Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

  Commission File Number 1-8787

GRAPHIC

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.)
   

 

 

180 Maiden Lane, New York, New York
(Address of principal executive offices)

 

10038
(Zip Code)

 

 

Registrant's telephone number, including area code: (212) 770-7000



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 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 accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

As of July 31, 2013, there were 1,476,350,909 shares outstanding of the registrant's common stock.

   


AMERICAN INTERNATIONAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2013
TABLE OF CONTENTS

FORM 10-Q
   
   

Item Number

 

Description

  Page

PART I — FINANCIAL INFORMATION


Item 1

 

Condensed Consolidated Financial Statements

  2

 

Note 1.    Basis of Presentation

  7

 

Note 2.    Summary of Significant Accounting Policies

  8

 

Note 3.    Segment Information

  10

 

Note 4.    Held-For-Sale Classification and Discontinued Operations

  12

 

Note 5.    Fair Value Measurements

  14

 

Note 6.    Investments

  33

 

Note 7.    Lending Activities

  41

 

Note 8.    Variable Interest Entities

  42

 

Note 9.    Derivatives and Hedge Accounting

  44

 

Note 10.  Contingencies, Commitments and Guarantees

  50

 

Note 11.  Equity

  59

 

Note 12.  Noncontrolling Interests

  64

 

Note 13.  Earnings Per Share

  65

 

Note 14.  Employee Benefits

  66

 

Note 15.  Income Taxes

  67

 

Note 16.  Information Provided in Connection with Outstanding Debt

  69

 

Note 17.  Subsequent Events

  75

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  76

 

        • Cautionary Statement Regarding Forward-Looking Information

  76

 

        • Use of Non-GAAP Measures

  79

 

        • Executive Overview

  80

 

        • Results of Operations

  90

 

        • Liquidity and Capital Resources

  139

 

        • Investments

  155

 

        • Enterprise Risk Management

  171

 

        • Critical Accounting Estimates

  179

 

        • Regulatory Environment

  183

 

        • Glossary

  185

 

        • Acronyms

  188

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

  189

Item 4

 

Controls and Procedures

  189

PART II — OTHER INFORMATION


Item 1

 

Legal Proceedings

  190

Item 1A

 

Risk Factors

  190

Item 4

 

Mine Safety Disclosures

  191

Item 5

 

Other Information

  192

Item 6

 

Exhibits

  192

SIGNATURES

 
193

 

1


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. / FINANCIAL STATEMENTS

 

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 
 


   
 
   
(in millions, except for share data)
 

June 30,
2013

  December 31,
2012

 
   

Assets:

 
 
 
 
     

Investments:

 
 
 
 
     

Fixed maturity securities:

 
 
 
 
     

Bonds available for sale, at fair value (amortized cost: 2013 – $248,694; 2012 – $246,149)

 
$
261,229
 
$ 269,959  

Bond trading securities, at fair value

 
 
23,789
 
  24,584  

Equity securities:

 
 
 
 
     

Common and preferred stock available for sale, at fair value (cost: 2013 – $1,590; 2012 – $1,640)

 
 
3,153
 
  3,212  

Common and preferred stock trading, at fair value

 
 
758
 
  662  

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2013 – $59; 2012 – $134)

 
 
19,857
 
  19,482  

Other invested assets (portion measured at fair value: 2013 – $7,871; 2012 – $7,056)

 
 
29,206
 
  29,117  

Short-term investments (portion measured at fair value: 2013 – $6,099; 2012 – $8,056)

 
 
20,215
 
  28,808
   

Total investments

 
 
358,207
 
  375,824  
   
 
 
 
     

Cash

 
 
1,762
 
  1,151  

Accrued investment income

 
 
2,916
 
  3,054  

Premiums and other receivables, net of allowance

 
 
14,203
 
  13,989  

Reinsurance assets, net of allowance

 
 
26,506
 
  25,595  

Deferred income taxes

 
 
20,044
 
  17,466  

Deferred policy acquisition costs

 
 
8,770
 
  8,182  

Derivative assets, at fair value

 
 
2,805
 
  3,671  

Other assets, including restricted cash of $922 in 2013 and $1,878 in 2012 (portion measured at fair value: 2013 – $582; 2012 – $696)

 
 
9,298
 
  10,399  

Separate account assets, at fair value

 
 
61,759
 
  57,337  

Assets held for sale

 
 
31,168
 
  31,965
   

Total assets

 
$
537,438
 
$ 548,633
   

Liabilities:

 
 
 
 
     

Liability for unpaid claims and claims adjustment expense

 
$
84,054
 
$ 87,991  

Unearned premiums

 
 
23,578
 
  22,537  

Future policy benefits for life and accident and health insurance contracts

 
 
39,844
 
  40,523  

Policyholder contract deposits (portion measured at fair value: 2013 – $586; 2012 – $1,257)

 
 
121,439
 
  122,980  

Other policyholder funds

 
 
5,400
 
  6,267  

Derivative liabilities, at fair value

 
 
3,124
 
  4,061  

Other liabilities (portion measured at fair value: 2013 – $867; 2012 – $1,080)

 
 
