CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K 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:
• •
the monetization of AIG's interests in AIG's strategy for risk management;
International Lease Finance
•
Corporation (ILFC), including whether AIG's generation of deployable
AIG's proposed sale of up to
capital;
90 percent of ILFC will be completed •
and if completed, the timing and final AIG's return on equity and earnings
terms of such sale; per share long-term
aspirational
• goals;
AIG's exposures to subprime mortgages, •
monoline insurers, the residential and AIG's strategies to grow net
commercial real estate markets, state investment income, efficiently manage
and municipal bond issuers and capital and reduce expenses;
sovereign bond issuers; •
• AIG's strategies for customer
AIG's exposure to European governments retention, growth, product
and European financial institutions; development, market position,
financial results and reserves; and
•
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:
• •
changes in market conditions; judgments concerning casualty
• insurance underwriting and insurance
the occurrence of catastrophic events, liabilities;
both natural and man-made;
•
• judgments concerning the
recognition
significant legal proceedings; of deferred tax assets;
• •
the timing and applicable requirements judgments concerning deferred policy
of any new regulatory framework to acquisition costs (DAC)
which AIG is subject as a savings and recoverability; and
loan holding company (SLHC), and if •
such a determination is made, as a such other factors discussed in:
systemically important financial •
institution (SIFI); this Part II, Item 7.
Management's
• Discussion and Analysis of
Financial
concentrations in AIG's investment Condition and Results of Operations
portfolios;
(MD&A); and
• •
actions by credit rating agencies; Part I, Item 1A. Risk Factors of this
Annual Report on Form 10-K.
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.
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Table of Contents
The MD&A is organized as follows:
INDEX TO ITEM 7
Page
.............
USE OF NON-GAAP MEASURES 54
EXECUTIVE OVERVIEW 56
RESULTS OF OPERATIONS 68
Segment Results 71
AIG Property Casualty Operations 74
Liability for Unpaid Claims and Claims Adjustment Expense
88
AIG Life and Retirement Operations 99
Other Operations 111
Discontinued Operations 116
Consolidated Comprehensive Income (Loss)
116
LIQUIDITY AND CAPITAL RESOURCES
120
Overview
120
Analysis of Sources and Uses of Cash
122
Liquidity and Capital Resources of AIG Parent and Subsidiaries
124
Credit Facilities
130
Contingent Liquidity Facilities
130
Contractual Obligations
131
Off-Balance Sheet Arrangements and Commercial Commitments 133
Debt 135
Credit Ratings 136
Regulation and Supervision 137
Dividend Restrictions 137
INVESTMENTS 138
Market Conditions 138
Investment Strategies 138
Investment Highlights 138
Impairments 150
ENTERPRISE RISK MANAGEMENT 155
Overview 155
Credit Risk Management 157
Market Risk Management 162
CRITICAL ACCOUNTING ESTIMATES 172
GLOSSARY 195
ACRONYMS 199
Throughout the MD&A, we use certain terms and abbreviations which are summarized
in the Glossary and Acronyms on pages 195 and 199, respectively.
AIG has incorporated into this discussion a number of cross-references to
additional information included throughout this Annual Report on Form 10-K to
assist readers seeking additional information related to a particular subject.
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Use of Non-GAAP Measures
In Item 6. Selected Financial Data and throughout this MD&A, we present AIG's
financial condition and results of operations in the way we believe will be most
meaningful, representative and most transparent. Some of the measurements we use
are "non-GAAP financial measures" under SEC rules and regulations. GAAP is the
acronym for "accounting principles generally accepted in the United States." The
non-GAAP financial measures we present may not be comparable to similarly-named
measures reported by other companies.
Book Value Per Share Excluding Accumulated Other Comprehensive Income (Loss)
(AOCI) is presented in Item 6. Selected Financial Data and is used to show the
amount of our net worth on a per-share basis. We believe Book Value Per Share
Excluding AOCI is useful to investors because it eliminates the effect of
non-cash items that can fluctuate significantly from period to period, including
changes in fair value of our available for sale portfolio and foreign currency
translation adjustments. Book Value Per Share Excluding AOCI is derived by
dividing Total AIG shareholders' equity, excluding AOCI, by Total common shares
outstanding. The reconciliation to book value per share, the most comparable
GAAP measure, is presented in Item 6. Selected Financial Data.
We use the following operating performance measures because we believe they
enhance understanding of the underlying profitability of continuing operations
and trends of AIG and our business segments. We believe they also allow for more
meaningful comparisons with our insurance competitors. When we use these
measures, reconciliations to the most comparable GAAP measure are provided in
the Results of Operations section of this MD&A.
º •
º AIG - After-tax operating income (loss) is derived by excluding the
following items from net income (loss): income (loss) from discontinued
operations, net loss (gain) on sale of divested businesses, income from
divested businesses, legacy FIN 48 and other tax adjustments, legal
reserves (settlements) related to "legacy crisis matters," deferred income
tax valuation allowance (releases) charges, amortization of the Federal
Reserve Bank of New York prepaid commitment fee asset, changes in fair
value of AIG Life and Retirement fixed income securities designated to
hedge living benefit liabilities, change in benefit reserves and deferred
policy acquisition costs (DAC), value of business acquired (VOBA), and
sales inducement assets (SIA) related to net realized capital (gains)
losses, (gain) loss on extinguishment of debt, net realized capital (gains)
losses, non-qualifying derivative hedging activities, excluding net
realized capital (gains) losses and bargain purchase gain. "Legacy crisis
matters" include favorable and unfavorable settlements related to events
leading up to and resulting from our September 2008 liquidity crisis. It
also includes legal fees incurred by AIG as the plaintiff in connection
with such legal matters.
º •
º AIG Property Casualty
º • º Operating income (loss): In 2012, AIG Property Casualty revised its
non-GAAP income measure from underwriting income (loss) to operating
income (loss), which includes both underwriting income (loss) and net
investment income, but not net realized capital (gains) losses or
other (income) expense, legal settlements related to legacy crisis
matters described above and bargain purchase gain. Underwriting income
(loss) is derived by reducing net premiums earned by claims and claims
adjustment expense and underwriting expenses; which consist of the
acquisition costs and general operating expenses;
º • º Ratios: AIG Property Casualty, along with most property and casualty
insurance companies, uses the loss ratio, the expense ratio and the
combined ratio as measures of underwriting performance. These ratios
are relative measurements that describe, for every $100 of net premiums earned, the amount of claims and claims adjustment expense,
and the amount of other underwriting expenses that would be incurred.
A combined ratio of less than 100 indicates an underwriting profit and
a combined ratio of over 100 indicates an underwriting loss. The
underwriting environment varies across countries and products, as does
the degree of litigation activity, all of which affect such ratios. In
addition, investment returns, local taxes, cost of capital,
regulation, product type and competition can have an effect on pricing
and consequently on profitability as reflected in underwriting profit
and associated ratios.
º •
º Accident year loss ratio, as adjusted: the loss ratio excluding
catastrophe losses and related reinstatement premiums, prior year
development, net of premium adjustments and the impact of reserve
discount.
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Catastrophe losses are generally weather or seismic events having
a net impact on AIG Property Casualty in excess of $10 million
each.
º •
º Accident year combined ratio, as adjusted: the combined ratio
excluding catastrophe losses and related reinstatement premiums,
prior year development, net of premium adjustments, and the
impact of reserve discounting.
º •
º AIG Life and Retirement
º •
º Operating income (loss): In 2012, we revised our definition of
operating income (loss). Operating income (loss) is derived by
excluding the following items from net income (loss): legal
settlements related to legacy crisis matters described above,
changes in fair values of fixed maturity securities designated to
hedge living benefit liabilities, net realized capital (gains)
losses, and changes in benefit reserves and DAC, VOBA, and SIA
related to net realized capital (gains) losses. We believe that
Operating income (loss) is useful because excluding these
volatile items permits investors to better assess the operating
performance of the underlying business by highlighting the
results from ongoing operations.
º •
º Premiums, deposits and other considerations: includes life
insurance premiums and deposits on annuity contracts and mutual
funds.
º • º Other Operations - Operating income (loss):income (loss) excluding certain
legal reserves (settlements) related to legacy crisis matters described
above, loss on extinguishment of debt, amortization of prepaid commitment
fee asset, Net realized capital (gains) losses, net (gains) losses on sale
of divested businesses and properties, and income from divested businesses.
Results from discontinued operations are excluded from all of these measures.
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Executive Overview
This overview of management's discussion and analysis highlights selected
information and may not contain all of the information that is important to
current or potential investors in AIG's securities. You should read this Annual
Report on Form 10-K in its entirety 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.
Executive Summary
AIG made solid progress toward many of its strategic objectives in 2012.
We fully repaid governmental support as a result of the Department of the
Treasury's sale of its remaining shares of AIG common stock, par value $2.50 per
share (AIG Common Stock).*
We improved our financial and operational performance, leading to a third
consecutive year of profitability:
º •
º AIG Property Casualty reported improved operating income and the business
also has continued to experience positive pricing trends.
º •
º AIG Life and Retirement assets under management grew significantly in 2012
from deposits and net flows from individual variable annuities and retail
mutual funds and appreciation due to higher equity markets. We enhanced
spread income and actively managed through the low interest rate
environment.
º • º Mortgage Guaranty reported new insurance written of $37.5 billion for 2012
compared to $18.8 billion in 2011 and has experienced improving credit
trends.
º •
º Our investment portfolio performance improved through the use of yield
enhancements, including the reduction of our concentration in
lower-yielding tax-exempt municipal securities and the purchase of other
higher-yielding securities. These purchases include securities acquired
through the Federal Reserve Bank of New York's (FRBNY) auction of Maiden
Lane III LLC (ML III) assets. Realized capital gains increased because
certain assets in unrealized gain positions were sold as part of a program
to utilize capital loss tax carryforwards.
º •
º Our balance sheet is stronger as a result of the issuance of unsecured
notes and the monetization of non-core assets.
Our financial flexibility was enhanced by $5.2 billion in cash distributions
from subsidiaries.
We announced an agreement to sell ILFC, received final distributions on our
interests in Maiden Lane II LLC (ML II) and ML III, and sold our remaining
interest in AIA Group Limited (AIA), which will support our capital management
initiatives, sharpen our business focus, and enable us to redeploy assets in a
more productive manner.
We completed $13.0 billion in share purchases using a portion of the proceeds of
our asset sales.
º *
º The Department of the Treasury continues to hold warrants to purchase
approximately 2.7 million shares of AIG Common Stock.
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Our Performance - Selected Indicators
Years Ended December 31,
(in millions, except per share data) 2012 2011 2010
Results of operations data:
Total revenues $ 65,656 $ 59,812 $ 72,829
Income from continuing operations 7,752 19,540 13,254
Net income attributable to AIG 3,438 20,622 10,058
Income per common share attributable to AIG
(diluted) 2.04 11.01 14.98
Balance sheet data:
Total assets $ 548,633 $ 553,054 $ 675,573
Long-term debt 48,500 75,253 106,461
Total AIG shareholders' equity 98,002 101,538 78,856
Book value per common share 66.38 53.53 561.40
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TOTAL REVENUES ($ millions)
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[[Image Removed: GRAPHIC]] [[Image Removed: GRAPHIC]]
[[Image Removed: GRAPHIC]] [[Image Removed: GRAPHIC]]
* Comparability between 2011 and 2010 data is affected by the
deconsolidation of AIA in the fourth quarter of 2010.
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The following table presents a reconciliation of pre-tax income (loss) to
operating income (loss) by operating segment and after-tax operating income
(loss), which are non-GAAP measures. See Use of Non-GAAP Measures for additional
information.
Years Ended December 31,
(in millions) 2012 2011 2010
AIG Property Casualty
Pre-tax income (loss) $ 1,837 $ 1,820 $ (93 )
Net realized capital (gains) losses 2 (607 ) 38
Legal settlements* (17 ) - -
Bargain purchase gain - - (332 )
Other (income) expense - net (2 ) 5 (669 )
Operating income (loss) $ 1,820 $ 1,218 $ (1,056 )
AIG Life and Retirement
Pre-tax income $ 3,780 $ 2,956 $ 2,701
Legal settlements* (154 ) - -
Changes in fair value of fixed maturity securities
designated to hedge living benefit liabilities
(37 ) - -
Net realized capital (gains) losses (630 ) (6 ) 1,251
Change in benefit reserves and DAC, VOBA and SIA
related to net realized capital (gains) losses 1,201 327 104
Operating income $ 4,160 $ 3,277 $ 4,056
Other Operations
Pre-tax income (loss) $ 3,899 $ (4,703 ) $ 17,611
Net realized capital gains (501 ) (12 ) (908 )
Net (gains) losses on sale of divested businesses 2 74 (18,897 )
Amortization of prepaid commitment fee asset - - 3,471
Legal reserves 754 20 3
Legal settlements* (39 ) - -
Deferred gain on FRBNY credit facility - (296 ) -
Loss on extinguishment of debt 9 3,143 104
Divested businesses - - (1,875 )
Operating income (loss) $ 4,124 $ (1,774 ) $ (491 )
Total
Operating income of reportable segments and other
operations $ 10,104 $ 2,721 $ 2,509
Consolidations, eliminations and other adjustments (20 ) (190 ) (301 )
Income tax benefits (expenses) (3,187 ) 243 (1,585 )
Non-controlling interest (262 )
(688 ) (2,172 )
After-tax operating income (loss) $ 6,635 $
2,086 $ (1,549 )
* Reflects litigation settlement income recorded in 2012 from settlements
with three financial institutions that participated in the creation, offering
and sale of RMBS as to which AIG and its subsidiaries suffered losses either for
their own accounts or in connection with their participation in AIG's securities
lending program.
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PRE-TAX INCOME (LOSS) ($ millions)
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OPERATING INCOME (LOSS) ($ millions)
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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.
AIG Property Casualty Operating 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 AIG Property Casualty
reportable segment results previously reported.
In the fourth quarter of 2012, to increase the focus on the drivers of the
losses and proactively mitigate reserve development and legal costs, the
management of certain environmental liability businesses written prior to 2004
was moved from Commercial Insurance to a separate claims organization. To align
financial reporting with the internal management changes, this environmental
(1987-2004) business is reported in the Other category. These revisions did not
affect our total reportable segment results previously reported.
Sale of ILFC and Discontinued Operations Presentation
On December 9, 2012, AIG entered into an agreement to sell 80.1 percent of ILFC
for approximately $4.2 billion in cash, with an option for the purchaser to buy
an additional 9.9 percent stake (the ILFC Transaction). The sale is expected to
close in 2013. At the closing of the transaction, in connection with the
termination of intercompany arrangements between AIG and ILFC, AIG will return
$1.1 billion to ILFC. As a result, ILFC operating results, which were previously
presented in the Aircraft Leasing segment, have been classified as discontinued
operations in all periods, and associated assets and liabilities have been
classified as held-for-sale at December 31, 2012. See Note 4 to the Consolidated
Financial Statements for further discussion.
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Changes in Fair Value of Derivatives
To align the presentation of changes in the 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 and
Consolidated Statement of Cash Flows. Specifically, amounts attributable to
derivative activity where AIG Financial Products Corp. and AIG Trading
Group Inc. and their respective subsidiaries (collectively AIGFP) is an
intermediary for AIG subsidiaries have been reclassified from Other income to
Net realized capital gains (losses).
Liquidity and Capital Resources Highlights
In March 2012, AIG paid down in full the $8.6 billion remaining preferred
interests (the AIA SPV Preferred Interests) in the special purpose vehicle
holding the proceeds of the AIA initial public offering (the AIA SPV) held by
the Department of the Treasury.
In addition, in 2012, the Department of the Treasury, as selling shareholder,
sold its remaining shares of AIG common stock by completing five registered
public offerings in March, May, August, September and December (collectively,
the 2012 Offerings). The Department of the Treasury sold approximately
1.5 billion shares of AIG Common Stock for aggregate proceeds of approximately
$45.8 billion in the 2012 Offerings. We purchased approximately 421 million
shares of AIG Common Stock at an average price of $30.86 per share for an
aggregate purchase amount of approximately $13.0 billion in the first four of
the 2012 Offerings. We did not purchase any shares in the December 2012
offering.
In 2012, AIG received $10.1 billion in distributions from the FRBNY's final
disposition of ML II and ML III assets. Also in 2012, we sold our entire
remaining interest in AIA ordinary shares for gross proceeds of approximately
$14.5 billion.
Additional discussion and other liquidity and capital resources developments are
included in Note 17 to the Consolidated Financial Statements and Liquidity and
Capital Resources herein.
Investment Highlights
Net investment income increased 38 percent to $20.3 billion in 2012 compared to
2011, primarily through our previous investments in ML III and AIA. The overall
credit rating of our fixed maturity portfolio was largely unchanged, and
other-than- temporary impairments declined compared to prior year levels.
º •
º Our insurance operations achieved a $1.3 billion increase in net investment
income in spite of the challenges presented by a continuing low rate
environment. Net investment income improved due to the impact of yield
enhancement initiatives and higher base yields. While corporate debt
securities represented the core of new investment allocations, we continued
to focus on risk weighted opportunistic investments in residential
mortgage-backed (RMBS) and other structured securities to improve yields.
These included purchases of assets sold in the ML II and ML III auctions by
the FRBNY.
º •
º The unrealized appreciation of our investment portfolio grew from
approximately $5.5 billion in 2011 to approximately $10.7 billion in 2012.
This was driven by declining interest rates and narrowing spreads in both
investment grade and high yield asset portfolios. We realized higher gains
on the sales of securities compared to the prior year as we repositioned
assets to meet strategic and tactical asset allocation objectives.
Other-than-temporary Impairments were lower than the prior year, in part
driven by favorable developments in the housing sector which drove strong
performance in our structured products portfolios.
º •
º The overall credit ratings of our fixed maturity investments were largely
unchanged from last year, reflecting a continued focus on long term risk
adjusted portfolio performance.
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Risk Management Highlights
Our Risk Management Process
Risk management is an integral part of managing our Risk Management
businesses. It is a key element of our approach to --------------------------
corporate governance. We have an integrated process
for managing risks throughout the organization. The •
framework of our Enterprise Risk Management (ERM) We remain committed to
system provides senior management with a consolidated adhering to the highest
view of our major risk positions. standards of risk
Our risk management process includes: management and
corporate
• governance.
An enhanced risk governance structure that supports •
consistent and transparent decision making. We have We continue to promote
recently revised our corporate policies to ensure awareness and
that accountability for the implementation and accountability for key
oversight of each policy is better aligned with risk and business
individual corporate executives while specialized decisions, and performance
risk governance committees already in operation than in the past.
receive regular reporting regarding policy •
compliance. We manage risks better by
• applying
performance
Risk committees at our corporate level as well as in metrics that enable us to
each business unit that manage the development and assess risk more clearly
maintenance of a risk and control culture and address
evolving
encompassing all significant risk categories. Our market conditions.
Board of Directors oversees the management of risk
through the complementary functioning of the Finance
and Risk Management Committee (the FRMC) and the
Audit Committee, as well as through its regular
interaction with other committees of the Board.
•
A capital and liquidity stress testing framework to
assess our aggregate exposure to our most significant
risks. We conduct enterprise-wide stress tests under
a range of scenarios to better understand the
resources needed to support our subsidiaries and
consolidated company.
Strategic Outlook
Industry Trends
Our business is affected by industry and economic factors such as interest
rates, credit and equity market conditions, regulation, tax policy, competition,
and general economic, market and political conditions. In 2012, and continuing
into 2013, we operated under difficult market conditions, characterized by
factors such as low interest rates, instability in the global markets due to the
European debt crisis, and slow growth in the U.S. economy.
The prevailing interest rate climate has a particularly significant effect on
our industry. Investment returns have declined as the U.S. fixed income market
remains in a low interest rate environment. In addition, current market
conditions may not necessarily permit insurance companies to increase pricing
across all our product lines.
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AIG Priorities for 2013
AIG is focused on the following priorities for 2013:
•
Strengthen and improve the operating performance of our core businesses;
•
Consummate the sale of up to 90 percent of our interest in ILFC;
•
Enhance the yield on our investments while maintaining focus on credit quality;
•
Manage AIG's capital and interest expense more efficiently by redeploying
excess capital in areas that promote profitable growth;
•
Work with the Board of Governors of the Federal Reserve System (the FRB) in its
capacity as AIG's principal regulator; and
•
Reduce recurring operating expenses by leveraging AIG's scale and driving
increased standardization through investments in infrastructure.
Strategic Outlook for Our Operating Businesses
The strategic outlook for each of our businesses and management initiatives to
improve growth and performance in 2013 and over the longer term are described
below.
AIG PROPERTY CASUALTY STRATEGIC OUTLOOK
We expect that the current low interest rate environment and ongoing uncertainty
in global economic conditions will continue to challenge the growth of net
investment income and limit growth in some markets through at least 2013. These
conditions, coupled with overcapacity in the property casualty insurance
industry business, are leading carriers to tighten terms and conditions, shed
unprofitable business and develop advanced data analytics in order to improve
profitability.
We have observed improving trends in certain key indicators that may offset the
effect of current economic challenges. Commencing in the second quarter of 2011,
and continuing since, we have benefited from favorable pricing trends,
particularly in our U.S. commercial business. The property casualty insurance
industry is beginning to experience modest growth as a result of this positive
rate trend and an increase in overall exposures in some markets. We expect that
expansion in certain growth economies will occur at a faster pace than in
developed countries, although at levels lower than those previously expected due
to revised economic assumptions.
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AIG Property Casualty is focused on the following strategic initiatives:
Business Mix Shift AIG Property Casualty
...................................................................................................................................................................................................................... Opportunities
. ---------------------
We expect that shifting our mix of business to higher value lines and geographies of opportunity will generate business with more favorable underwriting results. However, 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, including direct marketing costs, are expected to continue to increase.
•
Underwriting Excellence Continue
shifting
......................................................................................................................................................................................................................
toward higher value
. business to increase
We anticipate that refining technical pricing account management tools and marketing analytics will further enhance our risk selection process. We believe that accident year loss ratios will continue to improve due profitability.
to these actions. •
Claims Best Practices Expand in attractive
......................................................................................................................................................................................................................
growth economies,
. specifically in Asia
We expect to reduce loss costs by realizing greater efficiencies in servicing customer claims, introducing fraud detection tools and developing knowledge of the economic drivers of losses, which will proactively Pacific, the Middle
mitigate reserve development and legal costs, and establish effective pricing strategies. East and Latin
Operating Expense Discipline America.
......................................................................................................................................................................................................................
•
. Enhance risk
We continue to make strategic investments in systems, processes and talent worldwide, which will result in elevated operating expense in the short-term, but is expected to create additional value and greater selection and pricing
efficiency beginning in 2014.
to earn returns
commensurate to the
risk assumed.
•
Implement improved
claims practices and
advanced technology
to lower the loss
ratio.
•
Apply operating
expense discipline
and drive
efficiencies by
leveraging our global
footprint.
•
Optimize the
investment portfolio
by aligning it with
our risk appetite and
tax objectives.
Capital Efficiency
We plan to continue to execute capital management initiatives by enhancing
broad-based risk tolerance guidelines for our operating units, implementing
underwriting strategies to increase return on equity by line of business and
reducing exposure to businesses with inadequate pricing and increased loss
trends. In addition, we remain focused on enhancing our global reinsurance
strategy to improve capital efficiency.
We continue to streamline our legal entity structure, to enhance transparency
with regulators and optimize capital and tax efficiency. For the year ended
December 31, 2012, we completed 41 legal entity and branch restructuring
transactions. We completed the integration of our European operations into a
single pan-European insurance company, AIG Europe Limited, and continued the
restructuring activities in the Asia Pacific region, including focusing on the
strategy to consolidate the Japan operations under one holding company. During
2012, our restructuring and capital management initiatives enabled certain
subsidiaries in Europe and the Asia Pacific region to return $575 million of
capital to be used for general corporate purposes. We continue to implement
restructuring plans in each region and the overall end state structure is
expected to be mostly completed by the end of 2014.
Our Investment Strategy for AIG Property Casualty
Consistent with AIG's worldwide insurance investment policy, we place primary
emphasis on investments in fixed maturity securities issued by corporations,
municipalities and other governmental agencies, and to a lesser extent, common
stocks, private equity, hedge funds and other alternative investments. We also
attempt to enhance returns through investments in a diversified portfolio of
private equity funds, hedge funds, and partnerships. Although these
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investments are subject to periodic volatility, they have historically achieved
yields in excess of the base portfolio yields. Our expectation is that these
alternative investments will continue to outperform the base portfolio yields
over the long-term.
Opportunistic investments in structured securities and other yield-enhancement
opportunities continue to be made with the objective of increasing net
investment income. Overall base yields increased in 2012 due to the portfolio
mix shift away from tax-exempt municipal bonds toward taxable instruments;
overall investment purchases were made at expected yields higher than the
weighted average yields of the existing portfolio.
In 2013, we expect to continue to refine our investment strategy, which includes
asset diversification and yield-enhancement opportunities that meet our
liquidity, duration and credit quality objectives as well as current risk-return
and tax objectives.
See Segment Results - AIG Property Casualty Operations - AIG Property Casualty
Results - AIG Property Casualty Investing and Other Results and Note 7 to the
Consolidated Financial Statements for additional information.
AIG LIFE AND RETIREMENT STRATEGIC OUTLOOK
AIG Life and Retirement's businesses and the life and AIG Life and Retirement
annuity industry continue to be affected by the current Opportunities
economic environment of low interest rates and volatile ------------------------
equity markets. Continued low interest rates put
pressure on long-term investment returns, negatively •
affect future sales of interest rate-sensitive products Grow assets under
and reduce future profits on certain existing business. management
Also, products such as payout annuities and traditional •
life insurance that are not rate-adjustable may require Increase life insurance
increases in reserves if future investment yields are in force
insufficient to support current valuation interest •
rates. Equity market volatility may result in higher Enhance return on equity
reserves for variable annuity guarantee features, and
both equity market volatility and low interest rates
can affect the recoverability and amortization rate of
DAC assets.
During 2012, AIG Life and Retirement implemented a
number of management actions to proactively address the
impact of low interest rates. These actions include a
continued disciplined approach to new business pricing
of interest sensitive products (e.g. fixed annuities),
active management of renewal crediting rates, increased
pricing in certain life insurance products and
re-filing of products to continue lowering minimum rate
guarantees.
AIG Life and Retirement is focused on the following strategic initiatives:
Growth of Assets Under Management
AIG Life and Retirement plans to fully leverage its unified all-channel
distribution organization to increase sales of profitable products across all
channels. In addition, management will pursue select institutional market
opportunities where AIG Life and Retirement's scale and capacity provides a
competitive market advantage. AIG Life and Retirement is well positioned to
capitalize on the growing demand for income solutions while certain competitors
are scaling back in this market. AIG Life and Retirement will continue to manage
the risks associated with variable annuity living benefits through innovative
product designs and hedging strategies. Given the size and diversity of AIG Life
and Retirement's overall product portfolio, variable annuity reserves are a
relatively small portion of its total reserves compared to others in this
market. As a result of a broad distribution network and a more favorable
competitive environment, AIG Life and Retirement expects variable annuity sales
to remain strong for 2013.
Increase Life Insurance In force
AIG Life and Retirement's strategic focus related to life insurance and other
mortality-based products includes disciplined underwriting, active expense
management and product innovation. AIG Life and Retirement's distribution
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strategy is to grow new sales by strengthening the core retail independent and
career agent distributor channels and expanding its market presence through the
development of innovative life insurance offerings based on consumer focused
research to drive superior, differentiated product solutions. In addition, AIG
Life and Retirement is enhancing its service and technology platform through the
consolidation of its life operations and administrative systems, which is
expected to result in a more efficient, cost-competitive and agile operating
model.
Enhance Return on Equity
AIG Life and Retirement expects to leverage its streamlined legal entity
structure to enhance financial strength and durability capital efficiency and
ease of doing business. AIG Life and Retirement completed the merger of six life
insurance operating legal entities into American General Life Insurance Company
effective December 31, 2012. This merger will allow for more effective capital
and dividend planning while creating operating efficiencies and making it easier
for producers and customers to do business with AIG Life and Retirement. AIG
Life and Retirement also plans to improve operational efficiencies and service
through investments in technology, more productive use of existing resources and
further use of lower-cost operations centers.
Our Investment Strategy for AIG Life and Retirement
AIG Life and Retirement places primary emphasis on investments in fixed maturity
securities issued by corporations, municipalities and other governmental
agencies, structured securities collateralized by, among others, residential and
commercial real estate, and to a lesser extent, commercial mortgage loans,
private equity, hedge funds, other alternative investments, and common and
preferred stock.
Our fundamental investment strategy is to maintain primarily a diversified, high
quality portfolio of fixed maturity securities and, as nearly as is practicable,
to match the duration characteristics of our liabilities with assets of
comparable duration. In addition, AIG Life and Retirement enhances its returns
through investments in a diversified portfolio of private equity funds, hedge
funds and affordable housing partnerships. Although returns on these investments
are more volatile than our base fixed maturity securities portfolio, they have
historically achieved higher total returns and yields than the base portfolio
yields. AIG Life and Retirement's expectation is that these alternative
investments will continue to outperform the base portfolio yields over the
long-term.
Opportunistic investments in structured securities and other yield enhancement
opportunities continue to be made with the objective of increasing net
investment income. Overall base yields increased in 2012 due to the reinvestment
of significant amounts of cash and short term investments during 2011. However,
base yields have been declining in the latter half of 2012 as investment
purchases were made at yields lower than the weighted average yield of the
existing portfolio. During prolonged periods of low or declining interest rates,
AIG Life and Retirement has to invest net flows and reinvest interest and
principal payments from its investment portfolio in lower yielding securities.
See Segment Results - AIG Life and Retirement Operations and Note 7 to the
Consolidated Financial Statements for additional information.
Other Operations
Mortgage Guaranty
The following are expected to continue to affect results Mortgage Guaranty
for 2013:
Opportunities
•
---------------------
Market developments - UGC is a market leader in the
mortgage insurance industry with a differentiated
•
risk-based pricing model that is designed to produce high Increase market share
quality new business. The withdrawal of certain
through
competitor
competitors from the market during 2011 combined with differentiation.
UGC's investment grade rating and risk-based pricing has •
positioned UGC to take advantage of market opportunities. Improve the risk
UGC plans to continue to execute this strategy during 2013 profile of new
and to further enhance its market position. UGC will insurance written.
continue to review its new business pricing relative to •
changes in the market to ensure that the price of coverage Build our market
is commensurate with the level of risk being underwritten. leadership position.
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º •
º Delinquent inventory review - During 2011 and 2012, UGC requested that
lenders file claims, in accordance with the terms of the respective master
policies, on approximately 21,000 accounts that had been delinquent
approximately 24 months or more and were not expected to cure. Many of
these delinquencies were the result of the foreclosure moratorium discussed
below. Through December 31, 2012, UGC received responses to approximately
96 percent of these requests. While accelerating the payment of claims,
these requests also impacted the cure rate of the delinquent inventory
which in turn impacted UGC's estimate of reserve for loss and loss
adjustment expenses. During 2013, reserve development may continue to have
an impact on the business. UGC expects that newly reported delinquent loans
will continue to decline during 2013 and that the delinquent inventory will
decline further albeit at a slower rate than in 2012. However, the extent
of the decline in delinquencies and the number of newly reported
delinquencies is dependent on the prevailing macroeconomic conditions and
the extent that the domestic economy does or does not improve. UGC will
closely monitor these trends and the impact on its incurred loss and loss
expenses in 2013.
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 2013 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.
Global Capital Markets (GCM)
AIG Markets acts as the derivatives intermediary between AIG and its
subsidiaries and third parties to provide hedging services. The derivative
portfolio of AIG Markets consists primarily of interest rate and currency
derivatives.
The remaining derivatives portfolio of AIGFP consists primarily of hedges of the
assets and liabilities of the DIB and a portion of the legacy hedges for AIG and
its subsidiaries. Future hedging needs for AIG and its subsidiaries will be
executed through AIG Markets. AIGFP's derivative portfolio consists primarily of
interest rate, currency, credit, commodity and equity derivatives. Additionally,
AIGFP has a credit default swap portfolio being managed for economic benefit and
with limited risk. The AIGFP portfolio continues to be wound down and is managed
consistent with our risk management objectives. Although the portfolio may
experience periodic fair value volatility, it consists predominantly of
transactions that we believe are of low complexity, low risk or currently not
economically appropriate to unwind based on a cost versus benefit analysis.
Direct Investment Book (DIB)
The DIB portfolio is being wound down and is managed with the objective of
ensuring that at all times it maintains the liquidity we believe is necessary to
meet all its liabilities, as they come due, even under stress scenarios and to
maximize return consistent with our risk management objectives. We are focused
on meeting the DIB's liquidity needs, including the need for contingent
liquidity arising from collateral posting for debt positions of the DIB without
relying on resources beyond the DIB. As part of this program management, we may
from time to time access the capital markets, subject to market conditions. In
addition, we may seek to buy back debt or sell assets on an opportunistic basis,
subject to market conditions.
From time to time, we may utilize cash allocated to the DIB that is not required
to meet the risk target for general corporate purposes unrelated to the DIB.
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. The overall hedging activity for the assets and liabilities of the
DIB is executed by GCM. The value of hedges related to the non-derivative assets
and liabilities of AIGFP in the DIB are included within the assets and
liabilities and operating results of GCM and are not included within the DIB
operating results, assets or liabilities.
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Results of Operations
The following section provides a comparative discussion of our Results of
Operations on a reported basis for the three-year period ended December 31,
2012. Factors that relate primarily to a specific business segment are
discussed in more detail within that business segment. For a discussion of the
Critical Accounting Estimates that affect the Results of Operations, see the
Critical Accounting Estimates section of Item 7. MD&A, in this Annual Report on
Form 10-K.
The following table presents AIG's condensed consolidated results of operations:
Percentage Change
Years Ended December 31, 2012 vs. 2011 vs.
