UNITED STATES

 

  

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 March 31, 2015

Commission File Number 1-8787

 

 

 

American International Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

13-2592361

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

175 Water Street, New York, New York

10038

(Address of principal executive offices)

(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      No ☐

 

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      No ☐

 

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 ☑ 

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

 

 

(Do not check if a

smaller reporting company)

 

 

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

 

As of April 29, 2015, there were 1,333,395,436 shares outstanding of the registrant’s common stock.

  

 


 

AMERICAN INTERNATIONAL GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED

March 31, 2015

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

11

 

Note 4.  

Discontinued Operations

12

 

Note 5.

Fair Value Measurements

12

 

Note 6.

Investments

27

 

Note 7.

Lending Activities

34

 

Note 8.

Variable Interest Entities

36

 

Note 9.

Derivatives and Hedge Accounting

38

 

Note 10.

Contingencies, Commitments and Guarantees

43

 

Note 11.

Equity

51

 

Note 12.

Noncontrolling Interests

54

 

Note 13.

Earnings Per Share

55

 

Note 14.  

Employee Benefits

56

 

Note 15.

Income Taxes

56

 

Note 16.

Information Provided in Connection with Outstanding Debt

58

 

Note 17.

Subsequent Events

64

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of

  

 

Operations

65

 

·       Cautionary Statement Regarding Forward-Looking Information

66

 

·       Use of Non-GAAP Measures

68

 

·       Executive Overview

71

 

·       Results of Operations

83

 

·       Investments

114

 

·       Insurance Reserves

132

 

·       Liquidity and Capital Resources

142

 

·       Enterprise Risk Management

157

 

·       Critical Accounting Estimates

162

 

·       Regulatory Environment

163

 

·       Glossary

164

 

·       Acronyms

168

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

169  

Item 4

Controls and Procedures

169  

PART II — OTHER INFORMATION
 

Item 1

Legal Proceedings

170  

Item 1A

Risk Factors

170

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

170

Item 4

Mine Safety Disclosures

170

Item 6

Exhibits

170  

SIGNATURES
171  

  

 

1


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

  

American International Group, Inc.

CONDENSED Consolidated Balance Sheets (unaudited)

 

March 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 - $242,114; 2014 - $243,307)

$

260,822

$

259,859

Other bond securities, at fair value (See Note 6)

 

19,013

 

19,712

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2015 - $1,683; 2014 - $1,930)

 

3,766

 

4,395

Other common and preferred stock, at fair value (See Note 6)

 

1,100

 

1,049

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2015 - $6; 2014 - $6)

 

25,313

 

24,990

Other invested assets (portion measured at fair value: 2015 - $9,196; 2014 - $9,394)

 

34,838

 

34,518

Short-term investments (portion measured at fair value: 2015 - $1,208; 2014 - $1,684)

 

11,961

 

11,243

Total investments

 

356,813

 

355,766

 

 

 

 

 

Cash

 

1,823

 

1,758

Accrued investment income

 

2,726

 

2,712

Premiums and other receivables, net of allowance

 

13,450

 

12,031

Reinsurance assets, net of allowance

 

22,208

 

21,959

Deferred income taxes

 

18,010

 

19,339

Deferred policy acquisition costs

 

9,708

 

9,827

Derivative assets, at fair value

 

1,621

 

1,604

Other assets, including restricted cash of $2,072 in 2015 and $2,025 in 2014

 

12,203

 

10,549

Separate account assets, at fair value

 

82,139

 

80,036

Total assets

$

520,701

$

515,581

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

74,490

$

77,260

Unearned premiums

 

22,437

 

21,324

Future policy benefits for life and accident and health insurance contracts

 

43,244

 

42,749

Policyholder contract deposits (portion measured at fair value: 2015 - $1,882; 2014 - $1,561)

 

124,935

 

124,613

Other policyholder funds (portion measured at fair value: 2015 - $8; 2014 - $8)

 

4,415

 

4,669

Derivative liabilities, at fair value

 

2,651

 

2,273

Other liabilities (portion measured at fair value: 2015 - $178; 2014 - $350)

 

26,024

 

24,168

Long-term debt (portion measured at fair value: 2015 - $4,844; 2014 - $5,466)

 

31,999

 

31,217

Separate account liabilities

 

82,139

 

80,036

Total liabilities

 

412,334

 

408,309

Contingencies, commitments and guarantees (see Note 10)

 

 

 

 

 

 

 

 

 