30,895
 
  32,068  

Long-term debt (portion measured at fair value: 2013 – $7,013; 2012 – $8,055)

 
 
42,614
 
  48,500  

Separate account liabilities

 
 
61,759
 
  57,337  

Liabilities held for sale

 
 
26,496
 
  27,366
   

Total liabilities

 
 
439,203
 
  449,630
   

Contingencies, commitments and guarantees (see Note 10)

 
 
 
 
     
   
 
 
 
     

Redeemable noncontrolling interests (see Note 12)

 
 
80
 
  334  
   
 
 
 
     

AIG shareholders' equity:

 
 
 
 
     

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2013 – 1,906,613,772 and 2012 – 1,906,611,680

 
 
4,766
 
  4,766  

Treasury stock, at cost; 2013 – 430,265,761; 2012 – 430,289,745 shares of common stock

 
 
(13,923
)
  (13,924 )

Additional paid-in capital

 
 
80,468
 
  80,410  

Retained earnings

 
 
19,113
 
  14,176  

Accumulated other comprehensive income

 
 
7,039
 
  12,574
   

Total AIG shareholders' equity

 
 
97,463
 
  98,002  

Non-redeemable noncontrolling interests (including $100 associated with businesses held for sale)

 
 
692
 
  667
   

Total equity

 
 
98,155
 
  98,669
   

Total liabilities and equity

 
$
537,438
 
$ 548,633
   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 
 


   
 


   
 
   
 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
(dollars in millions, except per share data)
 

2013

  2012
 

2013

  2012
 
   

Revenues:

 
 
 
 
     
 
 
 
     

Premiums

 
$
9,200
 
$ 9,629  
$
18,572
 
$ 19,099  

Policy fees

 
 
623
 
  567  
 
1,238
 
  1,151  

Net investment income

 
 
3,844
 
  4,481  
 
8,008
 
  11,586  

Net realized capital gains:

 
 
 
 
     
 
 
 
     

Total other-than-temporary impairments on available for sale securities

 
 
(17
)
  (99 )
 
(57
)
  (267 )

Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Other comprehensive income (loss)

 
 
(10
)
  (51 )
 
(11
)
  (336 )
   

Net other-than-temporary impairments on available for sale securities recognized in net income

 
 
(27
)
  (150 )
 
(68
)
  (603 )

Other realized capital gains

 
 
1,618
 
  549  
 
1,959
 
  751
   

Total net realized capital gains

 
 
1,591
 
  399  
 
1,891
 
  148  

Other income

 
 
2,057
 
  1,145  
 
3,494
 
  1,734
   

Total revenues

 
 
17,315
 
  16,221  
 
33,203
 
  33,718
   

Benefits, claims and expenses:

 
 
 
 
     
 
 
 
     

Policyholder benefits and claims incurred

 
 
8,090
 
  7,789  
 
14,818
 
  14,908  

Interest credited to policyholder account balances

 
 
972
 
  1,054  
 
1,989
 
  2,116  

Amortization of deferred acquisition costs

 
 
1,353
 
  1,472  
 
2,639
 
  2,819  

Other acquisition and insurance expenses

 
 
2,245
 
  2,264  
 
4,483
 
  4,522  

Interest expense

 
 
535
 
  567  
 
1,112
 
  1,132  

Loss on extinguishment of debt

 
 
38
 
  9  
 
378
 
  9  

Other expenses

 
 
935
 
  1,397  
 
1,805
 
  2,077
   

Total benefits, claims and expenses

 
 
14,168
 
  14,552  
 
27,224
 
  27,583
   

Income from continuing operations before income tax expense

 
 
3,147
 
  1,669  
 
5,979
 
  6,135  

Income tax expense (benefit)

 
 
422
 
  (491 )
 
1,116
 
  590
   

Income from continuing operations

 
 
2,725
 
  2,160  
 
4,863
 
  5,545  

Income from discontinued operations, net of income tax expense

 
 
33
 
  179  
 
126
 
  243
   

Net income

 
 
2,758
 
  2,339  
 
4,989
 
  5,788
   

Less:

 
 
 
 
     
 
 
 
     

Net income from continuing operations attributable to noncontrolling interests:

 
 
 
 
     
 
 
 
     

Nonvoting, callable, junior and senior preferred interests

 
 
 
   
 
 
  208  

Other

 
 
27
 
  7  
 
52
 
  40
   

Total net income from continuing operations attributable to noncontrolling interests

 
 
27
 
  7  
 
52
 
  248
   

Net income attributable to AIG

 
$
2,731
 
$ 2,332  
$
4,937
 
$ 5,540
   

Income per common share attributable to AIG:

 
 
 
 
     
 
 
 
     

Basic:

 
 
 
 
     
 
 
 
     

Income from continuing operations

 
$
1.83
 
$ 1.23  
$
3.26
 
$ 2.92  

Income from discontinued operations

 
$
0.02
 
$ 0.10  
$
0.08
 
$ 0.13  

Net Income attributable to AIG

 
$
1.85
 
$ 1.33  
$
3.34
 
$ 3.05
   

Diluted:

 
 
 
 
     
 
 
 
     

