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 June 30, 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 July 29, 2015, there were 1,293,886,920 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, 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.

Fair Value Measurements

13

 

Note 5.

Investments

32

 

Note 6.

Lending Activities

40

 

Note 7.

Variable Interest Entities

41

 

Note 8.

Derivatives and Hedge Accounting

44

 

Note 9.

Contingencies, Commitments and Guarantees

49

 

Note 10.

Equity

56

 

Note 11.

Earnings Per Share

61

 

Note 12.  

Employee Benefits

62

 

Note 13.

Income Taxes

63

 

Note 14.

Information Provided in Connection with Outstanding Debt

65

 

Note 15.

Subsequent Events

72

 

 

 

Item 2

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

  

 

Operations

73

 

·       Cautionary Statement Regarding Forward-Looking Information

73

 

·       Use of Non-GAAP Measures

76

 

·       Executive Overview

79

 

·       Results of Operations

92

 

·       Investments

129

 

·       Insurance Reserves

148

 

·       Liquidity and Capital Resources

158

 

·       Enterprise Risk Management

174

 

·       Critical Accounting Estimates

179

 

·       Regulatory Environment

180

 

·       Glossary

181

 

·       Acronyms

185

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

186  

Item 4

Controls and Procedures

186  

PART II — OTHER INFORMATION
 

Item 1

Legal Proceedings

187  

Item 1A

Risk Factors

187

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

187

Item 4

Mine Safety Disclosures

187

Item 6

Exhibits

187  

SIGNATURES
188  

  

 

1


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

  

American International Group, Inc.

CONDENSED Consolidated Balance Sheets (unaudited)

 

June 30,

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 - $242,917; 2014 - $243,307)

$

255,066

$

259,859

Other bond securities, at fair value (See Note 5)

 

16,598

 

19,712

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2015 - $2,385; 2014 - $1,930)

 

4,755

 

4,395

Other common and preferred stock, at fair value (See Note 5)

 

1,323

 

1,049

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

 

27,143

 

24,990

Other invested assets (portion measured at fair value: 2015 - $9,389; 2014 - $9,394)

 

29,829

 

34,518

Short-term investments (portion measured at fair value: 2015 - $2,281; 2014 - $1,684)

 

13,865

 

11,243

Total investments

 

348,579

 

355,766

 

 

 

 

 

Cash

 

1,937

 

1,758

Accrued investment income

 

2,632

 

2,712

Premiums and other receivables, net of allowance

 

13,258

 

12,031

Reinsurance assets, net of allowance

 

21,361

 

21,959

Deferred income taxes

 

18,665

 

19,339

Deferred policy acquisition costs

 

10,270

 

9,827

Derivative assets, at fair value

 

1,256

 

1,604

Other assets, including restricted cash of $461 in 2015 and $2,025 in 2014

 

9,894

 

10,549

Separate account assets, at fair value

 

82,135

 

80,036

Total assets

$

509,987

$

515,581

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

72,939

$

77,260

Unearned premiums

 

22,786

 

21,324

Future policy benefits for life and accident and health insurance contracts

 

42,787

 

42,749

Policyholder contract deposits (portion measured at fair value: 2015 - $1,268; 2014 - $1,561)

 

124,480

 

124,613

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

 

4,378

 

4,669

Derivative liabilities, at fair value

 

1,546

 

2,273

Other liabilities (portion measured at fair value: 2015 - $284; 2014 - $350)

 

23,934

 

24,168

Long-term debt (portion measured at fair value: 2015 - $4,269; 2014 - $5,466)

 

30,360

 

31,217

Separate account liabilities

 

82,135

 

80,036

Total liabilities

 

405,345

 

408,309

Contingencies, commitments and guarantees (see Note 9)

 

 

 

 

 

 

 

 

 

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 - 599,222,972 shares; 2014 - 530,744,521 shares

 

(23,165)

 

(19,218)

Additional paid-in capital

 

81,330

 

80,958

Retained earnings

 

33,707

 

29,775

Accumulated other comprehensive income

 

7,620

 

10,617

Total AIG shareholders’ equity

 

104,258

 

106,898

Non-redeemable noncontrolling interests

 

384

 

374

Total equity

 

104,642

 

107,272

Total liabilities and equity

$

509,987

$

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

 

Six Months Ended

 

 

June 30,

 

June 30,

(dollars in millions, except per share data)