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 - 559,593,905 shares; 2014 - 530,744,521 shares

 

(20,820)

 

(19,218)

Additional paid-in capital

 

81,303

 

80,958

Retained earnings

 

32,073

 

29,775

Accumulated other comprehensive income

 

10,657

 

10,617

Total AIG shareholders’ equity

 

107,979

 

106,898

Non-redeemable noncontrolling interests

 

388

 

374

Total equity

 

108,367

 

107,272

Total liabilities and equity

$

520,701

$

515,581

 

 

 

 

 

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 March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Premiums

 

 

 

 

 

 

 

 

 

$

8,822

 

$

9,075

   Policy fees

 

 

 

 

 

 

 

 

 

 

677

 

 

631

   Net investment income

 

 

 

 

 

 

 

 

 

 

3,838

 

 

4,196

   Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

(87)

 

 

(50)

      Portion of other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         fixed maturity securities recognized in Other comprehensive income

 

 

 

 

 

 

 

 

 

 

(10)

 

 

(4)

      Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         securities recognized in net income

 

 

 

 

 

 

 

 

 

 

(97)

 

 

(54)

      Other realized capital gains (losses)

 

 

 

 

 

 

 

 

 

 

1,438

 

 

(98)

         Total net realized capital gains (losses)

 

 

 

 

 

 

 

 

 

 

1,341

 

 

(152)

   Aircraft leasing revenue

 

 

 

 

 

 

 

 

 

 

-

 

 

1,113

   Other income

 

 

 

 

 

 

 

 

 

 

1,297

 

 

1,300

Total revenues

 

 

 

 

 

 

 

 

 

 

15,975

 

 

16,163

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Policyholder benefits and losses incurred

 

 

 

 

 

 

 

 

 

 

6,551

 

 

6,797

   Interest credited to policyholder account balances

 

 

 

 

 

 

 

 

 

 

935

 

 

955

   Amortization of deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

1,350

 

 

1,305

   General operating and other expenses

 

 

 

 

 

 

 

 

 

 

2,949

 

 

3,024

   Interest expense

 

 

 

 

 

 

 

 

 

 

340

 

 

479

   Aircraft leasing expenses

 

 

 

 

 

 

 

 

 

 

-

 

 

1,096

   Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

68

 

 

238

   Net (gain) loss on sale of properties and divested businesses

 

 

 

 

 

 

 

 

 

 

6

 

 

(4)

Total benefits, losses and expenses

 

 

 

 

 

 

 

 

 

 

12,199

 

 

13,890

Income from continuing operations before income tax expense

 

 

 

 

 

 

 

3,776

 

 

2,273

Income tax expense

 

 

 

 

 

 

 

 

 

 

1,300

 

 

614

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

2,476

 

 

1,659

Income (loss) from discontinued operations, net of income tax expense

 

 

 

 

 

 

 

 

 

 

1

 

 

(47)

Net income

 

 

 

 

 

 

 

 

 

 

2,477

 

 

1,612

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   noncontrolling interests

 

 

 

 

 

 

 

 

 

 

9

 

 

3

Net income attributable to AIG

 

 

 

 

 

 

 

 

 

$

2,468

 

$

1,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income from continuing operations

 

 

 

 

 

 

 

 

 

$

1.81

 

$

1.13

      Loss from discontinued operations

 

 

 

 

 

 

 

 

 

$

-

 

$

(0.03)

      Net income attributable to AIG

 

 

 

 

 

 

 

 

 

$

1.81

 

$

1.10

   Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income from continuing operations

 

 

 

 

 

 

 

 

 

$

1.78

 

$

1.12

      Loss from discontinued operations

 

 

 

 

 

 

 

 

 

$

-

 

$

(0.03)

      Net income attributable to AIG

 

 

 

 

 

 

 

 

 

$

1.78

 

$

1.09

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

 

 

 

 

 

 

 

 

1,365,951,690

 

 

1,459,249,393

   Diluted

 

 

 

 

 

 

 

 

 

 

1,386,263,549

 

 

1,472,510,813

Dividends declared per common share

 

 

 

 

 

 

 

 

 

$

0.125

 

$

0.125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (unaudited)

Three Months Ended March 31,

 

 

 

 

 

 

 

(in millions)

 

 

 

2015

 

 

2014

Net income

 

 

$

2,477

 

$

1,612

Other comprehensive income, net of tax

 

 

 

 

 

 

 

   Change in unrealized appreciation (depreciation) of fixed maturity investments on