Income from continuing operations

 
$
1.82
 
$ 1.23  
$
3.25
 
$ 2.92  

Income from discontinued operations

 
$
0.02
 
$ 0.10  
$
0.08
 
$ 0.13  

Net Income attributable to AIG

 
$
1.84
 
$ 1.33  
$
3.33
 
$ 3.05
   

Weighted average shares outstanding:

 
 
 
 
     
 
 
 
     

Basic

 
 
1,476,512,720
 
  1,756,689,067  
 
1,476,491,719
 
  1,816,331,019  

Diluted

 
 
1,482,246,618
 
  1,756,714,475  
 
1,479,462,612
 
  1,816,358,625
   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

 
 


   
   
   
 
   
 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
(in millions)
 

2013

  2012
 

2013

  2012
 
   

Net income

 
$
2,758
 
$ 2,339  
$
4,989
 
$ 5,788
   

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

 
 
(87
)
  17  
 
195
 
  630  

Change in unrealized appreciation (depreciation) of all other investments

 
 
(4,446
)
  1,305  
 
(5,234
)
  2,286  

Change in foreign currency translation adjustments

 
 
(305
)
  (427 )
 
(578
)
  (336 )

Change in net derivative gains arising from cash flow hedging activities

 
 
 
  1  
 
 
  23  

Change in retirement plan liabilities adjustment

 
 
17
 
  14  
 
61
 
  32
   

Other comprehensive income (loss)

 
 
(4,821
)
  910  
 
(5,556
)
  2,635
   

Comprehensive income (loss)

 
 
(2,063
)
  3,249  
 
(567
)
  8,423  

Comprehensive income (loss) attributable to noncontrolling nonvoting, callable, junior and senior preferred interests

 
 
 
   
 
 
  208  

Comprehensive income (loss) attributable to other noncontrolling interests

 
 
6
 
  (1 )
 
31
 
  37
   

Total comprehensive income (loss) attributable to noncontrolling interests

 
 
6
 
  (1 )
 
31
 
  245
   

Comprehensive income (loss) attributable to AIG

 
$
(2,069
)
$ 3,250  
$
(598
)
$ 8,178
   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY (unaudited)

   
Six Months Ended
June 30, 2013

(in millions)
  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, beginning of year

  $ 4,766   $ (13,924 ) $ 80,410   $ 14,176   $ 12,574   $ 98,002   $ 667   $ 98,669
   

Net income attributable to AIG or other noncontrolling interests*

                4,937         4,937     48     4,985  

Other comprehensive loss

                    (5,535 )   (5,535 )   (4 )   (5,539 )

Deferred income taxes

            (7 )           (7 )       (7 )

Net increase due to deconsolidation

                            1     1  

Contributions from noncontrolling interests

                            13     13  

Distributions to noncontrolling interests

                            (31 )   (31 )

Other

        1     65             66     (2 )   64
   

Balance, end of period

  $ 4,766   $ (13,923 ) $ 80,468   $ 19,113   $ 7,039   $ 97,463   $ 692   $ 98,155
   

*     Excludes gains of $4 million for the six months ended June 30, 2013 attributable to redeemable noncontrolling interests. See Note 12 to the Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 
 


   
 
   
Six Months Ended June 30,
(in millions)
 

2013

  2012
 
   

Cash flows from operating activities:

 
 
 
 
     

Net income

 
$
4,989
 
$ 5,788  

Income from discontinued operations

 
 
(126
)
  (243 )
   

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

 
 
(1,665
)
  (1,812 )

Net losses on extinguishment of debt

 
 
378
 
  9  

Unrealized gains in earnings — net

 
 
(2,367
)
  (4,096 )

Equity in income from equity method investments, net of dividends or distributions

 
 
(792
)
  (395 )

Depreciation and other amortization

 
 
2,439
 
  2,558  

Impairments of assets

 
 
282
 
  957  

Changes in operating assets and liabilities:

 
 
 
 
     

Property casualty and life insurance reserves

 
 
775
 
  (639 )

Premiums and other receivables and payables — net

 
 
(518
)
  515  

Reinsurance assets and funds held under reinsurance treaties

 
 
(544
)
  (365 )

Capitalization of deferred policy acquisition costs

 
 
(2,953
)
  (2,863 )

Current and deferred income taxes — net

 
 
907
 
  286  

Other, net

 
 
(486
)
  506
   

Total adjustments

 
 
(4,544
)
  (5,339 )
   

Net cash provided by operating activities — continuing operations

 
 
319
 
  206  

Net cash provided by operating activities — discontinued operations

 
 
1,355
 
  1,426
   

Net cash provided by operating activities

 
 
1,674
 
  1,632
   

Cash flows from investing activities:

 
 
 
 
     

Proceeds from (payments for)

 
 
 
 
     

Sales or distribution of:

 
 
 
 
     

Available for sale investments

 
 
19,164
 
  21,402  

Trading securities

 
 
2,850
 
  5,671  

Other invested assets

 
 
2,959
 
  7,718  

Maturities of fixed maturity securities available for sale

 
 
12,517
 
  10,728  

Principal payments received on and sales of mortgage and other loans receivable

 
 
1,602
 
  1,372  

Purchases of:

 
 
 
 
     

Available for sale investments

 
 
(35,522
)
  (22,644 )

Trading securities

 
 
(1,763
)
  (8,743 )

Other invested assets

 
 
(2,423
)
  (2,163 )

Mortgage and other loans receivable

 
 
(2,143
)
  (1,402 )

Net change in restricted cash

 
 
956
 
  (284 )

Net change in short-term investments

 
 
8,524
 
  (859 )

Other, net

 
 
(417
)
  123
   

Net cash provided by investing activities — continuing operations

 
 
6,304
 
  10,919  

Net cash used in investing activities — discontinued operations

 
 
(233
)
  (48 )
   

Net cash provided by investing activities

 
 
6,071
 
  10,871
   

Cash flows from financing activities:

 
 
 
 
     

Proceeds from (payments for)

 
 
 
 
     

Policyholder contract deposits

 
 
6,757
 
  6,809  

Policyholder contract withdrawals

 
 
(8,066
)
  (7,077 )

Issuance of long-term debt

 
 
486
 
  4,045  

Repayments of long-term debt

 
 
(5,403
)
  (5,271 )

Repayment of Department of the Treasury SPV Preferred Interests

 
 
 
  (8,636 )

Purchase of Common Stock

 
 
 
  (5,000 )

Other, net

 
 
290
 
  2,599
   

Net cash used in financing activities — continuing operations

 
 
(5,936
)
  (12,531 )

Net cash used in financing activities — discontinued operations

 
 
(1,119
)
  (190 )
   

Net cash used in financing activities

 
 
(7,055
)
  (12,721 )
   

Effect of exchange rate changes on cash

 
 
(70
)
  (24 )
   

Net increase (decrease) in cash

 
 
620
 
  (242 )

Cash at beginning of period

 
 
1,151
 
  1,474  

Change in cash of businesses held for sale

 
 
(9
)
 
   

Cash at end of period

 
$
1,762
 
$ 1,232
   
 
               

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

               

Cash paid during the period for:

 
 
 
 
     

Interest

 
$
2,408
 
$ 2,088  

Taxes

 
$
209
 
$ 206  

Non-cash investing/financing activities:

 
 
 
 
     

Interest credited to policyholder contract deposits included in financing activities

 
$
1,980
 
$ 2,186
   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

ITEM 1 / NOTE 1.    BASIS OF PRESENTATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION

 

American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-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" or "our" mean American International Group, Inc. and its consolidated subsidiaries and the term "AIG Parent" means American International Group, Inc. and not any of its consolidated subsidiaries.

These unaudited condensed consolidated financial statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Annual Report). The condensed consolidated financial information as of December 31, 2012 included herein has been derived from audited consolidated financial statements in the 2012 Annual Report.

Certain of our foreign subsidiaries included in the condensed consolidated financial statements report on different fiscal-period bases. The effect on our condensed consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these condensed consolidated financial statements has been recorded. In the opinion of management, these condensed consolidated financial statements contain normal recurring adjustments, including eliminations of material intercompany accounts and transactions, necessary for a fair statement of the results presented herein.

Interim period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to June 30, 2013 and prior to the issuance of these condensed consolidated financial statements.

Presentation Changes

 

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 Condensed 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 Condensed 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.

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involves a significant degree of judgment. Accounting policies that 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 International Lease Finance Corporation (ILFC) as held for sale;

insurance liabilities, including property casualty and mortgage guaranty unpaid claims and claims adjustment expenses and future policy benefits for life and accident and health contracts;

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;

recoverability of assets, including reinsurance assets;

 

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ITEM 1 / NOTE 1.    BASIS OF PRESENTATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

estimated gross profits for investment-oriented products;

other-than-temporary impairments of financial instruments;

liabilities 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Standards Adopted During 2013

 

Testing Indefinite-Lived Intangible Assets for Impairment

 

In July 2012, the Financial Accounting Standards Board (FASB) issued an accounting standard that allows a company, as a first step in an impairment review, to assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired. We are not required to calculate the fair value of an indefinite-lived intangible asset and perform a quantitative impairment test unless we determine, based on the results of the qualitative assessment, that it is more likely than not the asset is impaired.

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. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.

Disclosures about Offsetting Assets and Liabilities

 

In January 2013, the FASB issued an accounting standard that clarifies the scope of transactions subject to disclosures about offsetting assets and liabilities. The standard applies to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset either in accordance with specific criteria contained in the FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement.

The standard became effective for fiscal years and interim periods beginning on or after January 1, 2013. We adopted the standard on its required effective date of January 1, 2013 and applied it retrospectively to all comparative periods presented. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.

Reporting of Amounts in Comprehensive Income

 

In February 2013, the FASB issued an accounting standard requiring us to disclose the effect of reclassifying significant items out of Accumulated other comprehensive income on the respective line items of net income or to provide a cross-reference to other disclosures required under GAAP.

The standard became effective for annual and interim reporting periods beginning after December 15, 2012. We adopted the standard on its required effective date of January 1, 2013. The adoption of this standard had no effect on our consolidated financial condition, results of operations or cash flows.