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

9,545

 

$

9,485

 

$

18,367

 

$

18,560

Policy fees

 

 

688

 

 

640

 

 

1,365

 

 

1,271

Net investment income

 

 

3,826

 

 

3,884

 

 

7,664

 

 

8,080

Net realized capital gains:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(148)

 

 

(32)

 

 

(235)

 

 

(82)

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

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income (loss)

 

 

(4)

 

 

(16)

 

 

(14)

 

 

(20)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income

 

 

(152)

 

 

(48)

 

 

(249)

 

 

(102)

Other realized capital gains

 

 

278

 

 

210

 

 

1,716

 

 

112

Total net realized capital gains

 

 

126

 

 

162

 

 

1,467

 

 

10

Aircraft leasing revenue

 

 

-

 

 

489

 

 

-

 

 

1,602

Other income

 

 

1,514

 

 

1,476

 

 

2,811

 

 

2,776

Total revenues

 

 

15,699

 

 

16,136

 

 

31,674

 

 

32,299

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

7,100

 

 

6,771

 

 

13,651

 

 

13,568

Interest credited to policyholder account balances

 

 

942

 

 

963

 

 

1,877

 

 

1,918

Amortization of deferred policy acquisition costs

 

 

1,356

 

 

1,396

 

 

2,706

 

 

2,701

General operating and other expenses

 

 

3,090

 

 

3,714

 

 

6,039

 

 

6,738

Interest expense

 

 

316

 

 

463

 

 

656

 

 

942

Aircraft leasing expenses

 

 

-

 

 

489

 

 

-

 

 

1,585

Loss on extinguishment of debt

 

 

342

 

 

34

 

 

410

 

 

272

Net (gain) loss on sale of divested businesses

 

 

1

 

 

(2,174)

 

 

7

 

 

(2,178)

Total benefits, claims and expenses

 

 

13,147

 

 

11,656

 

 

25,346

 

 

25,546

Income from continuing operations before income tax expense

 

 

2,552

 

 

4,480

 

 

6,328

 

 

6,753

Income tax expense

 

 

777

 

 

1,474

 

 

2,077

 

 

2,088

Income from continuing operations

 

 

1,775

 

 

3,006

 

 

4,251

 

 

4,665

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

 

 

16

 

 

30

 

 

17

 

 

(17)

Net income

 

 

1,791

 

 

3,036

 

 

4,268

 

 

4,648

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

(9)

 

 

(37)

 

 

-

 

 

(34)

Net income attributable to AIG

 

$

1,800

 

$

3,073

 

$

4,268

 

$

4,682

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.34

 

$

2.11

 

$

3.16

 

$

3.24

Income (loss) from discontinued operations

 

$

0.01

 

$

0.02

 

$

0.01

 

$

(0.01)

Net income attributable to AIG

 

$

1.35

 

$

2.13

 

$

3.17

 

$

3.23

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.31

 

$

2.08

 

$

3.09

 

$

3.20

Income (loss) from discontinued operations

 

$

0.01

 

$

0.02

 

$

0.01

 

$

(0.01)

Net income attributable to AIG

 

$

1.32

 

$

2.10

 

$

3.10

 

$

3.19

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,329,157,366

 

 

1,442,397,111

 

 

1,347,452,833

 

 

1,450,776,629

Diluted

 

 

1,365,390,431

 

 

1,464,676,330

 

 

1,376,325,971

 

 

1,468,364,283

Dividends declared per common share

 

$

0.125

 

$

0.125

 

$

0.250

 

$

0.250

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Six Months Ended

 

 

June 30,

 

June 30,

(in millions)

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Net income

 

$

1,791

 

$

3,036

 

$

4,268

 

$

4,648

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

 

 

(36)

 

 

26

 

 

(108)

 

 

115

Change in unrealized appreciation (depreciation) of all other investments

 

 

(2,991)

 

 

2,355

 

 

(2,452)

 

 

5,140

Change in foreign currency translation adjustments

 

 

(37)

 

 

47

 

 

(496)

 

 

(111)

Change in retirement plan liabilities adjustment

 

 

27

 

 

(2)

 

 

56

 

 

7

Other comprehensive income (loss)

 

 

(3,037)

 

 

2,426

 

 

(3,000)

 

 

5,151

Comprehensive income (loss)

 

 

(1,246)

 

 

5,462

 

 

1,268

 

 

9,799

Comprehensive loss attributable to noncontrolling interests

 

 

(9)

 

 

(37)

 

 

(3)

 

 

(34)

Comprehensive income (loss) attributable to AIG

 

$

(1,237)

 

$

5,499

 

$

1,271

 

$

9,833

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to 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

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(19,218)

$

80,958

$

29,775

$

10,617

$

106,898

$

374

$

107,272

Purchase of common stock

 

-

 

(3,947)

 

-

 

-

 

-

 

(3,947)

 

-

 

(3,947)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

4,268

 

-

 

4,268

 

-

 

4,268

Dividends

 

-

 

-

 

-

 

(335)

 

-

 

(335)

 

-

 

(335)

Other comprehensive loss

 

-

 

-

 

-

 

-

 

(2,997)

 

(2,997)

 

(3)

 

(3,000)

Deferred income taxes

 

-

 

-

 

(12)

 

-

 

-

 

(12)

 

-

 

(12)

Net increase due to acquisitions

 

-

 

-

 

-

 

-

 

-

 

-

 

9

 

9

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(3)

 

(3)

Other

 

-

 

-

 

384

 

(1)

 

-

 

383

 

7

 

390

Balance, end of period

$

4,766

$

(23,165)

$

81,330

$

33,707

$

7,620

$

104,258

$

384

$

104,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(14,520)

$

80,899

$

22,965

$

6,360

$

100,470

$

611

$

101,081

Purchase of common stock

 

-

 

(1,849)

 

-

 

-

 

-

 

(1,849)

 

-

 

(1,849)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

4,682

 

-

 

4,682

 

(34)

 

4,648

Dividends

 

-

 

-

 

-

 

(361)

 

-

 

(361)

 

-

 

(361)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

5,151

 

5,151

 

-

 

5,151

Net decrease due to dispositions

 

-

 

-

 

-

 

-

 

-

 

-

 

(127)

 

(127)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

9

 

9

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(37)

 

(37)

Other

 

-

 

-

 

68

 

-

 

-

 

68

 

(2)

 

66

Balance, end of period

$

4,766

$

(16,369)

$

80,967

$

27,286

$

11,511

$

108,161

$

420

$

108,581

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)

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

Net income

$

4,268

$

4,648

(Income) loss from discontinued operations

 

(17)

 

17

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

 

(666)

 

(456)

Net (gain) loss on sale of divested businesses

 

7

 

(2,178)

Losses on extinguishment of debt

 

410

 

272

Unrealized (gains) losses in earnings - net

 

(1,425)

 

127

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

 

(715)

 

(687)

Depreciation and other amortization

 

2,410

 

2,343

Impairments of assets

 

471

 

259

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

(420)

 

981

Premiums and other receivables and payables - net

 

(1,359)

 

(782)

Reinsurance assets and funds held under reinsurance treaties

 

573

 

(815)

Capitalization of deferred policy acquisition costs

 

(2,880)

 

(3,019)

Current and deferred income taxes - net

 

1,739

 

1,605

Other, net

 

(1,903)

 

(674)

Total adjustments

 

(3,758)

 

(3,024)

Net cash provided by operating activities

 

493

 

1,641

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale investments

 

14,144

 

12,191

Other securities

 

3,998

 

2,744

Other invested assets

 

6,218

 

1,925

Divested businesses, net

 

-

 

2,348

Maturities of fixed maturity securities available for sale

 

12,176

 

11,460

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

 

2,470

 

1,646

Purchases of:

 

 

 

 

Available for sale investments

 

(24,198)

 

(22,186)

Other securities

 

(583)

 

(290)

Other invested assets

 

(1,743)

 

(2,236)

Mortgage and other loans receivable

 

(4,459)

 

(3,445)

Net change in restricted cash

 

1,462

 

(628)

Net change in short-term investments

 

(2,693)

 

498

Other, net

 

(1,506)

 

(365)

Net cash provided by investing activities

 

5,286

 

3,662

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

7,541

 

8,162

Policyholder contract withdrawals

 

(7,225)

 

(7,241)

Issuance of long-term debt

 

2,774

 

3,028

Repayments of long-term debt

 

(3,701)

 

(6,027)

Purchase of Common Stock

 

(3,743)

 

(1,849)

Dividends paid

 

(335)

 

(361)

Other, net

 

(877)

 

(1,514)