 

 

 

 

 

 

 

      which other-than-temporary credit impairments were taken

 

 

 

(72)

 

 

89

   Change in unrealized appreciation of all other investments

 

 

 

539

 

 

2,785

   Change in foreign currency translation adjustments

 

 

 

(459)

 

 

(158)

   Change in retirement plan liabilities adjustment

 

 

 

29

 

 

9

Other comprehensive income

 

 

 

37

 

 

2,725

Comprehensive income

 

 

 

2,514

 

 

4,337

Comprehensive income attributable to noncontrolling interests

 

 

 

6

 

 

3

Comprehensive income attributable to AIG

 

 

$

2,508

 

$

4,334

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(19,218)

$

80,958

$

29,775

$

10,617

$

106,898

$

374

$

107,272

Purchase of common stock

 

-

 

(1,602)

 

-

 

-

 

-

 

(1,602)

 

-

 

(1,602)

Net income attributable to AIG or other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

2,468

 

-

 

2,468

 

9

 

2,477

Dividends

 

-

 

-

 

-

 

(170)

 

-

 

(170)

 

-

 

(170)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

40

 

40

 

(3)

 

37

Net increase due to deconsolidation

 

-

 

-

 

-

 

-

 

-

 

-

 

7

 

7

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

1

 

1

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(4)

 

(4)

Other

 

-

 

-

 

345

 

-

 

-

 

345

 

4

 

349

Balance, end of period

$

4,766

$

(20,820)

$

81,303

$

32,073

$

10,657

$

107,979

$

388

$

108,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(14,520)

$

80,899

$

22,965

$

6,360

$

100,470

$

611

$

101,081

Purchase of common stock

 

-

 

(867)

 

-

 

-

 

-

 

(867)

 

-

 

(867)

Net income attributable to AIG or other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

1,609

 

-

 

1,609

 

3

 

1,612

Dividends

 

-

 

-

 

-

 

(182)

 

-

 

(182)

 

-

 

(182)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

2,725

 

2,725

 

-

 

2,725

Net decrease due to consolidation

 

-

 

-

 

-

 

-

 

-

 

-

 

(34)

 

(34)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

5

 

5

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(22)

 

(22)

Other

 

-

 

1

 

76

 

1

 

-

 

78

 

(3)

 

75

Balance, end of period

$

4,766

$

(15,386)

$

80,975

$

24,393

$

9,085

$

103,833

$

560

$

104,393

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)

Three Months Ended March 31,

 

 

 

 

(in millions)

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

Net income

$

2,477

$

1,612

(Income) loss from discontinued operations

 

(1)

 

47

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

 

(974)

 

(246)

Net (gain) loss on sale of divested businesses

 

6

 

(4)

Net losses on extinguishment of debt

 

68

 

238

Unrealized losses in earnings - net

 

457

 

585

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

 

(362)

 

(441)

Depreciation and other amortization

 

1,226

 

1,121

Impairments of assets

 

212

 

138

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

(295)

 

1,495

Premiums and other receivables and payables - net

 

(572)

 

(701)

Reinsurance assets and funds held under reinsurance treaties

 

(272)

 

(1,532)

Capitalization of deferred policy acquisition costs

 

(1,439)

 

(1,462)

Current and deferred income taxes - net

 

1,161

 

450

Other, net

 

(1,304)

 

(537)

Total adjustments

 

(2,088)

 

(896)

Net cash provided by operating activities

 

388

 

763

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distribution of:

 

 

 

 

Available for sale investments

 

6,189

 

6,365

Other securities

 

1,094

 

1,725

Sales or distributions of other invested assets (including flight equipment)

 

1,648

 

1,041

Maturities of fixed maturity securities available for sale

 

5,251

 

5,347

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

 

1,047

 

765

Purchases of:

 

 

 

 

Available for sale investments

 

(9,844)

 

(11,592)

Other securities

 

(476)

 

(181)

Purchases of other invested assets (including flight equipment)

 

(1,132)

 

(1,218)

Mortgage and other loans receivable

 

(1,657)

 

(1,307)

Net change in restricted cash

 

(47)

 

(667)

Net change in short-term investments

 

(804)

 

3,588

Other, net

 

(955)

 

(83)

Net cash provided by investing activities

 

314

 

3,783

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

3,713

 

4,008

Policyholder contract withdrawals

 

(3,533)

 

(3,548)

Issuance of long-term debt

 

2,585

 