 

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Table of Contents

ITEM 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Future Application of Accounting Standards

 

Certain Obligations Resulting from Joint and Several Liability Arrangements

 

In February 2013, the FASB issued an accounting standard that requires us to measure obligations resulting from joint and several liability arrangements 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 basis of our arrangement among our co-obligors and (ii) any additional amount we expect to pay on behalf of our co-obligors.

The standard is effective for fiscal years and interim periods beginning after December 15, 2013, but earlier adoption is permitted. Upon adoption, the standard should be applied retrospectively to all prior periods presented. We plan to adopt the standard on its required effective date of January 1, 2014 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.

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

 

In March 2013, the FASB issued an accounting standard addressing whether consolidation guidance or foreign currency guidance applies 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 (other than a sale of in-substance real estate) within a foreign entity. The guidance also resolves the diversity in practice for the cumulative translation adjustment treatment in business combinations achieved in stages involving foreign entities.

Under this standard, the entire amount of the cumulative translation adjustment associated with the foreign entity should be released into earnings when there has been: (i) a sale of a subsidiary or group of net assets within a foreign entity 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 method to an investment in a foreign entity to consolidating the foreign entity.

The standard is effective for fiscal years and interim periods beginning after December 15, 2013, and will be applied prospectively. We plan to adopt the standard on its required effective date of January 1, 2014 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.

Investment Company Guidance

 

In June 2013, the FASB issued an accounting standard that amends the criteria a company must meet to qualify as an investment company, clarifies the measurement guidance, and requires new disclosures 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 should be considered when making the assessment.

The standard is effective for fiscal years and interim periods beginning after December 15, 2013. Earlier adoption is prohibited. An entity that no longer meets the requirements to be an investment company as a result of this standard should present the change in its status as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. An entity that 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. We plan to adopt the standard on its required effective date of January 1, 2014 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.

 

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ITEM 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


Inclusion of the Federal Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

 

In July 2013, the FASB issued an accounting standard that permits the Federal Funds Effective Swap Rate (or Overnight Index Swap Rate) to be used 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. The standard is effective on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

Presentation of Unrecognized Tax Benefits

 

In July 2013, the FASB issued an accounting standard that requires a liability related to unrecognized tax benefits to be presented as a reduction to the related deferred tax asset for a net operating loss carryforward or a tax credit carryforward (the Carryforwards). When the Carryforwards are not available 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 assets.

The standard is effective for fiscal years and interim periods beginning after December 15, 2013, but earlier adoption is permitted. Upon adoption, the standard should be applied prospectively to unrecognized tax benefits that existed at the effective date. Retrospective application is permitted. We plan to adopt the standard prospectively on its required effective date of January 1, 2014 and are assessing the effect of adopting the standard on our consolidated financial condition, results of operations and cash flows.

3. SEGMENT INFORMATION

 

We report the results of our operations through two reportable segments: AIG Property Casualty and AIG Life and Retirement. We evaluate performance based on revenues and pre-tax income (loss), excluding results from discontinued operations, because we believe this provides more meaningful information on how our operations are performing.

AIG Property Casualty Investment Income Allocation

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 and allocated capital. Commencing in the first quarter of 2013, AIG Property Casualty began applying similar duration and risk-free yields (plus an illiquidity premium) to the allocated capital of Commercial Insurance and Consumer Insurance as is applied to reserves.

AIG Life and Retirement Operating Segment Change

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.

 

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ITEM 1 / NOTE 3. SEGMENT INFORMATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

AIG Life and Retirement fully implemented these changes during the first quarter of 2013 and now presents its operating results in the following two operating segments:

These changes align financial reporting with the manner in which AIG's chief operating decision makers review the business to assess performance and to allocate resources. Prior period amounts have been revised to reflect the new structure, which did not affect previously reported pre-tax income from continuing operations for AIG Life and Retirement. Prior to the first quarter of 2013, AIG Life and Retirement was presented as two operating segments: Life Insurance and Retirement Services.

The following table presents AIG's operations by reportable segment:

 
 


   
   
 
   
 
  2013   2012  
Three Months Ended June 30,
(in millions)
 

Total Revenues

 

Pre-tax Income
(Loss) from
continuing operations

  Total Revenues
  Pre-tax Income
(Loss) from
continuing operations

 
   

AIG Property Casualty

 
 
 
 
 
 
 
           

Commercial Insurance

 
$
5,696
 
$
535
 
$ 6,051   $ 745  

Consumer Insurance

 
 
3,347
 
 
91
 
  3,564     192  

Other

 
 
723
 
 
542
 
  405     24
   

Total AIG Property Casualty

 
 
9,766
 
 
1,168
 
  10,020     961
   

AIG Life and Retirement

 
 
 
 
 
 
 
           

Retail

 
 
3,439
 
 
1,177
 
  2,501     341  

Institutional

 
 
2,609
 
 
542
 
  1,927     436
   

Total AIG Life and Retirement

 
 
6,048
 
 
1,719
 
  4,428     777
   

Other Operations

 
 
 
 
 
 
 
           

Mortgage Guaranty

 
 
243
 
 
75
 
  224     48  

Global Capital Markets

 
 
232
 
 
175
 
  10     (25 )

Direct Investment book

 
 
815
 
 
720
 
  584     485  

Retained Interests

 
 
 
 
 
  813     813  

Corporate & Other

 
 
411
 
 
(701
)
  251     (1,435 )

Consolidation and elimination

 
 
(10
)
 
1
 
  (13 )   (2 )
   

Total Other Operations

 
 
1,691
 
 
270
 
  1,869     (116 )
   

AIG Consolidation and elimination

 
 
(190
)
 
(10
)
  (96 )   47
   

Total AIG Consolidated

 
$
17,315
 
$
3,147
 
$ 16,221   $ 1,669
   

 

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ITEM 1 / NOTE 3. SEGMENT INFORMATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


 
 


   
   
 
   
 
  2013   2012  
Six Months Ended June 30,
(in millions)
 

Total Revenues

 

Pre-tax Income
(Loss) from
continuing operations

  Total Revenues
  Pre-tax Income
(Loss) from
continuing operations

 
   

AIG Property Casualty

 
 
 
 
 
 
 
           

Commercial Insurance

 
$
11,469
 
$
1,576
 
$ 11,944   $ 1,390  

Consumer Insurance

 
 
6,853
 
 
244
 
  7,176     426  

Other

 
 
1,403
 
 
952
 
  698     55
   

Total AIG Property Casualty

 
 
19,725
 
 
2,772
 
  19,818     1,871
   

AIG Life and Retirement

 
 
 
 
 
 
 
           

Retail

 
 
6,442
 
 
2,173
 
  4,900     825  

Institutional

 
 
4,346
 
 
1,116
 
  3,430     814
   

Total AIG Life and Retirement

 
 
10,788
 
 
3,289
 
  8,330     1,639
   

Other Operations

 
 
 
 
 
 
 
           

Mortgage Guaranty

 
 
474
 
 
119
 
  424     56  

Global Capital Markets

 
 
505
 
 
402
 
  170     63  

Direct Investment book

 
 
1,226
 
 
1,032
 
  928     733  

Retained Interests

 
 
 
 
 
  3,860     3,860  

Corporate & Other

 
 
813
 
 
(1,699
)
  513     (2,093 )

Consolidation and elimination

 
 
(19
)
 
2
 
  (23 )   1
   

Total Other Operations

 
 
2,999
 
 
(144
)
  5,872     2,620
   

AIG Consolidation and elimination

 
 
(309
)
 
62
 
  (302 )   5
   

Total AIG Consolidated

 
$
33,203
 
$
5,979
 
$ 33,718   $ 6,135
   

4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS

 

International Lease Finance Corporation Sale

 

On December 9, 2012, American International Group, Inc. (AIG Parent), AIG Capital Corporation (Seller), a wholly-owned direct subsidiary of AIG Parent and the sole shareholder of International Lease Finance Corporation (ILFC), and Jumbo Acquisition Limited (Purchaser) entered into a definitive agreement (the 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). The Share Purchase Agreement permits the Purchaser to elect to purchase an additional 9.9 percent of the common stock of ILFC for $522.5 million (the Option). On June 15, 2013, AIG, Seller and Purchaser entered into an amendment (the Amendment) to the Share Purchase Agreement, as amended by Amendment No. 1, dated May 10, 2013. The Amendment extended to July 31, 2013, the date on which any of AIG Parent, Seller or Purchaser may terminate the Share Purchase Agreement, as amended, if the closing of the ILFC Transaction has not yet occurred. Under the Amendment, AIG Parent and Seller may pursue (but not enter into definitive documentation for, or consummate) other offers for ILFC and may continue to pursue (but not engage in widespread solicitation of orders for, or request effectiveness of) the alternative of a public offering.

On July 15, 2013, the Purchaser delivered notice that it intended to exercise the Option, raising the size of the total purchase to 90 percent of the common stock of ILFC.

As of August 5, 2013, the closing of the ILFC Transaction has not occurred. AIG continues to consider ILFC as a non-core business and is continuing to pursue other options including a sale or initial public offering. We determined ILFC met the criteria for held for sale and discontinued operations accounting at June 30, 2013 and December 31, 2012.

 

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ITEM 1 / NOTE 4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table summarizes the components of assets and liabilities, all of which consist of ILFC, held-for-sale:

 
 


   
 
   
(in millions)
 

June 30,
2013

  December 31,
2012

 
   

Assets:

 
 
 
 
     

Equity securities

 
$
2
 
$ 1  

Mortgage and other loans receivable, net

 
 
118
 
  117  

Flight equipment primarily under operating leases, net of accumulated depreciation

 
 
34,948
 
  34,468  

Short-term investments

 
 
1,521
 
  1,861  

Cash

 
 
73
 
  63  

Premiums and other receivables, net of allowance

 
 
334
 
  308  

Other assets

 
 
2,062
 
  1,864
   

Assets of businesses held for sale

 
 
39,058
 
  38,682
   

Less: Loss accrual

 
 
(7,890
)
  (6,717 )
   

Total assets held for sale

 
$
31,168
 
$ 31,965
   

Liabilities:

 
 
 
 
     

Other liabilities

 
$
3,222
 
$ 3,043  

Long-term debt

 
 
23,274
 
  24,323
   

Total liabilities held for sale

 
$
26,496
 
$ 27,366
   

The following table summarizes income from discontinued operations:

 
 


   
 


   
 
   
 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
(in millions)
 

2013

  2012
 

2013

  2012
 
   

Revenues:

 
 
 
 
     
 
 
 
     

Aircraft leasing revenue

 
$
1,115
 
$ 1,123  
$
2,193
 
$ 2,279  

Net realized capital gains (losses)

 
 
 
  (2 )
 
(1
)
  (1 )

Other income

 
 
(4
)
  (4 )
 
(7
)
  (9 )
   

Total revenues

 
 
1,111
 
  1,117  
 
2,185
 
  2,269
   

Benefits, claims and expenses, excluding Aircraft leasing expenses

 
 
383
 
  389  
 
771
 
  798  

Aircraft leasing expenses

 
 
90
 
  646  
 
180
 
  1,271
   

Income from discontinued operations

 
 
638
 
  82  
 
1,234
 
  200
   

Gain (loss) on sale

 
 
(591
)
  (8 )
 
(1,027
)
  12
   

Income from discontinued operations, before income tax expense

 
 
47
 
  74  
 
207
 
  212
   

Income tax (benefit) expense

 
 
14
 
  (105 )
 
81
 
  (31 )
   

Income from discontinued operations, net of income tax

 
$
33
 
$ 179  
$
126
 
$ 243
   

We recorded a $4.4 billion after-tax loss on the sale of ILFC for the year ended December 31, 2012. In the three- and six-month periods ended June 30, 2013, we recorded an additional $619 million and $1.2 billion pre-tax loss, respectively, on the sale of ILFC, largely offsetting ILFC operating results for such periods. ILFC operating results did not include depreciation and amortization expense as a result of its classification as held for sale, as depreciation and amortization expense is not recorded on the assets of a business after the business is classified as held-for-sale.

ALICO

 

In connection with the sale of American Life Insurance Company (ALICO) to MetLife, Inc. (MetLife), we recognized pre-tax gains of $28 million and $145 million, in the three- and six-month periods ended June 30, 2013, respectively,

 

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ITEM 1 / NOTE 4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

primarily attributable to refunds of taxes, interest and penalties after a successful appeal to the Japanese tax authorities related to the deduction of unrealized foreign exchange losses on certain bond securities held by ALICO prior to its sale to MetLife in 2010.

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. You should read the following in conjunction with Note 6 to the Consolidated Financial Statements in the 2012 Annual Report for a complete discussion of our accounting policies and procedures regarding fair value measurements.

Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are classified in accordance with a fair value hierarchy consisting of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

Level 1:  Fair value measurements based on quoted prices (unadjusted) in active markets that AIG has 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.

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 as to 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 those 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.

 

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ITEM 1 / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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:

   
June 30, 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

  $ 266   $ 3,264   $   $   $   $ 3,530  

Obligations of states, municipalities and political subdivisions

        31,783     945             32,728  

Non-U.S. governments

    562     23,047     20             23,629  

Corporate debt

        142,323     1,634             143,957  

RMBS

        23,288     13,694             36,982  

CMBS

        5,226     5,455             10,681  

CDO/ABS

        3,580     6,142             9,722
   

Total bonds available for sale

    828     232,511     27,890             261,229
   

Bond trading securities:

                                     

U.S. government and government sponsored entities

    164     5,897                 6,061  

Obligations of states, municipalities and political subdivisions

        181                 181  

Non-U.S. governments

        2                 2  

Corporate debt

        1,098                 1,098  

RMBS

        1,404     782             2,186  

CMBS

        881     820             1,701  

CDO/ABS

        3,588     8,972             12,560
   

Total bond trading securities

    164     13,051     10,574             23,789
   

Equity securities available for sale:

                                     

Common stock

    2,817         76             2,893  

Preferred stock

        33     48             81  

Mutual funds

    170     9                 179
   

Total equity securities available for sale

    2,987     42     124             3,153
   

Equity securities trading

    676     82                 758  

Mortgage and other loans receivable

        59                 59  

Other invested assets

    11     2,221     5,639             7,871  

Derivative assets:

                                     

Interest rate contracts

    8     4,109     961             5,078  

Foreign exchange contracts

        117                 117  

Equity contracts

    137     55     73             265  

Commodity contracts

        123     1             124  

Credit contracts

            56             56  

Other contracts

        1     36             37  

Counterparty netting and cash collateral

                (2,011 )   (861 )   (2,872 )
   

Total derivative assets

    145     4,405     1,127     (2,011 )   (861 )   2,805
   

Short-term investments

    215     5,884                 6,099  

Separate account assets

    58,796     2,963                 61,759  

Other assets

        582                 582
   

Total

  $ 63,822   $ 261,800   $ 45,354   $ (2,011 ) $ (861 ) $ 368,104
   

Liabilities:

                                     

Policyholder contract deposits

  $   $   $ 586   $   $   $ 586  

Derivative liabilities:

                                     

Interest rate contracts

        4,359     182             4,541  

Foreign exchange contracts

        155                 155  

Equity contracts

        104     3             107  

Commodity contracts

        127                 127  

Credit contracts

            1,650             1,650  

Other contracts

        26     141             167  

Counterparty netting and cash collateral

                (2,011 )   (1,612 )   (3,623 )
   

Total derivative liabilities

        4,771     1,976     (2,011 )   (1,612 )   3,124
   

Long-term debt

        6,594     419             7,013  

Other liabilities

    116     751                 867
   

Total

  $ 116   $ 12,116   $ 2,981   $ (2,011 ) $ (1,612 ) $ 11,590
   

 

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Table of Contents

ITEM 1 / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
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
   

Bond trading 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 bond trading 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
   

Equity securities trading

    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 a qualifying master netting agreement.

(b)  Represents cash collateral posted and received. Securities collateral posted for derivative transactions that is reflected in Fixed maturity securities in the Condensed Consolidated Balance Sheets, and collateral received, not reflected in the Condensed Consolidated Balance Sheets, was $1.4 billion and $143 million, respectively, at June 30, 2013 and $1.9 billion and $299 million, respectively, at December 31, 2012.

 

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Table of Contents

ITEM 1 / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 three- and six-month periods ended June 30, 2013, we transferred $318 million and $557 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, respectively, as they are no longer considered actively traded. For similar reasons, during the six-month period ended June 30, 2013, we transferred $93 million of securities issued by the U.S. government and U.S. government-sponsored entities from Level 1 to Level 2. We had no material transfers from Level 1 to Level 2 for U.S. government and government-sponsored entities for the three-month period ended June 30, 2013. We had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2013.

During the three- and six-month periods ended June 30, 2012, we transferred $135.9 million of investments in securities issued by Non-U.S. governments from Level 1 to Level 2, as they were no longer considered actively traded. We had no material transfers from Level 2 to Level 1 during the three- and six-month periods ended June 30, 2012.

 

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Table of Contents

ITEM 1 / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Changes in Level 3 Recurring Fair Value Measurements

 

The following tables present changes during the three- and six-month periods ended June 30, 2013 and 2012 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 Condensed Consolidated Balance Sheets at June 30, 2013 and 2012:

   
(in millions)
  Fair Value
Beginning
of Period(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 Period

  Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Period

 
   

Three Months Ended June 30, 2013

                                                 

Assets:

                                                 

Bonds available for sale:

                                                 

Obligations of states, municipalities and political subdivisions

  $ 1,019   $ 24   $ (145 ) $ 69   $   $ (22 ) $ 945   $  

Non-U.S. governments

    18     (1 )       4         (1 )   20      

Corporate debt

    1,449         (20 )   8     256     (59 )   1,634      

RMBS

    12,096     204     (144 )   1,529     9         13,694      

CMBS

    5,315         (121 )   263     7     (9 )   5,455      

CDO/ABS

    5,577     72     (76 )   381     198     (10 )   6,142    
   

Total bonds available for sale

    25,474     299     (506 )   2,254     470     (101 )   27,890    
   

Bond trading securities:

                                                 

RMBS

    730     (12 )       64             782     (12 )

CMBS

    776     (1 )       (41 )   93     (7 )   820     (16 )

CDO/ABS

    8,842     569         (572 )   133         8,972     336
   

Total bond trading securities

    10,348     556         (549 )   226     (7 )   10,574     308
   

Equity securities available for sale:

                                                 

Common stock

    22     (9 )   6     57             76      

Preferred stock

    49         (1 )               48    
   

Total equity securities available for sale

    71     (9 )   5     57             124    
   

Other invested assets

    5,467     108     23     42     218     (219 )   5,639    
   

Total

  $ 41,360   $ 954   $ (478 ) $ 1,804   $ 914   $ (327 ) $ 44,227   $ 308
   

Liabilities:

                                                 

Policyholder contract deposits

  $ (1,047 ) $ 410   $   $ 51   $   $   $ (586 ) $ 637  

Derivative liabilities, net:

                                                 

Interest rate contracts

    756     3         20             779     (7 )

Equity contracts

    66     8         (6 )   2         70     (15 )

Commodity contracts

    1                         1      

Credit contracts

    (1,775 )   138         43             (1,594 )   (181 )

Other contracts

    (139 )   13     8     13             (105 )   10
   

Total derivative liabilities, net

    (1,091 )   162     8     70     2         (849 )   (193 )
   

Long-term debt(b)

    (407 )   (15 )       3             (419 )   13
   

Total

  $ (2,545 ) $ 557   $ 8   $ 124   $ 2   $   $ (1,854 ) $ 457
   

 

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Table of Contents

ITEM 1 / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
(in millions)
  Fair Value
Beginning
of Period(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 Period

  Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Period

 
   

Six Months Ended June 30, 2013

                                                 

Assets:

                                                 

Bonds available for sale:

                                                 

Obligations of states, municipalities and political subdivisions

  $ 1,024   $ 25   $ (150 ) $ 205   $   $ (159 ) $ 945   $  

Non-U.S. governments

    14             6     1     (1 )   20      

Corporate debt

    1,487