (18,726 | ) | | NM | |
Amounts attributable to discontinued operations | | | 150 | | | 66 | | | 44.0 | | | – | | | – | | | – | | | 3,505 | | | 1,038 | | | 29.6 | |
| | |
Amounts attributable to continuing operations | | $ | 9,368 | | $ | 360 | | | 3.8 | % | $ | 2,891 | | $ | (808 | ) | | (27.9 | )% | $ | (901 | ) | $ | (19,764 | ) | | NM | % |
| | |
For the year ended December 31, 2013, the effective tax rate on income from continuing operations was 3.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $2.8 billion related to a decrease in AIGthe U.S. Life and Retirement'sInsurance Companies’ capital loss carryforward valuation allowance, $396 million related to a decrease in certain other valuation allowances associated with foreign
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 23. INCOME TAXES
jurisdictions and $298 million associated with tax exempt interest income. These items were partially offset by charges of $632 million related to uncertain tax positions.
For the year ended December 31, 2012, the effective tax rate on income from continuing operations was (27.9) percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to decreases in AIG Life and Retirement's capital loss carryforward valuation allowance of $1.9 billion related to the actual and projected gains from AIG Life and Retirement's available-for-sale securities, and tax effects associated with tax exempt interest income of $302 million. These items were partially offset by changes in uncertain tax positions of $446 million.
For the year ended December 31, 2011, the effective tax rate on loss from continuing operations was not meaningful, due to the significant effect of releasing approximately $18.4 billion of the deferred tax asset valuation allowance. Other factors that contributed to the difference from the statutory rate included tax benefits of $454 million associated with tax exempt interest income, $386 million associated with the effect of foreign operations, and $224 million related to our investment in subsidiaries and partnerships.
The following table presents the components of the net deferred tax assets (liabilities):
| | | | |
December 31,
(in millions)
| | 2013
| | 2012
| | |
|---|
| | | |
December 31, | | | | | |
(in millions) | | | 2015 | | 2014 |
Deferred tax assets: | | | | | | | | | | | |
Losses and tax credit carryforwards | | $ | 20,825 | | $ | 25,359 | | $ | 18,680 | $ | 18,203 |
Unrealized loss on investments | | | 4,843 | | | 3,365 | | |
Basis differences on investments | | | 4,886 | | 4,114 |
Life policy reserves | | | 353 | | 629 |
Accruals not currently deductible, and other | | | 2,935 | | | 4,499 | | | 1,003 | | 1,804 |
Investments in foreign subsidiaries and joint ventures | | | 1,035 | | | 1,435 | | |
Loss reserve discount | | | 1,164 | | | 1,235 | | | 1,021 | | 1,378 |
Loan loss and other reserves | | | 888 | | | 547 | | | 8 | | 152 |
Unearned premium reserve reduction | | | 1,451 | | | 1,145 | | | 1,603 | | 1,269 |
Flight equipment, fixed assets and intangible assets | | | 129 | | 28 |
Other | | | 577 | | 220 |
Employee benefits | | | 1,217 | | | 1,483 | | | 1,286 | | 1,543 |
| | | |
Total deferred tax assets | | | 34,358 | | | 39,068 | | | 29,546 | | 29,340 |
| | | |
Deferred tax liabilities: | | | | | | | | | | | |
Adjustment to life policy reserves | | | 445 | | | (1,817 | ) | |
Investments in foreign subsidiaries | | | (33) | | (58) |
Deferred policy acquisition costs | | | (3,396 | ) | | (2,816 | ) | | (3,467) | | (3,003) |
Flight equipment, fixed assets and intangible assets | | | (2,354 | ) | | (2,015 | ) | |
Unrealized gains related to available for sale debt securities | | | (3,693 | ) | | (7,464 | ) | | (3,077) | | (5,795) |
Other | | | (571 | ) | | (225 | ) | |
| | | |
Total deferred tax liabilities | | | (9,569 | ) | | (14,337 | ) | | (6,577) | | (8,856) |
| | | |
Net deferred tax assets before valuation allowance | | | 24,789 | | | 24,731 | | | 22,969 | | 20,484 |
Valuation allowance | | | (3,596 | ) | | (8,036 | ) | | (3,012) | | (1,739) |
| | | |
Net deferred tax assets (liabilities) | | $ | 21,193 | | $ | 16,695 | | $ | 19,957 | $ | 18,745 |
| | | |
The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 20132015.
December 31, 2015 | | | | Tax | | Expiration |
(in millions) | | Gross | | Effected | | Periods |
Net operating loss carryforwards | $ | 34,883 | $ | 12,209 | | 2028 - 2035 |
Foreign tax credit carryforwards | | | | 6,853 | | 2016 - 2024 |
Other carryforwards | | | | 538 | | Various |
Total AIG U.S. consolidated income tax group tax losses and credits | | | | | | |
carryforwards on a tax return basis | | | | 19,600 | | |
Unrecognized tax benefit | | | | (2,523) | | |
Total AIG U.S. consolidated income tax group tax losses and credits | | | | | | |
carryforwards on a U.S. GAAP basis* | | | $ | 17,077 | | |
* Includes other carryforwards, e.g. general business credits, of $326 million on a tax returnU.S. GAAP basis.
We have U.S. federal consolidated net operating loss and tax credit carryforwards of approximately $17.1 billion, including $266 million of the foreign tax credit carryforward originated in tax years 2006 and 2007. The carryforward periods for 2006 and 2007 foreign tax credits expire in 2016 and 2017, respectively. As detailed in the Assessment of Deferred Tax Asset Valuation Allowance section of this footnote, we determined that it is more likely than not that our U.S. federal consolidated tax attribute carryforwards will be realized prior to their expiration.
| | | | | | | | | | |
| | |
December 31, 2013
(in millions)
| | Gross
| | Tax
Effected
| | Expiration
Periods
| |
|---|
| | |
Net operating loss carryforwards | | $ | 34,233 | | $ | 11,981 | | | 2028 – 2031 | |
Capital loss carryforwards – Life | | | 1,117 | | | 391 | | | 2014 | |
Capital loss carryforwards – Non-Life | | | – | | | – | | | N/A | |
Foreign tax credit carryforwards | | | – | | | 5,796 | | | 2016 – 2023 | |
Other carryforwards and other | | | – | | | 513 | | | Various | |
| | |
Total AIG U.S. consolidated income tax group tax losses and credits carryforwards | | | | | $ | 18,681 | | | | |
| | |
Assessment of Deferred Tax Asset Valuation Allowance
The evaluation of the recoverability of theour deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 23. INCOME TAXES
which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.
Our framework for assessing the recoverability of the deferred tax assetsasset requires us to consider all available evidence, including:
•·the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
·
•- the sustainability of recent operating profitability of our subsidiaries;
·
•- the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;
·
•- the carryforward
periodsperiod for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and
·
•- prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.
In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by the net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As a result of sales inDecember 31, 2015, based on all available evidence, it is more likely than not that the ordinary courseU.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.
Estimates of business to manage the investment portfolio and the implementation offuture taxable income, including income generated from prudent and feasible actions and tax planning strategies duringcould change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.
For the three months ended December 31, 2015, recent changes in market conditions, including rising interest rates, impacted the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale portfolio, resulting in an increase to the related deferred tax asset. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery. As of December 31, 2015, based on all available evidence, we concluded that a valuation allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized.
For the year ended December 31, 2013, certain capital loss carryforwards primarily related to AIG Life and Retirement were realized prior to their expiration. Therefore, for the year ended December 31, 2013,2015, we recognized a decrease of $3.5established $1.2 billion of capital loss carryforward valuation allowance associated with AIGthe unrealized tax losses in the U.S. Life and Retirement,Insurance Companies, all of which $3.3 billion was allocated to income from continuing operations and $200 million was allocated to other comprehensive income. Included in the $3.3 billion allocated to continuing operations was a decrease in deferred tax asset valuation allowance of $552 million related to a portion of AIG Life and Retirement's capital loss carryforward that expired in 2013.
During the year ended December 31, 2013,2015, we also recognized a $1.0 billion decrease toan increase of $110 million in our deferred tax asset valuation allowance associated with certain state, local and foreign jurisdictions, primarily attributable to our abilityfactors such as cumulative losses in recent years and the inability to demonstrate sustainability of recent operating profitabilityprofits within thosethe specific jurisdictions over the relevant carryforward periods as well as routine business operations in the current year. Included in the $1.0 billion was a decrease in deferred tax asset valuation allowance of $377 million related to tax attributes that expired.periods.
The following table presents the net deferred tax assets (liabilities) at December 31, 20132015 and 20122014 on a U.S. GAAP basis:
| | | | |
December 31,
(in millions)
| | 2013
| | 2012
| | |
|---|
| | | |
December 31, | | December 31, | | | | | |
(in millions) | | | | | 2015 | | 2014 |
Net U.S. consolidated return group deferred tax assets | | $ | 26,296 | | $ | 29,550 | | | | $ | 24,134 | $ | 24,543 |
Net deferred tax assets (liabilities) in accumulated other comprehensive income | | | (3,337 | ) | | (7,174 | ) | | | | (2,806) | | (5,510) |
Valuation allowance | | | (1,650 | ) | | (5,068 | ) | | | | (1,281) | | (129) |
| | | |
Subtotal | | | 21,309 | | | 17,308 | | | | | 20,047 | | 18,904 |
| | | |
Net foreign, state and local deferred tax assets | | | 2,563 | | | 3,126 | | | | | 2,078 | | 2,045 |
Valuation allowance | | | (1,947 | ) | | (2,968 | ) | | | | (1,731) | | (1,610) |
| | | |
Subtotal | | | 616 | | | 158 | | | | | 347 | | 435 |
| | | |
Subtotal – Net U.S, foreign, state and local deferred tax assets | | | 21,925 | | | 17,466 | | |
Subtotal - Net U.S, foreign, state and local deferred tax assets | | | | | 20,394 | | 19,339 |
Net foreign, state and local deferred tax liabilities | | | (732 | ) | | (771 | ) | | | | (437) | | (594) |
| | | |
Total AIG net deferred tax assets (liabilities) | | $ | 21,193 | | $ | 16,695 | | | | $ | 19,957 | $ | 18,745 |
| | | |
Deferred Tax Asset Valuation Allowance of U.S. Consolidated Income Tax Group
At December 31, 2013,2015 and 2012,2014, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $21.3$20.0 billion and $17.3$18.9 billion, respectively. At December 31, 2013,2015 and 2012,2014, our U.S. consolidated income tax group had valuation allowances of $1.7$1.3 billion and $5.1 billion,$129 million, respectively.
Deferred Tax Liability — Foreign, State and Local
At December 31, 20132015 and 2012,2014, we had net deferred tax liabilities of $116$90 million and $613$159 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 23. INCOME TAXES
At December 31, 20132015 and 2012,2014, we had deferred tax asset valuation allowances of $2.0$1.7 billion and $2.9$1.6 billion, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.
Tax Examinations and Litigation
We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Several U.S. subsidiaries included in the consolidated financial statements previously filed separate U.S. federal income tax returns and were not part of our U.S. consolidated income tax group. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.
The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently under examination for the tax years 2000 through 2006.2010.
On March 20, 2008, we received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to 1999. The Notice asserted that we owe additional taxes and penalties for these years primarily due to the disallowance of foreign tax credits associated with cross-border financing transactions. The transactions that are the subject of the Notice extend beyond the period covered by the Notice, and the IRS is challenginghas administratively challenged the later periods. It isThe IRS has also possible that the IRS will consideradministratively challenged other cross-border transactions to be similar to these transactions.in later years. We have paid the assessed tax plus interest and penalties for 1997 to 1999. On February 26, 2009, we filed a complaint in the United States District Court for the Southern District of New York (Southern District) seeking a refund of approximately $306 million in taxes, interest and penalties paid with respect to itsthe 1997 taxable year. We allege that the IRS improperly disallowed foreign tax credits and that our taxable income should be reduced as a result of the 2005 restatement of our consolidated financial statements.
We also filed an administrative refund claim on September 9, 2010 for our 1998 and 1999 tax years.
On March 29, 2011, the U.S. District Court for the Southern District of New York, ruled on a motion for partial summary judgment that we filed on July 30, 2010 related to the disallowance of foreign tax credits associated with cross-border financing transactions. The court denied our motion with leave to renew following the completion of discovery regarding certain transactions referred to in our motion, which we believe may be significant to the outcome of the action.
On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions. On March 29, 2013, the U.S. District Court for the Southern District of New York (the Southern District of New York) denied our motion. On AprilMarch 17, 2013, we initiated a process for immediate appeal to2014, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) and on November 5, 2013,granted our petition for an immediate appeal of the Southern District of New York certified our request. We are presently awaiting a decision frompartial summary judgment decision. On September 9, 2015, the Second Circuit on whether to accept our immediate appeal to reviewaffirmed the decision of the Southern District. On October 13, 2015, we filed a petition for a writ of certiorari to the U.S Supreme Court. If the U.S. Supreme Court does not grant certiorari the case will be remanded back to the Southern District of New York.for trial.
We will vigorously defend our position and continue to believe that we have adequate reserves for any liability that could result from the IRSthese government actions.
We continue to monitor legal and other developments in this area and evaluate the effect, if any, on our position, including recent decisions adverse toaffecting other taxpayers.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 23. INCOME TAXES
Accounting For Uncertainty in Income Taxes
The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:
| | | | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| | |
|---|
| | | |
Years Ended December 31, | | | | | | | |
(in millions) | | | 2015 | | 2014 | | 2013 |
Gross unrecognized tax benefits, beginning of year | | $ | 4,385 | | $ | 4,279 | | $ | 5,296 | | $ | 4,395 | $ | 4,340 | $ | 4,385 |
Increases in tax positions for prior years | | | 680 | | | 336 | | 239 | | | 162 | | 91 | | 680 |
Decreases in tax positions for prior years | | | (796 | ) | | (264 | ) | | (1,046 | ) | | (209) | | (60) | | (796) |
Increases in tax positions for current year | | | 43 | | | 47 | | 48 | | | - | | 10 | | 43 |
Lapse in statute of limitations | | | (20 | ) | | (8 | ) | | (7 | ) | | (4) | | (6) | | (20) |
Settlements | | | (2 | ) | | (5 | ) | | (259 | ) | | (13) | | - | | (2) |
Activity of discontinued operations | | | 50 | | | – | | 8 | | | - | | 20 | | 50 |
| | | |
Gross unrecognized tax benefits, end of year | | $ | 4,340 | | $ | 4,385 | | $ | 4,279 | | $ | 4,331 | $ | 4,395 | $ | 4,340 |
| | | |
At December 31, 2013, 20122015, 2014 and 2011,2013, our unrecognized tax benefits, excluding interest and penalties, were $4.3 billion, $4.4 billion and $4.3 billion, respectively. The decrease from December 31, 2012 was primarily due toactivity includes increases for amounts associated with cross border financing transactions partially offset by certain benefits realized due to the partial completion of the IRSInternal Revenue Service examination covering the years 2003-2005 and foreign exchange translation, partially offset by increases related to foreign tax credits associated with cross border financing transactions. year 2006. At December 31, 2013, 20122015, 2014 and 2011,2013, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $0.1 billion, $0.2$0.3 billion and $0.7$0.1 billion, respectively. Accordingly, at December 31, 2013, 20122015, 2014 and 2011,2013, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.2 billion, $4.1 billion and $4.2 billion, and $3.5 billion, respectively.
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 20132015 and 2012,2014, we had accrued liabilities of $1.1$1.2 billion and $935 million,$1.1 billion, respectively for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2013, 20122015, 2014 and 2011,2013, we accrued expense (benefits) of $142$156 million, $192$21 million and $(170)$142 million, respectively, for the payment of interest (net of the federal benefit) and penalties.The interest increase from December 31, 2014 was primarily due to increases in amounts associated with cross border financing transactions.
We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2013,2015, such proposed adjustments would not have resulted in a material change to our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next 12 months, based on the information currently available, we do not expect any change to be material to our consolidated financial condition.
Listed below are the tax years that remain subject to examination by major tax jurisdictions:
| | | | |
| |
At December 31, 20132015
| | | Open Tax Years
| |
|---|
| |
Major Tax Jurisdiction | | | |
|
United States | | | 2000 – 2012 | 2000-2014 |
Australia | | | 2009 – 2012 | 2011-2014 |
France | | | 2011 – 2012 | 2013-2014 |
Japan | | | 2008 – 2012 | 2009-2014 |
Korea | | | 2008 – 2012 | 2010-2014 |
Singapore | | | 2011 – 2012 | 2011-2014 |
United Kingdom | | | 2012 | 2013-2014 |
TABLE OF CONTENTS
24. RECAPITALIZATION
On January 14, 2011 (the Closing), we completed a series of integrated transactions to recapitalize AIG (the Recapitalization) with the Department of the Treasury, the FRBNY and AIG Credit Facility Trust (the Trust), including the repayment of all amounts owed under the FRBNY Credit Facility. At the Closing, we recognized a net loss on extinguishment of debt, primarily representing $3.3 billion in accelerated amortization of the remaining prepaid commitment fee asset resulting from the termination of the FRBNY Credit Facility.
AIG 2013 Form 10-K
Table of Contents
ITEMItem 8 / NOTE 24. RECAPITALIZATION
Repayment and Termination of the FRBNY Credit Facility
At the Closing, we repaid to the FRBNY approximately $21 billion in cash, representing complete repayment of all amounts owed under the FRBNY Credit Facility, and the FRBNY Credit Facility was terminated. The funds for the repayment came from the net cash proceeds from our sale of 67 percent of the ordinary shares of AIA in its initial public offering and from our sale of ALICO in 2010.
Repurchase and Exchange of SPV Preferred Interests
At the Closing, we drew down approximately $20.3 billion (the Series F Closing Drawdown Amount) under the Department of the Treasury Commitment (Series F) pursuant to the Series F Securities Purchase Agreement (SPA). The Series F Closing Drawdown Amount was the full amount remaining under the Department of the Treasury Commitment (Series F), less $2 billion that we designated to be available after the closing for general corporate purposes under a commitment relating to our Series G Preferred Stock described below (the Series G Drawdown Right). Our right to draw on the Department of the Treasury Commitment (Series F) (other than the Series G Drawdown Right) was terminated.
We used the Series F Closing Drawdown Amount to repurchase all of the FRBNY's AIA SPV Preferred Interests and the ALICO SPV Preferred Interests. We transferred the SPV Preferred Interests to the Department of the Treasury as part of the consideration for the exchange of the Series F Preferred Stock (described below).
During the first quarter of 2011, the liquidation preference of the ALICO SPV Preferred Interests was paid down in full. During the first quarter of 2012, the liquidation preference of the AIA SPV Preferred Interests was paid down in full.
Issuance and Cancellation of Our Series G Preferred Stock
At the Closing, we and the Department of the Treasury amended and restated the Series F SPA to provide for the issuance of 20,000 shares of Series G Preferred Stock by AIG to the Department of the Treasury. The Series G Preferred Stock was issued with a liquidation preference of zero. Because the net proceeds to us from the completion of the registered public offering of AIG Common Stock in May 2011 of $2.9 billion exceeded the $2.0 billion Series G Drawdown Right, the Series G Drawdown Right was terminated and the Series G Preferred Stock was cancelled immediately thereafter.
Exchange of Our Series C, E and F Preferred Stock for AIG Common Stock and Series G Preferred Stock
At the Closing:
•the shares of our Series C Preferred Stock held by the Trust were exchanged for 562,868,096 shares of newly issued AIG Common Stock, which were subsequently transferred by the Trust to the Department of the Treasury;
•the shares of our Series E Preferred Stock held by the Department of the Treasury were exchanged for 924,546,133 newly issued shares of AIG Common Stock; and
•the shares of the Series F Preferred Stock held by the Department of the Treasury, were exchanged for (a) the SPV Preferred Interests, (b) 20,000 shares of the Series G Preferred Stock (subsequently cancelled) and (c) 167,623,733 shares of newly issued AIG Common Stock.
