UNITED STATES

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2016

Commission File Number 1-8787

 

 

 

American International Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

13-2592361

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

175 Water Street, New York, New York

10038

(Address of principal executive offices)

(Zip Code)

 

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

________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No ☐   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☑ 

Accelerated filer ☐ 

Non-accelerated filer ☐ 

Smaller reporting company ☐ 

 

 

(Do not check if a

smaller reporting company)

 

 

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

 

As of April 27, 2016, there were 1,119,032,377 shares outstanding of the registrant’s common stock.

  

 


 

AMERICAN INTERNATIONAL GROUP, INC.

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

March 31, 2016

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

29

 

Note 6.

Lending Activities

37

 

Note 7.

Variable Interest Entities

39

 

Note 8.

Derivatives and Hedge Accounting

41

 

Note 9.

Contingencies, Commitments and Guarantees

46

 

Note 10.

Equity

52

 

Note 11.

Earnings Per Share

55

 

Note 12.  

Employee Benefits

56

 

Note 13.

Income Taxes

57

 

Note 14.

Information Provided in Connection with Outstanding Debt

60

 

Note 15.

Subsequent Events

64

 

 

 

Item 2

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

  

 

Operations

66

 

·       Cautionary Statement Regarding Forward-Looking Information

66

 

·       Use of Non-GAAP Measures

69

 

·       Executive Overview

72

 

·       Results of Operations

86

 

·       Investments

116

 

·       Insurance Reserves

133

 

·       Liquidity and Capital Resources

145

 

·       Enterprise Risk Management

159

 

·       Critical Accounting Estimates

164

 

·       Regulatory Environment

165

 

·       Glossary

166

 

·       Acronyms

169

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

170  

Item 4

Controls and Procedures

170  

PART II — OTHER INFORMATION
 

Item 1

Legal Proceedings

171  

Item 1A

Risk Factors

171

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

172

Item 4

Mine Safety Disclosures

172

Item 6

Exhibits

172  

SIGNATURES
173  

  

 

1


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

  

American International Group, Inc.

CONDENSED Consolidated Balance Sheets (unaudited)

 

March 31,

December 31,

(in millions, except for share data)

 

2016

 

2015

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value (amortized cost: 2016 - $241,730; 2015 - $240,968)

$

253,785

$

248,245

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

 

15,344

 

16,782

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2016 - $1,329; 2015 - $1,379)

 

2,770

 

2,915

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

 

877

 

921

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2016 - $11; 2015 - $11)

 

30,676

 

29,565

Other invested assets (portion measured at fair value: 2016 - $7,996; 2015 - $8,912)

 

28,480

 

29,794

Short-term investments (portion measured at fair value: 2016 - $2,468; 2015 - $2,591)

 

10,914

 

10,132

Total investments

 

342,846

 

338,354

 

 

 

 

 

Cash

 

1,499

 

1,629

Accrued investment income

 

2,657

 

2,623

Premiums and other receivables, net of allowance

 

12,414

 

11,451

Reinsurance assets, net of allowance

 

21,332

 

20,413

Deferred income taxes

 

20,116

 

20,394

Deferred policy acquisition costs

 

10,800

 

11,115

Other assets, including restricted cash of $181 in 2016 and $170 in 2015

 

11,581

 

11,289

Separate account assets, at fair value

 

79,532

 

79,574

Total assets

$

502,777

$

496,842

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

73,946

$

74,942

Unearned premiums

 

22,060

 

21,318

Future policy benefits for life and accident and health insurance contracts

 

44,573

 

43,585

Policyholder contract deposits (portion measured at fair value: 2016 - $3,290; 2015 - $2,325)

 

130,007

 

127,588

Other policyholder funds (portion measured at fair value: 2016 - $6; 2015 - $6)

 

4,203

 

4,212

Other liabilities (portion measured at fair value: 2016 - $175; 2015 - $62)

 

27,423

 

26,164

Long-term debt (portion measured at fair value: 2016 - $3,902; 2015 - $3,670)

 

31,952

 

29,249

Separate account liabilities

 

79,532

 

79,574

Total liabilities

 

413,696

 

406,632

Contingencies, commitments and guarantees (see Note 9)

 

 

 

 

 

 

 

 

 

AIG shareholders’ equity:

 

 

 

 

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2016 - 1,906,671,492 and

 

 

 

 

2015 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2016 - 775,933,133 shares; 2015 - 712,754,875 shares of common stock

