CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q and other publicly available documents may
include, and officers and representatives of American International Group, Inc.
(AIG) may from time to time make, projections, goals, assumptions and statements
that may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These projections, goals,
assumptions and statements are not historical facts but instead represent only
AIG's belief regarding future events, many of which, by their nature, are
inherently uncertain and outside AIG's control. These projections, goals,
assumptions and statements include statements preceded by, followed by or
including words such as "believe," "anticipate," "expect," "intend," "plan,"
"view," "target" or "estimate". These projections, goals, assumptions and
statements may address, among other things:
º •
º the timing of the disposition of the ownership position of the United
States Department of the Treasury (Department of the Treasury) in AIG;
º •
º the monetization of AIG's interests in International Lease Finance
Corporation (ILFC);
º •
º AIG's exposures to subprime mortgages, monoline insurers, the residential and commercial real estate markets, state and municipal
bond issuers and sovereign bond issuers;
º •
º AIG's exposure to European governments and European financial
institutions;
º •
º AIG's strategy for risk management;
º •
º AIG's ability to retain and motivate its employees;
º •
º AIG's generation of deployable capital;
º • º AIG's return on equity and earnings per share long-term aspirational
goals;
º •
º AIG's strategies to grow net investment income, efficiently manage
capital and reduce expenses;
º • º AIG's strategies for customer retention, growth, product development,
market position, financial results and reserves; and
º •
º the revenues and combined ratios of AIG's subsidiaries.
It is possible that AIG's actual results and financial condition will differ,
possibly materially, from the results and financial condition indicated in these
projections, goals, assumptions and statements. Factors that could cause AIG's
actual results to differ, possibly materially, from those in the specific
projections, goals, assumptions and statements include:
º •
º actions by credit rating agencies;
º •
º changes in market conditions;
º •
º the occurrence of catastrophic events;
º •
º significant legal proceedings;
º • º the timing of, and the applicable requirements of, any new regulatory
framework to which AIG becomes subject;
º •
º concentrations in AIG's investment portfolios, including its municipal
bond portfolio;
º •
º judgments concerning casualty insurance underwriting and reserves;
º •
º judgments concerning the recognition of deferred tax assets;
AIG 2012 Form 10-Q 85
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American International Group, Inc.
º •
º judgments concerning deferred policy acquisition costs (DAC)
recoverability;
º • º judgments concerning the recoverability of aircraft values in ILFC's
fleet; and
º •
º such other factors as are discussed throughout this Management's
Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) and in Part II, Item 1A. Risk Factors of this
Quarterly Report on Form 10-Q, and discussed throughout Part II,
Item 7. MD&A and in Part I, Item 1A. Risk Factors of AIG's Annual Report on Form 10-K for the year ended December 31, 2011, as amended
by Amendment No. 1 and Amendment No. 2 on Form 10-K/A filed on
February 27, 2012 and March 30, 2012, respectively, and discussed
throughout Exhibit 99.2, MD&A of AIG's Current Report on Form 8-K
filed on May 4, 2012 (collectively, the 2011 Annual Report).
AIG is not under any obligation (and expressly disclaims any obligation) to
update or alter any projections, goals, assumptions or other statements, whether
written or oral, that may be made from time to time, whether as a result of new
information, future events or otherwise. Unless the context otherwise requires,
the terms AIG, the Company, we, us, and our mean AIG and its consolidated
subsidiaries.
USE OF NON-GAAP MEASURES
Throughout this MD&A, AIG presents its operations in the way it believes will
be most meaningful, representative, and most transparent. Certain of the
measurements used by AIG management are "non-GAAP financial measures" under
Securities and Exchange Commission (SEC) rules and regulations.
Management believes that the measures described at Results of Operations -
Segment Results enhance the understanding of the underlying profitability of the
ongoing operations of the businesses and allow for more meaningful comparisons
with AIG's insurance competitors. Reconciliations of these measures to pre-tax
income or unadjusted ratios, the most directly comparable measurements derived
from accounting principles generally accepted in the United States (GAAP), are
included in Results of Operations - Segment Results.
EXECUTIVE OVERVIEW
This executive overview of this MD&A highlights selected information and may
not contain all of the information that is important to current or potential
investors in AIG's securities. This Quarterly Report on Form 10-Q should be read
in its entirety, together with the 2011 Annual Report, for a complete
description of events, trends and uncertainties as well as the capital,
liquidity, credit, operational and market risks, and the critical accounting
estimates affecting AIG and its subsidiaries.
AIG reports its results of operations as follows:
º •
º Chartis - Chartis offers property and casualty insurance products and
services to businesses and individuals worldwide. Commercial insurance
products for large and small businesses are primarily distributed
through insurance brokers. Major lines of business include casualty,
property, financial lines and specialty (including aerospace,
environmental, surety, marine, trade credit and political risk
insurance). Consumer insurance products are distributed to individual
consumers or groups of consumers through insurance brokers, agents,
and on a direct-to-consumer basis. Consumer insurance products include accident & health (A&H) and personal lines insurance. In addition,
Fuji Fire & Marine Insurance Company Limited (Fuji) in Japan offers
life insurance products through Fuji Life Insurance Company (Fuji
Life), which are included in A&H.
º •
º SunAmerica Financial Group (SunAmerica) - SunAmerica offers a
comprehensive suite of products and services to individuals and
groups, including term life, universal life, A&H, fixed and variable
deferred annuities, fixed payout annuities, mutual funds and financial
planning. SunAmerica offers its products and services through a
diverse, multi-channel distribution network that includes banks,
national, regional and independent broker-dealers, affiliated
financial advisors, independent marketing organizations, independent
and career insurance agents, structured settlement brokers, benefit
consultants and direct-to-consumer platforms.
86 AIG 2012 Form 10-Q
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American International Group, Inc.
º •
º Aircraft Leasing - AIG's commercial aircraft leasing business is
conducted through ILFC (and, since the date of its acquisition by ILFC
on October 7, 2011, AeroTurbine, Inc. (AeroTurbine)).
º •
º Other Operations - AIG's Other operations include results from
Mortgage Guaranty operations (conducted through United Guaranty
Corporation (UGC)), Global Capital Markets operations (consisting of the operations of AIG Markets, Inc. (AIG Markets) and the remaining
derivatives portfolio of AIG Financial Products Corp. and AIG Trading
Group Inc. and their respective subsidiaries (collectively, AIGFP)),
Direct Investment book (including the Matched Investment Program (MIP)
and certain non-derivative assets and liabilities of AIGFP), Retained
Interests (as defined below) and Corporate & Other operations (after
allocations to AIG's business segments).
PRIOR PERIOD REVISIONS
Prior period amounts have been revised to reflect the following:
Accounting for Deferred Acquisition Costs
As discussed in Note 2 to the Consolidated Financial Statements, AIG
retrospectively adopted an accounting standard on January 1, 2012 that amended
the accounting for costs incurred by insurance companies that can be capitalized
in connection with acquiring or renewing insurance contracts.
Changes in Fair Value of Derivatives
To align the presentation of Changes in fair value of derivatives with changes
in the administration of AIG's derivatives portfolio, changes were made to the
presentation within the Consolidated Statement of Operations for activity where
Global Capital Markets executes transactions with third parties on behalf of AIG
subsidiaries. Specifically, derivative activity where AIGFP is an intermediary
for AIG subsidiaries, which historically has been reported in Other income, has
been reclassified to Net realized capital gains (losses). Prior period amounts
were reclassified to conform to the current period presentation.
The impact to AIG shareholders' equity and Net income (loss) attributable to AIG
previously reported in 2011 is summarized below:
At December 31,
(in millions) 2011
AIG shareholders' equity as previously reported $ 104,951
Impact of adoption of new standard on AIG Shareholders' equity (3,413 )
AIG shareholders' equity as currently reported $ 101,538
Three Months
Ended Six Months Ended
(in millions) June 30, 2011 June 30, 2011
Net income attributable to AIG as previously
reported $ 1,840 $ 2,109
Impact of adoption of new standard on Net
income attributable to AIG (4 )
1,024
Net income attributable to AIG as currently
reported $ 1,836 $ 3,133
Chartis Segment Changes
To align financial reporting with changes made during 2012 to the manner in
which AIG's chief operating decision makers review the businesses to assess
performance and make decisions about resources to be allocated, certain products
previously reported in Commercial Insurance were reclassified to Consumer
Insurance. These revisions did not affect the total Chartis reportable segment
results previously reported.
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American International Group, Inc.
FINANCIAL OVERVIEW
Income from continuing operations before income taxes was $1.8 billion for
both the three months ended June 30, 2012 and 2011, and reflected the following:
º •
º pre-tax income from insurance operations of $1.7 billion and
$1.6 billion in the three months ended June 30, 2012 and 2011,
respectively;
º •
º a decrease in fair value of AIG's interest in AIA Group Limited (AIA)
ordinary shares of $493 million in the three months ended June 30,
2012, compared to an increase in fair value of $1.5 billion in the
three months ended June 30, 2011;
º •
º an increase in fair value of AIG's interest in ML III of $1.3 billion
in the three months ended June 30, 2012 based in part on sales of ML
III assets by the Federal Reserve Bank of New York (the FRBNY) in the
second quarter of 2012, compared to a decrease in fair value of
$667 million in the three months ended June 30, 2011; and
º •
º an increase in estimated litigation liability of approximately
$719 million for the three months ended June 30, 2012 based on
developments in several actions.
Income from continuing operations before income taxes was $6.3 billion for the
six months ended June 30, 2012 compared to $484 million for the same period in
2011, primarily driven by the following:
º •
º pre-tax income from insurance operations of $3.5 billion in the six
months ended June 30, 2012, compared to $2.2 billion in the six months
ended June 30, 2011, which included catastrophe losses of
$2.3 billion, largely arising from the Great Tohoku Earthquake &
Tsunami in Japan (the Tohoku Catastrophe);
º •
º increases in fair value of AIG's interest in AIA ordinary shares of
$1.3 billion and $2.6 billion in the six months ended June 30, 2012
and 2011, respectively;
º • º increases in fair value of AIG's interest in ML III of $2.6 billion
and $0.1 billion in the six months ended June 30, 2012 and 2011,
respectively;
º •
º an increase in estimated litigation liability of approximately
$727 million for the six months ended June 30, 2012 based on
developments in several actions; and
º •
º a $3.3 billion charge, primarily consisting of the accelerated
amortization of the remaining prepaid commitment fee asset resulting
from the termination of the credit facility provided by the FRBNY(the
FRBNY Credit Facility) in 2011.
Pre-tax income from insurance operations reflected Chartis' continued benefit
from growth in higher value lines and geographies and improving pricing trends.
Chartis results included net prior year adverse development of $137 million and
$184 million in the three and six months ended June 30, 2012, respectively.
Chartis is benefiting from higher interest income on fixed maturity securities
driven by the redeployment of excess cash and short-term investments into longer
term investments, the implementation of Chartis' investment strategy to reduce
its concentration in non-taxable municipal instruments and increase higher
yielding corporate and structured securities and an increase in maturing life
settlement policies
SunAmerica is benefiting from its broad portfolio of innovative products,
diverse and strong distribution relationships, and continued discipline in
product pricing. SunAmerica 2012 results also benefited, in comparison, from the
reinvestment of cash in 2011 and increase in base yields. Partially offsetting
SunAmerica's improvements were lower returns from hedge funds and private equity
investments.
88 AIG 2012 Form 10-Q
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American International Group, Inc.
CAPITAL RESOURCES AND LIQUIDITY
In the first six months of 2012, AIG paid down in full the remaining preferred
interests in the AIA Group Limited (AIA) special purpose vehicle (the AIA SPV,
and such interests, the AIA SPV Preferred Interests) held by the Department of
the Treasury. In addition, the Department of the Treasury, as selling
shareholder, completed two registered public offerings in March 2012 (the March
Offering) and May 2012 (the May Offering, and together with the March Offering,
the Equity Offerings) of AIG common stock, par value $2.50 per share (AIG Common
Stock).
In the March Offering, the Department of the Treasury sold approximately
207 million shares of AIG Common Stock for aggregate proceeds of approximately
$6.0 billion. AIG purchased approximately 103 million shares of AIG Common Stock
in the March Offering at the initial public offering price of $29.00 per share
for an aggregate purchase amount of approximately $3.0 billion.
In the May Offering, the Department of the Treasury sold approximately
189 million shares of AIG Common Stock for aggregate proceeds of approximately
$5.7 billion. AIG purchased approximately 66 million shares of AIG Common Stock
in the May Offering at the initial public offering price of $30.50 per share for
an aggregate purchase amount of approximately $2.0 billion.
As a result of the Department of the Treasury's sale of AIG Common Stock and
AIG's purchase of shares in the Equity Offerings, ownership by the Department of
the Treasury was reduced from approximately 77 percent to approximately
61 percent of the AIG Common Stock outstanding after the completion of the May
Offering.
AIG expects that the Department of the Treasury will seek to further reduce
its ownership interest in AIG over time through additional secondary offerings
or open market sales. Depending upon market conditions, available capital
resources and liquidity, and any repurchase authorization then available, AIG
may determine to participate as a purchaser in such secondary offerings.
See Note 1 to the Consolidated Financial Statements and Capital Resources and
Liquidity - Liquidity of Parent and Subsidiaries herein for further discussion
and other capital resources and liquidity developments.
OUTLOOK
PRIORITIES FOR 2012
AIG remains committed to its long-term aspirational goals and is focused on
the following priorities for 2012:
º •
º continuing to strengthen and grow AIG's core businesses;
º •
º implementing a strategic alternative for ILFC through an initial
public offering or sale;
º •
º managing its capital and interest expense more efficiently;
º •
º taking appropriate actions to prepare for scenarios under which the
Board of Governors of the Federal Reserve System (the FRB) would
become AIG's regulator;
º •
º continuing to build, strengthen and streamline the financial and operating systems infrastructure and control environment throughout
the organization, particularly in financial reporting, financial
operations and human resources; and
º •
º restructuring AIG's operations consistent with its smaller size and
plans to increase its competitiveness.
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American International Group, Inc.
REGULATORY
On October 18, 2011, the Financial Stability Oversight Council (the FSOC)
published a second notice of proposed rulemaking and related interpretive
guidance under the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank) regarding the designation of non-bank systemically important
financial institutions (SIFIs). On April 3, 2012, the FSOC formally adopted the
rule in substantially the same form as proposed. The rule sets forth a
three-stage determination process for designating non-bank SIFIs. In Stage 1,
FSOC would apply a set of uniform quantitative thresholds to identify the
nonbank financial companies that will be subject to further evaluation. AIG
expects that the FSOC will make its Stage 1 identifications before the end of
2012. Based on its financial condition as of June 30, 2012, AIG would meet the
criteria in Stage 1 and would be subject to further evaluation by the FSOC in
the SIFI determination process. Because Stages 2 and 3 would involve qualitative
judgment by the FSOC, AIG cannot predict whether it would be designated as a
non-bank SIFI under the rule.
The SEC and the CFTC have adopted final rules defining major swap participant
for purposes of Title VII of Dodd-Frank. The definitions contain quantitative
tests to be applied on a quarterly basis. Based on these quantitative tests and
the existing size of AIGFP's swap portfolio, it appears that both AIGFP and AIG
Parent, as a guarantor of AIGFP's swaps, may need to register as major swap
participants. However, interpretational issues remain with respect to the final
rules, including the treatment of stable value contracts and the
extra-territorial scope of the rules, and the precise time when the quantitative
tests must be applied is uncertain. Accordingly, depending on the exact timing
of the testing and the size of AIGFP's swap portfolio at that time, AIGFP and
AIG Parent may not meet the quantitative tests for registration. If AIGFP and
AIG Parent are required to register as major swap dealers, they will become
subject to derivative transaction clearing, execution and reporting
requirements, capital and margin requirements and business conduct rules.
AIG's insurance companies, like other insurers, are subject to regulation and
supervision by the states and jurisdictions in which they do business. State
regulation relates primarily to financial condition as well as corporate conduct
and market conduct activities; in particular, states have also become
increasingly aggressive in using escheatment laws to seek recovery of unclaimed
life insurance benefits. There are a number of proposals to amend state
insurance laws and regulations, and a review of insurance solvency regulation
throughout the U.S. regulatory system, which could significantly affect AIG's
insurance businesses. At the federal level, Dodd-Frank will subject AIG's
insurance subsidiaries, investment advisors, broker-dealers and their affiliates
to additional federal regulation. In addition, regulators and lawmakers around
the world are developing recommendations to address issues such as financial
group supervision, corporate governance, enterprise risk management, capital and
solvency standards, and related issues, which could potentially affect AIG and
its subsidiaries.
In March 2011, federal regulators, as required by Dodd-Frank, issued a
proposed risk retention rule that included a definition of a Qualified
Residential Mortgage (QRM) in respect of which issuers of asset-backed
securities would not be subject to certain risk retention requirements. The QRM
definition included, among other standards, a maximum loan-to-value ratio (LTV)
of 80 percent for a home purchase transaction. The LTV is calculated without
imputing any benefit from private mortgage insurance coverage that may be
purchased for that loan. The final regulations could adversely impact UGC's
volume of domestic first-lien new insurance written, depending on the final
definition of a QRM, the maximum LTV allowed and the benefit, if any, ascribed
to private mortgage insurance. In July 2012, federal regulators indicated that
the final QRM regulations will not be issued until after the Consumer Financial
Protection Bureau finalizes the Qualified Mortgage standards, expected sometime
in 2013.
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American International Group, Inc.
CHARTIS
Chartis expects that the current low interest rate environment and ongoing
uncertainty in global economic conditions will continue to negatively impact
financial results through at least the next 12 months, although improving trends
in certain key indicators may offset the effect of some of these challenges.
Beginning in the second quarter of 2011, Chartis has observed positive pricing
trends, particularly in its U.S. commercial business. Chartis expects that
expansion in certain growth economies will trend higher than in developed
countries, albeit at reduced levels than had been expected previously due to
revised economic assumptions for some of these nations.
Strategy
Chartis continues to make progress with its strategy to grow higher value and
less capital intensive lines of business, and to implement corrective actions on
underperforming businesses. Management reviews each of the businesses to
evaluate their contribution to overall performance objectives.
Chartis seeks to provide value for people and businesses worldwide through the
identification and efficient management of risk. In pursuing this mission and
growing its intrinsic value, Chartis has established strategic initiatives in
several key areas. Initiatives in these areas are helping Chartis direct its
capital and resources to optimize financial results, while acknowledging that
performance in these areas may vary from quarter to quarter depending on local
market conditions, such as pricing and the effects of foreign exchange rates or
changes in the investment environment.
º •
º Business Mix Shift - Chartis seeks to continue to diversify its
business portfolio, while retaining the flexibility to capitalize on
sustainable profit in products and geographies of opportunity. Chartis
believes that there is an opportunity to shift its current mix of
business toward growth economy nations, such as China, India and
Brazil, among others, and to higher value lines such as consumer
business and less commoditized commercial lines.
º •
º Commercial Insurance is effectively utilizing globalunderwriting
and product best practices to target high value customers and
geographies. Chartis is leveraging its significant global
footprint and multinational capabilities to serve large and
mid-sized businesses with cross-border operations. Commercial
Insurance is also expanding its presence in the growth economy
nations. In the Americas and the Europe, Middle East and Africa
(EMEA) regions, Commercial Insurance expects to focus on the
higher value lines within its portfolio and to capitalize on
market opportunities.
º •
º Consumer Insurance continues to grow its net premiums written in
key markets and to expand internationally, particularly in growth
economy nations. Consumer Insurance growth strategies span
multiple distribution channels and include direct to consumer,
agent, broker and affinity groups. In the Asia Pacificregion,
the acquisition of Fuji enables the continued introduction of a
breadth of products across its distribution channels and customer
base. In the Americas region, Consumer Insurance continues to
focus its growth in niche areas, such as the high net worth
market, geographic expansion in Latin America, and the
implementation of a strategic group benefits partnership with
American General Life Companies (American General). In the EMEA
region, management expects modest growth and will continue to
focus on profitable underwriting performance.
º •
º Underwriting Excellence - Chartis is implementing enhanced pricing,
risk selection and account management tools, and marketing analytics
that it believes enable underwriters to better select and price risks.
Further changes include greater actuarial involvement in product
pricing and attachments, widespread utilization of pricing and predictive models, policy form changes, increased policy exclusions
and fewer multi-year policies being offered. In 2011, as part of its
ongoing initiatives to reduce exposure to capital intensive long-tail
lines, Chartis ceased to actively write Excess Workers' Compensation
business on a stand-alone basis. Based on this decision, Chartis
includes this legacy line of business in Chartis Other.
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American International Group, Inc.
º •
º Claims Best Practices - Chartis is continuing to focus on reducing the
costs associated with claims by improving the effectiveness and
efficiency in servicing its customers, thus improving its loss ratio.
Chartis is placing emphasis on streamlining its claims operations,
implementing effective technology and processes and the use of fraud
detection tools to create a competitive advantage. Analyzing
actuarial, underwriting, claims and legal data is helping Chartis
develop its knowledge of the structural drivers of losses and improve
pricing. Chartis is addressing these loss drivers proactively to
mitigate their impact on reserve development and legal costs. Current
accident year loss ratios have started to improve and Chartis expects
this trend to continue.
º •
º Expense Discipline - To achieve expense reductions, Chartis plans to
take advantage of its global footprint to improve efficiencies and
expand the use of shared services to support regional businesses in strategic locations, reduce use of external services and negotiate
preferred rates with vendors. As a result of the business mix shift to
consumer products, higher value commercial products, and the
investment in growth economy nations, policy acquisition expenses are
expected to increase in the next 12 months. Chartis expects, however,
that these changes will ultimately help generate business with more
favorable underwriting results. Chartis continues to make strategic
investments in systems processes and talent worldwide, which will
increase expenses in the short-term, but should create additional
value and greater efficiency in the future.
Capital Deployment
In 2012, Chartis expects to continue to execute capital management initiatives
by enhancing broad-based risk tolerance guidelines for its operating units,
executing underwriting strategies, implementing its global reinsurance strategy
to improve capital ratios, increasing return on equity by line of business and
reducing exposure to businesses with inadequate pricing and increased loss
trends.
Chartis continues to streamline its legal entity structure, to enhance
transparency with regulators and optimize capital and tax efficiency. In 2012,
Chartis completed 25 legal entity and branch restructuring transactions. In
preparation for Solvency II compliance, on December 1, 2011, Chartis Ireland was
merged into Chartis Europe Limited as the first step towards achieving a single
Pan-European insurance carrier that will simplify the legal entity structure in
Europe by the end of 2012, subject to regulatory approval.
Investments
For 2012, Chartis expects to continue to refine its investment strategy, which
includes asset diversification and yield-enhancement opportunities that meet
Chartis' liquidity, duration and credit quality objectives as well as current
risk-return and tax objectives.
See Segment Results - Chartis Operations - Chartis Results - Chartis Investing
and Other Results and Note 5 to the Consolidated Financial Statements for
additional information.
SUNAMERICASunAmerica continues to pursue its goals of (i) expanding the breadth and
depth of its distribution relationships, (ii) introducing innovative new
products and product enhancements, (iii) disciplined life insurance underwriting
and matching of assets and liability durations, (iv) maintaining a high quality
investment portfolio and strong statutory surplus, (v) proactively managing
expenses and, (vi) subject to regulatory approval, continuing to make
distributions to AIG Parent. SunAmerica expects to continue to make progress on
all of these efforts for the remainder of 2012.
Business Environment
º •
º Effect of low interest rates - SunAmerica's businesses and the life
and annuity industry in general continue to be affected by the current
low interest rate environment. Low interest rates can affect the
recoverability
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American International Group, Inc.
and amortization rate of deferred acquisition costs (DAC). Continued
low interest rates also put pressure on long-term investment returns,
negatively affect future sales of interest rate-sensitive products and
reduce future profits. Products such as payout annuities and
traditional life insurance that are not rate-adjustable may require
increases in reserves if changes in estimates of future investment
returns result in projected future losses. SunAmerica would not expect
a DAC unlocking or an increase in reserves due to loss recognition in
2012 solely as a result of the low interest rate environment. However,
because of the long-term nature of certain contracts for which
reserving assumptions are established upon issuance of the contracts,
small changes in certain of the original assumptions, particularly
estimates of future invested asset returns, may cause large changes in
the amount of reserve adequacy. In conjunction with the development of
prudent and feasible programs that resulted in the utilization of
capital loss carryforwards, in the first six months of 2012,
SunAmerica sold approximately $8.9 billion of investments. These sales
resulted in capital gains which enhanced statutory capital and
effectively transferred $548 million of shadow loss recognition to
actual loss recognition. Additional sales of such securities that
would result in capital gains are contemplated for the remainder of
2012, which could result in additional loss recognition or reserve
increases in future periods. See Results of Operations - Segment
Results - SunAmerica Operations.
º •
º Equity market volatility - Declines in the equity markets may result
in higher reserves for variable annuity guarantee features and equity
market volatility can affect the recoverability and amortization rate
of DAC. In amortizing DAC, value of new business acquired (VOBA) and
sales inducement assets (SIA), SunAmerica uses a reversion to the mean
methodology to account for fluctuations in separate account returns
for its variable annuity business. Positive separate account returns
could trigger a favorable unlocking, where the reversion to the mean
assumption is reset. No unlocking is currently anticipated for 2012
solely as the result of positive market returns.
Organizational Realignment
On April 12, 2012, SunAmerica announced several key organizational structure
and management changes intended to better serve the organization's distribution
partners and customers. Key aspects of the new structure are distinct product
divisions, shared annuity and life operations platforms and a unified
all-channel distribution organization with access to all SunAmerica products.
Beginning in 2013, SunAmerica expects to modify its presentation of results when
organizational changes are implemented and all prior periods' presentations will
be conformed.
SunAmerica intends to continue its efforts to consolidate its regulated
insurance companies to implement a more efficient legal entity structure, while
continuing to market products and services under currently existing brands. At
the conclusion of this legal entity consolidation initiative, SunAmerica expects
to reduce the number of its operating life insurance legal entities to three.
Subject to receiving all necessary regulatory approvals, these legal entity
mergers are targeted to be effective as of December 31, 2012.
Variable Annuities
SunAmerica variable annuity sales increased due to access to broad
distribution, including several new distributors and reinstatement in
SunAmerica's largest pre-financial crisis distribution partner, as well as its
innovative product offerings. In addition, several competitors have scaled back
or ceased selling variable annuity products in 2012. As a result of a broad
distribution network and a more favorable competitive environment, SunAmerica
expects variable annuity sales to remain strong in 2012.
SunAmerica has a dynamic hedging program designed to manage economic risk
exposure associated with changes in the fair value of embedded derivative
liabilities contained in certain variable annuity contracts, caused by changes
in the equity markets, interest rates and market implied volatilities.
SunAmerica substantially hedges its exposure to equity markets. However, due to
regulatory capital considerations, a significant portion of SunAmerica's
interest rate exposure is unhedged. In the first quarter of 2012, SunAmerica
began purchasing U.S. Treasury bonds as a capital-efficient strategy to reduce
this interest rate risk exposure over time. In addition, in
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American International Group, Inc.
2010 SunAmerica indexed living benefit fees to market volatility as measured by
the Chicago Board Options Exchange Volatility Index (VIX), reducing SunAmerica's
exposure to changes in market volatility. Beginning in 2012, SunAmerica launched
a new product offering with a volatility-controlled fund, which further reduces
SunAmerica's risk related to market volatility while offering a competitive
benefit. The volatility-controlled fund seeks capital appreciation and current
income while managing net equity exposure by investing a portion of SunAmerica's
assets in accordance with a strategy designed to reduce the effects of
volatility.
Fixed Annuities
Changes in the interest rate environment affect the relative attractiveness of
fixed annuities compared to alternative products. As a result of the current low
interest rate environment, fixed annuity sales in the first six months of 2012
were significantly below 2011 levels. If the low interest rate environment
continues, SunAmerica expects its fixed annuities sales (including deposits into
fixed options within variable annuities sold in group retirement markets) to
continue to decline for the remainder of 2012.
Life Insurance
SunAmerica's strategic focus for mortality-based products includes disciplined
underwriting, active expense management and product innovation. SunAmerica's
distribution strategy is to grow new sales by strengthening the core retail
independent and career agent distributor channels and expanding its market
presence. In addition, SunAmerica is enhancing its service and technology
platform through the consolidation of its life operations and administrative
systems. These efforts are expected to result in an improved service delivery
model and a more efficient operating platform over time.
Interest Crediting Rates
The contractual provisions for renewal of crediting rates and guaranteed
minimum crediting rates included in SunAmerica products may have the effect, in
a continued low interest rate environment, of reducing SunAmerica's spreads and
thus reducing future profitability. SunAmerica partially mitigates this interest
rate risk through its asset-liability management process, product design
elements, and crediting rate strategies. A prolonged low interest rate
environment may, nevertheless, negatively affect spreads on interest-sensitive
business.
As of June 30, 2012, the majority of assets backing insurance liabilities
consisted of intermediate- and long-term fixed maturity securities. SunAmerica
generally purchases assets with the intent of matching expected maturities of
the insurance liabilities. An extended low interest rate environment may result
in a lengthening of maturities from initial estimates, primarily due to lower
lapses. Opportunistic investments in structured securities continue to be made
in order to improve yields, increase net investment income and help to offset
the impact of the lower interest rate environment.
SunAmerica's annuity and universal life products were designed with
contractual provisions that allow crediting rates to be reset at pre-established
intervals subject to minimum crediting rate guarantees. Therefore, on new
business currently written, as well as on in-force business above minimum
guarantees, SunAmerica has adjusted, and will continue to adjust, crediting
rates in order to maintain targeted interest rate spreads.
New fixed annuity sales have declined in the first six months of 2012 relative
to the same period in 2011, as consumers appeared reluctant to purchase such
annuities at the relatively lower crediting rates offered. However, even in the
current interest rate environment, SunAmerica continues to pursue new sales at
targeted interest rate spreads. These annuity products generally have minimum
interest rate guarantees of 1 percent. Universal life insurance interest rate
guarantees are generally 2 to 3 percent on new non-indexed products and
1 percent on new indexed products, and are designed to be sufficient to meet
targeted interest spreads.
As a result of these actions, SunAmerica estimates that if interest rates
remain at or near current levels through the end of 2013, full year 2012 and
2013 pre-tax operating income will not be materially impacted. The effect would
increase modestly in 2014.
94 AIG 2012 Form 10-Q
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American International Group, Inc.
As indicated in the table below, approximately 56 percent of SunAmerica's
annuity and universal life account values are at their minimum crediting rates
as of June 30, 2012, an increase from 45 percent at December 31, 2011 due to
continued spread management actions taken through crediting rate changes. These
products have minimum guaranteed interest rates as of June 30, 2012 ranging from
1.0 percent to 5.5 percent, with the higher rates representing guarantees on
older products.
The following table presents account values by range of current minimum
guaranteed interest rates and current crediting rates for SunAmerica's universal
life and deferred fixed annuity products and fixed account options of variable
annuity products:
Current Crediting Rates
1 - 50 Basis More than 50
June 30, 2012 Points Basis
Contractual Minimum Guaranteed Above Points Above
Interest Rate Account Values At Contractual Minimum Minimum
(in millions) Minimum Guarantee Guarantee Guarantee Total
Universal life insurance
1% $ 12 $ - $ 9 $ 21
> 1% - 2% - - 232 232
> 2% - 3% 92 198 1,538 1,828
> 3% - 4% 2,120 236 1,589 3,945
> 4% - 5% 4,415 81 198 4,694
> 5% - 5.5% 320 3 5 328
Subtotal $ 6,959 $ 518 $ 3,571 $ 11,048
Fixed annuities
1% $ 569 $ 2,385 $ 6,366 $ 9,320
> 1% - 2% 3,435 8,149 11,752 23,336
> 2% - 3% 27,740 3,381 7,232 38,353
> 3% - 4% 12,557 1,931 573 15,061
> 4% - 5% 8,123 - 7 8,130
> 5% - 5.5% 243 - 5 248
Subtotal $ 52,667 $ 15,846 $ 25,935 $ 94,448
Total $ 59,626 $ 16,364 $ 29,506 $ 105,496
Percentage of total 56 % 16 % 28 % 100 %
In addition to the products discussed above, certain traditional long-duration
products for which SunAmerica does not have the ability to adjust interest
rates, such as payout annuities, are exposed to reduced earnings and potential
losses in a prolonged low interest rate environment.
AIRCRAFT LEASING
On September 2, 2011, ILFC Holdings, Inc., an indirect wholly-owned subsidiary
of AIG, which is intended to become a holding company for ILFC, filed a
registration statement on Form S-1 with the SEC for a proposed initial public
offering. The number of shares to be offered, price range and timing for any
offering have not been determined. The timing of any offering will depend on
market conditions and no assurance can be given regarding the terms of any
offering or that an offering will be completed.
Challenges in the global economy, including the European sovereign debt
crisis, political uncertainty in the Middle East, and sustained higher fuel
prices, have negatively impacted many airlines' profitability, cash flows and
liquidity, and increased the probability that some airlines, including ILFC
customers, will cease operations or file for bankruptcy. During the first six
months of 2012, ILFC has had six lessees cease operations or file for bankruptcy
(or its equivalent) and these lessees returned 45 aircraft to ILFC. As of
July 24, 2012, 31 aircraft have been committed to new leases, 10 have been or
are intended for part-out, one has been sold and three remain to be re-leased.
Most of ILFC's lessees, like much of the international airline industry, are not
publicly rated and are rated internally non-investment grade by AIG. Future
events, including a prolonged recession, ongoing uncertainty
AIG 2012 Form 10-Q
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American International Group, Inc.
regarding the European sovereign debt crisis, political unrest, continued weak
consumer demand, high fuel prices, or restricted availability of credit to the
aviation industry could lead to the weakening or cessation of operations of
additional airlines, which in turn would adversely affect ILFC's earnings and
cash flows.
OTHER OPERATIONS
Mortgage Guaranty
The following will continue to affect results in 2012:
º •
º Market developments - UGC believes it is a market leader in the mortgage insurance industry with a differentiated risk-based pricing
model producing new high quality business. The withdrawal of certain
competitors from the market during 2011 combined with the
differentiation strategy that UGC implemented in late 2010 and early 2011 has positioned UGC to take advantage of market opportunities. UGC
is continuing to execute this strategy during 2012. In the first six
months of 2012, UGC increased pricing nationally by approximately
3.5 percent and will continue to review its new business pricing
relative to changes in the market to ensure that the price of coverage
is commensurate with the level of risk being underwritten.
º •
º Delinquent inventory review - Beginning in the third quarter of 2011
and continuing into the second quarter of 2012, UGC requested that
lenders file claims, in accordance with the terms of the respective
master policies, on approximately 20,000 accounts that had been
delinquent approximately 24 months or more and were not expected to be
cured. Many of these delinquencies were the result of the foreclosure
moratorium discussed below. Through June 30, 2012, UGC received
responses to approximately 88 percent of these requests. The claims
arising from these requests have resulted in coverage rescissions and
claim denials at levels higher than previously experienced. UGC has
considered these higher levels of rescissions and denials and the
potential for higher levels of overturns in estimating its reserves
for loss and loss adjustment expenses. Over the remainder of 2012,
reserve development and premium refunds associated with these claim
requests will continue to impact the business, especially in the third
quarter of 2012 when UGC expects overturn activity related to these
delinquencies to be at its highest. UGC continues to monitor and
review the status of these requests and plans to contact lenders on an
ongoing basis regarding additional delinquencies that meet these
criteria. Under the terms of these master policies, if a claim is not
submitted within a year of UGC's request, the lender would no longer
be able to file a claim.
º •
º Foreclosure delays - Since 2010, a variety of servicing practices have
come to light that have delayed the foreclosure process in many
states. Some of these practices, such as the "robo-signing" of
affidavits in judicial foreclosures, have resulted in government
investigations into lenders' foreclosure practices. These developments
have slowed the reporting of foreclosures, which has in turn slowed
the filing of mortgage insurance claims and increased the uncertainty
surrounding the determination of the liability for losses and loss
adjustment expenses. UGC's assumptions regarding future foreclosures
on current delinquencies take into consideration this trend, although
significant uncertainty remains surrounding the determination of the
liability for unpaid claims and claims adjustment expenses. UGC
expects that this trend may continue for the remainder of 2012 and may negatively affect UGC's future financial results. Final resolution of
these issues is uncertain and UGC cannot reasonably estimate the
ultimate financial impact that any resolution, individually or
collectively, may have on its future results of operations or
financial condition. As discussed above, UGC has requested that lenders file claims on delinquent loans before foreclosure proceedings
have commenced in an effort to reduce the uncertainty surrounding
these issues. UGC expects to continue this practice as long as
significant delays in reporting foreclosures continue.
Global Capital Markets
The remaining AIGFP portfolio continues to be wound down and is managed
opportunistically, consistent with AIG's risk management objectives. The
portfolio consists of interest rate, currency, commodity, and equity
96 AIG 2012 Form 10-Q
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derivatives primarily to hedge trades with AIG affiliates and to further AIG's
risk management objectives. Additionally, AIGFP has a credit default swap
portfolio being managed for maximum economic benefit and limited risk. Although
the portfolio may experience periodic fair value volatility, it consists
predominantly of transactions AIG believes are of low complexity, low risk or
currently not economically appropriate to unwind based on a cost versus benefit
analysis.