For a discussion of the Department of the Treasury's sale of all of its ownership of AIG Common Stock, see Note 16 herein.
Issuance of Warrants to Purchase AIG Common Stock
On January 19, 2011, as part of the Recapitalization, we issued to the holders of record of AIG Common Stock as of January 13, 2011, by means of a dividend, ten-year warrants to purchase a total of 74,997,778 shares of AIG Common Stock at an exercise price of $45.00 per share. We retained 67,650 of these warrants for tax withholding purposes. No warrants were issued to the Trust, the Department of the Treasury or the FRBNY.
AIG 2013 Form 10-K
Table of Contents
ITEM 8 / NOTE 25. note 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
25.
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Consolidated Statements of Income (Loss)
| Three Months Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
(dollars in millions, except per share data) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Total revenues | $ | 15,975 | $ | 16,163 | $ | 15,699 | $ | 16,136 | $ | 12,822 | $ | 16,697 | $ | 13,831 | $ | 15,410 |
Income (loss) from continuing | | | | | | | | | | | | | | | | |
operations before income taxes* | | 3,776 | | 2,273 | | 2,552 | | 4,480 | | (115) | | 3,019 | | (2,932) | | 729 |
Income (loss) from discontinued | | | | | | | | | | | | | | | | |
operations, net of income taxes | | 1 | | (47) | | 16 | | 30 | | (17) | | 2 | | - | | (35) |
Net income (loss) | | 2,477 | | 1,612 | | 1,791 | | 3,036 | | (197) | | 2,201 | | (1,849) | | 675 |
Net income (loss) from | | | | | | | | | | | | | | | | |
continuing operations attributable | | | | | | | | | | | | | | | | |
to noncontrolling interests | | 9 | | 3 | | (9) | | (37) | | 34 | | 9 | | (8) | | 20 |
Net income (loss) attributable to AIG* | $ | 2,468 | $ | 1,609 | $ | 1,800 | $ | 3,073 | $ | (231) | $ | 2,192 | $ | (1,841) | $ | 655 |
Earnings (loss) per common share | | | | | | | | | | | | | | | | |
attributable to AIG common | | | | | | | | | | | | | | | | |
shareholders: | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | |
Income (loss) from continuing | | | | | | | | | | | | | | | | |
operations | $ | 1.81 | $ | 1.13 | $ | 1.34 | $ | 2.11 | $ | (0.17) | $ | 1.54 | $ | (1.50) | $ | 0.50 |
Income (loss) from discontinued | | | | | | | | | | | | | | | | |
operations | $ | - | $ | (0.03) | $ | 0.01 | $ | 0.02 | $ | (0.01) | $ | - | $ | - | $ | (0.03) |
Diluted: | | | | | | | | | | | | | | | | |
Income (loss) from continuing | | | | | | | | | | | | | | | | |
operations | $ | 1.78 | $ | 1.12 | $ | 1.31 | $ | 2.08 | $ | (0.17) | $ | 1.52 | $ | (1.50) | $ | 0.49 |
Income (loss) from discontinued | | | | | | | | | | | | | | | | |
operations | $ | - | $ | (0.03) | $ | 0.01 | $ | 0.02 | $ | (0.01) | $ | - | $ | - | $ | (0.03) |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | |
Basic | 1,365,951,690 | 1,459,249,393 | 1,329,157,366 | 1,442,397,111 | 1,279,072,748 | 1,419,239,774 | 1,226,880,632 | 1,391,790,420 |
Diluted | 1,386,263,549 | 1,472,510,813 | 1,365,390,431 | 1,464,676,330 | 1,279,072,748 | 1,442,067,842 | 1,226,880,632 | 1,412,162,456 |
Noteworthy quarterly items - | | | | | | | | | | | | | | | | |
income (expense): | | | | | | | | | | | | | | | | |
Other-than-temporary | | | | | | | | | | | | | | | | |
impairments | | (128) | | (59) | | (164) | | (55) | | (273) | | (50) | | (106) | | (83) |
Net (gain) loss on sale of | | | | | | | | | | | | | | | | |
divested businesses | | 6 | | (4) | | 1 | | (2,174) | | 3 | | (18) | | 1 | | (1) |
Federal and foreign valuation | | | | | | | | | | | | | | | | |
allowance for deferred tax assets | | 93 | | 65 | | (40) | | 75 | | 8 | | 21 | | 49 | | 20 |
Net gain (loss) on extinguishment of | | | | | | | | | | | | | | | | |
debt | | (68) | | (238) | | (342) | | (34) | | (346) | | (742) | | - | | (1,268) |
Reserve strengthening charges | | 24 | | - | | 317 | | - | | 191 | | - | | 3,587 | | - |
Restructuring and other costs | | - | | - | | - | | - | | 274 | | - | | 222 | | - |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|---|
| | |
| | Three Months Ended | |
|---|
| | March 31, | | June 30, | | September 30, | | December 31, | |
|---|
(dollars in millions, except per share data)
| |
|---|
| | 2013
| | 2012
| | 2013
| | 2012
| | 2013
| | 2012
| | 2013
| | 2012
| |
|---|
| | |
Total revenues | | $ | 16,962 | | $ | 18,649 | | $ | 18,426 | | $ | 17,338 | | $ | 15,944 | | $ | 17,865 | | $ | 17,346 | | $ | 17,169 | |
Income (loss) from continuing operations before income taxes | | | 2,875 | | | 4,584 | | | 3,165 | | | 1,751 | | | 1,178 | | | 2,595 | | | 2,150 | | | (6,039 | ) |
Income (loss) from discontinued operations, net of income taxes | | | 73 | | | 13 | | | 18 | | | (5 | ) | | (18 | ) | | 1 | | | 11 | | | (8 | ) |
Net income (loss) | | | 2,231 | | | 3,449 | | | 2,758 | | | 2,339 | | | 2,130 | | | 1,861 | | | 1,973 | | | (3,949 | ) |
Net income (loss) from continuing operations attributable to noncontrolling interests: | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonvoting, callable, junior, and senior preferred interests | | | – | | | 208 | | | – | | | – | | | – | | | – | | | – | | | – | |
Other | | | 25 | | | 33 | | | 27 | | | 7 | | | (40 | ) | | 5 | | | (5 | ) | | 9 | |
| | |
Total net income (loss) attributable to noncontrolling interests | | | 25 | | | 241 | | | 27 | | | 7 | | | (40 | ) | | 5 | | | (5 | ) | | 9 | |
Net income (loss) attributable to AIG* | | $ | 2,206 | | $ | 3,208 | | $ | 2,731 | | $ | 2,332 | | $ | 2,170 | | $ | 1,856 | | $ | 1,978 | | $ | (3,958 | ) |
| | |
Earnings (loss) per common share attributable to AIG common shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.44 | | $ | 1.70 | | $ | 1.84 | | $ | 1.33 | | $ | 1.48 | | $ | 1.13 | | $ | 1.34 | | $ | (2.68 | ) |
Income (loss) from discontinued operations | | $ | 0.05 | | $ | 0.01 | | $ | 0.01 | | $ | – | | $ | (0.01 | ) | $ | – | | $ | 0.01 | | $ | – | |
| | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.44 | | $ | 1.70 | | $ | 1.83 | | $ | 1.33 | | $ | 1.47 | | $ | 1.13 | | $ | 1.33 | | $ | (2.68 | ) |
Income (loss) from discontinued operations | | $ | 0.05 | | $ | 0.01 | | $ | 0.01 | | $ | – | | $ | (0.01 | ) | $ | – | | $ | 0.01 | | $ | – | |
| | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 1,476,471,097 | | | 1,875,972,970 | | | 1,476,512,720 | | | 1,756,689,067 | | | 1,475,053,126 | | | 1,642,472,814 | | | 1,468,725,573 | | | 1,476,457,586 | |
Diluted | | | 1,476,678,931 | | | 1,876,002,775 | | | 1,482,246,618 | | | 1,756,714,475 | | | 1,485,322,858 | | | 1,642,502,251 | | | 1,480,654,482 | | | 1,476,457,586 | |
| | |
Noteworthy quarterly items — income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairments | | | (74 | ) | | (618 | ) | | (86 | ) | | (216 | ) | | (56 | ) | | (114 | ) | | (111 | ) | | (219 | ) |
Net (gain) loss on sale of divested businesses | | | – | | | 3 | | | 47 | | | – | | | – | | | – | | | 1 | | | 6,733 | |
Adjustment to federal deferred tax valuation allowance | | | 761 | | | 347 | | | 509 | | | 1,239 | | | 1,154 | | | 205 | | | 741 | | | 116 | |
Net gain (loss) on extinguishment of debt | | | (340 | ) | | (21 | ) | | (38 | ) | | (11 | ) | | (81 | ) | | – | | | (192 | ) | | – | |
Change in fair value of AIA securities | | | – | | | 1,795 | | | – | | | (493 | ) | | – | | | 527 | | | – | | | 240 | |
Change in fair value of Maiden Lane Interests | | | – | | | 1,498 | | | – | | | 1,306 | | | – | | | 330 | | | – | | | – | |
| | |
* For the three months ended December 31, 2015, we recorded out of period adjustments related to prior periods that decreased Net income attributable to AIG by $193 million, decreased AIG’s Income from continuing operations before income taxes by $308 million and decreased pre-tax operating income by $122 million. The out of period adjustments primarily related to impairments of Other invested assets and changes in Liability for unpaid losses and loss adjustment expenses and income tax liabilities. Had these adjustments, which were determined not to be material, been recorded in their appropriate periods, Net income attributable to AIG for the three-month periodperiods ended September 30, 2015, June 30, 2015 and March 31, 2015 would have decreased by $36 million, increased by $15 million and decreased by $16 million, respectively. Net income attributable to AIG for the three-month periods ended December 31, 2013 includes $3272014, September 30, 2014, June 30, 2014 and March 31, 2014 would have increased by $25 million, of net charges primarily related to income taxes to correct prior 2013 quarters presented. Such amounts are not material to any period presented.decreased by $61 million, increased by $13 million and decreased by $28 million, respectively.
AIG 2013 Form 10-K
Table of ContentsTABLE OF CONTENTS
ITEM 8 / NOTE 25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables present amounts previously reported and adjusted amounts presented in the above table. See Note 1 herein for a description of the changes.
| | | | | | | | | | | | | | | | | | | |
| | |
| | Three Months Ended | |
|---|
| | March 31, 2013 | | June 30, 2013 | | September 30, 2013 | |
|---|
(dollars in millions, except per share data)
| | As Previously
Reported
| | As Currently
Reported
| | As Previously
Reported
| | As Currently
Reported
| | As Previously
Reported
| | As Currently
Reported
| |
|---|
| | |
Total revenues | | $ | 15,888 | | $ | 16,962 | | $ | 17,315 | | $ | 18,426 | | $ | 14,826 | | $ | 15,944 | |
Income (loss) from continuing operations before income taxes | | | 2,832 | | | 2,875 | | | 3,147 | | | 3,165 | | | 1,179 | | | 1,178 | |
Income (loss) from discontinued operations, net of income taxes | | | 93 | | | 73 | | | 33 | | | 18 | | | (42 | ) | | (18 | ) |
Earnings (loss) per common share attributable to AIG common shareholders: | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.43 | | $ | 1.44 | | $ | 1.83 | | $ | 1.84 | | $ | 1.50 | | $ | 1.48 | |
Income (loss) from discontinued operations | | $ | 0.06 | | $ | 0.05 | | $ | 0.02 | | $ | 0.01 | | $ | (0.03 | ) | $ | (0.01 | ) |
Diluted: | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.43 | | $ | 1.44 | | $ | 1.82 | | $ | 1.83 | | $ | 1.49 | | $ | 1.47 | |
Income (loss) from discontinued operations | | $ | 0.06 | | $ | 0.05 | | $ | 0.02 | | $ | 0.01 | | $ | (0.03 | ) | $ | (0.01 | ) |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Three Months Ended | |
|---|
| | March 31, 2012 | | June 30, 2012 | | September 30, 2012 | | December 31, 2012 | |
|---|
(dollars in millions, except per share data)
| | As Previously Reported
| | As Currently Reported
| | As Previously Reported
| | As Currently Reported
| | As Previously Reported
| | As Currently Reported
| | As Previously Reported
| | As Currently Reported
| |
|---|
| | |
Total revenues | | $ | 17,497 | | $ | 18,649 | | $ | 16,221 | | $ | 17,338 | | $ | 16,722 | | $ | 17,865 | | $ | 15,854 | | $ | 17,169 | |
Income (loss) from continuing operations before income taxes | | | 4,466 | | | 4,584 | | | 1,669 | | | 1,751 | | | 2,558 | | | 2,595 | | | 629 | | | (6,039 | ) |
Income (loss) from discontinued operations, net of income taxes | | | 64 | | | 13 | | | 179 | | | (5 | ) | | 37 | | | 1 | | | (4,332 | ) | | (8 | ) |
Earnings (loss) per common share attributable to AIG common shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.68 | | $ | 1.70 | | $ | 1.23 | | $ | 1.33 | | $ | 1.11 | | $ | 1.13 | | $ | 0.25 | | $ | (2.68 | ) |
Income (loss) from discontinued operations | | $ | 0.03 | | $ | 0.01 | | $ | 0.10 | | $ | – | | $ | 0.02 | | $ | – | | $ | (2.93 | ) | $ | – | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 1.68 | | $ | 1.70 | | $ | 1.23 | | $ | 1.33 | | $ | 1.11 | | $ | 1.13 | | $ | 0.25 | | $ | (2.68 | ) |
Income (loss) from discontinued operations | | $ | 0.03 | | $ | 0.01 | | $ | 0.10 | | $ | – | | $ | 0.02 | | $ | – | | $ | (2.93 | ) | $ | – | |
| | |
AIG 2013 Form 10-K
Table of Contents
ITEMItem 8 / NOTE 26. note 24. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT
26.
24. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT
The following condensed consolidating financial statements reflect the results of AIG Life Holdings, Inc. (AIGLH), a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AIGLH.
Condensed Consolidating Balance Sheets
| | American | | | | | | | | |
| | International | | | | | Reclassifications | | |
| | Group, Inc. | | | | Other | | and | Consolidated |
(in millions) | (As Guarantor) | AIGLH | | Subsidiaries | | Eliminations | | AIG |
December 31, 2015 | | | | | | | | | | |
Assets: | | | | | | | | | | |
Short-term investments | $ | 4,042 | $ | - | $ | 9,637 | $ | (3,547) | $ | 10,132 |
Other investments(a) | | 7,425 | | - | | 320,797 | | - | | 328,222 |
Total investments | | 11,467 | | - | | 330,434 | | (3,547) | | 338,354 |
Cash | | 34 | | 116 | | 1,479 | | - | | 1,629 |
Loans to subsidiaries(b) | | 35,927 | | - | | 578 | | (36,505) | | - |
Investment in consolidated subsidiaries(b) | | 51,151 | | 30,239 | | - | | (81,390) | | - |
Other assets, including deferred income taxes | | 23,398 | | 260 | | 135,690 | | (2,388) | | 156,960 |
Total assets | $ | 121,977 | $ | 30,615 | $ | 468,181 | $ | (123,830) | $ | 496,943 |
Liabilities: | | | | | | | | | | |
Insurance liabilities | $ | - | $ | - | $ | 271,645 | $ | - | $ | 271,645 |
Long-term debt | | 19,876 | | 706 | | 8,768 | | - | | 29,350 |
Other liabilities, including intercompany balances(a) | | 11,869 | | 201 | | 99,777 | | (6,109) | | 105,738 |
Loans from subsidiaries(b) | | 574 | | 3 | | 35,928 | | (36,505) | | - |
Total liabilities | | 32,319 | | 910 | | 416,118 | | (42,614) | | 406,733 |
Total AIG shareholders’ equity | | 89,658 | | 29,705 | | 51,511 | | (81,216) | | 89,658 |
Non-redeemable noncontrolling interests | | - | | - | | 552 | | - | | 552 |
Total equity | | 89,658 | | 29,705 | | 52,063 | | (81,216) | | 90,210 |
Total liabilities and equity | $ | 121,977 | $ | 30,615 | $ | 468,181 | $ | (123,830) | $ | 496,943 |
| | | | | | | | | | | | | | | | |
| | |
(in millions)
| | American
International
Group, Inc.
(As Guarantor)
| | AIGLH
| | Other
Subsidiaries
| | Reclassifications
and
Eliminations
| | Consolidated
AIG
| |
|---|
| | |
December 31, 2013 | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Short-term investments | | $ | 11,965 | | $ | – | | $ | 11,404 | | $ | (1,752 | ) | $ | 21,617 | |
Other investments(a) | | | 7,561 | | | – | | | 327,250 | | | – | | | 334,811 | |
| | |
Total investments | | | 19,526 | | | – | | | 338,654 | | | (1,752 | ) | | 356,428 | |
Cash | | | 30 | | | 51 | | | 2,160 | | | – | | | 2,241 | |
Loans to subsidiaries(b) | | | 31,220 | | | – | | | 854 | | | (32,074 | ) | | – | |
Investment in consolidated subsidiaries(b) | | | 66,201 | | | 39,103 | | | – | | | (105,304 | ) | | – | |
Other assets, including deferred income taxes | | | 21,606 | | | 112 | | | 132,492 | | | (1,086 | ) | | 153,124 | |
Assets held for sale | | | – | | | – | | | 29,536 | | | – | | | 29,536 | |
| | |
Total assets | | $ | 138,583 | | $ | 39,266 | | $ | 503,696 | | $ | (140,216 | ) | $ | 541,329 | |
| | |
Liabilities: | | | | | | | | | | | | | | | | |
Insurance liabilities | | $ | – | | $ | – | | $ | 271,252 | | $ | – | | $ | 271,252 | |
Long-term debt | | | 30,839 | | | 1,352 | | | 9,502 | | | – | | | 41,693 | |
Other liabilities, including intercompany balances(a)(c) | | | 6,422 | | | 161 | | | 98,908 | | | (2,766 | ) | | 102,725 | |
Loans from subsidiaries(b) | | | 852 | | | 200 | | | 31,173 | | | (32,225 | ) | | – | |
Liabilities held for sale | | | – | | | – | | | 24,548 | | | – | | | 24,548 | |
| | |
Total liabilities | | | 38,113 | | | 1,713 | | | 435,383 | | | (34,991 | ) | | 440,218 | |
| | |
Redeemable noncontrolling interests (see Note 17) | | | – | | | – | | | 30 | | | – | | | 30 | |
| | |
Total AIG shareholders' equity | | | 100,470 | | | 37,553 | | | 67,672 | | | (105,225 | ) | | 100,470 | |
Non-redeemable noncontrolling interests | | | – | | | – | | | 611 | | | – | | | 611 | |
| | |
Total equity | | | 100,470 | | | 37,553 | | | 68,283 | | | (105,225 | ) | | 101,081 | |
| | |
Total liabilities and equity | | $ | 138,583 | | $ | 39,266 | | $ | 503,696 | | $ | (140,216 | ) | $ | 541,329 | |
| | |
December 31, 2012 | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Short-term investments | | $ | 14,764 | | $ | – | | $ | 17,061 | | $ | (3,017 | ) | $ | 28,808 | |
Other investments(a) | | | 3,902 | | | – | | | 343,114 | | | – | | | 347,016 | |
| | |
Total investments | | | 18,666 | | | – | | | 360,175 | | | (3,017 | ) | | 375,824 | |
Cash | | | 81 | | | 73 | | | 997 | | | – | | | 1,151 | |
Loans to subsidiaries(b) | | | 35,064 | | | – | | | (2,251 | ) | | (32,813 | ) | | – | |
Investment in consolidated subsidiaries(b) | | | 70,781 | | | 43,891 | | | – | | | (114,672 | ) | | – | |
Other assets, including deferred income taxes | | | 23,153 | | | 150 | | | 120,575 | | | (4,185 | ) | | 139,693 | |
Assets held for sale | | | – | | | – | | | 31,965 | | | – | | | 31,965 | |
| | |
Total assets | | $ | 147,745 | | $ | 44,114 | | $ | 511,461 | | $ | (154,687 | ) | $ | 548,633 | |
| | |
Liabilities: | | | | | | | | | | | | | | | | |
Insurance liabilities | | $ | – | | $ | – | | $ | 280,434 | | $ | (136 | ) | $ | 280,298 | |
Long-term debt | | | 36,366 | | | 1,638 | | | 10,496 | | | – | | | 48,500 | |
Other liabilities, including intercompany balances(a)(c) | | | 12,375 | | | 261 | | | 84,761 | | | (3,931 | ) | | 93,466 | |
Loans from subsidiaries(b) | | | 1,002 | | | 472 | | | 34,500 | | | (35,974 | ) | | – | |
Liabilities held for sale | | | – | | | – | | | 27,366 | | | – | | | 27,366 | |
| | |
Total liabilities | | | 49,743 | | | 2,371 | | | 437,557 | | | (40,041 | ) | | 449,630 | |
| | |
Redeemable noncontrolling interests (see Note 17) | | | – | | | – | | | 334 | | | – | | | 334 | |
| | |
Total AIG shareholders' equity | | | 98,002 | | | 41,743 | | | 72,903 | | | (114,646 | ) | | 98,002 | |
Non-redeemable noncontrolling interests | | | – | | | – | | | 667 | | | – | | | 667 | |
| | |
Total equity | | | 98,002 | | | 41,743 | | | 73,570 | | | (114,646 | ) | | 98,669 | |
| | |
Total liabilities and equity | | $ | 147,745 | | $ | 44,114 | | $ | 511,461 | | $ | (154,687 | ) | $ | 548,633 | |
| | |
TABLE OF CONTENTS
Item 8 / note 24. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT
December 31, 2014 | | | | | | | | | | |
Assets: | | | | | | | | | | |
Short-term investments | $ | 6,078 | $ | - | $ | 6,231 | $ | (1,066) | $ | 11,243 |
Other investments(a) | | 11,415 | | - | | 333,108 | | - | | 344,523 |
Total investments | | 17,493 | | - | | 339,339 | | (1,066) | | 355,766 |
Cash | | 26 | | 91 | | 1,641 | | - | | 1,758 |
Loans to subsidiaries(b) | | 31,070 | | - | | 779 | | (31,849) | | - |
Investment in consolidated subsidiaries(b) | | 62,811 | | 35,850 | | - | | (98,661) | | - |
Other assets, including deferred income taxes | | 23,835 | | 2,305 | | 141,826 | | (9,909) | | 158,057 |
Total assets | $ | 135,235 | $ | 38,246 | $ | 483,585 | $ | (141,485) | $ | 515,581 |
Liabilities: | | | | | | | | | | |
Insurance liabilities | $ | - | $ | - | $ | 270,615 | $ | - | $ | 270,615 |
Long-term debt | | 21,190 | | 820 | | 9,207 | | - | | 31,217 |
Other liabilities, including intercompany balances(a) | | 6,196 | | 2,314 | | 108,189 | | (10,222) | | 106,477 |
Loans from subsidiaries(b) | | 951 | | - | | 30,898 | | (31,849) | | - |
Total liabilities | | 28,337 | | 3,134 | | 418,909 | | (42,071) | | 408,309 |
Total AIG shareholders’ equity | | 106,898 | | 35,112 | | 64,302 | | (99,414) | | 106,898 |
Non-redeemable noncontrolling interests | | - | | - | | 374 | | - | | 374 |
Total equity | | 106,898 | | 35,112 | | 64,676 | | (99,414) | | 107,272 |
Total liabilities and equity | $ | 135,235 | $ | 38,246 | $ | 483,585 | $ | (141,485) | $ | 515,581 |
(a) Includes intercompany derivative positions, which are reported at fair value before credit valuation adjustment.
(b) Eliminated in consolidation.
(c) For December 31, 2013 and December 31, 2012, includes intercompany tax payable of $1.4 billion and $6.1 billion, respectively, and intercompany derivative liabilities of $249 million and $602 million, respectively, for American International Group, Inc. (As Guarantor) and intercompany tax receivables of $98 million and $120 million, respectively, for AIGLH.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / NOTE 26. note 24. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT
Condensed Consolidating Statements of Income (Loss)
| | | | | | | | | | |
| | American | | | | | | | | |
| | International | | | | | | Reclassifications | | |
| | Group, Inc. | | | | Other | | and | | Consolidated |
(in millions) | | (As Guarantor) | | AIGLH | | Subsidiaries | | Eliminations | | AIG |
Year Ended December 31, 2015 | | | | | | | | | | |
Revenues: | | | | | | | | | | |
Equity in earnings of consolidated subsidiaries* | $ | 3,954 | $ | 1,936 | $ | - | $ | (5,890) | $ | - |
Other income | | 88 | | - | | 58,953 | | (714) | | 58,327 |
Total revenues | | 4,042 | | 1,936 | | 58,953 | | (6,604) | | 58,327 |
Expenses: | | | | | | | | | | |
Interest expense | | 1,049 | | 58 | | 302 | | (128) | | 1,281 |
Loss on extinguishment of debt | | 703 | | - | | 46 | | 7 | | 756 |
Other expenses | | 1,178 | | 44 | | 52,374 | | (587) | | 53,009 |
Total expenses | | 2,930 | | 102 | | 52,722 | | (708) | | 55,046 |
Income (loss) from continuing operations before income tax | | | | | | | | | | |
expense (benefit) | | 1,112 | | 1,834 | | 6,231 | | (5,896) | | 3,281 |
Income tax expense (benefit) | | (1,086) | | (73) | | 2,218 | | - | | 1,059 |
Income (loss) from continuing operations | | 2,198 | | 1,907 | | 4,013 | | (5,896) | | 2,222 |
Income (loss) from discontinued operations, net of income taxes | | (2) | | - | | 2 | | - | | - |
Net income (loss) | | 2,196 | | 1,907 | | 4,015 | | (5,896) | | 2,222 |
Less: | | | | | | | | | | |
Net income from continuing operations attributable to | | | | | | | | | | |
noncontrolling interests | | - | | - | | 26 | | - | | 26 |
Net income (loss) attributable to AIG | $ | 2,196 | $ | 1,907 | $ | 3,989 | $ | (5,896) | $ | 2,196 |
Year Ended December 31, 2014 | | | | | | | | | | |
Revenues: | | | | | | | | | | |
Equity in earnings of consolidated subsidiaries* | $ | 9,450 | $ | 3,519 | $ | - | $ | (12,969) | $ | - |
Other income | | 1,658 | | - | | 63,157 | | (409) | | 64,406 |
Total revenues | | 11,108 | | 3,519 | | 63,157 | | (13,378) | | 64,406 |
Expenses: | | | | | | | | | | |
Interest expense | | 1,507 | | 100 | | 243 | | (132) | | 1,718 |
Loss on extinguishment of debt | | 2,248 | | - | | 85 | | (51) | | 2,282 |
Other expenses | | 1,546 | | 203 | | 48,315 | | (159) | | 49,905 |
Total expenses | | 5,301 | | 303 | | 48,643 | | (342) | | 53,905 |
Income (loss) from continuing operations before income tax | | | | | | | | | | |
expense (benefit) | | 5,807 | | 3,216 | | 14,514 | | (13,036) | | 10,501 |
Income tax expense (benefit) | | (1,735) | | (103) | | 4,817 | | (52) | | 2,927 |
Income (loss) from continuing operations | | 7,542 | | 3,319 | | 9,697 | | (12,984) | | 7,574 |
Loss from discontinued operations, net of income taxes | | (13) | | - | | (37) | | - | | (50) |
Net income (loss) | | 7,529 | | 3,319 | | 9,660 | | (12,984) | | 7,524 |
Less: | | | | | | | | | | |
Net income (loss) from continuing operations attributable to | | | | | | | | | | |
noncontrolling interests: | | - | | - | | (5) | | - | | (5) |
Net income (loss) attributable to AIG | $ | 7,529 | $ | 3,319 | $ | 9,665 | $ | (12,984) | $ | 7,529 |
| | | | | | | | | | | | | | | | |
| | |
(in millions)
| | American
International
Group, Inc.
(As Guarantor)
| | AIGLH
| | Other
Subsidiaries
| | Reclassifications
and
Eliminations
| | Consolidated
AIG
| |
|---|
| | |
Year Ended December 31, 2013 | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | |
Equity in earnings of consolidated subsidiaries* | | $ | 7,638 | | $ | 4,075 | | $ | – | | $ | (11,713 | ) | $ | – | |
Other income | | | 1,487 | | | 1 | | | 67,502 | | | (312 | ) | | 68,678 | |
| | |
Total revenues | | | 9,125 | | | 4,076 | | | 67,502 | | | (12,025 | ) | | 68,678 | |
| | |
Expenses: | | | | | | | | | | | | | | | | |
Interest expense | | | 1,938 | | | 126 | | | 233 | | | (155 | ) | | 2,142 | |
Loss on extinguishment of debt | | | 580 | | | – | | | 71 | | | – | | | 651 | |
Other expenses | | | 1,520 | | | 75 | | | 55,081 | | | (159 | ) | | 56,517 | |
| | |
Total expenses | | | 4,038 | | | 201 | | | 55,385 | | | (314 | ) | | 59,310 | |
| | |
Income (loss) from continuing operations before income tax expense (benefit) | | | 5,087 | | | 3,875 | | | 12,117 | | | (11,711 | ) | | 9,368 | |
Income tax expense (benefit) | | | (4,012 | ) | | (58 | ) | | 4,454 | | | (24 | ) | | 360 | |
| | |
Income (loss) from continuing operations | | | 9,099 | | | 3,933 | | | 7,663 | | | (11,687 | ) | | 9,008 | |
Income (loss) from discontinued operations, net of income taxes | | | (14 | ) | | – | | | 98 | | | – | | | 84 | |
| | |
Net income (loss) | | | 9,085 | | | 3,933 | | | 7,761 | | | (11,687 | ) | | 9,092 | |
Less: | | | | | | | | | | | | | | | | |
Total net income attributable to noncontrolling interests | | | – | | | – | | | 7 | | | – | | | 7 | |
| | |
Net income (loss) attributable to AIG | | $ | 9,085 | | $ | 3,933 | | $ | 7,754 | | $ | (11,687 | ) | $ | 9,085 | |
| | |
Year Ended December 31, 2012 | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | |
Equity in earnings of consolidated subsidiaries* | | $ | 1,970 | | $ | 2,315 | | $ | – | | $ | (4,285 | ) | $ | – | |
Change in fair value of ML III | | | 2,287 | | | – | | | 601 | | | – | | | 2,888 | |
Other income | | | 1,911 | | | 49 | | | 66,556 | | | (383 | ) | | 68,133 | |
| | |
Total revenues | | | 6,168 | | | 2,364 | | | 67,157 | | | (4,668 | ) | | 71,021 | |
| | |
Expenses: | | | | | | | | | | | | | | | | |
Interest expense | | | 2,257 | | | 174 | | | 271 | | | (383 | ) | | 2,319 | |
Loss on extinguishment of debt | | | 9 | | | – | | | 23 | | | – | | | 32 | |
Other expenses | | | 1,602 | | | – | | | 64,177 | | | – | | | 65,779 | |
| | |
Total expenses | | | 3,868 | | | 174 | | | 64,471 | | | (383 | ) | | 68,130 | |
| | |
Income (loss) from continuing operations before income tax expense (benefit) | | | 2,300 | | | 2,190 | | | 2,686 | | | (4,285 | ) | | 2,891 | |
Income tax expense (benefit) | | | (1,137 | ) | | (17 | ) | | 346 | | | – | | | (808 | ) |
| | |
Income (loss) from continuing operations | | | 3,437 | | | 2,207 | | | 2,340 | | | (4,285 | ) | | 3,699 | |
Income from discontinued operations, net of income taxes | | | 1 | | | – | | | – | | | – | | | 1 | |
| | |
Net income (loss) | | | 3,438 | | | 2,207 | | | 2,340 | | | (4,285 | ) | | 3,700 | |
Less: | | | | | | | | | | | | | | | | |
Net income from continuing operations attributable to noncontrolling interests: | | | | | | | | | | | | | | | | |
Nonvoting, callable, junior and senior preferred interests | | | – | | | – | | | – | | | 208 | | | 208 | |
Other | | | – | | | – | | | 54 | | | – | | | 54 | |
| | |
Total net income attributable to noncontrolling interests | | | – | | | – | | | 54 | | | 208 | | | 262 | |
| | |
Net income (loss) attributable to AIG | | $ | 3,438 | | $ | 2,207 | | $ | 2,286 | | $ | (4,493 | ) | $ | 3,438 | |
| | |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / NOTE 26. note 24. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT
| | | | |
(in millions)
| | American
International
Group, Inc.
(As Guarantor)
| | AIGLH
| | Other
Subsidiaries
| | Reclassifications
and
Eliminations
| | Consolidated
AIG
| | |
|---|
| | | |
Year Ended December 31, 2011 | | |
Year Ended December 31, 2013 | | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Equity in earnings of consolidated subsidiaries* | | $ | 6,260 | | $ | 1,586 | | $ | – | | $ | (7,846 | ) | $ | – | | $ | 7,638 | $ | 4,075 | $ | - | $ | (11,713) | $ | - |
Change in fair value of ML III | | (723 | ) | | – | | 77 | | – | | (646 | ) | |
Other income | | 1,088 | | 189 | | 65,663 | | (1,189 | ) | | 65,751 | | | 1,487 | | 1 | | 67,698 | | (312) | | 68,874 |
| | | |
Total revenues | | 6,625 | | 1,775 | | 65,740 | | (9,035 | ) | | 65,105 | | | 9,125 | | 4,076 | | 67,698 | | (12,025) | | 68,874 |
| | | |
Expenses: | | | | | | | | | | | |
Interest expense on FRBNY Credit Facility | | 72 | | – | | – | | (2 | ) | | 70 | | |
Other interest expense | | 2,845 | | 281 | | 437 | | (1,189 | ) | | 2,374 | | | 1,938 | | 126 | | 233 | | (155) | | 2,142 |
Loss on extinguishment of debt | | 2,847 | | – | | 61 | | – | | 2,908 | | | 580 | | - | | 71 | | - | | 651 |
Other expenses | | 867 | | – | | 59,787 | | – | | 60,654 | | | 1,520 | | 75 | | 55,277 | | (159) | | 56,713 |
| | | |
Total expenses | | 6,631 | | 281 | | 60,285 | | (1,191 | ) | | 66,006 | | | 4,038 | | 201 | | 55,581 | | (314) | | 59,506 |
| | | |
Income (loss) from continuing operations before income tax expense (benefit) | | (6 | ) | | 1,494 | | 5,455 | | (7,844 | ) | | (901 | ) | |
Income (loss) from continuing operations before income tax | | | | | | | | | | | |
expense (benefit) | | | 5,087 | | 3,875 | | 12,117 | | (11,711) | | 9,368 |
Income tax expense (benefit) | | (19,695 | ) | | (103 | ) | | 34 | | – | | (19,764 | ) | | (4,012) | | (58) | | 4,454 | | (24) | | 360 |
| | | |
Income (loss) from continuing operations | | 19,689 | | 1,597 | | 5,421 | | (7,844 | ) | | 18,863 | | | 9,099 | | 3,933 | | 7,663 | | (11,687) | | 9,008 |
Income (loss) from discontinued operations, net of income taxes | | 933 | | – | | 1,536 | | (2 | ) | | 2,467 | | | (14) | | - | | 98 | | - | | 84 |
| | | |
Net income (loss) | | 20,622 | | 1,597 | | 6,957 | | (7,846 | ) | | 21,330 | | | 9,085 | | 3,933 | | 7,761 | | (11,687) | | 9,092 |
Less: | | | | | | | | | | | |
Net income from continuing operations attributable to noncontrolling interests: | | |
Nonvoting, callable, junior and senior preferred interests | | – | | – | | – | | 634 | | 634 | | |
Other | | – | | – | | 55 | | – | | 55 | | |
| | | |
Total net income from continuing operations attributable to noncontrolling interests | | – | | – | | 55 | | 634 | | 689 | | |
Net Income from discontinued operations attributable to noncontrolling interests | | – | | – | | 19 | | – | | 19 | | |
| | | |
Total net income attributable to noncontrolling interests | | – | | – | | 74 | | 634 | | 708 | | |
| | | |
Net income from continuing operations attributable to | | | | | | | | | | | |
noncontrolling interests | | | - | | - | | 7 | | - | | 7 |
Net income (loss) attributable to AIG | | $ | 20,622 | | $ | 1,597 | | $ | 6,883 | | $ | (8,480 | ) | $ | 20,622 | | $ | 9,085 | $ | 3,933 | $ | 7,754 | $ | (11,687) | $ | 9,085 |
| | | |
* Eliminated in consolidation.
AIG 2013 Form 10-K
Condensed Consolidating Statements of Comprehensive Income (Loss)
| | American | | | | | | | | |
| | International | | | | | | Reclassifications | | |
| | Group, Inc. | | | | Other | | and | | Consolidated |
(in millions) | | (As Guarantor) | | AIGLH | | Subsidiaries | | Eliminations | | AIG |
Year Ended December 31, 2015 | | | | | | | | | | |
Net income (loss) | $ | 2,196 | $ | 1,907 | $ | 4,015 | $ | (5,896) | $ | 2,222 |
Other comprehensive income (loss) | | (8,080) | | 2,320 | | 54,757 | | (57,083) | | (8,086) |
Comprehensive income (loss) | | (5,884) | | 4,227 | | 58,772 | | (62,979) | | (5,864) |
Total comprehensive income attributable to noncontrolling interests | | - | | - | | 20 | | - | | 20 |
Comprehensive income (loss) attributable to AIG | $ | (5,884) | $ | 4,227 | $ | 58,752 | $ | (62,979) | $ | (5,884) |
Year Ended December 31, 2014 | | | | | | | | | | |
Net income (loss) | $ | 7,529 | $ | 3,319 | $ | 9,660 | $ | (12,984) | $ | 7,524 |
Other comprehensive income (loss) | | 4,257 | | 2,794 | | 3,235 | | (6,029) | | 4,257 |
Comprehensive income (loss) | | 11,786 | | 6,113 | | 12,895 | | (19,013) | | 11,781 |
Total comprehensive loss attributable to noncontrolling interests | | - | | - | | (5) | | - | | (5) |
Comprehensive income (loss) attributable to AIG | $ | 11,786 | $ | 6,113 | $ | 12,900 | $ | (19,013) | $ | 11,786 |
Year Ended December 31, 2013 | | | | | | | | | | |
Net income (loss) | $ | 9,085 | $ | 3,933 | $ | 7,761 | $ | (11,687) | $ | 9,092 |
Other comprehensive income (loss) | | (6,214) | | (4,689) | | (6,719) | | 11,385 | | (6,237) |
Comprehensive income (loss) | | 2,871 | | (756) | | 1,042 | | (302) | | 2,855 |
Total comprehensive loss attributable to noncontrolling interests | | - | | - | | (16) | | - | | (16) |
Comprehensive income (loss) attributable to AIG | $ | 2,871 | $ | (756) | $ | 1,058 | $ | (302) | $ | 2,871 |
| | | | | | | | | | | | | | | | |
| | |
(in millions)
| | American
International
Group, Inc.