 

(33,584)

 

(30,098)

Additional paid-in capital

 

81,415

 

81,510

Retained earnings

 

30,396

 

30,943

Accumulated other comprehensive income

 

5,525

 

2,537

Total AIG shareholders’ equity

 

88,518

 

89,658

Non-redeemable noncontrolling interests

 

563

 

552

Total equity

 

89,081

 

90,210

Total liabilities and equity

$

502,777

$

496,842

 

 

 

 

 

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 March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Premiums

 

 

 

 

 

 

 

 

 

$

8,806

 

$

8,822

   Policy fees

 

 

 

 

 

 

 

 

 

 

687

 

 

677

   Net investment income

 

 

 

 

 

 

 

 

 

 

3,013

 

 

3,838

   Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

(209)

 

 

(87)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         fixed maturity securities recognized in Other comprehensive income

 

 

 

 

 

 

 

 

 

 

7

 

 

(10)

      Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         securities recognized in net income (loss)

 

 

 

 

 

 

 

 

 

 

(202)

 

 

(97)

      Other realized capital gains (losses)

 

 

 

 

 

 

 

 

 

 

(904)

 

 

1,438

         Total net realized capital gains (losses)

 

 

 

 

 

 

 

 

 

 

(1,106)

 

 

1,341

   Other income

 

 

 

 

 

 

 

 

 

 

379

 

 

1,297

Total revenues

 

 

 

 

 

 

 

 

 

 

11,779

 

 

15,975

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Policyholder benefits and losses incurred

 

 

 

 

 

 

 

 

 

 

6,387

 

 

6,551

   Interest credited to policyholder account balances

 

 

 

 

 

 

 

 

 

 

950

 

 

935

   Amortization of deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

1,262

 

 

1,350

   General operating and other expenses

 

 

 

 

 

 

 

 

 

 

3,003

 

 

2,949

   Interest expense

 

 

 

 

 

 

 

 

 

 

306

 

 

340

   Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

83

 

 

68

   Net loss on sale of properties and divested businesses

 

 

 

 

 

 

 

 

 

 

2

 

 

6

Total benefits, losses and expenses

 

 

 

 

 

 

 

 

 

 

11,993

 

 

12,199

Income (loss) from continuing operations before income tax expense (benefit)

 

 

 

 

 

 

 

(214)

 

 

3,776

Income tax expense (benefit)

 

 

 

 

 

 

 

 

 

 

(58)

 

 

1,300

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

(156)

 

 

2,476

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

 

 

 

 

 

 

 

 

 

 

(47)

 

 

1

Net income (loss)

 

 

 

 

 

 

 

 

 

 

(203)

 

 

2,477

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   noncontrolling interests

 

 

 

 

 

 

 

 

 

 

(20)

 

 

9

Net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

$

(183)

 

$

2,468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

$

(0.12)

 

$

1.81

      Loss from discontinued operations

 

 

 

 

 

 

 

 

 

$

(0.04)

 

$

-

      Net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

$

(0.16)

 

$

1.81

   Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

$

(0.12)

 

$

1.78

      Loss from discontinued operations

 

 

 

 

 

 

 

 

 

$

(0.04)

 

$

-

      Net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

$

(0.16)

 

$

1.78

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

 

 

 

 

 

 

 

 

1,156,548,459

 

 

1,365,951,690

   Diluted

 

 

 

 

 

 

 

 

 

 

1,156,548,459

 

 

1,386,263,549

Dividends declared per common share

 

 

 

 

 

 

 

 

 

$

0.320

 

$

0.125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

3


TABLE OF CONTENTS 

 

Item 1 / Financial statements

 

American International Group, Inc.

CONDENSED Consolidated Statements of Comprehensive Income (unaudited)

Three Months Ended March 31,

 

 

 

 

 

 

 

(in millions)

 

 

 

2016

 

 

2015

Net income (loss)

 

 

$

(203)

 

$

2,477

Other comprehensive income, net of tax

 

 

 

 

 

 

 

   Change in unrealized depreciation of fixed maturity investments on

 

 

 

 

 

 

 

      which other-than-temporary credit impairments were taken

 

 

 

(349)

 

 

(72)

   Change in unrealized appreciation of all other investments

 

 

 

3,427

 

 

539

   Change in foreign currency translation adjustments

 

 

 

(92)

 

 

(459)

   Change in retirement plan liabilities adjustment

 

 

 

2

 

 

29

Other comprehensive income

 

