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 September 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 October 29, 2015, there were 1,237,012,512 shares outstanding of the registrant’s common stock.

  

 


 

AMERICAN INTERNATIONAL GROUP, INC.

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

September 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

55

 

Note 11.

Earnings Per Share

60

 

Note 12.  

Employee Benefits

60

 

Note 13.

Income Taxes

62

 

Note 14.

Information Provided in Connection with Outstanding Debt

64

 

Note 15.

Subsequent Events

71

 

 

 

Item 2

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

  

 

Operations

72

 

·       Cautionary Statement Regarding Forward-Looking Information

72

 

·       Use of Non-GAAP Measures

75

 

·       Executive Overview

78

 

·       Results of Operations

91

 

·       Investments

130

 

·       Insurance Reserves

149

 

·       Liquidity and Capital Resources

162

 

·       Enterprise Risk Management

177

 

·       Critical Accounting Estimates

182

 

·       Regulatory Environment

183

 

·       Glossary

184

 

·       Acronyms

187

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

188  

Item 4

Controls and Procedures

188  

PART II — OTHER INFORMATION
 

Item 1

Legal Proceedings

189  

Item 1A

Risk Factors

189

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

189

Item 4

Mine Safety Disclosures

189

Item 6

Exhibits

190  

SIGNATURES
191  

  

 

1


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

  

American International Group, Inc.

CONDENSED Consolidated Balance Sheets (unaudited)

 

September 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 - $241,985; 2014 - $243,307)

$

252,954

$

259,859

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

 

16,822

 

19,712

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2015 - $1,806; 2014 - $1,930)

 

3,792

 

4,395

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

 

1,066

 

1,049

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2015 - $11; 2014 - $6)

 

28,236

 

24,990

Other invested assets (portion measured at fair value: 2015 - $9,333; 2014 - $9,394)

 

31,123

 

34,518

Short-term investments (portion measured at fair value: 2015 - $2,733; 2014 - $1,684)

 

12,408

 

11,243

Total investments

 

346,401

 

355,766

 

 

 

 

 

Cash

 

1,569

 

1,758

Accrued investment income

 

2,696

 

2,712

Premiums and other receivables, net of allowance

 

12,078

 

12,031

Reinsurance assets, net of allowance

 

20,542

 

21,959

Deferred income taxes

 

19,511

 

19,339

Deferred policy acquisition costs

 

10,537

 

9,827

Other assets, including restricted cash of $247 in 2015 and $2,025 in 2014

 

11,515

 

12,153

Separate account assets, at fair value

 

77,136

 

80,036

Total assets

$

501,985

$

515,581

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

71,436

$

77,260

Unearned premiums

 

22,686

 

21,324

Future policy benefits for life and accident and health insurance contracts

 

42,991

 

42,749

Policyholder contract deposits (portion measured at fair value: 2015 - $2,287; 2014 - $1,561)

 

126,641

 

124,613

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

 

4,192

 

4,669

Other liabilities (portion measured at fair value: 2015 - $298; 2014 - $350)

 

26,565

 

26,441

Long-term debt (portion measured at fair value: 2015 - $3,985; 2014 - $5,466)

 

30,719

 

31,217

Separate account liabilities

 

77,136

 

80,036

Total liabilities

 

402,366

 

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 - 659,876,877 shares; 2014 - 530,744,521 shares

 

(26,881)

 

(19,218)

Additional paid-in capital

 

81,435

 

80,958

Retained earnings

 

33,122

 

29,775

Accumulated other comprehensive income

 

6,557

 

10,617

Total AIG shareholders’ equity

 

98,999

 

106,898

Non-redeemable noncontrolling interests

 

620

 

374

Total equity

 

99,619

 

107,272

Total liabilities and equity

$

501,985

$

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 (LOSS)  (unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(dollars in millions, except per share data)

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,862

 

$

9,486

 

$

27,229

 

$

28,046

Policy fees

 

 

701

 

 

677

 

 

2,066

 

 

1,948

Net investment income

 

 

3,206

 

 

4,028

 

 

10,870

 

 

12,108

Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(225)

 

 

(34)

 

 

(460)

 

 

(116)

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

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income (loss)

 

 

(17)

 

 

(1)

 

 

(31)

 

 

(21)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income (loss)

 

 

(242)

 

 

(35)

 

 

(491)

 

 

(137)

Other realized capital gains (losses)

 

 

(100)

 

 

571

 

 

1,616

 

 

683

Total net realized capital gains (losses)

 

 

(342)

 

 

536

 

 

1,125

 

 

546

Aircraft leasing revenue

 

 

-

 

 

-

 

 

-

 

 

1,602

Other income

 

 

395

 

 

1,970

 

 

3,206

 

 

4,746

Total revenues

 

 

12,822

 

 

16,697

 

 