1,583

Repayments of long-term debt

 

(1,893)

 

(3,281)

Purchase of Common Stock

 

(1,398)

 

(867)

Dividends paid

 

(170)

 

(182)

Other, net

 

92

 

(2,002)

Net cash used in financing activities

 

(604)

 

(4,289)

Effect of exchange rate changes on cash

 

(33)

 

(11)

Net increase in cash

 

65

 

246

Cash at beginning of year

 

1,758

 

2,241

Change in cash of businesses held-for-sale

 

-

 

3

Cash at end of period

$

1,823

$

2,490

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

307

$

840

Taxes

$

140

$

165

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

937

$

1,052

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

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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 global insurance organization serving customers in more than 100 countries and jurisdictions. 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, 2014 (2014 Annual Report). The condensed consolidated financial information as of December 31, 2014 included herein has been derived from audited Consolidated Financial Statements in the 2014 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 March 31, 2015 and prior to the issuance of these Condensed Consolidated Financial Statements.

Sale of ILFC

 

On May 14, 2014, we completed 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). The total value of the consideration was based in part on AerCap’s closing price per share of $47.01 on May 13, 2014. ILFC’s results of operations are reflected in Aircraft leasing revenue and Aircraft leasing expenses in the Condensed Consolidated Statements of Income through the date of the completion of the sale. 

 

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Item 1 / NOTE 1. BASIS OF PRESENTATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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:

·          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 losses and loss adjustment 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 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Standards Adopted During 2015

 

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

 

In January 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard that clarifies that a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer 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 the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.

We adopted the standard on its required effective date of January 1, 2015. The adoption of this standard had no 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)

 

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.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures

 

In June 2014, the FASB issued an accounting standard that changes the accounting 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 accounted 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 forward agreement.

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.

Future Application of Accounting Standards

 

Revenue Recognition

 

In May 2014, the FASB issued an accounting standard that supersedes most existing revenue recognition guidance. The standard excludes from its scope the accounting for insurance contracts, leases, financial instruments, and other agreements that are governed under other GAAP guidance, but could affect the revenue recognition for certain of our other activities.

The standard is effective for interim and annual reporting periods beginning after December 15, 2016 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. Early adoption is not permitted. We plan to adopt the standard on its required effective date of January 1, 2017 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.

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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 or 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 to all relevant prior periods presented starting with January 1, 2010 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 are assessing the impact of the standard 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 are assessing the impact of the standard on our consolidated financial condition, results of operations and cash flows.

 

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Item 1 / NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

3. SEGMENT INFORMATION

 

 

We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources through two reportable segments:  Commercial Insurance and Consumer Insurance in addition to a Corporate and Other category.  The Corporate and Other category consists of businesses and items not allocated to our reportable segments. 

We evaluate performance based on revenue and pre-tax operating income (loss).  Pre-tax operating income (loss) is derived by excluding certain items from net income (loss) attributable to AIG.  See the table below for items excluded from pre-tax operating income (loss).

The following tables present our operations by reportable segment:

 

2015

2014

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Three Months Ended March 31,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

5,956

$

1,170

$

6,112

$

1,116

    Mortgage Guaranty

 

264

 

145

 

248

 

76

    Institutional Markets

 

624

 

147

 

695

 

229

      Total Commercial Insurance

 

6,844

 

1,462

 

7,055

 

1,421

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

2,388

 

800

 

2,485

 

915

    Life

 

1,613

 

171

 

1,610

 

235

    Personal Insurance

 

2,862

 

(26)

 

3,064

 

18

      Total Consumer Insurance

 

6,863

 

945

 

7,159

 

1,168

Corporate and Other

 

 

 

 

 

 

 

 

    Direct Investment book

 

178

 

145

 

519

 

440

    Global Capital Markets

 

137

 

114

 

59

 

29

    AIG Parent and Other*

 

968

 

(120)

 

523

 

(538)

    Consolidation and elimination

 

(273)

 

(1)

 

(133)

 

1

      Total Corporate and Other

 

1,010

 

138

 

968

 

(68)

AIG Consolidation and elimination

 

(127)

 

(18)

 

(82)

 

35

Total AIG Consolidated revenues and pre-tax operating income

$

14,590

$

2,527

$

15,100

$

2,556

Reconciling Items from pre-tax operating income to pre-tax income:

 

 

 

 

 

 

 

 

    Changes in fair values of fixed maturity securities designated to

 

 

 

 

 

 

 