 

 

2,988

 

 

37

Comprehensive income

 

 

 

2,785

 

 

2,514

Comprehensive income (loss) attributable to noncontrolling interests

 

 

 

(20)

 

 

6

Comprehensive income attributable to AIG

 

 

$

2,805

 

$

2,508

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed 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

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(30,098)

$

81,510

$

30,943

$

2,537

$

89,658

$

552

$

90,210

Common stock issued under stock plans

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Purchase of common stock

 

-

 

(3,486)

 

-

 

-

 

-

 

(3,486)

 

-

 

(3,486)

Net loss attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

(183)

 

-

 

(183)

 

(20)

 

(203)

Dividends

 

-

 

-

 

-

 

(363)

 

-

 

(363)

 

-

 

(363)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

2,988

 

2,988

 

-

 

2,988

Current and Deferred income taxes

 

-

 

-

 

2

 

-

 

-

 

2

 

-

 

2

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

33

 

33

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

2

 

2

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(2)

 

(2)

Other

 

-

 

-

 

(97)

 

(1)

 

-

 

(98)

 

(2)

 

(100)

Balance, end of period

$

4,766

$

(33,584)

$

81,415

$

30,396

$

5,525

$

88,518

$

563

$

89,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(19,218)

$

80,958

$

29,775

$

10,617

$

106,898

$

374

$

107,272

Purchase of common stock

 

-

 

(1,602)

 

-

 

-

 

-

 

(1,602)

 

-

 

(1,602)

Net income attributable to AIG or other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

2,468

 

-

 

2,468

 

9

 

2,477

Dividends

 

-

 

-

 

-

 

(170)

 

-

 

(170)

 

-

 

(170)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

40

 

40

 

(3)

 

37

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

7

 

7

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

1

 

1

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(4)

 

(4)

Other

 

-

 

-

 

345

 

-

 

-

 

345

 

4

 

349

Balance, end of period

$

4,766

$

(20,820)

$

81,303

$

32,073

$

10,657

$

107,979

$

388

$

108,367

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


TABLE OF CONTENTS 

 

Item 1 / Financial statements

 

American International Group, Inc.

CONDENSED Consolidated Statements of Cash Flows (unaudited)

Three Months Ended March 31,

 

 

 

 

(in millions)

 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

Net Income (loss)

$

(203)

$

2,477

(Income) loss from discontinued operations

 

47

 

(1)

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

 

 

 

 

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

 

 

 

 

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

 

204

 

(974)

Net loss on sale of divested businesses

 

2

 

6

Losses on extinguishment of debt

 

83

 

68

Unrealized losses in earnings - net

 

672

 

457

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

 

346

 

(362)

Depreciation and other amortization

 

1,197

 

1,226

Impairments of assets

 

450

 

212

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

8

 

(295)

Premiums and other receivables and payables - net

 

(861)

 

(572)

Reinsurance assets and funds held under reinsurance treaties

 

(846)

 

(272)

Capitalization of deferred policy acquisition costs

 

(1,360)

 

(1,439)

Current and deferred income taxes - net

 

(109)

 

1,161

Other, net

 

(598)

 

(1,304)

Total adjustments

 

(812)

 

(2,088)

Net cash provided by (used in) operating activities

 

(968)

 

388

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale investments

 

5,710

 

6,189

Other securities

 

1,681

 

1,094

Other invested assets

 

1,649

 

1,648

Maturities of fixed maturity securities available for sale

 

6,069

 

5,251

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

 

1,133

 

1,047

Purchases of:

 

 

 

 

Available for sale investments

 

(12,454)

 

(9,844)

Other securities

 

(173)

 

(476)

Other invested assets

 

(743)

 

(1,132)

Mortgage and other loans receivable

 

(2,432)

 

(1,657)

Net change in restricted cash

 

(59)

 

(47)

Net change in short-term investments

 

(577)

 

(804)

Other, net

 

581

 

(955)

Net cash provided by investing activities

 

385

 

314

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

4,812

 

3,713

Policyholder contract withdrawals

 

(3,178)

 

(3,533)

Issuance of long-term debt

 

3,289

 

2,585

Repayments of long-term debt

 

(958)

 

(1,893)

Purchase of common stock

 

(3,486)

 

(1,398)

Dividends paid

 

(363)

 

(170)

Other, net

 

337

 

92

Net cash provided by (used in) financing activities

 

453

 

(604)

Effect of exchange rate changes on cash

 

-

 

(33)

Net increase (decrease) in cash

 

(130)

 

65

Cash at beginning of year

 

1,629

 

1,758

Change in cash of businesses held-for-sale

 

-

 

-

Cash at end of period

$

1,499

$

1,823

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

362

$

307

Taxes

$

39

$

140

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

913

$

937

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

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Item 1 / NOTE 1. BASIS OF PRESENTATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. BASIS OF PRESENTATION

 

American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 100 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property‑casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG) and the Tokyo Stock Exchange. Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.