Net cash used in financing activities

 

(5,566)

 

(5,802)

Effect of exchange rate changes on cash

 

(34)

 

(3)

Net increase (decrease) in cash

 

179

 

(502)

Cash at beginning of year

 

1,758

 

2,241

Change in cash of businesses held-for-sale

 

-

 

88

Cash at end of period

$

1,937

$

1,827

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

760

$

1,727

Taxes

$

338

$

482

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

1,826

$

1,937

Non-cash consideration received from sale of ILFC

$

-

$

4,586

Non-cash consideration received from sale of AerCap

$

500

$

-

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

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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 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 June 30, 2015 and prior to the issuance of these Condensed Consolidated Financial Statements.

Sale of ILFC and shares of AerCap

 

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. 

In June 2015, we sold 86.9 million ordinary shares of AerCap by means of an underwritten public offering of 71.2 million ordinary shares and a private sale of 15.7 million ordinary shares to AerCap. We received cash proceeds of approximately $3.7 billion, reflecting proceeds of approximately $3.4 billion from the underwritten offering and cash proceeds of $250 million from the private sale of shares to AerCap. In connection with the closing of the private sale of shares to AerCap, we also received $500 million of 6.50% fixed-to-floating rate junior subordinated notes issued by AerCap Global Aviation Trust and guaranteed by AerCap and certain of its subsidiaries. These notes, included in Bonds available for sale, mature in 2045 and are callable beginning in 2025. Our remaining 10.7 million ordinary shares of AerCap are included in Common and preferred stock available for sale.  We accounted for our interest in AerCap using the equity method of accounting through the date of 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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TABLE OF CONTENTS 

 

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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TABLE OF CONTENTS 

 

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 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.

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

 

In April 2015, the FASB issued an accounting standard that provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change generally accepted accounting principles. Consequently, all software licenses will be accounted for consistent with other licenses of intangible assets.

The standard is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The standard may be adopted prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Short Duration Insurance Contracts

 

In May 2015, the FASB issued an accounting standard that requires additional disclosures (including accident year information) for short-duration insurance contracts. New disclosures about the liability for unpaid losses and loss adjustment expenses will be required of public business entities for annual periods beginning after December 15, 2015. The annual disclosures by accident year include: disaggregated net incurred and paid claims development tables segregated by business type (not required to exceed 10 years), reconciliation of total net reserves included in development tables to the reported liability for unpaid losses and loss adjustment expenses, incurred but not reported (IBNR) information, quantitative information and a qualitative description about claim frequency, and the average annual percentage payout of incurred claims. Further, the new standard requires, when applicable, disclosures about discounting liabilities for unpaid losses and loss adjustment expenses and significant changes and reasons for changes in methodologies and assumptions used to determine unpaid losses and loss adjustment expenses.  In addition, the roll forward of the liability for unpaid losses and loss adjustment expenses currently disclosed in annual financial statements will be required for interim periods beginning in the first quarter of 2017.  Early adoption of the new annual and interim disclosures is permitted.

We plan to adopt the standard on its required effective date.  Because the new standard does not affect accounting recognition or measurement, the adoption of the standard will have no effect on our consolidated financial condition, results of operations, or cash flows.  

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).

 

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Item 1 / NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following tables present our operations by reportable segment:

 

2015

2014

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Three Months Ended June 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

6,233

$

1,192

$

6,331

$

1,245

    Mortgage Guaranty

 

261

 

157

 

259

 

210

    Institutional Markets

 

1,172

 

151

 

707

 

170

      Total Commercial Insurance

 

7,666

 

1,500

 

7,297

 

1,625

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

2,465

 

804

 

2,410

 

764

    Life

 

1,632

 

149

 

1,560

 

215

    Personal Insurance

 

2,869

 

70

 

3,129

 

140

      Total Consumer Insurance

 

6,966

 

1,023

 

7,099

 

1,119

Corporate and Other*

 

1,119

 

372

 

1,114

 

(57)

AIG consolidation and elimination

 

(116)

 

(27)

 

(91)

 

6

Total AIG consolidated revenues and pre-tax operating income

 

15,635

 

2,868

 

15,419

 

2,693

Reconciling items from revenues and pre-tax operating income to revenues and pre-tax income:

 

 

 

 

 

 

 

 

    Changes in fair values of fixed maturity securities designated to

 

 

 

 

 

 