(As Guarantor)
| | AIGLH
| | Other
Subsidiaries
| | Reclassifications
and
Eliminations
| | Consolidated
AIG
| |
|---|
| | |
Year Ended December 31, 2013 | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 9,085 | | $ | 3,933 | | $ | 7,761 | | $ | (11,687 | ) | $ | 9,092 | |
Other comprehensive income (loss) | | | (6,214 | ) | | (4,689 | ) | | (6,719 | ) | | 11,385 | | | (6,237 | ) |
| | |
Comprehensive income (loss) | | | 2,871 | | | (756 | ) | | 1,042 | | | (302 | ) | | 2,855 | |
Total comprehensive loss attributable to noncontrolling interests | | | – | | | – | | | (16 | ) | | – | | | (16 | ) |
| | |
Comprehensive income (loss) attributable to AIG | | $ | 2,871 | | $ | (756 | ) | $ | 1,058 | | $ | (302 | ) | $ | 2,871 | |
| | |
Year Ended December 31, 2012 | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 3,438 | | $ | 2,207 | | $ | 2,340 | | $ | (4,285 | ) | $ | 3,700 | |
Other comprehensive income (loss) | | | 6,093 | | | 3,973 | | | 7,158 | | | (11,128 | ) | | 6,096 | |
| | |
Comprehensive income (loss) | | | 9,531 | | | 6,180 | | | 9,498 | | | (15,413 | ) | | 9,796 | |
Total comprehensive income attributable to noncontrolling interests | | | – | | | – | | | 57 | | | 208 | | | 265 | |
| | |
Comprehensive income (loss) attributable to AIG | | $ | 9,531 | | $ | 6,180 | | $ | 9,441 | | $ | (15,621 | ) | $ | 9,531 | |
| | |
Year Ended December 31, 2011 | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 20,622 | | $ | 1,597 | | $ | 6,957 | | $ | (7,846 | ) | $ | 21,330 | |
Other comprehensive income (loss) | | | (2,483 | ) | | 1,101 | | | (2,674 | ) | | 1,452 | | | (2,604 | ) |
| | |
Comprehensive income (loss) | | | 18,139 | | | 2,698 | | | 4,283 | | | (6,394 | ) | | 18,726 | |
Total comprehensive income (loss) attributable to noncontrolling interests | | | – | | | – | | | (47 | ) | | 634 | | | 587 | |
| | |
Comprehensive income (loss) attributable to AIG | | $ | 18,139 | | $ | 2,698 | | $ | 4,330 | | $ | (7,028 | ) | $ | 18,139 | |
| | |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / NOTE 26. note 24. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT
Condensed Consolidating Statements of Cash Flows
| | American | | | | | | | | |
| | International | | | | | | Reclassifications | | |
| | Group, Inc. | | | | Other | | and | | Consolidated |
(in millions) | | (As Guarantor) | | AIGLH | | Subsidiaries* | | Eliminations* | | AIG |
Year Ended December 31, 2015 | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | 4,443 | $ | 2,314 | $ | 1,112 | $ | (4,992) | $ | 2,877 |
Cash flows from investing activities: | | | | | | | | | | |
Sales of investments | | 7,767 | | - | | 69,726 | | (4,877) | | 72,616 |
Purchase of investments | | (1,881) | | - | | (68,261) | | 4,877 | | (65,265) |
Loans to subsidiaries – net | | (83) | | - | | 367 | | (284) | | - |
Contributions to subsidiaries | | 565 | | - | | - | | (565) | | - |
Net change in restricted cash | | - | | - | | 1,457 | | - | | 1,457 |
Net change in short-term investments | | 2,300 | | - | | (1,137) | | - | | 1,163 |
Other, net | | (175) | | - | | (1,334) | | - | | (1,509) |
Net cash provided by investing activities | | 8,493 | | - | | 818 | | (849) | | 8,462 |
Cash flows from financing activities: | | | | | | | | | | |
Issuance of long-term debt | | 5,540 | | - | | 1,327 | | - | | 6,867 |
Repayments of long-term debt | | (6,504) | | (114) | | (3,187) | | - | | (9,805) |
Purchase of Common Stock | | (10,691) | | - | | - | | - | | (10,691) |
Intercompany loans - net | | (201) | | 3 | | (86) | | 284 | | - |
Cash dividends paid | | (1,028) | | (2,178) | | (2,814) | | 4,992 | | (1,028) |
Other, net | | (44) | | - | | 2,707 | | 565 | | 3,228 |
Net cash (used in) financing activities | | (12,928) | | (2,289) | | (2,053) | | 5,841 | | (11,429) |
Effect of exchange rate changes on cash | | - | | - | | (39) | | - | | (39) |
Change in cash | | 8 | | 25 | | (162) | | - | | (129) |
Cash at beginning of year | | 26 | | 91 | | 1,641 | | - | | 1,758 |
Change in cash of businesses held for sale | | - | | - | | - | | - | | - |
Cash at end of year | $ | 34 | $ | 116 | $ | 1,479 | $ | - | $ | 1,629 |
| | | | | | | | | | |
Year Ended December 31, 2014 | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | 9,316 | $ | 6,155 | $ | 8,979 | $ | (19,443) | $ | 5,007 |
Cash flows from investing activities: | | | | | | | | | | |
Sales of investments | | 3,036 | | - | | 65,108 | | (2,040) | | 66,104 |
Purchase of investments | | (1,051) | | - | | (59,099) | | 2,040 | | (58,110) |
Loans to subsidiaries – net | | 446 | | - | | 169 | | (615) | | - |
Contributions to subsidiaries | | (148) | | - | | 296 | | (148) | | - |
Net change in restricted cash | | (501) | | - | | (946) | | - | | (1,447) |
Net change in short-term investments | | 5,792 | | - | | 2,968 | | - | | 8,760 |
Other, net | | (141) | | - | | (882) | | - | | (1,023) |
Net cash (used in) provided by investing activities | | 7,433 | | - | | 7,614 | | (763) | | 14,284 |
| | | | | | | | | | | | | |
| | |
(in millions)
| | American
International
Group, Inc.
(As Guarantor)
| | AIGLH
| | Other
Subsidiaries
and
Eliminations
| | Consolidated
AIG
| |
|---|
| | |
Year Ended December 31, 2013 | | | | | | | | | | | | | |
| | |
Net cash (used in) provided by operating activities | | | 6,422 | | | 4,488 | | | (5,045 | ) | | 5,865 | |
| | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Sales of investments | | | 1,425 | | | – | | | 75,669 | | | 77,094 | |
Purchase of investments | | | (5,506 | ) | | – | | | (72,381 | ) | | (77,887 | ) |
Loans to subsidiaries – net | | | 3,660 | | | – | | | (3,660 | ) | | – | |
Contributions to subsidiaries – net | | | (2,081 | ) | | (1 | ) | | 2,082 | | | – | |
Net change in restricted cash | | | 493 | | | – | | | 751 | | | 1,244 | |
Net change in short-term investments | | | 2,361 | | | – | | | 5,481 | | | 7,842 | |
Other, net | | | 130 | | | – | | | (1,324 | ) | | (1,194 | ) |
| | |
Net cash (used in) provided by investing activities | | | 482 | | | (1 | ) | | 6,618 | | | 7,099 | |
| | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Issuance of long-term debt | | | 2,015 | | | – | | | 3,220 | | | 5,235 | |
Repayments of long-term debt | | | (7,439 | ) | | (245 | ) | | (6,513 | ) | | (14,197 | ) |
Purchase of Common Stock | | | (597 | ) | | – | | | – | | | (597 | ) |
Intercompany loans – net | | | (123 | ) | | (273 | ) | | 396 | | | – | |
Cash dividends paid | | | (294 | ) | | (3,991 | ) | | 3,991 | | | (294 | ) |
Other, net | | | (517 | ) | | – | | | (1,388 | ) | | (1,905 | ) |
| | |
Net cash (used in) financing activities | | | (6,955 | ) | | (4,509 | ) | | (294 | ) | | (11,758 | ) |
| | |
Effect of exchange rate changes on cash | | | – | | | – | | | (92 | ) | | (92 | ) |
| | |
Change in cash | | | (51 | ) | | (22 | ) | | 1,187 | | | 1,114 | |
Cash at beginning of year | | | 81 | | | 73 | | | 997 | | | 1,151 | |
Change in cash of businesses held for sale | | | – | | | – | | | (24 | ) | | (24 | ) |
| | |
Cash at end of year | | $ | 30 | | $ | 51 | | $ | 2,160 | | $ | 2,241 | |
| | |
| | | | | | | | | | | | | |
| |
| |
| |
| |
| |
|---|
| | |
Year Ended December 31, 2012 | | | | | | | | | | | | | |
| | |
Net cash (used in) provided by operating activities | | | (825 | ) | | 2,682 | | | 1,819 | | | 3,676 | |
| | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Sales of investments | | | 16,874 | | | – | | | 84,532 | | | 101,406 | |
Purchase of investments | | | (4,406 | ) | | – | | | (72,161 | ) | | (76,567 | ) |
Loans to subsidiaries – net | | | 5,126 | | | – | | | (5,126 | ) | | – | |
Contributions to subsidiaries – net | | | (152 | ) | | – | | | 152 | | | – | |
Net change in restricted cash | | | (377 | ) | | – | | | 791 | | | 414 | |
Net change in short-term investments | | | (2,029 | ) | | – | | | (6,080 | ) | | (8,109 | ) |
Other, net | | | 259 | | | – | | | (791 | ) | | (532 | ) |
| | |
Net cash provided by investing activities | | | 15,295 | | | – | | | 1,317 | | | 16,612 | |
| | |
Cash flows from financing activities: | | | | | | | | | | | | | |
Issuance of long-term debt | | | 3,754 | | | – | | | 4,858 | | | 8,612 | |
Repayments of long-term debt | | | (3,238 | ) | | – | | | (7,863 | ) | | (11,101 | ) |
Intercompany loans – net | | | (2,032 | ) | | (2,622 | ) | | 4,654 | | | – | |
Purchase of common stock | | | (13,000 | ) | | – | | | – | | | (13,000 | ) |
Other, net | | | (49 | ) | | – | | | (5,026 | ) | | (5,075 | ) |
| | |
Net cash (used in) financing activities | | | (14,565 | ) | | (2,622 | ) | | (3,377 | ) | | (20,564 | ) |
| | |
Effect of exchange rate changes on cash | | | – | | | – | | | 16 | | | 16 | |
| | |
Change in cash | | | (95 | ) | | 60 | | | (225 | ) | | (260 | ) |
Cash at beginning of year | | | 176 | | | 13 | | | 1,285 | | | 1,474 | |
Reclassification to assets held for sale | | | – | | | – | | | (63 | ) | | (63 | ) |
| | |
Cash at end of year | | $ | 81 | | $ | 73 | | $ | 997 | | $ | 1,151 | |
| | |
AIG 2013 Form 10-K
Table of ContentsTABLE OF CONTENTS
ITEMItem 8 / NOTE 26. note 24. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT
| | | | | | | | | | | | | |
| | |
(in millions)
| | American
International
Group, Inc.
(As Guarantor)
| | AIGLH
| | Other
Subsidiaries
and
Eliminations
| | Consolidated
AIG
| |
|---|
| | |
Year Ended December 31, 2011 | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | | $ | (5,600 | ) | $ | 1,277 | | $ | 872 | | $ | (3,451 | ) |
Net cash provided by operating activities – discontinued operations | | | – | | | – | | | 3,370 | | | 3,370 | |
| | |
Net cash (used in) provided by operating activities | | | (5,600 | ) | | 1,277 | | | 4,242 | | | (81 | ) |
| | |
Cash flows from investing activities: | | | | | | | | | | | | | |
Sales of investments | | | 2,565 | | | – | | | 82,468 | | | 85,033 | |
Sales of divested businesses, net | | | 1,075 | | | – | | | (488 | ) | | 587 | |
Purchase of investments | | | (19 | ) | | – | | | (101,136 | ) | | (101,155 | ) |
Loans to subsidiaries – net | | | 3,757 | | | – | | | (3,757 | ) | | – | |
Contributions to subsidiaries – net | | | (15,973 | ) | | (2 | ) | | 15,975 | | | – | |
Net change in restricted cash | | | 1,945 | | | – | | | 25,299 | | | 27,244 | |
Net change in short-term investments | | | (7,130 | ) | | – | | | 27,118 | | | 19,988 | |
Other, net | | | 1,543 | | | – | | | (1,270 | ) | | 273 | |
| | |
Net cash (used in) provided by investing activities | | | (12,237 | ) | | (2 | ) | | 44,209 | | | 31,970 | |
Net cash provided by investing activities – discontinued operations | | | – | | | – | | | 4,478 | | | 4,478 | |
| | |
Net cash (used in) provided by investing activities | | | (12,237 | ) | | (2 | ) | | 48,687 | | | 36,448 | |
| | |
Cash flows from financing activities: | | | | | | | | | | | | | |
FRBNY credit facility repayments | | | (14,622 | ) | | – | | | – | | | (14,622 | ) |
Issuance of long-term debt | | | 2,135 | | | – | | | 5,627 | | | 7,762 | |
Repayments of long-term debt | | | (6,181 | ) | | – | | | (11,629 | ) | | (17,810 | ) |
Proceeds from drawdown on the Department of the Treasury Commitment* | | | 20,292 | | | – | | | – | | | 20,292 | |
Issuance of common stock | | | 5,055 | | | – | | | – | | | 5,055 | |
Intercompany loans – net | | | 11,519 | | | (1,262 | ) | | (10,257 | ) | | – | |
Purchase of common stock | | | (70 | ) | | – | | | – | | | (70 | ) |
Other, net | | | (164 | ) | | – | | | (35,427 | ) | | (35,591 | ) |
| | |
Net cash (used in) provided by financing activities | | | 17,964 | | | (1,262 | ) | | (51,686 | ) | | (34,984 | ) |
Net cash (used in) financing activities – discontinued operations | | | – | | | – | | | (1,942 | ) | | (1,942 | ) |
| | |
Net cash (used in) provided by financing activities | | | 17,964 | | | (1,262 | ) | | (53,628 | ) | | (36,926 | ) |
| | |
Effect of exchange rate changes on cash | | | – | | | – | | | 29 | | | 29 | |
| | |
Change in cash | | | 127 | | | 13 | | | (670 | ) | | (530 | ) |
Cash at beginning of year | | | 49 | | | – | | | 1,509 | | | 1,558 | |
Change in cash of businesses held for sale | | | – | | | – | | | 446 | | | 446 | |
| | |
Cash at end of year | | $ | 176 | | $ | 13 | | $ | 1,285 | | $ | 1,474 | |
| | |
* Includes activities related to the Recapitalization. See Note 24 herein.
AIG 2013 Form 10-K
Cash flows from financing activities: | | | | | | | | | | |
Issuance of long-term debt | | 3,247 | | - | | 3,440 | | - | | 6,687 |
Repayments of long-term debt | | (14,468) | | (477) | | (1,215) | | - | | (16,160) |
Intercompany loans - net | | 110 | | (280) | | (445) | | 615 | | - |
Purchase of common stock | | (4,902) | | - | | - | | - | | (4,902) |
Cash dividends paid to shareholders | | (712) | | (5,358) | | (14,085) | | 19,443 | | (712) |
Other, net | | (28) | | - | | (4,821) | | 148 | | (4,701) |
Net cash (used in) provided by financing activities | | (16,753) | | (6,115) | | (17,126) | | 20,206 | | (19,788) |
Effect of exchange rate changes on cash | | - | | - | | (74) | | - | | (74) |
Change in cash | | (4) | | 40 | | (607) | | - | | (571) |
Cash at beginning of year | | 30 | | 51 | | 2,160 | | - | | 2,241 |
Reclassification to assets held for sale | | - | | - | | 88 | | - | | 88 |
Cash at end of year | $ | 26 | $ | 91 | $ | 1,641 | $ | - | $ | 1,758 |
| | | | | | | | | | |
Year Ended December 31, 2013 | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | 6,422 | $ | 4,488 | $ | 7,385 | $ | (12,430) | $ | 5,865 |
Cash flows from investing activities: | | | | | | | | | | |
Sales of investments | | 1,425 | | - | | 78,868 | | (3,199) | | 77,094 |
Purchase of investments | | (5,506) | | - | | (75,580) | | 3,199 | | (77,887) |
Loans to subsidiaries – net | | 3,660 | | - | | 395 | | (4,055) | | - |
Contributions to subsidiaries | | (2,081) | | (1) | | - | | 2,082 | | - |
Net change in restricted cash | | 493 | | - | | 751 | | - | | 1,244 |
Net change in short-term investments | | 2,361 | | - | | 5,481 | | - | | 7,842 |
Other, net | | 130 | | - | | (1,324) | | - | | (1,194) |
Net cash (used in) provided by investing activities | | 482 | | (1) | | 8,591 | | (1,973) | | 7,099 |
Cash flows from financing activities: | | | | | | | | | | |
Issuance of long-term debt | | 2,015 | | - | | 3,220 | | - | | 5,235 |
Repayments of long-term debt | | (7,439) | | (245) | | (6,513) | | - | | (14,197) |
Intercompany loans - net | | (123) | | (273) | | (3,659) | | 4,055 | | - |
Purchase of common stock | | (597) | | - | | - | | - | | (597) |
Cash dividends paid to shareholders | | (294) | | (3,991) | | (8,439) | | 12,430 | | (294) |
Other, net | | (517) | | - | | 694 | | (2,082) | | (1,905) |
Net cash (used in) provided by financing activities | | (6,955) | | (4,509) | | (14,697) | | 14,403 | | (11,758) |
Effect of exchange rate changes on cash | | - | | - | | (92) | | - | | (92) |
Change in cash | | (51) | | (22) | | 1,187 | | - | | 1,114 |
Cash at beginning of year | | 81 | | 73 | | 997 | | - | | 1,151 |
Change in cash of businesses held for sale | | - | | - | | (24) | | - | | (24) |
Cash at end of year | $ | 30 | $ | 51 | $ | 2,160 | $ | - | $ | 2,241 |
* The Other Subsidiaries and Reclassifications and Eliminations amounts were disclosed together in prior periods. The new presentation had no impact on the Consolidated AIG amounts.
Supplementary Disclosure of Condensed Consolidating Cash Flow Information
| | American | | | | | | | | |
| | International | | | | | | Reclassifications | | |
| | Group, Inc. | | | | Other | | and | | Consolidated |
(in millions) | | (As Guarantor) | | AIGLH | | Subsidiaries* | | Eliminations* | | AIG |
Cash (paid) received during the year ended December 31, 2015 for: | | | | | | | | | | |
Interest: | | | | | | | | | | |
Third party | $ | (1,030) | $ | (59) | $ | (279) | $ | - | $ | (1,368) |
Intercompany | | - | | - | | - | | - | | - |
Taxes: | | | | | | | | | | |
Income tax authorities | $ | (11) | $ | - | $ | (500) | $ | - | $ | (511) |
Intercompany | | 829 | | - | | (829) | | - | | - |
Cash (paid) received during the year ended December 31, 2014 for: | | | | | | | | | | |
Interest: | | | | | | | | | | |
Third party | $ | (1,624) | $ | (87) | $ | (1,656) | $ | - | $ | (3,367) |
Intercompany | | 5 | | (7) | | 2 | | - | | - |
Taxes: | | | | | | | | | | |
Income tax authorities | $ | (18) | $ | - | $ | (719) | $ | - | $ | (737) |
Intercompany | | 1,172 | | - | | (1,172) | | - | | - |
Cash (paid) received during the year ended December 31, 2013 for: | | | | | | | | | | |
Interest: | | | | | | | | | | |
Third party* | $ | (1,963) | $ | (111) | $ | (1,782) | $ | - | $ | (3,856) |
Intercompany | | (12) | | (21) | | 33 | | - | | - |
Taxes: | | | | | | | | | | |
Income tax authorities | $ | (161) | $ | - | $ | (635) | $ | - | $ | (796) |
Intercompany | | 288 | | (78) | | (210) | | - | | - |
| | | | | | | | | | | | | |
| | |
(in millions)
| | American
International
Group, Inc.
(As Guarantor)
| | AIGLH
| | Other
Subsidiaries
and
Eliminations
| | Consolidated
AIG
| |
|---|
| | |
Cash (paid) received during the year ended December 31, 2013 for: | | | | | | | | | | | | | |
Interest: | | | | | | | | | | | | | |
Third party | | $ | (1,963 | ) | $ | (111 | ) | $ | (1,782 | ) | $ | (3,856 | ) |
Intercompany | | | (12 | ) | | (21 | ) | | 33 | | | – | |
Taxes: | | | | | | | | | | | | | |
Income tax authorities | | $ | (161 | ) | $ | – | | $ | (635 | ) | $ | (796 | ) |
Intercompany | | | 288 | | | (78 | ) | | (210 | ) | | – | |
| | |
Cash (paid) received during the year ended December 31, 2012 for: | | | | | | | | | | | | | |
Interest: | | | | | | | | | | | | | |
Third party | | $ | (2,089 | ) | $ | (128 | ) | $ | (1,820 | ) | $ | (4,037 | ) |
Intercompany | | | (133 | ) | | (56 | ) | | 189 | | | – | |
Taxes: | | | | | | | | | | | | | |
Income tax authorities | | $ | (7 | ) | $ | – | | $ | (440 | ) | $ | (447 | ) |
Intercompany | | | 230 | | | (41 | ) | | (189 | ) | | – | |
| | |
Cash (paid) received during the year ended December 31, 2011 for: | | | | | | | | | | | | | |
Interest: | | | | | | | | | | | | | |
Third party* | | $ | (6,909 | ) | $ | (128 | ) | $ | (1,948 | ) | $ | (8,985 | ) |
Intercompany | | | (311 | ) | | (169 | ) | | 480 | | | – | |
Taxes: | | | | | | | | | | | | | |
Income tax authorities | | $ | 13 | | $ | – | | $ | (729 | ) | $ | (716 | ) |
Intercompany | | | (335 | ) | | 1 | | | 334 | | | – | |
| | |
* Includes payment of FRBNY Credit Facility accrued compounded interest of $4.7 billionThe Other Subsidiaries and Reclassifications and Eliminations amounts were disclosed together in prior periods. The new presentation had no impact on the first quarter of 2011.
Consolidated AIG amounts.
American International Group, IncInc. (As Guarantor) supplementary disclosure of non-cash activities:
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Intercompany non-cash financing and investing activities: | | | | | | |
Capital contributions to subsidiaries through forgiveness of loans | $ | - | $ | - | $ | 341 |
Dividends received in the form of securities | | 2,326 | | 3,088 | | - |
Other capital contributions - net | | 494 | | 2,457 | | 523 |
Return of capital* | | - | | 4,836 | | - |
Non-cash financing/investing activities: | | | | | | |
Consideration received from sale of shares of AerCap | | 500 | | - | | - |
* Includes $4.8 billion return of capital from AIG Capital Corporation related to the sale of ILFC.
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Intercompany non-cash financing and investing activities: | | | | | | | | | | |
Capital contributions | | | | | | | | | | |
in the form of bond available for sale securities | | $ | – | | $ | 4,078 | | $ | – | |
to subsidiaries through forgiveness of loans | | | 341 | | | – | | | – | |
Return of capital and dividend received | | | | | | | | | | |
in the form of cancellation of intercompany loan | | | – | | | 9,303 | | | – | |
in the form of other bond securities | | | – | | | 3,320 | | | 3,668 | |
Intercompany loan receivable offset by intercompany payable | | | – | | | – | | | 18,284 | |
Other capital contributions – net | | | 523 | | | 579 | | | 523 | |
| | |
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
ITEMItem 8 / NOTE 27. note 25. SUBSEQUENT EVENTS
27. SUBSEQUENT EVENTS
25. Subsequent events
Debt Redemption
In January 2014, AIG reduced DIB debt by $2.2 billion through a redemption of $1.2 billion aggregate principal amount of its 4.250% Notes due 2014 and a repurchase of $1.0 billion of its 8.25% Notes due 2018 using cash and short term investments allocated to the DIB.
Increase in Dividends Declared and Share Repurchase Authorization
On February 13, 2014,11, 2016, our Board of Directors declared a cash dividend on AIG Common Stock of $0.125$0.32 per share, payable on March 25, 201428, 2016, to shareholders of record on March 14, 2016.
On February 11, 2014. The payment of any future dividends will be at the discretion of2016, our Board of Directors and will depend on various factors, includingauthorized an additional increase to the regulatory framework applicable to us.
On February 13, 2014, our Boardrepurchase authorization of Directors increased the aggregate purchase amount authorized under AIG's August 1, 2013 AIG Common Stock share repurchase authorization by $1.0of $5.0 billion, resulting in an aggregate remaining authorization on such date of approximately $1.4$5.8 billion.
See Note 16 for further discussion.
AIG 2013 Form 10-K
Table of ContentsPART II
Part II
ITEM 9 / CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
None.
ITEM 9A / CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In connection with the preparation of this Annual Report on Form 10-K, an evaluation was carried out by AIG management, with the participation of AIG'sAIG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2013.2015. Based on this evaluation, AIG'sAIG’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2013.2015.
Management'sManagement’s Report on Internal Control Over Financial Reporting
Management of AIG is responsible for establishing and maintaining adequate internal control over financial reporting. AIG'sAIG’s internal control over financial reporting is a process, under the supervision of AIG'sAIG’s Chief Executive Officer and Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of AIG'sAIG’s financial statements for external purposes in accordance with U.S. GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
AIG management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 20132015 based on the criteria established in the 19922013 Internal Control —– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
AIG management has concluded that, as of December 31, 2013,2015, our internal control over financial reporting was effective based on the criteria articulated in the 19922013 Internal Control —– Integrated Frameworkissued by the COSO. The effectiveness of our internal control over financial reporting as of December 31, 20132015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
We continue our implementation of new technology solutions, which began in 2010, to mitigate the reliance on manual controls and to improve internal controls relating to the period-end financial reporting and consolidation process, income taxes and reporting for non-standard transactions. As a result, we have updated our internal controls to accommodate the modifications to our business processes and accounting procedures. We have evaluated the effect on our internal control over financial reporting of this implementation for the quarter ended December 31, 2013, and determined that this conversion has not materially affected, and is not reasonably likely to materially affect, our internal control over financial reporting. There have been no other changes in our internal control over financial reporting that have occurred during the quarter ended December 31, 20132015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Table of Contents
PART III
Part III
ITEM 10 / DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except for the information provided in Part 1, Item 1. Business under the heading "Directors and Executive Officers of AIG", allAll information required by Items 10, 11, 12, 13 and 14 of this Form 10-K is incorporated by reference from the definitive proxy statement for AIG's 2014AIG’s 2016 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to Regulation 14A.
ITEM 11 / EXECUTIVE COMPENSATION
See Item 10 herein.
ITEM 12 / SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See Item 10 herein.
ITEM 13 /CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See Item 10 herein.
ITEM 14 / PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 10 herein.
Part IV
PART IV
ITEM 15 / EXHIBITS, FINANCIAL STATEMENT SCHEDULES
- (a)
- Financial Statements and Schedules. See accompanying Index to Financial Statements.
(b)
- Exhibits. See accompanying Exhibit Index.
AIG 2013 Form 10-K
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 20th19th of February, 2014.2016.
AMERICAN INTERNATIONAL GROUP, INC.
| | | | |
| | AMERICAN INTERNATIONAL GROUP, INC. |
|
|
By |
|
/s/ ROBERT H. BENMOSCHE
(Robert H. Benmosche, President and
Chief Executive Officer)
|
By /s/ PETER D. HANCOCK
(Peter D. Hancock, President and Chief Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert H. BenmoschePeter D. Hancock and David L. Herzog, and each of them severally, his or her true and lawful attorney-in-fact, with full power of substitution and resubstitution, to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 20th19th of February, 2014.2016.
| | | |
| | | |
|---|
|
|
|
|
| |
/s/ ROBERT H. BENMOSCHE
/s/ PETER D. HANCOCK
(Robert H. Benmosche)
| | President, Chief Executive Officer and Director
|
(Peter D. Hancock) | (Principal Executive Officer) |
|
|
/s/ /s/ DAVID L. HERZOG
(David L. Herzog)
|
|
Executive Vice President and Chief Financial Officer
|
(David L. Herzog) | (Principal Financial Officer) |
|
|
/s/ DON W. CUMMINGS
/s/ ELIAS F. HABAYEB
(Don W. Cummings)
|
|
Senior Vice President —– Deputy Chief Financial Officer and Group Controller
|
(Elias F. Habayeb) | (Principal Accounting Officer) |
|
|
/s/ W. DON CORNWELL
| Director |
(W. Don Cornwell) |
|
Director |
|
|
/s/ PETER R. FISHER | Director |
(Peter R. Fisher) | |
| |
/s/ JOHN H. FITZPATRICK
| Director |
(John H. Fitzpatrick) |
|
Director |
|
|
/s/ WILLIAM G. JURGENSEN
| Director |
(William G. Jurgensen) |
|
Director |
AIG 2013 Form 10-K
Table of Contents
| | | |
| Signature
| | Title
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|---|
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| |
/s/ /s/ CHRISTOPHER S. LYNCH
| Director |
(Christopher S. Lynch) | | Director |
|
/s/ ARTHUR C. MARTINEZ
(Arthur C. Martinez) |
|
Director |
|
/s/ /s/ GEORGE L. MILES, JR.
| Director |
(George L. Miles, Jr.) |
|
Director |
|
|
/s/ /s/ HENRY S. MILLER
| Director |
(Henry S. Miller) |
|
Director |
|
|
/s/ /s/ ROBERT S. MILLER
| Director |
(Robert S. Miller) |
|
Director |
|
|
/s/ /s/ LINDA A. MILLS
| Director |
(Linda A. Mills) | |
| |
/s/ SUZANNE NORA JOHNSON
| Director |
(Suzanne Nora Johnson) |
|
Director |
|
|
/s/ /s/ RONALD A. RITTENMEYER
| Director |
(Ronald A. Rittenmeyer) |
|
Director |
|
|
/s/ /s/ DOUGLAS M. STEENLAND
| Director |
(Douglas M. Steenland) |
|
Director |
|
|
/s/ THERESA M. STONE
| Director |
(Theresa M. Stone) |
|
|
Director |
EXHIBIT INDEX
| | | | | |
| | | | |
|---|
2 | 2 | | Plan of acquisition, reorganization, arrangement, liquidation or succession | | |
|
|
|
(1) Master Transaction Agreement, dated as of December 8, 2010, among AIG, ALICO Holdings LLC, AIA Aurora LLC, the Federal Reserve Bank of New York, the United States Department of the Treasury and the AIG Credit Facility Trust |
|
Incorporated by reference to Exhibit 2.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on December 8, 2010 (File No. 1-8787). |
3 |
3 |
|
Articles of incorporation and by-laws by‑laws |
|
|
3(i) |
3(i) |
|
Amended and Restated Certificate of Incorporation of AIG |
|
Incorporated by reference to Exhibit 3.23.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on July 13, 2011May 12, 2014 (File No. 1-8787). |
3(ii) |
3(ii) |
|
AIG By-laws, amended August 10, 2009 November 16, 2015 |
|
Incorporated by reference to Exhibit 3(ii)3.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on August 14, 2009November 16, 2015 (File No. 1-8787). |
4 |
4 |
|
Instruments defining the rights of security holders, including indentures |
|
Certain instruments defining the rights of holders of long-term debt securities of AIG and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. AIG hereby undertakes to furnish to the Commission, upon request, copies of any such instruments. |
|
|
|
(1) Credit Agreement, dated as of September 22, 2008, between AIG and Federal Reserve Bank of New York |
|
Incorporated by reference to Exhibit 99.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on September 26, 2008 (File No. 1-8787). |
|
|
|
(2) Warrant Agreement (including Form of Warrant), dated as of January 6, 2011, between AIG and Wells Fargo Bank, N.A., as Warrant Agent |
|
Incorporated by reference to Exhibit 10.1 to AIG'sAIG’s Current Report on Form 8-K8‑K filed with the SEC on January 7, 2011 (File No. 1-8787)1‑8787). |
|
|
|
(3) Tax Asset Protection Plan, dated as of March 9, 2011, between AIG and Wells Fargo Bank, N.A., as Rights Agent, including as Exhibit A the forms of Rights Certificate and of Election to Exercise |
|
Incorporated by reference to Exhibit 4.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on March 9, 2011 (File No. 1-8787). |
|
|
|
(4) Amendment No. 1, dated as of January 8, 2014, to Tax Asset Protection Plan, between AIG and Wells Fargo Bank, National Association, as Rights Agent. Agent |
|
Incorporated by reference to Exhibit 4.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on January 8, 2014 (File No. 1-8787). |
9 |
|
|
(5) Subordinated Debt Indenture, dated as of August 23, 2012, between AIG and The Bank of New York Mellon, as Trustee |
|
Incorporated by reference to Exhibit 4.1 to AIG's Current Report on Form 8-K filed with the SEC on August 23, 2012 (File No. 1-8787). |
|
|
|
(6) Amendment to the Replacement Capital Covenants, dated as of August 23, 2012, by AIG in favor of and for the benefit of each Covered Debtholder |
|
Incorporated by reference to Exhibit 99.1 to AIG's Current Report on Form 8-K filed with the SEC on August 23, 2012 (File No. 1-8787). |
|
9 |
|
Voting Trust Agreement |
|
None. |
10 |
10 |
|
Material contracts |
|
|
|
|
|
(1) AIG Amended and Restated 1999 Stock Option Plan* |
|
Filed as exhibit to AIG'sAIG’s Definitive Proxy Statement dated April 4, 2003 (File No. 1-8787) and incorporated herein by reference. |
|
|
|
(2) Form of Stock Option Grant Agreement under the AIG Amended and Restated 1999 Stock Option Plan* |
|
Incorporated by reference to Exhibit 10(a) to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-8787). |
AIG 2013 Form 10-K
Table of Contents
| | | | | |
Exhibit
Number
| | Description
| | Location
|
|---|
| | | (3) AIG Executive Deferred Compensation Plan* | | Incorporated by reference to Exhibit 4(a) to AIG'sAIG’s Registration Statement on Form S-8 (File No. 333-101640). |
|
|
|
(4) AIG Supplemental Incentive Savings Plan* |
|
Incorporated by reference to Exhibit 4(b) to AIG'sAIG’s Registration Statement on Form S-8 (File No. 333-101640). |
|
|
|
(5) AIG Director Stock Plan* |
|
Filed as an exhibit to AIG'sAIG’s Definitive Proxy Statement dated April 5, 2004 (File No. 1-8787) and incorporated herein by reference. |
|
|
|
(6) Amended and Restated American General Supplemental Thrift Plan (December 31, 1998)* |
|
Incorporated by reference to Exhibit 10.15 to American General Corporation'sCorporation’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-7981). |
|
|
|
(7) Letter Agreement, dated August 16, 2009, between AIG and Robert H. Benmosche* |
|
Incorporated by reference to Exhibit 99.1 to AIG's Current Report on Form 8-K filed with the SEC on August 17, 2009 (File No. 1-8787). |
|
|
|
(8) AIG Amended and Restated Executive Severance Plan* |
|
Incorporated by reference to Exhibit 10.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on September 26, 2008 (File No. 1-8787). |
|
|
|
(9)(8) Assurance Agreement, by AIG in favor of eligible employees, dated as of June 27, 2005, relating to certain obligations of Starr International Company, Inc.* |
|
Incorporated by reference to Exhibit 10(6) to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 1-8787). |
|
|
|
(10)(9) Final Judgment and Consent with the Securities and Exchange Commission, including the related complaint, dated February 9, 2006 |
|
Incorporated by reference to Exhibit 10.2 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on February 9, 2006 (File No. 1-8787). |
|
|
|
(11)(10) Agreement between the Attorney General of the State of New York and AIG and its Subsidiaries, dated January 18, 2006 |
|
Incorporated by reference to Exhibit 10.3 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on February 9, 2006 (File No. 1-8787). |
|
(11) AIG Amended and Restated 2007 Stock Incentive Plan* |
|
(12) AIG Senior Partners Plan (amended and restated effective December 31, 2008)* |
|
Incorporated by reference to Exhibit 10.5910.62 to AIG'sAIG’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-8787). |
|
(12) AIG Form of Stock Option Award Agreement* |
Incorporated by reference to Exhibit 10.A to AIG’s Registration Statement on Form S-8 (File No. 333-148148). |
|
(13) AIG Amended and Restated 2007Form of Non-Employee Director Deferred Stock Incentive Plan* Units Award Agreement* |
|
Incorporated by reference to Exhibit 10.6210.69 to AIG'sAIG’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-8787). |
|
|
|
(14) AIG Form of Stock Option Award Agreement* |
|
Incorporated by reference to Exhibit 10.A to AIG's Registration Statement on Form S-8 (File No. 333-148148). |
|
|
|
(15) AIG Amended and Restated Form of Non-Employee Director Deferred Stock Units Award Agreement * |
|
Incorporated by reference to Exhibit 10.69 to AIG's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-8787). |
|
|
|
(16) Form of AIG 2009 TARP RSU Award Agreement (Top 25)* |
|
Incorporated by reference to Exhibit 10.2 to AIG's Current Report on Form 8-K filed with the SEC on December 31, 2009 (File No. 1-8787). |
|
|
|
(17) Form of AIG 2009 TARP RSU Award Agreement (Top 100)* |
|
Incorporated by reference to Exhibit 10.63 to AIG's Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-8787). |
|
|
|
(18) Form of AIG Stock Salary Award Agreement* |
|
Incorporated by reference to Exhibit 10.2 to AIG's Current Report on Form 8-K filed with the SEC on December 31, 2009 (File No. 1-8787). |
|
|
|
(19) Memorandum of Understanding, dated November 25, 2009, between AIG, Maurice R. Greenberg, Howard I. Smith, C.V. Starr and Star International Company, Inc. |
|
Incorporated by reference to Exhibit 10.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on November 25, 2009 (File No. 1-8787). |
AIG 2013 Form 10-K
Table of Contents
| | | | | |
Exhibit
Number
| | Description
| | Location
|
|---|
| | | (20) Second Amended and Restated Limited Liability Company Agreement of ALICO Holdings LLC, dated as of December 1, 2009, between AIG and the Federal Reserve Bank of New York | | Incorporated by reference to Exhibit 10.2 to AIG's Current Report on Form 8-K filed with the SEC on December 1, 2009 (File No. 1-8787). |
|
|
|
(21)(15) Master Investment and Credit Agreement, dated as of November 25, 2008, among Maiden Lane III LLC, the Federal Reserve Bank of New York, AIG and the Bank of New York Mellon |
|
Incorporated by reference to Exhibit 10.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on December 2, 2008 (File No. 1-8787). |
|
|
|
(22)(16) Asset Purchase Agreement, dated as of December 12, 2008, among the Sellers party thereto, AIF Securities Lending Corp., AIG, Maiden Lane II LLC and the Federal Reserve Bank of New York |
|
Incorporated by reference to Exhibit 10.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on December 15, 2008 (File No. 1-8787). |
|
|
|
(23)(17) AIG Credit Facility Trust Agreement, dated as of January 16, 2009, among the Federal Reserve Bank of New York and Jill M. Considine, Chester B. Feldberg and Douglas L. Foshee, as Trustees |
|
Incorporated by reference to Exhibit 10.1 to AIG's Current Report on Form 8-K filed with the SEC on January 23, 2009 (File No. 1-8787). |
|
|
|
(24) 2009-2010 Stock Salary Award Agreement between AIG and Robert H. Benmosche, dated November 24, 2009* |
|
Incorporated by reference to Exhibit 10.1 to AIG's Current Report on Form 8-K filed with the SEC on November 25, 2009 (File No. 1-8787). |
|
|
|
(25) Restrictive Covenant Agreement between AIG and Robert H. Benmosche, dated November 24, 2009* |
|
Incorporated by reference to Exhibit 10.1 to AIG's Current Report on Form 8-K filed with the SEC on November 25, 2009 (File No. 1-8787). |
|
|
|
(26) Form of Reimbursement Agreement for Use of Corporate Aircraft* |
|
Incorporated by reference to Exhibit 10.1 to AIG's Current Report on Form 8-K filed with the SEC on January 25, 2010 (File No. 1-8787). |