These unaudited Condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited Consolidated Financial Statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Annual Report). The condensed consolidated financial information as of December 31, 2015 included herein has been derived from the audited Consolidated Financial Statements in the 2015 Annual Report.

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

Interim-period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to March 31, 2016 and prior to the issuance of these Condensed Consolidated Financial Statements.

Sale of ILFC

 

On May 14, 2014, we completed the sale of 100 percent of the common stock of International Lease Finance Corporation (ILFC) to AerCap Ireland Limited, a wholly owned subsidiary of AerCap Holdings N.V. (AerCap), in exchange for total consideration of approximately $7.6 billion, including cash and 97.6 million newly issued AerCap common shares (the AerCap Transaction). The total value of the consideration was based in part on AerCap’s closing price per share of $47.01 on May 13, 2014. ILFC’s results of operations are reflected in Aircraft leasing revenue and Aircraft leasing expenses in the Condensed Consolidated Statements of Income (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 other invested assets, including investments in life settlements, and goodwill impairment;

    liability for legal contingencies; and

    fair value measurements of certain financial assets and liabilities.

These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Standards Adopted During 2016

 

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.

We adopted the standard prospectively on its required effective date of January 1, 2016. The adoption of this standard did not 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.

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

We adopted the standard retrospectively on its required effective date of January 1, 2016. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or 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.

We adopted the standard prospectively on its required effective date of January 1, 2016. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

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

 

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

We adopted this standard prospectively on its required effective date of January 1, 2016. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows

Simplifying the Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued an accounting standard that amends the guidance for debt issuance costs by requiring such costs to be presented as a deduction to the corresponding debt liability, rather than as an asset, and for the amortization of such costs to be reported as interest expense.  The amendments are intended to simplify the presentation of debt issuance costs and make it consistent with the presentation of debt discounts or premiums. The amendments, however, do not change the recognition and measurement guidance applicable to debt issuance costs.

We adopted this standard on a retrospective basis on January 1, 2016, its required effective date.  Because the new standard did not affect accounting recognition or measurement of debt issuance costs, the adoption of the standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows.  

Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent)

In May 2015, the FASB amended guidance on fair value disclosures for investments for which fair value is measured using the net asset value (NAV) per share (or its equivalent) as a practical expedient.  The amendment in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

share practical expedient.  In addition, the amendment removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share as a practical expedient. 

We adopted the standard on its required effective date of January 1, 2016 on a retrospective basis.  The adoption of this standard did not have a 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

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.  

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued an accounting standard that affects the recognition, measurement, presentation, and disclosure of financial instruments.  Specifically, under the new standard, equity investments (other than those accounted for using the equity method of accounting or those subject to consolidation) will be measured at fair value with changes in fair value recognized in earnings.  Also, for those financial liabilities for which fair value option accounting has been elected, the new standard requires changes in fair value due to instrument-specific credit risk to be presented separately in other comprehensive income. The standard updates certain fair value disclosure requirements for financial instruments carried at amortized cost.

The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption of certain provisions is permitted.  We are assessing the impact of the standard on our consolidated financial condition, results of operations and cash flows.

Leases

 

In February 2016, the FASB issued an accounting standard that will require lessees with lease terms of more than 12 months to recognize a right of use asset and a corresponding lease liability on their balance sheets. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating leases or finance leases.

The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted using a modified retrospective approach. We expect to adopt this guidance when effective and are currently assessing the impact of the standard on our consolidated financial condition, results of operations and 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 revenues 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 the 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:

Three Months Ended March 31,

2016

2015

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

 

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

5,278

$

720

$

5,956

$

1,170

    Mortgage Guaranty

 

261

 

163

 

264

 

145

    Institutional Markets

 

619

 

6

 

624

 

147

      Total Commercial Insurance

 

6,158

 

889

 

6,844

 

1,462

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

2,114

 

461

 

2,388

 

800

    Life

 

1,597

 

105

 

1,613

 

171

    Personal Insurance

 

2,821

 

222

 

2,862

 

(26)

      Total Consumer Insurance

 

6,532

 

788

 

6,863

 

945

Corporate and Other*

 

206

 

(733)

 

1,042

 

162

AIG Consolidation and elimination

 

(159)

 

10

 

(159)

 

(42)

Total AIG Consolidated revenues and pre-tax operating income

$

12,737

$

954

$

14,590

$

2,527

Reconciling Items from pre-tax operating income to pre-tax income (loss) :

 

 

 

 

 

 

 

 

    Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

       living benefits

 

133

 

133

 

44

 

44

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

40

 

-

 

(54)

    Other income (expense) - net

 

-

 

7

 

-

 

-

    Loss on extinguishment of debt

 

-

 

(83)

 

-

 

(68)

    Net realized capital gains

 

(1,106)

 

(1,106)

 

1,341

 

1,341

    Income from divested businesses

 

-

 

(2)

 

(15)

 

(21)

    Non-operating litigation reserves and settlements

 

34

 

31

 

15

 

7

    Reserve development related to non-operating run-off insurance

 

 

 

 

 

 

 

 

       business

 

-

 

-

 

-

 

-

    Restructuring and other costs

 

-

 

(188)

 

-

 

-

    Other

 

(19)

 

-

 

-

 

-

Pre-tax income (loss)

$

11,779

$

(214)

$

15,975

$

3,776

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

 

 

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Item 1 / NOTE 4. FAIR VALUE MEASUREMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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:

March 31, 2016

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

7

$

2,034

$

-

$

-

$

-

$

2,041

Obligations of states, municipalities and political subdivisions

 

-

 

25,562

 

2,196

 

-

 

-

 

27,758

Non-U.S. governments

 

708

 

17,877

 

30

 

-

 

-

 

18,615

Corporate debt

 

-

 

137,924

 

1,024

 

-

 

-

 

138,948

RMBS

 

-

 

20,060

 

16,162

 

-

 

-

 

36,222

CMBS

 

-

 

12,069

 

2,368

 

-

 

-

 

14,437

CDO/ABS

 

-

 

9,172

 

6,592

 

-

 

-

 

15,764

Total bonds available for sale

 

715

 

224,698

 

28,372

 

-

 

-

 

253,785

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

30

 

3,373

 

-

 

-

 

-

 

3,403

Obligations of states, municipalities and political subdivisions

 

-

 

-

 

-

 

-

 

-

 

-

Non-U.S. governments

 

-

 

53

 

-

 

-

 

-

 

53

Corporate debt

 

-

 

1,861

 

18

 

-

 

-

 

1,879

RMBS

 

-

 

440

 

1,513

 

-

 

-

 

1,953

CMBS

 

-

 

517

 

170

 

-

 

-

 

687

CDO/ABS

 

-

 

793

 

6,576

 

-

 

-

 

7,369

Total other bond securities

 

30

 

7,037

 

8,277

 

-

 

-

 

15,344

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

2,274

 

-

 

-

 

-

 

-

 

2,274

Preferred stock

 

23

 

-

 

-

 

-

 

-

 

23

Mutual funds

 

471

 

2

 

-

 

-

 

-

 

473

Total equity securities available for sale

 

2,768

 

2

 

-

 

-

 

-

 

2,770

Other equity securities

 

862

 

-

 

15

 

-

 

-

 

877

Mortgage and other loans receivable

 

-

 

-

 

11

 

-

 

-

 

11

Other invested assets(a)

 

1

 

32

 

263

 

-

 

-

 

296

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

4,391

 

14

 

-

 

-

 

4,405

Foreign exchange contracts

 

-

 

877

 

-

 

-

 

-

 

877

Equity contracts

 

123

 

69

 

51

 

-

 

-

 

243

Commodity contracts

 

-

 

-

 

-

 

-

 

-

 

-

Credit contracts

 

-

 

-

 

3

 

-

 

-

 

3

Other contracts

 

-

 

1

 

21

 

-

 

-

 

22

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,023)

 

(2,036)

 

(4,059)

Total derivative assets

 

123

 

5,338

 

89

 

(2,023)

 

(2,036)

 

1,491

Short-term investments

 

1,367

 

1,101

 

-

 

-

 

-

 

2,468

Separate account assets

 

74,470

 

5,062

 

-

 

-

 

-

 

79,532

Total