44,496

 

 

48,996

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

6,936

 

 

7,203

 

 

20,587

 

 

20,771

Interest credited to policyholder account balances

 

 

881

 

 

882

 

 

2,758

 

 

2,800

Amortization of deferred policy acquisition costs

 

 

1,275

 

 

1,288

 

 

3,981

 

 

3,989

General operating and other expenses

 

 

3,175

 

 

3,151

 

 

9,214

 

 

9,889

Interest expense

 

 

321

 

 

430

 

 

977

 

 

1,372

Aircraft leasing expenses

 

 

-

 

 

-

 

 

-

 

 

1,585

Loss on extinguishment of debt

 

 

346

 

 

742

 

 

756

 

 

1,014

Net (gain) loss on sale of divested businesses

 

 

3

 

 

(18)

 

 

10

 

 

(2,196)

Total benefits, claims and expenses

 

 

12,937

 

 

13,678

 

 

38,283

 

 

39,224

Income (loss) from continuing operations before income tax expense

 

 

(115)

 

 

3,019

 

 

6,213

 

 

9,772

Income tax expense

 

 

65

 

 

820

 

 

2,142

 

 

2,908

Income (loss) from continuing operations

 

 

(180)

 

 

2,199

 

 

4,071

 

 

6,864

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

 

 

(17)

 

 

2

 

 

-

 

 

(15)

Net income (loss)

 

 

(197)

 

 

2,201

 

 

4,071

 

 

6,849

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

34

 

 

9

 

 

34

 

 

(25)

Net income (loss) attributable to AIG

 

$

(231)

 

$

2,192

 

$

4,037

 

$

6,874

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.17)

 

$

1.54

 

$

3.05

 

$

4.78

Income (loss) from discontinued operations

 

$

(0.01)

 

$

-

 

$

-

 

$

(0.01)

Net income (loss) attributable to AIG

 

$

(0.18)

 

$

1.54

 

$

3.05

 

$

4.77

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.17)

 

$

1.52

 

$

2.97

 

$

4.72

Income (loss) from discontinued operations

 

$

(0.01)

 

$

-

 

$

-

 

$

(0.01)

Net income (loss) attributable to AIG

 

$

(0.18)

 

$

1.52

 

$

2.97

 

$

4.71

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,279,072,748

 

 

1,419,239,774

 

 

1,324,407,969

 

 

1,440,148,774

Diluted

 

 

1,279,072,748

 

 

1,442,067,842

 

 

1,357,108,784

 

 

1,459,483,233

Dividends declared per common share

 

$

0.280

 

$

0.125

 

$

0.530

 

$

0.375

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Net income (loss)

 

$

(197)

 

$

2,201

 

$

4,071

 

$

6,849

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

 

 

(61)

 

 

59

 

 

(169)

 

 

174

Change in unrealized appreciation (depreciation) of all other investments

 

 

(857)

 

 

(168)

 

 

(3,309)

 

 

4,972

Change in foreign currency translation adjustments

 

 

(238)

 

 

(78)

 

 

(734)

 

 

(189)

Change in retirement plan liabilities adjustment

 

 

92

 

 

6

 

 

148

 

 

13

Other comprehensive income (loss)

 

 

(1,064)

 

 

(181)

 

 

(4,064)

 

 

4,970

Comprehensive income (loss)

 

 

(1,261)

 

 

2,020

 

 

7

 

 

11,819

Comprehensive income (loss) attributable to noncontrolling interests

 

 

33

 

 

8

 

 

30

 

 

(26)

Comprehensive income (loss) attributable to AIG

 

$

(1,294)

 

$

2,012

 

$

(23)

 

$

11,845

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

4


TABLE OF CONTENTS 

 

Item 1 / Financial statements

 

American International Group, Inc.

CONDENSED CONSOLIDATED Statements 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

Nine Months Ended September 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

 

-

 

(7,663)

 

-

 

-

 

-

 

(7,663)

 

-

 

(7,663)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

4,037

 

-

 

4,037

 

34

 

4,071

Dividends

 

-

 

-

 

-

 

(687)

 

-

 

(687)

 

-

 

(687)

Other comprehensive loss

 

-

 

-

 

-

 

-

 

(4,060)

 

(4,060)

 

(4)

 

(4,064)

Deferred income taxes

 

-

 

-

 

(7)

 

-

 

-

 

(7)

 

-

 

(7)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

214

 

214

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(2)

 

(2)

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(5)

 

(5)

Other

 

-

 

-

 

484

 

(3)

 

-

 

481

 

9

 

490

Balance, end of period

$

4,766

$

(26,881)

$

81,435

$

33,122

$

6,557

$

98,999

$

620

$

99,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 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

 

-

 

(3,200)

 

-

 

-

 

-

 

(3,200)

 

-

 

(3,200)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

6,874

 