|
|
|
(27) First(18) Third Amended and Restated Credit Agreement, dated as of OctoberNovember 5, 2012,2015, among AIG, the subsidiary borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and each Several L/C Agent party thereto. thereto |
|
Incorporated by reference to Exhibit 10.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on OctoberNovember 5, 20122015 (File No. 1-8787) . |
|
|
|
(28) Purchase Agreement, dated as of September 30, 2010, between American International Group, Inc. and Prudential Financial, Inc. (excluding certain exhibits and schedules) |
|
Incorporated by reference to Exhibit 2.1 to AIG's Current Report on Form 8-K filed with the SEC on October 4, 2010 (File No. 1-8787). |
|
|
|
(29)(19) American International Group, Inc. 2010 Stock Incentive Plan* |
|
Incorporated by reference to AIG'sAIG’s Definitive Proxy Statement, dated April 12, 2010 (Filed No. 1-8787). |
|
|
|
(30)(20) AIG Amended Form of 2010 Stock Incentive Plan DSU Award Agreement* |
|
Incorporated by reference to Exhibit 10.14 to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (File No. 1-8787). |
|
(21) Release and Restrictive Covenant Agreement between AIG and Peter Hancock* |
|
(31) Form of Award Letter for LTPU-based stock salary* |
|
Incorporated by reference to Exhibit 10.299.3 to AIG's Current Report on Form 8-K filed with the SEC on May 28, 2010 (File No. 1-8787). |
|
|
|
(32) Determination Memorandum, dated March 23, 2010, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.1 to AIG's Current Report on Form 8-K filed with the SEC on April 2, 2010 (File No. 1-8787). |
|
|
|
(33) Stock Purchase Agreement, dated as of March 7, 2010, among American International Group, Inc., ALICO Holdings LLC and MetLife, Inc. |
|
Incorporated by reference to Exhibit 2.1 to AIG's Current Report on Form 8-K filed with the SEC on March 11, 2010 (File No. 1-8787). |
|
|
|
(34) Supplemental Determination Memorandum, dated February 5, 2010, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 99.2 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on February 8, 2010 (File No. 1-8787). |
AIG 2013 Form 10-K
Table of Contents
| | | | | |
Exhibit
Number
| | Description
| | Location
|
|---|
| | | | (35) Release | | |
| (22) Non-Competition and Restrictive CovenantNon-Solicitation Agreement between AIG and Peter Hancock*Hancock, dated February 8, 2010* | | Incorporated by reference to Exhibit 99.399.4 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on February 8, 2010 (File No. 1-8787). |
|
|
|
(36) Non-Competition and Non-Solicitation(23) Letter Agreement, dated August 14, 2013, between AIG and Peter Hancock, dated February 8, 2010* Kevin Hogan* |
|
Incorporated by reference to Exhibit 99.4 to AIG's Current Report on Form 8-K filed with the SEC on February 8, 2010 (File No. 1-8787). |
|
|
|
(37) Determination Memorandum, dated April 16, 2010, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.2 to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 20102015 (File No. 1-8787). |
|
|
|
(38) Supplemental Determination Memorandum,(24) Non-Solicitation and Non-Disclosure Agreement, dated August 3, 2010, from the Office of the Special Master for TARP Executive Compensation to AIG* 14, 2013, between AIG and Kevin Hogan* |
|
Incorporated by reference to Exhibit 10(103)10.3 to AIG's AnnualAIG’s Quarterly Report on Form 10-K10-Q for the yearquarter ended DecemberMarch 31, 20102015 (File No. 1-8787). |
|
(25) Introductory Bonus Agreement, dated August 14, 2013, between AIG and Kevin Hogan* |
|
(39) Supplemental Determination Memorandum, dated December 20, 2010, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10(104)10.4 to AIG's AnnualAIG’s Quarterly Report on Form 10-K10-Q for the yearquarter ended DecemberMarch 31, 20102015 (File No. 1-8787). |
|
|
(26) AIG Non-Qualified Retirement Income Plan (as amended)* |
(40) Supplemental Determination Memorandum, dated May 18, 2010, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10(105) to AIG's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-8787). |
|
|
|
(41) Amendment No. 1, dated as of March 7, 2010, to the Second Amended and Restated Limited Liability Company Agreement of ALICO Holdings LLC |
|
Incorporated by reference to Exhibit 10(106) to AIG's Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 1-8787). |
|
|
|
(42) Determination Memorandum, dated April 1, 2011, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.1 to AIG's CurrentAIG’s Quarterly Report on Form 8-K filed with10-Q for the SEC on April 1, 2011quarter ended September 30, 2015 (File No. 1-8787). |
|
|
(27) AIG Supplemental Executive Retirement Plan (as amended)* |
(43) Determination Memorandum, dated April 8, 2011, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.10910.2 to AIG's AnnualAIG’s Quarterly Report on Form 10-K10-Q for the yearquarter ended December 31, 2011September 30, 2015 (File No. 1-8787). |
|
|
(28) American General Corporation Supplemental Executive Retirement Plan* |
(44) Supplemental Determination Memorandum, dated October 21, 2011, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.110 to AIG's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-8787). |
|
|
|
(45) Supplemental Determination Memorandum, dated August 19, 2011, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.111 to AIG's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-8787). |
|
|
|
(46) Determination Memorandum, dated April 6, 2012, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.1 to AIG's CurrentAmerican General Corporation’s Quarterly Report on Form 8-K filed with10-Q for the SEC on April 10, 2012quarter ended September 30, 1998 (File No. 1-8787)1-7981). |
|
|
(29) Amendment Number One to the American General Corporation Supplemental Executive Retirement Plan* |
(47) Determination Memorandum, dated May 9, 2012, from the Office of the Special Master for TARP Executive Compensation to AIG* |
|
Incorporated by reference to Exhibit 10.6610.73 to AIG'sAIG’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-8787). |
|
|
(30) Amendment Number Two to the American General Corporation’ Supplemental Executive Retirement Plan* |
(48) AIG Non-Qualified Retirement Income Plan* |
|
Incorporated by reference to Exhibit 10.6910.74 to AIG'sAIG’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-8787). |
|
|
|
(49) AIG Supplemental Executive Retirement Plan* |
|
Incorporated by reference to Exhibit 10.70 to AIG's Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-8787). |
|
|
|
(50) Amendment to the AIG Supplemental Executive Retirement Plan* |
|
Incorporated by reference to Exhibit 10.71 to AIG's Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-8787). |
|
|
|
(51) American General Corporation Supplemental Executive Retirement Plan* |
|
Incorporated by reference to Exhibit 10.1 to American General Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 1-7981). |
AIG 2013 Form 10-K
Table of Contents
| | | | | |
Exhibit
Number
| | Description
| | Location
|
|---|
| | | (52) Amendment Number One to the American General Corporation Supplemental Executive Retirement Plan* | | Incorporated by reference to Exhibit 10.73 to AIG's Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-8787). |
|
|
|
(53) Amendment Number Two to the American General Corporation' Supplemental Executive Retirement Plan* |
|
Incorporated by reference to Exhibit 10.74 to AIG's Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 1-8787). |
|
|
|
(54)(31) Master Transaction Agreement, dated as of April 19, 2011, by and among American Home Assurance Company, Chartis Casualty Company (f/k/a American International South Insurance Company), Chartis Property Casualty Company (f/k/a AIG Casualty Company), Commerce and Industry Insurance Company, Granite State Insurance Company, Illinois National Insurance Co., National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company, The Insurance Company of the State of Pennsylvania, Chartis Select Insurance Company (f/k/a AIG Excess Liability Insurance Company Ltd.), Chartis Specialty Insurance Company (f/k/a American International Specialty Lines Insurance Company), Landmark Insurance Company, Lexington Insurance Company, AIU Insurance Company, American International Reinsurance Company, Ltd. and American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company and Chartis Overseas Limited acting as members of the Chartis Overseas Association as respects business written or assumed by or from affiliated companies of Chartis Inc. (collectively, the Reinsureds), Eaglestone Reinsurance Company and National Indemnity Company |
|
Incorporated by reference to Exhibit 10.6 to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 1-8787). |
|
|
|
(55) Amended and Restated Unconditional Capital Maintenance Agreement, dated as of February 18, 2014, between American International Group, Inc. and American General Life Insurance Company |
|
Filed herewith. |
|
|
|
(56) Amended and Restated Unconditional Capital Maintenance Agreement, dated as of February 18, 2014, between American International Group, Inc. and The United States Life Insurance Company in the City of New York |
|
Filed herewith. |
|
|
|
(57) Amended and Restated Unconditional Capital Maintenance Agreement, dated as of February 18, 2014, among American International Group, Inc., AIG Property Casualty Inc., AIU Insurance Company, American Home Assurance Company, AIG Assurance Company, AIG Property Casualty Company, AIG Specialty Insurance Company, Commerce and Industry Insurance Company, Granite State Insurance Company, Illinois National Insurance Co., Lexington Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., New Hampshire Insurance Company and The Insurance Company of the State of Pennsylvania |
|
Filed herewith. |
AIG 2013 Form 10-K
Table of Contents
| | | | | |
Exhibit
Number
| | Description
| | Location
|
|---|
| | | | (58) | | |
| | (32) Amended and Restated Unconditional Capital Maintenance Agreement, dated as of February 18, 2014, between American International Group, Inc. and AGC Life Insurance Company | | Filed herewith.Incorporated by reference to Exhibit 10.58 to AIG’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 1-8787). | |
|
|
|
(59) Amended and Restated Unconditional Capital Maintenance Agreement, dated as of February 18, 2014, between American International Group, Inc. and The Variable Annuity Life Insurance Company |
|
Filed herewith. |
|
|
|
(60)(33) Unconditional Capital Maintenance Agreement, dated as of July 1, 2013, between American International Group, Inc. and United Guaranty Residential Insurance Company |
|
Incorporated by reference to Exhibit 10.7 to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 1-8787). | |
|
|
(34) Side Letter, dated as of August 1, 2014, to Unconditional Capital Maintenance Agreement, dated as of July 1, 2013, between AIG and United Guaranty Residential Insurance Company |
(61) AIG 2013 Long-Term Incentive Plan* |
|
Incorporated by reference to Exhibit 10.110.2 to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 1-8787). | |
| | (35) AIG 2013 Long-Term Incentive Plan (as amended)* | | Filed herewith. | |
| | (36) Form of 2013 Long-Term Incentive Plan Performance Share Units Award Agreement* | | Incorporated by reference to Exhibit 10.2 to AIG’s Current Report on Form 8-K filed with the SEC on March 27, 2013 (File No. 1-8787). | |
|
|
|
(62)(37) Form of 2013 Long-Term Incentive Plan2015 Performance Share Units Award Agreement* |
|
Incorporated by reference to Exhibit 10.210.5 to AIG'sAIG’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (File No. 1-8787). | |
| | (38) AIG Clawback Policy* | | Incorporated by reference to Exhibit 10.3 to AIG’s Current Report on Form 8-K filed with the SEC on March 27, 2013 (File No. 1-8787). | |
|
|
(39) AIG 2013 Short-Term Incentive Plan* |
(63) AIG Clawback Policy* |
|
Incorporated by reference to Exhibit 10.310.5 to AIG's CurrentAIG’s Quarterly Report on Form 8-K filed with10-Q for the SEC on March 27, 2013quarter ended September 30, 2014 (File No. 1-8787). | |
|
|
|
(64) AIG 2013 Short-Term Incentive Plan* |
|
Incorporated by reference to Exhibit 10.4 to AIG's Current Report on Form 8-K filed with the SEC on March 27, 2013 (File No. 1-8787). |
|
|
|
(65)(40) Form of 2013 Short-Term Incentive Plan Award Letter* |
|
Incorporated by reference to Exhibit 10.5 to AIG's Currentof AIG’s Quarterly Report on Form 8-K filed with10-Q for the SEC on March 27, 2013quarter ended September 30, 2014 (File No. 1-8787). | |
|
|
(41) AIG Annual Short-Term Incentive Plan (as amended)* |
(66) | Filed herewith. | |
| | (42) AIG 2013 Omnibus Incentive Plan* |
|
Incorporated by reference to Appendix B in AIG'sAIG’s Definitive Proxy Statement on Schedule 14A, dated April 4, 2013 (File No. 1-8787). | |
|
|
|
(67)(43) Description of Non-Management Director Compensation* |
|
Incorporated by reference to "Compensation“Compensation of Directors"Directors” in AIG'sAIG’s Definitive Proxy Statement on Schedule 14A, dated April 4, 2013March 30, 2015 (File No. 1-8787). | |
|
|
|
(68) Description of Named Executive Officer Compensation* |
|
Incorporated by reference to AIG's Current Report on Form 8-K filed with the SEC on April 4, 2013 (File No. 1-8787). |
|
|
|
(69)(44) AIG 2012 Executive Severance Plan (as amended)* |
|
Filed herewith. |
|
|
|
(70) Share Purchase Agreement, dated as of December 9, 2012, by and among AIG Capital Corporation, AIG and Jumbo Acquisition Limited |
|
Incorporated by reference to Exhibit 2.1 to AIG's Current10.3 of AIG’s Quarterly Report on Form 8-K filed with10-Q for the SEC on December 10, 2012quarter ended September 30, 2014 (File No. 1-8787). | |
|
|
|
(71) Amendment No.1 to the Share Purchase Agreement, dated as of May 10, 2013, among AIG, AIG Capital Corporation and Jumbo Acquisition Limited |
|
Incorporated by reference to Exhibit 2.1 to AIG's Current Report on Form 8-K filed with the SEC on May 13, 2013 (File No. 1-8787). |
|
|
|
(72) Amendment No.2 to the Share Purchase Agreement, dated as of June 15, 2013, among AIG, AIG Capital Corporation and Jumbo Acquisition Limited |
|
Incorporated by reference to Exhibit 2.1 to AIG's Current Report on Form 8-K filed with the SEC on June 17, 2013 (File No. 1-8787). |
|
|
|
(73) AerCap Share Purchase Agreement, dated as of December 16, 2013, by and among AIG Capital Corporation, AIG, AerCap Holdings N.V., and AerCap Ireland Limited |
|
Incorporated by reference to Exhibit 2.1 to AIG's Current Report on Form 8-K filed with the SEC on December 16, 2013 (File No. 1-8787). |
AIG 2013 Form 10-K
Table of Contents
| | | | | |
Exhibit
Number
| | Description
| | Location
|
|---|
| | | (74)(45) Revolving Credit Agreement, dated as of December 16, 2013 by and among AIG, AerCap Ireland Capital Limited, AerCap Holdings N.V., AerCap Ireland Limited and certain subsidiaries of AerCap Holdings N.V., as guarantors.guarantors | | Incorporated by reference to Exhibit 10.1 to AIG'sAIG’s Current Report on Form 8-K filed with the SEC on December 16, 2013 (File No. 1-8787). | |
11 |
11 |
|
Statement re: Computation of Per Share Earnings |
|
Included in Note 1819 to Consolidated Financial Statements. |
12 |
12 |
|
Computation of Ratios of Earnings to Fixed Charges |
|
Filed herewith. |
21 |
21 |
|
Subsidiaries of Registrant |
|
Filed herewith. |
23 |
23 |
|
Consent of Independent Registered Public Accounting Firm |
|
Filed herewith. |
24 |
23.1 |
|
Consent of Independent Accountants |
|
Filed herewith. |
|
24 |
|
Powers of attorney |
|
Included on signature page and filed herewith. |
31 |
31 |
|
Rule 13a-14(a)/15d-14(a) Certifications |
|
Filed herewith. |
32 |
32 |
|
Section 1350 Certifications** |
|
Filed herewith. |
|
99.02 |
|
| | | | | |
99.02 | Securities Registered pursuant to Section 12(b) of the Act |
|
Filed herewith. |
101 |
99.1 |
|
AIA Group Limited Consolidated Financial Statements for the year ended November 30, 2011 |
|
Filed herewith. |
|
101 |
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 20132015 and December 31, 2012,2014, (ii) the Consolidated Statements of Income for the three years ended December 31, 2013,2015, (iii) the Consolidated Statements of Equity for the three years ended December 31, 2013,2015, (iv) the Consolidated Statements of Cash Flows for the three years ended December 31, 2013,2015, (v) the Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 20132015 and (vi) the Notes to the Consolidated Financial Statements. |
|
Filed herewith. |
| | |
* This exhibit is a management contract or a compensatory plan or arrangement.
** This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
Summary of Investments — Other than Investments in Related Parties
Schedule I
| | | | | | Schedule I |
| | | | | | |
| | | | | | Amount at |
At December 31, 2015 | | | | | | which shown in |
(in millions) | | Cost(a) | | Fair Value | | the Balance Sheet |
Fixed maturities: | | | | | | |
U.S. government and government sponsored entities | $ | 5,066 | $ | 5,212 | $ | 5,212 |
Obligations of states, municipalities and political subdivisions | | 26,079 | | 27,399 | | 27,399 |
Non-U.S. governments | | 17,803 | | 18,245 | | 18,245 |
Public utilities | | 17,713 | | 18,646 | | 18,646 |
All other corporate debt securities | | 117,835 | | 119,377 | | 119,377 |
Mortgage-backed, asset-backed and collateralized | | 73,256 | | 76,148 | | 76,148 |
Total fixed maturity securities | | 257,752 | | 265,027 | | 265,027 |
Equity securities and mutual funds: | | | | | | |
Common stock: | | | | | | |
Public utilities | | 5 | | 5 | | 5 |
Banks, trust and insurance companies | | 1,493 | | 2,835 | | 2,835 |
Industrial, miscellaneous and all other | | 336 | | 482 | | 482 |
Total common stock | | 1,834 | | 3,322 | | 3,322 |
Preferred stock | | 19 | | 22 | | 22 |
Mutual funds | | 447 | | 492 | | 492 |
Total equity securities and mutual funds | | 2,300 | | 3,836 | | 3,836 |
Mortgage and other loans receivable, net of allowance | | 29,565 | | 30,344 | | 29,565 |
Other invested assets | | 29,155 | | 29,067 | | 29,794 |
Short-term investments, at cost (approximates fair value) | | 10,132 | | 10,132 | | 10,132 |
Derivative assets(b) | | 1,309 | | 1,309 | | 1,309 |
Total investments | $ | 330,213 | $ | 339,715 | $ | 339,663 |
| | | | | | | | | | |
| | |
At December 31, 2013
(in millions)
| | Cost*
| | Fair Value
| | Amount at
which shown in
the Balance Sheet
| |
|---|
| | |
Fixed maturities: | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 8,807 | | $ | 8,918 | | $ | 8,918 | |
Obligations of states, municipalities and political subdivisions | | | 28,825 | | | 29,501 | | | 29,501 | |
Non-U.S. governments | | | 22,047 | | | 22,511 | | | 22,511 | |
Public utilities | | | 21,714 | | | 22,630 | | | 22,630 | |
All other corporate debt securities | | | 118,916 | | | 123,091 | | | 123,091 | |
Mortgage-backed, asset-backed and collateralized | | | 70,845 | | | 74,246 | | | 74,246 | |
| | |
Total fixed maturity securities | | | 271,154 | | | 280,897 | | | 280,897 | |
| | |
Equity securities and mutual funds: | | | | | | | | | | |
Common stock: | | | | | | | | | | |
Public utilities | | | 14 | | | 17 | | | 17 | |
Banks, trust and insurance companies | | | 1,646 | | | 3,388 | | | 3,388 | |
Industrial, miscellaneous and all other | | | 453 | | | 647 | | | 647 | |
| | |
Total common stock | | | 2,113 | | | 4,052 | | | 4,052 | |
Preferred stock | | | 24 | | | 27 | | | 27 | |
Mutual funds | | | 423 | | | 411 | | | 411 | |
| | |
Total equity securities and mutual funds | | | 2,560 | | | 4,490 | | | 4,490 | |
| | |
Mortgage and other loans receivable, net of allowance | | | 20,765 | | | 21,637 | | | 20,765 | |
Other invested assets | | | 27,343 | | | 27,699 | | | 28,659 | |
Short-term investments, at cost (approximates fair value) | | | 21,617 | | | 21,617 | | | 21,617 | |
Derivative assets | | | 1,665 | | | 1,665 | | | 1,665 | |
| | |
Total investments | | $ | 345,104 | | $ | 358,005 | | $ | 358,093 | |
| | |
*(a) Original cost of equity securities and fixed maturities is reduced by other-than-temporary impairment charges, and, as to fixed maturity securities, reduced by repayments and adjusted for amortization of premiums or accretion of discounts.