 

       hedge living benefit liabilities, net of interest expense

 

44

 

44

 

76

 

76

    Changes in benefit reserves and DAC, VOBA and SIA related to

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(54)

 

-

 

7

    Loss on extinguishment of debt

 

-

 

(68)

 

-

 

(238)

    Net realized capital gains

 

1,341

 

1,341

 

(152)

 

(152)

    Income from divested businesses

 

(15)

 

(21)

 

1,113

 

21

    Legal settlements related to legacy crisis matters

 

15

 

15

 

26

 

26

    Legal reserves related to legacy crisis matters

 

-

 

(8)

 

-

 

(23)

Pre-tax income

$

15,975

$

3,776

$

16,163

$

2,273

*    Includes Run-off Insurance Lines and Other Businesses.

 

 

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Item 1 / NOTE 4. DISCONTINUED OPERATIONS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

4. DISCONTINUED OPERATIONS

 

  

Discontinued Operations

 

In connection with the 2010 sale of American Life Insurance Company (ALICO) to MetLife, Inc. (MetLife), we recognized the following income (loss) from discontinued operations:

Three Months Ended March 31,

 

 

 

 

 

 

(in millions)

 

 

 

2015

 

2014

Revenues:

 

 

 

 

 

 

Gain (loss) on sale

 

 

$

1

$

(1)

Gain (loss) from discontinued operations, before income tax expense

 

 

 

1

 

(1)

Income tax expense

 

 

 

-

 

46

Income (loss) from discontinued operations, net of income tax expense

 

 

$

1

$

(47)

5. FAIR VALUE MEASUREMENTS

 

  

Fair Value Measurements on a Recurring Basis

 

Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three “levels” based on the observability of valuation inputs:

·     Level 1:  Fair value measurements 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.

·     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.

 

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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:

March 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

$

65

$

2,709

$

-

$

-

$

-

$

2,774

Obligations of states, municipalities and political subdivisions

 

-

 

25,579

 

2,256

 

-

 

-

 

27,835

Non-U.S. governments

 

716

 

19,139

 

34

 

-

 

-

 

19,889

Corporate debt

 

-

 

142,315

 

1,827

 

-

 

-

 

144,142

RMBS

 

-

 

20,387

 

17,345

 

-

 

-

 

37,732

CMBS

 

-

 

10,749

 

2,694

 

-

 

-

 

13,443

CDO/ABS

 

-

 

8,554

 

6,453

 

-

 

-

 

15,007

Total bonds available for sale

 

781

 

229,432

 

30,609

 

-

 

-

 

260,822

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

5,483

 

-

 

-

 

-

 

5,483

Obligations of states, municipalities and political subdivisions

 

-

 

76

 

-

 

-

 

-

 

76

Non-U.S. governments

 

-

 

2

 

-

 

-

 

-

 

2

Corporate debt

 

-

 

551

 

16

 

-

 

-

 

567

RMBS

 

-

 

888

 

1,288

 

-

 

-

 

2,176

CMBS

 

-

 

676

 

269

 

-

 

-

 

945

CDO/ABS

 

-

 

1,914

 

7,850

 

-

 

-

 

9,764

Total other bond securities

 

-

 

9,590

 

9,423

 

-

 

-

 

19,013

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

3,056

 

3

 

1

 

-

 

-

 

3,060

Preferred stock

 

25

 

-

 

-

 

-

 

-

 

25

Mutual funds

 

680

 

1

 

-

 

-

 

-

 

681

Total equity securities available for sale

 

3,761

 

4

 

1

 

-

 

-

 

3,766

Other equity securities

 

1,076

 

2

 

22

 

-

 

-

 

1,100

Mortgage and other loans receivable

 

-

 

-

 

6

 

-

 

-

 

6

Other invested assets

 

2

 

4,096

 

5,098

 

-

 

-

 

9,196

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

1

 

4,806

 

14

 

-

 

-

 

4,821

Foreign exchange contracts

 

-

 

971

 

-

 

-

 

-

 

971

Equity contracts

 

109

 

7

 

68

 

-

 

-

 

184

Commodity contracts

 

-

 

-

 

-

 

-

 

-

 

-

Credit contracts

 

-

 

-

 

4

 

-

 

-

 

4

Other contracts

 

-

 

-

 

29

 

-

 

-

 

29

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,476)

 

(1,912)

 

(4,388)

Total derivative assets

 

110

 

5,784

 

115

 

(2,476)

 

(1,912)