-

 

6,874

 

(25)

 

6,849

Dividends

 

-

 

-

 

-

 

(539)

 

-

 

(539)

 

-

 

(539)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

4,971

 

4,971

 

(1)

 

4,970

Net decrease due to dispositions

 

-

 

-

 

-

 

-

 

-

 

-

 

(123)

 

(123)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

13

 

13

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(78)

 

(78)

Other

 

-

 

-

 

5

 

-

 

-

 

5

 

5

 

10

Balance, end of period

$

4,766

$

(17,720)

$

80,904

$

29,300

$

11,331

$

108,581

$

402

$

108,983

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)

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

Net income

$

4,071

$

6,849

Loss from discontinued operations

 

-

 

15

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

Noncash revenues, expenses, gains and losses included in income (loss):

 

 

 

 

Net gains on sales of securities available for sale and other assets

 

(660)

 

(602)

Net (gain) loss on sale of divested businesses

 

10

 

(2,196)

Losses on extinguishment of debt

 

756

 

1,014

Unrealized gains in earnings - net

 

(550)

 

(797)

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

 

(684)

 

(1,106)

Depreciation and other amortization

 

3,502

 

3,372

Impairments of assets

 

886

 

415

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

(1,618)

 

184

Premiums and other receivables and payables - net

 

(389)

 

41

Reinsurance assets and funds held under reinsurance treaties

 

1,396

 

(64)

Capitalization of deferred policy acquisition costs

 

(4,376)

 

(4,546)

Current and deferred income taxes - net

 

1,736

 

2,291

Other, net

 

(1,846)

 

(513)

Total adjustments

 

(1,837)

 

(2,507)

Net cash provided by operating activities

 

2,234

 

4,357

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale investments

 

20,846

 

16,063

Other securities

 

4,895

 

3,936

Other invested assets

 

7,015

 

3,034

Divested businesses, net

 

-

 

2,348

Maturities of fixed maturity securities available for sale

 

18,427

 

18,628

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

 

3,298

 

2,552

Purchases of:

 

 

 

 

Available for sale investments

 

(36,333)

 

(34,630)

Other securities

 

(1,622)

 

(301)

Other invested assets

 

(2,675)

 

(3,205)

Mortgage and other loans receivable

 

(6,845)

 

(4,945)

Net change in restricted cash

 

1,476

 

(660)

Net change in short-term investments

 

(1,028)

 

2,342

Other, net

 

(774)

 

(295)

Net cash provided by investing activities

 

6,680

 

4,867

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

12,216

 

12,311

Policyholder contract withdrawals

 

(10,801)

 

(11,036)

Issuance of long-term debt

 

6,449

 

5,827

Repayments of long-term debt

 

(8,343)

 

(11,561)

Purchase of Common Stock

 

(7,473)

 

(3,403)

Dividends paid

 

(687)

 

(539)

Other, net

 

(425)

 

(1,200)

Net cash (used in) financing activities

 

(9,064)

 

(9,601)

Effect of exchange rate changes on cash

 

(39)

 

(19)

Net decrease in cash

 

(189)

 

(396)

Cash at beginning of year

 

1,758

 

2,241

Change in cash of businesses held-for-sale

 

-

 

88

Cash at end of period

$

1,569

$

1,933

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,112

$

2,496

Taxes

$

406

$

614

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,801

$

3,007

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 September 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 (Loss) through the date of the completion of the sale. 

In June 2015, we sold 86.9 million ordinary shares of AerCap by means of an underwritten public offering of 71.2 million ordinary shares and 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.  We accounted for our interest in AerCap using the equity method of accounting through the date of the June 2015 sale, and as available for sale thereafter.  In August 2015, we sold our remaining 10.7 million ordinary shares of AerCap by means of an underwritten public offering and received proceeds of approximately $500 million.

 

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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 certain 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, 2017 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We plan to adopt the standard on its required effective date of January 1, 2018 and are assessing the impact of the standard on our consolidated financial condition, results of operations and cash flows

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Accounting for Share-Based Payments with Performance Targets

 

In June 2014, the FASB issued an accounting standard that clarifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.

The standard is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The standard may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We plan to adopt the standard on its required effective date of January 1, 2016 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations 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.