The overall hedging activity for AIG and its operating companies will be
executed primarily by Global Capital Markets (GCM) through AIG Markets.
Direct Investment Book
MIP assets and liabilities and certain non-derivative assets and liabilities
of AIGFP (collectively, the Direct Investment book or DIB) are currently managed
collectively on a single program basis to limit the need for additional
liquidity from AIG Parent.
Program management is focused on winding down this portfolio over time, and
reducing and managing its liquidity needs, including the need for contingent
liquidity arising from collateral posting for debt positions of the DIB. As part
of this program management, AIG may from time to time access the capital
markets, subject to market conditions. In addition, AIG may seek to buy back
debt or sell assets on an opportunistic basis, subject to market conditions.
As further discussed in Note 5 to the Consolidated Financial Statements, AIG
received substantial distributions from ML III subsequent to June 30, 2012. A
portion of those proceeds were re-invested by the DIB in certain CDO securities
sold in the auctions of ML III assets and AIG expects to receive approximately
$1.9 billion in proceeds from auctions completed through July 31, 2012 by
mid-August. The FRBNY has continued to auction the remaining ML III assets and
any proceeds from further sales of ML III assets by the FRBNY will be allocated
67 percent to the FRBNY and 33 percent to AIG. Proceeds received by AIG from
such sales may be reinvested in CDO securities sold by ML III.
Including the amounts to be received from completed auctions, the DIB will
have more than $5 billion of liquidity in excess of the amount that AIG believes
is necessary to meet all of the DIB maturing liabilities even in stress
scenarios, without having to liquidate DIB assets or rely on additional
liquidity from AIG Parent.
Certain non-derivative assets and liabilities of the DIB, including CDO
securities purchased from ML III, are accounted for under the fair value option
and thus operating results are subject to periodic market volatility.
Retained Interests
Retained Interests may continue to experience volatility due to fair value
gains or losses on the AIA ordinary shares and the retained interests in ML III.
At June 30, 2012, AIG owned approximately 19 percent of the outstanding ordinary
shares of AIA. A change of one Hong Kong dollar in AIA's share price would
result in an approximate $300 million change in AIG's pre-tax income.
AIG is restricted from selling any of its remaining AIA ordinary shares to
third parties or entering into hedging transactions that might protect AIG
against fluctuations in the value of its remaining interest in AIA until
September 4, 2012. After that date, AIG expects to monetize its investment in
AIA ordinary shares from time to time depending on market conditions, AIG's
liquidity position and opportunities for cash redeployment.
AIG 2012 Form 10-Q
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AIG has incorporated into this discussion a number of cross-references to
additional information included throughout this Quarterly Report on Form 10-Q to
assist readers seeking additional information related to a particular subject.
The remainder of this MD&A is organized as follows:
Index Page
Results of Operations 99
Consolidated Results 99
Segment Results 104
Chartis Operations 106
Liability for Unpaid Claims and Claims Adjustment Expense 117
SunAmerica Operations 124
Aircraft Leasing Operations 130
Other Operations 132
Consolidated Comprehensive Income (Loss) 138
Capital Resources and Liquidity 140
Overview 140
Liquidity Adequacy Management 141
Analysis of Sources and Uses of Cash 142
Liquidity of Parent and Subsidiaries 143
Credit Facilities 149
Contingent Liquidity Facilities 150
Contractual Obligations 151
Off-Balance Sheet Arrangements and Commercial Commitments 151
Debt 152
Credit Ratings 155
Investments 156
Investment Strategies 156
Investment Highlights 156
Impairments 166
Enterprise Risk Management 171
Overview 171
Credit Risk Management 171
Market Risk Management 177
Critical Accounting Estimates 178
98 AIG 2012 Form 10-Q
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American International Group, Inc.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following table presents AIG's condensed consolidated results of operations:
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Revenues:
Premiums $ 9,619 $ 9,898 (3 )% $ 19,080 $ 19,380 (2 )%
Policy fees 674 682 (1 ) 1,365 1,366 -
Net investment income 4,481 4,464 - 11,586 10,033 15
Net realized capital gains (losses) 397 75 429 147 (660 ) NM
Aircraft leasing revenue 1,123 1,134 (1 ) 2,279 2,290 -
Other income 829 427 94 1,109 1,710 (35 )
Total revenues 17,123 16,680 3 35,566 34,119 4
Benefits, claims and expenses:
Policyholder benefits and claims incurred 7,769 8,086 (4 ) 14,871 17,045 (13 )
Interest credited to policyholder account
balances 1,064 1,114 (4 ) 2,133 2,220 (4 )
Amortization of deferred acquisition costs 1,472 1,322
11 2,819 2,553 10
Other acquisition and insurance expenses 2,264 2,129 6 4,522 4,097 10
Interest expense 954 1,001 (5 ) 1,907 2,085 (9 )
Aircraft leasing expenses 646 578 12 1,271 1,207 5
Net loss on extinguishment of debt 11 79 (86 ) 32 3,392 (99 )
Other expenses 1,192 577 107 1,676 1,036 62
Total benefits, claims and expenses 15,372 14,886 3 29,231 33,635 (13 )
Income from continuing operations before
income tax expense (benefit) 1,751 1,794 (2 ) 6,335 484 NM
Income tax expense (benefit) (593 ) (296 )
(100 ) 555 (522 ) NM
Income from continuing operations 2,344 2,090 12 5,780 1,006 475
Income (loss) from discontinued operations,
net of income tax expense (benefit) (5 ) (37 ) 86 8 2,548 (100 )
Net income 2,339 2,053 14 5,788 3,554 63
Less: Net income attributable to
noncontrolling interests 7 217 (97 ) 248 421 (41 )
Net income attributable to AIG $ 2,332 $ 1,836 27 % $ 5,540 $ 3,133 77 %
Significant factors affecting items for the three- and six-month periods ended
June 30, 2012 and 2011 are discussed below.
Premiums and Policy Fees
Premiums decreased in the three- and six-month periods ended June 30, 2012
compared to the same periods in 2011 primarily due to declines in Commercial
Insurance, resulting from enhanced risk selection and the continued execution of
strategic initiatives to improve pricing and loss ratios. These were partially
offset by increases in Consumer Insurance, resulting from the business mix shift
towards higher value lines and continued investment in the direct marketing
channel.
Policy fees decreased slightly in the three-and six month periods ended
June 30, 2012 compared to the same periods in 2011 due to lower variable annuity
living benefit fees.
AIG 2012 Form 10-Q 99
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American International Group, Inc.
The following table summarizes the components of consolidated Net investment
income:
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Fixed maturity
securities,
including
short-term
investments $ 3,180 $ 3,039 5 % $ 6,284 $ 5,730 10 %
Change in fair
value of ML II - (176 ) NM 246 75 228
Change in fair
value of ML III 1,306 (667 ) NM 2,558 77 NM
Change in fair
value of AIA
securities
including realized
gain in 2012 (493 ) 1,521 NM 1,302 2,583 (50 )
Change in the fair
value of MetLife
securities prior
to their sale - - NM - (157 ) NM
Equity securities 21 16 31 32 34 (6 )
Interest on
mortgage and other
loans 264 263 - 529 530 -
Alternative
investments* 280 470 (40 ) 695 1,124 (38 )
Mutual funds (14 ) 12 NM (6 ) 61 NM
Real estate 32 27 19 58 52 12
Other investments 62 76 (18 ) 167 168 (1 )
Total investment
income 4,638 4,581 1 11,865 10,277 15
Investment
expenses 157 117 34 279 244 14
Net investment
income $ 4,481 $ 4,464 - % $ 11,586 $ 10,033 15 %
º *
º Includes hedge funds, private equity funds and affordable housing
partnerships.
Net investment income for the three months ended June 30, 2012 was consistent
with the same period in 2011. The fair value of AIG's ML III interest increased
in the current period compared to the three months ended June 30, 2011. This
increase was offset by a decrease in the fair value of AIA securities in the
current period compared to an increase in the prior period.
Net investment income for the six months ended June 30, 2012 improved from the
same period of 2011, primarily due to:
º •
º increases in the fair value of Maiden Lane II LLC (ML II), which made
its final distribution in the first quarter of 2012, and fair value
gains on AIG's ML III interest; and
º •
º higher income from fixed maturity securities and short-term
investments attributable to higher average invested balances in
connection with the redeployment of cash in the second quarter of
2011.
The increases were partially offset by:
º •
º declines in the fair value of AIA securities as a result of AIG's
reduced ownership compared to the same period in the prior year; and
º •
º declines in alternative investment income in 2012 due to lower equity
market performance in 2012.
100 AIG 2012 Form 10-Q
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American International Group, Inc.
Net Realized Capital Gains (Losses)
The following table summarizes the components of consolidated Net realized
capital gains (losses):
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Sales of fixed
maturity securities $ 852 $ 624 37 % $ 1,326 $ 757 75 %
Sales of equity
securities 13 37 (65 ) 461 140 229
Other-than-temporary
impairments:
Severity (10 ) (13 ) 23 (14 ) (21 ) 33
Change in intent (2 ) - NM (22 ) (4 ) (450 )
Foreign currency
declines (1 ) (3 ) 67 (6 ) (5 ) (20 )
Issuer-specific
credit events (202 ) (162 ) (25 ) (788 ) (390 ) (102 )
Adverse projected
cash flows (1 ) (3 ) 67 (4 ) (16 ) 75
Provision for loan
losses 24 (18 ) NM 26 (35 ) NM
Change in the fair
value of MetLife
securities prior to
their sale - - NM - (191 ) NM
Foreign exchange
transactions 184 (342 ) NM (48 ) (1,030 ) 95
Derivative
instruments (398 ) 153 NM (659 ) 372 NM
Other (62 ) (198 ) 69 (125 ) (237 ) 47
Net realized capital
gains (losses) $ 397 $ 75 429 $ 147 $ (660 ) NM
AIG recognized higher net realized capital gains in the three-month period
ended June 30, 2012 compared to the same period in 2011 due to higher gains on
the sales of fixed maturity securities, due in part to a program that resulted
in the utilization of capital loss tax carryforwards in the SunAmerica
operations, lower impairments on life settlement contracts, which are included
in Other in the above table, and foreign exchange gains during the three-month
period ended June 30, 2012, reflecting the strengthening of the U.S. dollar
against the euro and the British pound. These gains were partially offset by the
following:
º •
º derivative losses driven primarily by lower U.S. Treasury rates and
the U.S. dollar strengthening against most foreign currencies; and
º •
º higher other-than-temporary impairments on equity investments,
primarily Japanese insurance companies and partnerships.
AIG recognized net realized capital gains in the six-month period ended
June 30, 2012 compared to net realized capital losses in the same period in 2011
due to the following:
º •
º significantly higher gains on sales of fixed maturity securities, due
in part to the capital loss tax carryforwards program discussed above,
and equity securities, which included a $426 million gain on the sale
of 35.7 million common units of The Blackstone Group L.P.;
º •
º foreign exchange losses during the six-month period ended June 30,
2011 primarily due to weakening of the U.S. dollar against the euro
and the Swiss franc; and
º •
º lower impairments on life settlement contracts.
These gains were partially offset by the following:
º •
º higher other-than-temporary impairments on RMBS;
º •
º higher other-than-temporary impairment on partnership portfolios and
equity securities in Japan; and
º •
º derivative losses driven primarily by spread tightening and the U.S.
dollar strengthening against foreign currencies.
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American International Group, Inc.
Aircraft Leasing Revenues and Expenses
Aircraft leasing revenue decreased slightly in the three- and six-month
periods ended June 30, 2012, primarily due to the impact of early returns of
aircraft from bankrupt lessees and lower lease revenue earned on re-leased
aircraft in its fleet and the limited delivery schedule of new aircraft over the
past year, partially offset by an increase from the consolidation of AeroTurbine
commencing in October 2011. In the second quarter of 2012, ILFC's average fleet
size remained relatively stable compared to the corresponding period in 2011.
ILFC recorded impairment charges, and fair value adjustments and lease-related
charges of $75 million and $130 million in the three- and six-month periods
ended June 30, 2012, respectively, compared to $42 million and $155 million in
the three- and six-month periods ended June 30, 2011, respectively. See Segment
Results - Aircraft Leasing Operations - Aircraft Leasing Results for additional
information.
Other Income and Expenses
The increase in Other income for the three-month period ended June 30, 2012
was driven by:
º •
º improvement in net credit valuation adjustments on the DIB assets and
liabilities for which the fair value option was elected due to the
tightening of counterparty credit spreads on assets and the widening
of AIG's credit spreads on liabilities. For the three-month period
ended June 30, 2012, a net credit valuation adjustment gain of
$321 million was recognized compared to a net credit valuation
adjustment gain of $16 million in the same period in 2011;
º •
º improvement in unrealized market valuations related to the super
senior CDS portfolio primarily from CDS transactions written on
multi-sector CDOs driven by price movements and amortization within the CDS portfolio. For the three-month period ended June 30, 2012, an
unrealized market valuation gain of $57 million was recognized
compared to an unrealized market valuation loss of $94 million in the
same period in 2011; and
º •
º gains recognized upon unwinding certain transactions in the amount of
$118 million.
The decrease in Other income for the six-month period ended June 30, 2012 was
driven by:
º •
º a decline in net credit valuation adjustments on the DIB assets and
liabilities for which the fair value option was elected due to the adverse impact of tightening of AIG's credit spreads on liabilities
carried at fair value. For the six-month period ended June 30, 2012, a
net credit valuation adjustment gain of $130 million was recognized
compared to a net credit valuation adjustment gain of $316 million in
the same period of 2011;
º •
º a decline in net credit valuation adjustments on the GCM derivative
assets and liabilities due to a tightening of AIG's credit spreads
relative to those of its counterparties. For the six-month period
ended June 30, 2012, a net credit valuation adjustment loss of
$76 million was recognized compared to a net credit valuation
adjustment gain of $26 million in the same period of 2011; and
º •
º a decline in unrealized market valuations related to the super senior
CDS portfolio primarily from CDS transactions written on Corporate
debt/CLOs driven by price movements within the CDS portfolio. For the
six-month period ended June 30, 2012, an unrealized market valuation
gain of $197 million was recognized compared to an unrealized market
valuation gain of $229 million in the same period of 2011.
In addition, Other income decreased in the three and six months ended June 30,
2012, due to lower gains on real estate dispositions and equity losses on real
estate investments.
Other expenses increased in the three and six months ended June 30, 2012 due
to an increase in estimated litigation liability during the second quarter of
2012 of approximately $719 million, partially offset by lower restructuring and
pension expenses.
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American International Group, Inc.
Policyholder Benefits and Claims Incurred
Policyholder benefits and claims incurred decreased in the three- and
six-month periods ended June 30, 2012 as a result of lower catastrophe losses
for Chartis in 2012 compared to 2011, primarily due to the U.S. tornadoes in the
second quarter of 2011 and the Tohoku Catastrophe in Japan and earthquakes in
New Zealand in the first quarter of 2011. The results for the three- and
six-month periods ended June 30, 2011 also include a provision of approximately
$100 million in estimated reserves for incurred but not reported death claims in
conjunction with the use of the Social Security Death Master File to identify
potential claims not yet presented.
Other Acquisition and Insurance Expenses
Amortization of deferred acquisition costs increased in the three- and
six-month periods ended June 30, 2012 compared to the same periods in 2011
primarily due to Chartis' continued strategy to grow the higher margin Consumer
Insurance business, which carries higher acquisition costs than Commercial
Insurance, and change its mix of business within Commercial and Consumer
Insurance to more profitable lines with higher acquisition costs.
Other acquisition and insurance expenses increased in the three- and six-month
periods ended June 30, 2012 compared to the same periods in 2011 due to
increases in bad debt expense, direct marketing expense, compensation expense
and expenses related to strategic initiatives for Chartis, and as a result of a
decrease in the benefit from the amortization of VOBA liabilities arising from
the Fuji acquisition.
Interest Expense
Interest expense decreased in the three- and six-month periods ended June 30,
2012 compared to the same periods in 2011 primarily as a result of a net
reduction in outstanding debt. Interest expense on the FRBNY Credit Facility was
$72 million in 2011 through the date of termination, including amortization of
the prepaid commitment fee asset of $48 million.
Loss on Extinguishment of Debt
The decline in loss on extinguishment of debt reflects the effect of the
$3.3 billion charge for the six-month period ended June 30, 2011 consisting of
the accelerated amortization of the remaining prepaid commitment fee asset
resulting from the termination of the FRBNY Credit Facility.
Income Taxes
Interim Tax Calculation Method
AIG uses the estimated annual effective tax rate method in computing its
interim tax provision. Certain items, including those deemed to be unusual,
infrequent or that cannot be reliably estimated, are excluded from the estimated
annual effective tax rate. In these cases, the actual tax expense or benefit
applicable to those items is treated discretely, and is reported in the same
period as the related item. For the three and six-month periods ended June 30,
2012, the tax effects of the gains on ML II and certain dispositions, including
a portion of the ordinary shares of AIA and common units of The Blackstone
Group L.P., as well as certain actual gains on SunAmerica's available-for-sale
securities were treated as discrete items. Those changes in the valuation
allowance, which were reflected in the three- and six-month periods ended
June 30, 2012 were also treated as discrete items.
Interim Tax Expense (Benefit)
For the three- and six-month periods ended June 30, 2012, the effective tax
rates on pretax income from continuing operations were (33.8) and 8.8 percent,
respectively. The effective tax rates for the three- and six-month periods ended
June 30, 2012, attributable to continuing operations differ from the statutory
tax rate of 35 percent primarily due to tax effects associated with tax exempt
interest income and investments in partnerships,
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American International Group, Inc.
adjustments to the tax bases of certain foreign aircraft leases and a decrease
in the life-insurance-business capital loss carryforward valuation allowance.
These items were partially offset by changes in uncertain tax positions.
For the three- and six-month periods ended June 30, 2011, the effective tax
rates on pretax income from continuing operations were (16.5) and (108.1)
percent, respectively. The effective tax rates for the three- and six-month
periods ended June 30, 2011, attributable to continuing operations differed from
the statutory rate of 35 percent primarily due to a decrease in the valuation
allowance attributable to continuing operations for the U.S. consolidated income
tax group, tax effects associated with tax exempt interest income, investments
in partnerships, and changes in uncertain tax positions.
See Note 12 to the Consolidated Financial Statements for additional
information.
Discontinued Operations
Results from discontinued operations for the six months ended June 30, 2011
include a pre-tax gain of $3.5 billion on the sale of AIG Star Life
Insurance Co., Ltd. (AIG Star) and AIG Edison Life Insurance Company (AIG
Edison). See Note 13 to the Consolidated Financial Statements for further
discussion.
SEGMENT RESULTS
AIG presents and discusses its financial information using the following
measures, which it believes are most meaningful to its financial statement
users:
º •
º Chartis -
º •
º Operating income (loss). During the first quarter of 2012, AIG
revised the non-GAAP measure for Chartis to operating income
(loss), which includes both underwriting income and investment
income, but not net realized capital gains (losses) or other
income (expense);
º •
º Accident year loss ratio, as adjusted, which is the loss ratio
excluding catastrophe losses, reinstatement premiums, prior year
development, net of premium adjustments and the impact of
discount;
º •
º Accident year combined ratio, as adjusted, which is the combined
ratio excluding catastrophe losses, reinstatement premiums, prior
year development, net of premium adjustments, and the impact of
discount;
º •
º SunAmerica - Operating income (loss). During the first quarter of
2012, AIG revised its definition of operating income (loss) to exclude
changes in the fair value of fixed maturity securities designated to
hedge living benefit liabilities, and changes in benefit reserves
related to net realized capital gains (losses). In addition to the
above items, SunAmerica also excludes net realized capital gains (losses) and the related DAC, VOBA and SIA amortization from Operating
income (loss);
º •
º Aircraft Leasing - Operating income (loss), which is pre-tax income
(loss) before net realized capital gains (losses); and
º •
º Mortgage Guaranty - Underwriting profit (loss), which is income (loss) before net investment income and net realized capital gains (losses).
Results from discontinued operations are excluded from these measures.
AIG believes that these measures allow for a better assessment and enhanced
understanding of the operating performance of each business by highlighting the
results from ongoing operations and the underlying profitability of its
businesses. When such measures are disclosed, reconciliations to GAAP pre-tax
income or unadjusted ratios are provided.
104 AIG 2012 Form 10-Q
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American International Group, Inc.
The following table summarizes the operations of each reportable segment. See
also Note 3 to the Consolidated Financial Statements.
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Total revenues:
Chartis $ 10,020 $ 10,218 (2 )% $ 19,818 $ 20,098 (1 )%
SunAmerica 4,213 3,896 8 7,909 7,735 2
Aircraft Leasing 1,121 1,119 - 2,275 2,260 1
Total reportable
segments 15,354 15,233 1 30,002 30,093 -
Other Operations 1,869 1,565 19 5,872 4,297 37
Consolidation
and eliminations (100 ) (118 ) 15 (308 ) (271 ) (14 )
Total 17,123 16,680 3 35,566 34,119 4
Pre-tax income
(loss):
Chartis 961 826 16 1,871 452 314
SunAmerica 777 766 1 1,639 1,733 (5 )
Aircraft Leasing 86 87 (1 ) 206 207 -
Total reportable
segments 1,824 1,679 9 3,716 2,392 55
Other Operations (116 ) 87 NM 2,620 (1,910 ) NM
Consolidation
and eliminations 43 28 54 (1 ) 2 NM
Total $ 1,751 $ 1,794 (2 )% $ 6,335 $ 484 NM %
Chartis Highlights
º •
º Net premiums written decreased by 1 percent and 2 percent for the
three- and six-month periods ended June 30, 2012, respectively, due to
the continued execution of management's strategic initiatives to
improve pricing and loss performance. Declines in certain lines of
business that did not meet internal operating objectives within
Commercial Insurance, particularly in the loss-sensitive Casualty book
of business, were partially offset by an increase in Consumer
Insurance net premiums written.
º •
º The loss ratio decreased by 5.1 points and 13.1 points for the three-and six-month periods ended June 30, 2012, respectively, due to
a reduction in catastrophe losses, coupled with the benefit from
positive pricing trends and the execution of Chartis' strategic
initiatives and an increase in reserve discount. Catastrophe losses,
adjusted for reinstatement premiums, were $328 million and
$408 million in the three- and six-month periods ended June 30, 2012,
respectively, compared to $539 million and $2.3 billion in the
respective prior year periods. Net prior year adverse development
including related premium adjustments was $137 million and
$184 million for the three- and six-month periods ended June 30, 2012,
respectively, compared to favorable development of $8 million and
$20 million in the respective prior year periods.
º •
º The expense ratio increased by 3.5 points and 4.3 points for the
three- and six-month periods ended June 30, 2012, respectively, as
acquisition costs (primarily commissions) increased due to the change
in business mix to higher value lines and increased market
competition. Acquisition costs also increased due to lower ceding
commissions on reinsured business as a result of Commercial Insurance
restructuring its Property reinsurance program as part of Chartis'
decision to retain more profitable business while continuing to manage
aggregate exposures. General operating expenses increased in both
periods as Chartis continued to invest in a number of strategic
initiatives. In addition, Chartis incurred higher personnel costs, as
it continued to attract, retain and develop its human capital and
seeks to better align employee performance with Chartis and AIG
strategic goals.
º •
º Net investment income increased slightly in both periods due to the
redeployment of excess cash, short-term investments, and the
investment in longer-term and higher-yielding securities.
º •
º Chartis paid dividends of $0.5 billion and $1.5 billion to AIG in the
three- and six-month periods ended June 30, 2012, respectively.
AIG 2012 Form 10-Q 105
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American International Group, Inc.
Chartis Operations
Chartis presents its financial information in two operating segments -
Commercial Insurance and Consumer Insurance, as well as a Chartis Other
category.
Commercial Insurance distributes its products through a network of agencies,
independent retail and wholesale brokers, and branches. These products are
categorized into four major lines of business:
º •
º Casualty: Includes general liability, commercial automobile liability,
workers' compensation, excess casualty and crisis management
insurance. Casualty also includes risk management and other customized
structured programs for large corporate customers and multinational
companies.
º •
º Property: Includes industrial and commercial property insurance products, which cover exposures to man-made and natural disasters,
including business interruption.
º •
º Specialty: Includes environmental, political risk, trade credit, surety, marine, and aerospace insurance, and various product offerings
for small-medium enterprises.
º •
º Financial: Includes various forms of professional liability insurance,
including director and officer (D&O), fidelity, employment practices,
fiduciary liability, network security, kidnap and ransom, and errors
and omissions insurance that protect individual insureds and corporate
entities.
Consumer Insurance provides personal insurance solutions for individuals,
organizations and families. Consumer product lines are distributed through
agents and brokers, as well as through direct marketing, partner organizations
and the internet. Consumer Insurance products are categorized into two major
lines of business:
º •
º Accident & Health: Includes individual and group voluntary and
sponsor-paid personal accidental and supplemental health products,
including accidental death and disability, accidental medical
reimbursement, hospital indemnity and medical excess for individual,
employees, associations and other organizations. It also includes life
products as well as a broad range of travel insurance products and
services for leisure and business travelers, including trip
cancellation, trip interruption, lost baggage, travel assistance and
concierge services.
º • º Personal Lines: Includes automobile, homeowners and extended warranty
insurance. It also includes insurance for high net worth individuals
(offered through the Chartis Private Client Group) including umbrella,
yacht and fine art, and consumer specialty products, such as identity
theft and credit card protection.
Chartis Other consists primarily of certain run-off lines of business,
including Excess Workers' Compensation written on a stand-alone basis and
Asbestos and Environmental (1986 and prior), certain Chartis expenses relating
to global corporate initiatives, expense allocations from AIG Parent not
attributable to the Commercial Insurance or Consumer Insurance operating
segments, unallocated net investment income and net realized capital gains and
losses.
The historical Chartis financial information has been revised to reflect the
reclassification of certain products that were previously reported in the
Commercial Insurance operating segment to the Consumer Insurance operating
segment. This change aligns the financial reporting with the changes made during
2012 to the manner in which AIG's chief operating decision makers review the
business to assess performance and make decisions about resources to be
allocated. These revisions did not impact the total Chartis reportable segment
results previously reported.
Chartis distributes its products through three major geographic regions:
º •
º Americas: Includes the United States, Canada, Central America, South
America, the Caribbean and Bermuda.
º • º Asia Pacific: Includes Japan and other Asia Pacific nations, including
China, Korea, Vietnam, Thailand, Australia and Indonesia.
º •
º EMEA (Europe, Middle East and Africa): Includes the United Kingdom,
Continental Europe, Russia, the Middle East and Africa.
106 AIG 2012 Form 10-Q
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American International Group, Inc.
Commencing in the fall of 2012, Chartis will be renamed AIG, although certain
existing brands may continue to be used.
Chartis Results
The following table presents Chartis results:
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Commercial Insurance
Underwriting results:
Net premiums written $ 5,564 $ 5,723 (3 )% $ 10,787 $ 11,447 (6 )%
Increase in unearned premiums (198 ) (106 ) (87 ) (233 ) (548 ) 57
Net premiums earned 5,366 5,617 (4 ) 10,554 10,899 (3 )
Claims and claims adjustment expenses
incurred 3,962 4,498 (12 ) 7,808 9,704 (20 )
Underwriting expenses 1,531 1,310 17 3,049 2,554 19
Underwriting loss (127 ) (191 ) 34 (303 ) (1,359 ) 78
Net investment income 721 820 (12 ) 1,462 1,604 (9 )
Operating income $ 594 $ 629 (6 )% $ 1,159 $ 245 373 %
Consumer Insurance
Underwriting results:
Net premiums written $ 3,528 $ 3,439 3 % $ 7,125 $ 6,856 4 %
Increase in unearned premiums (79 ) (46 ) (72 ) (180 ) (117 ) (54 )
Net premiums earned 3,449 3,393 2 6,945 6,739 3
Claims and claims adjustment expenses
incurred 2,043 2,102 (3 ) 4,073 4,599 (11 )
Underwriting expenses 1,329 1,321 1 2,677 2,513 7
Underwriting profit (loss) 77 (30 ) NM 195 (373 ) NM
Net investment income 115 89 29 231 177 31
Operating income (loss) $ 192 $ 59 225 % $ 426 $ (196 ) NM %
Other
Underwriting results:
Net premiums written $ 3 $ 5 (40 )% $ 3 $ 30 (90 )%
Decrease in unearned premiums 2 18 (89 ) 6 16 (63 )
Net premiums earned 5 23 (78 ) 9 46 (80 )
Claims and claims adjustment expenses
incurred 74 80 (8 ) 107 133 (20 )
Underwriting expenses 98 81 21 191 143 34
Underwriting loss (167 ) (138 ) (21 ) (289 ) (230 ) (26 )
Net investment income 317 233 36 683 540 26
Operating income 150 95 58 394 310 27
Net realized capital gains (losses) 23 43 (47 ) (112 ) 93 NM
Other income (expense) - net 2 - NM 4 - NM
Pre-tax income $ 175 $ 138 27 % $ 286 $ 403 (29 )%
AIG 2012 Form 10-Q 107
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American International Group, Inc.
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Total Chartis
Underwriting results:
Net premiums written $ 9,095 $ 9,167 (1 )% $ 17,915 $ 18,333 (2 )%
Increase in unearned premiums (275 ) (134 ) (105 ) (407 ) (649 ) 37
Net premiums earned 8,820 9,033 (2 ) 17,508 17,684 (1 )
Claims and claims adjustment expenses
incurred 6,079 6,680 (9 ) 11,988 14,436 (17 )
Underwriting expenses 2,958 2,712 9 5,917 5,210 14
Underwriting loss (217 ) (359 ) 40 (397 ) (1,962 ) 80
Net investment income 1,153 1,142 1 2,376 2,321 2
Operating income 936 783 20 1,979 359 451
Net realized capital gains (losses) 23 43 (47 ) (112 ) 93 NM
Other income (expense) - net 2 - NM 4 - NM
Pre-tax income $ 961 $ 826 16 % $ 1,871 $ 452 314 %
Operating income increased in the three- and six-month periods ended June 30,
2012, primarily reflecting lower catastrophe losses and underwriting
improvements related to rate increases, enhanced risk selection and a reduced
loss-sensitive Casualty book of business, partially offset by higher acquisition
costs as a result of the change in business mix from Commercial Insurance to
Consumer Insurance. General operating expenses increased due to the continued
investment in strategic initiatives during 2012. In addition, Chartis incurred
higher personnel costs, as it continued to attract, retain and develop its human
capital and seeks to better align employee performance with Chartis and AIG
strategic goals. Catastrophe losses adjusted for reinstatement premiums were
$328 million and $408 million in the three- and six-month periods ended June 30,
2012, respectively, compared to $539 million and $2.3 billion in the respective
prior year periods. The three and six months ended June 30, 2012 also benefited
from a $100 million increase in reserve discount. Net prior year adverse
development including related premium adjustments was $137 million and
$184 million in the three- and six-month periods ended June 30, 2012,
respectively, compared to net prior year favorable development of $8 million and
$20 million in the respective prior year periods. In 2012, net prior year
adverse development was due to claims emergence in the Chartis Environmental
business (policies written after 1987), the legacy environmental exposures (1986
and prior), and excess casualty lines, partially offset by favorable development
from catastrophe-related reserves of $106 million and $254 million in the three-
and six-month periods ended June 30, 2012, respectively. In 2011, net prior year
adverse development was due to the impact of claims emergence in
non-catastrophic reserves, reduced by additional premiums, offset by favorable
development from catastrophes of $11 million and $50 million in the three- and
six-month periods ended June 30, 2011, respectively. The increase in the
favorable development from catastrophe-related reserves is due primarily to the
unique severity of 2011 catastrophes.
See Liability for Unpaid Claims and Claims Adjustment Expense for further
discussion of discounting of reserves and prior year development.
Commercial Insurance Quarterly and Year-to-Date Results
Operating income in the three-month period ended June 30, 2012 decreased,
reflecting an increase in acquisition expenses coupled with a decrease in the
allocated net investment income, primarily due to a decrease in the risk free
rate. Acquisition expenses increased as a result of a decrease in loss sensitive
business as Chartis moves towards higher value lines, and increased market
competition. This is partially offset by lower catastrophe losses and the impact
of underwriting improvements related to rate increases and enhanced risk
selection. The current period benefited from a $100 million increase in reserve
discount. In the three-month period ended June 30, 2012, catastrophe losses,
adjusted for reinstatement premiums were $288 million compared to $470 million
in the same period in 2011. Net prior year adverse development including related
premium
108 AIG 2012 Form 10-Q
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American International Group, Inc.
adjustments was $123 million in the three-month period ended June 30, 2012
compared to favorable development of $43 million in the prior year period.
Operating income in the six-month period ended June 30, 2012 increased,
reflecting lower catastrophe losses, the impact of underwriting improvements
related to rate increases and enhanced risk selection and an increase in reserve
discount, partially offset by higher acquisition costs and a decrease in the
allocated net investment income due to a decrease in the risk free rate. The
current period benefited from a $100 million increase in reserve discount.
Catastrophe losses, adjusted for reinstatement premiums, in 2012 were
$364 million compared to $1.7 billion in 2011 as the prior year included the
impact of the Tohoku Catastrophe in Japan and the earthquakes in New Zealand.
Acquisition costs increased primarily as a result of higher commission expense
due to a decrease in loss sensitive business as Chartis moves towards higher
value lines. In 2012, net prior year adverse development was $171 million
compared to net prior year favorable development of $60 million in the prior
year.
Consumer Insurance Quarterly and Year-to-Date Results
Operating income in the three- and six-month periods ended June 30, 2012
increased primarily due to the combination of lower catastrophe losses, the
effect of rate increases and underwriting improvements related to enhanced risk
selection and portfolio management, and higher allocated net investment income,
which were partially offset by higher acquisition costs. In the six-month period
ended June 30, 2012, expenses increased primarily as a result of a change in the
mix of business to higher value lines with higher acquisition costs, increased
investment in direct marketing, and a decrease in the benefit from the
amortization of VOBA liabilities recognized at the time of the Fuji acquisition.
Catastrophe losses for the three- and six-month periods ended 2012 were
$40 million and $44 million, respectively, compared to $69 million and
$558 million during the same period in the prior year. Net prior year favorable
development was $36 million and $50 million in the three- and six-month periods
ended June 30, 2012, respectively, compared to net prior year adverse
development of $28 million in each of the respective prior year periods.
Chartis Net Premiums Written
Net premiums written are the sales of an insurer, adjusted for reinsurance
premiums assumed and ceded, during a given period. Net premiums earned are the
revenue of an insurer for covering risk during a given period. Net premiums
written are a measure of performance for a sales period while net premiums
earned are a measure of performance for a coverage period. From the period in
which the premiums are written until the period in which they are earned, the
amount is presented as a component of unearned premiums in the consolidated
balance sheet.
AIG 2012 Form 10-Q 109
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American International Group, Inc.
The following table presents Chartis net premiums written by major line of
business:
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Commercial Insurance
Casualty $ 2,181 $ 2,531 (14 )% $ 4,533 $ 5,262 (14 )%
Property 1,447 1,320 10 2,418 2,335 4
Specialty 860 875 (2 ) 1,851 1,831 1
Financial lines 1,076 997 8 1,985 2,019 (2 )
Total net premiums
written $ 5,564 $ 5,723 (3 )% $ 10,787 $ 11,447 (6 )%
Consumer Insurance
Accident & Health $ 1,696 $ 1,649 3 % $ 3,502 $ 3,373 4 %
Personal lines 1,832 1,790 2 3,623 3,483 4
Total net premiums
written $ 3,528 $ 3,439 3 % $ 7,125 $ 6,856 4 %
Other 3 5 (40 ) 3 30 (90 )
Total Chartis net
premiums written $ 9,095 $ 9,167 (1 )% $ 17,915 $ 18,333 (2 )%
Commercial Insurance Net Premiums Written
In 2012, Commercial Insurance continued to concentrate on growing higher value
business. The decrease in net premiums written in each period was primarily due
to enhanced risk selection, particularly in the Casualty line of business. This
is consistent with Chartis' business strategy to improve pricing and loss ratios
and to not renew business that does not meet Chartis' internal performance or
operating targets. Retentions are in line with management's expectations based
on the execution of these strategic initiatives.
Casualty net premiums written decreased in both periods primarily due to the
continuation of Chartis' strategic initiatives related to improved risk
selection and rate increases. The continuation of the restructuring of the loss
sensitive book of business in the Americas resulted in a reduction of net
premiums written of $75 million and $222 million in the three- and six-month
periods ended June 30, 2012, respectively. Further, management continued to
emphasize higher value lines, while taking corrective action in lines and
accounts that do not meet internal performance targets, including U.S. workers'
compensation and European primary casualty.
Property net premiums written increased in both periods due to a restructuring
of a reinsurance program as part of Chartis' decision to retain more favorable
risks while continuing to manage aggregate exposure. Catastrophe exposed
business retained in the Americas and Asia Pacific region also benefitted from
rate increases.
Specialty net premiums written for the three-month period ended June 30, 2012
decreased due to the continuation of Chartis' strategic initiatives related to
improved risk selection, particularly within products provided to small and
medium enterprises, which was partially offset by the restructuring of a
reinsurance program. Specialty net premiums written for the six-month period
ended June 30, 2012 increased slightly as Chartis continues to shift its
business mix towards higher value lines, particularly in aerospace and trade
credit.
Financial lines net premiums written for the three-month period ended June 30,
2012 increased primarily due to growth in Asia Pacific and the Americas.
Financial lines net premiums written for the six-month period ended June 30,
2012 decreased as 2011 benefited from a multi-year Errors and Omissions policy
in the Americas that produced net premiums written of $148 million.
Consumer Insurance Net Premiums Written
The Consumer Insurance business continued to grow its net premiums written and
build momentum through its multiple distribution channels and focus on the
growth economy nations. Consumer Insurance is well-diversified
110 AIG 2012 Form 10-Q
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American International Group, Inc.
across the major lines of business and has global strategies that are executed
across its regions to enhance customer relationships and business performance.
Consumer Insurance currently has direct marketing operations in over 50
countries, and management continued to emphasize the growth of this channel,
which accounts for 15 percent of its overall net premiums written. Total global
direct marketing spending outside the Americas region has increased by
approximately 20 percent in the three- and six-month periods ended June 30,
2012, respectively, from the same periods in 2011.
A&H net premiums written increased in both periods due to the implementation
of the strategic partnership with American General, strong growth of new
business sales in Fuji Life, direct marketing programs in Japan and other Asia
Pacific nations and growth in individual personal travel. This was partially
offset by the continuing strategies to reposition U.S. direct marketing, as well
as pricing and underwriting actions in Europe.
Personal lines net premiums written increased in both periods primarily due to
the execution of Chartis' strategic initiative to grow higher value lines of
business such as personal property. Auto net premiums written grew slightly
while its proportion of the portfolio declined due to management focus on
diversifying the global base.
Chartis Other Net Premiums Written
Substantially all premiums reported in Chartis Other relate to Excess Workers'
Compensation, written on a stand-alone basis. During 2011, as part of its
ongoing initiatives to reduce exposure to capital intensive long-tail lines,
Chartis determined to cease writing Excess Workers' Compensation business on a
stand-alone basis. This line of business is subject to premium audits (upon the
expiration of the underlying policy) and as a result, Chartis Other will reflect
the effects of premium audit activity through subsequent years.
The following table presents Chartis' net premiums written by region:
Three Months Ended Percentage Percentage Six Months Ended Percentage Percentage
June 30, Change in Change in June 30, Change in Change in
U.S. Original U.S. Original
(in millions) 2012 2011 dollars Currency 2012 2011 dollars Currency
Commercial Insurance:
Americas $ 3,962 $ 4,238 (7 )% (7 )% $ 7,045 $ 7,659 (8 )% (8 )%
Asia Pacific 538 460 17 17 989 899 10 8
EMEA 1,064 1,025 4 8 2,753 2,889 (5 ) (2 )
Total net premiums written $ 5,564 $ 5,723 (3 )% (2 )% $ 10,787 $ 11,447 (6 )% (5 )%
Consumer Insurance:
Americas $ 948 $ 916 3 % 4 % $ 1,972 $ 1,827 8 % 9 %
Asia Pacific 2,154 2,032 6 6 4,175 3,949 6 3
EMEA 426 491 (13 ) (7 ) 978 1,080 (9 ) (6 )
Total net premiums written $ 3,528 $ 3,439 3 % 3 % $ 7,125 $ 6,856 4 % 3 %
Chartis Other:
Americas $ 1 $ 5 (80 )% (80 )% $ 1 $ 30 (97 )% (97 )%
Asia Pacific 2 - NM NM 2 - NM NM
Total net premiums written $ 3 $ 5 (40 )% (40 )% $ 3 $ 30 (90 )% (90 )%
Total Chartis:
Americas $ 4,911 $ 5,159 (5 )% (5 )% $ 9,018 $ 9,516 (5 )% (5 )%
Asia Pacific 2,694 2,492 8 8 5,166 4,848 7 4
EMEA 1,490 1,516 (2 ) 3 3,731 3,969 (6 ) (3 )
Total net premiums written $ 9,095 $ 9,167 (1 )% NM % $ 17,915 $ 18,333 (2 )% (2 )%
AIG transacts business in most major foreign currencies. The primary
currencies resulting in foreign exchange fluctuations in net premiums written
are the British pound, euro and Japanese yen.
AIG 2012 Form 10-Q 111
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American International Group, Inc.
The Americas net premiums written decreased in both periods, primarily due to
the restructuring of the loss sensitive Casualty book of business and Specialty
workers compensation. This was partially offset by continued growth in Consumer
Insurance, which was primarily attributable to increases in the U.S. personal
accident business, the strategic group benefits partnership with American
General, and all personal property lines.
Asia Pacific net premiums written increased in both periods due to growth in
Consumer Insurance, which was primarily driven by A&H, personal property, direct
marketing and travel written in Japan. The expansion in Asia Pacific countries
outside Japan also continued, supported by growth in direct marketing,
individual personal accident insurance in China and nearly all Personal Lines
products.
EMEA net premiums written decreased in both periods primarily due to the
impact of foreign exchange as the U.S. dollar strengthened against the British
pound and euro. Excluding foreign exchange, net premiums written increased in
the three-month period ended June 30, 2012 mainly due to a reduction of
reinsurance protection in the Property and Specialty lines of Commercial
Insurance. For the six-month period ended June 30, 2012, the EMEA net premiums
written decreased due to the execution of underwriting discipline, a reduction
in primary casualty as it did not meet internal performance targets, and rate
strengthening initiatives on new and renewal business for Commercial Insurance.
Consumer Insurance is focused on re-building its direct marketing programs that
it previously shared with American Life Insurance Company (ALICO).
Chartis Underwriting Ratios
The following table presents the Chartis combined ratios based on GAAP data and
a reconciliation to the accident year combined ratio, as adjusted:
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
2012 2011 (Decrease) 2012 2011 (Decrease)
Commercial
Insurance
Loss ratio 73.8 80.1 (6.3 ) 74.0 89.0 (15.0 )
Catastrophe losses
and reinstatement
premiums (5.3 ) (8.3 ) 3.0 (3.5 ) (15.5 ) 12.0
Prior year
development net of
premium adjustments (2.2 ) 0.3 (2.5 ) (1.5 ) 0.2 (1.7 )
Change in discount 1.9 - 1.9 0.9 - 0.9
Accident year loss
ratio, as adjusted 68.2 72.1 (3.9 ) 69.9 73.7 (3.8 )
Expense ratio 28.5 23.3 5.2 28.9 23.4 5.5
Combined ratio 102.3 103.4 (1.1 ) 102.9 112.4 (9.5 )
Catastrophe losses
and reinstatement
premiums (5.3 ) (8.3 ) 3.0 (3.5 ) (15.5 ) 12.0
Prior year
development net of
premium adjustments (2.2 ) 0.3 (2.5 ) (1.5 ) 0.2 (1.7 )
Change in discount 1.9 - 1.9 0.9 - 0.9
Accident year
combined ratio, as
adjusted 96.7 95.4 1.3 98.8 97.1 1.7
112 AIG 2012 Form 10-Q
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American International Group, Inc.
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
2012 2011 (Decrease) 2012 2011 (Decrease)
Consumer Insurance
Loss ratio 59.2 62.0 (2.8 ) 58.6 68.2 (9.6 )
Catastrophe losses
and reinstatement
premiums (1.1 ) (2.1 ) 1.0 (0.6 ) (8.2 ) 7.6
Prior year
development net of
premium adjustments 1.0 (0.8 ) 1.8 0.7 (0.5 ) 1.2
Accident year loss
ratio, as adjusted 59.1 59.1 - 58.7 59.5 (0.8 )
Expense ratio 38.5 38.9 (0.4 ) 38.5 37.3 1.2
Combined ratio 97.7 100.9 (3.2 ) 97.1 105.5 (8.4 )
Catastrophe losses
and reinstatement
premiums (1.1 ) (2.1 ) 1.0 (0.6 ) (8.2 ) 7.6
Prior year
development net of
premium adjustments 1.0 (0.8 ) 1.8 0.7 (0.5 ) 1.2
Accident year
combined ratio, as
adjusted 97.6 98.0 (0.4 ) 97.2 96.8 0.4
Total Chartis
Loss ratio 68.9 74.0 (5.1 ) 68.5 81.6 (13.1 )
Catastrophe losses
and reinstatement
premiums (3.7 ) (6.0 ) 2.3 (2.4 ) (12.7 ) 10.3
Prior year
development net of
premium adjustments (1.5 ) (0.2 ) (1.3 ) (1.0 ) (0.1 ) (0.9 )
Change in discount 1.1 (0.1 ) 1.2 0.4 (0.2 ) 0.6
Accident year loss
ratio, as adjusted 64.8 67.7 (2.9 ) 65.5 68.6 (3.1 )
Expense ratio 33.5 30.0 3.5 33.8 29.5 4.3
Combined ratio 102.4 104.0 (1.6 ) 102.3 111.1 (8.8 )
Catastrophe losses
and reinstatement
premiums (3.7 ) (6.0 ) 2.3 (2.4 ) (12.7 ) 10.3
Prior year
development net of
premium adjustments (1.5 ) (0.2 ) (1.3 ) (1.0 ) (0.1 ) (0.9 )
Change in discount 1.1 (0.1 ) 1.2 0.4 (0.2 ) 0.6
Accident year
combined ratio, as
adjusted 98.3 97.7 0.6 99.3 98.1 1.2
Given the run-off nature of the legacy lines of business and the nature of the
expenses included in Chartis Other, management has determined that the
traditional underwriting measures of loss ratio, expense ratio and combined
ratio do not provide an appropriate measure of underwriting performance.
Therefore, underwriting ratios are not presented for Chartis Other.
Commercial Insurance Quarterly and Year-to-Date Loss Ratios
The loss ratio decreased in 2012 primarily due to a decrease in catastrophe
losses incurred and an increase in reserve discount of $100 million for the
three- and six-month periods ended June 30, 2012. The improvement in the
accident year loss ratio, as adjusted, for the three- and six-month periods
ended June 30, 2012 reflects the continued execution of Chartis' strategic
initiatives, including enhanced risk selection, particularly in the Property
business. Net prior year adverse development including related premium
adjustments was $123 million and $171 million in the three- and six-month
periods ended June 30, 2012, respectively, compared to net prior year favorable
development of $43 million and $60 million in the respective prior year periods.
See Chartis Quarterly and Year-to-Date Loss Ratios below for further information
on prior year development.
Consumer Insurance Quarterly and Year-to-Date Loss Ratios
The Consumer Insurance loss ratio in the three- and six-month periods ended
June 30, 2012 decreased compared to the same periods in 2011 mainly due to lower
catastrophes as the prior year period was impacted by the Tohoku Catastrophe in
Japan and other events. The accident year loss ratio, as adjusted, in the
three-month
AIG 2012 Form 10-Q 113
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American International Group, Inc.
period ended June 30, 2012 was unchanged from the same prior year period as an
unfavorable quarter in Japan reflecting higher average severity in the auto and
A&H businesses was offset by solid results in the rest of the world. The
accident year loss ratio, as adjusted, for the six-month period ended June 30,
2012 decreased despite having an unfavorable quarter in Japan. Management
continued to focus on improving price sophistication and the loss performance of
the portfolio by taking underwriting actions, where necessary, to meet internal
performance or operating targets.
Chartis Quarterly and Year-to-Date Loss Ratios
The decrease in the loss ratio in both periods reflects a decrease in
catastrophe losses coupled with the benefit from positive pricing trends and the
execution of Chartis' strategic initiatives, including business mix changes and
risk selection. The loss ratio in the prior year was primarily impacted by the
Tohoku Catastrophe in Japan and the earthquakes in New Zealand.
In 2012, net prior year adverse development was due to claims emergence in the
Chartis Environmental business (policies written after 1987), the legacy
environmental exposures (1986 and prior), and excess casualty lines, partially
offset by favorable development from catastrophe-related reserves of
$106 million and $254 million in the three- and six-month periods ended June 30,
2012, respectively. In 2011, net prior year adverse development was due to the
impact of claims emergence in non-catastrophic reserves, reduced by additional
premiums, offset by favorable development from catastrophes of $11 million and
$50 million in the three-and six-month periods ended June 30, 2011,
respectively. The increase in the favorable development from catastrophe-related
reserves is due primarily to the unique severity of 2011 catastrophes.
See Liability for Unpaid Claims and Claims Adjustment Expense for further
discussion of discounting of reserves and prior year development.
The following table presents the components of net prior year development for
Chartis:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2012 2011 2012 2011
Commercial Insurance
Prior year adverse (favorable)
development, Net of Reinsurance $ 103 $ 48 $ 157 $ 68
Returned (additional) premium on
loss-sensitive business 20 (91 ) 14 (128 )
Net prior year loss development $ 123 $ (43 ) $
171 $ (60 )
Consumer Insurance
Prior year adverse (favorable) loss
development, Net of Reinsurance $ (36 ) $ 28 $ (50 ) $ 28
Returned (additional) premium on
loss-sensitive business - - - -
Net prior year loss development $ (36 ) $ 28 $
(50 ) $ 28
Other
Prior year adverse (favorable)
development, Net of Reinsurance $ 50 $ 7 $ 63 $ 12
Returned (additional) premium on
loss-sensitive business - - - -
Net prior year loss development $ 50 $ 7 $
63 $ 12
Total Chartis
Prior year adverse (favorable)
development, Net of Reinsurance $ 117 $ 83 $ 170 $ 108
Returned (additional) premium on
loss-sensitive business 20 (91 )
14 (128 )
Net prior year loss development $ 137 $ (8 ) $ 184 $ (20 )
114 AIG 2012 Form 10-Q
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American International Group, Inc.
The following table presents Chartis accident year catastrophe losses by major
event:
2012 2011
# of Commercial Consumer # of Commercial Consumer
(in millions) Events Insurance Insurance Total Events Insurance Insurance Total
Three Months Ended June 30,
Event:*
U.S. Windstorms 7 $ 231 $ 11 $ 242 4 $ 334 $ 14 $ 348
Japan Windstorms 2 37 29 66 - - - -
UK Floods 1 20 - 20 - - - -
U.S. Floods - - - - 1 43 - 43
New Zealand earthquakes - - - - 1 54 - 54
All other events - - - - 8 25 55 80
Claims and claim expenses 288 40 328 456 69 525
Reinstatement premiums - - - 14 - 14
Total catastrophe-related charges 10 $ 288 $ 40 $
328 14 $ 470 $ 69 $ 539
Six Months Ended June 30,
Event:*
U.S. Windstorms 7 $ 307 $ 15 $ 322 6 $ 412 $ 24 $ 436
Japan Windstorms 2 37 29 66 - - - -
UK Floods 1 20 - 20 - - - -
U.S. Floods - - - - 1 43 - 43
Tohoku Catastrophe - - - - 1 787 497 1,284
New Zealand earthquakes - - - - 2 270 8 278
Northeast Australia floods - - - - 1 64 8 72
All other events - - - - 4 79 21 100
Claims and claim expenses 364 44 408 1,655 558 2,213
Reinstatement premiums - - - 53 - 53
Total catastrophe-related charges 10 $ 364 $ 44 $
408 15 $ 1,708 $ 558 $ 2,266
º *
º Events shown in the above table are catastrophic events having a net impact
on Chartis in excess of $20 million each. All other events include events
that are considered catastrophic but which remain below the $20 million
itemization threshold.
Commercial Insurance Quarterly and Year-to-Date Expense Ratios
The expense ratio increased by 5.2 points and 5.5 points in the three- and
six-month periods ended June 30, 2012, respectively, primarily due to an
increase in acquisition costs related to Chartis' strategy of growing higher
value lines, which typically incur higher commission rates. In addition, ceding
commissions decreased as a result of a restructuring of the Property reinsurance
program as part of Chartis' decision to retain more profitable business while
continuing to manage aggregate exposures. The increase in acquisition costs
contributed approximately 3.1 points and 3.2 points in the three- and six-month
periods ended June 30, 2012, respectively. Further, increases in bad debt
expense of approximately $119 million contributed approximately 1.1 points to
the expense ratio in the six-month period ended June 30, 2012. The remainder of
the expense ratio increase was primarily due to higher personnel costs.
Consumer Insurance Quarterly and Year-to-Date Expense Ratios
The expense ratio in the three-month period ended June 30, 2012 decreased by
0.4 points compared to the same period in the prior year, primarily due to a
change in business mix. The expense ratio in the six-month period ended June 30,
2012 increased by 1.2 points primarily due to increases in operating expenses
incurred to grow key lines of business across a number of geographic areas and a
$58 million decrease in VOBA benefit compared to the same period in the prior
year.
AIG 2012 Form 10-Q 115
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American International Group, Inc.
Chartis Quarterly and Year-to-Date Expense Ratios
Chartis also continued to invest in a number of strategic initiatives during
2012, including the implementation of global finance and information systems,
preparation for Solvency II compliance, readiness for potential regulation by
the FRB under the Dodd-Frank Act, legal entity restructuring, and underwriting
and claims initiatives that are reported as part of Chartis Other. For the
three- and six-month periods ended June 30, 2012, such investments totaled
$60 million and $109 million, respectively, representing an increase of
approximately $27 million and $64 million over the same periods in the prior
year. Chartis incurred higher personnel costs, as it continued efforts to
attract, retain and develop its human capital and to better align employee
performance with Chartis and AIG strategic goals. These items combined
contributed approximately 1.5 points to the expense ratio increase in each
respective period.
Chartis Investing and Other Results
The following table presents Chartis' investing and other results:
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Net investment
income
Commercial
Insurance $ 721 $ 820 (12 )% $ 1,462 $ 1,604 (9 )%
Consumer
Insurance 115 89 29 231 177 31
Other 317 233 36 683 540 26
Total net
investment
income 1,153 1,142 1 2,376 2,321 2
Net realized
capital gains
(losses) 23 43 (47 ) (112 ) 93 NM
Other income
(expense) - net 2 - NM 4 - NM
Investing and
other results $ 1,178 $ 1,185 (1 )% $ 2,268 $ 2,414 (6 )%
Chartis manages and accounts for its invested assets on a legal entity basis
in conformity with regulatory requirements. Within a legal entity, invested
assets are available to pay claims and expenses of both Commercial and Consumer
Insurance operating segments as well as Chartis Other. Invested assets are not
segregated or otherwise separately identified for the Commercial and Consumer
Insurance operating segments.
Investment income is allocated to the Commercial Insurance and Consumer
Insurance operating segments based on an internal investment income allocation
model. The model estimates investable funds based primarily on loss reserves,
unearned premium and a capital allocation for each segment. The investment
income allocation is calculated based on the estimated investable funds and
risk-free yields (plus an illiquidity premium) consistent with the approximate
duration of the liabilities. The actual yields in excess of the allocated
amounts and the investment income from the assets not attributable to the
Commercial Insurance and Consumer Insurance operating segments are assigned to
Chartis Other.
Net realized capital gains (losses) and Other income (expense) - net are not
allocated to Commercial Insurance and Consumer Insurance, but are reported as
part of Chartis Other.
Quarterly and Year-to-Date Net Investment Income
Net investment income increased in both periods due to higher interest income
on fixed maturity securities driven by the redeployment of excess cash and
short-term investments into longer term investments. Additionally, 2012
investment income increased due to the strategic partnership with American
General, all of which is reported in Consumer Insurance. This was offset by
decreases in hedge fund returns, reflective of the overall lower market
performance for the respective periods and decreases in dividend income
primarily due to a reduction in investments in common stock in Japan, as a
result of de-risking the portfolio. For the six-month period ended June 30,
2012, mutual fund income decreased as a result of Chartis selling a significant
portion of its mutual fund holdings during the second half of 2011.
116 AIG 2012 Form 10-Q
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American International Group, Inc.
Quarterly and Year-to-Date Net Realized Capital Gains (Losses)
Net realized capital gains for the three-month period ended June 30, 2012 were
primarily driven by gains recognized on the sale of fixed maturity and equity
securities in the amount of $165 million. This was partially offset by
other-than-temporary impairment of $96 million, primarily attributable to
publicly traded and privately-held equity securities in the Japan portfolios and
a decrease in recoverable values for structured securities. In addition,
impairment charges of $56 million related to life settlement contracts were
recorded during the period.
Net realized capital losses for the six-month period ended June 30, 2012 were
primarily driven by other-than-temporary impairments of $299 million, primarily
attributable to a decrease in recoverable values for structured securities, and
partnership investments and equity securities in an unrealized loss position for
more than 12 months. In addition, impairment charges of $114 million related to
life settlement contracts were recorded during the period. These items were
partially offset by gains recognized on the sale of fixed maturity securities in
the amount of $329 million for the period.
Liability for Unpaid Claims and Claims Adjustment Expense
The following discussion of the consolidated liability for unpaid claims and
claims adjustment expenses (loss reserves) presents loss reserves for Chartis as
well as the loss reserves pertaining to the Mortgage Guaranty reporting unit,
which is reported in AIG's Other operations category.
The following table presents the components of AIG's gross loss reserves by
major lines of business on a U.S. statutory basis*:
June 30, December 31,
(in millions) 2012 2011
Other liability occurrence $ 22,287 $ 22,526
International 18,008 17,726
Workers' compensation 17,591 17,420
Other liability claims made 11,374 11,216
Property 3,774 6,165
Auto liability 2,992 3,081
Mortgage guaranty credit 1,999 3,046
Products liability 2,202 2,416
Accident and health 1,526 1,553
Medical malpractice 1,637 1,690
Commercial multiple peril 1,310 1,134
Aircraft 1,023 1,020
Fidelity/surety 597 786
Other 1,551 1,366
Total $ 87,871 $ 91,145
º * º Presented by lines of business pursuant to statutory reporting requirements
as prescribed by the National Association of Insurance Commissioners.
AIG's gross loss reserves represent the accumulation of estimates of ultimate
losses, including estimates for IBNR and loss expenses, less applicable discount
for future investment income. The methods used to determine loss reserve
estimates and to establish the resulting reserves are continually reviewed and
updated. Any adjustments resulting from this review are currently reflected in
pre-tax income. Because loss reserve estimates are subject to the outcome of
future events, changes in estimates are unavoidable given that loss trends vary
and time is often required for changes in trends to be recognized and confirmed.
Reserve changes that increase previous estimates of ultimate cost are referred
to as unfavorable or adverse development or reserve strengthening. Reserve
changes that decrease previous estimates of ultimate cost are referred to as
favorable development.
AIG 2012 Form 10-Q 117
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American International Group, Inc.
The net loss reserves represent loss reserves reduced by reinsurance
recoverables, net of an allowance for unrecoverable reinsurance, less applicable
discount for future investment income.
The following table classifies the components of net loss reserves by business
unit:
June 30, December 31,
(in millions) 2012 2011
Chartis:
Commercial Insurance $ 56,422 $ 58,549
Consumer Insurance 5,506 5,438
Other 4,180 3,992
Total Chartis 66,108 67,979
Other operations - Mortgage Guaranty 2,257 2,846
Net liability for unpaid claims and claims adjustment
expense at end of period $ 68,365 $ 70,825
Discounting of Reserves
At June 30, 2012, net loss reserves reflect a loss reserve discount of
$3.2 billion, including tabular and non-tabular calculations. The tabular
workers' compensation discount is calculated using a 3.5 percent interest rate
and the 1979 - 81 Decennial Mortality Table. The non-tabular workers'
compensation discount is calculated separately for companies domiciled in New
York and Pennsylvania, and follows the statutory regulations for each state. For
New York companies, the discount is based on a five percent interest rate and
the companies' own payout patterns. For Pennsylvania companies, the statute has
specified discount factors for accident years 2001 and prior, which are based on
a six percent interest rate and an industry payout pattern. For accident years
2002 and subsequent, the discount is based on the payout patterns and investment
yields of the companies. Beginning in 2011, a portion of these discounted
reserves were ceded to a new Pennsylvania domiciled AIG subsidiary. However,
this had no impact on the calculation of the overall discount. Certain other
asbestos business that was written by Chartis is discounted based on the
investment yields of the companies and the payout pattern for this business. The
discount consists of the following: $777 million - tabular discount for workers'
compensation in the U.S. operations of Chartis and $2.4 billion - non-tabular
discount for workers' compensation in the U.S. operations of Chartis; and
$41 million - non-tabular discount for asbestos for Chartis.
Changes in loss reserve discount are recorded in claims and claims adjustment
expenses incurred. The change in discount for the three- and six-month periods
ended June 30, 2012 was a $94 million benefit and $74 million benefit,
respectively, compared to an $8 million charge and $43 million charge in the
same prior year periods. Accretion of discount of $91 million and $183 million
for the three- and six-month periods ended June 30, 2012, respectively, was
offset by new discount of $85 million and $170 million, respectively, associated
with current accident year workers' compensation reserves. Accretion of discount
of $89 million and $178 million for the three- and six-month periods ended
June 30, 2011, respectively, was offset by new discount of $81 million and
$162 million, respectively, associated with 2011 accident year workers'
compensation reserves. The benefit from the change in discount in the three-and
six-month periods ended June 30, 2012 includes a $100 million increase in the
reserve discount due to the commutation of an internal reinsurance treaty, under
which a U.S. subsidiary previously ceded workers' compensation claims to a
non-U.S. subsidiary. AIG discounts its loss reserves related to workers'
compensation business written by its U.S. domiciled subsidiaries as permitted by
the domiciliary statutory regulatory authorities. As a result of the
commutation, the reserves for these claims are now being discounted commencing
in the three-month period ended June 30, 2012. The commutation is an integral
part of Chartis' efforts to simplify its internal reinsurance arrangements.
The prior year development and changes in the estimates in the payout patterns
of previously established loss reserves did not have a significant impact on the
change in discount in any of the periods presented.
118 AIG 2012 Form 10-Q
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American International Group, Inc.
Quarterly Reserving Process
AIG believes that its net loss reserves are adequate to cover net losses and
loss expenses as of June 30, 2012. While AIG regularly reviews the adequacy of
established loss reserves, there can be no assurance that AIG's ultimate loss
reserves will not develop adversely and materially exceed AIG's loss reserves as
of June 30, 2012. In the opinion of management, such adverse development and
resulting increase in reserves are not likely to have a material adverse effect
on AIG's consolidated financial condition, although such events could have a
material adverse effect on AIG's consolidated results of operations for an
individual reporting period.
In determining the loss development from prior accident years, AIG conducts
analyses to determine the change in estimated ultimate loss for each accident
year for each class of business. For example, if loss emergence for a class of
business is different than expected for certain accident years, the actuaries
examine the indicated effect such emergence would have on the reserves of that
class of business. In some cases, the higher or lower than expected emergence
may result in no clear change in the ultimate loss estimate for the accident
years in question, and no adjustment would be made to the reserves for the class
of business for prior accident years. In other cases, the higher or lower than
expected emergence may result in a larger change, either favorable or
unfavorable, than the difference between the actual and expected loss emergence.
AIG conducted reserve analyses in 2012 to determine the loss development from
prior accident years. As part of its reserving process, AIG also considers
notices of claims received with respect to emerging and/or evolving issues, such
as those related to changes in the legal, regulatory, judicial and social
environment, changes in medical cost trends (inflation, intensity and
utilization of medical services), underlying policy pricing, terms and
conditions, and claims handling practices.
The following table presents the rollforward of net loss reserves:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2012 2011 2012 2011
Net liability for unpaid claims and claims
adjustment expense at beginning of period $ 69,873 $ 73,474 $ 70,825 $ 71,507
Foreign exchange effect 548 165 634 711
Change due to NICO reinsurance transaction (25 ) - (33 ) -
Losses and loss expenses incurred:
Current year, undiscounted 6,058 6,600 11,939 14,364
Prior years, undiscounted 72 108 111 92
Change in discount (94 ) 8 (74 ) 43
Losses and loss expenses incurred 6,036 6,716 11,976 14,499
Losses and loss expenses paid 8,067 6,788 15,037 13,150
Net liability for unpaid claims and claims
adjustment expense at end of period $ 68,365 $ 73,567 $ 68,365 $ 73,567
AIG 2012 Form 10-Q 119
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American International Group, Inc.
The following tables summarize development, (favorable) or unfavorable, of
incurred losses and loss expenses for prior years, net of reinsurance:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2012 2011 2012 2011
Prior Accident Year Development by
business unit:
Chartis:
Commercial Insurance $ 103 $ 48 $ 157 $ 68
Consumer Insurance (36 ) 28 (50 ) 28
Other 50 7 63 12
Total Chartis 117 83 170 108
Other operations - Mortgage Guaranty (45 ) 25 (59 ) (16 )
Total $ 72 $ 108 $ 111 $ 92
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2012 2011 2012 2011
Prior Accident Year Development by Major
Class of Business:
Chartis:
Excess casualty $ 24 $ (73 ) $ 129 $ (66 )
D&O and related management liability - (37 ) (2 ) (37 )
Environmental 184 66 249 85
Primary (specialty) workers'
compensation - 17 3 17
Asbestos and environmental (1986 and
prior) 50 7 75 12
Commercial risk 18 45 4 70
Natural catastrophes (106 ) (11 ) (254 ) (50 )
All other, net (53 ) 69 (34 ) 77
Total Chartis 117 83 170 108
Other operations - Mortgage Guaranty (45 ) 25 (59 ) (16 )
Total $ 72 $ 108 $ 111 $ 92
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2012 2011 2012 2011
Prior Accident Year Development by
Accident Year:
Accident Year
2011 $ (167 ) $ (324 )
2010 (25 ) $ 49 (75 ) $ (15 )
2009 12 34 17 31
2008 (34 ) 27 (27 ) (24 )
2007 25 (35 ) 18 72
2006 (6 ) (92 ) (7 ) (161 )
2005 23 (34 ) 58 (75 )
2004 18 (20 ) (15 ) (33 )
2003 41 27 53 13
2002 and prior 185 152 413 284
Total $ 72 $ 108 $ 111 $ 92
120 AIG 2012 Form 10-Q
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American International Group, Inc.
Quarterly and Year-to-Date Prior Accident Year Development
As noted in the prior accident year development by major class of business
table above, Chartis experienced adverse development in the three- and six-month
periods ended June 30, 2012, primarily due to reserve increases on claims in the
Chartis Environmental business (1987 and subsequent), legacy environmental
exposures (1986 and prior), and excess casualty lines. This was partially offset
by net favorable development in reserves for natural catastrophes (principally
the Tohoku Catastrophe) and favorable development in the Consumer Insurance
operating segment, which is included in All other, net.
The development in the Chartis Environmental business was primarily
attributable to claims increases in four major categories:
º •
º Site liability coverage for known remediation projects and ensuing
increased clean-up costs;
º •
º Fixed facility coverage for manufacturers and distributors whose raw
materials, products or industrial processes present a significant
environmental exposure;
º • º Policies that provide an enhanced general liability product designed
specifically to meet the needs of environmental consultants and
contractors; and
º • º A Surety policy that provided performance bonding for the remediation
and closure of a landfill site.
The claims increase in the Chartis Environmental line was the result of an
on-going review of certain cases that AIG believes to be subject to the most
volatility. For several of those cases, AIG concluded that the reserves should
be increased to take into account the updated assessment of the claims. AIG also
reviewed the legacy environmental (1986 and prior) claims and increased the
reserves for certain of those claims.
Adding to the unfavorable development in the three- and six-month periods
ended June 30, 2012, were returned premiums on loss-sensitive business of
$20 million and $14 million, respectively.
See Chartis Results herein and Other Operations - Other Operations Results -
Mortgage Guaranty for further discussion of net loss development.
Asbestos and Environmental (1986 and Prior) Reserves
The estimation of loss reserves relating to asbestos and environmental claims
on insurance policies written many years ago is subject to greater uncertainty
than other types of claims due to inconsistent court decisions as well as
judicial interpretations and legislative actions that in some cases have tended
to broaden coverage beyond the original intent of such policies and in others
have expanded theories of liability.
As described more fully in the 2011 Annual Report, AIG's reserves relating to
asbestos and environmental claims reflect a comprehensive ground-up analysis
performed annually. In the six-month period ended June 30, 2012, a minor amount
of incurred loss pertaining to the asbestos loss reserve discount is reflected
in the table below. In the six-month period ended June 30, 2012, AIG increased
its gross environmental reserves by $150 million and increased its net
environmental reserves by $74 million. This development is primarily
attributable to several large accounts which led to an increase in the estimate
of claims that have been incurred but not reported.
In addition to the U.S. asbestos and environmental reserve amounts shown in
the tables below, Chartis also has asbestos reserves relating to foreign risks
written by non-U.S. entities of $212 million gross and $149 million net reserves
as of June 30, 2012. Similar amounts were held at December 31, 2011.
AIG 2012 Form 10-Q
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American International Group, Inc.
The following table provides a summary of reserve activity, including estimates
for applicable IBNR, relating to asbestos and environmental claims separately
and combined:
Six Months Ended June 30, 2012 2011
(in millions) Gross Net* Gross Net
Asbestos:
Liability for unpaid claims and claims adjustment
expense at beginning of year $ 5,226 $ 537 $ 5,526 $ 2,223
Losses and loss expenses incurred 57 9 99 43
Losses and loss expenses paid (230 ) (66 ) (257 ) (135 )
Reduction of liability for unpaid claims and claims
adjustment expense due to NICO reinsurance
transaction - - - (1,711 )
Other changes - - - 131
Liability for unpaid claims and claims adjustment
expense at end of period $ 5,053 $ 480 $
5,368 $ 551
Environmental:
Liability for unpaid claims and claims adjustment
expense at beginning of year $ 204 $ 119 $ 240 $ 127
Losses and loss expenses incurred 150 74 22 12
Losses and loss expenses paid (22 ) (15 )
(51 ) (25 )
Liability for unpaid claims and claims adjustment
expense at end of period $ 332 $ 178 $
211 $ 114
Combined:
Liability for unpaid claims and claims adjustment
expense at beginning of year $ 5,430 $ 656 $ 5,766 $ 2,350
Losses and loss expenses incurred 207 83 121 55
Losses and loss expenses paid (252 ) (81 ) (308 ) (160 )
Reduction of liability for unpaid claims and claims
adjustment expense due to NICO reinsurance
transaction - - - (1,711 )
Other changes - - - 131
Liability for unpaid claims and claims adjustment
expense at end of period $ 5,385 $ 658 $ 5,579 $ 665
º *
º Includes the reduction due to the National Indemnity Company (NICO)
reinsurance transaction of $1,703 million. See Chartis Operations -
Liability for Unpaid Claims and Claims Adjustment Expense - Asbestos and
Environmental Reserves in the 2011 Annual Report for further discussion of
the NICO reinsurance transaction.
The following table presents the estimate of the gross and net IBNR included in
the Liability for unpaid claims and claims adjustment expense, relating to
asbestos and environmental claims separately and combined:
June 30, 2012 2011
(in millions) Gross Net Gross Net
Asbestos $ 3,593 $ 191 * $ 4,070 $ 272 *
Environmental 111 62 75 31
Combined $ 3,704 $ 253 $ 4,145 $ 303
º * º Net IBNR includes the reduction due to the NICO reinsurance transaction of
$1,359 million and $1,527 million as of June 30, 2012 and 2011,
respectively.
122 AIG 2012 Form 10-Q
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American International Group, Inc.
The following table presents a summary of asbestos and environmental claims
count activity:
2012 2011
Six Months Ended June 30, Asbestos Environmental Combined Asbestos Environmental Combined
Claims at beginning of year 5,443 3,782 9,225 4,933 4,087 9,020
Claims during year:
Opened 197 96 293 40 82 122
Settled (58 ) (133 ) (191 ) (72 ) (33 ) (105 )
Dismissed or otherwise resolved(a) (77 ) (1,945 ) (2,022 ) (265 ) (327 ) (592 )
Other(b) - - - 841 - 841
Claims at end of period 5,505 1,800 7,305 5,477 3,809 9,286
º (a)
º The number of environmental claims dismissed or otherwise resolved,
increased substantially during 2012 as a result of Chartis' determination
that certain methyl tertiary-butyl ether (MTBE) claims presented no further
potential for exposure since these underlying claims were resolved through
dismissal, settlement, or trial for all of the accounts involved. All of
these accounts were fully reserved at the account level and included
adequate reserves for those underlying individual claims that contributed
to the actual losses. These individual claim closings, therefore, had no
impact on Chartis' environmental reserves.
º (b)
º Represents an administrative change to the method of determining the number
of open claims, which had no effect on carried reserves.
Survival Ratios - Asbestos and Environmental
The following table presents AIG's survival ratios for asbestos and
environmental claims at June 30, 2012 and 2011. The survival ratio is derived by
dividing the current carried loss reserve by the average payments for the three
most recent calendar years for these claims. Therefore, the survival ratio is a
simplistic measure estimating the number of years it would take before the
current ending loss reserves for these claims would be paid off using recent
year average payments.
Many factors, such as aggressive settlement procedures, mix of business and
level of coverage provided, have a significant effect on the amount of asbestos
and environmental reserves and payments and the resultant survival ratio.
Moreover, as discussed above, the primary basis for AIG's determination of its
reserves is not survival ratios, but instead the ground-up and top-down
analyses. Thus, caution should be exercised in attempting to determine reserve
adequacy for these claims based simply on this survival ratio.
The following table presents survival ratios for asbestos and environmental
claims, separately and combined, which were based upon a three-year average
payment:
2012 2011
Six Months Ended June 30, Gross Net* Gross Net*
Survival ratios:
Asbestos 9.1 9.3 8.9 9.9
Environmental 5.0 4.7 2.9 2.7
Combined 8.7 8.7 8.3 8.7
º *
º Survival ratios are calculated consistent with the basis on historical
reserve excluding the effects of the NICO reinsurance transaction.
SunAmerica Highlights
The results of SunAmerica for the three and six months ended June 30, 2012 and
2011, reflected the following:
º •
º Higher net investment income due to an increase in base yields from
the reinvestment of significant amounts of cash and short term
investments in 2011. Offsetting higher base yields were lower income
from private equity and hedge funds and lower call and tender income.
º •
º The liquidation and distribution of the ML II investment in March 2012
increased investment income by $176 million in the six-month period
ended June 30, 2012 compared to the same period in 2011.
AIG 2012 Form 10-Q 123
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American International Group, Inc.
º •
º Prudent spread management, through crediting rate changes, resulted in
improvements in base net investment spreads for both the three and six
months ended June 30, 2012.
º •
º Higher net realized capital gains from the sale of investments were
reflected in both the three- and six-month periods ended June 30,
2012. The sales of securities in unrealized gain positions that
support certain payout annuity products, and subsequent reinvestment
of the proceeds at generally lower yields, triggered loss recognition
charges in both the three- and six-month periods ended June 30, 2012.
SunAmerica Operations
SunAmerica offers a comprehensive suite of products and services to
individuals and groups including term life, universal life, A&H, fixed and
variable deferred annuities, fixed payout annuities, mutual funds and financial
planning. SunAmerica offers its products and services through a diverse,
multi-channel distribution network that includes banks, national, regional and
independent broker-dealers, affiliated financial advisors, independent marketing
organizations, independent and career insurance agents, structured settlement
brokers, benefit consultants and direct-to-consumer platforms.
SunAmerica presents its business in two operating segments: Domestic Life
Insurance, which focuses on mortality-and morbidity-based protection products,
and Domestic Retirement Services, which focuses on investment, retirement
savings and income solution products.
Commencing in the fall of 2012, SunAmerica will be renamed as AIG Life and
Retirement, although certain existing brands may continue to be used.
124 AIG 2012 Form 10-Q
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American International Group, Inc.
SunAmerica Results
The following table presents SunAmerica results:
Three Months Six Months
Ended June 30, Percentage Ended June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Domestic Life Insurance:
Revenue:
Premiums $ 622 $ 662 (6 )% $ 1,227 $ 1,283 (4 )%
Policy fees 354 366 (3 ) 728 742 (2 )
Net investment income 984 965 2 2,056 2,012 2Operating expenses:
Policyholder benefits and claims incurred 1,046 1,190 (12 ) 2,147 2,223
(3 )
Interest credited to policyholder account
balances 206 209 (1 ) 413 419 (1 )
Amortization of deferred acquisition
costs 102 97 5 210 192 9
Other acquisition and insurance expenses 268 275 (3 ) 525 569 (8 )
Operating income 338 222 52 716 634 13
Net realized capital gains 524 153 242 632 71 NM
Change in benefit reserves and DAC, VOBA
and SIA related to net realized capital
gains (189 ) (6 ) NM (187 ) (3 ) NM
Pre-tax income $ 673 $ 369 82 % $ 1,161 $ 702 65 %
Domestic Retirement Services:
Revenue:
Policy fees $ 320 $ 316 1 % $ 637 $ 624 2 %
Net investment income 1,537 1,496 3 3,350 3,203 5
Operating expenses:
Policyholder benefits and claims incurred 27 22 23 (4 ) 4 NM
Interest credited to policyholder account
balances 858 905 (5 ) 1,720 1,801 (4 )
Amortization of deferred acquisition
costs 127 143 (11 ) 224 283 (21 )
Other acquisition and insurance expenses 250 241 4 519 479 8
Operating income 595 501 19 1,528 1,260 21
Changes in fair value of fixed maturity
securities designated to hedge living
benefit liabilities 70 - NM 51 - NM
Net realized capital losses (198 ) (62 ) (219 ) (772 ) (200 ) (286 )
Change in benefit reserves and DAC, VOBA,
and SIA related to net realized capital
gains (losses) (363 ) (42 ) NM (329 ) (29 ) NM
Pre-tax income $ 104 $ 397 (74 )% $ 478 $ 1,031 (54 )%
Total SunAmerica:
Revenue:
Premiums $ 622 $ 662 (6 )% $ 1,227 $ 1,283 (4 )%
Policy fees 674 682 (1 ) 1,365 1,366 -
Net investment income 2,521 2,461 2 5,406 5,215 4
Operating expenses:
Policyholder benefits and claims incurred 1,073 1,212 (11 ) 2,143 2,227
(4 )
Interest credited to policyholder account
balances 1,064 1,114 (4 ) 2,133 2,220 (4 )
Amortization of deferred acquisition
costs 229 240 (5 ) 434 475 (9 )
Other acquisition and insurance expenses 518 516 - 1,044 1,048 -
Operating income 933 723 29 2,244 1,894 18
Changes in fair value of fixed maturity
securities designated to hedge living
benefit liabilities 70 - NM 51 - NM
Net realized capital gains (losses) 326 91 258 (140 ) (129 ) (9 )
Change in benefit reserves and DAC, VOBA,
and SIA related to net realized capital
gains (losses) (552 ) (48 ) NM (516 ) (32 ) NM
Pre-tax income $ 777 $ 766 1 % $ 1,639 $ 1,733 (5 )%
AIG 2012 Form 10-Q 125
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American International Group, Inc.
Quarterly SunAmerica Results
The increase in net investment income reflected an increase in base yields of
9 basis points, due to the reinvestment of significant amounts of cash and short
term investments during 2011. Together with continued active crediting rate
management, this resulted in higher base spreads across all of SunAmerica's
spread-based annuity businesses in 2012. In addition to the increase from
reinvestment, net investment income compared to the same quarter of 2011
reflected the following items:
º •
º a $176 million fair value loss on ML II in the three months ended
June 30, 2011. In March 2012, SunAmerica received a distribution of
$1.6 billion from the sale by the FRBNY of the securities held by ML
II, which resulted in the full liquidation by the FRBNY of this
investment;
º •
º $139 million decrease in income from private equity funds and hedge
funds; and
º •
º $76 million decrease in call and tender income.
In the three months ended June 30, 2011, SunAmerica recorded an increase of
approximately $100 million in the estimated reserves for incurred but not
reported death claims in conjunction with the use of the Social Security Death
Master File (SSDMF) to identify potential claims not yet presented to the
Company. Other than for the payment of claims, no significant adjustments to
these reserves were recorded in 2012.
In a weak equity market, SunAmerica increases policyholder benefit reserves to
recognize the expected value of death benefits in excess of the projected
account balance for certain guaranteed benefits features of variable annuities.
DAC related to these products may also be adjusted through amortization expense
to reflect updates of future estimated gross profits due to changes in equity
market assumptions. The effect of short-term fluctuations in the equity markets
on the estimated gross profits of variable products is mitigated in part through
the use of a reversion to mean methodology for estimating future gross profits.
Under this methodology, SunAmerica assumes a long-term growth rate for the
assets backing these liabilities, which factors in potential short-term
fluctuations in the financial markets, and if the long-term growth rate
assumption is deemed to be unreasonable in light of the current market
conditions, the long-term growth rate assumption is revised upward or downward
to reflect the revised estimate. SunAmerica did not make any changes to its
long-term growth rate assumptions in 2011 or 2012. The effect of market
underperformance was approximately $15 million higher DAC amortization and
policyholder benefit expenses in 2012 compared to 2011.
SunAmerica has a dynamic hedging program designed to manage economic risk
exposure associated with changes in the fair value of embedded policy derivative
liabilities contained in certain variable annuity contracts, caused by changes
in the equity markets, interest rates and market implied volatilities.
SunAmerica substantially hedges its exposure to equity markets. However, due to
regulatory capital considerations, a significant portion of the interest rate
exposure is unhedged. In the first quarter of 2012, SunAmerica began purchasing
U.S. Treasury notes as a capital-efficient strategy to reduce this interest rate
exposure. SunAmerica has elected to account for these securities at fair value.
As a result of decreases in interest rates on U.S. Treasury securities during
the three months ended June 30, 2012, the fair value of these securities, net of
financing costs, increased by $70 million, which partially offset $226 million
of embedded derivative losses included as a component of net realized capital
gains (losses).
Pre-tax income for SunAmerica in the second quarter of 2012 included
$326 million in net realized capital gains compared to $91 million of net
realized capital gains in the same period of 2011. Higher gains from the sale of
investments were partially offset by higher fair value losses on variable
annuity embedded derivatives due to declines in long-term interest rates.
The sale of securities in unrealized gain positions that support certain
payout annuity products, and subsequent reinvestment of the proceeds at
generally lower yields, triggered loss recognition of $461 million in the three
months ended June 30 2012, which was reported as a component of Change in
benefit reserves and DAC, VOBA and SIA related to net realized capital losses.
These sales effectively transferred shadow loss recognition to actual loss
recognition in the three months ended June 30, 2012. As part of a program to
utilize capital loss tax
126 AIG 2012 Form 10-Q
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American International Group, Inc.
carryforwards, additional sales of such securities that would result in capital
gains are planned during the remainder of 2012.
Year-to-Date SunAmerica Results
Net investment income increased for the six-month period ended June 30, 2012
reflecting an increase in base yields of 28 basis points, due to the
reinvestment of significant amounts of cash and short term investments during
2011. In addition to the increase from reinvestment, net investment income
compared to the same period of 2011 reflected the following items.
º •
º $171 million fair value loss on ML II in 2011;
º •
º $270 million decrease in income from private equity funds and hedge
funds; and
º •
º $99 million decrease in call and tender income.
The six months ended June 30, 2011, included the previously described
approximately $100 million in the estimated reserves for incurred but not
reported death claims.
The effect of positive equity market performance resulted in approximately
$37 million lower DAC amortization and policyholder benefit expenses in the
first six months of 2012 compared to the same period of 2011.
As a result of decreases in interest rates on U.S. Treasury securities during
the first six months of 2012, the fair value of the aforementioned U.S. Treasury
securities used for hedging, net of financing costs, increased by $51 million.
Pre-tax income for SunAmerica included a $11 million increase in net realized
capital losses, due to higher other-than-temporary impairments and higher fair
value losses on variable annuity embedded derivatives due to declining credit
spreads and declines in long-term interest rates, offset by higher gains from
the sale of investments.
The sale of securities in unrealized gain positions that support certain
payout annuity products, and subsequent reinvestment of the proceeds at
generally lower yields, triggered loss recognition of $548 million in 2012,
which had previously been reflected in shareholders' equity as reserves related
to unrealized appreciation at December 31, 2011.
Sales and Deposits
The following tables summarize SunAmerica premiums, deposits and other
considerations by product*:
Three Months Six Months
Ended June 30, Percentage Ended June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Premiums, deposits and
other considerations
Individual fixed annuity
deposits $ 470 $ 2,018 (77 )% $ 1,080 $ 4,169 (74 )%
Group retirement product
deposits 1,738 1,705 2 3,582 3,407 5
Life insurance 1,334 1,371 (3 ) 2,626 2,690 (2 )
Individual variable annuity
deposits 1,259 832 51 2,307 1,591 45
Retail mutual funds 619 329 88 1,368 739 85
Individual annuities runoff 14 19 (26 ) 31 36 (14 )
Total premiums, deposits
and other considerations $ 5,434 $ 6,274 (13 )% $ 10,994 $ 12,632 (13 )%
Life Insurance Sales
Retail - Independent $ 35 $ 37 (5 )% $ 69 $ 68 1 %
Retail - Affiliated (Career
and Matrix Direct) 32 28 14 57 52 10
Total Retail 67 65 3 126 120 5
Institutional - Independent 11 6 83 14 6 133
Total life insurance sales $ 78 $ 71 10 % $ 140 $ 126 11 %
º *
º Life insurance sales include periodic premiums from new business expected
to be collected over a one-year period and 10 percent of single premiums
and unscheduled deposits from new and existing policyholders. Annuity sales
represent deposits from new and existing customers.
AIG 2012 Form 10-Q 127
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American International Group, Inc.
Total premiums, deposits and other considerations decreased in both the three-
and six-month periods ended June 30, 2012 as substantial decreases in individual
fixed annuities were only partially offset by significant increases in
individual variable annuities, and retail mutual funds which showed significant
increases.
Individual fixed annuity deposits declined due to the low interest rate
environment as consumers are more reluctant to purchase such annuities at the
relatively lower crediting rates currently offered. Group retirement product
deposits (which include deposits into fixed options within variable annuities
sold in group retirement markets) increased modestly due to higher levels of
individual rollover deposits in 2012. SunAmerica expects that the low interest
rate environment will begin to impact group retirement deposits, resulting in
lower levels of deposits into fixed options over the remainder of 2012.
Individual variable annuity deposits increased due to innovative product
enhancements, expanded distribution as well as a more favorable competitive
environment. Deposits from life insurance products increased in 2012 but were
more than offset by declines in deferred annuities sold through life insurance
distribution channels. Retail mutual fund annual sales growth was driven by
SunAmerica Asset Management Corp.'s Focused Dividend Strategy product offering
which continues as a top short and long term performer within its respective
peer group.
SunAmerica's total life sales continued to show steady growth, increasing
11 percent during the first six months of 2012 compared to the same period in
2011. Term life sales have increased in both the independent and
direct-to-consumer channels. SunAmerica's term life sales through its affiliated
Matrix Direct channel in the first six months of 2012 were up more than
40 percent compared to the same period in 2011, due in part to the shift toward
selling proprietary products. Private placement variable universal life sales
have been strong in the first six months of 2012. Universal life sales were
flat, as the economic environment continues to put pressure on the sales of
these products, which typically have higher annual premiums than term products
and also offer additional features.
Premiums
Premiums represent premiums received on traditional life insurance policies
and deposits on life-contingent payout annuities. Premiums, deposits and other
considerations is a non-GAAP measure which includes life insurance premiums,
deposits on annuity contracts and mutual funds.
The following table presents a reconciliation of premiums, deposits and other
considerations to premiums:
Three Months Six Months
Ended June 30, Ended June 30,
(in millions) 2012 2011 2012 2011
Premiums, deposits and other considerations $ 5,434 $ 6,274 $ 10,994 $ 12,632
Deposits (4,628 ) (5,484 ) (9,431 ) (11,093 )
Other (184 ) (128 ) (336 ) (256 )
Premiums $ 622 $ 662 $ 1,227 $ 1,283
128 AIG 2012 Form 10-Q
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American International Group, Inc.
Domestic Retirement Services Net Flows
The following table presents the account value rollforward for Domestic
Retirement Services:
Three Months Six Months
Ended June 30, Ended June 30,
(in millions) 2012 2011 2012 2011
Group retirement products
Balance, beginning of year $ 74,089 $ 70,565 $ 69,925 $ 68,365
Deposits - annuities 1,278 1,303 2,677 2,594
Deposits - mutual funds 460 402 905 813
Total deposits 1,738 1,705 3,582 3,407
Surrenders and other withdrawals (1,401 ) (1,448 ) (2,916 ) (2,951 )
Death benefits (99 ) (90 ) (201 ) (173 )
Net inflows 238 167 465 283
Change in fair value of underlying
investments, interest credited, net of fees (1,008 ) 401 2,918 2,485
Effect of unrealized gains (losses) (shadow
loss) 4 - 15 -
Balance, end of period $ 73,323 $ 71,133 $ 73,323 $ 71,133
Individual fixed annuities
Balance, beginning of year $ 52,057 $ 49,854 $ 52,276 $ 48,489
Deposits 470 2,018 1,080 4,169
Surrenders and other withdrawals (876 ) (913 ) (1,739 ) (1,753 )
Death benefits (416 ) (425 ) (820 ) (827 )
Net inflows (outflows) (822 ) 680 (1,479 ) 1,589
Change in fair value of underlying
investments, interest credited, net of fees 737 460 1,183 916
Effect of unrealized gains (losses) (shadow
loss) (186 ) - (194 ) -
Balance, end of period $ 51,786 $ 50,994 $ 51,786 $ 50,994
Individual variable annuities
Balance, beginning of year $ 27,044 $ 26,277 $ 24,896 $ 25,581
Deposits 1,259 832 2,307 1,591
Surrenders and other withdrawals (663 ) (838 ) (1,371 ) (1,676 )
Death benefits (111 ) (115 ) (223 ) (225 )
Net inflows (outflows) 485 (121 ) 713 (310 )
Change in fair value of underlying
investments, interest credited, net of fees (518 ) (73 ) 1,402 812
Balance, end of period $ 27,011 $ 26,083 $ 27,011 $ 26,083
Retail mutual funds
Balance, beginning of year $ 6,593 $ 6,059 $ 6,221 $ 5,975
Deposits 619 329 1,368 739
Redemptions (410 ) (324 ) (789 ) (704 )
Net inflows 209 5 579 35
Change in fair value of underlying
investments, interest credited, net of fees (182 ) (23 ) (180 ) 31
Balance, end of period $ 6,620 $ 6,041 $ 6,620 $ 6,041
Total Domestic Retirement Services
Balance, beginning of year $ 159,783 $ 152,755 $ 153,318 $ 148,410
Deposits 4,086 4,884 8,337 9,906
Surrenders, redemptions and other
withdrawals (3,350 ) (3,523 ) (6,815 ) (7,084 )
Death benefits (626 ) (630 ) (1,244 ) (1,225 )
Net inflows 110 731 278 1,597
Change in fair value of underlying
investments, interest credited, net of fees (971 ) 765 5,323 4,244
Effect of unrealized gains (losses) (shadow
loss) (182 ) - (179 ) -
Balance, end of period, excluding runoff 158,740 154,251 158,740 154,251
Individual annuities runoff 4,187 4,346 4,187 4,346
GIC runoff 5,963 6,836 5,963 6,836
Balance, end of period $ 168,890 $ 165,433 $ 168,890 $ 165,433
General and separate account reserves and
mutual funds
General account reserve $ 102,597 $ 99,159 $ 102,597 $ 99,159
Separate account reserve 48,994 50,418 48,994 50,418
Total general and separate account reserves 151,591 149,577 151,591 149,577
Group retirement mutual funds 10,679 9,815 10,679 9,815
Retail mutual funds 6,620 6,041 6,620 6,041
Total reserves and mutual funds $ 168,890 $ 165,433 $ 168,890 $ 165,433
AIG 2012 Form 10-Q 129
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American International Group, Inc.
Overall net flows declined in the three- and six-month periods ended June 30,
2012, primarily due to lower fixed annuity deposits resulting from the low
interest rate environment, but remained positive. However, surrender rates for
individual fixed annuities also decreased in the three- and six-month periods
ended June 30, 2012 due to the relative competitiveness of interest credited
rates on the existing block of fixed annuities versus interest rates on
alternative investment options available in the marketplace. Net flows improved
in the three- and six-month periods ended June 30, 2012 for individual variable
annuities and group retirement products due to both the increase in deposits and
favorable surrender experience. Net flows improved in the three- and six-month
periods ended June 30, 2012 for retail mutual funds due to increased deposits.
The following table presents reserves by surrender charge category and surrender
rates:
At June 30, 2012 2011
Group Individual Individual Group Individual Individual
Retirement Fixed Variable Retirement Fixed Variable
(in millions) Products* Annuities Annuities Products* Annuities Annuities
No surrender charge $ 54,500$ 19,507$ 10,984$ 54,369$ 15,639$ 12,085
0% - 2%
1,336 3,141 4,136 1,210 3,500 3,855
Greater than 2% - 4% 1,209 3,893 2,252 1,400 5,180 2,279
Greater than 4% 4,517 21,695 8,782 3,562 23,567 7,701
Non-surrenderable 1,082 3,550 857 777 3,108 163
Total reserves $ 62,644$ 51,786$ 27,011$ 61,318$ 50,994$ 26,083
Surrender rates 8.0 % 6.7 % 10.6 % 8.4 % 7.1 % 12.9 %
º *
º Excludes mutual funds of $10.7 billion and $9.8 billion at June 30, 2012
and 2011, respectively.
The following table summarizes the major components of the changes in SunAmerica
DAC/VOBA:
Six Months Ended June 30,
(in millions) 2012 2011
Balance, beginning of year $ 6,502 $ 9,606
Cumulative effect of accounting change(a) - (2,348 )
Acquisition costs deferred 395 452
Amortization expense (462 ) (501 )
Change in net unrealized gains on securities (353 ) (320 )
Balance, end of period(b) $ 6,082 $ 6,889
º (a)
º Represents the retrospective adoption of the accounting standard that amends the accounting for costs incurred by insurance companies that can be
capitalized in connection with acquiring or renewing insurance contracts.
See Note 2 to Consolidated Financial Statements for further discussion.
º (b)
º Net of benefit of DAC and VOBA related to net realized capital losses.
As SunAmerica operates in various markets, the estimated gross profits used to
amortize DAC and VOBA are subject to differing market returns and interest rate
environments in any single period. The combination of market returns and
interest rates may lead to acceleration of amortization in some products and
simultaneous deceleration of amortization in other products.
DAC and VOBA for insurance-oriented, investment-oriented and retirement
services products are reviewed for recoverability, which involves estimating the
future profitability of current business. This review involves significant
management judgment. See Note 2(g) to the Consolidated Financial Statements in
the 2011 Annual Report for additional information on DAC and VOBA
recoverability.
Aircraft Leasing Operations
AIG's Aircraft Leasing operations are the operations of ILFC, which generates
its revenues primarily from leasing new and used commercial jet aircraft to
foreign and domestic airlines, and (since the date of its acquisition by ILFC)
AeroTurbine. Aircraft Leasing operations also include gains and losses that
result from the remarketing of commercial jet aircraft for ILFC's own account,
and remarketing and fleet management services for airlines and other aircraft
fleet owners.
130 AIG 2012 Form 10-Q
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American International Group, Inc.
Aircraft Leasing Results
Aircraft Leasing results were as follows:
Three Months Six Months
Ended June 30, Percentage Ended June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Aircraft leasing
revenues, excluding
net realized capital
gains (losses):
Rental revenue $ 1,095 $ 1,111 (1 )% $ 2,225 $2,252 (1 )%
Interest and
other revenues 28 7 300 51 4 NM
Total aircraft leasing
revenues, excluding
net realized capital
gains (losses) 1,123 1,118 - 2,276 2,256 1
Interest expense 387 393 (2 ) 775 785 (1 )
Loss on extinguishment
of debt 2 61 (97 ) 23 61 (62 )
Aircraft leasing
expense:
Depreciation
expense 481 459 5 962 912 5
Impairments charges,
fair value adjustments
and lease-related
charges 75 42 79 130 155 (16 )
Other expenses 90 77 17 179 140 28
Total aircraft leasing
expense 646 578 12 1,271 1,207 5
Operating income 88 86 2 207 203 2
Net realized capital
gains (losses) (2 ) 1 NM (1 ) 4 NM
Pre-tax income $ 86 $ 87 (1 )% $ 206 $ 207 - %
Quarterly Aircraft Leasing Results
Aircraft Leasing pre-tax income remained constant due to:
º •
º lower lease revenue due to early returns of aircraft by bankrupt
lessees and lower lease revenue earned on re-leased aircraft in its
fleet;
º •
º an increase in depreciation expense due to the change in depreciable
lives and residual values of certain aircraft; and
º •
º an increase in fair value adjustments and impairment charges on
aircraft.
These items were offset by lower losses on extinguishment of debt.
Year-to-Date Aircraft Leasing Results
Aircraft Leasing pre-tax income remained constant due to:
º •
º lower lease revenue due to early returns of aircraft by bankrupt
lessees and lower lease revenue earned on re-leased aircraft in its
fleet; and
º •
º an increase in depreciation expense due to the change in depreciable
lives and residual values of certain aircraft.
These items were offset by lower impairment charges and lower losses on
extinguishment of debt.
AIG 2012 Form 10-Q 131
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American International Group, Inc.
Other Operations
AIG's Other operations include results from Mortgage Guaranty operations,
Global Capital Markets operations, Direct Investment book (DIB), Retained
Interests and Corporate & Other operations (after allocations to AIG's business
segments).
AIG's Other operations include the following:
º •
º Mortgage Guaranty - UGC subsidiaries issue residential mortgage
guaranty insurance, both domestically and to a lesser extent
internationally, that covers mortgage lenders from the first loss for
credit defaults on high loan-to-value conventional first-lien
mortgages for the purchase or refinance of one-to four-family
residences.
º • º Global Capital Markets - consist of the operations of AIG Markets and
the remaining AIGFP derivatives portfolio. AIG Markets acts as the
derivatives intermediary between AIG companies and third parties. The
remaining AIGFP portfolio continues to be wound down and is managed opportunistically, consistent with AIG's risk management objectives.
Although the portfolio may experience periodic fair value volatility,
it consists predominantly of transactions AIG believes are of low
complexity, low risk or currently not economically appropriate to
unwind based on a cost versus benefit analysis.
º • º Direct Investment book - includes results for the MIP and certain
non-derivative assets and liabilities of AIGFP. Certain non-derivative
assets and liabilities of the DIB are accounted for under the fair
value option and thus operating results are subject to periodic market
volatility.
º •
º Retained Interests - includes fair value gains or losses on AIG's
remaining interest in AIA ordinary shares, the retained interest in ML
III, and, prior to their sale on March 8, 2011, the MetLife, Inc.
(MetLife) securities that were received as consideration from the sale
of American Life Insurance Company (ALICO, and such sale, the ALICO
Sale).
º •
º Corporate & Other - consists primarily of interest expense,
intercompany interest income that is eliminated in consolidation,
expenses of corporate staff not attributable to specific business segments (including restructuring costs), expenses related to internal
controls, corporate initiatives, certain compensation plan expenses,
corporate-level net realized capital gains and losses, and certain
litigation-related charges and credits.
132 AIG 2012 Form 10-Q
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American International Group, Inc.
Other Operations Results
The following table presents pre-tax income for AIG's Other operations:
Three Months Six Months
Ended June 30, Percentage Ended June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Mortgage Guaranty $ 48 $ 6 NM % $ 56 $ 14 300 %
Global Capital Markets (25 ) (169 ) 85 63 121 (48 )
Direct Investment book 485 73 NM 733 483 52
Retained interests:
Change in fair value of AIA securities,
including realized gain in 2012 (493 ) 1,521 NM 1,302 2,583 (50 )
Change in fair value of ML III 1,306 (667 ) NM 2,558 77 NM
Change in the fair value of the MetLife
securities prior to their sale - - NM - (157 ) NM
Corporate & Other:
Interest expense on FRBNY Credit Facility - - NM - (72 ) NM
Other interest expense (474 ) (513 ) 8 (945 ) (1,047 ) 10
Corporate expenses, net (953 ) (201 ) (374 ) (1,131 ) (259 ) (337 )
Real estate and other non-core businesses 118 88 34 95 191 (50 )
Loss on extinguishment of debt (9 ) (18 ) 50 (9 ) (3,331 ) 100
Net realized capital losses (117 ) (22 ) (432 ) (100 ) (423 ) 76
Net loss on sale of divested businesses - (2 )
NM (3 ) (74 ) 96
Total Corporate & Other (1,435 ) (668 )
(115 ) (2,093 ) (5,015 ) 58
Consolidation and eliminations (2 ) (9 ) 78 1 (16 ) NM
Total Other operations $ (116 ) $ 87 NM % $ 2,620 $ (1,910 ) NM %
Mortgage Guaranty
The following table presents pre-tax income for Mortgage Guaranty:
Three Months Six Months
Ended June 30, Percentage Ended June 30, Percentage
(in millions) 2012 2011 Change 2012 2011 Change
Underwriting results:
Net premiums written $ 212 $ 191 11 % $ 403 $ 395 2 %
(Increase) decrease in
unearned premiums (33 ) 13 NM (55 ) 19 NM
Net premiums earned 179 204 (12 ) 348 414 (16 )
Claims and claims
adjustment expenses
incurred 126 183 (31 ) 271 376 (28 )
Underwriting expenses 50 43 16 97 80 21
Underwriting profit
(loss) 3 (22 ) NM (20 ) (42 ) 52
Investing and other
results:
Net investment income 40 34 18 71 68 4
Net realized capital
gains (losses) 5 (6 ) NM 5 (12 ) NM
Pre-tax income $ 48 $ 6 NM % $ 56 $ 14 300 %
AIG 2012 Form 10-Q 133
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American International Group, Inc.
Quarterly Mortgage Guaranty Results
Mortgage Guaranty pre-tax income increased in the three-month period ended
June 30, 2012 compared to the same period in 2011 primarily due to:
º •
º a decrease in claims and claims adjustment expenses of $57 million,
primarily in first-lien business, reflecting lower levels of newly
reported delinquencies, increased denied and rescinded claims and
favorable prior year loss development of $45 million in the three
months ended June 30, 2012. Favorable development arising from the
claims requests sent to lenders mentioned above was $41 million for
the same period. This favorable development was more than offset by
newly reported delinquencies on the 2008 and prior business; and
º •
º an increase in realized investment gains of $11 million for the three
months ended June 30, 2012.
Partially offset by:
º •
º a decline in first lien earned premiums reflecting premium refunds of
$10 million due to the rescissions arising from the claims requests
sent to lenders during the fourth quarter of 2011 and continuing into
the first six months of 2012, as discussed in Outlook herein, in
addition to the declining persistency on the 2008 and prior policy
years;
º •
º a decline in earned premiums on second-lien and international
businesses, both of which were placed into runoff during 2008, of
$10 million and $6 million respectively; and
º •
º a $7 million increase in underwriting expenses driven primarily by an
increase in underwriting, sales and product initiatives. All of these
activities support the increase in new insurance written for the
quarter.
Year-to-Date Mortgage Guaranty Results
Mortgage Guaranty pre-tax results improved in the six month period ended
June 30, 2012 compared to the same period in 2011 primarily due to:
º •
º a decrease in claims and claims adjustment expenses of $105 million,
primarily in first-lien business, reflecting lower levels of newly
reported delinquencies, increased denied and rescinded claims and
favorable loss development of $59 million for the six months ended
June 30, 2012. Favorable development arising from the claims requests
sent to lenders mentioned above was $77 million. This favorable
development was more than offset by newly reported delinquencies on
the 2008 and prior business; and
º •
º an increase in realized capital gains of $17 million in the six month
period ending June 30, 2012.
Partially offset by:
º • º a decline in first lien earned premiums of $33 million reflecting
higher premium refunds due to the rescissions arising from the claims
requests sent to lenders during the fourth quarter of 2011 and
continuing into the first six months of 2012, as discussed in Outlook
herein, in addition to the declining persistency on the 2008 and prior
policy years;
º •
º a decline in earned premiums on second-lien, and international
businesses, both of which were placed into runoff during 2008, of
$20 million and $14 million respectively; and
º •
º a $17 million increase in underwriting expenses driven primarily by an
increase in underwriting, sales and product initiatives. All of these
activities support the increase in new insurance written for the year.
New insurance written, which represents the original principal balance of the
insured mortgages, was approximately $15 billion and $6 billion for the six
months ended June 30, 2012 and 2011, respectively. The increase in new insurance
written is the result of the market acceptance by lenders of UGC's risk-based
pricing model and withdrawal of certain competitors from the market during 2011.
See Outlook - Other Operations - Mortgage Guaranty for further discussion.
134 AIG 2012 Form 10-Q
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American International Group, Inc.
Risk-in-Force
The following table presents risk in force and delinquency ratio information for
Mortgage Guaranty domestic business:
At June 30,
(dollars in billions) 2012 2011
Domestic first-lien:
Risk in force $ 26.6 $ 24.7
60+ day delinquency ratio on primary loans(a) 10.3 % 14.6 %
Domestic second-lien:
Risk in force(b) $ 1.4 $ 1.7
º (a)
º Based on number of policies.
º (b)
º Represents the full amount of second-lien loans insured reduced for
contractual aggregate loss limits on certain pools of loans, usually
10 percent of the full amount of loans insured in each pool. Certain second-lien pools have reinstatement provisions, which will expire as the
loan balances are repaid.
Global Capital Markets (GCM) Operations
Quarterly Global Capital Markets Results
GCM's pre-tax loss decreased in the three-month period ended June 30, 2012
compared to the same period in 2011 primarily due to improvement in unrealized
market valuations related to the super senior CDS portfolio and a decrease in
operating expenses partially offset by an decline in net credit valuation
adjustments on the GCM derivative assets and liabilities. For the three-month
period ended June 30, 2012, an unrealized market valuation gain of $57 million
was recognized compared to an unrealized market valuation loss of $94 million in
2011. The improvement resulted primarily from CDS transactions written on
multi-sector CDOs driven by price movements and amortization within the CDS
portfolio. For the three-month period ended June 30, 2012, a net credit
valuation adjustment loss of $54 million was recognized compared to a net credit
valuation adjustment loss of $2 million in 2011 due to a widening of
counterparty credit spreads.
Year-to-Date Global Capital Markets Results
GCM's pre-tax income decreased in the six-month period ended June 30, 2012
compared to the same period in 2011 primarily due to a decline in net credit
valuation adjustments on the GCM derivative assets and liabilities and a decline
in unrealized market valuations related to the super senior CDS portfolio,
partially offset by a decrease in operating expenses. For the six-month period
ended June 30, 2012, a net credit valuation adjustment loss of $76 million was
recognized compared to a net credit valuation adjustment gain of $26 million in
2011 due to a tightening of AIG's credit spreads relative to those of its
counterparties. For the six-month period ended June 30, 2012, an unrealized
market valuation gain of $197 million was recognized compared to an unrealized
market valuation gain of $229 million in 2011. The decline in gains resulted
primarily from CDS transactions written on Corporate debt/CLOs driven by price
movements within the CDS portfolio.
See Critical Accounting Estimates - Level 3 Assets and Liabilities herein for
a discussion of the super senior CDS portfolio.
AIG 2012 Form 10-Q 135
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American International Group, Inc.
Direct Investment Book Results
Quarterly Direct Investment Book Results
The DIB's pre-tax income increased in the three-month period ended June 30,
2012 compared to the same period in 2011 primarily due to improvement in net
credit valuation adjustments on the DIB assets and liabilities for which the
fair value option was elected and $118 million of gains realized from unwinding
certain transactions, partially offset by losses in the MIP driven by negative
spread income. For the three-month period ended June 30, 2012, a net credit
valuation adjustment gain of $321 million was recognized compared to a net
credit valuation adjustment gain of $16 million in 2011 due to the tightening of
counterparty credit spreads on assets and the widening of AIG's credit spreads
on liabilities.
Year-to-Date Direct Investment Book Results
The DIB's pre-tax income increased in the six-month period ended June 30, 2012
compared to the same period in 2011 primarily due to realized capital gains in
2012 partially offset by a decline in net credit valuation adjustments on the
DIB assets and liabilities for which the fair value option was elected. In the
first quarter of 2012, the DIB realized a capital gain of $426 million on the
sale of 35.7 million common units of The Blackstone Group L.P. In addition, the
DIB recognized gains of $122 million from unwinding certain transactions. For
the six-month period ended June 30, 2012, a net credit valuation adjustment gain
of $130 million was recognized compared to a net credit valuation adjustment
gain of $316 million in 2011 due to the adverse impact of tightening of AIG's
credit spreads.
The following table presents credit valuation adjustment gains (losses) for the
DIB assets and liabilities for which the fair value option was elected
(excluding intercompany transactions):
(in millions)
Counterparty Credit AIG's Own Credit
Valuation Adjustment on Assets Valuation Adjustment on Liabilities
Three Months Ended June 30, 2012
Bond trading securities $ 248 Notes and bonds payable $ 18
Hybrid financial instrument
Loans and other assets 10 liabilities 26
Guaranteed Investment Agreements 17
Other liabilities 2
Increase in assets $ 258 Decrease in liabilities $ 63
Net pre-tax increase to Other income $ 321
Three Months Ended June 30, 2011
Bond trading securities $ (43 ) Notes and bonds payable $ 14
Hybrid financial instrument
Loans and other assets 2 liabilities 22
GIAs 20
Other liabilities 1
Decrease in assets $ (41 ) Decrease in liabilities $ 57
Net pre-tax increase to Other income $ 16
136 AIG 2012 Form 10-Q
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American International Group, Inc.
(in millions)
Counterparty Credit AIG's Own Credit
Valuation Adjustment on Assets Valuation Adjustment on Liabilities
Six Months Ended June 30, 2012
Bond trading securities $ 602 Notes and bonds payable $ (183 )
Hybrid financial instrument
Loans and other assets 23 liabilities (216 )
Guaranteed Investment Agreements (73 )
Other liabilities (23 )
Increase in assets $ 625 Increase in liabilities $ (495 )
Net pre-tax increase to Other income $ 130
Six Months Ended June 30, 2011
Bond trading securities $ 282 Notes and bonds payable $ (4 )
Hybrid financial instrument
Loans and other assets 18 liabilities (8 )
GIAs 29
Other liabilities (1 )
Increase in assets $ 300 Decrease in liabilities $ 16
Net pre-tax increase to Other income $ 316
Retained Interests
Change in Fair Value of AIA Securities
On March 7, 2012, AIG sold 1.72 billion ordinary shares of AIA and recognized
a gain of $0.6 billion. AIG's percentage of AIA ordinary shares decreased from
approximately 33 percent to approximately 19 percent as a result of this sale.
The fair value of AIG's remaining interest in AIA securities decreased
$493 million for the three month period ended June 30, 2012 and increased
$0.7 billion for six-month period ended June 30, 2012.
Change in Fair Value of ML III
The gains attributable to AIG's interest in ML III for 2012 were based in part
on sales of ML III assets by the FRBNY.