(b) The balance is reported in Other Assets.
AIG 2013 Form 10-K
TABLE OF CONTENTSTable of Contents
Condensed Financial Information of Registrant
Balance Sheets — Parent Company Only
Condensed Financial Information of Registrant |
Balance Sheets — Parent Company Only |
Schedule II
| | Schedule II |
| | | | |
December 31, | | | | |
(in millions) | | 2015 | | 2014 |
Assets: | | | | |
Short-term investments | $ | 4,042 | $ | 6,078 |
Other investments | | 7,425 | | 11,415 |
Total investments | | 11,467 | | 17,493 |
Cash | | 34 | | 26 |
Loans to subsidiaries* | | 35,927 | | 31,070 |
Due from affiliates - net* | | 1,967 | | 3,561 |
Intercompany tax receivable* | | 3,234 | | - |
Deferred income taxes | | 17,564 | | 18,309 |
Investments in consolidated subsidiaries* | | 51,151 | | 62,811 |
Other assets | | 633 | | 1,965 |
Total assets | $ | 121,977 | $ | 135,235 |
Liabilities: | | | | |
Due to affiliate* | $ | 4,059 | $ | - |
Intercompany tax payable* | | 3,916 | | 343 |
Deferred tax liabilities | | 9 | | - |
Notes and bonds payable | | 17,136 | | 15,821 |
Junior subordinated debt | | 1,337 | | 2,466 |
MIP notes payable | | 1,372 | | 2,870 |
Series AIGFP matched notes and bonds payable | | 31 | | 33 |
Loans from subsidiaries* | | 574 | | 951 |
Other liabilities (includes intercompany derivative liabilities of $144 in 2015 and $275 in 2014) | | 3,885 | | 5,853 |
Total liabilities | | 32,319 | | 28,337 |
AIG Shareholders’ equity: | | | | |
Common stock | | 4,766 | | 4,766 |
Treasury stock | | (30,098) | | (19,218) |
Additional paid-in capital | | 81,510 | | 80,958 |
Retained earnings | | 30,943 | | 29,775 |
Accumulated other comprehensive income | | 2,537 | | 10,617 |
Total AIG shareholders’ equity | | 89,658 | | 106,898 |
Total liabilities and equity | $ | 121,977 | $ | 135,235 |
| | | | | | | |
| |
| |
| |
|---|
| | |
December 31,
(in millions)
| | 2013
| | 2012
| |
|---|
| | |
Assets: | | | | | | | |
Short-term investments | | $ | 11,965 | | $ | 14,764 | |
Other investments | | | 7,561 | | | 3,902 | |
| | |
Total investments | | | 19,526 | | | 18,666 | |
Cash | | | 30 | | | 81 | |
Loans to subsidiaries* | | | 31,220 | | | 35,064 | |
Due from affiliates – net* | | | 765 | | | 422 | |
Deferred income taxes | | | 19,352 | | | 20,601 | |
Investments in consolidated subsidiaries* | | | 66,201 | | | 70,781 | |
Other assets | | | 1,489 | | | 2,130 | |
| | |
Total assets | | $ | 138,583 | | $ | 147,745 | |
| | |
Liabilities: | | | | | | | |
Intercompany tax payable* | | $ | 1,419 | | $ | 6,078 | |
Notes and bonds payable | | | 14,312 | | | 14,334 | |
Junior subordinated debt | | | 5,533 | | | 9,416 | |
MIP notes payable | | | 7,963 | | | 9,287 | |
Series AIGFP matched notes and bonds payable | | | 3,031 | | | 3,329 | |
Loans from subsidiaries* | | | 852 | | | 1,002 | |
Other liabilities (includes intercompany derivative liabilities of $249 in 2013 and $602 in 2012) | | | 5,003 | | | 6,297 | |
| | |
Total liabilities | | | 38,113 | | | 49,743 | |
| | |
AIG Shareholders' equity: | | | | | | | |
Common stock | | | 4,766 | | | 4,766 | |
Treasury stock | | | (14,520 | ) | | (13,924 | ) |
Additional paid-in capital | | | 80,899 | | | 80,410 | |
Retained earnings | | | 22,965 | | | 14,176 | |
Accumulated other comprehensive income | | | 6,360 | | | 12,574 | |
| | |
Total AIG shareholders' equity | | | 100,470 | | | 98,002 | |
| | |
Total liabilities and equity | | $ | 138,583 | | $ | 147,745 | |
| | |
* Eliminated in consolidation.
See Accompanying Notes to Condensed Financial Information of Registrant.
AIG 2013 Form 10-K
Condensed Financial Information of Registrant (Continued) | | | | | | |
Statements of Income — Parent Company Only | | | | | | |
| | | | | | |
| | | | Schedule II |
| | | | | | |
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Revenues: | | | | | | |
Equity in undistributed net income (loss) of consolidated subsidiaries* | $ | (2,929) | $ | (5,573) | $ | (2,226) |
Dividend income from consolidated subsidiaries* | | 6,883 | | 15,023 | | 9,864 |
Interest income | | 342 | | 305 | | 387 |
Net realized capital gains (losses) | | (587) | | 8 | | 169 |
Other income | | 333 | | 1,345 | | 931 |
Expenses: | | | | | | |
Interest expense | | 1,049 | | 1,507 | | 1,938 |
Net loss on extinguishment of debt | | 703 | | 2,248 | | 580 |
Other expenses | | 1,178 | | 1,546 | | 1,520 |
Income from continuing operations before income tax expense (benefit) | | 1,112 | | 5,807 | | 5,087 |
Income tax benefit | | (1,086) | | (1,735) | | (4,012) |
Net income | | 2,198 | | 7,542 | | 9,099 |
Loss from discontinued operations | | (2) | | (13) | | (14) |
Net income attributable to AIG Parent Company | $ | 2,196 | $ | 7,529 | $ | 9,085 |
* Eliminated in consolidation. |
| | | | | | |
See Accompanying Notes to Condensed Financial Information of Registrant. |
Condensed Financial Information of Registrant (Continued) | | | | | | | |
Statements of Comprehensive Income — Parent Company Only | | | | | | | |
| | | | | | | |
| | | | | Schedule II |
| | | | | | | |
Years Ended December 31, | | | | | | | |
(in millions) | | | 2015 | | 2014 | | 2013 |
Net income | | $ | 2,196 | $ | 7,529 | $ | 9,085 |
Other comprehensive income | | | (8,080) | | 4,257 | | (6,214) |
Total comprehensive income attributable to AIG | | $ | (5,884) | $ | 11,786 | $ | 2,871 |
| | | | | | | |
See accompanying Notes to Condensed Financial Information of Registrant |
Schedule IITABLE OF CONTENTS
| | | | | | | | | | |
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| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Revenues: | | | | | | | | | | |
Equity in undistributed net income (loss) of consolidated subsidiaries* | | $ | (2,226 | ) | $ | (8,740 | ) | $ | 432 | |
Dividend income from consolidated subsidiaries* | | | 9,864 | | | 10,710 | | | 5,828 | |
Interest income | | | 387 | | | 358 | | | 596 | |
Change in fair value of ML III | | | – | | | 2,287 | | | (723 | ) |
Net realized capital gains | | | 169 | | | 747 | | | 213 | |
Other income | | | 931 | | | 806 | | | 279 | |
Expenses: | | | | | | | | | | |
Interest expense | | | 1,938 | | | 2,257 | | | 2,917 | |
Net loss on extinguishment of debt | | | 580 | | | 9 | | | 2,847 | |
Other expenses | | | 1,520 | | | 1,602 | | | 867 | |
| | |
Income (loss) from continuing operations before income tax expense (benefit) | | | 5,087 | | | 2,300 | | | (6 | ) |
Income tax benefit | | | (4,012 | ) | | (1,137 | ) | | (19,695 | ) |
| | |
Net income | | | 9,099 | | | 3,437 | | | 19,689 | |
Income (loss) from discontinued operations | | | (14 | ) | | 1 | | | 933 | |
| | |
Net income attributable to AIG Parent Company | | $ | 9,085 | | $ | 3,438 | | $ | 20,622 | |
| | |
* Eliminated in consolidation.
See Accompanying Notes to Condensed Financial Information of Registrant.
Condensed Financial Information of Registrant(Continued)
Statements of Income — Parent Company Only
Schedule II
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Net income | | $ | 9,085 | | $ | 3,438 | | $ | 20,622 | |
Other comprehensive income | | | (6,214 | ) | | 6,093 | | | (2,483 | ) |
| | |
Total comprehensive income attributable to AIG | | $ | 2,871 | | $ | 9,531 | | $ | 18,139 | |
| | |
See accompanying Notes to Condensed Financial Information of Registrant
AIG 2013 Form 10-K
Table of Contents
Condensed Financial Information of Registrant (Continued)
Statements of Cash Flows — Parent Company Only
Condensed Financial Information of Registrant (Continued) | | | | | | |
Statements of Cash Flows — Parent Company Only | | | | | | |
| | | | | | |
| | | | Schedule II |
| | | | | | |
Years Ended December 31, | | | | | | |
(in millions) | | 2015 | | 2014 | | 2013 |
Net cash provided by operating activities | $ | 4,443 | $ | 9,316 | $ | 6,422 |
Cash flows from investing activities: | | | | | | |
Sales and maturities of investments | | 7,609 | | 2,996 | | 1,074 |
Purchase of investments | | (1,881) | | (1,051) | | (5,506) |
Net change in restricted cash | | - | | (501) | | 493 |
Net change in short-term investments | | 2,300 | | 5,792 | | 2,361 |
Contributions to subsidiaries - net | | 565 | | (148) | | (2,081) |
Payments received on mortgages and other loan receivables | | 158 | | 40 | | 351 |
Loans to subsidiaries - net | | (83) | | 446 | | 3,660 |
Other, net | | (175) | | (141) | | 130 |
Net cash provided by investing activities | | 8,493 | | 7,433 | | 482 |
Cash flows from financing activities: | | | | | | |
Issuance of long-term debt | | 5,540 | | 3,247 | | 2,015 |
Repayment of long-term debt | | (6,504) | | (14,468) | | (7,439) |
Cash dividends paid | | (1,028) | | (712) | | (294) |
Loans from subsidiaries - net | | (201) | | 110 | | (123) |
Purchase of Common Stock | | (10,691) | | (4,902) | | (597) |
Other, net | | (44) | | (28) | | (517) |
Net cash used in financing activities | | (12,928) | | (16,753) | | (6,955) |
Change in cash | | 8 | | (4) | | (51) |
Cash at beginning of year | | 26 | | 30 | | 81 |
Cash at end of year | $ | 34 | $ | 26 | $ | 30 |
| | | | | | |
Supplementary disclosure of cash flow information: | | | | | | |
| Years Ended December 31, |
(in millions) | | 2015 | | 2014 | | 2013 |
Cash (paid) received during the period for: | | | | | | |
Interest: | | | | | | |
Third party | $ | (1,030) | $ | (1,624) | $ | (1,963) |
Intercompany | | - | | 5 | | (12) |
Taxes: | | | | | | |
Income tax authorities | | (11) | | (18) | | (161) |
Intercompany | | 829 | | 1,172 | | 288 |
Intercompany non-cash financing and investing activities: | | | | | | |
Capital contributions to subsidiaries through forgiveness of loans | | - | | - | | 341 |
Other capital contributions - net | | 494 | | 2,457 | | 523 |
Return of capital* | | - | | 4,836 | | - |
Dividends received in the form of securities | | 2,326 | | 3,088 | | - |
| | | | | | |
See Accompanying Notes to Condensed Financial Information of Registrant. |
* Includes $4.8 billion return of capital from AIG Capital Corporation related to the sale of ILFC. |
Schedule IITABLE OF CONTENTS
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
Years Ended December 31,
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Net cash provided by (used in) operating activities | | $ | 6,422 | | $ | (825 | ) | $ | (5,600 | ) |
| | |
Cash flows from investing activities: | | | | | | | | | | |
Sales and maturities of investments | | | 1,074 | | | 16,546 | | | 2,224 | |
Sales of divested businesses | | | – | | | – | | | 1,075 | |
Purchase of investments | | | (5,506 | ) | | (4,406 | ) | | (19 | ) |
Net change in restricted cash | | | 493 | | | (377 | ) | | 1,945 | |
Net change in short-term investments | | | 2,361 | | | (2,029 | ) | | (7,130 | ) |
Contributions to subsidiaries – net | | | (2,081 | ) | | (152 | ) | | (15,973 | ) |
Payments received on mortgages and other loan receivables | | | 351 | | | 328 | | | 341 | |
Loans to subsidiaries – net | | | 3,660 | | | 5,126 | | | 3,757 | |
Other, net | | | 130 | | | 259 | | | 1,543 | |
| | |
Net cash provided by (used in) investing activities | | | 482 | | | 15,295 | | | (12,237 | ) |
| | |
Cash flows from financing activities: | | | | | | | | | | |
Federal Reserve Bank of New York credit facility repayments | | | – | | | – | | | (14,622 | ) |
Issuance of long-term debt | | | 2,015 | | | 3,754 | | | 2,135 | |
Repayment of long-term debt | | | (7,439 | ) | | (3,238 | ) | | (6,181 | ) |
Proceeds from drawdown on the Department of the Treasury Commitment | | | – | | | – | | | 20,292 | |
Issuance of Common Stock | | | – | | | – | | | 5,055 | |
Cash dividends paid | | | (294 | ) | | – | | | – | |
Loans from subsidiaries – net | | | (123 | ) | | (2,032 | ) | | 11,519 | |
Purchase of Common Stock | | | (597 | ) | | (13,000 | ) | | (70 | ) |
Other, net | | | (517 | ) | | (49 | ) | | (164 | ) |
| | |
Net cash provided by (used in) financing activities | | | (6,955 | ) | | (14,565 | ) | | 17,964 | |
| | |
Change in cash | | | (51 | ) | | (95 | ) | | 127 | |
Cash at beginning of year | | | 81 | | | 176 | | | 49 | |
| | |
Cash at end of year | | $ | 30 | | $ | 81 | | $ | 176 | |
| | |
Supplementary disclosure of cash flow information:
| | | | | | | | | | |
| |
| |
| |
| |
|---|
| | |
| | Years Ended December 31, | |
|---|
(in millions)
| | 2013
| | 2012
| | 2011
| |
|---|
| | |
Cash (paid) received during the period for: | | | | | | | | | | |
Interest: | | | | | | | | | | |
Third party* | | $ | (1,963 | ) | $ | (2,089 | ) | $ | (6,909 | ) |
Intercompany | | | (12 | ) | | (133 | ) | | (311 | ) |
Taxes: | | | | | | | | | | |
Income tax authorities | | | (161 | ) | | (7 | ) | | 13 | |
Intercompany | | | 288 | | | 230 | | | (335 | ) |
Intercompany non-cash financing and investing activities: | | | | | | | | | | |
Capital contributions in the form of available for sale securities | | | – | | | 4,078 | | | – | |
Capital contributions to subsidiaries through forgiveness of loans | | | 341 | | | – | | | – | |
Other capital contributions – net | | | 523 | | | 579 | | | 523 | |
Intercompany loan receivable offset by intercompany payable | | | – | | | – | | | 18,284 | |
Return of capital and dividend received in the form of cancellation of intercompany loan | | | – | | | 9,303 | | | – | |
Return of capital and dividend received in the form of other bonds securities | | | – | | | 3,320 | | | 3,668 | |
| | |
See Accompanying Notes to Condensed Financial Information of Registrant.
* 2011 includes payment of the FRBNY credit facility accrued compounded interest of $4.7 billion, before the facility was terminated on January 14, 2011 in connection with the Recapitalization.
AIG 2013 Form 10-K
Table of Contents
Notes to Condensed Financial Information of Registrant
American International Group, Inc.'s’s (the Registrant) investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries. The accompanying condensed financial statements of the Registrant should be read in conjunction with the consolidated financial statements and notes thereto of American International Group, Inc. and subsidiaries included in the Registrant's 2013Registrant’s 2015 Annual Report on Form 10-K for the year ended December 31, 2013 (20132015 (2015 Annual Report on Form 10-K) filed with the Securities and Exchange Commission on February 20, 2014.19, 2016.
The Registrant includes in its statementStatement of incomeIncome dividends from its subsidiaries and equity in undistributed income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.
On December 1, 2009, the Registrant and the Federal Reserve Bank of New York (FRBNY) completed two transactions that reduced the outstanding balance and the maximum amount of credit available under the FRBNY Credit Facility by $25 billion. In connection with one of those transactions, the Registrant assigned $16 billion of its obligation under the FRBNY Credit Agreement to a subsidiary. The Registrant subsequently settled its obligation to the subsidiary with a $15.5 billion non-cash dividend from the subsidiary. The difference was recognized over the remaining term of the FRBNY Credit Agreement as a reduction to interest expense. The remaining difference was derecognized by AIG through earnings due to the repayment in January 2011 of all amounts owed under, and the termination of, the FRBNY Credit Facility.
Certain prior period amounts have been reclassified to conform to the current period presentation.
The five-year debt maturity schedule is incorporated by reference from Note 14 to Consolidated Financial Statements.
The Registrant files a consolidated federal income tax return with certain subsidiaries and acts as an agent for the consolidated tax group when making payments to the Internal Revenue Service. The Registrant and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated Federal income taxes. Amounts allocated to the subsidiaries under the written agreement are included in Due from affiliates in the accompanying Condensed Balance Sheets.
Income taxes in the accompanying Condensed Balance Sheets are composed of the Registrant'sRegistrant’s current and deferred tax assets, the consolidated group'sgroup’s current income tax receivable, deferred taxes related to tax attribute carryforwards of AIG'sAIG’s U.S. consolidated income tax group and a valuation allowance to reduce the consolidated deferred tax asset to an amount more likely than not to be realized. See Note 2322 to the Consolidated Financial Statements for additional information.
The consolidated U.S. deferred tax asset for net operating loss, capital loss and tax credit carryforwards and valuation allowance are recorded by the Parent Company, which files the consolidated U.S. Federal income tax return, and are not allocated to its subsidiaries. Generally, as, and if, the consolidated net operating losses and other tax attribute carryforwards are utilized, the intercompany tax balance will be settled with the subsidiaries.