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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

 

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

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

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 as well as 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 September 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

5,715

$

569

$

6,425

$

952

    Mortgage Guaranty

 

266

 

162

 

262

 

135

    Institutional Markets

 

578

 

84

 

626

 

153

      Total Commercial Insurance

 

6,559

 

815

 

7,313

 

1,240

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

2,203

 

635

 

2,472

 

1,094

    Life

 

1,578

 

(40)

 

1,575

 

50

    Personal Insurance

 

2,871

 

62

 

3,163

 

120

      Total Consumer Insurance

 

6,652

 

657

 

7,210

 

1,264

Corporate and Other*

 

109

 

(613)

 

1,121

 

149

AIG consolidation and elimination

 

(141)

 

(11)

 

(168)

 

(68)

Total AIG consolidated revenues and pre-tax operating income

 

13,179

 

848

 

15,476

 

2,585

Reconciling items from Total revenues and Pre-tax operating income (loss) to revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

    Changes in fair values of fixed maturity securities designated to

 

 

 

 

 

 

 

 

       hedge living benefit liabilities, net of interest expense

 

4

 

4

 

32

 

32

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(2)

 

-

 

(45)

    Loss on extinguishment of debt

 

-

 

(346)

 

-

 

(742)

    Net realized capital gains (loss)

 

(342)

 

(342)

 

536

 

536

    Net gain (loss) on sale of divested businesses

 

-

 

(3)

 

-

 

17

    Non-operating litigation reserves and settlements

 

-

 

30

 

653

 

636

    Reserve development related to non-operating run-off insurance business

 

-

 

(30)

 

-

 

-

    Restructuring and other costs

 

-

 

(274)

 

-

 

-

    Other

 

(19)

 

-

 

-

 

-

Revenues and pre-tax income (loss)

$

12,822

$

(115)

$

16,697

$

3,019

 

 

 

 

 

 

 

 

 

 

2015

2014

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Nine Months Ended September 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

17,904

$

2,931

$

18,868

$

3,313

    Mortgage Guaranty

 

791

 

464

 

769

 

421

    Institutional Markets

 

2,374

 

382

 

2,028

 

552

      Total Commercial Insurance

 

21,069

 

3,777

 

21,665

 

4,286

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

7,056

 

2,239

 

7,367

 

2,773

    Life

 

4,823

 

280

 

4,745

 

500

    Personal Insurance

 

8,602

 

106

 

9,356

 

278

      Total Consumer Insurance

 

20,481

 

2,625

 

21,468

 

3,551

Corporate and Other*

 

2,270

 

(79)

 

3,218

 

39

AIG consolidation and elimination

 

(416)

 

(80)

 

(356)

 

(42)

Total AIG consolidated revenues and pre-tax operating income

 

43,404

 

6,243

 

45,995

 

7,834

 

 

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Item 1 / NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Reconciling items from Total revenues and Pre-tax operating income (loss) to revenues and pre-tax income:

 

 

 

 

 

 

 

 

    Changes in fair values of fixed maturity securities designated to

 

 

 

 

 

 

 

 

       hedge living benefit liabilities, net of interest expense

 

(39)

 

(39)

 

162

 

162

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(84)

 

-

 

(90)

    Loss on extinguishment of debt

 

-

 

(756)

 

-

 

(1,014)

    Net realized capital gains

 

1,125

 

1,125

 

546

 

546

    Net gain (loss) on sale of divested businesses

 

(48)

 

(58)

 

1,602

 

2,189

    Non-operating litigation reserves and settlements

 

91

 

86

 

691

 

145

    Reserve development related to non-operating run-off insurance business

 

-

 

(30)

 

-

 

-

    Restructuring and other costs

 

-

 

(274)

 

-

 

-

    Other

 

(37)

 

-

 

-

 

-

Revenues and pre-tax income

$

44,496

$

6,213

$

48,996

$

9,772

*    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:

September 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

$

8

$

1,874

$

-

$

-

$

-

$

1,882

Obligations of states, municipalities and political subdivisions

 

-

 

25,406

 

2,140

 

-

 

-

 

27,546

Non-U.S. governments

 

709

 

17,688

 

31

 

-

 

-

 

18,428

Corporate debt

 

-

 

137,646

 

2,476

 

-

 

-

 

140,122

RMBS

 

-

 

18,766

 

16,859

 

-

 

-

 

35,625

CMBS

 

-

 

10,988

 

2,729

 

-

 

-

 

13,717

CDO/ABS

 

-

 

9,526

 

6,108

 

-

 

-

 

15,634

Total bonds available for sale

 

717

 

221,894

 

30,343

 

-

 

-

 

252,954

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

155

 

3,658

 

-

 

-

 

-

 

3,813

Obligations of states, municipalities and political subdivisions

 

-

 

75

 

-

 

-

 

-

 

75

Non-U.S. governments

 

-

 

2

 

-

 

-

 

-

 

2

Corporate debt

 

-

 

1,233

 

16

 

-

 

-

 

1,249

RMBS

 

-

 

784

 

1,501

 

-

 

-

 

2,285

CMBS

 

-

 

600

 

219

 

-

 

-

 

819

CDO/ABS

 

-

 

1,432

 

7,147

 

-

 

-

 

8,579

Total other bond securities

 

155

 

7,784

 

8,883

 

-

 

-

 

16,822

Equity securities available for sale: