UNITED STATES

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 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 July 29, 2016, there were 1,070,659,944 shares outstanding of the registrant’s common stock.

  

 

 


 

AMERICAN INTERNATIONAL GROUP, INC.

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

June 30, 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

13

 

Note 4.

Fair Value Measurements

14

 

Note 5.

Investments

34

 

Note 6.

Lending Activities

43

 

Note 7.

Variable Interest Entities

45

 

Note 8.

Derivatives and Hedge Accounting

47

 

Note 9.

Contingencies, Commitments and Guarantees

53

 

Note 10.

Equity

59

 

Note 11.

Earnings Per Share

63

 

Note 12.  

Employee Benefits

63

 

Note 13.

Income Taxes

65

 

Note 14.

Information Provided in Connection with Outstanding Debt

68

 

Note 15.

Subsequent Events

73

 

 

 

Item 2

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

  

 

Operations

74

 

·       Cautionary Statement Regarding Forward-Looking Information

74

 

·       Use of Non-GAAP Measures

77

 

·       Executive Overview

80

 

·       Results of Operations

96

 

·       Investments

139

 

·       Insurance Reserves

159

 

·       Liquidity and Capital Resources

172

 

·       Enterprise Risk Management

186

 

·       Critical Accounting Estimates

191

 

·       Regulatory Environment

192

 

·       Glossary

193

 

·       Acronyms

196

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

197  

Item 4

Controls and Procedures

197  

PART II — OTHER INFORMATION
 

Item 1

Legal Proceedings

198  

Item 1A

Risk Factors

198

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

199

Item 4

Mine Safety Disclosures

199

Item 6

Exhibits

199  

SIGNATURES
200  

  

 

1


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

  

American International Group, Inc.

CONDENSED Consolidated Balance Sheets (unaudited)

 

June 30,

December 31,

(in millions, except for share data)

 

2016

 

2015

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value (amortized cost: 2016 - $244,450; 2015 - $240,968)

$

262,089

$

248,245

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

 

15,335

 

16,782

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2016 - $1,246; 2015 - $1,379)

 

1,642

 

2,915

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

 

661

 

921

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

 

31,261

 

29,565

Other invested assets (portion measured at fair value: 2016 - $7,177; 2015 - $8,912)

 

27,345

 

29,794

Short-term investments (portion measured at fair value: 2016 - $3,949; 2015 - $2,591)

 

12,334

 

10,132

Total investments

 

350,667

 

338,354

 

 

 

 

 

Cash

 

1,784

 

1,629

Accrued investment income

 

2,590

 

2,623

Premiums and other receivables, net of allowance

 

12,078

 

11,451

Reinsurance assets, net of allowance

 

21,441

 

20,413

Deferred income taxes

 

18,542

 

20,394

Deferred policy acquisition costs

 

10,487

 

11,115

Other assets, including restricted cash of $191 in 2016 and $170 in 2015

 

12,188

 

11,289

Separate account assets, at fair value

 

80,572

 

79,574

Total assets

$

510,349

$

496,842

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

74,143

$

74,942

Unearned premiums

 

22,165

 

21,318

Future policy benefits for life and accident and health insurance contracts

 

45,982

 

43,585

Policyholder contract deposits (portion measured at fair value: 2016 - $4,016; 2015 - $2,325)

 

131,936

 

127,588

Other policyholder funds (portion measured at fair value: 2016 - $5; 2015 - $6)

 

4,292

 

4,212

Other liabilities (portion measured at fair value: 2016 - $241; 2015 - $62)

 

27,393

 

26,164

Long-term debt (portion measured at fair value: 2016 - $3,747; 2015 - $3,670)

 

33,329

 

29,249

Separate account liabilities

 

80,572

 

79,574

Total liabilities

 

419,812

 

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 - 823,982,130 shares; 2015 - 712,754,875 shares of common stock

 

(36,262)

 

(30,098)

Additional paid-in capital

 

81,232

 

81,510

Retained earnings

 

31,951

 

30,943

Accumulated other comprehensive income

 

8,259

 

2,537

Total AIG shareholders’ equity

 

89,946

 

89,658

Non-redeemable noncontrolling interests

 

591

 

552

Total equity

 

90,537

 

90,210

Total liabilities and equity

$

510,349

$

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  (unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(dollars in millions, except per share data)

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,751

 

$

9,545

 

$

17,557

 

$

18,367

Policy fees

 

 

696

 

 

688

 

 

1,383

 

 

1,365

Net investment income

 

 

3,683

 

 

3,826

 

 

6,696

 

 

7,664

Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(65)

 

 

(148)

 

 

(274)

 

 

(235)

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

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income (loss)

 

 

(29)

 

 

(4)

 

 

(22)

 

 

(14)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income

 

 

(94)

 

 

(152)

 

 

(296)

 

 

(249)

Other realized capital gains

 

 

1,136

 

 

278

 

 

232

 

 

1,716

Total net realized capital gains (losses)

 

 

1,042

 

 

126

 

 

(64)

 

 

1,467

Other income

 

 

552

 

 

1,514

 

 

931

 

 

2,811

Total revenues

 

 

14,724

 

 

15,699

 

 

26,503

 

 

31,674

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

6,872

 

 

7,100

 

 

13,259

 

 

13,651

Interest credited to policyholder account balances

 

 

961

 

 

942

 

 

1,911

 

 

1,877

Amortization of deferred policy acquisition costs

 

 

1,345

 

 

1,356

 

 

2,607

 

 

2,706

General operating and other expenses

 

 

2,586

 

 

3,090

 

 

5,589

 

 

6,039

Interest expense

 

 

320

 

 

316

 

 

626

 

 

656

Loss on extinguishment of debt

 

 

7

 

 

342

 

 

90

 

 

410

Net (gain) loss on sale of divested businesses

 

 

(225)

 

 

1

 

 

(223)

 

 

7

Total benefits, losses and expenses

 

 

11,866

 

 

13,147

 

 

23,859

 

 

25,346

Income from continuing operations before income tax expense

 

 

2,858

 

 

2,552

 

 

2,644

 

 

6,328

Income tax expense

 

 

924

 

 

777

 

 

866

 

 

2,077

Income from continuing operations

 

 

1,934

 

 

1,775

 

 

1,778

 

 

4,251

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

 

 

(10)

 

 

16

 

 

(57)

 

 

17

Net income

 

 

1,924

 

 

1,791

 

 

1,721

 

 

4,268

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

11

 

 

(9)

 

 

(9)

 

 

-

Net income attributable to AIG

 

$

1,913

 

$

1,800

 

$

1,730

 

$

4,268

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.73

 

$

1.34

 

$

1.57

 

$

3.16

Income (loss) from discontinued operations

 

$

(0.01)

 

$

0.01

 

$

(0.05)

 

$

0.01

Net income attributable to AIG

 

$

1.72

 

$

1.35

 

$

1.52

 

$

3.17

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.69

 

$

1.31

 

$

1.54

 

$

3.09

Income (loss) from discontinued operations

 

$

(0.01)

 

$

0.01

 

$

(0.05)

 

$

0.01

Net income attributable to AIG

 

$

1.68

 

$

1.32

 

$

1.49

 

$

3.10

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,113,587,927

 

 

1,329,157,366

 

 

1,135,068,193

 

 

1,347,452,833

Diluted

 

 

1,140,045,973

 

 

1,365,390,431

 

 

1,163,089,748

 

 

1,376,325,971

Dividends declared per common share

 

$

0.320

 

$

0.125

 

$

0.640

 

$

0.250

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

3


TABLE OF CONTENTS 

 

Item 1 / Financial statements

 

American International Group, Inc.

CONDENSED Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(in millions)

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Net income

 

$

1,924

 

$

1,791

 

$

1,721

 

$

4,268

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

 

 

22

 

 

(36)

 

 

(327)

 

 

(108)

Change in unrealized appreciation (depreciation) of all other investments

 

 

2,409

 

 

(2,991)

 

 

5,836

 

 

(2,452)

Change in foreign currency translation adjustments

 

 

313

 

 

(37)

 

 

221

 

 

(496)

Change in retirement plan liabilities adjustment

 

 

(10)

 

 

27

 

 

(8)

 

 

56

Other comprehensive income (loss)

 

 

2,734

 

 

(3,037)

 

 

5,722

 

 

(3,000)

Comprehensive income (loss)

 

 

4,658

 

 

(1,246)

 

 

7,443

 

 

1,268

Comprehensive income (loss) attributable to noncontrolling interests

 

 

11

 

 

(9)

 

 

(9)

 

 

(3)

Comprehensive income (loss) attributable to AIG

 

$

4,647

 

$

(1,237)

 

$

7,452

 

$

1,271

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Six Months Ended June 30, 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

 

-

 

84

 

(172)

 

-

 

-

 

(88)

 

-

 

(88)

Purchase of common stock

 

-

 

(6,248)

 

-

 

-

 

-

 

(6,248)

 

-

 

(6,248)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

1,730

 

-

 

1,730

 

(9)

 

1,721

Dividends

 

-

 

-

 

-

 

(713)

 

-

 

(713)

 

-

 

(713)

Other comprehensive income

 

-

 

-

 

-

 

-

 

5,722

 

5,722

 

-

 

5,722

Current and deferred income taxes

 

-

 

-

 

19

 

-

 

-

 

19

 

-

 

19

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

44

 

44

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

3

 

3

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(15)

 

(15)

Other

 

-

 

-

 

(125)

 

(9)

 

-

 

(134)

 

16

 

(118)

Balance, end of period

$

4,766

$

(36,262)

$

81,232

$

31,951

$

8,259

$

89,946

$

591

$

90,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(19,218)

$

80,958

$

29,775

$

10,617

$

106,898

$

374

$

107,272

Purchase of common stock

 

-

 

(3,947)

 

-

 

-

 

-

 

(3,947)

 

-

 

(3,947)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

4,268

 

-

 

4,268

 

-

 

4,268

Dividends

 

-

 

-

 

-

 

(335)

 

-

 

(335)

 

-

 

(335)

Other comprehensive loss

 

-

 

-

 

-

 

-

 

(2,997)

 

(2,997)

 

(3)

 

(3,000)

Deferred income taxes

 

-

 

-

 

(12)

 

-

 

-

 

(12)

 

-

 

(12)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

9

 

9

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(3)

 

(3)

Other

 

-

 

-

 

384

 

(1)

 

-

 

383

 

7

 

390

Balance, end of period

$

4,766

$

(23,165)

$

81,330

$

33,707

$

7,620

$

104,258

$

384

$

104,642

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


TABLE OF CONTENTS 

 

Item 1 / Financial statements

 

American International Group, Inc.

CONDENSED Consolidated Statements of Cash Flows (unaudited)

Six Months Ended June 30,

 

 

 

 

(in millions)

 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

Net income

$

1,721

$

4,268

(Income) loss from discontinued operations

 

57

 

(17)

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Noncash revenues, expenses, gains and losses included in income:

 

 

 

 

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

 

(907)

 

(666)

Net (gain) loss on sale of divested businesses

 

(223)

 

7

Losses on extinguishment of debt

 

90

 

410

Unrealized (gains) losses in earnings - net

 

1,130

 

(1,425)

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

 

145

 

(715)

Depreciation and other amortization

 

2,270

 

2,410

Impairments of assets

 

636

 

471

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

313

 

(420)

Premiums and other receivables and payables - net

 

(614)

 

(1,359)

Reinsurance assets and funds held under reinsurance treaties

 

(988)

 

573

Capitalization of deferred policy acquisition costs

 

(2,554)

 

(2,880)

Current and deferred income taxes - net

 

750

 

1,739

Other, net

 

(1,255)

 

(1,903)

Total adjustments

 

(1,207)

 

(3,758)

Net cash provided by operating activities

 

571

 

493

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale investments

 

13,540

 

14,144

Other securities

 

2,246

 

3,998

Other invested assets

 

3,687

 

6,218

Maturities of fixed maturity securities available for sale

 

12,350

 

12,176

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

 

2,964

 

2,470

Purchases of:

 

 

 

 

Available for sale investments

 

(27,573)

 

(24,198)

Other securities

 

(381)

 

(583)

Other invested assets

 

(1,602)

 

(1,743)

Mortgage and other loans receivable

 

(5,081)

 

(4,459)

Net change in restricted cash

 

(78)

 

1,462

Net change in short-term investments

 

(1,755)

 

(2,693)

Other, net

 

1,419

 

(1,506)

Net cash provided by (used in) investing activities

 

(264)

 

5,286

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

9,539

 

7,541

Policyholder contract withdrawals

 

(6,787)

 

(7,225)

Issuance of long-term debt

 

6,688

 

2,774

Repayments of long-term debt

 

(2,919)

 

(3,701)

Purchase of common stock

 

(6,248)

 

(3,743)

Dividends paid

 

(713)

 

(335)

Other, net

 

250

 

(877)

Net cash used in financing activities

 

(190)

 

(5,566)

Effect of exchange rate changes on cash

 

38

 

(34)

Net increase in cash

 

155

 

179

Cash at beginning of year

 

1,629

 

1,758

Change in cash of businesses held-for-sale

 

-

 

-

Cash at end of period

$

1,784

$

1,937

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

650

$

760

Taxes

$

117

$

338

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

1,797

$

1,826

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, 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 considered for adjustment and/or disclosure. In the opinion of management, these Condensed Consolidated Financial Statements contain normal recurring adjustments, including eliminations of material intercompany accounts and transactions, necessary for a fair statement of the results presented herein.

Interim-period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to June 30, 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.

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.  

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.

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.  

 

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TABLE OF CONTENTS 

 

Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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 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 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.  

 

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TABLE OF CONTENTS 

 

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 are assessing the impact of the standard on our consolidated financial condition, results of operations and cash flows.

Derivative Contract Novations

 

In March 2016, the FASB issued an accounting standard that clarifies that a change in the counterparty (novation) to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. 

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

Contingent Put and Call Options in Debt Instruments

 

In March 2016, the FASB issued an accounting standard that clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts.  The standard requires an evaluation of embedded call (put) options solely on a four-step decision sequence that requires an entity to consider whether (1) the amount paid upon settlement is adjusted based on changes in an index, (2) the amount paid upon settlement is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount and (4) the put or call option is contingently exercisable.

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

 

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Simplifying the Transition to the Equity Method of Accounting

 

In March 2016, the FASB issued an accounting standard that eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods during which the investment had been held.

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

Improvements to Employee Share-Based Payment Accounting

 

In March 2016, the FASB issued a standard that simplifies several aspects of the accounting for share-based compensation, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows.

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

Calculation of Credit Losses

 

In June 2016, the FASB issued an accounting standard that will change how entities account for credit losses for most financial assets.  The standard will replace the existing incurred loss impairment model with a new “current expected credit loss model” and will apply to financial assets subject to credit losses, those measured at amortized cost and certain off-balance sheet credit exposures.  The impairment for available-for-sale debt securities will be measured in a similar manner, except that losses will be recognized as allowances rather than reductions in the amortized cost of the securities.  The standard will also require additional information to be disclosed in the footnotes.

The standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods after December 15, 2018.  We are assessing the impact of the standard on our consolidated financial condition, results of operations or cash flows.     

 

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Item 1 / NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

3. SEGMENT INFORMATION

 

 

We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources through two reportable segments:  Commercial Insurance and Consumer Insurance 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).

The following tables present our operations by reportable segment:

 

2016

2015

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Three Months Ended June 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

5,540

$

791

$

6,233

$

1,192

    Mortgage Guaranty

 

275

 

187

 

261

 

157

    Institutional Markets

 

695

 

110

 

1,172

 

151

      Total Commercial Insurance

 

6,510

 

1,088

 

7,666

 

1,500

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

2,209

 

741

 

2,465

 

804

    Life

 

1,690

 

184

 

1,632

 

149

    Personal Insurance

 

2,915

 

179

 

2,869

 

70

      Total Consumer Insurance

 

6,814

 

1,104

 

6,966

 

1,023

Corporate and Other*

 

450

 

(544)

 

1,119

 

372

AIG consolidation and elimination

 

(205)

 

(28)

 

(116)

 

(27)

Total AIG consolidated operating revenues and pre-tax operating income

 

13,569

 

1,620

 

15,635

 

2,868

Reconciling items from Total revenues and Pre-tax operating income

 

 

 

 

 

 

 

 

    (loss) to revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

    Changes in fair values of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

       living benefits

 

120

 

120

 

(87)

 

(87)

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(64)

 

-

 

(28)

    Other income - net

 

-

 

5

 

-

 

-

    Loss on extinguishment of debt

 

-

 

(7)

 

-

 

(342)

    Net realized capital gains

 

1,042

 

1,042

 

126

 

126

    Income (loss) from divested businesses

 

-

 

225

 

(33)

 

(34)

    Non-operating litigation reserves and settlements

 

7

 

7

 

76

 

49

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

 

-

 

-

 

-

 

-

    Restructuring and other costs

 

-

 

(90)

 

-

 

-

    Other

 

(14)

 

-

 

(18)

 

-

Revenues and pre-tax income

$

14,724

$

2,858

$

15,699

$

2,552

 

 

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TABLE OF CONTENTS 

 

Item 1 / NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

2016

2015

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Six Months Ended June 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

    Property Casualty

$

10,818

$

1,511

$

12,189

$

2,362

    Mortgage Guaranty

 

536

 

350

 

525

 

302

    Institutional Markets

 

1,314

 

116

 

1,796

 

298

      Total Commercial Insurance

 

12,668

 

1,977

 

14,510

 

2,962

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

4,323

 

1,202

 

4,853

 

1,604

    Life

 

3,287

 

289

 

3,245

 

320

    Personal Insurance

 

5,736

 

401

 

5,731

 

44

      Total Consumer Insurance

 

13,346

 

1,892

 

13,829

 

1,968

Corporate and Other*

 

656

 

(1,277)

 

2,161

 

534

AIG consolidation and elimination

 

(364)

 

(18)

 

(275)

 

(69)

Total AIG consolidated operating revenues and pre-tax operating income

 

26,306

 

2,574

 

30,225

 

5,395

Reconciling items from Total revenues and Pre-tax operating income

 

 

 

 

 

 

 

 

    (loss) to revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

    Changes in fair values of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

       living benefits

 

253

 

253

 

(43)

 

(43)

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(24)

 

-

 

(82)

    Other income - net

 

-

 

12

 

-

 

-

    Loss on extinguishment of debt

 

-

 

(90)

 

-

 

(410)

    Net realized capital gains (losses)

 

(64)

 

(64)

 

1,467

 

1,467

    Income (loss) from divested businesses

 

-

 

223

 

(48)

 

(55)

    Non-operating litigation reserves and settlements

 

41

 

38

 

91

 

56

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

 

-

 

-

 

-

 

-

    Restructuring and other costs

 

-

 

(278)

 

-

 

-

    Other

 

(33)

 

-

 

(18)

 

-

Revenues and pre-tax income

$

26,503

$

2,644

$

31,674

$

6,328

*    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

 

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Item 1 / NOTE 4. FAIR VALUE MEASUREMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:

June 30, 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

$

19

$

2,248

$

-

$

-

$

-

$

2,267

Obligations of states, municipalities and political subdivisions

 

-

 

26,464

 

2,313

 

-

 

-

 

28,777

Non-U.S. governments

 

654

 

19,410

 

28

 

-

 

-

 

20,092

Corporate debt

 

-

 

141,325

 

836

 

-

 

-

 

142,161

RMBS

 

-

 

20,665

 

16,779

 

-

 

-

 

37,444

CMBS

 

-

 

12,679

 

2,295

 

-

 

-

 

14,974

CDO/ABS

 

-

 

9,299

 

7,075

 

-

 

-

 

16,374

Total bonds available for sale

 

673

 

232,090

 

29,326

 

-

 

-

 

262,089

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

136

 

3,459

 

-

 

-

 

-

 

3,595

Obligations of states, municipalities and political subdivisions

 

-

 

-

 

-

 

-

 

-

 

-

Non-U.S. governments

 

-

 

55

 

-

 

-

 

-

 

55

Corporate debt

 

-