AIG 2013 Form 10-K
Table of Contents
Supplementary Insurance Information
Schedule III
| | | | | | | | | | | Schedule III |
| | | | | | | | | | | | |
At December 31, 2015 and 2014 |
| | | | | | | | | | | | |
| | | | | | | | Liability | | | | |
| | | | | | | | for Unpaid | | | | |
| | | | | | | | Losses and | | | | |
| | | | | | | | Loss | | | | |
| | | | | | Deferred | | Adjustment | | | | Policy |
| | | | | | Policy | | Expenses, | | | | and |
| | | | | | Acquisition | | Future Policy | | Unearned | | Contract |
Segment (in millions) | | | | | | Costs | | Benefits | | Premiums | | Claims |
2015 | | | | | | | | | | | | |
Non-Life Insurance Companies | | | $ | 2,631 | $ | 69,213 | $ | 20,961 | $ | - |
Life Insurance Companies | | | | | | 8,467 | | 42,893 | | - | | 851 |
Corporate and Other(a) | | | | | | 17 | | 6,421 | | 357 | | 11 |
| | | | | $ | 11,115 | $ | 118,527 | $ | 21,318 | $ | 862 |
2014 | | | | | | | | | | | | |
Non-Life Insurance Companies | | | $ | 2,551 | $ | 77,839 | $ | 21,325 | $ | - |
Life Insurance Companies | | | | | | 7,258 | | 42,004 | | - | | 818 |
Corporate and Other(a) | | | | | | 18 | | 166 | | (1) | | 11 |
| | | | | $ | 9,827 | $ | 120,009 | $ | 21,324 | $ | 829 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
For the years ended December 31, 2015, 2014 and 2013 | | | | | | |
| | | | | | | | | | | | |
| | | | | | Losses | | Amortization | | | | |
| | Premiums | | | | and Loss | | of Deferred | | | | |
| | and | | Net | | Expenses | | Policy | | Other | | Net |
| | Policy | | Investment | | Incurred, | | Acquisition | | Operating | | Premiums |
Segment (in millions) | | Fees | | Income | | Benefits | | Costs | | Expenses | | Written(b) |
2015 | | | | | | | | | | | | |
Commercial Insurance | $ | 22,720 | $ | 5,474 | $ | 20,425 | $ | 2,342 | $ | 3,775 | $ | 21,486 |
Consumer Insurance | | 16,642 | | 8,322 | | 13,791 | | 2,887 | | 7,013 | | 11,580 |
Corporate and Other(a) | | 48 | | 257 | | 860 | | 7 | | - | | - |
| $ | 39,410 | $ | 14,053 | $ | 35,076 | $ | 5,236 | $ | 10,788 | $ | 33,066 |
2014 | | | | | | | | | | | | |
Commercial Insurance | $ | 22,408 | $ | 6,393 | $ | 16,985 | $ | 2,512 | $ | 3,794 | $ | 22,044 |
Consumer Insurance | | 17,389 | | 9,082 | | 14,149 | | 2,759 | | 7,087 | | 12,412 |
Corporate and Other(a) | | 72 | | 604 | | 915 | | 59 | | 6 | | - |
| $ | 39,869 | $ | 16,079 | $ | 32,049 | $ | 5,330 | $ | 10,887 | $ | 34,456 |
2013 | | | | | | | | | | | | |
Commercial Insurance | $ | 22,209 | $ | 6,653 | $ | 17,415 | $ | 2,418 | $ | 4,049 | $ | 21,928 |
Consumer Insurance | | 17,554 | | 9,352 | | 14,434 | | 2,836 | | 6,826 | | 12,700 |
Corporate and Other(a) | | 76 | | (195) | | 1,546 | | (97) | | 8 | | - |
| $ | 39,839 | $ | 15,810 | $ | 33,395 | $ | 5,157 | $ | 10,883 | $ | 34,628 |
At December 31, 2013, 2012(a) Includes consolidation and 2011 and forelimination entries.
(b) Balances reflect the years then ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
|---|
| | |
Segment(in millions)
| | Deferred
Policy
Acquisition
Costs
| | Liability
for Unpaid
Claims and
Claims
Adjustment
Expense,
Future Policy
Benefits(a)
| | Reserve
for
Unearned
Premiums
| | Policy
and
Contract
Claims(b)
| | Premiums
and
Policy
Fees
| | Net
Investment
Income
| | Losses
and Loss
Expenses
Incurred,
Benefits
| | Amortization
of Deferred
Policy
Acquisition
Costs
| | Other
Operating
Expenses
| | Net
Premiums
Written
| |
|---|
| | |
2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 2,623 | | $ | 83,742 | | $ | 21,341 | | $ | 23 | | $ | 33,953 | | $ | 5,267 | | $ | 22,639 | | $ | 4,479 | | $ | 7,275 | | $ | 34,388 | |
AIG Life and Retirement | | | 6,723 | | | 36,914 | | | – | | | 773 | | | 5,131 | | | 10,693 | | | 10,106 | | | 658 | | | 2,187 | | | – | |
Mortgage Guaranty | | | 67 | | | 1,348 | | | 612 | | | – | | | 809 | | | 132 | | | 514 | | | 20 | | | 202 | | | 1,048 | |
Other | | | 23 | | | 196 | | | – | | | 10 | | | (8 | ) | | (282 | ) | | 136 | | | – | | | (498 | ) | | – | |
| | |
| | $ | 9,436 | | $ | 122,200 | | $ | 21,953 | | $ | 806 | | $ | 39,885 | | $ | 15,810 | | $ | 33,395 | | $ | 5,157 | | $ | 9,166 | | $ | 35,436 | |
| | |
2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 2,441 | | $ | 90,011 | | $ | 22,161 | | $ | 24 | | $ | 34,873 | | $ | 4,780 | | $ | 25,785 | | $ | 4,761 | | $ | 7,304 | | $ | 34,436 | |
AIG Life and Retirement | | | 5,672 | | | 36,471 | | | – | | | 856 | | | 4,813 | | | 10,755 | | | 10,014 | | | 931 | | | 2,079 | | | – | |
Mortgage Guaranty | | | 44 | | | 1,957 | | | 376 | | | – | | | 715 | | | 146 | | | 659 | | | 17 | | | 177 | | | 858 | |
Other | | | 25 | | | 75 | | | – | | | 9 | | | (5 | ) | | 4,662 | | | (82 | ) | | – | | | (325 | ) | | – | |
| | |
| | $ | 8,182 | | $ | 128,514 | | $ | 22,537 | | $ | 889 | | $ | 40,396 | | $ | 20,343 | | $ | 36,376 | | $ | 5,709 | | $ | 9,235 | | $ | 35,294 | |
| | |
2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 2,375 | | $ | 91,686 | | $ | 23,236 | | $ | 26 | | $ | 35,689 | | $ | 4,253 | | $ | 27,949 | | $ | 4,324 | | $ | 6,514 | | $ | 34,840 | |
AIG Life and Retirement | | | 6,502 | | | 34,300 | | | – | | | 880 | | | 4,858 | | | 9,882 | | | 9,170 | | | 1,142 | | | 2,085 | | | – | |
Mortgage Guaranty | | | 25 | | | 3,104 | | | 229 | | | – | | | 792 | | | 132 | | | 834 | | | 20 | | | 167 | | | 801 | |
Other | | | 35 | | | 65 | | | – | | | 5 | | | (4 | ) | | 488 | | | 2 | | | – | | | (308 | ) | | – | |
| | |
| | $ | 8,937 | | $ | 129,155 | | $ | 23,465 | | $ | 911 | | $ | 41,335 | | $ | 14,755 | | $ | 37,955 | | $ | 5,486 | | $ | 8,458 | | $ | 35,641 | |
| | |
(a) Liability for unpaid claims and claims adjustment expense with respectsegment changes discussed in Note 3 – Segment Information to the General Insurance operations are net of discounts of $3.56 billion, $3.25 billion and $3.18 billion at December 31, 2013, 2012 and 2011, respectively.Consolidated Financial Statements.
(b) Reflected in insurance balances payable in the accompanying Consolidated Balance Sheet.
AIG 2013 Form 10-K
Reinsurance
Schedule IV
At December 31, 2013, 2012 and 2011 and for the years then ended
| | | | | | | | | | Schedule IV |
| | | | | | | | | | | |
At December 31, 2015, 2014 and 2013 and for the years then ended |
| | | | | | | | | | | |
| | | | | | | | | | Percent of | |
| | | | Ceded to | | Assumed | | | | Amount | |
| | Gross | | Other | | from Other | | | | Assumed | |
(in millions) | | Amount | | Companies | | Companies | | Net Amount | | to Net | |
2015 | | | | | | | | | | | |
Long-duration insurance in force | $ | 1,051,571 | $ | 177,025 | $ | 372 | $ | 874,918 | | - | % |
Premiums: | | | | | | | | | | | |
Non-Life Insurance Companies | $ | 37,698 | $ | 7,604 | $ | 2,972 | $ | 33,066 | | 9.0 | % |
Life Insurance Companies | | 5,227 | | 756 | | 7 | | 4,478 | | 0.2 | |
Run-off insurance lines | | 6 | | - | | - | | 6 | | - | |
Total | $ | 42,931 | $ | 8,360 | $ | 2,979 | $ | 37,550 | | 7.9 | % |
2014 | | | | | | | | | | | |
Long-duration insurance in force | $ | 1,033,281 | $ | 180,178 | $ | 410 | $ | 853,513 | | - | % |
Premiums: | | | | | | | | | | | |
Non-Life Insurance Companies | $ | 39,375 | $ | 8,318 | $ | 3,399 | $ | 34,456 | | 9.9 | % |
Life Insurance Companies | | 4,039 | | 661 | | 20 | | 3,398 | | 0.6 | |
Run-off insurance lines | | 11 | | - | | - | | 11 | | - | |
Total | $ | 43,425 | $ | 8,979 | $ | 3,419 | $ | 37,865 | | 9.0 | % |
2013 | | | | | | | | | | | |
Long-duration insurance in force | $ | 946,743 | $ | 122,012 | $ | 427 | $ | 825,158 | | 0.1 | % |
Premiums: | | | | | | | | | | | |
Non-Life Insurance Companies | $ | 39,833 | $ | 9,514 | $ | 4,306 | $ | 34,625 | | 12.4 | % |
Life Insurance Companies | | 4,142 | | 620 | | 13 | | 3,535 | | 0.4 | |
Run-off insurance lines | | 9 | | - | | - | | 9 | | - | |
Total | $ | 43,984 | $ | 10,134 | $ | 4,319 | $ | 38,169 | | 11.3 | % |
| | | | | | | | | | | | | | | | |
| |
|---|
| | |
(in millions)
| | Gross
Amount
| | Ceded to
Other
Companies
| | Assumed
from Other
Companies
| | Net Amount
| | Percent of
Amount
Assumed
to Net
| |
|---|
| | |
2013 | | | | | | | | | | | | | | | | |
Long-duration insurance in force | | $ | 947,170 | | $ | 122,012 | | $ | 427 | | $ | 825,585 | | | 0.1 | % |
| | |
Premiums: | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 39,545 | | $ | 8,816 | | $ | 3,659 | | $ | 34,388 | | | 10.6 | % |
AIG Life and Retirement | | | 3,256 | | | 673 | | | 13 | | | 2,596 | | | 0.5 | |
Mortgage Guaranty | | | 1,099 | | | 38 | | | (13 | ) | | 1,048 | | | (1.2 | ) |
Divested businesses | | | 9 | | | – | | | – | | | 9 | | | – | |
Eliminations | | | – | | | 3 | | | 3 | | | – | | | – | |
| | |
Total premiums | | $ | 43,909 | | $ | 9,530 | | $ | 3,662 | | $ | 38,041 | | | 9.6 | % |
| | |
2012 | | | | | | | | | | | | | | | | |
Long-duration insurance in force | | $ | 918,260 | | $ | 129,159 | | $ | 458 | | $ | 789,559 | | | 0.1 | % |
| | |
Premiums: | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 40,428 | | $ | 9,420 | | $ | 3,428 | | $ | 34,436 | | | 10.0 | % |
AIG Life and Retirement | | | 3,049 | | | 602 | | | 17 | | | 2,464 | | | 0.7 | |
Mortgage Guaranty | | | 938 | | | 70 | | | (10 | ) | | 858 | | | (1.2 | ) |
Divested businesses | | | 11 | | | – | | | – | | | 11 | | | – | |
Eliminations | | | – | | | 7 | | | 7 | | | – | | | – | |
| | |
Total premiums | | $ | 44,426 | | $ | 10,099 | | $ | 3,442 | | $ | 37,769 | | | 9.1 | % |
| | |
2011 | | | | | | | | | | | | | | | | |
Long-duration insurance in force | | $ | 891,145 | | $ | 140,156 | | $ | 1,220 | | $ | 752,209 | | | 0.2 | % |
| | |
Premiums: | | | | | | | | | | | | | | | | |
AIG Property Casualty | | $ | 41,710 | | $ | 9,901 | | $ | 3,031 | | $ | 34,840 | | | 8.7 | % |
AIG Life and Retirement | | | 3,121 | | | 591 | | | 19 | | | 2,549 | | | 0.7 | |
Mortgage Guaranty | | | 898 | | | 97 | | | – | | | 801 | | | – | |
Divested businesses | | | 15 | | | 6 | | | 2 | | | 11 | (b) | | 18.2 | |
Eliminations | | | – | | | (5 | ) | | (5 | ) | | – | | | – | |
| | |
Total premiums | | $ | 45,744 | | $ | 10,590 | | $ | 3,047 | | $ | 38,201 | | | 8.0 | % |
| | |
Valuation and Qualifying Accounts
Schedule V
For the years ended December 31, 2013, 2012 and 2011
| | | | | | | | | | | | Schedule V |
| | | | | | | | | | | | | | |
For the years ended December 31, 2015, 2014 and 2013 | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | Additions | | | | | | | | |
| | Balance, | | Charged to | | | | Activity of | | | | | | |
| | Beginning | | Costs and | | | | Discontinued | | Divested | | Other | | Balance, |
(in millions) | | of year | | Expenses | | Charge Offs | | Operations | | Businesses | | Changes* | | End of year |
2015 | | | | | | | | | | | | | | |
Allowance for mortgage and | | | | | | | | | | | | | | |
other loans receivable | $ | 271 | $ | 58 | $ | (29) | $ | - | $ | 3 | $ | 5 | $ | 308 |
Allowance for premiums and | | | | | | | | | | | | | | |
insurances balances receivable | | 431 | | 35 | | (120) | | - | | - | | (13) | | 333 |
Allowance for reinsurance assets | | 258 | | 90 | | (67) | | - | | - | | (9) | | 272 |
Federal and foreign valuation | | | | | | | | | | | | | | |
allowance for deferred tax assets | | 1,739 | | 110 | | - | | - | | - | | 1,163 | | 3,012 |
2014 | | | | | | | | | | | | | | |
Allowance for mortgage and | | | | | | | | | | | | | | |
other loans receivable | $ | 312 | $ | (8) | $ | (68) | $ | - | $ | 1 | $ | 34 | $ | 271 |
Allowance for premiums and | | | | | | | | | | | | | | |
insurances balances receivable | | 560 | | 35 | | (99) | | - | | - | | (65) | | 431 |
Allowance for reinsurance assets | | 276 | | 4 | | (3) | | - | | - | | (19) | | 258 |
Federal and foreign valuation | | | | | | | | | | | | | | |
allowance for deferred tax assets | | 3,596 | | (181) | | - | | - | | - | | (1,676) | | 1,739 |
2013 | | | | | | | | | | | | | | |
Allowance for mortgage and | | | | | | | | | | | | | | |
other loans receivable | $ | 405 | $ | 20 | $ | (116) | $ | - | $ | (6) | $ | 9 | $ | 312 |
Allowance for premiums and | | | | | | | | | | | | | | |
insurances balances receivable | | 624 | | 14 | | (74) | | - | | - | | (4) | | 560 |
Allowance for reinsurance assets | | 338 | | (42) | | (31) | | - | | - | | 11 | | 276 |
Federal and foreign valuation | | | | | | | | | | | | | | |
allowance for deferred tax assets | | 8,036 | | (3,165) | | - | | (40) | | - | | (1,235) | | 3,596 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| |
| | Additions | |
| |
| |
| |
| |
| |
|---|
(in millions)
| | Balance,
Beginning
of year
| | Charged to
Costs and
Expenses
| | Charge
Offs
| | Activity of
Discontinued
Operations
| | Reclassified
to Assets of
Businesses
Held for Sale
| | Divested
Businesses
| | Other
Changes*
| | Balance,
End of year
| |
|---|
| | |
2013 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for mortgage | | | | | | | | | | | | | | | | | | | | | | | | | |
and other loans | | | | | | | | | | | | | | | | | | | | | | | | | |
receivable | | $ | 405 | | $ | 20 | | $ | (116 | ) | $ | – | | $ | – | | $ | (6 | ) | $ | 9 | | $ | 312 | |
Allowance for premiums | | | | | | | | | | | | | | | | | | | | | | | | | |
and insurances | | | | | | | | | | | | | | | | | | | | | | | | | |
balances receivable | | | 624 | | | 14 | | | (74 | ) | | – | | | – | | | – | | | (4 | ) | | 560 | |
Allowance for | | | | | | | | | | | | | | | | | | | | | | | | | |
reinsurance assets | | | 338 | | | (42 | ) | | (31 | ) | | – | | | – | | | – | | | 11 | | | 276 | |
Federal and foreign | | | | | | | | | | | | | | | | | | | | | | | | | |
valuation allowance for | | | | | | | | | | | | | | | | | | | | | | | | | |
deferred tax assets | | | 8,036 | | | (3,165 | ) | | – | | | (40 | ) | | – | | | – | | | (1,235 | ) | | 3,596 | |
| | |
2012 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for mortgage | | | | | | | | | | | | | | | | | | | | | | | | | |
and other loans | | | | | | | | | | | | | | | | | | | | | | | | | |
receivable | | $ | 740 | | $ | (103 | ) | $ | (43 | ) | $ | (205 | ) | $ | – | | $ | – | | $ | 16 | | $ | 405 | |
Allowance for premiums | | | | | | | | | | | | | | | | | | | | | | | | | |
and insurances | | | | | | | | | | | | | | | | | | | | | | | | | |
balances receivable | | | 484 | | | 174 | | | (36 | ) | | – | | | – | | | – | | | 2 | | | 624 | |
Allowance for | | | | | | | | | | | | | | | | | | | | | | | | | |
reinsurance assets | | | 364 | | | (4 | ) | | (1 | ) | | – | | | – | | | – | | | (21 | ) | | 338 | |
Federal and foreign | | | | | | | | | | | | | | | | | | | | | | | | | |
valuation allowance for | | | | | | | | | | | | | | | | | | | | | | | | | |
deferred tax assets | | | 11,047 | | | (1,907 | ) | | – | | | – | | | – | | | – | | | (1,104 | ) | | 8,036 | |
| | |
2011 | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for mortgage
and other loans
receivable | | $ | 878 | | $ | (18 | ) | $ | (125 | ) | $ | 22 | | $ | – | | $ | (55 | ) | $ | 38 | | $ | 740 | |
Allowance for premiums
and insurances
balances receivable | | | 515 | | | 63 | | | (94 | ) | | – | | | – | | | – | | | – | | | 484 | |
Allowance for
reinsurance assets | | | 492 | | | (116 | ) | | (63 | ) | | – | | | – | | | – | | | 51 | | | 364 | |
Federal and foreign
valuation allowance for
deferred tax assets | | | 27,548 | | | (18,307 | ) | | – | | | – | | | – | | | – | | | 1,806 | | | 11,047 | |
| | |
* Includes recoveries of amounts previously charged off and reclassifications to/from other accounts.
AIG 2013 Form 10-K