 

 

       hedge living benefit liabilities, net of interest expense

 

(87)

 

(87)

 

54

 

54

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

 

 

 

 

 

-

 

-

       net realized capital gains

 

-

 

(28)

 

-

 

(52)

    Loss on extinguishment of debt

 

-

 

(342)

 

-

 

(34)

    Net realized capital gains

 

126

 

126

 

162

 

162

    Net gain (loss) on sale of divested businesses

 

(33)

 

(34)

 

489

 

2,151

    Legal settlements related to legacy crisis matters

 

76

 

76

 

12

 

12

    Legal reserves related to legacy crisis matters

 

-

 

(27)

 

-

 

(506)

Other

 

(18)

 

-

 

-

 

-

Revenues and pre-tax income

$

15,699

$

2,552

$

16,136

$

4,480

 

 

 

 

 

 

 

 

 

 

2015

2014

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Six Months Ended June 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

12,189

$

2,362

$

12,443

$

2,361

    Mortgage Guaranty

 

525

 

302

 

507

 

286

    Institutional Markets

 

1,796

 

298

 

1,402

 

399

      Total Commercial Insurance

 

14,510

 

2,962

 

14,352

 

3,046

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

4,853

 

1,604

 

4,895

 

1,679

    Life

 

3,245

 

320

 

3,170

 

450

    Personal Insurance

 

5,731

 

44

 

6,193

 

158

      Total Consumer Insurance

 

13,829

 

1,968

 

14,258

 

2,287

Corporate and Other*

 

2,161

 

534

 

2,097

 

(110)

AIG consolidation and elimination

 

(275)

 

(69)

 

(188)

 

26

Total AIG consolidated revenues and pre-tax operating income

 

30,225

 

5,395

 

30,519

 

5,249

 

 

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Item 1 / NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Reconciling items from revenues and pre-tax operating income to revenues and pre-tax income:

 

 

 

 

 

 

 

 

    Changes in fair values of fixed maturity securities designated to

 

 

 

 

 

 

 

 

       hedge living benefit liabilities, net of interest expense

 

(43)

 

(43)

 

130

 

130

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(82)

 

-

 

(45)

    Loss on extinguishment of debt

 

-

 

(410)

 

-

 

(272)

    Net realized capital gains

 

1,467

 

1,467

 

10

 

10

    Net gain (loss) on sale of divested businesses

 

(48)

 

(55)

 

1,602

 

2,172

    Legal settlements related to legacy crisis matters

 

91

 

91

 

38

 

38

    Legal reserves related to legacy crisis matters

 

-

 

(35)

 

-

 

(529)

Other

 

(18)

 

-

 

-

 

-

Revenues and pre-tax income

$

31,674

$

6,328

$

32,299

$

6,753

*    Corporate and Other includes income from assets held by AIG Parent and other corporate subsidiaries.

 

4. 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 4. 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, 2015

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting*

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1

$

2,513

$

-

$

-

$

-

$

2,514

Obligations of states, municipalities and political subdivisions

 

-

 

25,482

 

2,180

 

-

 

-

 

27,662

Non-U.S. governments

 

648

 

18,468

 

33

 

-

 

-

 

19,149

Corporate debt

 

-

 

138,745

 

2,118

 

-

 

-

 

140,863

RMBS

 

-

 

19,151

 

17,097

 

-

 

-

 

36,248

CMBS

 

-

 

10,845

 

2,677

 

-

 

-

 

13,522

CDO/ABS

 

-

 

9,037

 

6,071

 

-

 

-

 

15,108

Total bonds available for sale

 

649

 

224,241

 

30,176

 

-

 

-

 

255,066

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

176

 

3,639

 

-

 

-

 

-

 

3,815

Obligations of states, municipalities and political subdivisions

 

-

 

75

 

-

 

-

 

-

 

75

Non-U.S. governments

 

-

 

2

 

-

 

-

 

-

 

2

Corporate debt

 

-

 

436

 

16

 

-

 

-

 

452

RMBS

 

-

 

873

 

1,337

 

-

 

-

 

2,210

CMBS

 

-

 

644

 

223

 

-

 

-

 

867

CDO/ABS

 

-

 

1,751

 

7,426

 

-

 

-

 

9,177

Total other bond securities

 

176

 

7,420

 

9,002

 

-

 

-

 

16,598

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

3,843

 

8

 

-

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