(in millions) 2012 2011 2010 2011 2010
Revenues:
Premiums $ 38,011 $ 38,990 $ 45,319 (3 )% (14 )%
Policy fees 2,791 2,705 2,710 3 -
Net investment income 20,343 14,755 20,934 38 (30 )
Net realized capital gains (losses) 929 701 (716 ) 33 NM
Other income 3,582 2,661 4,582 35 (42 )
Total revenues 65,656 59,812 72,829 10 (18 )
Benefits, claims and expenses:
Policyholder benefits and claims incurred 31,977 33,450 41,392 (4 ) (19 )
Interest credited to policyholder account
balances 4,362 4,467 4,487 (2 ) -
Amortization of deferred acquisition costs 5,709 5,486 5,821 4
(6 )
Other acquisition and insurance expenses 9,235 8,458 10,163 9
(17 )
Interest expense 2,319 2,444 6,742 (5 ) (64 )
Net loss on extinguishment of debt 9 2,847 104 (100 ) NM
Net (gain) loss on sale of properties and
divested businesses 2 74 (19,566 ) (97 ) NM
Other expenses 2,721 2,470 3,439 10 (28 )
Total benefits, claims and expenses 56,334 59,696
52,582 (6 ) 14
Income from continuing operations before
income tax expense (benefit) 9,322 116 20,247 NM (99 )
Income tax expense (benefit) 1,570 (19,424 ) 6,993 NM NM
Income from continuing operations 7,752 19,540 13,254 (60 ) 47
Income (loss) from discontinued operations,
net of income tax expense (benefit) (4,052 ) 1,790 (969 ) NM NM
Net income 3,700 21,330 12,285 (83 ) 74
Less: Net income attributable to
noncontrolling interests 262 708
2,227 (63 ) (68 )
Net income attributable to AIG $ 3,438 $ 20,622 $ 10,058 (83 )% 105 %
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AIG 2012 and 2011 Comparison
Income from continuing operations before income taxes for 2012 and 2011
reflected the following:
• A Year of
Progress
pre-tax income from insurance operations of $5.6 billion ----------------------
in 2012, which included catastrophe losses of
$2.7 billion, largely arising from Storm Sandy, and •
severe losses of $326 million, compared to pre-tax income For the third
from insurance operations of $4.8 billion in 2011, which consecutive year we
included catastrophe losses of $3.3 billion, largely posted a full year
arising from Hurricane Irene, U.S. tornadoes and the profit.
Great Tohoku Earthquake & Tsunami in Japan (the Tohoku •
Catastrophe) and severe losses of $296 million; Our total AIG
Property
• Casualty accident year
increases in fair value of AIG's interest in AIA ordinary loss ratio, as
shares of $2.1 billion and $1.3 billion in 2012 and 2011, adjusted, improved
respectively. The increase in fair value in 2012 included each year during the
a gain on sale of AIA ordinary shares of approximately past three years.
$0.8 billion; •
• We enhanced
spread
an increase in fair value of AIG's interest in ML III of income and actively
$2.9 billion in 2012, compared to a decrease in fair managed through the
value of $646 million in the same period of 2011; low interest
rate
• environment.
an increase in estimated litigation liability of •
approximately $783 million for the year ended Our investment
December 31, 2012 based on developments in several portfolio performance
actions; improved due to the
• completion of the cash
litigation settlement income of $210 million in 2012 from deployment in 2011.
settlements with three financial institutions who
participated in the creation, offering and sale of RMBS
from which AIG and its subsidiaries suffered losses
either for their own accounts or in connection with their
participation in AIG's securities lending program; and
•
a $3.3 billion net loss, 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. This was partially offset by a
$484 million gain on extinguishment of debt in the fourth
quarter of 2011 due to the exchange of subordinated debt.
For the year ended December 31, 2012, the effective tax rate on pre-tax income
from continuing operations was 16.8 percent. This rate differs from the
statutory rate primarily due to tax benefits of $1.9 billion related to a
decrease in the life-insurance-business capital loss carryforward valuation
allowance and $302 million associated with tax exempt interest income. These
items were partially offset by charges in uncertain tax positions of
$586 million and $172 million associated with the effect of foreign operations.
For the year ended December 31, 2011, the effective tax rate on pre-tax income
from continuing operations was not meaningful, due to the significant effect of
releasing approximately $18.4 billion of the deferred tax asset valuation
allowance. Other factors that contributed to the difference from the statutory
rate included tax benefits of $454 million associated with tax exempt interest
income, $386 million associated with the effect of foreign operations, and
$224 million related to our investment in subsidiaries and partnerships.
In 2012, AIG recorded a loss from discontinued operations, net of income taxes,
of $4.1 billion, which included a pre-tax loss of $6.7 billion on the announced
sale of ILFC.
After-tax operating income for 2012 was $6.6 billion compared to $2.1 billion
for 2011.
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AIG 2011 and 2010 Comparison
Income from continuing operations before income taxes for 2011 and 2010
reflected the following:
º •
º pre-tax income from insurance operations of $4.8 billion in 2011 which
included the catastrophe losses described above, compared to $2.6 billion
in 2010, which included catastrophe losses of $1.1 billion;
º •
º a $3.3 billion net loss on extinguishment of debt from the termination of
the FRBNY Credit Facility on January 14, 2011. This was partially offset by
a $484 million gain on extinguishment of debt in the fourth quarter of 2011
due to the exchange of junior subordinated debt;
º •
º $604 million in unfavorable fair value adjustments on AIG's economic
interest in ML II and equity interest in ML III (together, the Maiden Lane
Interests);
º •
º our 2010 results included gains of $19.6 billion on sales of divested
businesses. These included a $18.1 billion gain from the initial public
offering and listing of AIA ordinary shares on the Hong Kong Stock Exchange
on October 29, 2010, and a gain of $1.3 billion recognized in 2010 related
to the sale of our headquarters building in Tokyo in 2009, which gain had
been deferred until the expiration of certain lease provisions; and
º •
º we had income in 2010 from divested businesses prior to their sale totaling
$2.4 billion, primarily representing AIA.
Partially offsetting these declines were:
º •
º a decrease in interest expense of $4.1 billion primarily resulting from the
January 2011 repayment of the FRBNY Credit Facility;
º •
º an increase in the fair value of AIA ordinary shares; and
º •
º a reduction in realized capital losses in 2011 compared to 2010.
As discussed above, AIG released $18.4 billion of the deferred tax asset
valuation allowance for the U.S. consolidated income tax group in 2011.
For the year ended December 31, 2010, the effective tax rate on pre-tax income
from continuing operations was 34.5 percent. This rate differs from the
statutory rate primarily due to tax benefits of $1.3 billion associated with our
investment in subsidiaries and partnerships, principally the AIA SPV which is
treated as a partnership for U.S. tax purposes, and $587 million associated with
tax exempt interest, partially offset by an increase in the deferred tax asset
valuation allowance attributable to continuing operations of $1.4 billion.
In 2011, AIG recorded income from discontinued operations net of taxes of
$1.8 billion, which included a pre-tax gain of $3.5 billion recorded in the
first quarter of 2011 on the sale of AIG Star Life Insurance Co., Ltd. (AIG
Star) and AIG Edison Life Insurance Company (AIG Edison). This compared to a net
loss of $969 million in 2010, which included goodwill impairment charges of
$4.6 billion associated with the sale of American Life Insurance Company
(ALICO), AIG Star and AIG Edison.
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The following table presents a reconciliation of income attributable to AIG from
continuing operations to after-tax operating income (loss):
Years Ended December 31,
(in millions) 2012 2011 2010
Net income
$ 3,700$ 21,330$ 12,285
Income (loss) from discontinued operations, net of income tax expense (benefit) (4,052 ) 1,790 (969 )
Income from continuing operations 7,752 19,540 13,254
Net (gains) losses on sale of divested businesses 1 48 (15,326 )
Income from divested businesses - (16 ) (1,552 )
Legacy FIN 48 and other tax adjustments 543 - -
Legal reserves (settlements) related to legacy crisis matters 353 13 2
Deferred income tax valuation allowance (releases) charges (1,911 ) (18,307 ) 1,392
Amortization of FRBNY prepaid commitment fee asset - 2,358 2,255
Changes in fair value of AIG Life and Retirement fixed income securities
designated to hedge living benefit liabilities
(24 ) - -
Change in benefit reserves and DAC, VOBA and SIA related to net realized
capital (gains) losses
781 202 74
(Gain) loss on extinguishment of debt 6 (520 ) 104
Net realized capital (gains) losses (586 ) (460 ) 1,104
Non-qualifying derivative hedging gains, excluding net realized capital (gains)
losses (18 ) (84 ) (352 )
Bargain purchase gain - - (332 )
After-tax operating income
6,897 2,774 623
Net income from continuing operations attributable to noncontrolling interests 262 688 2,172
After-tax operating income (loss)
$ 6,635$ 2,086 $ (1,549 )
After-tax operating income increased in 2012 compared to 2011 primarily due to
increases in income from insurance operations and in the fair value gains on
AIG's interest in AIA ordinary shares and AIG's interest in ML III, discussed
above. This was partially offset by an increase in income tax expenses in 2012
compared to an income tax benefit in 2011.
For the year ended December 31, 2012, the effective tax rate on pre-tax
operating income was 31.6 percent. The effective tax rate for the year ended
December 31, 2012, attributable to pre-tax operating income differs from the
statutory rate primarily due to tax exempt interest income and other permanent
tax items.
For the year ended December 31, 2011, the effective tax rate on pre-tax
operating income was (9.6) percent. The significant factors that contributed to
the difference from the statutory rate included tax benefits resulting from tax
exempt interest income, tax benefits associated with non-controlling interests,
as well as discrete tax benefits recorded during the year.
We reported after-tax operating income in 2011 compared to after-tax operating
losses in 2010 primarily due to a net charge to strengthen AIG Property
Casualty's loss reserves in 2010, partially offset by higher catastrophe losses
in 2011.
For the year ended December 31, 2010, the effective tax rate on pre-tax
operating income was 70.2 percent. The effective tax rate attributable to
pre-tax operating income for the year ended December 31, 2010 differs from the
statutory rate primarily due to tax benefits associated with divested
businesses, which are excluded from after-tax operating income.
Segment Results
AIG reports the results of its operations through two reportable segments: AIG
Property Casualty and AIG Life and Retirement. The Other operations category
consists of businesses and items not allocated to our reportable segments.
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The following table summarizes the operations of each reportable segment. See
also Note 3 to the Consolidated Financial Statements.
Percentage Change
Years Ended December 31, 2012 vs. 2011 vs.
(in millions) 2012 2011 2010 2011 2010
Total revenues:
AIG Property Casualty $ 39,781 $ 40,722 $ 37,207 (2 )% 9 %
AIG Life and Retirement 16,767 15,315 14,747 9 4
Total reportable segments 56,548 56,037 51,954 1 8
Other Operations 9,974 4,079 21,405 145 (81 )
Consolidation and eliminations (866 ) (304 ) (530 ) (185 ) 43
Total 65,656 59,812 72,829 10 (18 )
Pre-tax income (loss):
AIG Property Casualty 1,837 1,820 (93 ) 1 NM
AIG Life and Retirement 3,780 2,956 2,701 28 9
Total reportable segments 5,617 4,776 2,608 18 83
Other Operations 3,899 (4,703 ) 17,611 NM NM
Consolidation and eliminations (194 ) 43 28 NM 54
Total 9,322 116 20,247 NM (99 )
A discussion of significant items affecting pre-tax segment income follows.
Factors that affect operating income for a specific business segment are
discussed in the detailed business segment analysis.
2012 and 2011 Pre-tax Income Comparison
AIG Property Casualty - Pre-tax income increased slightly in 2012 compared to
2011. The increase in pre-tax income was the result of lower underwriting losses
due to the impact of lower catastrophe losses, underwriting improvements related
to rate increases and enhanced risk selection, higher net investment income due
to asset diversification by reducing the concentration in tax-exempt municipal
instruments and increasing investments in private placement debt and structured
securities. These increases were partially offset by higher acquisition costs as
a result of the change in business mix from Commercial Insurance to Consumer
Insurance and higher general operating expenses and lower net realized capital
gains.
AIG Life and Retirement - Pre-tax income increased in 2012 compared to 2011,
principally due to efforts to actively manage net investment spreads. Results
benefited from higher net investment income, lower interest credited, lower
reserves for death claims and the impact of more favorable separate account
performance on DAC amortization and policyholder benefit reserves. These items
were partially offset by significant proceeds from a legal settlement in 2011,
higher mortality costs and an increase in GIC reserves.
Other Operations - Other Operations recorded pre-tax income in 2012 compared to
a pre-tax loss in 2011 due to fair value and realized gains in our interest in
AIA ordinary shares, and in our interest in ML III, partially offset by an
increase in estimated litigation liability, and a loss on extinguishment of debt
of $3.3 billion in 2011 in connection with the termination of the FRBNY Credit
Facility.
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2011 and 2010 Pre-tax Income Comparison
AIG Property Casualty - AIG Property Casualty generated pre-tax income in 2011
compared to a pre-tax loss in 2010. The increase in pre-tax income was the
result of lower underwriting losses primarily due to an increase in premium
revenues, resulting from the consolidation of Fuji commencing in the third
quarter of 2010 and lower prior year adverse development in 2011. These
increases in pre-tax income were partially offset by higher catastrophe losses,
and higher acquisition and general operating expenses due to a change in
business mix.
Pre-tax income also increased as a result of net realized gains in 2011 compared
to realized capital losses in 2010 due to an increase in gains on sales of
securities, economic hedges and foreign exchange. In 2010, AIG Property Casualty
recognized a bargain purchase gain from the acquisition of Fuji and a gain on
divested properties.
AIG Life and Retirement - Pre-tax income increased in 2011 compared to 2010
primarily due to net realized capital gains in 2011 compared to net realized
capital losses in 2010 as a result of a decline in other-than-temporary
impairments, partially offset by lower net investment income due to lower base
yields and an increase in death claim reserves in conjunction with the use of
the Social Security Death Master File (SSDMF) to identify potential claims not
yet filed with its life insurance companies.
Other Operations - Other Operations recorded a pre-tax loss in 2011 compared to
pre-tax income in 2010 due to a net gain on sale of divested businesses in 2010,
primarily related to AIA.
AIG Property Casualty
AIG Property Casualty 2012 Highlights
Net premiums written decreased for the year ended December 31, 2012 reflecting
the continued execution of our strategic initiatives to improve business mix,
pricing and loss performance. Declines within Commercial Insurance due to
certain lines of business that did not meet internal operating objectives were
partially offset by an increase in Consumer Insurance net premiums written.
The loss ratio improved by 4.4 points for the year ended December 31, 2012, due
to a decrease in catastrophe losses, the benefit from positive pricing trends,
the execution of our strategic initiatives and an increase in reserve discount.
Catastrophe losses, adjusted for reinstatement premiums, were $2.7 billion in
2012, primarily as a result of Storm Sandy in the fourth quarter of 2012,
compared to $3.3 billion in 2011. For the years ended December 31, 2012 and
2011, catastrophe losses contributed 7.5 and 9.2 points to the loss ratio,
respectively. Net prior year adverse development, including related premium
adjustments was $445 million and $39 million for the years ended December 31,
2012 and 2011, respectively.
The acquisition ratio increased by 1.8 points for the year ended December 31,
2012, primarily due to the change in business mix to higher value lines and
increased market competition, the restructuring of the loss-sensitive business
with low commission rates, and changes in our reinsurance strategy, all
resulting in higher commissions.
The general operating expense ratio increased by 2.4 points for the year ended
December 31, 2012, as we continue to build, strengthen and streamline our
financial and operating systems infrastructure and control environment
throughout the organization, particularly in financial reporting, policy and
claims administration, and human resources as a result of our continued
investment in our employees. The total costs of these initiatives were
approximately $455 million for the year ended December 31, 2012, an increase of
approximately $233 million from the prior year. In addition, bad debt expense
increased by approximately $143 million from the prior year.
Net investment income increased by 11.0 percent for the year ended December 31,
2012, due to asset diversification by reducing the concentration in tax-exempt
municipal instruments and increasing investments in private placement debt and
structured securities.
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We paid cash and non-cash dividends of $2.5 billion to AIG in the year ended
December 31, 2012. As a result of Storm Sandy catastrophe losses, AIG
contributed $1.0 billion of capital in cash to its U.S. property casualty
insurance subsidiaries in December 2012.
AIG Property Casualty Operations
We present our financial information in two operating segments - Commercial
Insurance and Consumer Insurance - as well as an Other category.
We will continue to assess the performance of our operating segments based on
operating income (loss), loss ratio, acquisition ratio, general operating
expense ratio and combined ratio.
We are developing new value-based metrics that provide management shorter-term
measures to evaluate our performance across multiple lines and various
countries. As an example, we have implemented a risk-adjusted profitability
model as a business performance measure. Along with underwriting results, this
risk-adjusted profitability model incorporates elements of capital allocations,
costs of capital and net investment income. We believe that such performance
measures will allow us to better assess the true economic returns of our
business.
For the years ended December 31, 2012 and 2011, results reflect the effects of
the full year of Fuji operations, while the corresponding 2010 period reflects
the effects of Fuji for only two quarters, because we began consolidating Fuji's
operating results on July 1, 2010, following its acquisition. Fuji operations
primarily relate to Consumer Insurance.
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AIG Property Casualty Results
The following table presents AIG Property Casualty results:
Percentage Change
Years Ended December 31, 2012 vs.
(in millions) 2012 2011 2010 2011 2011 vs. 2010
Commercial Insurance
Underwriting results:
Net premiums written $ 20,300 $ 21,055 $ 20,173 (4 )% 4 %
Decrease in unearned premiums 500 748 889 (33 ) (16 )
Net premiums earned 20,800 21,803 21,062 (5 ) 4
Claims and claims adjustment expenses incurred 16,696 18,332 18,814 (9 ) (3 )
Underwriting expenses 6,009 5,345 5,252 12 2
Underwriting loss (1,905 ) (1,874 ) (3,004 ) (2 ) 38
Net investment income 2,809 3,213 3,309 (13 ) (3 )
Operating income $ 904 $ 1,339 $ 305 (32 )% 339 %
Consumer Insurance
Underwriting results:
Net premiums written $ 14,150 $ 13,762 $ 11,346 3 % 21 %
Increase in unearned premiums (198 ) (7 ) (67 ) NM 90
Net premiums earned 13,952 13,755 11,279 1 22
Claims and claims adjustment expenses incurred 8,498 8,900 6,745 (5 ) 32
Underwriting expenses 5,613 5,253 4,650 7 13
Underwriting loss (159 ) (398 ) (116 ) 60 (243 )
Net investment income 451 354 301 27 18
Operating income (loss) $ 292 $ (44 ) $ 185 NM % NM %
Other
Underwriting results:
Net premiums written $ (14 ) $ 23 $ 93 NM % (75 )%
Decrease in unearned premiums 135 108 87 25 24
Net premiums earned 121 131 180 (8 ) (27 )
Claims and claims adjustment expenses incurred 591 717 2,308 (18 ) (69 )
Underwriting expenses 466 272 200 71 36
Underwriting loss (936 ) (858 ) (2,328 ) (9 ) 63
Net investment income 1,560 781 782 100 -
Operating income (loss) 624 (77 ) (1,546 ) NM 95
Net realized capital gains (losses) (2 ) 607 (38 ) NM NM
Legal settlement 17 - - NM NM
Bargain purchase gain - - 332 NM NM
Other income (expense) - net 2 (5 ) 669 NM NM
Pre-tax income (loss) $ 641 $ 525 $ (583 ) 22 % NM %
Total AIG Property Casualty
Underwriting results:
Net premiums written $ 34,436 $ 34,840 $ 31,612 (1 )% 10 %
Decrease in unearned premiums 437 849 909 (49 ) (7 )
Net premiums earned 34,873 35,689 32,521 (2 ) 10
Claims and claims adjustment expenses incurred 25,785 27,949 27,867 (8 ) -
Underwriting expenses 12,088 10,870 10,102 11 8
Underwriting loss (3,000 ) (3,130 ) (5,448 ) 4 43
Net investment income 4,820 4,348 4,392 11 (1 )
Operating income (loss) 1,820 1,218 (1,056 ) 49 NM
Net realized capital gains (losses) (2 ) 607 (38 ) NM NM
Legal settlement 17 - - NM NM
Bargain purchase gain - - 332 NM NM
Other income (expense) - net* 2 (5 ) 669 NM NM
Pre-tax income (loss) $ 1,837 $ 1,820 $ (93 ) 1 % NM %
* Includes gain on divested properties of $669 million in 2010.
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2012 and 2011 Comparison
AIG Property Casualty Results
Operating income increased in 2012, primarily due to a decrease in catastrophe
losses to $2.7 billion from $3.3 billion in the prior year. In addition, net
investment income increased due to asset diversification, from concentration in
tax-exempt municipal instruments into investments in private placement debt and
structured securities. This was slightly offset by an increase in acquisition
costs due to the change in business mix to higher value lines of business and
the change in business mix from Commercial Insurance to Consumer Insurance.
General operating expenses increased due to the continued investment in
strategic initiatives and human resources, as a result of AIG's continued
investment in its employees. For the year ended December 31, 2012, investments
in strategic initiatives totaled approximately $455 million, representing an
increase of approximately $233 million over the prior year. In addition, bad
debt expense increased by approximately $143 million from the prior year. Net
prior year adverse development, including premium adjustments, was $445 million
for 2012 compared to $39 million for 2011.
Commercial Insurance Results
Operating income decreased in 2012, primarily due to a decrease in allocated net
investment income reflecting a decrease in the risk-free rate. Underwriting
losses increased slightly compared to the prior year, reflecting lower
catastrophe and improved current accident year losses, the effect of rate
increases and enhanced risk selection, and an increase in reserve discount of
$100 million, offset by higher acquisition and general operating expenses, and
higher adverse prior year development.
Acquisition costs increased primarily as a result of higher commission expense
due to the restructuring of the U.S. Casualty, primarily loss-sensitive
business, as we move towards higher value lines. General operating expenses
increased due to an increase in bad debt expense of approximately $143 million
and investments in strategic initiatives.
Consumer Insurance Results
Consumer Insurance generated operating income in 2012 compared to an operating
loss in 2011, reflecting a reduction in underwriting loss as well as an increase
in allocated net investment income resulting primarily from the strategic group
benefits partnership with AIG Life and Retirement. Underwriting results improved
due to the combination of lower catastrophe losses, favorable loss reserve
development, the effect of rate increases, enhanced risk selection and portfolio
management. These improvements were offset in part by higher acquisition and
general operating expenses.
Acquisition costs increased primarily due to an increase in warranty profit
sharing arrangements, increased investment in direct marketing, and a decrease
of approximately $49 million in the benefit from the amortization of VOBA
liabilities recognized at the time of the Fuji acquisition. General operating
expenses increased in 2012 due to investments in infrastructure and strategic
expansion in growth economy nations.
2011 and 2010 Comparison
AIG Property Casualty Results
We recognized operating income in 2011 compared to an operating loss in 2010
primarily due to an increase in premium revenues, partially offset by higher
acquisition and general operating expenses. Prior year adverse loss development,
net of premium adjustments, decreased from $4.8 billion in 2010 to $39 million
in 2011. Catastrophe losses were $3.3 billion in 2011 compared to $1.1 billion
in 2010.
Acquisition and general operating expenses increased in 2011, primarily due to
the effect of including Fuji results for a full year. General operating expenses
also increased due to investments in a number of strategic initiatives during
2011, including the implementation of improved regional governance and risk
management capabilities, the implementation of global accounting and claims
systems, preparation for Solvency II and certain other legal entity
restructuring initiatives.
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Commercial Insurance Results
Operating income increased in 2011, reflecting the effect of rate increases and
enhanced risk selection. These items were partially offset by higher catastrophe
losses, higher acquisition expenses and a decrease in the allocated net
investment income due to a decrease in the risk-free rate. In 2011, catastrophe
losses, adjusted for reinstatement premiums, were $2.6 billion compared to
$1.0 billion in 2010, as 2011 included the impact of the Tohoku Catastrophe in
Japan and the earthquakes in New Zealand. In 2011, net prior year favorable
development, including premium adjustments, was $455 million compared to net
prior year adverse development of $2.6 billion in 2010.
Consumer Insurance Results
Consumer Insurance recognized an operating loss in 2011 compared to operating
income in 2010 primarily due to an increase in catastrophe losses, which
includes the Tohoku Catastrophe and Hurricane Irene. This was partially offset
by an improvement in the accident year loss ratio, and an increase in allocated
net investment income. Catastrophe losses for the year ended December 31, 2011
were $715 million compared to $66 million during the prior year. Net prior year
adverse development was $85 million in 2011 as compared to net prior year
favorable development of $63 million in 2010.
See AIG Property Casualty Underwriting Ratios below for further information on
prior year development.
AIG Property Casualty Net Premiums Written
The following table presents AIG Property Casualty net premiums written by major
line of business:
Percentage Change
Years Ended December 31, 2012 vs.
(in millions) 2012 2011 2010 2011 2011 vs. 2010
Commercial Insurance
Casualty $ 8,574 $ 9,820 $ 9,940 (13 )% (1 )%
Property 4,191 3,811 3,180 10 20
Specialty 3,576 3,552 3,335 1 7
Financial lines 3,959 3,872 3,718 2 4
Total net premiums written $ 20,300$ 21,055$ 20,173 (4 )%
4 %
Consumer Insurance
Accident & Health $ 6,969 $ 6,762 $ 5,774 3 % 17 %
Personal lines 7,181 7,000 5,572 3 26
Total net premiums written $ 14,150$ 13,762$ 11,346 3 %
21 %
Other (14 ) 23 93 NM (75 )
Total AIG Property Casualty
net premiums written $ 34,436 $ 34,840 $ 31,612 (1 )% 10 %
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2012 and 2011 Comparison
Commercial Insurance Net Premiums Written
In 2012, Commercial Insurance focused on the execution of the previously
announced strategic objectives. The overall decrease in Casualty was partially
offset by increases in all the other lines of business.
Casualty net premiums written decreased, as planned, primarily due to the
execution of our strategy to improve loss ratios. Our enhanced risk selection
process, and adherence to pricing targets resulted in the non-renewal of
approximately $800 million of net premiums written, primarily within the
workers' compensation business in the Americas, and within the Primary Casualty
business in EMEA. In addition, the restructuring of the loss-sensitive programs
decreased Casualty net premiums written by approximately $260 million in 2012.
The additional premiums associated with prior year development in the
loss-sensitive business also decreased by approximately $120 million. We also
entered into a quota share reinsurance treaty in the U.S. for the Excess
Casualty business that decreased net premiums written by approximately
$60 million. We implemented rate increases in retained business, especially in
the U.S., that partially offset the premium decreases noted above.
Property net premiums written increased due to rate increases, primarily in the
U.S., reduced catastrophe bond purchases in 2012, and the restructuring of the
per-risk reinsurance program as part of our 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.
We have continued the strategy, adopted in 2010, to improve the allocation of
our reinsurance between traditional reinsurance markets and capital markets.
During 2011, as part of this strategy, we secured a three-year catastrophe bond
with an industry index, first occurrence trigger, providing for $575 million in
protection for U.S. hurricanes and earthquakes. The bond transaction reduced net
premiums written by approximately $201 million in 2011. There were no
catastrophe bond purchases in 2012.
Specialty net premiums written increased in 2012 due to the restructuring of the
aerospace reinsurance program to retain more favorable risks while continuing to
manage aggregate exposure. This increase was slightly offset by our strategic
initiatives related to improved risk selection, particularly within products
provided to small and medium sized enterprises in the Americas and EMEA regions.
We continue to shift our business mix towards higher value lines, particularly
in aerospace.
Financial lines net premiums written increased, reflecting strong business
growth in all regions, despite targeted decreases where the business did not
meet our risk selection and internal performance criteria. Financial lines net
premiums written for year ended December 31, 2011 benefited from a multi-year
Errors and Omissions policy in the Americas that produced net premiums written
of $148 million.
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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 continuing focus
on direct marketing. Consumer Insurance is well-diversified 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 we continued
to emphasize the growth of this channel, which for the year ended December 31,
2012, accounted for approximately 15 percent of our overall net premiums
written.
A&H net premiums written increased, due to the growth of group personal accident
business in the Americas and Asia Pacific, strong growth of new business sales
in Fuji Life, travel insurance business, direct marketing programs in Japan and
other Asia Pacific nations and growth in individual personal accident in other
Asia Pacific nations. This was partially offset by the continuing strategies to
reposition U.S. direct marketing operations, as well as pricing and underwriting
actions in Europe.
Personal lines net premiums written increased primarily due to the execution of
our strategic initiative to grow higher value lines of business in
non-automobile products and rate increases in Japan automobile products. Growth
in non-automobile net premiums written outpaced growth in automobile net
premiums written, increasing its proportion to total net premiums written, due
to our focus on diversifying the global product mix.
2011 and 2010 Comparison
Commercial Insurance Net Premiums Written
In 2011, net premiums written increased due to the effects of overall
improvements in ratable exposures (i.e., asset values, payrolls and sales),
general pricing improvement and retrospective premium adjustments on
loss-sensitive contracts. We implemented certain initiatives designed to provide
for a more effective use of capital, further growth in the strategic higher
value lines of business and improvement in foreign exchange rates.
Casualty net premiums written decreased primarily due to our strategic
initiatives in workers' compensation and certain other lines of business, as
well as a continued commitment to maintain price discipline in lines where
market rates are unsatisfactory. However, given the capital intensive nature of
these classes of casualty business, we expect that over time, these actions will
improve our results. Net premiums written decreased by approximately
$0.6 billion as we ceased writing excess workers' compensation business as a
stand-alone product. This was slightly offset by an increase in additional
premiums on loss-sensitive business in the amount of approximately $164 million
compared to 2010.
Property net premiums written increased due to particularly strong pricing
trends in the U.S. and Japan, coupled with changes in the reinsurance strategy
resulting in increased retentions. The catastrophe bond transactions in 2011 and
2010 reduced net premiums written by approximately $201 million and
$208 million, respectively.
Specialty net premiums written increased due to the strategic initiative to grow
higher value lines, including aerospace, global marine, and credit insurance,
all of which benefited from the impact of rate increases as well as new business
growth.
Financial lines net premiums written increased primarily due to a multi-year
Errors and Omissions policy in the Americas that produced net premiums written
of $148 million in 2011.
Consumer Insurance Net Premiums Written
Consumer Insurance net premiums written increased in 2011 primarily due to the
effect of including Fuji results for a full year, improvement in foreign
currency exchange rates, primarily in the Japanese Yen, and further growth in
the strategic higher value lines of business. Excluding the effect of the Fuji
acquisition and foreign exchange, Consumer Insurance net premiums written
declined by one percent in 2011, primarily due to the non-renewal of certain
programs in the U.S. and Canada that did not meet internal performance targets
in Personal lines business.
A&H net premiums written increased primarily due to the Fuji acquisition, direct
marketing, group and individual accident, travel business, and the execution of
new business strategies at Fuji Life. Excluding the Fuji acquisition, A&H net
premiums written increased by approximately 7 percent, mainly attributable to
favorable marketing programs and the benefits of rate increases implemented in
2010 in Japan and the effect of foreign exchange. Growth was also demonstrated
in key geographic markets such as China, Continental Europe and Israel.
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Personal lines net premiums written increased primarily driven by the full year
consolidation of Fuji results and growth in auto, personal property, and
specialty personal lines products. Excluding the effects of the Fuji
acquisition, Personal Lines net premiums decreased one percent, primarily as a
result of a management decision to not renew certain programs in the U.S. and
Canada that did not meet internal performance targets. Personal Lines continued
to grow in key markets, including Japan and other Asia Pacific countries, Latin
America, and in key lines, such as personal property and specialty personal
lines products.
AIG Property Casualty Net Premiums Written by Region
The following table presents AIG Property Casualty's net premiums written by
region:
Percentage Change in Percentage Change in
U.S. dollars Original CurrencyYears Ended December 31, 2012 vs. 2011 vs. 2012 vs. 2011 vs.
(in millions) 2012 2011 2010 2011 2010 2011 2010
Commercial Insurance:
Americas $ 13,717 $ 14,493 $ 14,302 (5 )% 1 % (5 )% 1 %
Asia Pacific 2,003 1,868 1,326 7 41 7 31
EMEA 4,580 4,694 4,545 (2 ) 3 1 1
Total net premiums written $ 20,300 $ 21,055 $ 20,173 (4 )% 4 % (3 )% 3 %
Consumer Insurance:
Americas $ 3,913 $ 3,628 $ 3,640 8 % - % 9 % - %
Asia Pacific 8,443 8,194 5,826 3 41 2 30
EMEA 1,794 1,940 1,880 (8 ) 3 (2 ) (1 )
Total net premiums written $ 14,150 $ 13,762 $ 11,346 3 % 21 % 3 % 15 %
Other:
Americas $ (16 ) $ 23 $ 93 NM % (75 )% NM % NM %
Asia Pacific 2 - - NM NM NM NM
Total net premiums written $ (14 ) $ 23 $ 93 NM % (75 )% NM % NM %
Total AIG Property Casualty:
Americas $ 17,614 $ 18,144 $ 18,035 (3 )% 1 % (3 )% 1 %
Asia Pacific 10,448 10,062 7,152 4 41 3 30
EMEA 6,374 6,634 6,425 (4 ) 3 - 1
Total net premiums written $ 34,436 $ 34,840 $ 31,612 (1 )% 10 % (1 )% 7 %
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2012 and 2011 Comparison
The Americas net premiums written decreased primarily due to the restructuring
of the Commercial Insurance Casualty book of business primarily in workers'
compensation and loss-sensitive business, slightly offset by rate increases.
These decreases were partially offset by continued growth in Consumer Insurance,
which was primarily attributable to increases to group accident, personal
property, and private client group and warranty lines. Additional premium
recognized on the loss-sensitive book of business was $54 million for the year
ended December 31, 2012 compared to additional premium of $172 million in the
prior year.
Asia Pacific net premiums written increased for the year ended December 31, 2012
primarily due to an increase in Consumer Insurance reflecting growth of personal
property business, group personal accident insurance, and direct marketing
business in Japan. The expansion in Asia Pacific countries outside Japan also
continued in the year ended December 31, 2012, supported by growth in individual
personal accident insurance, direct marketing and personal lines products.
Commercial Insurance increased in the region primarily due to organic growth and
rate increases in Property and moderate organic growth in Specialty and
Financial lines.
EMEA net premiums written decreased primarily due to the impact of foreign
exchange. The continued execution of underwriting discipline and the reduction
in certain casualty lines that did not meet internal performance targets were
offset by rate strengthening initiatives on new and renewal business for
Commercial Insurance. Consumer Insurance experienced modest growth in travel,
warranty, and specialty personal lines products while focused on re-building its
direct marketing programs that it previously shared with American Life Insurance
Company (ALICO).
2011 and 2010 Comparison
The Americas net premiums written increased slightly as a result of modest
growth in Commercial Insurance offset by a small decrease in Consumer Insurance.
The increase in Commercial Insurance was primarily due to the pricing
improvements in Property and Specialty, which was slightly offset by a decrease
in Casualty due to the strategic initiative in workers' compensation. The
decrease in Consumer insurance was primarily due to underwriting actions taken
in private client group to meet performance targets and a decrease in warranty
lines new business in the U.S. and Canada, partially offset by continued growth
in travel business and A&H direct marketing in Latin America.
Asia Pacific net premiums written increased as a result of the effect of the
full year consolidation of Fuji. Excluding the effect of the Fuji acquisition,
net premium written increased 13 percent. The increase in Commercial Insurance
was due to rate increases in Property, primarily in Japan. Consumer Insurance
business in Asia Pacific countries outside Japan also expanded, supported by
growth in nearly all lines of business, particularly individual personal
accident insurance, travel, and auto products.
In EMEA, the increase in Commercial Insurance was primarily related to growth in
specialty products in line with our strategic initiative to grow higher value
lines. Excluding the impact of foreign exchange, Consumer Insurance decreased as
the business was focused on rebuilding the direct marketing programs that we
previously shared with ALICO and the non-renewal of certain business to retain
underwriting discipline. These decreases were largely offset by growth in group
accident insurance, automobile and specialty personal lines products.
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AIG Property Casualty Underwriting Ratios
The following table presents the AIG Property Casualty combined ratios based on
GAAP data and reconciliation to the accident year combined ratio, as adjusted:
Increase (Decrease)
Years Ended December 31, 2012 vs. 2011 vs.
2012 2011 2010 2011 2010
Commercial Insurance
Loss ratio 80.3 84.1 89.3 (3.8 ) (5.2 )
Catastrophe losses and
reinstatement premiums (10.9 ) (11.9 ) (4.8 ) 1.0 (7.1 )
Prior year development net of
premium adjustments (1.2 ) 1.9 (12.2 ) (3.1 ) 14.1
Change in discount 0.5 0.2 1.9 0.3 (1.7 )
Accident year loss ratio, as
adjusted 68.7 74.3 74.2 (5.6 ) 0.1
Acquisition ratio 16.6 14.6 14.1 2.0 0.5
General operating expense ratio 12.3 9.9 10.8 2.4 (0.9 )
Expense ratio 28.9 24.5 24.9 4.4 (0.4 )
Combined ratio 109.2 108.6 114.2 0.6 (5.6 )
Catastrophe losses and
reinstatement premiums (10.9 ) (11.9 ) (4.8 ) 1.0 (7.1 )
Prior year development net of
premium adjustments (1.2 ) 1.9 (12.2 ) (3.1 ) 14.1
Change in discount 0.5 0.2 1.9 0.3 (1.7 )
Accident year combined ratio, as
adjusted 97.6 98.8 99.1 (1.2 ) (0.3 )
Consumer Insurance
Loss ratio 60.9 64.7 59.8 (3.8 ) 4.9
Catastrophe losses and
reinstatement premiums (2.7 ) (5.2 ) (0.6 ) 2.5 (4.6 )
Prior year development net of
premium adjustments 0.1 (0.6 ) 0.6 0.7 (1.2 )
Accident year loss ratio, as
adjusted 58.3 58.9 59.8 (0.6 ) (0.9 )
Acquisition ratio 25.0 23.8 26.5 1.2 (2.7 )
General operating expense ratio 15.3 14.4 14.7 0.9 (0.3 )
Expense ratio 40.3 38.2 41.2 2.1 (3.0 )
Combined ratio 101.2 102.9 101.0 (1.7 ) 1.9
Catastrophe losses and
reinstatement premiums (2.7 ) (5.2 ) (0.6 ) 2.5 (4.6 )
Prior year development net of
premium adjustments 0.1 (0.6 ) 0.6 0.7 (1.2 )
Accident year combined ratio, as
adjusted 98.6 97.1 101.0 1.5 (3.9 )
Total AIG Property Casualty
Loss ratio 73.9 78.3 85.7 (4.4 ) (7.4 )
Catastrophe losses and
reinstatement premiums (7.5 ) (9.2 ) (3.3 ) 1.7 (5.9 )
Prior year development net of
premium adjustments (1.4 ) (0.3 ) (14.9 ) (1.1 ) 14.6
Change in discount 0.2 (0.1 ) 1.7 0.3 (1.8 )
Accident year loss ratio, as
adjusted 65.2 68.7 69.2 (3.5 ) (0.5 )
Acquisition ratio 19.9 18.1 18.3 1.8 (0.2 )
General operating expense ratio 14.8 12.4 12.8 2.4 (0.4 )
Expense ratio 34.7 30.5 31.1 4.2 (0.6 )
Combined ratio 108.6 108.8 116.8 (0.2 ) (8.0 )
Catastrophe losses and
reinstatement premiums (7.5 ) (9.2 ) (3.3 ) 1.7 (5.9 )
Prior year development net of
premium adjustments (1.4 ) (0.3 ) (14.9 ) (1.1 ) 14.6
Change in discount 0.2 (0.1 ) 1.7 0.3 (1.8 )
Accident year combined ratio, as
adjusted 99.9 99.2 100.3 0.7 (1.1 )
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Given the nature of the lines of business and the expenses included in Other,
management has determined that the traditional underwriting measures of loss
ratio, acquisition ratio, general operating expense ratio and combined ratio do
not provide an appropriate measure of underwriting performance. Therefore, these
ratios are not separately presented for Other.
See Liability for Unpaid Claims and Claims Adjustment Expense for further
discussion of discounting of reserves and prior year development.
2012 and 2011 Comparison
Commercial Insurance Ratios
The improvement in the accident year loss ratio, as adjusted, for the year ended
December 31, 2012 reflects the realization of benefits from the continued
execution of our multi-faceted strategy to enhance risk selection, pricing
discipline, exposure management and claims processing. Although the execution of
these strategies resulted in a reduction of Casualty net premiums written, it
also improved the accident year loss ratio as we remediated our primary and
excess Casualty books in both the Americas and EMEA regions. Financial lines
improved due to rate strengthening and restructuring and re-underwriting of
certain products. Property improved due to rate strengthening, enhanced
engineering and exposure management.
The acquisition ratio increased by 2.0 points primarily due to our strategy of
growing higher value lines, which typically incur higher acquisition costs, and
the restructuring of our Casualty lines, especially the loss-sensitive
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business in the U.S. In addition, ceding commissions decreased as a result of
restructuring of the Property and Specialty reinsurance program as part of the
strategic decision to retain more profitable business while continuing to manage
aggregate exposures.
The general operating expense ratio increased by 2.4 points due to increases in
bad debt expense, investments in strategic initiatives and human resources,
coupled with a lower net premiums earned base. The lower net premiums earned
base contributed approximately 0.2 points to the increase in the general
operating expense ratio. Bad debt expense increased by approximately
$143 million, which contributed approximately 0.7 points to the general
operating expense ratio increase in the year ended December 31, 2012. For the
year ended December 31, 2012, investments in strategic initiatives, commercial
lines platform, our newly formed scientific group, underwriting and pricing
tools totaled approximately $51 million, representing an increase of
approximately $41 million over the prior year. The remainder of the general
operating expense ratio increase was primarily due to higher personnel costs, as
part of AIG's continued investment in its employees.
Consumer Insurance Ratios
The accident year loss ratio, as adjusted, in the year ended December 31, 2012
improved in both A&H and Personal lines. The improvement in A&H is primarily
attributable to favorable underwriting performance of individual personal
accident business in Asia Pacific, targeted underwriting actions, coupled with
rate increases and risk selection of group A&H in the U.S. and the overall
travel business. The improvement in Personal lines is primarily attributable to
improved underwriting and risk selection in the warranty line of business, price
sophistication and rate strengthening for Japan, EMEA automobile and the U.S.
private client group, and targeted business mix changes that resulted in faster
growth in non-automobile products than the automobile line of business. Included
in the accident year loss ratio, as adjusted, for the year ended December 31,
2012, are severe losses totaling $33 million. There were no severe losses for
the year ended December 31, 2011.
The acquisition ratio increased by 1.2 points primarily due to profit sharing
arrangements in lines of business targeted for growth, direct marketing expenses
and the reduction in VOBA benefit. Overall direct marketing costs increased by
approximately 9 percent in 2012; total direct marketing spending outside the
U.S. increased by approximately 18 percent in the same period. There was also a
decrease of approximately $49 million in the benefit from the amortization of
VOBA liabilities recognized at the time of the Fuji acquisition.
The general operating expense ratio increased by 0.9 points as a result of
incurring additional expenses to grow key lines of business across a number of
geographic areas and strategic expansion in growth economy nations. For the year
ended December 31, 2012, investments in strategic initiatives, including
investments in an integrated consumer lines platform and information systems
infrastructure totaled approximately $44 million, representing an increase of
approximately $27 million or 0.2 points over the prior year. The remainder of
the increase was primarily due to higher personnel costs, as we continue our
efforts to align employee performance across the globe with our strategic goals.
Other Category
We 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 regulation by the FRB,
legal entity restructuring, and underwriting and claims improvement initiatives.
We also continued to streamline our finance, policy and claims administration
and human resources operations. The costs of these initiatives, which are not
specific to either Commercial Insurance or Consumer Insurance, are reported as
part of the Other category. For the year ended December 31, 2012, such costs
totaled $391 million, representing an increase of approximately $195 million
over the prior year, and contributed approximately 1.1 points to the AIG
Property Casualty general operating expense ratio.
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2011 and 2010 Comparison
Commercial Insurance Ratios
The Commercial Insurance accident year loss ratio, as adjusted, increased in
2011 due to increased losses for the Specialty Workers' Compensation and Excess
Casualty business (in the Americas region) and the Primary Casualty and
Professional Indemnity businesses (in the EMEA region). Severe losses were
$296 million for the year ended December 31, 2011, compared to $135 million in
the prior year. These increases were largely offset by rate strengthening and
underwriting actions taken since 2010.
The acquisition ratio increased by 0.5 point in 2011 due to a change in the mix
of business from low commission casualty business to higher commission property
business, due to the underwriting actions taken since 2010, partially offset by
rate strengthening.
The general operating expense ratio decreased by 0.9 points in 2011 compared to
2010 due to the overall growth in the business. In addition, the expense ratio
reflects the effects of continued enhancements to regional governance, risk
management capabilities and investments within growth economy nations.
Consumer Insurance Ratios
The accident year loss ratio, as adjusted, in the year ended December 31, 2011
decreased, primarily due to rate strengthening and underwriting actions taken
since 2010 and strong results in direct marketing and individual personal
accident business.
The acquisition ratio decreased by 2.7 points primarily due to the effects of
the full year consolidation of Fuji results. Fuji has a lower average
acquisition ratio than the rest of the Consumer Insurance business due in part
to its business mix.
The general operating expense ratio decreased by 0.3 points, primarily due to
the growth in the business offset by investments in strategic initiatives,
including a consumer lines platform and the implementation of global finance and
information systems totaling $16 million, an increase of approximately
$9 million over the prior year.
Other Category
We increased investments in a number of strategic initiatives during 2011,
including the implementation of improved regional governance and risk management
capabilities, the implementation of global accounting and claims systems,
preparation for Solvency II and certain other legal entity restructuring
initiatives. For the year ended December 31, 2011, such investments totaled
$196 million, representing an increase of approximately $134 million over the
prior year, and contributed approximately 0.5 points to the AIG Property
Casualty general operating expense ratio.
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The following table presents AIG Property Casualty accident year catastrophe
losses, by major event and severe losses:
Years Ended
December 31, 2012 2011 2010
# of Commercial Consumer # of Commercial Consumer # of Commercial Consumer
(in millions) Events Insurance Insurance Total Events Insurance Insurance Total Events Insurance Insurance Total
Event: (a)
Storm Sandy (b) 1 $ 1,691 $ 322 $ 2,013 - $ - $ - $ - - $ - $ - $ -
U.S. Windstorms 8 326 13 339 4 383 14 397 8 291 51 342
U.S. Drought 1 108 - 108 - - - - - - - -
Hurricane Isaac 1 56 22 78 - - - - - - - -
Hurricane Irene - - - - 1 296 73 369 - - - -
Thailand Flood - - - - 1 366 2 368 - - - -
Tohoku Catastrophe (c) - - - - 1 667 524 1,191 - - - -
New Zealand earthquakes - - - - 2 344 7 351 - - - -
Chile earthquake - - - - - - - - 1 289 2 291
Southeast U.S. flood - - - - - - - - 1 171 4 175
All other events 3 62 25 87 13 525 95 620 9 249 9 258
Claims and claim
expenses 2,243 382 2,625 2,581 715 3,296 1,000 66 1,066
Reinstatement premiums 27 - 27 11 - 11 10 - 10
Total
catastrophe-related
charges 14 $ 2,270 $ 382 $ 2,652 22 $ 2,592 $ 715 $ 3,307 19 $ 1,010 $ 66 $ 1,076
Total severe losses and
loss adjustment expense 23 $ 293 $ 33 $ 326 21 $ 296 $ - $ 296 12 $ 135 $ 12 $ 147
(a) Events shown in the above table are catastrophic insured events having a
net impact in excess of $10 million each. Severe losses are defined as
non-catastrophe individual first party losses greater than $10 million, net of
related reinsurance.
(b) On October 29, 2012 Storm Sandy, one of the largest Atlantic hurricanes on
record, came ashore in the U.S. When the storm made landfall, it was categorized
as an extratropical cyclone, not a hurricane. Storm Sandy is expected to be the
second-costliest Atlantic hurricane in history, only surpassed by Hurricane
Katrina in 2005. Storm Sandy caused widespread flooding and wind damage across
the mid-Atlantic states.
(c) On March 11, 2011, a major earthquake occurred near the northeast coast of
Honshu, Japan, triggering a tsunami in the Pacific Ocean. This disaster is
referred to as the Tohoku Catastrophe.
AIG Property Casualty Investing and Other Results
The following table presents AIG Property Casualty's investing and other
results:
Percentage Change
Years Ended December 31, 2012 vs. 2011 vs.
(in millions) 2012 2011 2010 2011 2010
Net investment income
Commercial Insurance $ 2,809 $ 3,213 $ 3,309 (13 )% (3 )%
Consumer Insurance 451 354 301 27 18
Other 1,560 781 782 100 -
Total net investment income 4,820 4,348 4,392 11 (1 )
Net realized capital gains (losses) ( 2 ) 607 (38 ) NM NM
Legal settlement 17 - - NM NM
Bargain purchase gain - - 332 NM NM
Other income (expense) - net* 2 (5 ) 669 NM NM
Investing and other results $ 4,837 $ 4,950 $ 5,355 (2 )% (8 )%
* Includes gain on divested properties of $669 million in 2010
We manage and account for our 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 Insurance and
Consumer Insurance operating segments as well as the Other category. Invested
assets are not segregated or otherwise separately identified for the Commercial
Insurance 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
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income from the assets not attributable to the Commercial Insurance and the
Consumer Insurance operating segments are assigned to the Other category.
Net realized capital gains (losses), bargain purchase gains and other income
(expense) - net are not allocated to Commercial Insurance and Consumer
Insurance, but are reported as part of the Other category.
2012 and 2011 Comparison
Net Investment Income
Net investment income is influenced by a number of factors including the amounts
and timing of inward and outward cash flows, the level of interest rates and
changes in overall asset allocation. Net investment income increased
$472 million or 11 percent in 2012, compared to 2011, primarily due to the
impact of the overall diversification in the asset portfolio during the year. We
adopted yield-enhancement initiatives in 2011, and continued through 2012, which
increased the average yield of our investment portfolio by 0.3 points to
4.0 percent during 2012.
While corporate debt securities continued to be the largest asset category, we
continued to reduce our concentration in lower yielding tax exempt municipal
bond holdings and focus on risk weighted opportunistic investments in higher
yielding assets such as structured securities. This asset diversification has
achieved an increase in average yields while the overall credit ratings of our
fixed maturity investments were largely unchanged. We expect to continue to
refine our investment strategy in 2013 to meet our liquidity, duration and
credit quality objectives as well as current risk-return and tax objectives.
Our invested asset portfolio grew by approximately $4.3 billion, or 3 percent
during the year with declining interest rates and narrowing spreads in both
investment grade and higher yield asset classes contributing to higher
unrealized appreciation in our portfolio.
Net investment income from other investment categories increased by $160 million
in 2012 compared to 2011, of which $82 million was attributed to the strong
performance of equity partnership investments, following a 16 percent increase
in the S&P 500 Index during 2012. Other investment income also increased by
$72 million due to the strategic group benefits partnership with AIG Life and
Retirement, all of which is reported in Consumer Insurance.
Net Realized Capital Gains (Losses)
Net realized capital losses for the year ended December 31, 2012 were driven by
other-than-temporary impairments and impairment charges on life settlement
contracts offset by gains recognized on the sale of fixed maturity and equity
securities. We recognized other-than-temporary impairment charges of
$377 million primarily attributable to a decrease in recoverable values for
structured securities, partnership investments and equity securities in an
unrealized loss position for more than 12 months. During 2012, we recognized
impairment charges on life settlement contracts in the amount of $309 million as
a result of decreases in their estimated fair value as well as a change in
management's intent about continuing to hold certain life settlement contracts.
In addition, we recognized a loss of $43 million from derivatives used to
economically hedge foreign currency positions. These decreases were offset by
gains recognized on the sale of fixed maturity and equity securities in the
amount of $675 million and a gain on the sale of a property in the amount of
$55 million.
See Consolidated Results for further discussion on net investment income and net
realized capital gains (losses).
Legal Settlements
In December of 2012, we recorded litigation settlement income from settlements
with three financial institutions who participated in the creation, offering and
sale of RMBS as to which AIG and its subsidiaries suffered losses either
directly on their own account or in connection with their participation in AIG's
securities lending program.
2011 and 2010 Comparison
Net Investment Income
Net investment income decreased slightly in 2011 compared to 2010. We
experienced declines in private equity and hedge fund income, as well as
increases in investment expenses, which were largely offset by increases in
interest income. The decrease in private equity and hedge fund income reflects
the decline in the overall equity markets during the second half of 2011. The
increase in investment expenses in 2011 resulted mainly from increases in both
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internal and external investment management fees. The interest income increase
reflects the redeployment of cash and short term instruments into longer term,
higher yield securities. In addition, 2011 reflects a full year of interest
income related to Fuji.
Net Realized Capital Gains (Losses)
Net realized capital gains were recorded in 2011, compared to losses in 2010. We
recorded gains on the sales of fixed maturity securities; a decrease in
other-than-temporary impairment charges; gains from improvements in foreign
currency exchange rates; and gains from derivative instruments that do not
qualify for hedge accounting, resulting primarily from declining long term
interest rates. These derivative instruments economically hedge products that
provide benefits over an extended period of time. Net realized capital gains on
sales of fixed maturity securities increased due to our strategy to better align
investment allocations with current overall performance and income tax planning
objectives.
These gains were partially offset by impairments within other invested assets,
primarily life settlement contracts. For the years 2011 and 2010, we recorded
impairment charges of $351 million and $78 million, respectively, related to
life settlement contracts. These charges included approximately $38 million and
$4 million of impairments, respectively, associated with life insurance policies
issued by AIG Life and Retirement that are eliminated in consolidation.
During 2011, we experienced an increase in the number of life settlement
contracts identified as potentially impaired, compared to previous analyses.
This increase reflected a new process adopted by us, in which updated medical
information on individual insured lives is requested on a routine basis. In some
cases, this updated information indicates that an individual's health has
improved, resulting in an impairment loss due to revised estimates of net cash
flows from the related contract. In addition, our domestic operations refined
our fair values based upon the availability of recent medical information.
See Consolidated Results for further discussion on net investment income and net
realized capital gains (losses).
Bargain Purchase Gain
On March 31, 2010, we purchased additional voting shares in Fuji which resulted
in the effective control and consolidation of Fuji. This acquisition resulted in
a bargain purchase gain of $0.3 billion, which was included in the Consolidated
Statement of Income (Loss) in Other Income. The bargain purchase gain was
primarily attributable to the depressed market value of Fuji's common stock,
which we believed was the result of macro-economic, capital market and
regulatory factors in Japan coupled with Fuji's financial condition and results
of operations.
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 AIG
Property Casualty as well as the loss reserves pertaining to the Mortgage
Guaranty reporting unit, which is reported in Other.
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The following table presents the components of AIG's gross loss reserves by
major lines of business on a U.S. statutory basis*:
At December 31,
(in millions) 2012 2011
Other liability occurrence $ 21,533 $ 22,471
International 17,453 17,726
Workers' compensation (net of discount) 17,319 17,420
Other liability claims made 11,443 11,216
Property 4,961 6,165
Auto liability 3,060 3,081
Products liability 2,195 2,416
Medical malpractice 1,651 1,690
Mortgage guaranty / credit 1,957 3,101
Accident and health 1,518 1,553
Commercial multiple peril 1,310 1,134
Aircraft 1,065 1,020
Fidelity/surety 647 786
Other 1,879 1,366
Total $ 87,991 $ 91,145
* 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. We regularly review and update the methods and
assumptions used to determine loss reserve estimates and to establish the
resulting reserves. Any adjustments resulting from this review are 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 prior years' estimates of ultimate cost are
referred to as unfavorable or adverse development or reserve strengthening.
Reserve changes that decrease prior years' estimates of ultimate cost are
referred to as favorable development.
The net loss reserves represent loss reserves reduced by reinsurance
recoverable, 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:
December 31,
(in millions) 2012 2011
AIG Property Casualty:
Commercial Insurance $ 56,462 $ 57,718
Consumer Insurance 5,592 5,438
Other 4,895 4,823
Total AIG Property Casualty 66,949 67,979
Other operations - Mortgage Guaranty 1,833
2,846
Net liability for unpaid claims and claims adjustment expense
at end of year $ 68,782 $ 70,825
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Discounting of Reserves
The following table presents the components of AIG Property Casualty's loss
reserve discount included above:
December 31,
(in millions) 2012 2011
U.S. workers' compensation:
Tabular $ 801 $ 777
Non-tabular 2,394 2,318
Asbestos 51 88
Total $ 3,246 $ 3,183
See Note 13 to the Consolidated Financial Statements for additional information
on discounting of loss reserves.
The following table presents the net reserve discount benefit (charge):
Years Ended December 31,
(in millions) 2012 2011 2010
Change in loss reserve discount - current accident year $ 348$ 342$ 381
Change in loss reserve discount - prior year development 87 (22 ) 527
Accretion of reserve discount ( 372 )
(354 ) (346 )
Net reserve discount benefit (charge) $ 63 $
(34 ) $ 562
The benefit from the change in discount in the year ended December 31, 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 recorded in a U.S. insurance subsidiary and accordingly are being discounted
commencing in the three-month period ended June 30, 2012. The commutation was
implemented as part of AIG Property Casualty's efforts to simplify its internal
reinsurance arrangements.
Annual Reserving Conclusion
AIG net loss reserves represent our best estimate of our liability for net
losses and loss expenses as of December 31, 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 December 31, 2012. In our opinion, 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.
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The following table presents the rollforward of net loss reserves:
Years Ended December 31,
(in millions) 2012 2011 2010
Net liability for unpaid claims and claims adjustment
expense at beginning of year $ 70,825 $ 71,507 $ 67,899
Foreign exchange effect 757 353 (126 )
Acquisitions(a) - - 1,538
Dispositions(b) (11 ) - (87 )
Change due to NICO reinsurance transaction 90 (1,703 ) -
Losses and loss expenses incurred:
Current year, undiscounted 25,385 27,931 24,455
Prior years, undiscounted(c) 421 195 4,182
Change in discount (63 ) 34 (562 )
Losses and loss expenses incurred 25,743
28,160 28,075
Losses and loss expenses paid:
Current year 9,297 11,534 9,873
Prior years 19,325 15,958 15,919
Losses and loss expenses paid 28,622
27,492 25,792
Net liability for unpaid claims and claims adjustment
expense at end of year $ 68,782 $ 70,825 $ 71,507
(a) Represents the acquisition of Fuji on March 31, 2010.
(b) Includes amounts related to dispositions through the date of disposition.
(c) See tables below for details of prior year development by business unit,
accident year and major class of business.
The following tables summarize development, (favorable) or unfavorable, of
incurred losses and loss expenses for prior years, net of reinsurance:
Years Ended December 31,
(in millions) 2012 2011 2010
Prior accident year development by accident year:
Accident Year
2011 $ (162 ) $ - $ -
2010 (75 ) 402 -
2009 (45 ) 117 (61 )
2008 (150 ) (294 ) 286
2007 157 (172 ) 528
2006 (20 ) (273 ) 199
2005 112 (164 ) 113
2004 33 (16 ) 134
2003 13 13 73
2002 and prior 558 582 2,910
Total $ 421 $ 195 $ 4,182
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For certain categories of claims (e.g., construction defect claims and
environmental claims), losses may sometimes be reclassified to an earlier or
later accident year as more information about the date of occurrence becomes
available to AIG. These reclassifications are shown as development in the
respective years in the table above.
Years Ended December 31,
(in millions) 2012 2011 2010
Prior accident year development by major class of business:
Commercial Insurance:
Excess casualty - U.S.
$ 262 $ (414 ) $ 1,071
D&O and related management liability - U.S. (307 ) (167 ) 94
Environmental (post 1986 - ongoing) - U.S. 161 32 -
Commercial risk - U.S. 46 265 224
Healthcare - U.S. 68 (45 ) (75 )
Primary (specialty) workers' compensation - U.S. 46 145 518
Primary casualty - U.S. 367 247 633
Natural catastrophes:
U.S. (144 ) 9 18
International (105 ) (84 ) (11 )
All other, net:
U.S. 42 (175 ) 12
International (146 ) (96 ) 93
Total all other, net (104 ) (271 ) 105
Total Commercial Insurance 290 (283 ) 2,577
Total Consumer Insurance (20 ) 85 (63 )
Other
Asbestos and environmental (1986 and prior)
U.S. 70 29 1,151
International 6 - 352
Total asbestos and environmental 76 29 1,503
Environmental (1987 - 2004) - U.S. 166 382 14
Excess workers' compensation - U.S. - - 825
All other, net (13 ) (2 ) (6 )
Total Other 229 409 2,336
Total AIG Property Casualty 499
211 4,850
Other operations - Mortgage Guaranty (78 ) (16 ) (668 )
Total $ 421 $ 195 $ 4,182
Net Loss Development by Class of Business
In determining the loss development from prior accident years, we analyze and
evaluate the change in estimated ultimate loss for each accident year by 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. As appropriate, we
make adjustments for the difference between the actual and expected loss
emergence. As part of our reserving process, we also consider notices of claims
received with respect to emerging and/or evolving issues, such as those related
to the U.S. mortgage and housing market.
The following is a discussion of the primary reasons for the development in
2012, 2011 and 2010 of those classes of business that experienced significant
prior accident year development during the three-year period. See Critical
Accounting Estimates for a description of our loss reserving process.
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Excess Casualty - U.S.
The excess casualty segment presents unique challenges for estimating the unpaid
claims. Insureds are generally required to provide notice of claims that exceed
a threshold, either expressed as a proportion of the attachment
(e.g., 50 percent of the attachment) or as particular types of claims
(e.g., death, quadriplegia). This threshold is generally established well below
our attachment point, in order to provide us with a precautionary notice of
claims that could potentially pierce our layer of coverage. This means that the
majority of claims close without payment because the claims never pierce our
layer, while the claims that close with payment can be large and highly
variable. Thus, estimates of unpaid claims carry significant uncertainty.
During 2012, the excess casualty class of business experienced $262 million of
adverse development based on worse than expected emergence in 2012, primarily
from adverse outcomes relating to certain large claims from older accident
years, from the legacy public entity excess casualty class of business and from
a refined analysis applied to claims in excess of $10 million. This refined
analysis considers the impact of changing attachment points (primarily impacting
frequency of excess claims) and limit structures (primarily impacting severity
of excess claims) throughout the loss development period.
During 2011 the excess casualty business segment experienced better than
expected loss emergence, based on the shorter-termed loss development pattern
from the year-end 2010 reserve analysis. However, accident year 2010 experienced
some large catastrophic losses causing its results to be worse than expected.
Loss development was affected by an increase in loss costs in 2010, primarily
due to medical inflation, which increased the economic loss component of tort
claims; advances in medical care, which extended the life span of severely
injured claimants; and larger jury verdicts, which increased the value of severe
tort claims.
Director and Officer (D&O) and Related Management Liability - U.S.
We experienced favorable development in 2012 and 2011. The favorable development
over the two-year period related primarily to accident years 2005-2007, 2010,
and, to a lesser extent, accident years 2001 and 2002. Development in 2010 was
slightly negative.
For the year-end 2012 loss reserve review, our actuaries took into account the
favorable emergence during 2012 for several accident years, especially accident
year 2010, the claims department's reviews of open claims and reduced the
ultimate losses for prior years accordingly. The 2012 actuarial review also
adopted a refined segmentation for this class of business with the selection of
differentiated frequency and severity trends. The overall loss cost trend
adopted for this class of business in 2012 from the application of the refined
segmentation was slightly lower than that adopted for the 2011 review reflecting
the continued favorable emergence from this class of business.
For the year-end 2011 loss reserve reviews, our actuaries took into account the
favorable development from prior accident years, as well as the continuing
favorable development observed in the ground-up claims projections by our claims
staff over the past five years.
Excess Workers' Compensation - U.S.
This class of business has an extremely long tail and is one of the most
challenging classes of business to reserve for, particularly when the excess
coverage is provided above a self-insured retention layer. The class is highly
sensitive to small changes in assumptions - in the rate of medical inflation or
the longevity of injured workers, for example - which can have a significant
effect on the ultimate reserve estimate.
During the 2012 loss reserve review, we augmented traditional reserve
methodologies with an analysis of underlying claims cost drivers to inform our
judgment of the ultimate loss costs for open reported claims from accident years
2003 and prior (representing approximately 95 percent of all open reported
claims) and used the refined analysis to inform our judgment of the ultimate
loss cost for claims that have not yet been reported using a frequency/severity
approach for these accident years.
The approach was deemed to be most suitable for injured workers whose medical
conditions had largely stabilized (i.e., at least 9 to 10 years have elapsed
since the date of injury). The reserves for accident years 2004 and subsequent
(13 percent of total case and IBNR reserves for this class) were determined
using traditional methods. See Critical Accounting Estimates for additional
information.
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The refined analysis confirmed that significant uncertainty remains for this
class of business, especially from unreported claims and from the propensity for
future medical deterioration. Based on the more refined analysis we did not
recognize any material development for accident years 2011 and prior.
AIG experienced significant adverse development of $825 million for this class
in 2010. With the passage of the Affordable Care Act in March 2010, we concluded
that there is increased vulnerability to the risk of further cost-shifting to
the excess workers' compensation class of business. Settlement efforts can also
be affected by changes to evaluation protocols implemented by the Centers for
Medicare & Medicaid Services in 2009. These changes were expected to result in
future prescription drug costs being borne by workers' compensation insurers to
a significantly greater degree than in the past, and were assessed as being
likely to lead to further deteriorating trends for the excess workers'
compensation class of business.
As part of our 2010 comprehensive loss reserve analysis, we compared and
contrasted the traditional techniques that have been used for this class with an
alternative approach that focuses more explicitly on projecting the effect of
future calendar year trends, while placing less weight on prior-period loss
development ratios due to the increased evidence of changes to the claims
environment. These various actuarial analyses indicated a substantial increase
in loss estimates from the prior-year level, primarily for accident years 2002
and prior.
Healthcare - U.S.
During 2012, this class recognized $68 million of adverse prior year development
due to several large claims that involved unusual coverage issues for this
class. With the exception of these claims, this class experienced claim activity
in line with expectations.
Healthcare business written by AIG Property Casualty's Americas region produced
moderate favorable development in 2011 and 2010. Healthcare loss reserves have
benefited from favorable market conditions and an improved legal environment in
accident years 2002 and subsequent, following a period of adverse loss trends
and market conditions that began in the mid 1990s.
Environmental
We maintain an active environmental insurance business related to pollution
legal liability and general liability for environmental consultants and
engineers, as well as runoff business for certain environmental coverage
(including Cost Cap Containment) which provides cost overrun protection. We
evaluate and report reserves associated with this business separately from the
1986 and prior asbestos and environmental reserves associated with standard
General Liability and Umbrella policies discussed in "Asbestos and Environmental
Reserves".
Because of an increase in the frequency and severity of claims observed
beginning in 2011, the 2012 loss reserve review consisted of an intensive review
of reported claims by a multi-disciplinary team including external experts in
environmental law and engineering science, toxicologists and other experts, our
actuaries, claims managers and underwriters to reassess our indicated loss
reserve need. The review improved our understanding of factors that drive claim
costs such as policy term, limit, pollution conditions covered, location of
incident and applicable laws and remediation standards. The analysis used these
factors to segment and analyze the claim data to determine ultimate costs, in
some cases, on a claim by claim basis. As a result of this analysis,
$326 million of prior year adverse development was recognized during 2012,
including $166 million reported in the AIG Property Casualty Other reporting
unit related to lines that are now in runoff. The majority (81 percent) of the
adverse development related to accident years 2003 and prior, before significant
underwriting changes were adopted.
Historically, we had used traditional actuarial methods to assess the reserves
for the environmental products. The comprehensive claims review provided a more
refined approach for the development of actuarial estimates for toxic tort
claims (which were found to have a distinctly lengthier loss development pattern
than other general liability claims in the environmental portfolio) as well as a
more appropriate methodology for incorporating case reserving based estimates of
ultimate loss costs for complex claims involving environmental remediation
and/or from policies with high policy limits (greater than $5 million per
policy). Notwithstanding the refined methodology and approach applied in 2012,
considerable uncertainty remains over the ultimate loss cost for this class of
business, especially for business written in accident years 2003 and prior.
We strengthened our post 1986 Environmental reserves in 2011 by $413 million,
partly due to large reserve increases on individual claims. Of this amount,
$382 million was included in the AIG Property Casualty Other
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reporting unit. Approximately 80 percent of the 2011 development was associated
with accident years 2003 and prior.
In addition to reserving actions, we have made significant changes to the
ongoing environmental business included in Commercial with the goal of ensuring
that the current policies are being written to earn an appropriate risk adjusted
profit. Underwriting guidelines have been revised to no longer cover known or
expected clean up costs, which were a significant driver of historical claims,
and a "new emerging contaminants" team has been formed within the dedicated
environmental engineering staff to track any new cleanup standards that may be
set by federal or state regulators. The percentage of long term policies (ten
years or more) has decreased from a historical average of 6 percent to
1.5 percent by policy count. In addition, minimum retentions have been
increased, and engineering reviews are required for specific business segments
(such as oil and gas, and landfills) that have traditionally generated higher
losses.
Primary Workers' Compensation and General Liability in Commercial Risk,
Specialty Workers' Compensation and Energy Business units
The Commercial Risk division writes casualty insurance accounts for businesses
with revenues of less than $700 million. The majority of the business is
workers' compensation. The Energy division writes casualty insurance accounts
(including workers' compensation) in the mining, oil and gas and power
generation sectors. The Commercial Specialty Workers' Compensation division
writes small monoline guaranteed cost risks. Our Commercial Specialty Workers'
Compensation business unit grew significantly in the early to mid 2000s but has
reduced premium writings by nearly 70 percent since 2007.
During 2012, we significantly intensified our claims management efforts for
those primary workers' compensation claims which are managed by AIG. These
efforts include consulting with various specialists, including clinical and
public health professionals and other advisors. We also continued to refine our
actuarial methodologies for estimating ultimate loss costs incorporating a more
refined segmentation by state (California and New York were analyzed separately)
and a more refined approach for business subject to deductibles as well as
business subject to premium adjustments (loss-sensitive business). Based on
these enhanced reviews we increased reserves by $46 million. We also reviewed
the General Liability (GL) loss experience of the primary casualty classes of
business using a more refined segmentation for business subject to a deductible
as well as loss-sensitive business. Our review focused on applying actuarial
loss development analyses to those GL claims for which these techniques are
appropriate. As a result of this analysis, we determined that prior year
reserves needed to be increased by $235 million for the primary GL class of
business in 2012 to reflect the worse than expected emergence of paid loss
severities for both bodily injury and property damage claims from the more
recent accident years (2008 and subsequent).
The Commercial Risk, Commercial Specialty Workers' Compensation and Energy
divisions contributed $265 million, $145 million and $115 million, respectively,
of adverse development in calendar year 2011. The vast majority of this adverse
development emanates from primary workers' compensation exposure, which was
largely from accident year 2010. In 2011, losses for accident year 2010
continued to emerge at higher levels than anticipated at prior year end. A key
driver was the effect of high unemployment on the frequency of higher severity
lost time claims. The poor economic environment precluded some employers from
offering "light duty" return-to-work alternatives that might otherwise have
mitigated lost time claims. At the same time, the increased use of pain
management strategies has led to increased medical claims. The increase in lost
time frequency and the adverse effects of medical cost trends resulted in higher
loss ratios than anticipated at prior year end. For each of the three classes,
our conclusion that the worsening experience necessitated a strengthening of the
reserves was confirmed by an independent third-party actuarial review during
2011.
We recorded a total of $518 million of adverse loss development for Commercial
Specialty Workers' Compensation in 2010. The need to strengthen the reserves was
confirmed by an independent third-party actuarial review during the fourth
quarter of 2010. Approximately 75 percent of the year-end 2010 reserve
strengthening for this business pertained to accident years 2007 through 2009.
For similar reasons, the Commercial Risk division strengthened workers'
compensation reserves in 2010.
For more information on our Loss Reserving Process, see Critical Accounting
Estimates.
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Asbestos and Environmental Reserves
Third-Party Actuarial Review of Asbestos Loss Reserve Estimates
As part of our more in-depth comprehensive loss-reserve review in the fourth
quarter of 2010, we conducted a series of top-down and ground-up reserve
analyses to determine the appropriate loss reserve estimate for our asbestos
exposures. To ensure the most comprehensive analysis possible, we engaged an
independent third-party actuarial firm to assist in assessing these exposures.
The ground-up study conducted by this firm used a proprietary model to calculate
the loss exposure on an insured-by-insured basis. We believe that the accuracy
of the reserve estimate is greatly enhanced through the combination of the
actuarial firm's industry modeling techniques and industry knowledge and our own
specific account-level experience.
Annually, we consider a number of factors and recent experience in addition to
the results of the top-down and ground-up analyses performed for asbestos and
environmental reserves. We considered the significant uncertainty that remains
as to our ultimate liability for asbestos and environmental claims, which is due
to several factors:
º •
º the long latency period between asbestos exposure and disease
manifestation, leading to the potential for involvement of multiple policy
periods for individual claims;
º •
º claims filed under the non-aggregate premises or operations section of
general liability policies;
º •
º the number of insureds seeking bankruptcy protection and the effect of
prepackaged bankruptcies;
º •
º diverging legal interpretations; and
º •
º the difficulty in estimating the allocation of remediation cost among
various parties with respect to environmental claims.
As a result of the top-down and ground-up reserve analyses and the factors
considered, asbestos reserves were strengthened by $3.3 billion gross and
$1.5 billion net in 2010.
In 2011, we completed a top-down report year projection as well as a market
share projection of our indicated asbestos and environmental loss reserves.
These projections consisted of a series of tests performed separately for
asbestos and for environmental exposures.
For asbestos, these tests project the losses expected to be reported
through 2027. This projection was based on the actual losses reported
through 2011 and the expected future loss emergence for these claims. Three
scenarios were tested, with a series of assumptions ranging from more optimistic
to more conservative.
For environmental claims, a comparable series of frequency/severity tests were
produced. We updated the top-down report year projections in 2012. In this
updated projection, environmental claims from future report years (i.e., IBNR)
are projected out ten years, through the year 2022.
As a result of the studies, we determined that no additional strengthening was
required for asbestos and environmental in 2011.
After we carefully considered the recent experience compared to the results of
the 2010 ground-up analysis, as well as all of the above factors, no adjustment
to gross and net asbestos reserves was recognized in 2012. Additionally in 2012,
a moderate amount of incurred loss pertaining to the asbestos loss reserve
discount is reflected in the table below and is related to the reserves not
subject to the NICO reinsurance agreement.
Upon completion of the environmental top-down analysis performed in the fourth
quarter of 2012, we concluded that the $75 million net reserve strengthening
recognized in the first half of 2012 was adequate.
In addition to the U.S. asbestos and environmental reserve amounts shown in the
tables below, AIG Property Casualty also has asbestos reserves relating to
foreign risks written by non-U.S. entities of $140 million gross and
$116 million net as of December 31, 2012. The asbestos reserves relating to
non-U.S. risks written by non-U.S. entities were $233 million gross and
$165 million net as of December 31, 2011.
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The following table provides a summary of reserve activity, including estimates
for applicable IBNR, relating to asbestos and environmental claims:
As of or for the Years Ended
December 31, 2012 2011 2010
(in millions) Gross Net Gross Net Gross Net
Asbestos:
Liability for unpaid claims and
claims adjustment expense at
beginning of year $ 5,226 $ 537 $ 5,526 $ 2,223 $ 3,236 $ 1,151
Change in net loss reserves due to
retroactive reinsurance:
Paid losses recoverable under
retroactive reinsurance contracts - 111 - 111 - -
Re-estimation of amounts recoverable
under retroactive reinsurance
contracts (a) - (21 ) -
(1,814 ) - -
Change in net loss reserves due to
retroactive reinsurance - 90 - (1,703 ) - -
Dispositions (10 ) (10 ) - - (17 ) (8 )
Loss and loss expenses incurred:
Prior years, undiscounted 1 1 2 2 3,326 1,479
Change in discount 83 37 190 74 (386 ) (162 )
Losses and loss expenses incurred (b) 84 38 192 76 2,940 1,317
Losses and loss expenses paid (b) (404 ) (228 ) (492 ) (236 ) (633 ) (237 )
Other changes
- - -
177 - -
Liability for unpaid claims and
claims adjustment expense at end of
year $ 4,896 $ 427 $ 5,226 $
537 $ 5,526$ 2,223
Environmental:
Liability for unpaid claims and
claims adjustment expense at
beginning of year $ 204 $ 119 $ 240 $ 127 $ 338 $ 159
Dispositions (1 ) (1 ) - - (27 ) (10 )
Losses and loss expenses incurred 150 75 33 27 23 24
Losses and loss expenses paid (44 ) (30 ) (69 ) (35 ) (94 ) (46 )
Liability for unpaid claims and
claims adjustment expense at end of
year $ 309 $ 163 $ 204 $
119 $ 240$ 127
Combined:
Liability for unpaid claims and
claims adjustment expense at
beginning of year $ 5,430 $ 656 $ 5,766 $ 2,350 $ 3,574 $ 1,310
Change in net loss reserves due to
retroactive reinsurance:
Paid losses recoverable under
retroactive reinsurance contracts - 111 - 111 - -
Re-estimation of amount recoverable
under retroactive reinsurance
contracts - (21 ) -
(1,814 ) - -
Change in net loss reserves due to
retroactive reinsurance - 90 - (1,703 ) - -
Dispositions (11 ) (11 ) - - (44 ) (18 )
Losses and loss expenses incurred:
Undiscounted 151 76 35 29 3,349 1,503
Change in discount 83 37 190 74 (386 ) (162 )
Losses and loss expenses incurred 234 113 225 103 2,963 1,341
Losses and loss expenses paid (448 ) (258 ) (561 ) (271 ) (727 ) (283 )
Other changes - - - 177 - -
Liability for unpaid claims and
claims adjustment expense at end of
year $ 5,205 $ 590 $ 5,430 $ 656 $ 5,766 $ 2,350
(a) Re-estimation of amounts recoverable under retroactive reinsurance
contracts includes effect of changes in reserve estimates and changes in
discount. Additionally, the 2011 Net amount includes the effect on net loss
reserves of the initial cession to NICO.
(b) These amounts exclude benefit from retroactive reinsurance.
Transfer of Domestic Asbestos Liabilities
On June 17, 2011, we completed a transaction under which the bulk of AIG
Property Casualty's net domestic asbestos liabilities were transferred to NICO,
a subsidiary of Berkshire Hathaway, Inc. This was part of our ongoing strategy
to reduce our overall loss reserve development risk. This transaction covers
potentially volatile U.S.-related asbestos exposures. It does not, however,
cover asbestos accounts that we believe have already been reserved to their
limit of liability or certain other ancillary asbestos exposure assumed by AIG
Property Casualty subsidiaries.
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Upon the closing of this transaction, but effective as of January 1, 2011, we
ceded the bulk of AIG Property Casualty's net domestic asbestos liabilities to
NICO under a retroactive reinsurance agreement with an aggregate limit of
$3.5 billion. Within this aggregate limit, NICO assumed collection risk for
existing third-party reinsurance recoverable associated with these liabilities.
AIG Property Casualty paid NICO approximately $1.67 billion as consideration for
this cession and NICO assumed approximately $1.82 billion of net U.S. asbestos
liabilities. As a result of this transaction, AIG Property Casualty recorded a
deferred gain of $150 million in the second quarter of 2011, which is being
amortized into income over the settlement period of the underlying claims.
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:
December 31, 2012 2011 2010
(in millions) Gross Net* Gross Net* Gross Net
Asbestos $ 3,193 $ 37 $ 3,685 $ 239 $ 4,520 $ 1,964
Environmental 75 35 57 28 93 38
Combined $ 3,268 $ 72 $ 3,742 $ 267 $ 4,613 $ 2,002
* Net IBNR includes the reduction due to the NICO reinsurance transaction of
$1,310 million and $1,414 million as of December 31, 2012 and 2011,
respectively. A significant part of the reduction in IBNR in 2012 is due to the
reclassification of estimated liabilities on a retained account from IBNR to
case reserves.
The following table presents a summary of asbestos and environmental claims
count activity:
As of or for the Years 2012 2011 2010
Ended December 31, Asbestos Environmental Combined Asbestos Environmental Combined Asbestos Environmental Combined
Claims at beginning of year 5,443 3,782 9,225 4,933 4,087 9,020 5,417 5,994 11,411
Claims during year:
Opened 226 222 448 141 207 348 502 354 856
Settled (254 ) (179 ) (433 ) (183 ) (83 ) (266 ) (247 ) (125 ) (372 )
Dismissed or otherwise resolved(a) (185 ) (2,211 ) (2,396 ) (289 ) (429 ) (718 ) (739 ) (2,136 ) (2,875 )
Other(b) - - - 841 - 841 - - -
Claims at end of year 5,230 1,614 6,844 5,443 3,782 9,225 4,933 4,087 9,020
(a) The number of environmental claims dismissed or otherwise resolved,
increased substantially during 2012 as a result of AIG Property Casualty's
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 AIG
Property Casualty's environmental reserves.
(b) 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 December 31, 2012, 2011 and 2010. 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 resulting survival ratio.
Additionally, we primarily base our determination of these reserves based on
ground-up and top-down analyses, and not on survival ratios.
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The following table presents survival ratios for asbestos and environmental
claims, separately and combined, which were based upon a three-year average
payment:
Years Ended December 31, 2012 2011 2010
Gross Net* Gross Net* Gross Net
Survival ratios:
Asbestos 9.6 8.7 9.1 10.3 8.6 9.2
Environmental 4.5 4.4 3.0 3.1 3.7 3.2
Combined 9.0 8.1 8.4 9.3 8.1 8.4
* Survival ratios are calculated consistent with the basis on historical
reserve excluding the effects of the NICO reinsurance transaction.
AIG Life and Retirement
AIG Life and Retirement Highlights
The results of AIG Life and Retirement for 2012 and 2011 reflected the
following:
º •
º Disciplined spread management, primarily through the effect of reinvestment
during 2011 of significant amounts of cash and short term investments and
crediting rate changes, resulted in improvements in base net investment
spreads for 2012. Private equity and hedge fund investment income increased
$112 million in 2012 compared to 2011.
º •
º Investment income from the ML II investment prior to its liquidation and
distribution in March 2012 increased $200 million in 2012 compared to 2011.
º •
º More favorable separate account performance driven in large part by equity
markets had a positive effect on policyholder benefits and DAC amortization
expenses for 2012.
º •
º Reserve increases related to enhanced death claim practices in connection
with the resolution of multi-state examinations were lower in 2012 compared
to 2011.
º •
º Higher net realized capital gains from the sale of investments were
reflected in 2012 in conjunction with a program to utilize capital loss tax
carryforwards. 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 accruals in
2012.
AIG Life and Retirement Operations
Commencing in the third quarter of 2012, the SunAmerica segment was renamed AIG
Life and Retirement, although certain existing brands will continue to be used
in the marketplace.
AIG Life and Retirement presents its business in two operating segments:
º •
º Life Insurance, which focuses on mortality and morbidity-based protection
products, and
º •
º Retirement Services, which focuses on investment, retirement savings and
income solution products.
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AIG Life and Retirement Results
The following table presents AIG Life and Retirement results:
Years Ended December 31, Percentage Change
2012 vs.
(in millions) 2012 2011 2010 2011 2011 vs. 2010
Life Insurance:
Revenue:
Premiums $ 2,428 $ 2,513 $ 2,520 (3 )% - %
Policy fees 1,465 1,478 1,576 (1 ) (6 )
Net investment income 4,101 3,925 4,313 4 (9 )
Other income 1 3 - (67 ) NM
Operating expenses:
Policyholder benefits and
claims incurred 4,511 4,510 4,277 - 5
Interest credited to
policyholder account
balances 822 851 843 (3 ) 1
Amortization of deferred
acquisition costs 467 389 596 20 (35 )
Other acquisition and
insurance expenses 1,059 1,126 1,140 (6 ) (1 )
Operating income 1,136 1,043 1,553 9 (33 )
Net realized capital gains
(losses) 1,471 363 (75 ) 305 NM
Legal settlements 43 - - NM NM
Change in benefit reserves
and DAC, VOBA and SIA
related to net realized
capital gains (losses) (684 ) (19 ) (37 ) NM 49
Pre-tax income $ 1,966 $ 1,387 $ 1,441 42 % (4 )%
Retirement Services:
Revenue:
Policy fees $ 1,326 $ 1,227 $ 1,134 8 % 8 %
Net investment income 6,617 5,957 6,455 11 (8 )
Other income 8 206 - (96 ) NM
Operating expenses:
Policyholder benefits and
claims incurred 22 104 (1 ) (79 ) NM
Interest credited to
policyholder account
balances 3,540 3,616 3,644 (2 ) (1 )
Amortization of deferred
acquisition costs 345 477 375 (28 ) 27
Other acquisition and
insurance expenses 1,020 959 1,068 6 (10 )
Operating income 3,024 2,234 2,503 35 (11 )
Legal settlements 111 - - NM NM
Changes in fair value of
fixed maturity securities
designated to hedge living
benefit liabilities 37 - - NM NM
Net realized capital losses (841 ) (357 ) (1,176 ) (136 )
70
Change in benefit reserves
and DAC, VOBA and SIA
related to net realized
capital losses (517 ) (308 ) (67 ) (68 ) (360 )
Pre-tax income $ 1,814 $ 1,569 $ 1,260 16 % 25 %
Total AIG Life and
Retirement:
Revenue:
Premiums $ 2,428 $ 2,513 $ 2,520 (3 )% - %
Policy fees 2,791 2,705 2,710 3 -
Net investment income 10,718 9,882 10,768 8 (8 )
Other income 9 209 - (96 ) NM
Operating expenses:
Policyholder benefits and
claims incurred 4,533 4,614 4,276 (2 ) 8
Interest credited to
policyholder account
balances 4,362 4,467 4,487 (2 ) -
Amortization of deferred
acquisition costs 812 866 971 (6 ) (11 )
Other acquisition and
insurance expenses 2,079 2,085 2,208 - (6 )
Operating income 4,160 3,277 4,056 27 (19 )
Legal settlements 154 - - NM NM
Changes in fair value of
fixed maturity securities
designated to hedge living
benefit liabilities 37 - - NM NM
Net realized capital gains
(losses) 630 6 (1,251 ) NM NM
Change in benefit reserves
and DAC, VOBA and SIA
related to net realized
capital gains (losses) (1,201 ) (327 ) (104 ) (267 ) (214 )
Pre-tax income $ 3,780 $ 2,956 $ 2,701 28 % 9 %
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2012 and 2011 Comparison
AIG Life and Retirement Operating Income
Operating income increased in 2012 principally due to our efforts to actively
manage spread income. Results benefitted from higher net investment income,
lower interest credited, lower reserve charges for death claims and the impact
of favorable separate account performance on policyholder benefit expenses and
DAC amortization. These items were partially offset by significant proceeds from
legal settlements in 2011, higher mortality costs and a charge to increase GIC
reserves.
Premiums decreased slightly in 2012 due to lower group benefit premiums
partially offset by higher term insurance premiums.
Policy fees increased in 2012 as a result of growth in variable annuity assets
under management from higher net flows and separate account performance, driven
in large part by higher equity markets.
Net investment income increased in 2012 reflecting higher base yields of 9 basis
points due to the reinvestment of significant amounts of cash and short-term
investments during 2011, opportunistic investments in structured securities,
fair value gains on MLII and other structured securities, a fair value gain of
approximately $57 million on the investment in PICC Group, lower impairment
charges on investments in leased commercial aircraft and higher returns on
alternative investments. The increase in net investment income combined with
lower interest credited resulted in improved net investment spreads in 2012
compared to 2011.
Other income decreased due to legal settlement proceeds of $226 million in 2011
to resolve a litigation matter.
Policyholder benefits and claims incurred decreased as lower reserve charges for
death claims not submitted to AIG in the normal course of business and the
impact of favorable separate account performance more than offset higher
mortality costs for individual life insurance.
Interest credited decreased in 2012 due to active crediting rate management
actions that included lowering renewal credited rates, maintaining discipline on
new business pricing including re-filing products to lower minimum rate
guarantees.
Amortization of deferred acquisition costs decreased in 2012 primarily as a
result of updated assumptions related to fixed annuity surrender rates and the
impact of favorable separate account performance.
Other acquisition and insurance expenses were essentially flat with 2011.
Life Insurance Operating Income
Life Insurance operating income increased in 2012 due to higher net investment
income and lower reserves for death claims, principally related to the effect of
multi-state unclaimed property examinations, that have not been submitted to AIG
in the normal course of business. These items were partially offset by higher
mortality costs, DAC amortization and loss recognition reserves related to a
legacy block of long-term care insurance.
Premiums decreased slightly in 2012 due to lower group benefit premiums
partially offset by higher term insurance premiums.
Policy fees were essentially flat with 2011.
Net investment income increased in 2012, reflecting the reinvestment of
significant amounts of cash and short-term investments during 2011,
opportunistic investments in structured securities, fair value gains on MLII in
2012 of $76 million, a fair value gain of $28 million on the investment in PICC
made in 2012, lower impairment charges on investments in leased commercial
aircraft and higher returns on alternative investments.
Policyholder benefits and claims incurred increased in 2012 reflecting higher
mortality costs and loss recognition reserves, partially offset by lower charges
to increase reserves for death claims as described below:
º •
º Mortality costs related to life insurance increased in 2012, although
overall mortality results remain within pricing expectations.
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º •
º Certain long-duration products, including traditional life insurance,
accident and health products, such as long-term care insurance and payout
annuities, may require increases in reserves if changes in estimates of
future investment returns result in projected future losses. Long term care
products may also require additional reserves if future expected premium
increases are not sufficient to cover future benefit cost increases not
provided for in the current reserves. For these long duration traditional
products, the assumptions used to calculate benefit liabilities and DAC are
"locked in" at policy issuance. These assumptions are based on our
estimates of mortality, morbidity, persistency, maintenance expenses,
investment returns and for long-term care, future premium increases. If
observed changes in actual experience or estimates result in projected
future losses under loss recognition testing, DAC is adjusted and
additional policyholder benefit liabilities may be recorded through a
charge to policyholder benefit expense. In the fourth quarter of 2012, loss
recognition reserves of $61 million were recorded for a legacy block of
long-term care insurance issued prior to 2002.
º •
º During 2012 AIG Life and Retirement resolved multi-state examinations
relating to the handling of unclaimed property and the use of the Social
Security Death Master File (SSDMF) to identify death claims that have not
been submitted to us in the normal course of business. The final settlement
of these examinations was announced on October 22, 2012. AIG Life and
Retirement is now taking enhanced measures to, among other things,
routinely match policyholder records with the SSDMF to determine if its
insured parties, annuitants, or retained account holders have died and
locate beneficiaries when a claim is payable. Charges related to the
resolution of the multi-state examinations and use of the SSDMF were
approximately $57 million in 2012 and $202 million in 2011.
Amortization of deferred acquisition costs increased in 2012 as a result of
updated assumptions for universal life products and certain blocks of fixed
annuities included in the Life Insurance operating segment. The updated
assumptions increased amortization by $78 million and primarily reflected the
impact of spread compression in the current low interest rate environment.
Other acquisition and insurance expenses decreased in 2012 primarily due to the
sharing of group benefit costs related to our strategic partnership with AIG
Property Casualty.
Retirement Services Operating Income
Retirement Services operating income increased in 2012 due to improved net
investment spreads (higher net investment income and lower interest credited),
the impact of favorable separate account performance on DAC amortization and
policyholder benefit expenses and lower DAC amortization due to updated
assumptions for fixed annuity surrenders. These items were partially offset by
significant proceeds from legal settlements in 2011 and an increase in GIC
reserves in 2012.
Policy fees increased in 2012 as a result of growth in variable annuity assets
under management due to higher net flows and separate account performance driven
in large part by higher equity markets.
Net investment income increased in 2012, reflecting higher base yields due to
the reinvestment of significant amounts of cash and short-term investments
during 2011, opportunistic investments in structured securities, fair value
gains on MLII in 2012 of $170 million, a fair value gain of $28 million on the
investment in PICC made in 2012, lower impairment charges on investments in
leased commercial aircraft and higher returns on alternative investments.
Other income decreased due to the previously discussed legal settlement proceeds
of $226 million in 2011 to resolve a litigation matter as discussed above.
Policyholder benefits and claims incurred decreased in 2012 due to the impact of
higher separate account returns for certain guaranteed benefit features of
variable annuities.
Interest credited to policyholder account balances decreased in 2012 as a result
of ongoing actions to actively manage interest crediting rates on new and
renewal business including lower renewal credited rates, discipline on new
business pricing and re-filing products to reduce minimum rate guarantees. As a
result of a comprehensive review of reserves for the GIC portfolio, AIG Life and
Retirement recorded an increase to such reserves through interest credited of
$110 million for 2012, which partially offset the impact of crediting rate
actions.
Amortization of deferred acquisition costs was lower in 2012 as a result of the
favorable impact of updated assumptions for lower fixed annuity surrenders and
the impact of higher separate account returns described above. For
investment-type annuity products, policy acquisition and issuance costs are
deferred and amortized, with interest, based on the estimated gross profits
expected to be realized over the lives of the contracts. Estimated gross profits
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include investment spreads, net realized investment gains and losses, fees,
surrender charges, expenses and mortality gains and losses. Emerging actual
gross profits are used to true up the amortization of DAC, VOBA and SIA each
quarter. In addition, future assumptions are reviewed to determine whether they
should be modified. If so, the DAC, VOBA and SIA assets may be recalculated and
adjusted to reflect the updated assumptions. AIG Life and Retirement completed
its comprehensive annual review of DAC assumptions in the fourth quarter of 2012
and adjusted the assumption for future fixed annuity surrender rates to be more
consistent with recent experience that is expected to continue as long as
interest rates remain relatively low.
Other acquisition and insurance expenses increased in 2012 due to higher
marketing and distribution expenses associated with growth initiatives for
variable annuities and group retirement products.
2011 and 2010 Comparison
AIG Life and Retirement Operating Income
Operating income decreased in 2011 due to lower net investment income, higher
DAC amortization and higher policyholder benefit expense in its variable annuity
business due to separate account performance, and an increase in death claim
reserves.
Policy fees were essentially flat from 2010.
Net investment income decreased in 2011 compared to 2010 reflecting lower base
yields of 12 basis points as investment purchases in late 2010 and 2011 were
made at yields lower than the weighted average yields of the existing base
portfolio. Net investment income also decreased due to a $471 million decrease
in fair value gains on ML II, $196 million lower call and tender income,
$163 million of impairment charges on investments in leased commercial aircraft
and a $121 million decrease in private equity and hedge funds income. The lower
yields were partially offset by an increase in income from the reinvestment of
significant amounts of cash and short term investments during 2011.
Other income increased due to the previously discussed legal settlement proceeds
of $226 million in 2011.
Policyholder benefits and claims incurred increased as a result of reserve
charges for death claims not submitted to us in the normal course of business
and higher reserves for guaranteed death benefits in our variable annuity
products as a result of less favorable separate account performance in 2011 as
compared to 2010.
Other acquisition and insurance expenses declined due to legal expense accruals
and state guaranty fund assessments which were higher in 2010, as well as a
reduction in the cost of letters of credit related to reinsurance.
Life Insurance Operating Income
Life Insurance operating income decreased in 2011 due to lower net investment
income and an increase in death claim reserves, partially offset by lower DAC
amortization due to updating actuarial assumptions in 2010 principally related
to mortality and surrender rates.
Policyholder fees declined primarily as a result of updating certain assumptions
in 2010 related to universal life and deferred annuity business, which resulted
in a $58 million increase in fee income.
Net investment income decreased in 2011 compared to 2010 reflecting lower base
yields as investment purchases in late 2010 and 2011 were made at yields lower
than the weighted average yields of the existing base portfolio. Net investment
income also decreased due to a $149 million decrease in fair value gains on ML
II, $126 million lower call and tender income and $50 million of impairment
charges on investments in leased commercial aircraft. The lower yields were
partially offset by an increase in income from the reinvestment of significant
amounts of cash and short term investments during 2011.
Policyholder benefits and claims incurred increased in 2011 reflecting an
increase in reserves for death claims. AIG Life and Retirement recorded an
increase of approximately $202 million in the estimated reserves for incurred
but not reported death claims in 2011 in conjunction with the use of the Social
Security Death Master File (SSDMF) to identify potential claims not yet filed
with its life insurance companies.
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Amortization of deferred acquisition costs was lower in 2011 as a result of
updating mortality and surrender rate assumptions on universal life and deferred
annuity business in 2010, which resulted in an $86 million increase in DAC
amortization in 2010.
Other acquisition and insurance expenses were essentially flat from 2010.
Retirement Services Operating Income
Retirement services operating income decreased in 2011 due to lower net
investment income, higher DAC amortization and higher policyholder benefit
expense in its variable annuity business from equity market conditions,
partially offset by higher income from legal settlements.
Net investment income decreased in 2011 compared to 2010 reflecting lower base
yields as investment purchases in late 2010 and 2011. Net investment income also
decreased due to a $322 million decrease in fair value gains on ML II,
$70 million lower call and tender income, $113 million of impairment charges on
investments in leased commercial aircraft and a $127 million decrease in private
equity and hedge fund income. The lower yields were partially offset by an
increase in income from the reinvestment of significant amounts of cash and
short term investments during 2011.
Other income increased due to the previously discussed legal settlement proceeds
of $226 million in 2011 to resolve a litigation matter as discussed above.
Policyholder benefits and claims incurred increased in 2011 due to the impact of
lower separate account performance in 2011 compared to 2010.
Other acquisition and insurance expenses declined due to legal expenses and
state guaranty fund assessments which were higher in 2010.
Legal Settlements
In December of 2012, we recorded litigation settlement income from settlements
with three financial institutions who participated in the creation, offering and
sale of RMBS as to which AIG and its subsidiaries suffered losses either
directly on their own account or in connection with their participation in AIG's
securities lending program.
Changes in Fair Value of Fixed Maturity Securities Designated to Hedge Living
Benefit Liabilities
AIG Life and Retirement has a dynamic hedging program designed to manage
economic risk exposure associated with changes in equity markets, interest rates
and volatilities related to embedded derivative liabilities contained in
guaranteed benefit features of variable annuities. We substantially hedge our
exposure to equity markets. However, due to regulatory capital considerations, a
portion of our interest rate exposure is unhedged. In 2012, we began purchasing
U.S. Treasury bonds as a capital-efficient strategy to reduce our interest rate
risk exposure over time. As a result of decreases in interest rates on U.S.
Treasury securities during 2012, the fair value of the U.S. Treasury securities
used for hedging, net of financing costs, increased by $37 million. This was
partially offset by embedded derivative losses related to the decline in
interest rates, which are reported in net realized gains (losses).
Net Realized Capital Gains (Losses)
Net realized capital gains increased by $624 million in 2012 as compared to 2011
due to higher gains from the sale of investments in conjunction with a program
to utilize capital loss tax carryforwards and lower other-than-temporary
impairments. The higher gains were partially offset by $557 million higher fair
value losses on variable annuity embedded derivatives, which were primarily due
to declining credit spreads and declines in long-term interest rates.
AIG Life and Retirement reported net realized capital gains in 2011 compared to
net realized capital losses in 2010. This was mainly due to a $981 million
decline in other-than-temporary impairments, a decline in fair value losses on
derivatives primarily used to hedge the effect of interest rate and foreign
exchange movements on GIC reserves, and declines in the allowance for mortgage
loans. These improvements were partially offset by a $465 million increase in
fair value losses on variable annuity embedded derivatives which were primarily
driven by declines in long-term interest rates.
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Change in Benefit Reserves and DAC, VOBA and SIA Related to Net Realized Capital
Gains (Losses)
In conjunction with a program to utilize capital loss tax carryforwards, we sold
approximately $19.5 billion of investments in 2012. These and other sales with
subsequent reinvestment at lower yields triggered loss recognition on certain
long-term payout annuity contracts in the amount of $1.2 billion, which
effectively transferred shadow loss recognition from unrealized (AOCI) to actual
loss recognition (benefit expense) and, to a much lesser extent, transferred
shadow DAC (AOCI) to DAC amortization expense in 2012. Assumptions related to
investment yields, mortality experience and expenses will be reviewed
periodically and updated as appropriate, which may result in additional loss
recognition reserves. In addition, due to the reinvestment of the assets at
lower yields, earnings related to this payout annuity block of business are
expected to decline beginning in 2013.
Premiums
Premiums represent amounts received on traditional life insurance policies,
group benefit policies and deposits on life-contingent payout annuities.
Premiums, deposits and other considerations is a non-GAAP measure that includes
life insurance premiums and deposits on annuity contracts and mutual funds.
The following table presents a reconciliation of premiums, deposits and other
considerations to premiums:
Years Ended December 31,
(in millions) 2012 2011 2010
Premiums, deposits and other considerations $ 20,994 $ 24,392 $ 19,505
Deposits (17,934 ) (21,338 ) (16,405 )
Other (632 ) (541 ) (580 )
Premiums $ 2,428 $ 2,513 $ 2,520
Sales and Deposits
The following tables summarize AIG Life and Retirement premiums, deposits and
other considerations by product*:
Percentage Change
Years Ended December 31, 2012 vs.
(in millions) 2012 2011 2010 2011 2011 vs. 2010
Premiums, deposits and other considerations
Individual fixed annuity deposits $ 1,495 $ 6,606 $ 4,410 (77 )% 50 %
Group retirement product deposits 7,028 7,312 6,309 (4 ) 16
Life insurance 5,129 5,267 5,529 (3 ) (5 )
Individual variable annuity deposits 4,561 3,212 2,072 42 55
Retail mutual funds 2,723 1,925 1,101 41 75
Individual annuities runoff 58 70 84 (17 ) (17 )
Total premiums, deposits and other
considerations $ 20,994 $ 24,392 $ 19,505 (14 )% 25 %
Life Insurance Sales
Retail - Independent $ 138 $ 144 $ 123 (4 )% 17 %
Retail - Affiliated (Career and AIG Direct) 110 109 98 1 11
Total Retail 248 253 221 (2 ) 14
Institutional - Independent 26 25 32 4 (22 )
Total life insurance sales $ 274 $ 278 $ 253 (1 )% 10 %
* 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.
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[[Image Removed: GRAPHIC]]
Total premiums, deposits and other considerations decreased in 2012 as
substantial decreases in individual fixed annuities were only partially offset
by significant increases in individual variable annuities and retail mutual
funds.
2012 and 2011 Comparison
Individual fixed annuity deposits declined due to the low interest rate
environment as consumers are reluctant to purchase these products at the
relatively low crediting rates currently offered. Group retirement product
deposits (which include deposits into mutual funds and fixed options within
variable annuities sold in group retirement markets) decreased modestly due to
slightly lower levels of individual rollover deposits and periodic deposits in
2012, partially offset by higher mutual fund deposits. The low interest rate
environment has affected group retirement deposits, resulting in lower levels of
deposits into fixed options. Individual variable annuity deposits increased due
to innovative product enhancements and expanded distribution as well as a more
favorable competitive environment. Premiums 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 sales
growth was principally driven by SunAmerica Asset Management Corp.'s Focused
Dividend Strategy product offering which continues to be a top long-term
performer within its respective peer group.
AIG Life and Retirement's total life sales decreased 1 percent during 2012
compared to 2011. Overall retail universal life sales decreased 1 percent with
sales of indexed products growing while sales of universal life products
sensitive to low interest rates declined. Retail term insurance sales increased
1 percent in 2012 compared to 2011 because we continued our disciplined focus
related to new business pricing and underwriting. Institutional life sales
increased 4 percent in 2012 compared to 2011 from growth in single premium
private placement universal life deposits.
2011 and 2010 Comparison
Group retirement deposits increased primarily due to higher levels of individual
rollover deposits in 2011. Individual fixed annuity deposits increased as
certain bank distributors negotiated a lower commission in exchange for a higher
rate offered to policyholders which made our individual fixed annuity products
more attractive. However, fixed annuity deposits declined in the latter part of
2011 from the first six months of 2011 due to significant declines in interest
rates. Variable annuity sales increased due to reinstatements of relationships
at a number of key broker-dealers, and increased wholesaler productivity.
Deposits from life insurance products increased in 2011, but were more than
offset by declines in deferred annuities sold through life insurance
distribution channels and a large private placement variable annuity sale in
2010. Retail mutual fund annual sales growth was driven by SunAmerica Asset
Management Corp.'s Specialty Series product offerings (Alternative Strategies
and Global Trends) and the Focused Dividend Strategy Portfolio.
AIG Life and Retirement grew new sales of mortality-based life insurance
products during 2011 by strengthening the core retail independent distribution
channel and continuing to focus on career agent and direct-to-consumer
distribution. Retail life sales increased 17 percent during 2011 as we continued
to re-engage independent distribution channels. Affiliated distribution channels
grew 11 percent in 2011 as a result of an enhanced product suite appealing
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to middle market consumers. AIG Direct, our direct-to-consumer platform, has
proven highly effective for the distribution of term life and A&H products. The
decline in institutional sales during 2011 reflected several large variable
universal life sales during 2010.
Retirement Services Net Flows
The following table presents the account value rollforward for Retirement
Services:
Years Ended December 31,
(in millions) 2012 2011 2010
Group retirement products
Balance, beginning of year $ 69,925 $ 68,365 $ 63,419
Deposits - annuities 5,083 5,652 4,937
Deposits - mutual funds 1,945 1,660 1,372
Total deposits 7,028 7,312 6,309
Surrenders and other withdrawals (6,325 ) (5,853 ) (6,647 )
Death benefits (401 ) (371 ) (317 )
Net inflows (outflows) 302 1,088 (655 )
Change in fair value of underlying investments,
interest credited, net of fees 6,087 457 5,601
Effect of unrealized gains (losses) (shadow loss) 178 15 -
Balance, end of year $ 76,492 $ 69,925 $ 68,365
Individual fixed annuities
Balance, beginning of year $ 52,276 $ 48,489 $ 47,202
Deposits 1,495 6,606 4,410
Surrenders and other withdrawals (3,465 ) (3,456 ) (3,520 )
Death benefits (1,632 ) (1,570 ) (1,479 )
Net inflows (outflows) (3,602 ) 1,580 (589 )
Change in fair value of underlying investments,
interest credited, net of fees 1,719 1,828 1,876
Other 479 - -
Effect of unrealized gains (losses) (shadow loss) (141 ) 379 -
Balance, end of year $ 50,731 $ 52,276 $ 48,489
Individual variable annuities
Balance, beginning of year $ 24,896 $ 25,581 $ 24,637
Deposits 4,561 3,212 2,072
Surrenders and other withdrawals (2,727 ) (2,982 ) (2,725 )
Death benefits (447 ) (452 ) (437 )
Net inflows (outflows) 1,387 (222 ) (1,090 )
Change in fair value of underlying investments,
interest credited, net of fees 2,830 (463 ) 2,034
Balance, end of year $ 29,113 $ 24,896 $ 25,581
Retail mutual funds
Balance, beginning of year $ 6,221 $ 5,975 $ 5,879
Deposits 2,723 1,925 1,101
Redemptions (1,705 ) (1,447 ) (1,252 )
Net inflows (outflows) 1,018 478 (151 )
Change in fair value of underlying investments,
interest credited, net of fees (69 ) (232 ) 247
Balance, end of year $ 7,170 $ 6,221 $ 5,975
Total Retirement Services
Balance, beginning of year $ 153,318 $ 148,410 $ 141,137
Deposits 15,807 19,055 13,892
Surrenders, redemptions and other withdrawals (14,222 ) (13,738 ) (14,144 )
Death benefits (2,480 ) (2,393 ) (2,233 )
Net inflows (outflows) (895 ) 2,924 (2,485 )
Change in fair value of underlying investments,
interest credited, net of fees 10,567 1,590 9,758
Other 479 - -
Effect of unrealized gains (losses) (shadow loss) 37 394 -
Balance, end of year, excluding runoff 163,506 153,318 148,410
Individual annuities runoff 4,151 4,299 4,430
GIC runoff 6,099 6,706 8,486
Balance, end of year $ 173,756 $ 164,323 $ 161,326
General and separate account reserves and mutual
funds
General account reserve $ 102,814 $ 102,580 $ 97,515
Separate account reserve 51,970 46,006 48,804
Total general and separate account reserves 154,784 148,586 146,319
Group retirement mutual funds 11,802 9,516 9,032
Retail mutual funds 7,170 6,221 5,975
Total reserves and mutual funds $ 173,756 $ 164,323 $ 161,326
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2012 and 2011 Comparison
Overall, net flows were negative in 2012, primarily due to lower fixed annuity
deposits resulting from the low interest rate environment. Net flows improved in
2012 for individual variable annuities due to both the increase in deposits and
favorable surrender experience. Net flows improved in 2012 for retail mutual
funds due to increased deposits.
2011 and 2010 Comparison
Net flows improved in 2011 due to both the significant increase in deposits and
favorable surrender experience in group retirement and individual fixed
annuities. However, individual fixed annuities net flows declined in the second
half of the year due to lower deposits resulting from the low interest rate
environment.
Surrender rates for individual fixed annuities also decreased in 2011 due to the
low interest rate environment and 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. AIG Life and
Retirement returned to a more normal level of group surrender activity that no
longer reflects the negative AIG publicity associated with the events of 2008
and 2009. Individual variable annuities net flows improved from 2010 levels due
primarily to higher deposits throughout 2011 and turned positive in the fourth
quarter of 2011.
The following table presents reserves by surrender charge category and surrender
rates:
2012 2011
Group Individual Individual Group Individual Individual
At December 31, Retirement Fixed Variable Retirement Fixed Variable
(in millions) Products* Annuities Annuities Products* Annuities Annuities
No surrender charge $ 55,892$ 21,528$ 11,548 $
53,100 $ 18,179 $ 10,061
0% - 2% 1,241 2,970 4,231 1,186 2,922 4,317
Greater than 2% - 4% 1,400 2,867 2,125 1,248 4,719 2,068
Greater than 4% 4,879 19,609 10,318 4,060 23,372 7,764
Non-surrenderable 1,278 3,757 891 815 3,084 686
Total reserves $ 64,690 $ 50,731 $ 29,113 $ 60,409 $ 52,276 $ 24,896
Surrender rates 8.6 % 6.8 % 10.3 % 8.4 % 6.8 % 11.9 %
* Excludes mutual funds of $11.8 billion and $9.5 billion at December 31,
2012 and 2011, respectively.
Low Interest Rate Environment
There are a variety of factors that impact AIG Life and Retirement's businesses,
and the life insurance and annuity industry in general, during a prolonged low
interest rate environment. Declining interest rates result in higher fair values
of assets backing insurance and annuity liabilities and may result in improved
persistency of certain lines of business. A sustained low interest rate
environment may also result in lower sales of fixed annuities and other products
and lower net investment spreads as portfolio cash flows are reinvested at lower
rates (spread compression). There are a number of management actions we may take
to mitigate these impacts as discussed below.
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AIG Life and Retirement is proactively addressing the impact of sustained low
interest rates. During 2012, a number of actions were taken on both the asset
and liability sides of our balance sheet:
•
Opportunistic investments in structured securities and re-deployment of cash in
2011 to increase yields
•
Continued disciplined approach to new business pricing
•
Actively managing renewal credited rates
•
Re-priced certain life insurance and annuity products to reflect current low
rate environment
•
Re-filed certain products to continue lowering minimum rate guarantees
As a result of these actions, we estimate that the effect of interest rates
remaining at or near current levels through the end of 2013 on pre-tax
operating income would not be material, and would be modestly more significant
with respect to 2014 results.
Opportunistic Investments: The majority of assets backing insurance and annuity
liabilities consists of intermediate- and long-term fixed maturity securities.
We generally purchase assets with the intent of matching expected maturities of
the insurance liabilities. An extended low interest rate environment may result
in a lengthening of liability maturities from initial estimates, primarily due
to lower lapses. Opportunistic investments in structured securities, private
placement corporate debt securities and mortgage loans continue to be made to
improve yields, increase net investment income and help to offset the impact of
the lower interest rate environment.
Disciplined New Business Pricing: New fixed annuity sales have declined in 2012
relative to 2011, due to the relatively low crediting rates offered as a result
of our disciplined approach to new business. However, even in the current
interest rate environment, we continue to pursue new sales of life and annuity
products at targeted net investment spreads. New sales of fixed 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 net investment spreads. If the low interest rate
environment continues, we expect our fixed annuities sales (including deposits
into fixed options within variable annuities sold in group retirement markets)
to remain weak into 2013.
Active Management of Renewal Credited Rates: The contractual provisions for
renewal of crediting rates and guaranteed minimum crediting rates included in
our products may have the effect, in a continued low interest rate environment,
of reducing our spreads and thus reducing future profitability. Although we
partially mitigate this interest rate risk through its asset-liability
management process, product design elements and crediting rate strategies, a
prolonged low interest rate environment may negatively affect future
profitability. Our 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. We have adjusted, and
will continue to adjust, crediting rates in order to maintain targeted net
investment spreads on both new business and in-force business where crediting
rates are above minimum guarantees. In addition to annuity and universal life
products discussed above, certain traditional long-duration products for which
we do not have the ability to adjust interest rates, such as payout annuities,
are exposed to reduced earnings and potential reserve increases in a prolonged
low interest rate environment.
As indicated in the table below, approximately 63 percent of our annuity and
universal life account values are at their minimum crediting rates as of
December 31, 2012, an increase from 45 percent at December 31, 2011. These
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products have minimum guaranteed interest rates as of December 31, 2012 ranging
from 1.0 percent to 5.5 percent, with the higher rates representing guarantees
on older products.
December 31, 2012 Current Crediting Rates
1-50 Basis More than 50
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% $ 24 $ - $ 9 $ 33
> 1% - 2% - - 232 232
> 2% - 3% 93 368 1,445 1,906
> 3% - 4% 2,143 209 1,566 3,918
> 4% - 5% 4,377 197 12 4,586
> 5% - 5.5% 321 3 2 326
Subtotal $ 6,958 $ 777 $ 3,266 $ 11,001
Fixed annuities
1% $ 1,317 $ 2,826 $ 6,079 $ 10,222
> 1% - 2% 6,146 8,146 8,857 23,149
> 2% - 3% 30,631 1,635 5,251 37,517
> 3% - 4% 13,262 962 417 14,641
> 4% - 5% 8,138 - 7 8,145
> 5% - 5.5% 238 - 5 243
Subtotal $ 59,732 $ 13,569 $ 20,616 $ 93,917
Total $ 66,690 $ 14,346 $ 23,882 $ 104,918
Percentage of total 63 % 14 % 23 % 100 %
Effective Product Management: AIG Life and Retirement has a dynamic product
management process designed to ensure that new business product offerings
appropriately reflect the current low interest rate environment. To the extent
that we cannot achieve targeted net investment spreads on new business, products
are re-priced or discontinued. Additionally, current products with higher
minimum rate guarantees have been re-filed with lower rates as permitted under
state insurance product regulations.
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Other Operations
Other Operations Results
The following table presents AIG's Other operations results:
Percentage Change
Years Ended December 31, 2012 vs. 2011 vs.
(in millions) 2012 2011 2010 2011 2010
Mortgage Guaranty $ 9 $ (97 ) $ 353 NM % NM %
Global Capital Markets 557 (11 ) 210 NM NM
Direct Investment book 1,215 604 1,421 101 (57 )
Retained interests:
Change in fair value of AIA securities, including
realized gain in 2012 2,069 1,289 (638 ) 61 NM
Change in fair value of ML III 2,888 (646 ) 1,792 NM NM
Change in the fair value of the MetLife
securities prior to their sale - (157 )
665 NM NM
Corporate & Other:
Interest expense on FRBNY Credit Facility* - (72 ) (636 ) NM 89
Other interest expense (1,597 ) (1,613 ) (1,856 ) 1 13
Corporate expenses, net (900 ) (1,095 ) (1,233 ) 18 11
Real estate and other non-core businesses (121 ) 24
(658 ) NM NM
Total Corporate & Other operating income (2,618 ) (2,756 ) (4,383 ) 5 37
Consolidation and eliminations 4 -
89 NM NM
Total Other operations operating income (loss) 4,124 (1,774 )
(491 ) NM (261 )
Legal reserves (754 ) (20 ) (3 ) NM NM
Legal settlements 39 - - NM NM
Deferred gain on FRBNY credit facility - 296 - NM NM
Amortization of prepaid commitment fee asset - - (3,471 ) NM NM
Gain (loss) on extinguishment of debt (9 ) (3,143 ) (104 ) 100 NM
Net realized capital gains 501 12 908 NM (99 )
Net gain (loss) on sale of divested businesses (2 ) (74 ) 18,897 97 NM
Divested businesses - -
1,875 NM NM
Total Other operations pre-tax income (loss) $ 3,899 $ (4,703 ) $ 17,611 NM % NM %
* Includes interest expense of $2 million and $75 million for 2011 and 2010,
respectively, allocated to discontinued operations in consolidation.
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In December of 2012, we recorded litigation settlement income from settlements
with three financial institutions who participated in the creation, offering and
sale of RMBS as to which AIG and its subsidiaries suffered losses either
directly on their own account or in connection with their participation in AIG's
securities lending program.
Mortgage Guaranty
The following table presents pre-tax income for Mortgage Guaranty:
Percentage Change
Years Ended December 31, 2012 vs. 2011 vs.
(in millions) 2012 2011 2010 2011 2010
Underwriting results:
Net premiums written $ 858 $ 801 $ 756 7 % 6 %
(Increase) decrease in unearned
premiums (143 ) (9 ) 219 NM NM
Net premiums earned 715 792 975 (10 ) (19 )
Claims and claims adjustment
expenses incurred 659 834 500 (21 ) 67
Underwriting expenses 193 187 271 3 (31 )
Underwriting profit (loss) (137 ) (229 ) 204 40 NM
Net investment income 146 132 149 11 (11 )
Operating income (loss) 9 (97 ) 353 NM NM
Net realized capital gains 6 20 44 (70 ) (55 )
Pre-tax income (loss) $ 15 $ (77 ) $ 397 NM % NM %
2012 and 2011 Comparison
Mortgage Guaranty recorded operating income in 2012 compared to an operating
loss in 2011 primarily due to:
º •
º a decrease in claims and claims adjustment expenses of $175 million. This
reflects decreases in first and second-lien businesses of $95 million and
$110 million, respectively, which were partially offset by an increase in
international claims and claims adjustment expenses of $34 million. Claims
and claims adjustment expenses in 2012 included favorable prior year loss
development of $78 million, which consists of $45 million in second liens,
$17 million in student loans and $33 million in the international business
partially offset by unfavorable development in first liens of $17 million.
This favorable prior year development was offset by current accident year
losses attributable to business written in 2008 and prior;
º •
º the $95 million decrease in first-lien claims and claims adjustment
expenses reflected 20 percent lower levels of newly reported delinquencies,
an improvement in the cure rate and lower unfavorable loss development of
$17 million in 2012 compared to $76 million of unfavorable development in
2011. The unfavorable development of $17 million in 2012, included$117 million of favorable development arising from the claims requests sent
to lenders mentioned above, offset by $134 million of unfavorable
development on delinquencies for which claim requests were not made;
º •
º the $110 million decline in second-lien business claims and claims
adjustment expenses. This reflected a decrease in claims and claims
adjustment expenses paid as more business reached the respective stop loss
limits; and
º •
º the increased claims and claims adjustment expenses in the international
business. This reflected a reduction in claim reserves in 2011 due to a
settlement of certain delinquencies with a major European lender that
resulted in a $43 million benefit.
These items were partially offset by:
º •
º a decline in first-lien earned premiums of $19 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 throughout
2012, as discussed in Outlook herein, in addition to the declining
persistency on the 2008 and prior policy years;
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º •
º a decline in earned premiums on second-lien and international businesses,
both of which were placed into run-off during 2008, of $41 million and
$24 million respectively; and
º •
º a $10 million increase in underwriting expenses driven primarily by an
increase in underwriting, sales and product initiatives, all of which
supported the increase in new insurance written for the year.
New insurance written, which represents the original principal balance of the
insured mortgages, was approximately $37 billion and $19 billion in 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.
Risk-in-Force
The following table presents risk-in-force and delinquency ratio information for
Mortgage Guaranty domestic business:
At December 31,
(dollars in billions) 2012 2011
Domestic first-lien:
Risk in force $ 29.0 $ 25.6
60+ day delinquency ratio on primary loans(a) 8.9 % 13.9 %
Domestic second-lien:
Risk in force(b) $ 1.3 $ 1.5
(a) Based on number of policies.
(b) 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.
2011 and 2010 Comparison
Mortgage Guaranty recorded an operating loss in 2011 compared to operating
income in 2010, primarily due to:
º •
º an increase in claims and claims adjustment expenses of $334 million,
primarily in first-lien business. This reflected increased overturns of
denied and rescinded claims and unfavorable first-lien loss development of
$76 million in 2011, compared to favorable loss development of $385 million
in 2010. These factors were partially offset by lower levels of newly
reported delinquencies in the first-lien, second-lien and international
products, and a reduction in reserves due to an agreement to resolve
certain delinquencies with a major European lender that resulted in a
$43 million benefit;
º • º declines in earned premiums from the second-lien, private student loan and
international businesses, which were placed into runoff during 2008,
partially offset by an increase in earned premiums from first-lien
business; and
º • º the accrual of $22 million to pay for previously rescinded losses, certain
legal fees and interest in connection with an adverse judgment. Mortgage
Guaranty has appealed the court's decision.
Partially offsetting these declines was a reduction in underwriting expenses
compared to 2010 reflecting a $94 million accrual of estimated remedy losses in
2010. Remedy losses represent the indemnification for losses incurred by lenders
arising from obligations contractually assumed by Mortgage Guaranty as a result
of underwriting services provided to lenders during times of high loan
origination activity. Mortgage Guaranty believes it has adequately accrued for
these losses at December 31, 2011. Pre-tax income for 2010 also includes gains
of approximately $150 million from legal settlements and reinsurance
commutations.
Global Capital Markets Operations
2012 and 2011 Comparison
GCM reported operating income in 2012 compared to an operating loss in 2011
primarily due to improvement in unrealized market valuations related to the
super senior credit default swap (CDS) portfolio, a decrease in operating
expenses and lower costs related to the wind-down of AIGFP's businesses and
portfolios. For 2012 and 2011,
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unrealized market valuation gains of $617 million and $339 million,
respectively, were recognized. The improvement resulted primarily from CDS
transactions written on multi sector CDOs driven by amortization and price
movements within the CDS portfolio. For 2012, the remaining portfolio of AIGFP
continued to be wound down and was managed consistent with AIG's risk management
objectives. The active wind-down of the AIGFP derivatives portfolio was
completed by the end of the second quarter of 2011.
2011 and 2010 Comparison
GCM reported an operating loss in 2011 compared to operating income in 2010
primarily due to a decrease in unrealized market valuation gains related to the
super senior CDS portfolio and losses in 2011 compared to gains in 2010 on the
CDS contracts referencing single-name exposures written on corporate, index and
asset-backed credits, which are not included in the super senior CDS portfolio.
These items were partially offset by improvement in net credit valuation
adjustments on derivative assets and liabilities. For 2011 and 2010, unrealized
market valuation gains of $339 million and $598 million, respectively, were
recognized on the super senior CDS portfolio. The decrease resulted primarily
from CDS transactions written on multi-sector CDOs as a result of price declines
of the underlying assets. For 2011, an unrealized market valuation loss of
$23 million was recognized on CDS contracts referencing single-name exposures
compared to a gain of $149 million in 2010 due to a decline in market
conditions. For 2011 and 2010, net credit valuation adjustment losses of
$53 million and $200 million, respectively, were recognized. The improvement
resulted primarily from the narrowing of corporate spreads.
Direct Investment Book Results
2012 and 2011 Comparison
The DIB's operating income increased in 2012 compared to 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 gains realized from
unwinding certain transactions. For 2012 and 2011, net credit valuation
adjustment gains of $789 million and $380 million, respectively, were
recognized. The improvement resulted primarily from gains on assets due to the
tightening of counterparty credit spreads, partially offset by losses on
liabilities due to the tightening of AIG's credit spreads.
2011 and 2010 Comparison
The DIB's operating income decreased in 2011 compared to 2010 primarily due to
lower net gains in credit valuation adjustments on non-derivative assets and
liabilities accounted for under the fair value option and lower interest income
due to approximately $4.9 billion in sales of investments during the fourth
quarter of 2010 and the first quarter of 2011 to increase liquidity.
The following table presents credit valuation adjustment gains (losses) for the
DIB (excluding intercompany transactions):
Years Ended December 31,
(in millions) 2012 2011 2010
Counterparty Credit Valuation Adjustment on Assets:
Bond trading securities $ 1,401 $ (71 ) $ 1,678
Loans and other assets 29 31 40
Increase (decrease) in assets $ 1,430 $ (40
) $ 1,718
AIG's Own Credit Valuation Adjustment on Liabilities:
Notes and bonds payable $ (235 ) $ 141
$ (251 )
Hybrid financial instrument liabilities (291 ) 147
(311 )
Guaranteed Investment Agreements (81 ) 112
(173 )
Other liabilities (34 ) 20
(44 )
(Increase) decrease in liabilities $ (641 ) $ 420
$ (779 )
Net increase to operating income $ 789 $ 380 $ 939
AIG 2012 Form 10-K
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Retained Interests
Change in Fair Value of AIA Securities Prior to Their Sale
We sold our remaining 33 percent interest in AIA ordinary shares for proceeds of
$14.5 billion and a net gain of $2.1 billion through three sale transactions on
March 7, September 11 and December 20, 2012.
We recognized a $1.3 billion gain in 2011, representing a 12 percent increase in
the value of AIG's then 33 percent interest in AIA, which is recorded in Other
invested assets and accounted for under the fair value option. In 2010, we
recognized a $638 million loss on our interest in AIA during the approximate
two-month holding period following the initial public offering in late October
2010.
Change in Fair Value of ML III Prior to Liquidation
The gains attributable to AIG's interest in ML III for 2012 were based in part
on the completion of the final auction of ML III assets by the FRBNY, in the
third quarter of 2012.
The loss attributable to AIG's interest in ML III for 2011 was due to
significant spread widening and reduced interest rates.
The gain on ML III for 2010 was attributable to the shortening of its weighted
average life. Additionally, fair value for 2010 was positively affected by a
decrease in projected credit losses in the underlying collateral securities.
Change in the Fair Value of the MetLife Securities Prior to Their Sale
We recognized a loss in 2011, representing the decline in the securities' value,
due to market conditions, from December 31, 2010 through the date of their sale
in the first quarter of 2011.
Corporate & Other
Corporate & Other reported lower operating losses in 2012 compared to 2011
primarily due to the effects of the following:
º •
º reduction in expense of $211 million in 2012 resulting from settlements of
the liability for the Department of the Treasury's underwriting fees for
the sale of AIG Common Stock at amounts lower than had been estimated at
the time the accrual was established, and AIG purchased a significant
amount of shares for which no payment to the underwriters was required; and
º •
º a decline in interest expense as a result of the repayment of the FRBNY
Credit Facility and the exchange of outstanding junior subordinated
debentures for senior unsecured notes in 2011.
Real estate and other non-core businesses declined due to lower gains on real
estate dispositions and higher equity losses on real estate investments in 2012
compared to 2011.
Corporate & Other reported lower operating losses in 2011 compared to 2010. This
was primarily due to:
º •
º a decline in interest expense as a result of the repayment of the FRBNY
Credit Facility; and
º •
º improvement in real estate and other non-core businesses due to
significantly lower levels of real estate investment impairment charges in
2011 compared to 2010.
Divested Businesses
Divested businesses include the operating results of divested businesses that
did not qualify for discontinued operations accounting through the date of their
sale. The Divested businesses results for 2010 primarily represent the
historical results of AIA, which was deconsolidated in November 2010 in
conjunction with its initial public offering.
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Discontinued Operations
Income (loss) from Discontinued Operations is comprised of the following:
Years Ended December 31,
(in millions) 2012 2011 2010
Foreign life insurance businesses $ - $ 1,170 $ (1,602 )
AGF - - (145 )
ILFC 304 (1,017 ) (581 )
Net gain (loss) on sale (6,733 ) 2,338 5,389
Consolidation adjustments - (1 ) (356 )
Interest allocation - (2 ) (75 )
Income (loss) from discontinued operations (6,429 ) 2,488 2,630
Income tax expense (benefit) (2,377 )
698 3,599
Income (loss) from discontinued operations, net of tax $ (4,052 ) $ 1,790 $ (969 )
Significant items affecting the comparison of results from discontinued
operations included the following:
º •
º a pre-tax loss of $6.7 billion ($4.4 billion after tax) on the announced
sale of ILFC in 2012;
º •
º a gain on the sale of AIG Star and AIG Edison in 2011, a gain on the sale
of ALICO in 2010, a loss on the sale of AGF in 2010 and a loss recognized
in 2010 related to the sale of Nan Shan;
º •
º impairments of goodwill in 2010 of $4.6 billion related to ALICO, AIG Star
and AIG Edison.
º •
º tax effects of the above transactions, notably the impact of non-deductible
goodwill impairment and the change in investment in subsidiaries, which was
principally related to changes in the estimated U.S. tax liability with
respect to the planned sales.
See Note 4 to the Consolidated Financial Statements for further discussion of
discontinued operations.
Consolidated Comprehensive Income (Loss)
The following table presents AIG's consolidated comprehensive income (loss):
Percentage Change
Years Ended December 31, 2012 vs.
(in millions) 2012 2011 2010 2011 2011 vs. 2010
Net income $ 3,700 $ 21,330 $ 12,285 (83 )% 74 %
Change in unrealized appreciation of
investments 10,710 5,518 9,910 94 (44 )
Change in deferred acquisition costs adjustment
and other (889 ) (630 ) (657 ) (41 ) 4
Change in future policy benefits (517 ) (2,302 ) - 78 NM
Change in foreign currency translation
adjustments (33 ) (97 ) 654 66 NM
Change in net derivative gains arising from
cash flow hedging activities 33 51 105 (35 ) (51 )
Change in retirement plan liabilities
adjustment (319 ) (365 ) 9 13 NM
Change attributable to divestitures and
deconsolidations - (5,041 ) (4,872 ) NM (3 )
Deferred tax asset (liability) (2,889 ) 262 (2,186 ) NM NM
Other comprehensive income (loss) 6,096 (2,604 ) 2,963 NM NM
Comprehensive income 9,796 18,726 15,248 (48 ) 23
Total comprehensive income attributable to
noncontrolling interests 265 587 2,408 (55 ) (76 )
Comprehensive income attributable to AIG $ 9,531$ 18,139$ 12,840 (47 )%
41 %
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2012 and 2011 Comparison
Change in Unrealized Appreciation of Investments
The increase in 2012 was primarily attributable to appreciation in bonds
available for sale due to lower interest rates and narrowing spreads for
investment grade and high-yield securities. The ten year U.S. Treasury rate
started the year at 1.88 percent, decreased to a historic low of 1.39 percent in
the middle of the year, and ended the year at 1.76 percent. High yield and
investment grade spreads were down approximately 200 basis points and 100 basis
points, respectively, during the year, with the narrowing spreads being the
major contributor to unrealized appreciation in bonds available for sale, which
was almost double the amount recorded in 2011. Corporate bonds and structured
securities were major beneficiaries from this continued low rate environment as
prices on these assets increased significantly during the year. Non-agency
securities provided the majority of the structured securities improvement as
high yield securities generally benefited from the significant narrowing of
spreads during the year. The significant majority of the unrealized appreciation
occurred during the first three quarters of the year, as the fourth quarter
experienced less rate and spread volatility.
During 2011, the insurance operations portfolio experienced appreciation in
bonds available for sale due to lower rates, which more than offset widening
spreads. The ten year U.S. Treasury rate started the year at 3.30 percent,
falling 188 basis points to end the year at 1.88 percent. Municipal bond rates
also decreased, resulting in unrealized appreciation in both the U.S. Government
securities and municipal bond portfolio. The drop in U.S. Treasury rates more
than offset the widening of spreads on Investment grade securities, resulting in
improved pricing and corresponding unrealized appreciation in the corporate bond
portfolio during the year.
The reclassification adjustments included in net income on unrealized
appreciation of investments increased by $1.0 billion in 2012 compared to 2011
as a result of realized gains and losses recognized on sales of securities
classified as available for sale.
See Investments - Investment Highlights - Securities available for sale herein
for a table on the gross unrealized gains (losses) of AIG's available for sale
securities by type of security.
Change in Deferred Acquisition Costs Adjustment and Other
The change in DAC in 2012 compared to 2011 is primarily the result of increases
in the unrealized appreciation of investments supporting interest-sensitive
products. DAC for investment-oriented products is adjusted for changes in
estimated gross profits that result from changes in the net unrealized gains or
losses on fixed maturity and equity securities available for sale. Because fixed
maturity and equity securities available for sale are carried at aggregate fair
value, an adjustment is made to DAC equal to the change in DAC amortization that
would have been recorded if such securities had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields. These
adjustments, net of tax, are credited or charged directly to Accumulated other
comprehensive income (loss).
Change in Future Policy Benefits
We periodically evaluate the assumptions used to establish deferred acquisition
costs and future policy benefits. These assumptions may be adjusted based on
actual experience and judgment. Key assumptions include mortality, morbidity,
persistency, maintenance expenses and investment returns.
Primarily as a result of the increase in unrealized appreciation of investments
during 2012 and 2011, we recorded additional future policy benefits through
Other comprehensive income. This change in future policy benefits assumes that
the securities underlying certain traditional long-duration products are sold at
their stated aggregate fair value and reinvested at current yields. This
increase in future policy benefits in other comprehensive income was partially
offset by loss reserve recognition in net income resulting from sales of
securities in unrealized gain positions.
Change in Foreign Currency Translation Adjustment
The change in foreign currency translation adjustment was a net loss in 2012 due
to the strengthening of the U.S. dollar against the Euro and Japanese Yen
slightly offset by the weakening of the U.S. dollar against British pound.
Change in Net Derivative Gains (Losses) Arising from Cash Flow Hedging
Activities
The decline primarily reflects the gradual run-off of the cash flow hedge
portfolio as well as the de-designations resulting from ILFC, partially offset
by a decline in the interest rate environment.
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Change in Retirement Plan Liabilities Adjustment
The decrease in the amount of change in 2012 compared to the 2011 was primarily
due to the overall decreases in discount rates resulting in a loss of
approximately $636 million and $677 million in 2012 and 2011, respectively.
Partially offsetting the 2012 loss was a gain from investment returns of
$213 million. Adding to the loss in 2011 was a loss from investment returns of
$146 million.
See Note 22 to the Consolidated Financial Statements for further discussion.
Change Attributable to Divestitures and Deconsolidations
The change attributable to divestitures and deconsolidations in 2011 primarily
reflects the derecognition of all items in Accumulated other comprehensive
income (loss) at the time of sale for AIG Star, AIG Edison and Nan Shan.
Deferred Taxes on Other Comprehensive Income
In 2012, the effective tax rate on pre-tax Other Comprehensive Income was
32.2 percent. The effective tax rate differed from the statutory 35 percent rate
primarily due to a decrease in the deferred tax asset valuation allowance and
the effect of foreign operations.
For the year ended December 31, 2011, the effective tax rate on pre-tax Other
Comprehensive Loss was 9.1 percent. The effective tax rate differs from the
statutory 35 percent rate primarily due to the effects of the Nan Shan
disposition.
2011 and 2010 Comparison
Change in Unrealized Appreciation of Investments
As discussed above, the 2011 increase in unrealized appreciation of investments
was due to the result of appreciation in bonds available for sale due to lower
rates, which more than offset widening spreads.
The $9.9 billion increase in 2010 primarily reflects an appreciation in bonds
available for sale due to lower U.S. Treasury rates and slightly narrowed
spreads. The structured securities portfolio accounted for more than half of the
positive change in 2010, as RMBS and CMBS continued to recover from the
distressed pricing levels of the financial crisis. The increase in 2010 also
includes an appreciation in available-for-sale equity securities.
The reclassification adjustments included in net income on unrealized
appreciation of investments decreased by $0.5 billion in 2011 compared to 2010
as a result of realized gains and losses recognized on sales of securities
classified as available for sale.
Change in Deferred Acquisition Costs Adjustment and Other
DAC amortization was reduced in 2011 and 2010 primarily as a result of increases
in the unrealized appreciation of investments supporting interest-sensitive
products. The declines also reflect the divestiture of multiple life insurance
operations, including the sales of Nan Shan, AIG Star and AIG Edison in 2011,
the deconsolidation of AIA in 2010 and sale of ALICO in 2010.
Change in Foreign Currency Translation Adjustments
The decline in foreign currency translation adjustments reflects the divestiture
of multiple foreign operations, including the sales of Nan Shan, AIG Star and
AIG Edison in 2011, the deconsolidation of AIA in 2010 and the sale of ALICO in
2010.
Change in Net Derivative Gains (Losses) Arising from Cash Flow Hedging
Activities
The decline in 2011 compared to 2010 primarily reflects the gradual wind-down of
the cash flow hedge portfolio, partially offset by a decline in the interest
rate environment.
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Change in Retirement Plan Liabilities Adjustment
The decrease in 2011 was primarily due to the announced redesign and resulting
remeasurement of the AIG Retirement and AIG Excess Plans, which was converted to
cash balance plans effective April 1, 2012. AIG recognized a $590 million
pre-tax reduction to Accumulated other comprehensive income in connection with
the remeasurement in 2011, primarily due to a decrease in the discount rate
since December 31, 2010. This decrease in Accumulated other comprehensive income
was partially offset by the effect of the increase in the discount rate in the
fourth quarter of 2011 in connection with the year end remeasurement.
Change Attributable to Divestitures and Deconsolidations
The change attributable to divestitures and deconsolidations in both periods
reflect the derecognition of all items in Accumulated other comprehensive income
(loss) at the point of sale and deconsolidation for all entities, including
domestic entities. In 2011, the most significant entities were AIG Star, AIG
Edison and Nan Shan. In 2010, the most significant entities were AIA and ALICO.
Deferred Taxes on Other Comprehensive Income
As discussed above, for the year ended December 31, 2011, the effective tax rate
differs from the statutory 35 percent rate primarily due to the effects of the
Nan Shan disposition.
For the year ended December 31, 2010, the effective tax rate on pre-tax Other
Comprehensive Income was 42.5 percent, primarily due to the effects of the AIA
initial public offering, the ALICO disposition and changes in the estimated U.S.
tax liability with respect to the potential sale of subsidiaries, including AIG
Star and AIG Edison.
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Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet
our payment obligations. It is defined as cash and unencumbered assets that can
be monetized in a short period of time at a reasonable cost. We manage our
liquidity prudently through various risk committees, policies and procedures,
and a stress testing and liquidity framework established by ERM. See Enterprise
Risk Management - Risk Governance Structure for additional information. The
liquidity framework is designed to measure both the amount and composition of
our liquidity to meet financial obligations in both normal and stressed markets.
See Enterprise Risk Management - Risk Appetite, Identification, and Measurement
and Liquidity Risk Management for additional information.
Capital refers to the long-term financial resources available to support the
operation of our businesses, fund business growth, and cover financial and
operational needs that arise from adverse circumstances. Our primary source of
ongoing capital generation is the profitability of our insurance subsidiaries.
We and our insurance subsidiaries must comply with numerous constraints on our
minimum capital positions. These constraints drive the requirements for capital
adequacy for both the consolidated company and the individual businesses and are
based on internally-defined risk tolerances, regulatory requirements, rating
agency and creditor expectations and business needs. Actual capital levels are
monitored on a regular basis and using ERM's stress testing methodology, we
evaluate the capital impact of potential macroeconomic, financial and insurance
stresses in relation to the relevant capital constraints of both the
consolidated company and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy
future requirements and meet our obligations to policyholders, customers,
creditors and debt-holders, including reasonably foreseeable contingencies or
events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed
projected liquidity or capital resources. Additional collateral calls,
deterioration in investment portfolios or reserve strengthening affecting
statutory surplus, higher surrenders of annuities and other policies, downgrades
in credit ratings, or catastrophic losses may result in significant additional
cash or capital needs, loss of some sources of liquidity or capital, or both. In
addition, regulatory, and other legal restrictions could limit our ability to
transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and
other factors, we may take various liability and capital management actions.
Liability management actions may include, but are not limited to repurchasing or
redeeming outstanding debt, issuing new debt or engaging in debt exchange
offers. Capital management actions may include, but are not limited to, paying
dividends to our shareholders, share purchases and acquisitions.
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Liquidity and Capital Resources Management Highlights 2012
Sources
•
Sales of AIA Shares
We sold our remaining interest of approximately 4.0 billion AIA ordinary shares
for gross proceeds of approximately $14.5 billion.
•
ML III Distributions
We received approximately $8.5 billion in distributions from the FRBNY's
dispositions of ML III assets.
•
AIG Parent Funding from Subsidiaries
Approximately $5.2 billion was paid to AIG Parent from subsidiaries in cash. In
addition, AIG Parent received non-cash dividends of approximately $1.0 billion
in the form of municipal bonds from AIG Property Casualty.
•
AIG Notes Offerings
We received approximately $3.8 billion in proceeds in registered public note
offerings.
•
ALICO Escrow Release
Approximately $1.0 billion held in escrow to secure indemnifications provided
to MetLife under the ALICO stock purchase agreement was released to AIG (see
Note 16 to the Consolidated Financial Statements for additional information).
Uses
•
AIG Share Purchases
We purchased an aggregate of approximately $13 billion of AIG Common Stock at
the initial public offering price in four registered public offerings of AIG
Common Stock conducted by the Department of the Treasury, as the selling
shareholder. See Note 17 to the Consolidated Financial Statements for
additional information on these offerings.
•
Pay Down of AIA SPV Preferred Interests
We paid down in full the remaining $8.6 billion liquidation preference of the
Department of the Treasury's AIA SPV Preferred Interests and redeemed the
Department of the Treasury's preferred participating return rights in the AIA
SPV and the special purpose vehicle holding the proceeds from the sale of ALICO
(ALICO SPV). The payment was funded using both existing funds and approximately
$1.6 billion in proceeds to us from the FRBNY's final disposition of ML II
securities, approximately $6.0 billion in proceeds from the sale of AIA
ordinary shares and funds allocated to the MIP.
•
Debt Reduction
We repaid an aggregate total of $7.7 billion of debt, which includes repayments
by AIG Parent of $3.2 billion.
•
AIG Parent Funding to Subsidiaries
We made $1.2 billion in net capital contributions to subsidiaries, including a
contribution of approximately $1.0 billion to AIG Property Casualty in the
aftermath of Storm Sandy.
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On February 19, 2013, AIG commenced cash tender offers for (i) our 8.625%
Series A-8 Junior Subordinated Debentures and 8.000% Series A-7 Junior
Subordinated Debentures for a purchase price of up to $325 million, (ii) our
6.250% Series A-1 Junior Subordinated Debentures and 8.175% Series A-6 Junior
Subordinated Debentures for a purchase price of up to $650 million and (iii) the
81/2% Capital Trust Pass-Through Securities of American General Capital II, the
7.57% Capital Securities, Series A of American General Institutional Capital A,
the 81/8% Capital Securities, Series B of American General Institutional
Capital B and the 5.60% Senior Debentures due July 2097 of SunAmerica Inc.
assumed by AIG, for a purchase price of up to $275 million, in each case plus
accrued interest or distributions through the settlement date. The offers are
not cross-conditioned and AIG may complete all, some or none of the tender
offers. The offers are scheduled to expire on March 18, 2013 with an early
participation period through March 4, 2013, in each case subject to amendment
and to extension in AIG's sole discretion. The purpose of the tender offers is
to purchase certain outstanding debt issued or guaranteed by AIG and to reduce
its level of indebtedness and its interest expense.
See Liquidity and Capital Resources of AIG Parent and Subsidiaries - AIG
Parent - Sources and Uses of Liquidity and Capital Resources of AIG Parent
herein for further discussion.
Analysis of Sources and Uses of Cash
The following table presents selected data from AIG's Consolidated Statement of
Cash Flows:
Years Ended December 31,
(in millions) 2012 2011 2010
Sources:
Net cash provided by (used in) operating
activities - continuing operations $ 748 $ (6,256 ) $ 6,161
Net cash provided by operating activities -
discontinued operations 2,928 6,175 10,436
Net cash provided by changes in restricted cash 695 27,202 -
Net cash provided by other investing activities 15,917 9,246 17,114
Changes in policyholder contract balances - 4,333 4,673
Issuance of other long-term debt 4,844 3,190 3,342
Federal Reserve Bank of New York credit facility
borrowings -
- 19,900
Proceeds from drawdown on the Department of Treasury
Commitment
- 20,292 2,199
Issuance of Common Stock - 5,055 -
Net cash provided by other financing activities 4,194 - -
Total sources 29,326 69,237 63,825
Uses:
Changes in restricted cash - - (27,026 )
Changes in policyholder contract balances (690 ) - -
Repayments of other long-term debt (7,276 ) (9,486 ) (7,986 )
Federal Reserve Bank of New York credit facility
repayments - (14,622 ) (23,178 )
Repayment of Department of Treasury SPV Preferred
Interests (8,636 ) (12,425 ) -
Repayment of Federal Reserve Bank of New York SPV
Preferred Interests - (26,432 ) -
Purchases of AIG Common Stock (13,000 ) (70 ) -
Net cash used in other financing activities - (6,761 ) (8,211 )
Total uses (29,602 ) (69,796 ) (66,401 )
Effect of exchange rate changes on cash 16 29 39
Decrease in cash (260 ) (530 ) (2,537 )
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The following table presents a summary of AIG's Consolidated Statement of Cash
Flows:
Years Ended December 31,
(in millions) 2012 2011 2010
Summary:
Net cash provided by (used in) operating activities $ 3,676 $ (81 ) $ 16,597
Net cash provided by (used in) investing activities 16,612 36,448 (9,912 )
Net cash used in financing activities (20,564 )
(36,926 ) (9,261 )
Effect of exchange rate changes on cash 16 29 39
Decrease in cash (260 ) (530 ) (2,537 )
Cash at beginning of year 1,474 1,558 4,400
Change in cash of businesses held for sale (63 ) 446 (305 )
Cash at end of year $ 1,151 $ 1,474 $ 1,558
Operating Cash Flow Activities
Interest payments totaled $4.0 billion in 2012 compared to $9.0 billion in 2011.
Cash paid for interest in 2011 includes the payment of FRBNY Credit Facility
accrued compounded interest totaling $6.4 billion. Excluding interest payments,
AIG generated positive operating cash flow of $7.7 billion and $8.9 billion in
2012 and 2011, respectively.
Insurance companies generally receive most premiums in advance of the payment of
claims or policy benefits. The ability of insurance companies to generate
positive cash flow is affected by the frequency and severity of losses under
their insurance policies, policy retention rates and operating expenses.
Cash provided by AIG Property Casualty operating activities was $1.1 billion in
2012 compared to $1.9 billion in 2011, primarily reflecting the decrease in net
premiums written as a result of the continued execution of strategic initiatives
to improve business mix and the timing of the cash flows used to pay claims and
claims adjustment expenses and the related reinsurance recoveries.
Cash provided by operating activities by AIG Life and Retirement was
$2.9 billion in 2012 compared to $2.4 billion in 2011, primarily reflecting
efforts to actively manage spread income.
Cash provided by operating activities of discontinued operations of $2.9 billion
in 2012 compared to $6.2 billion in 2011, includes ILFC, and in 2011 and 2010,
foreign life insurance subsidiaries that were divested in 2011, including Nan
Shan, AIG Star and AIG Edison.
Net cash provided by operating activities declined in 2011 compared to 2010,
principally due to the following:
º •
º the cash payment by AIG Parent of $6.4 billion in accrued compounded
interest and fees under the FRBNY Credit Facility. In prior periods, these
payments were paid in-kind and did not affect operating cash flows;
º •
º cash provided by operating activities of foreign life subsidiaries declined
by $10.4 billion due to the sale of those subsidiaries (AIA, ALICO, AIG
Star, AIG Edison and Nan Shan). The subsidiaries generated operational cash
inflows of $3.4 billion and $13.8 billion in 2011 and 2010, respectively;
and
º •
º the effect of catastrophes and the cession of a large portion of AIG
Property Casualty's net asbestos liabilities in the U.S. to NICO. Excluding
the impact of the NICO cession and catastrophes, cash provided by AIG's
reportable segments in 2011 is consistent with 2010, as increases in claims
paid were offset by increases in premiums collected at the insurance
subsidiaries.
Investing Cash Flow Activities
Net cash provided by investing activities for 2012 includes the following items:
º •
º payments received relating to the sale of the underlying assets held by ML
II of approximately $1.6 billion;
º •
º payments of approximately $8.5 billion received in connection with the
dispositions of ML III assets by the FRBNY;
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º •
º gross proceeds of approximately $14.5 billion from the sale of
approximately 4.0 billion AIA ordinary shares; and
º •
º approximately $2.1 billion of cash collateral received in connection with
the securities lending program launched during 2012 by AIG Life and
Retirement.
Net cash provided by investing activities in 2011 was primarily attributable to:
º •
º the utilization of $26.4 billion of restricted cash generated from the AIA
IPO and ALICO sale in connection with the Recapitalization and $9.6 billion
from the disposition of MetLife securities;
º •
º the sale of AIG Star, AIG Edison and Nan Shan in 2011 for total proceeds of
$6.4 billion; and
º •
º net sales of short term investments and maturities of available for sale
investments, primarily at AIG Property Casualty and AIG Life and
Retirement, which were partially offset by purchases of available for sale
investments.
Net cash used in investing activities in 2010 primarily resulted from net
purchases of fixed maturity securities, resulting from our investment of cash
generated from operating activities, and the redeployment of liquidity that had
been accumulated by the insurance companies in 2009.
Financing Cash Flow Activities
Net cash used in financing activities during 2012 includes the following
activities:
º •
º $8.6 billion pay down of the Department of the Treasury's AIA SPV Preferred
Interests; and
º •
º total payments of approximately $13.0 billion for the purchase of
approximately 421 million shares of AIG Common Stock.
Net cash used in financing activities for 2011 primarily resulted from the
repayment of the FRBNY Credit Facility and the $12.4 billion partial repayment
of the AIA SPV Preferred Interests and the ALICO SPV in connection with the
Recapitalization and use of proceeds received from the sales of foreign life
insurance entities in 2011.
Net cash used in financing activities in 2010 reflected declines in policyholder
contract withdrawals, due to improved conditions for the life insurance and
retirement services businesses. This was partially offset by the issuance of
long-term debt.
Liquidity and Capital Resources of AIG Parent and Subsidiaries
AIG Parent
As of December 31, 2012, AIG Parent had $16.1 billion in liquidity resources.
AIG Parent's primary sources of liquidity are dividends, distributions, and
other payments from subsidiaries, as well as credit and contingent liquidity
facilities. AIG Parent's primary uses of liquidity are for debt service, capital
management, operating expenses and subsidiary capital needs.
AIG Parent's primary sources of capital are dividends and distributions from
subsidiaries. AIG Parent has unconditional capital maintenance agreements (CMAs)
in place with certain AIG Property Casualty and AIG Life and Retirement
subsidiaries to facilitate the transfer of capital and liquidity within the
consolidated company. We expect these CMAs to continue to enhance AIG's capital
management practices, and help manage the flow of capital between AIG Parent and
these subsidiaries. We have entered into and expect to enter into additional
CMAs with certain other insurance companies in 2013. See AIG Property Casualty
and AIG Life and Retirement below for additional information. Nevertheless,
regulatory and other legal restrictions could limit our ability to transfer
capital freely, either to or from our subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy
future requirements and meet our obligations to policyholders, customers,
creditors and debt-holders. We expect to access the debt markets from time to
time to meet funding requirements as needed.
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The following table presents AIG Parent's liquidity:
As of
(In millions) December 31, 2012
Cash and short-term investments(a) $ 12,586
Available capacity under Syndicated Credit Facility(b)
3,037
Available capacity under Contingent Liquidity Facility(c)
500
Total AIG Parent liquidity sources $
16,123
(a) Includes reverse repurchase agreements totaling $8.9 billion, which are
secured short term investments.
(b) AIG entered into an amended and restated syndicated bank credit facility
on October 5, 2012. For additional information relating to this credit facility,
see Credit Facilities below.
(c) For additional information relating to the contingent liquidity facility,
see Contingent Liquidity Facilities below.
Sources and Uses of Liquidity and Capital Resources of AIG Parent
Sources
During 2012, we:
•
sold our entire interest of approximately 3.9 billion AIA ordinary shares for
gross proceeds of approximately $14.0 billion (excluding proceeds from the sale
of AIA ordinary shares held by AIA SPV to an AIG Property Casualty subsidiary);
•
received approximately $8.5 billion in distributions from the FRBNY's
dispositions of ML III assets;
•
collected approximately $5.2 billion in cash distributions from subsidiaries,
including:
•
approximately $2.9 billion in note repayments from AIG Life and Retirement
subsidiaries funded by payments of dividends from subsidiaries of which
$1.6 billion represented proceeds from the FRBNY's sale of ML II assets;
•
approximately $1.5 billion in cash dividends from AIG Property Casualty;
•
$400 million in dividends from the AIA SPV, representing the proceeds from the
sale of shares of AIA held by the AIA SPV to an AIG Property Casualty
subsidiary;
•
received non-cash dividends of approximately $1.0 billion in the form of
municipal bonds from AIG Property Casualty;
•
issued $750 million principal amount of 3.000% Notes Due 2015 and $1.25 billion
principal amount of 3.800% Notes Due 2017. These proceeds were used to continue
to reduce the risk of, and better match the assets and liabilities in, the MIP
(described more fully in Other Operations - Direct Investment Book below);
•
issued $1.5 billion principal amount of 4.875% Notes Due 2022. These proceeds
are being used for general corporate purposes which are currently expected to
include the repayment of debt maturing in 2013;
•
issued $250 million principal amount of 2.375% Subordinated Notes Due 2015.
Proceeds from this offering are being used for general corporate purposes; and
•
received approximately $1.0 billion that was released to AIG from an escrow
that secures indemnifications provided to MetLife under the ALICO stock
purchase agreement (see Note 16 to the Consolidated Financial Statements for
additional information).
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Uses
During 2012, we:
•
purchased an aggregate of approximately $13.0 billion of AIG Common Stock at
the initial public offering price in four registered public offerings of AIG
Common Stock completed by the Department of the Treasury, as the selling
shareholder; we purchased approximately 421 million shares (see Note 17 to the
Consolidated Financial Statements for additional information on these
offerings);
•
retired $3.2 billion of debt, including $2.6 billion of MIP long-term debt, and
made interest pay- ments totaling $2.1 billion;
•
utilized approximately $1.6 billion in proceeds from the distributions from ML
II, approximately $6.0 billion in gross proceeds from the sale of AIA ordinary
shares and existing funds from the MIP to pay down in full the liquidation
preference of the AIA SPV Preferred Interests and redeem the Department of the
Treasury's preferred participating return rights in the AIA SPV and the ALICO
SPV; as a result, the following items, which had been held as security to
support the repayment of the AIA SPV Preferred Interests, were released from
that pledge:
•
the equity interests in ILFC,
•
the ordinary shares of AIA held by the AIA SPV,
•
the common equity interest in the AIA SPV held by us,
•
our interests in ML III, and
•
cash held in escrow to secure indemnifications provided to MetLife under the
ALICO stock purchase agreement.
•
paid $550 million as a result of final approval of a settlement under the
Consolidated 2004 Securities Litigation (see Note 16 to the Consolidated
Financial Statements for additional information); and
•
made $1.2 billion in net capital contributions to subsidiaries, including a
contribution of approximately $1.0 billion to AIG Property Casualty in the
aftermath of Storm Sandy.
AIG Property Casualty
We expect that AIG Property Casualty subsidiaries will be able to continue to
satisfy future liquidity requirements and meet their obligations, including
those arising from reasonably foreseeable contingencies or events, through cash
from operations and, to the extent necessary, asset dispositions. AIG Property
Casualty subsidiaries maintain substantial liquidity in the form of cash and
short-term investments, totaling $8.6 billion as of December 31, 2012. Further,
AIG Property Casualty subsidiaries maintain significant levels of
investment-grade fixed maturity securities, including substantial holdings in
government and corporate bonds, which could be monetized in the event liquidity
levels are deemed insufficient.
AIG Property Casualty paid cash and non-cash dividends totaling of $2.5 billion
to AIG Parent in 2012, consisting of cash and municipal bonds, including
$902 million of cash dividends in the fourth quarter of 2012.
In December 2012, AIG Parent contributed $1.0 billion of capital to AIG Property
Casualty U.S. insurance companies to strengthen capital levels, as a result of
the impact of Storm Sandy-related catastrophe losses.
AIG Parent could be required to provide additional funding to AIG Property
Casualty subsidiaries to meet capital or liquidity needs under certain
circumstances, including:
º •
º large catastrophes that may require AIG to provide additional support to
the affected operations;
º •
º downgrades in AIG's credit ratings that could put pressure on the insurer
financial strength ratings of AIG's subsidiaries which could result in
non-renewals or cancellations by policyholders and adversely affect the
subsidiary's ability to meet its own obligations;
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º •
º increases in market interest rates that may adversely affect the financial
strength ratings of our subsidiaries, as rating agency capital models may
reduce the amount of available capital relative to required capital; and
º •
º other potential events that could cause a liquidity strain, including
economic collapse of a nation or region significant to our operations,
nationalization, catastrophic terrorist acts, pandemics or other events
causing economic or political upheaval.
In February 2012, AIG Parent, Chartis Inc. and certain AIG Property Casualty
domestic insurance subsidiaries, entered into a single CMA, which replaced the
CMAs entered into in February 2011. Under the 2012 CMA, the total adjusted
capital and total authorized control level Risk-Based Capital (RBC) (as defined
by National Association of Insurance Commissioners (NAIC) guidelines and
determined based on the subsidiaries' statutory financial statements) of these
AIG Property Casualty insurance subsidiaries are measured as a group (the Fleet)
rather than on an individual company basis.
Among other things, the 2012 CMA provides that AIG Parent will maintain the
total adjusted capital of the Fleet at or above the specified minimum percentage
of the Fleet's projected total authorized control level RBC. As a result, the
2012 CMA provides that if the total adjusted capital of the Fleet falls below
the specified minimum percentage of the Fleet's total authorized control level
RBC, AIG Parent will contribute cash or other instruments admissible under
applicable regulations to Chartis Inc., which will further contribute such funds
to the AIG Property Casualty subsidiaries in the amount necessary to increase
the Fleet's total adjusted capital to a level at least equal to such specified
minimum percentage. Any required contribution under the 2012 CMA would generally
be made during the second and fourth quarters of each year; however, AIG Parent
may also make contributions in such amounts and at such times as it deems
appropriate. In addition, the 2012 CMA provides that if the total adjusted
capital of the Fleet exceeds that same specified minimum percentage of the
Fleet's total authorized control level RBC, subject to board approval, the AIG
Property Casualty insurance subsidiaries would declare and pay ordinary
dividends to their respective equity holders up to an amount that is the lesser
of:
º (i)
º the amount (to be determined by Chartis Inc.) necessary to reduce the
Fleet's projected or actual total adjusted capital to a level equal to or
not materially greater than such specified minimum percentage or
º (ii)
º the maximum amount of ordinary dividends permitted under applicable
insurance law.
The 2012 CMA does not prohibit, however, the payment of extraordinary dividends,
subject to board or regulatory approval, to reduce the Fleet's projected or
actual total adjusted capital to a level equal to or not materially greater than
the specified minimum percentage. Any required dividend under the 2012 CMA would
generally be made on a quarterly basis. As structured, the 2012 CMA contemplates
that the specified minimum percentage would be reviewed and agreed upon at least
annually.
For the years ended December 31, 2012 and 2011, AIG Parent received $2.3 billion
and $1.3 billion, respectively, in dividends from Chartis Inc. that were made
pursuant to the CMAs then in place, and AIG Parent was not required to make any
capital contributions in either period pursuant to the CMAs then in place.
On February 20, 2013, the 2012 CMA was amended to exclude deferred tax assets
from the calculation of total adjusted capital. As a result, effective
February 20, 2013, the specified minimum percentage decreased from 350 percent
to 325 percent.
In March 2012, the National Union Fire Insurance Company of Pittsburgh, Pa.
(NUFI), an AIG Property Casualty company, became a member of the Federal Home
Loan Bank (FHLB) of Pittsburgh. In August 2012, Chartis Specialty Insurance
Company (CSI), an AIG Property Casualty company, became a member of the FHLB of
Chicago. FHLB membership provides participants with access to various services,
including access to low-cost advances through pledging of certain
mortgage-backed securities, government and agency securities and other
qualifying assets. These advances may be used to provide an additional source of
liquidity for balance sheet management or contingency funding purposes. As of
December 31, 2012, neither NUFI nor CSI had any advances outstanding under their
respective FHLB facilities.
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AIG Life and Retirement
We believe that AIG Life and Retirement subsidiaries have liquidity sources
adequate to satisfy future liquidity requirements and meet their obligations,
including those arising from reasonably foreseeable contingencies or events,
through cash from operations and, to the extent necessary, asset dispositions.
The AIG Life and Retirement subsidiaries maintain liquidity in the form of cash
and short-term investments, totaling $7.8 billion as of December 31, 2012. In
2012, AIG Life and Retirement provided $2.9 billion of liquidity to AIG Parent
through note repayments funded by the payment of dividends from insurance
subsidiaries. These payments included a $1.6 billion distribution relating to
the liquidation of ML II and a distribution of $440 million in the form of a
note repayment.
The need to fund product surrenders, withdrawals and maturities creates a
significant potential liquidity requirement for AIG Life and Retirement's
subsidiaries. We believe that because of the size and liquidity of our
investment portfolios, AIG Life and Retirement does not face a significant
liquidity risk due to normal deviations from projected claim or surrender
experience. As part of its risk management framework, AIG Life and Retirement
continues to evaluate programs, including securities lending programs and other
secured financings, to improve its liquidity position and facilitate AIG Life
and Retirement's ability to maintain a fully invested asset portfolio.
During 2012, AIG Life and Retirement began utilizing programs that lend
securities from its investment portfolio to supplement liquidity or for other
uses as deemed appropriate by management. Under these programs, the AIG Life and
Retirement subsidiaries lend securities to financial institutions and receive
collateral equal to 102 percent of the fair value of the loaned securities.
Reinvestment of cash collateral received is restricted to highly liquid
short-term investments. AIG Life and Retirement's liability to the borrower for
collateral received was $3.1 billion as of December 31, 2012. In addition, in
2011, certain AIG Life and Retirement insurance subsidiaries became members of
the FHLBs in their respective districts. As of December 31, 2012, AIG Life and
Retirement had outstanding borrowings of $82 million from the FHLBs.
In March 2011, AIG Parent entered into CMAs with certain AIG Life and Retirement
insurance subsidiaries. Among other things, the CMAs provide that AIG Parent
will maintain the total adjusted capital of each of these AIG Life and
Retirement insurance subsidiaries at or above a specified minimum percentage of
the subsidiary's projected Company Action Level RBC. As a result, the CMAs
provide that if the total adjusted capital of these AIG Life and Retirement
insurance subsidiaries falls below the specified minimum percentage of their
respective Company Action Level RBC, AIG Parent will contribute cash or
instruments admissible under applicable regulations to these AIG Life and
Retirement insurance subsidiaries in the amount necessary to increase total
adjusted capital to a level at least equal to such specified minimum percentage.
Any required contribution under the CMAs would generally be made during the
second and fourth quarters of each year; however, AIG Parent may also make
contributions in such amounts and at such times as it deems appropriate.
In addition, the CMAs provide that if the total adjusted capital of these AIG
Life and Retirement insurance subsidiaries is in excess of that same specified
minimum percentage of their respective total company action level RBC, subject
to board approval, the subsidiaries would declare and pay ordinary dividends to
their respective equity holders up to an amount that is the lesser of:
º •
º (i) the amount necessary to reduce projected or actual total adjusted
capital to a level equal to or not materially greater than such specified
minimum percentage or
º •
º (ii) the maximum amount of ordinary dividends permitted under applicable
insurance law.
The CMAs do not prohibit, however, the payment of extraordinary dividends,
subject to board and regulatory approval, to reduce projected or actual total
adjusted capital to a level equal to or not materially greater than the
specified minimum percentage. Any required dividend under the CMAs would
generally be made on a quarterly basis. As structured, the CMAs contemplate that
the specified minimum percentage would be reviewed and agreed upon at least
annually. As a result of a reduction in rating agency minimum requirements and
greater capital efficiency arising from the consolidation of legal entities, the
specified minimum percentage decreased from 435 percent to 385 percent effective
February 19, 2013, except for the CMA with AGC Life Insurance Company, where the
specified minimum percentage remained at 250 percent.
For the years ended December 31, 2012 and 2011, AIG Parent received a total of
approximately $2.9 billion and $1.4 billion, respectively, in distributions from
AIG Life and Retirement subsidiaries in the form of note repayments funded by
the payment of dividends from these subsidiaries, which were made under the
CMAs. AIG Parent was not required to make any capital contributions to AIG Life
and Retirement subsidiaries in either period under the CMAs then in place.
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Other Operations
Mortgage Guaranty
We currently expect that our Mortgage Guaranty subsidiaries will be able to
continue to satisfy future liquidity requirements and meet their obligations,
including requirements arising out of reasonably foreseeable contingencies or
events, through cash from operations and, to the extent necessary, asset
dispositions. Mortgage Guaranty subsidiaries maintain substantial liquidity in
the form of cash and short-term investments, totaling $699 million as of
December 31, 2012. Mortgage Guaranty businesses also maintain significant levels
of investment-grade fixed maturity securities, which could be monetized in the
event liquidity levels are insufficient to meet obligations. These securities
included substantial holdings in municipal and corporate bonds totaling
$3.5 billion at December 31, 2012.
Global Capital Markets
GCM acts as the derivatives intermediary between AIG and its subsidiaries and
third parties to provide hedging services. It executes its derivative trades
under International Swaps and Derivatives Association, Inc. (ISDA) agreements.
The agreements with third parties typically require collateral postings. Many of
GCM's transactions with AIG and its subsidiaries also include collateral posting
requirements. However, generally, no collateral is called under these contracts
unless it is needed to satisfy posting requirements with third parties. Most of
GCM's CDS are subject to collateral posting provisions. These provisions differ
among counterparties and asset classes. The amount of future collateral posting
requirements is a function of our credit ratings, the rating of the reference
obligations and the market value of the relevant reference obligations, with the
latter being the most significant factor. We estimate the amount of potential
future collateral postings associated with the super senior CDS using various
methodologies. The contingent liquidity requirements associated with such
potential future collateral postings are incorporated into our liquidity
planning assumptions.
As of December 31, 2012 and December 31, 2011, respectively, GCM had total
assets of $8.0 billion and $9.6 billion and total liabilities of $4.9 billion
and $5.8 billion. GCM's assets consist primarily of cash, short-term
investments, other receivables, net of allowance, and unrealized gains on swaps,
options and forwards. GCM's liabilities consist primarily of trade payables and
unrealized losses on swaps, options and forwards. Collateral posted included in
GCM to third parties was $4.2 billion and $5.1 billion at December 31, 2012 and
December 31, 2011, respectively. Collateral obtained included in GCM from third
parties was $846 million and $1.2 billion at December 31, 2012 and December 31,
2011, respectively. The collateral amounts reflect counterparty netting
adjustments available under master netting agreements and are inclusive of
collateral that exceeded the fair value of derivatives as of the reporting date.
Direct Investment Book
The DIB is managed so that it maintains the liquidity that we believe is
necessary to meet all of the DIB liabilities as they come due, even under stress
scenarios, without having to liquidate DIB assets or rely on additional
liquidity from AIG Parent. If the DIB's risk target is breached, we expect to
take appropriate actions to increase the DIB's liquidity sources or reduce
liquidity requirements to maintain the risk target, although no assurance can be
given that this can be achieved under then-prevailing market conditions. Any
additional liquidity shortfalls would need to be funded by AIG Parent.
The DIB's assets consist primarily of cash, short term investments, fixed
maturity securities issued by U.S. government and government sponsored entities,
mortgage and asset backed securities and, to a lesser extent, bank loans and
mortgage loans. The DIB's liabilities consist primarily of notes and other
borrowings supported by assets as well as other short-term financing
obligations. As of December 31, 2012 and December 31, 2011, respectively, the
DIB had total assets of $28.5 billion and $31.0 billion and total liabilities of
$23.8 billion and $28.2 billion.
The overall hedging activity for the assets and liabilities of the DIB is
executed by GCM. The value of hedges related to the non-derivative assets and
liabilities of AIGFP in the DIB is included within the assets and liabilities
and operating results of GCM and are not included within the DIB operating
results, assets or liabilities.
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Collateral posted by operations included in the DIB to third parties was
$4.3 billion and $5.1 billion at December 31, 2012 and December 31, 2011,
respectively. This collateral primarily consists of securities of the U.S.
government and government sponsored entities and generally cannot be repledged
or resold by the counterparties.
The following summarizes significant liquidity events during 2012:
º •
º The DIB used current program liquidity to pay down $6.6 billion in debt. In
addition, in the first quarter of 2012, AIG issued $2.0 billion aggregate
principal amount of unsecured notes, consisting of $750 million principal
amount of 3.000% Notes Due 2015 and $1.25 billion principal amount of
3.800% Notes Due 2017. The proceeds from the sale of these notes were used
to reduce overall risk and better match the assets and liabilities in the
MIP. The notes are included within MIP notes payable in the debt
outstanding table in "Debt - Debt Maturities" below.
º • º AIG Parent allocated cash from the MIP to pay down the AIA SPV Preferred
Interests. In exchange, AIG's remaining interest in ML III and the future
proceeds from the cash held in escrow to secure indemnities provided to
MetLife were allocated to the MIP.
º •
º The DIB received approximately $8.5 billion in distributions from the
FRBNY's auctions of ML III assets.
Credit Facilities
We maintain a committed revolving four-year syndicated credit facility (the
Four-Year Facility) as a potential source of liquidity for general corporate
purposes. The Four-Year Facility also provides for the issuance of letters of
credit. We currently expect to replace or extend the Four-Year Facility on or
prior to its expiration in October 2016, although no assurance can be given that
the Four-Year Facility will be replaced on favorable terms or at all.
The Four-Year Facility provides for $4.0 billion of unsecured revolving loans,
which includes a $2.0 billion letter of credit sublimit. Our ability to borrow
under the Four-Year Facility is not contingent on our credit ratings. However,
our ability to borrow under the Four-Year Facility is conditioned on the
satisfaction of certain legal, operating, administrative and financial covenants
and other requirements contained in the Four-Year Facility. These include
covenants relating to our maintenance of a specified total consolidated net
worth and total consolidated debt to total consolidated capitalization. Failure
to satisfy these and other requirements contained in the Four-Year Facility
would restrict our access to the Four-Year Facility and could have a material
adverse effect on our financial condition, results of operations and liquidity.
See Note 15 to the Consolidated Financial Statements for further discussion of
the Four-Year Facility.
Contingent Liquidity Facilities
AIG Parent has access to a contingent liquidity facility of up to $500 million
as a potential source of liquidity for general corporate purposes. Under this
facility, we have the unconditional right, prior to December 15, 2015, to issue
up to $500 million in senior debt to the counterparty, based on a put option
agreement between AIG Parent and the counterparty.
Our ability to borrow under this facility is not contingent on our credit
ratings.
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Contractual Obligations
The following table summarizes contractual obligations in total, and by
remaining maturity:
December 31, 2012 Payments due by Period
Total 2014 - 2016 -
(in millions) Payments 2013 2015 2017 Thereafter
Insurance operations
Loss reserves $ 91,237 $ 23,579 $ 26,111 $ 13,480 $ 28,067
Insurance and investment contract liabilities 234,492 14,502 25,144 24,066 170,780
Borrowings 1,843 43 15 8 1,777
Interest payments on borrowings 3,525 131 264 265 2,865
Operating leases 1,196 284 390 276 246
Other long-term obligations 37 9 14 8 6
Total $ 332,330 $ 38,548 $ 51,938 $ 38,103 $ 203,741
Other and discontinued operations
Borrowings(a) 69,166 7,199 11,670 16,104 34,193
Interest payments on borrowings 48,478 3,873 6,931 5,525 32,149
Operating leases 302 106 99 33 64
Aircraft purchase commitments 17,511 1,517 4,146 7,374 4,474
Other long-term obligations 231 56 84 - 91
Total $ 135,688 $ 12,751 $ 22,930 $ 29,036 $ 70,971
Consolidated
Loss reserves(b) $ 91,237 $ 23,579 $ 26,111 $ 13,480 $ 28,067
Insurance and investment contract liabilities 234,492 14,502 25,144 24,066 170,780
Borrowings(a) 71,009 7,242 11,685 16,112 35,970
Interest payments on borrowings 52,003 4,004 7,195 5,790 35,014
Operating leases 1,498 390 489 309 310
Aircraft purchase commitments 17,511 1,517 4,146 7,374 4,474
Other long-term obligations(c) 268 65 98 8 97
Total(d) $ 468,018 $ 51,299 $ 74,868 $ 67,139 $ 274,712
(a) Includes $24.3 billion of borrowings related to ILFC
(b) Loss reserves relate to the AIG Property Casualty and the Mortgage
Guaranty business, and represent future loss and loss adjustment expense
payments estimated based on historical loss development payment patterns. Due to
the significance of the assumptions used, the payments by period presented above
could be materially different from actual required payments. We believe that the
AIG Property Casualty and Mortgage Guaranty subsidiaries maintain adequate
financial resources to meet the actual required payments under these
obligations.
(c) Primarily includes contracts to purchase future services and other capital
expenditures.
(d) Does not reflect unrecognized tax benefits of $4.4 billion ($4.1 billion
excluding Aircraft Leasing), the timing of which is uncertain. In addition, the
majority of our credit default swaps require us to provide credit protection on
a designated portfolio of loans or debt securities. At December 31, 2012, the
fair value derivative liability was $1.9 billion, relating to the super senior
multi-sector CDO credit default swap portfolio. At December 31, 2012, collateral
posted with respect to these swaps was $1.6 billion.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate
to AIG Life and Retirement businesses. These liabilities include various
investment-type products with contractually scheduled maturities, including
periodic payments of a term certain nature. These liabilities also include
benefit and claim liabilities, of which a significant portion represents
policies and contracts that do not have stated contractual maturity dates and
may not result in any future payment obligations. For these policies and
contracts (i) we are currently not making payments until the occurrence of an
insurable event, such as death or disability, (ii) payments are conditional on
survivorship or (iii) payment may occur due to a surrender or other
non-scheduled event out of our control.
We have made significant assumptions to determine the estimated undiscounted
cash flows of these contractual policy benefits. These assumptions include
mortality, morbidity, future lapse rates, expenses, investment returns and
interest crediting rates, offset by expected future deposits and premiums on
in-force policies. Due to the significance of the assumptions, the periodic
amounts presented could be materially different from actual required payments.
The
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amounts presented in this table are undiscounted and exceed the future policy
benefits and policyholder contract deposits included in the Consolidated Balance
Sheet.
We believe that AIG Life and Retirement subsidiaries have adequate financial
resources to meet the payments actually required under these obligations. These
subsidiaries have substantial liquidity in the form of cash and short-term
investments. In addition, AIG Life and Retirement businesses maintain
significant levels of investment-grade fixed income securities, including
substantial holdings in government and corporate bonds, and could seek to
monetize those holdings in the event operating cash flows are insufficient. We
expect liquidity needs related to GIC liabilities to be funded through cash
flows generated from maturities and sales of invested assets.
Borrowings
Our borrowings exclude those incurred by consolidated investments and include
hybrid financial instrument liabilities recorded at fair value. We expect to
repay the long-term debt maturities and interest accrued on borrowings by AIG
and its subsidiaries through maturing investments and asset sales, future cash
flows from operations, cash flows generated from invested assets, future debt
issuance and other financing arrangements.
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Off-Balance Sheet Arrangements and Commercial Commitments
The following table summarizes Off-Balance Sheet Arrangements and Commercial
Commitments in total, and by remaining maturity:
December 31, 2012 Amount of Commitment Expiring
Total Amounts 2014 - 2016 -
(in millions) Committed 2013 2015 2017 Thereafter
Insurance operations
Guarantees:
Standby letters of credit 802 - - 725 77
Guarantees of indebtedness 178 - - - 178
All other guarantees(b) 16 7 7 - 2
Commitments:
Investment commitments(c) 1,861 1,459 204 198 -
Commitments to extend credit 234 192 41 - 1
Letters of credit 10 10 - - -
Other commercial commitments(d) 688 - - - 688
Total(e) $ 3,789 $ 1,668 $ 252 $ 923 $ 946
Other and discontinued operations
Guarantees:
Liquidity facilities(a) $ 101 $ - $ - $ - $ 101
Standby letters of credit 307 299 6 1 1
All other guarantees(b) 407 171 35 109 92
Commitments:
Investment commitments(c) 396 302 70 25 (1 )
Commitments to extend credit 72 70 4 - (2 )
Letters of credit 16 16 - - -
Other commercial commitments(d) 17 16 2 - (1 )
Total(e)(f) $ 1,316 $ 874 $ 117 $ 135 $ 190
Consolidated
Guarantees:
Liquidity facilities(a) $ 101 $ - $ - $ - $ 101
Standby letters of credit 1,109 299 6 726 78
Guarantees of indebtedness 178 - - - 178
All other guarantees(b) 423 178 42 109 94
Commitments:
Investment commitments(c) 2,257 1,761 274 223 (1 )
Commitments to extend credit 306 262 45 - (1 )
Letters of credit 26 26 - - -
Other commercial commitments(d) 705 16 2 - 687
Total(e)(f) $ 5,105 $ 2,542 $ 369 $ 1,058 $ 1,136
(a) Primarily represents liquidity facilities provided in connection with
certain municipal swap transactions and collateralized bond obligations.
(b) Includes residual value guarantees associated with aircraft and AIG Life
and Retirement construction guarantees connected to affordable housing
investments. Excludes potential amounts for indemnification obligations included
in asset sales agreements. See Note 16 to the Consolidated Financial Statements
for further information on indemnification obligations. .
(c) Includes commitments to invest in private equity, hedge funds and mutual
funds and commitments to purchase and develop real estate in the United States
and abroad. The commitments to invest in private equity funds, hedge funds and
other funds are called at the discretion of each fund, as needed for funding new
investments or expenses of the fund. The expiration of these commitments is
estimated in the table above based on the expected life cycle of the related
fund, consistent with past trends of requirements for funding. Investors under
these commitments are primarily insurance and real estate subsidiaries.
(d) Excludes commitments with respect to pension plans. The annual pension
contribution for 2013 is expected to be approximately $100 million for U.S. and
non-U.S. plans.
(e) Does not include guarantees, capital maintenance agreements or other
support arrangements among AIG consolidated entities.
(f) Includes $340 million attributable to ILFC, which is reported as
discontinued operations.
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Securities Financing
At December 31, 2012, there were no securities transferred under repurchase
agreements accounted for as sales and no related cash collateral obtained. See
Note 2 to the Consolidated Financial Statements for additional information on
the modification of the criteria for determining whether securities transferred
under repurchase agreements are accounted for as sales.
Arrangements with Variable Interest Entities
While AIG enters into various arrangements with variable interest entities
(VIEs) in the normal course of business, our involvement with VIEs is primarily
as a passive investor in fixed maturity securities (rated and unrated) and
equity interests issued by VIEs. We consolidate a VIE when we are the primary
beneficiary of the entity. For a further discussion of our involvement with
VIEs, see Note 11 to the Consolidated Financial Statements.
Indemnification Agreements
We are subject to financial guarantees and indemnity arrangements in connection
with our sales of businesses. These arrangements may be triggered by declines in
asset values, specified business contingencies, the realization of contingent
liabilities, litigation developments, or breaches of representations, warranties
or covenants provided by us. These arrangements are typically subject to time
limitations, defined by the contract or by operation of law, such as by
prevailing statutes of limitation. Depending on the specific terms of the
arrangements, the maximum potential obligation may or may not be subject to
contractual limitations. For additional information regarding our
indemnification agreements, see Note 16 to the Consolidated Financial
Statements.
We have recorded liabilities for certain of these arrangements where it is
possible to estimate them. These liabilities are not material in the aggregate.
We are unable to develop a reasonable estimate of the maximum potential payout
under some of these arrangements. Overall, we believe that it is unlikely we
will have to make any material payments related to completed sales under these
arrangements.
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Debt
The following table provides the rollforward of AIG's total debt outstanding:
Year Ended December 31, 2012 Reclassified
to
Balance at Maturities Effect of Activity of Liabilities of Balance at
December 31, and Foreign Other Discontinued businesses December 31,
(in millions) 2011 Issuances Repayments Exchange Changes Operations(a) held for sale
2012
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable $ 12,725 $ 1,508 $ (244 ) $ 96 $ (1 ) $ - $ - $ 14,084
Subordinated debt - 250 - - - - - 250
Junior subordinated debt 9,327 - - 91 (2 ) - - 9,416
Loans and mortgages payable 234 - (145 ) (14 ) 4 - - 79
SunAmerica Financial Group, Inc. notes and bonds
payable 298 - - - - - - 298
Liabilities connected to trust preferred stock 1,339 - - - - - - 1,339
Total AIG general borrowings 23,923 1,758 (389 ) 173 1 - - 25,466
AIG borrowings supported by assets: (b)
MIP notes payable 10,147 1,996 (2,618 ) (143 ) (86 ) - - 9,296
Series AIGFP matched notes and bonds payable 3,807 - (234 ) - (29 ) - - 3,544
GIAs, at fair value 7,964 591 (2,009 ) - (45 ) - - 6,501
Notes and bonds payable, at fair value 2,316 17 (1,498 ) - 719 - - 1,554
Loans and mortgages payable, at fair value 486 - (488 ) - 2 - - -
Total AIG borrowings supported by assets 24,720 2,604 (6,847 ) (143 ) 561 - - 20,895
Total debt issued or guaranteed by AIG 48,643 4,362 (7,236 ) 30 562 - - 46,361
Debt not guaranteed by AIG:
ILFC:
Notes and bonds payable, ECA facility, bank
financings and other secured financings 23,365 - - - - (42 ) (23,323 ) -
Junior subordinated debt 999 - - - - - (999 ) -
Total ILFC debt 24,364 - - - - (42 ) (24,322 ) -
Other subsidiaries notes, bonds, loans and mortgages
payable
393 101 (164 ) (2 ) (3 ) - - 325
Debt of consolidated investments 1,853 381 (263 ) 32 (189 ) - - 1,814
Total debt not guaranteed by AIG 26,610 482 (427 ) 30 (192 ) (42 ) (24,322 ) 2,139
Total debt $ 75,253 $ 4,844 $ (7,663 ) $ 60 $ 370 (42 ) (24,322 ) $ 48,500
(a) Primarily represents activity related to ILFC.
(b) AIG Parent guarantees all DIB debt, except for MIP notes payable and
Series AIGFP matched notes and bonds payable, which are direct obligations of
AIG Parent.
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Debt Maturities - AIG and Subsidiaries
The following table summarizes maturing debt at December 31, 2012 of AIG and its
subsidiaries for the next four quarters:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in millions) 2013 2013 2013 2013 Total
AIG general borrowings $ 75 $ 1,000 $ 2 $ 469 $ 1,546
AIG borrowings supported by assets 483 222 819 76 1,600
Other subsidiaries notes, bonds, loans and mortgages payable 35 6 1 1 43
Total $ 593 $ 1,228 $ 822 $ 546 $ 3,189
AIG borrowings supported by assets consisted of debt under the DIB. At
December 31, 2012, all of the debt maturities in the DIB through December 31,
2013 are supported by short-term investments and maturing investments.
See Note 15 to the Consolidated Financial Statements for additional details for
debt outstanding.
Credit Ratings
Credit ratings estimate a company's ability to meet its obligations and may
directly affect the cost and availability to that company of financing. The
following table presents the credit ratings of AIG and certain of its
subsidiaries as of February 13, 2013. Figures in parentheses indicate the
relative ranking of the ratings within the agency's rating categories; that
ranking refers only to the major rating category and not to the modifiers
assigned by the rating agencies.
Short-Term Debt Senior Long-Term Debt
Moody's S&P Moody's(a) S&P(b) Fitch(c)
P-2 A-2 A- BBB
(2nd of (2nd of Baa 1 (3rd of (4th of
AIG 3) 8) (4th of 9) 8) 9)
Stable Stable Negative Stable
Outlook Outlook Outlook Outlook
AIG Financial Products Corp.(d) P-2 A-2 Baa 1 A- -
Stable Stable Negative
Outlook Outlook Outlook
AIG Funding, Inc.(d) P-2 A-2 - - -
Stable
Outlook
(a) Moody's appends numerical modifiers 1, 2 and 3 to the generic rating
categories to show relative position within the rating categories.
(b) S&P ratings may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
(c) Fitch ratings may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
(d) AIG guarantees all obligations of AIG Financial Products Corp. and AIG
Funding, Inc.
These credit ratings are current opinions of the rating agencies. They may be
changed, suspended or withdrawn at any time by the rating agencies as a result
of changes in, or unavailability of, information or based on other
circumstances. Ratings may also be withdrawn at our request.
We are party to some agreements that contain "ratings triggers". Depending on
the ratings maintained by one or more rating agencies, these triggers could
result in (i) the termination or limitation of credit availability or require
accelerated repayment, (ii) the termination of business contracts or
(iii) requirement to post collateral for the benefit of counterparties.
In the event of adverse actions on our long-term debt ratings by the major
rating agencies, AIGFP would be required to post additional collateral under
some derivative transactions, or to permit termination of the transactions. Such
transactions could adversely affect our business, our consolidated results of
operations in a reporting period or our liquidity. In the event of a further
downgrade of AIG's long-term senior debt ratings, AIGFP would be required to
post additional collateral, and certain of AIGFP's counterparties would be
permitted to terminate their contracts early.
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The actual amount of collateral that we would be required to post to
counterparties in the event of such downgrades, or the aggregate amount of
payments that we could be required to make, depend on market conditions, the
fair value of outstanding affected transactions and other factors prevailing at
the time of the downgrade.
For a discussion of the effects of downgrades in the financial strength ratings
of our insurance companies or our credit ratings, see Note 12 to the
Consolidated Financial Statements and Part I, Item 1A. Risk Factors.
Regulation and Supervision
We are currently regulated by the Board of Governors of the Federal Reserve
System (FRB) and subject to its examination, supervision and enforcement
authority and reporting requirements as a savings and loan holding company
(SLHC). In addition, under Dodd-Frank we may separately become subject to the
examination, enforcement and supervisory authority of the FRB. In October 2012,
we received a notice that we are under consideration by the Financial Stability
Oversight Council created by Dodd-Frank for a proposed determination that we are
a systemically important financial institution (SIFI). Changes mandated by
Dodd-Frank include directing the FRB to promulgate minimum capital requirements
for both SLHCs and SIFIs. See Item 1. Business - Regulation and Item 1A. Risk
Factors - Regulation for further information.
Our insurance subsidiaries are subject to regulation and supervision by the
states and jurisdictions in which they do business. In the United States, the
NAIC has developed RBC Model Law requirements. The RBC formula is designed to
measure the adequacy of an insurer's statutory surplus in relation to the risks
inherent in its business. The statutory surplus of each of our U.S.-based life
and property and casualty insurance subsidiaries exceeded minimum required RBC
levels as of December 31, 2012. Our foreign insurance operations are
individually subject to local solvency margin requirements that require
maintenance of adequate capitalization. We comply with these requirements in
each country.
To the extent that any of our insurance entities were to fall below prescribed
levels of statutory surplus, it would be our intention to provide appropriate
capital or other types of support to that entity, under formal support
agreements, CMAs or otherwise. For additional details regarding CMAs that we
have entered into with our insurance subsidiaries, see Liquidity and Capital
Resources of AIG Parent and Subsidiaries - AIG Property Casualty and Liquidity
and Capital Resources of AIG Parent and Subsidiaries - AIG Life and Retirement.
Dividend Restrictions
Payment of future dividends to our shareholders depends in part on the
regulatory framework that will ultimately be applicable to us, including our
status as an SLHC under Dodd-Frank and whether we are determined to be a SIFI.
See Note 17 to the Consolidated Financial Statements for additional discussion
of potential restrictions on dividend payments to common shareholders.
Dividend payments to AIG Parent by our insurance subsidiaries are subject to
certain restrictions imposed by regulatory authorities. With respect to our
domestic insurance subsidiaries, the payment of any dividend requires formal
notice to the insurance department in which the particular insurance subsidiary
is domiciled. Foreign jurisdictions may restrict the ability of our foreign
insurance subsidiaries to pay dividends, which may also have unfavorable income
tax consequences. There are also various local restrictions limiting cash loans
and advances to AIG Parent by our subsidiaries. See Note 20 to the Consolidated
Financial Statements for additional discussion of restrictions on payments of
dividends by AIG and its subsidiaries.
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Investments
OVERVIEW
Our investment strategies are tailored to the specific business needs of each
operating unit. The investment objectives are driven by the business model for
each of the businesses: AIG Property Casualty, AIG Life and Retirement, and the
Direct Investment book. The primary objectives are generation of investment
income, preservation of capital, liquidity management and growth of surplus to
support the insurance products. The majority of assets backing our insurance
liabilities consist of intermediate and long duration fixed maturity securities.
Market Conditions
Our investments and investment strategies were affected by the following
conditions in 2012:
º •
º Central banks initiated actions intended to improve weakening economic
conditions, including the European Central Bank's commitment to further
bond purchases and the U.S. Federal Reserve's commitment to maintain the
Federal Funds Rate in the zero to a quarter percent range. The Federal
Reserve also committed to support the mortgage market via purchases of
agency mortgage-backed securities, and extended "Operation Twist", a
program of redeeming short-term U.S. Treasury securities and using the proceeds to buy longer-term U.S. Treasury securities with the objective of
putting downward pressure on longer-term interest rates.
º •
º Equity markets experienced positive returns.
º •
º Bond yields remained low in the U.S., as evidenced by the 10-year U.S.
Treasury rate ending the year at 1.76 percent.
º •
º The U.S. dollar weakened during the year by 2 percent and 5 percent versus
the Euro and British pound, respectively, and strengthened 13 percent
versus the Yen.
Investment Strategies
At the local operating unit level, investment strategies are based on
considerations that include the local market, general market conditions,
liability duration and cash flow characteristics, rating agency and regulatory
capital considerations, legal investment limitations, tax optimization and
diversification.
º •
º In the case of life insurance and retirement services companies, as well as
in the DIB, our fundamental investment strategy is to match the duration
characteristics of the liabilities with assets of comparable duration, to
the extent practicable.
º •
º Fixed maturity securities held by the domestic insurance companies included
in AIG Property Casualty historically have consisted primarily of laddered
holdings of tax-exempt municipal bonds, which provided attractive after-tax
returns and limited credit risk. To meet the current risk-return and tax
objectives of AIG Property Casualty, cash flows from the investment
portfolio and insurance operations are generally being reinvested by the
domestic property and casualty companies in taxable instruments which meet
the companies' liquidity, duration and credit quality objectives as well as
current risk-return and tax objectives.
º •
º Outside of the U.S., fixed maturity securities held by AIG Property
Casualty companies consist primarily of intermediate duration high-grade
securities generally denominated in the currencies of the countries in
which we operate.
Investment Highlights
The following is an overview of investment activities during 2012:
º •
º Purchases of corporate debt securities continued to be the largest asset
allocation of new investments.
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º •
º We continued to make risk-weighted opportunistic investments in RMBS and
other structured securities to improve yields and increase net investment
income.
º •
º We purchased an aggregate of $7.1 billion of CDOs sold in the FRBNY
auctions of ML III assets, and elected fair value option accounting
treatment on those assets.
º •
º Blended investment yields on new AIG Life and Retirement investments were
lower than blended rates on investments that were sold, matured or called.
Base yields at AIG Property Casualty benefited from blended yields on new
investments that were higher than the yields on investments that were sold,
matured or called.
º •
º A continued low interest rate environment and narrowing spreads in many
fixed income asset classes contributed to unrealized gains in the
investment portfolio.
º • º Other-than-temporary-impairments on structured securities decreased from
2011.
º •
º We disposed of our remaining interest in AIA, and our position in ML III
was liquidated.
Credit Ratings
At December 31, 2012, approximately 88 percent of fixed maturity securities were
held by our domestic entities. Approximately 17 percent of such securities were
rated AAA by one or more of the principal rating agencies, and approximately
15 percent were rated below investment grade or not rated. Our investment
decision process relies primarily on internally generated fundamental analysis
and internal risk ratings. Third-party rating services' ratings and opinions
provide one source of independent perspective for consideration in the internal
analysis.
A significant portion of our foreign entities' fixed maturity securities
portfolio is rated by Moody's, S&P or similar foreign rating services. Rating
services are not available for some foreign issued securities. Our Credit Risk
Management department closely reviews the credit quality of the foreign
portfolio's non-rated fixed maturity securities. At December 31, 2012,
approximately 18 percent of such investments were either rated AAA or, on the
basis of our internal analysis, were equivalent from a credit standpoint to
securities rated AAA, and approximately 3 percent were rated below investment
grade or not rated at that date. Approximately 49 percent of the foreign
entities' fixed maturity securities portfolio is comprised of sovereign fixed
maturity securities supporting policy liabilities in the country of issuance.
With respect to our fixed maturity investments, the credit ratings in the table
below and in subsequent tables reflect: (a) a composite of the ratings of the
three major rating agencies, or when agency ratings are not available, the
rating assigned by the National Association of Insurance Commissioners (NAIC)
Securities Valuations Office (SVO) (over 99 percent of total fixed maturity
investments), or (b) our equivalent internal ratings when these investments have
not been rated by any of the major rating agencies or the NAIC. The "Non-rated"
category in those tables consists of fixed maturity securities that have not
been rated by any of the major rating agencies, the NAIC or us, and for 2011,
represents primarily our interest in ML III at December 31, 2011.
See Enterprise Risk Management herein for a discussion of credit risks
associated with Investments.
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The following table presents the composite AIG credit ratings of our fixed
maturity securities calculated on the basis of their fair value:
Available for Sale Trading Total
December 31, December 31, December 31, December 31, December 31, December 31,
2012 2011 2012 2011 2012 2011
Rating:
Other fixed maturity
securities
AAA 10 % 13 % 75 % 89 % 12 % 15 %
AA 20 25 8 1 20 24
A 29 26 7 6 28 26
BBB 36 32 6 2 35 31
Below investment grade 5 4 3 2 4 4
Non-rated - - 1 - 1 -
Total 100 % 100 % 100 % 100 % 100 % 100 %
Mortgage backed, asset
backed and
collateralized
AAA 40 % 48 % 17 % 19 % 35 % 41 %
AA 6 5 18 14 9 7
A 10 9 6 8 9 9
BBB 7 6 5 3 6 5
Below investment grade 37 32 54 22 41 29
Non-rated - - - 34 - 9
Total 100 % 100 % 100 % 100 % 100 % 100 %
Total
AAA 16 % 19 % 36 % 41 % 17 % 21 %
AA 18 21 14 10 17 20
A 25 24 6 8 24 22
BBB 30 27 5 2 28 25
Below investment grade 11 9 38 16 13 10
Non-rated - - 1 23 1 2
Total 100 % 100 % 100 % 100 % 100 % 100 %
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Investments by Segment
The following tables summarize the composition of AIG's investments by
reportable segment:
Reportable Segment
AIG Property AIG Life and Aircraft Other
(in millions) Casualty Retirement Leasing Operations Total
December 31, 2012
Fixed maturity securities:
Bonds available for sale, at fair value $ 102,563 $ 163,550 $ - $ 3,846 $ 269,959
Bond trading securities, at fair value 1,597 1,855 - 21,132 24,584
Equity securities:
Common and preferred stock available for
sale, at fair value 3,093 111 - 8 3,212
Common and preferred stock trading, at
fair value - 562 - 100 662
Mortgage and other loans receivable, net
of allowance 712 17,089 - 1,681 19,482
Other invested assets 12,720 12,777 - 3,620 29,117
Short-term investments 7,935 7,495 - 13,378 28,808
Total investments(a) 128,620 203,439 - 43,765 375,824
Cash 649 297 - 205 1,151
Total invested assets $ 129,269 $ 203,736 $ - $ 43,970$ 376,975
December 31, 2011
Fixed maturity securities:
Bonds available for sale, at fair value $ 103,831 $ 154,912 $ - $ 5,238 $ 263,981
Bond trading securities, at fair value 88 1,583 - 22,693 24,364
Equity securities:
Common and preferred stock available for
sale, at fair value 2,895 208 1 520 3,624
Common and preferred stock trading, at
fair value - - - 125 125
Mortgage and other loans receivable, net
of allowance 553 16,759 90 2,087 19,489
Flight equipment primarily under operating
leases, net of accumulated depreciation - - 35,539 - 35,539
Other invested assets 12,279 12,560 - 15,905 (b) 40,744
Short-term investments 4,660 3,318 1,910 12,684 22,572
Total investments(a) 124,306 189,340 37,540 59,252 410,438
Cash 673 463 65 273 1,474
Total invested assets $ 124,979 $ 189,803 $ 37,605 $ 59,525 $ 411,912
(a) At December 31, 2012, approximately 88 percent and 12 percent of
investments were held by domestic and foreign entities, respectively, compared
to approximately 90 percent and 10 percent, respectively, at December 31, 2011.
(b) Includes $12.4 billion of AIA ordinary shares at December 31, 2011.
AIG Property Casualty
In our property casualty business, the duration of liabilities for long-tail
casualty lines is greater than other lines. As differentiated from the life
insurance and retirement services companies, the focus is not on asset-liability
matching, but on preservation of capital and growth of surplus.
Fixed income holdings of AIG Property Casualty domestic operations, with an
average duration of 4.0 years, are currently comprised primarily of tax-exempt
securities, which provide attractive risk-adjusted after-tax returns as well
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as taxable municipal bonds, government bonds and agency and corporate
securities. The majority of these high quality investments are rated A or higher
based on composite ratings.
Fixed income assets held in AIG Property Casualty foreign operations are of high
quality and short to intermediate duration, averaging 3.5 years.
While invested assets backing reserves are invested in conventional fixed income
securities in AIG Property Casualty domestic operations, a modest portion of
surplus is allocated to alternative investments, including private equity and
hedge funds. Notwithstanding the current environment, these investments have
provided a combination of added diversification and attractive long-term returns
over time.
AIG Life and Retirement
With respect to AIG Life and Retirement, we use asset-liability management as a
tool to determine the composition of the invested assets. Our objective is to
maintain a matched asset-liability structure, although we may occasionally
determine that it is economically advantageous to be temporarily in an unmatched
position. To the extent that we have maintained a matched asset-liability
structure, the economic effect of interest rate fluctuations is partially
mitigated.
Our investment strategy for AIG Life and Retirement is to produce cash flows
greater than maturing insurance liabilities. There exists a future investment
risk associated with certain policies currently in-force which will have premium
receipts in the future. That is, the investment of these future premium receipts
may be at a yield below that required to meet future policy liabilities.
AIG Life and Retirement frequently reviews its interest rate assumptions and
actively manages the crediting rates used for its new and in force business.
Business strategies continue to evolve to maintain profitability of the overall
business.
The investment of insurance cash flows and reinvestment of the proceeds of
matured securities and coupons requires active management of investment yields
while maintaining satisfactory investment quality and liquidity.
A number of guaranteed benefits, such as living benefits and guaranteed minimum
death benefits, are offered on certain variable and indexed annuity products.
The fair value of these benefits is measured based on actuarial and capital
market assumptions related to projected cash flows over the expected lives of
the contracts. We manage our exposure resulting from these long-term guarantees
through reinsurance or capital market hedging instruments. We actively review
underlying assumptions of policyholder behavior and persistency related to these
guarantees. We have taken positions in certain derivative financial instruments
in order to hedge the impact of changes in equity markets and interest rates on
these benefit guarantees. We execute listed futures and options contracts on
equity indexes to hedge certain guarantees of variable and indexed annuity
products. We also enter into various types of futures and options contracts,
primarily to hedge changes in value of certain guarantees of variable and
indexed annuities due to fluctuations in interest rates. We use several
instruments to hedge interest rate exposure, including listed futures on
government securities, listed options on government securities and the purchase
of government securities.
With respect to over-the-counter derivatives, we deal with highly rated
counterparties and do not expect the counterparties to fail to meet their
obligations under the contracts. We have controls in place to monitor credit
exposures by limiting transactions with specific counterparties within specified
dollar limits and assessing the creditworthiness of counterparties periodically.
We generally use ISDA Master Agreements and Credit Support Annexes (CSAs) with
bilateral collateral provisions to reduce counterparty credit exposures.
Fixed income holdings of AIG Life and Retirement, with an average duration of
6.3 years, are comprised of taxable corporate bonds, as well as municipal and
government bonds, commercial mortgage loans, and agency and non-agency
structured securities. The majority of these investments are held in the
available for sale portfolio and are rated investment grade based on our
composite ratings.
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Available-for-Sale Investments
The following table presents the fair value of our available-for-sale
securities:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2012 2011
Bonds available for sale:
U.S. government and government sponsored entities $ 3,483 $ 6,078
Obligations of states, municipalities and
political subdivisions 35,705 37,498
Non-U.S. governments 26,800 25,735
Corporate debt 151,112 144,818
Mortgage-backed, asset-backed and collateralized:
RMBS 34,392 34,604
CMBS 10,134 7,946
CDO/ABS 8,333 7,302
Total mortgage-backed, asset-backed and
collateralized 52,859
49,852
Total bonds available for sale* 269,959
263,981
Equity securities available for sale:
Common stock 3,029 3,421
Preferred stock 78 143
Mutual funds 105 60
Total equity securities available for sale 3,212 3,624
Total $ 273,171 $ 267,605
* At December 31, 2012 and December 31, 2011, bonds available for sale held
by us that were below investment grade or not rated totaled $29.6 billion and
$24.2 billion, respectively.
Investments in Municipal Bonds
At December 31, 2012, the U.S. municipal bond portfolio was composed primarily
of essential service revenue bonds and high-quality tax-backed bonds with
97 percent of the portfolio rated A or higher.
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The following table presents the fair values of our available for sale U.S.
municipal bond portfolio by state and municipal bond type:
December 31, 2012 State Local Total
General General Fair
(in millions) Obligation Obligation Revenue Value
State:
California $ 674 $ 1,292 $ 3,301 $ 5,267
Texas 201 2,377 2,135 4,713
New York 46 833 3,706 4,585
Washington 717 278 831 1,826
Massachusetts 919 - 891 1,810
Illinois 159 671 710 1,540
Florida 510 9 1,017 1,536
Virginia 89 150 855 1,094
Arizona - 162 820 982
Georgia 490 42 386 918
Ohio 215 150 525 890
Wisconsin 325 49 368 742
Pennsylvania 459 82 197 738
All other states 1,750 1,302 6,012 9,064
Total(a)(b) $ 6,554 $ 7,397 $ 21,754 $ 35,705
(a) Excludes certain university and not- for- profit entities that issue their
bonds in the corporate debt market. Includes industrial revenue bonds.
(b) Includes $7.9 billion of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale
corporate debt securities based on amortized cost:
December 31, December 31,
Industry Category 2012 2011
Financial institutions:
Money Center /Global Bank Groups 8 % 9 %
Regional banks - other 1 1
Life insurance 3 4
Securities firms and other finance companies - -
Insurance non-life 4 3
Regional banks - North America 5 6
Other financial institutions 5 5
Utilities 16 16
Communications 8 8
Consumer noncyclical 12 11
Capital goods 6 6
Energy 7 7
Consumer cyclical 7 7
Other 18 17
Total* 100 % 100 %
* At December 31, 2012 and December 31, 2011, approximately 94 percent and
95 percent, respectively, of these investments were rated investment grade.
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Investments in RMBS
The following table presents our RMBS available for sale investments by year of
vintage:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2012 2011
Total RMBS
2012 $ 1,630 $ -
2011 7,545 9,247
2010 2,951 3,925
2009 378 620
2008 431 714
2007 and prior* 21,457 20,098
Total RMBS $ 34,392 $ 34,604
Agency
2012 $ 1,395 $ -
2011 5,498 7,005
2010 2,812 3,774
2009 321 549
2008 431 714
2007 and prior 3,117 4,315
Total Agency $ 13,574 $ 16,357
Alt-A
2010 $ 53 $ 64
2007 and prior 7,871 5,744
Total Alt-A $ 7,924 $ 5,808
Subprime
2007 and prior $ 2,151 $ 1,456
Total Subprime $ 2,151 $ 1,456
Prime non-agency
2012 $ 235 $ -
2011 2,047 2,241
2010 86 88
2009 58 71
2007 and prior 7,910 8,194
Total Prime non-agency $ 10,336 $ 10,594
Total Other housing related $ 407 $ 389
* Includes approximately $10.9 billion of securities that were purchased at
a significant discount to amortized cost commencing in the second quarter of
2011.
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The following table presents our RMBS available for sale investments by credit
rating:
Fair Value at Fair Value at
(in millions) December 31, 2012 December 31, 2011
Rating:
Total RMBS
AAA $ 16,048 19,436
AA 795 979
A 411 409
BBB 744 773
Below investment grade(a) 16,283 12,999
Non-rated 111 8
Total RMBS(b) $ 34,392 34,604
Agency RMBS
AAA $ 13,464 16,357
AA 110 -
Total Agency $ 13,574 16,357
Alt-A RMBS
AAA $ 57 126
AA 195 414
A 83 161
BBB 314 251
Below investment grade(a) 7,275 4,856
Non-rated - -
Total Alt-A $ 7,924 5,808
Subprime RMBS
AAA $ 38 105
AA 170 127
A 129 18
BBB 185 221
Below investment grade(a) 1,629 985
Non-rated - -
Total Subprime $ 2,151 1,456
Prime non-agency
AAA $ 2,487 2,850
AA 317 429
A 196 189
BBB 208 287
Below investment grade(a) 7,017 6,831
Non-rated 111 8
Total prime non-agency $ 10,336 10,594
Total Other housing related $ 407 389
(a) Commencing in the second quarter of 2011, we began purchasing certain
RMBSs that had experienced deterioration in credit quality since their
origination. See Note 7 to the Consolidated Financial Statements, Investments -
Purchased Credit Impaired (PCI) Securities, for additional discussion.
(b) The weighted average expected life was 6 years at both December 31, 2012
and December 31, 2011, respectively.
Our underwriting practices for investing in RMBS, other asset-backed securities
and CDOs take into consideration the quality of the originator, the manager, the
servicer, security credit ratings, underlying characteristics of the mortgages,
borrower characteristics, and the level of credit enhancement in the
transaction.
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Investments in CMBS
The following table presents our CMBS available for sale investments:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2012 2011
CMBS (traditional) $ 7,880 $ 6,333
ReRemic/CRE CDO 219 261
Agency 1,486 1,290
Other 549 62
Total $ 10,134 $ 7,946
The following table presents our CMBS available for sale investments by year of
vintage:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2012 2011
Year:
2012 $ 1,427 $ -
2011 1,347 1,423
2010 807 298
2009 44 42
2008 161 211
2007 and prior 6,348 5,972
Total $ 10,134 $ 7,946
The following table presents our CMBS available for sale investments by credit
rating:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2012 2011
Rating:
AAA $ 4,278 $ 3,693
AA 1,591 734
A 827 948
BBB 1,266 818
Below investment grade 2,156 1,740
Non-rated 16 13
Total $ 10,134 $ 7,946
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The following table presents the percentage of our CMBS available for sale
investments by geographic region based on amortized cost:
December 31, December 31,
2012 2011
Geographic region:
New York 16 % 15 %
California 9 10
Texas 6 6
Florida 4 5
Virginia 3 3
New Jersey 3 3
Illinois 3 2
Pennsylvania 2 2
Nevada 2 2
Georgia 2 2
Massachusetts 2 2
Washington 2 2
All other* 46 46
Total 100 % 100 %
* Includes Non-U.S. locations.
The following table presents the percentage of our CMBS available for sale
investments by industry based on amortized cost:
December 31, 2012 2011
Industry:
Office 27 % 28 %
Multi-family* 23 26
Retail 25 25
Lodging 13 8
Industrial 6 6
Other 6 7
Total 100 % 100 %
* Includes Agency-backed CMBS.
The fair value of CMBS holdings remained stable throughout 2012. The majority of
our investments in CMBS are in tranches that contain substantial protection
features through collateral subordination. As indicated in the tables,
downgrades have occurred on many CMBS holdings. The majority of CMBS holdings
are traditional conduit transactions, broadly diversified across property types
and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale investments by
collateral type:
Fair value at Fair value at
December 31, December 31,
(in millions) 2012 2011
Collateral Type:
Bank loans (CLO) $ 2,579 $ 1,756
Synthetic investment grade 25 76
Other 424 390
Subprime ABS 10 10
Total $ 3,038 $ 2,232
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The following table presents our CDO available for sale investments by credit
rating:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2012 2011
Rating:
AAA $ 144 $ 130
AA 542 299
A 1,284 745
BBB 485 467
Below investment grade 583 591
Total $ 3,038 $ 2,232
Commercial Mortgage Loans
At December 31, 2012, we had direct commercial mortgage loan exposure of
$13.8 billion. At that date, over 99 percent of the loans were current.
The following table presents the commercial mortgage loan exposure by location
and class of loan based on amortized cost:
December 31,
2012 Class
Number Percent
(dollars in of of
millions) Loans Apartments Offices Retails Industrials Hotels Others Total Total
State:
California 153 $ 119 $ 942 $ 286 $ 640 $ 394 $ 652 $ 3,033 22 %
New York 85 268 1,320 176 98 101 120 2,083 15
New Jersey 57 477 283 302 8 19 65 1,154 8
Florida 93 52 175 255 99 20 231 832 6
Texas 58 37 294 154 208 101 32 826 6
Pennsylvania 57 48 99 171 119 17 13 467 3
Ohio 54 167 40 98 64 38 10 417 3
Colorado 19 11 198 1 - 97 58 365 3
Maryland 21 22 145 170 13 4 4 358 3
Virginia 25 38 186 50 10 17 - 301 2
Other states 333 359 1,253 1,010 397 345 465 3,829 28
Foreign 61 1 - - - - 122 123 1
Total* 1,016 $ 1,599 $ 4,935 $ 2,673 $ 1,656 $ 1,153 $ 1,772 $ 13,788 100 %
* Excludes portfolio valuation losses.
AIA Investment
We sold our remaining 33 percent interest in AIA ordinary shares for proceeds of
$14.5 billion and a net gain of $2.1 billion through three sale transactions on
March 7, September 11 and December 20, 2012.
See Note 7 to the Consolidated Financial Statements for further discussion.
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Impairments
The following table presents impairments by investment type:
Years Ended December 31,
(in millions) 2012 2011 2010
Fixed maturity securities, available for sale $ 723$ 1,009$ 2,337
Equity securities, available for sale 105 37 193
Private equity funds and hedge funds 339 234 509
Subtotal $ 1,167 $ 1,280 $ 3,039
Life settlement contracts(a) 309 312 74
Aircraft trusts - 168 -
Alternative investments 9 - -
Real estate(b) 7 30 622
Total $ 1,492 $ 1,790 $ 3,735
(a) Impairments of investments in Life settlement contracts are recorded in
Other realized losses.
(b) Impairments of investments in Real estate are recorded in Other income.
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit
analyses of individual securities without regard to rating agency ratings. Based
on this analysis, we expect to receive cash flows sufficient to cover the
amortized cost of all below investment grade securities for which credit
impairments were not recognized.
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The following tables present other-than-temporary impairment charges recorded in
earnings on fixed maturity securities, equity securities, private equity funds
and hedge funds.
Other-than-temporary impairment charges by reportable segment and impairment
type:
Reportable Segment
AIG Property AIG Life and Other
(in millions) Casualty Retirement Operations Total
For the Year Ended December 31,
2012
Impairment Type:
Severity $ 35 $ 9 $ - $ 44
Change in intent 4 20 38 62
Foreign currency declines 8 - - 8
Issuer-specific credit events 330 691 27 1,048
Adverse projected cash flows 1 4 - 5
Total $ 378 $ 724 $ 65 $ 1,167
For the Year Ended December 31,
2011
Impairment Type:
Severity $ 47 $ 4 $ - $ 51
Change in intent 1 11 - 12
Foreign currency declines 32 - - 32
Issuer-specific credit events 193 943 29 1,165
Adverse projected cash flows 1 19 - 20
Total $ 274 $ 977 $ 29 $ 1,280
For the Year Ended December 31,
2010
Impairment Type:
Severity $ 30 $ 14 $ 29 $ 73
Change in intent 389 34 18 441
Foreign currency declines 17 - 46 63
Issuer-specific credit events 141 1,906 410 2,457
Adverse projected cash flows - 4 1 5
Total $ 577 $ 1,958 $ 504 $ 3,039
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Other-than-temporary impairment charges by investment type and impairment type:
Other Fixed Equities/Other
(in millions) RMBS CDO/ABS CMBS Maturity Invested Assets* Total
For the Year Ended
December 31, 2012
Impairment Type:
Severity $ - $ - $ - $ - $ 44 $ 44
Change in intent 4 - - 34 24 62
Foreign currency
declines - - - 8 - 8
Issuer-specific
credit events 433 7 208 24 376 1,048
Adverse projected
cash flows 5 - - - - 5
Total $ 442 $ 7 $ 208 $ 66 $ 444 $ 1,167
For the Year Ended
December 31, 2011
Impairment Type:
Severity $ - $ - $ - $ - $ 51 $ 51
Change in intent - - - 7 5 12
Foreign currency
declines - - - 32 - 32
Issuer-specific
credit events 769 20 150 11 215 1,165
Adverse projected
cash flows 20 - - - - 20
Total $ 789 $ 20 $ 150 $ 50 $ 271 $ 1,280
For the Year Ended
December 31, 2010
Impairment Type:
Severity $ - $ - $ - $ - $ 73 $ 73
Change in intent 210 - 99 41 91 441
Foreign currency
declines - 5 - 57 1 63
Issuer-specific
credit events 1,066 34 739 81 537 2,457
Adverse projected
cash flows 5 - - - - 5
Total $ 1,281 $ 39 $ 838 $ 179 $ 702 $ 3,039
* Includes other-than-temporary impairment charges on private equity funds,
hedge funds and direct private equity investments.
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Other-than-temporary impairment charges by investment type and credit rating:
Other Fixed Equities/Other
(in millions) RMBS CDO/ABS CMBS Maturity Invested Assets* Total
For the Year Ended
December 31, 2012
Rating:
AAA $ - $ - $ - $ 2 $ - $ 2
AA 10 - - - - 10
A - 2 - 4 - 6
BBB - - - - - -
Below investment
grade 432 5 208 26 - 671
Non-rated - - - 34 444 478
Total $ 442 $ 7 $ 208 $ 66 $ 444 $ 1,167
For the Year Ended
December 31, 2011
Rating:
AAA $ 3 $ - $ - $ 9 $ - $ 12
AA 24 - - 10 - 34
A 7 - - 15 - 22
BBB 6 5 - 1 - 12
Below investment
grade 749 15 150 14 - 928
Non-rated - - - 1 271 272
Total $ 789 $ 20 $ 150 $ 50 $ 271 $ 1,280
For the Year Ended
December 31, 2010
Rating:
AAA $ 5 $ - $ - $ 10 $ - $ 15
AA 20 - - 3 - 23
A 2 - 13 14 - 29
BBB 47 - 41 10 - 98
Below investment
grade 1,207 30 784 108 - 2,129
Non-rated - 9 - 34 702 745
Total $ 1,281 $ 39 $ 838 $ 179 $ 702 $ 3,039
* Includes other-than-temporary impairment charges on private equity funds,
hedge funds and direct private equity investments.
We recorded other-than-temporary impairment charges in the years ended
December 31, 2012 and 2011 related to:
º •
º issuer-specific credit events;
º •
º securities for which we have changed our intent from hold to sell;
º •
º declines due to foreign exchange rates;
º •
º adverse changes in estimated cash flows on certain structured securities;
º •
º securities that experienced severe market valuation declines; and
º •
º other impairments, including equity securities, private equity funds, hedge
funds, direct private equity investments, aircraft trusts and investments
in life settlement contracts.
There was no significant impact to our consolidated financial condition or
results of operations from other-than-temporary impairment charges for any one
single credit. Also, no individual other-than-temporary impairment charge
exceeded 0.11 percent, 0.20 percent and 0.20 percent of total equity at
December 31, 2012, 2011 or 2010, respectively.
In periods subsequent to the recognition of an other-than-temporary impairment
charge for available for sale fixed maturity securities that is not
foreign-exchange related, we generally prospectively accrete into earnings the
difference between the new amortized cost and the expected undiscounted recovery
value over the remaining life of the security. The accretion that was recognized
for these securities in earnings was $915 million in 2012, and
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$542 million in 2011, and $401 million in 2010. For a discussion of AIG's
other-than-temporary impairment accounting policy, see Note 7 to the
Consolidated Financial Statements.
The following table shows the aging of the pre-tax unrealized losses of fixed
maturity and equity securities, the extent to which the fair value is less than
amortized cost or cost, and the number of respective items in each category:
December 31, Less Than or Equal Greater Than 20% Greater Than 50%
2012 to 20% of Cost(b) to 50% of Cost(b) of Cost(b) Total
Aging(a)
(dollars in Unrealized Unrealized Unrealized Unrealized
millions) Cost(c) Loss Items(e) Cost(c) Loss Items(e) Cost(c) Loss Items(e) Cost(c) Loss(d) Items(e)
Investment
grade bonds
0 - 6 months $ 10,865 $ 157 1,637 $ - $ - - $ - $ - - $ 10,865 $ 157 1,637
7 -
11 months 465 10 112 - - - - - - 465 10 112
12 months or
more 4,830 277 631 481 129 47 12 10 2 5,323 416 680
Total $ 16,160 $ 444 2,380 $ 481 $ 129 47 $ 12 $ 10 2 $ 16,653 $ 583 2,429
Below
investment
grade bonds
0 - 6 months $ 904 $ 56 354 $ 122 $ 34 17 $ - $ - - $ 1,026 $ 90 371
7 -
11 months 175 9 108 14 4 10 4 2 14 193 15 132
12 months or
more 2,987 227 508 1,164 353 135 201 128 62 4,352 708 705
Total $ 4,066 $ 292 970 $ 1,300 $ 391 162 $ 205 $ 130 76 $ 5,571 $ 813 1,208
Total bonds
0 - 6 months $ 11,769 $ 213 1,991 $ 122 $ 34 17 $ - $ - - $ 11,891 $ 247 2,008
7 -
11 months 640 19 220 14 4 10 4 2 14 658 25 244
12 months or
more 7,817 504 1,139 1,645 482 182 213 138 64 9,675 1,124 1,385
Total (e) $ 20,226 $ 736 3,350 $ 1,781 $ 520 209 $ 217 $ 140 78 $ 22,224 $ 1,396 3,637
Equity
securities
0 -
11 months $ 225 $ 18 151 $ 61 $ 18 43 $ - $ - - $ 286 $ 36 194
12 months or
more 17 - 2 2 1 2 - - - 19 1 4
Total $ 242 $ 18 153 $ 63 $ 19 45 $ - $ - - $ 305 $ 37 198
(a) Represents the number of consecutive months that fair value has been less
than cost by any amount.
(b) Represents the percentage by which fair value is less than cost at
December 31, 2012.
(c) For bonds, represents amortized cost.
(d) The effect on Net income of unrealized losses after taxes will be
mitigated upon realization because certain realized losses will result in
current decreases in the amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
For 2012, net unrealized gains related to fixed maturity and equity securities
increased by $10.4 billion primarily due to the decline in interest rates and
narrowing of credit spreads.
As of December 31, 2012, the majority of our fixed maturity investments in an
unrealized loss position of more than 50 percent for 12 months or more consisted
of the unrealized loss of $138 million primarily related to CMBS and RMBS
securities originally rated investment grade that are floating rate or that have
low fixed coupons relative to current market yields. A total of 2 securities
with an amortized cost of $12 million and a net unrealized loss of $10 million
are still investment grade. As part of our credit evaluation procedures we
consider the nature of both the specific securities and the market conditions
for those securities. For most security types supported by real estate-related
assets, current market yields continue to be higher than the yields at the time
those securities were issued. In addition, for floating rate securities,
persistently low LIBOR levels continue to make these securities less attractive
to secondary purchasers of these assets.
We believe that these securities are trading at significant price discounts
primarily due to the lack of demand for commercial and residential real estate
collateral-based securities, low contractual coupons and interest rate spreads,
and the deterioration in the level of collateral support due to real estate
market conditions. Based on our analysis, and taking into account the level of
subordination below these securities, we continue to believe that the expected
cash flows from these securities will be sufficient to recover the amortized
cost of our investment. We continue to monitor these positions for potential
credit impairments that could result from further deterioration in commercial
and residential real estate fundamentals.
See also Note 7 to the Consolidated Financial Statements for further discussion
of our investment portfolio.
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Enterprise Risk Management
At AIG, risk management includes the identification and measurement of various
forms of risk, the establishment of risk thresholds and the creation of processes
intended to maintain risks within these thresholds while optimizing returns. We
consider risk management an integral part of managing our core businesses and a
key element of our approach to corporate governance.
OVERVIEW Enterprise Risk
--------------------------------------------------------- Management (ERM)
----------------------
At AIG, we have an integrated process for managing risks
throughout our organization in accordance with our •
firm-wide risk appetite. Our Board of Directors has Our ERM framework
oversight responsibility for the management of risk. Our provides senior
Enterprise Risk Management (ERM) Department supervises management with a
and integrates the risk management functions in each of consolidated view of
our business units, providing senior management with a our risk appetite and
consolidated view of the firm's major risk positions. major risk positions.
Within each business unit, senior leaders and executives •
approve risk-taking policies and targeted risk tolerance In each of our
within the framework provided by ERM. ERM supports our business units, senior
businesses and management in the embedding of enterprise leaders and executives
risk management in all of our key day to day business approve risk-taking
processes and in identifying, assessing, quantifying, policies and targeted
managing and mitigating the risks taken by us and our risk tolerance within
businesses. the ERM framework
while working with AIG
Risk Governance Structure ERM to mitigate risks
--------------------------------------------------------- across the firm.
•
Risk management is an
Our risk governance fosters the development and integral part of how
maintenance of a risk and control culture that we manage our core
encompasses all significant risk categories. businesses.
Accountability for the implementation and oversight of
risk policies is aligned with individual corporate
executives, with the risk committees receiving regular
reports regarding compliance with each policy to support
risk governance at our corporate level as well as in each
business unit.
Our Board of Directors oversees the management of risk through its Finance and
Risk Management Committee (the FRMC) and the Audit Committee. Those committees
regularly interact with other committees of the Board. Our Executive Vice
President (EVP) and Chief Risk Officer (CRO) reports to both the FRMC and AIG's
Chief Executive Officer (CEO).
The Group Risk Committee (the GRC) is the senior management group charged with
assessing all significant risk issues on a global basis in order to protect our
financial strength, optimize our intrinsic value, and protect our reputation
among key stakeholders. The GRC is chaired by our CRO. Its membership includes
our CEO, EVP and Chief Financial Officer (CFO), EVP and General Counsel, and 12
other executives from across our corporate functions and business units. Our CRO
reports periodically on behalf of the GRC to both the FRMC and the Audit
Committee of the Board.
Management committees that support the GRC are described below. These committees
are comprised of senior executives and experienced business representatives from
a range of functions and business units throughout AIG and its subsidiaries.
These committees are charged with identifying, analyzing and reviewing specific
risk matters within their respective mandates.
Financial Risk Group (FRG): The FRG is responsible for the oversight of
financial risks taken by AIG and its subsidiaries. Its mandate includes
overseeing our aggregate credit, market, interest rate, liquidity and model
risks, as well as asset-liability management, derivatives activity, and foreign
exchange transactions. Membership of the FRG includes our EVP - Investments, EVP
and Treasurer, as well as our EVP and CFO, and other senior executives from
Finance and ERM. Our CRO serves as Chair of the FRG.
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Transaction Approval and Business Practices Committee (TABPC): TABPC provides
the primary corporate-level review function for all proposed transactions and
business practices that are significant in size, complex in scope, or that
present heightened legal, reputational, accounting or regulatory risks. Our EVP
and Treasurer serves as TABPC Chair and additional members include our EVP and
General Counsel, EVP and CRO, EVP and CFO, EVP - Investments, and a senior
executive from Finance.
Operational Risk Committee (ORC): This Committee is tasked with overview of the
enterprise-wide identification, escalation and mitigation of risks that may
arise from inadequate or failed internal processes, people, systems, or external
events. The Committee approves AIG's Operational Risk Management (ORM) framework
and related policies, which includes the risk and control self assessment
(RCSA), Risk Events, Key Risk Indicators (KRIs) and Scenario Analysis. The
Committee monitors the adequacy of ORM staffing and ensures applicable
governance structures are established to provide oversight of operational risk
at each Business Unit and Corporate Function. The ORC also reviews aggregate
firm-wide operational risk reports. Our Chief Administrative Officer is Chair of
the ORC and our Head of Operational Risk Management serves as ORC Secretary.
Other ORC members include senior AIG executives with expertise in legal,
compliance, technology, finance and operational risk, as well as business
continuity management and the chief risk officers of our business units.
[[Image Removed: GRAPHIC]]
Business Unit Risk Committees: Each of our major insurance businesses has
established a risk and capital committee (BU RCC) that serves as the senior
management committee responsible for risk oversight at the individual business
unit level. The BU RCCs are responsible for the identification, assessment and
monitoring of all sources of risk within their respective portfolios. Specific
responsibilities include setting risk tolerances, approving capital management
strategies (including asset allocation and risk financing), insurance portfolio
optimization, risk management policies and providing oversight of economic
capital models. In addition to its BU RCC, each major insurance business has
established subordinate committees which identify, assess and monitor the
specific operational, transactional and financial risks inherent in its
respective business. Together, the BU Risk Committees and AIG Risk Committees
described above provide comprehensive risk oversight throughout the
organization.
Risk oversight activities also continue to be coordinated with discontinued
operations, such as ILFC, until pending sale transactions are closed.
Risk Appetite, Identification, and Measurement
ERM has developed a company-wide Risk Appetite Statement (RAS), which will be
updated on at least an annual basis. By formally defining our risk appetite, we
seek to integrate stakeholder interests, business goals and available financial
resources through taking measured risks that are intended to generate
repeatable, sustainable earnings and produce long-term value and stability.
The RAS articulates our risk-taking capacity by setting consolidated capital and
liquidity tolerances as observed under expected and stressed business and
economic conditions. RAS also reflects constraints on minimum capital positions
for our insurance operations. These constraints inform the requirements for
capital adequacy for individual businesses, based on capital assessments under
rating agency, regulatory and other business needs. Consistent with our risk
appetite, we have established risk tolerances that are reflected in our business
planning and are integrated into the management of our operations. Risk
tolerances cover insurance company capital ratios as well as metrics associated
with AIG Parent resources, including consolidated company capital ratios and
parent liquidity. Our GRC routinely reviews the level of risk taken by the
consolidated organization in relation to established risk tolerances. A
consolidated risk report is also presented to the FRMC by our CRO.
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We employ various approaches to measure, monitor, and manage risk exposures,
including the utilization of a variety of metrics and early warning indicators.
We use a proprietary stress testing framework to measure our quantifiable risks.
This framework is built on our existing ERM stress testing methodology for both
insurance and non-insurance operations. The framework measures risk over
multiple time horizons and under different levels of stress. We develop a range
of stress scenarios based both on internal experience and regulatory guidance.
The stress tests are intended to ensure that sufficient resources for our
regulated subsidiaries and the consolidated company are available under both
idiosyncratic and systemic market stress conditions.
The stress testing framework assesses our aggregate exposure to our most
significant financial and insurance risks, including the risk in each of our
regulated subsidiaries in relation to its statutory capital needs under stress,
risks inherent in our unregulated subsidiaries, and risks to AIG consolidated
capital. Using our stress testing methodology, we evaluate the capital and
earnings impact of potential stresses in relation to the relevant capital
constraint of each business operation. We use this information to determine the
liquidity resources AIG Parent needs to support insurance operations, contingent
liquidity required from AIG Parent under stressed scenarios for non-insurance
operations, and capital resources required to maintain consolidated company
target capitalization levels.
To complement our risk policies and governance framework, we also employ an
enterprise-wide vulnerability identification (VID) process. The process is
designed to ensure that potential new or emerging risks are brought to the
attention of senior management. On a bi-annual basis, our VID process solicits
this information from a broad range of senior managers across the organization.
This process enables vulnerabilities that are not captured by other risk
management practices to be identified and reported to senior management on a
regular basis.
We evaluate and manage risk in material topics as shown below. These topics are
discussed in more detail in the following pages:
• • •
Credit Risk Liquidity Risk Insurance Operations Risks
• • •
Market Risk Operational Risk Global Capital Markets Risks
Credit Risk Management
Overview
Credit risk is defined as the risk that our customers or counterparties are
unable or unwilling to repay their contractual obligations when they become due.
Credit risk may also result from a downgrade of counterparty's credit ratings.
We devote considerable resources to managing our direct and indirect credit
exposures. These exposures may arise from fixed income investments, equity
securities, deposits, reverse repurchase agreements and repurchase agreements,
commercial paper, corporate and consumer loans, leases, reinsurance
recoverables, counterparty risk arising from derivatives activities, collateral
extended to counterparties, insurance risk cessions to third parties, financial
guarantees and letters of credit.
Our credit risks are managed at the corporate level within ERM. ERM is assisted
by credit functions headed by seasoned credit officers in all the business
units, whose primary role is to assure appropriate credit risk management
relative to our credit risk parameters. Our Chief Credit Officer (CCO) and
credit executives are primarily responsible for the development and maintenance
of credit risk policies and procedures.
Responsibilities of the CCO and credit executives include:
º •
º developing and implementing our company-wide credit policies;
º •
º approving delegated credit authorities to our credit executives;
º •
º managing the approval process for requests for credit limits, program
limits and credit transactions above authorities or where concentrations of
risk may exist or be incurred;
º •
º aggregating globally all credit exposure data by counterparty, country,
sector and industry and reporting risk concentrations regularly to and
reviewing with senior management;
º • º administering regular portfolio credit reviews of investment, derivative
and credit-incurring business units and recommending corrective actions
where required;
º •
º conducting credit research on countries, sectors and asset classes where
risk concentrations may exist;
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º •
º developing methodologies for quantification and assessment of credit risks,
including the establishment and maintenance of our internal risk rating
process; and
º •
º approving appropriate credit reserves, credit-related other-than-temporary
impairments and corresponding methodologies in all credit portfolios.
We monitor and control our company-wide credit risk concentrations and attempt
to avoid unwanted or excessive risk accumulations, whether funded or unfunded.
To minimize the level of credit risk in some circumstances, we may require
third-party guarantees, reinsurance or collateral, such as letters of credit and
trust collateral accounts. We treat these guarantees, reinsurance recoverables,
letters of credit and trust collateral accounts as credit exposure and include
them in our risk concentration exposure data. We identify our aggregate credit
exposures to our underlying counterparty risks.
Largest Credit Concentrations
Our single largest credit exposure, the U.S. Government, was 25 percent of Total
equity at December 31, 2012 compared to 30 percent at December 31, 2011.
Exposure to the U.S. Government primarily includes credit exposure related to
U.S. Treasury and government agency securities and to direct and guaranteed
exposures to U.S. government-sponsored entities, primarily the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) based upon their U.S. Government conservatorship. The reduction in
exposure was primarily related to U.S. government-sponsored entities.
Based on our internal risk ratings, at December 31, 2012, our largest below
investment grade-rated credit exposure, apart from ILFC leasing arrangements
secured by aircraft with airlines having below investment grade ratings, was
related to a non-financial corporate counterparty and that exposure was
0.6 percent of Total equity, compared to 0.5 percent at December 31, 2011.
Government Credit Concentrations (non-U.S.)
Our total direct and guaranteed credit exposure to non-U.S. governments is
$22.5 billion at December 31, 2012, compared to $26.2 billion in December 31,
2011. Our single largest concentration was to the government of Japan in the
amount of $8.1 billion at December 31, 2012. Most of these securities were held
in the investment portfolios of our Japanese insurance operations.
The following table presents our aggregate (gross and net) credit exposures to
non-U.S. governments:
December 31, December 31,
(in millions) 2012 2011
Japan $ 8,109 $ 9,205
Canada 2,718 3,153
Germany 1,446 1,854
France 1,207 1,157
China 926 132
United Kingdom 816 1,615
Australia 601 879
Mexico 552 507
Netherlands 442 442
Russia 340 293
Other 5,350 6,934
Total $ 22,507 $ 26,171
Financial Institution Concentrations
Our single largest industry credit exposure in 2012 was to the global financial
institutions sector as a whole, which includes banks and finance companies,
securities firms, and insurance and reinsurance companies, many of which can be
highly correlated at times of market stress. As of December 31, 2012, credit
exposure to this sector was $85.5 billion, or 84 percent of Total equity
compared to 106 percent at December 31, 2011.
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At December 31, 2012:
º •
º $80.6 billion, or 94 percent, of these global financial institution credit
exposures were considered investment grade based on our internal ratings.
º •
º $4.9 billion, or 6 percent, were considered non-investment grade. Most of
the non-investment grade exposure was to financial institutions in
countries that we believe are not of investment grade quality. Aggregate
credit exposure to the ten largest below investment grade-rated financial
institutions was $2.1 billion.
º •
º Our aggregate credit exposure to fixed maturity securities of the financial
institution sector amounted to $34.4 billion.
º •
º Short-term bank deposit placements, reverse repurchase agreements,
repurchase agreements and commercial paper issued by financial institutions
(primarily commercial banks), operating account balances with banks and
bank-issued commercial letters of credit supporting insurance credit
exposures were $20.4 billion, or 24 percent of the total global financial
institution credit exposure.
º •
º The remaining credit exposures to this sector were primarily related to
reinsurance recoverables, collateral extended to counterparties mostly
pursuant to derivative transactions, derivatives, and captive fronting risk
management programs for these financial institutions.
European Concentrations
We actively monitor our European credit exposures, especially those exposures to
issuers in the Euro-Zone periphery. We use various stress assumptions to
identify issuers and securities warranting review by senior management and to
determine the need for mitigating actions. As a mitigating action, we typically
decide not to renew maturing exposures or, when the opportunity presents itself,
to sell or to tender securities. To date, we have not actively used credit
default protection. We periodically evaluate the financial condition of issuers
and adjust internal risk ratings as warranted.
The result of these continuing reviews has led us to believe that our combined
credit risk exposures to sovereign governments, financial institutions and
non-financial corporations in the Euro-Zone are manageable risks given the type
and size of exposure and the credit quality and size of the issuers.
The following table presents our aggregate United Kingdom and European credit
exposures (excluding ILFC) by major sector:
December 31, 2012
Structured December 31,
(in Financial Non-Financial Products/ 2011
millions) Sovereign Institution Corporates Other(a) Total Total
Euro-Zone
countries:
France $ 1,207 $ 2,535 $ 6,728 $ 63 $ 10,533 $ 8,612
Germany 1,446 3,675 3,879 248 9,248 14,696
Netherlands 442 4,205 2,295 1,391 8,333 8,650
Spain 146 682 2,197 1,042 4,067 4,909
Italy 96 348 2,168 236 2,848 2,816
Belgium 132 209 833 - 1,174 1,062
Ireland - 98 858 62 1,018 1,644
Luxembourg - 24 607 35 666 613
Austria 157 168 198 - 523 557
Finland 138 32 262 - 432 378
Other
Euro-Zone 26 22 245 13 306 253
Total
Euro-Zone $ 3,790 $ 11,998 $ 20,270 $ 3,090 $ 39,148 $ 44,190
Remainder
of Europe
United
Kingdom $ 816 $ 9,557 $ 15,802 $ 4,197 $ 30,372 $ 29,052
Switzerland 67 4,521 2,702 - 7,290 7,670
Sweden 195 2,934 514 - 3,643 5,584
Other
remainder
of Europe 1,098 1,659 1,715 1,140 5,612 5,492
Total
remainder
of Europe $ 2,176 $ 18,671 $ 20,733 $ 5,337 $ 46,917 $ 47,798
Total $ 5,966 $ 30,669 $ 41,003 $ 8,427 $ 86,065 $ 91,988
(a) Other represents mortgage guaranty insurance ($1.3 billion), primarily in
Spain ($941 million) and Italy ($188 million).
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Aggregate credit exposure to European governments totaled $6.0 billion at
December 31, 2012, compared to $7.6 billion at December 31, 2011. Many of the
European governments' ratings have been downgraded by one or more of the major
rating agencies, occurring mostly in countries in the Euro-Zone periphery
(Spain, Italy and Portugal) where our government credit exposures totaled
$245 million at December 31, 2012. The downgrades primarily reflect large
government budget deficits, rising government debt-to-GDP ratios and large
financing requirements of these countries, which have led to difficult financing
conditions. These credit exposures primarily included available-for-sale and
trading securities (at fair value) issued by these governments. At December 31,
2012, we had no direct or guaranteed credit exposure to the governments of
Greece or Ireland.
Our exposure to European financial institutions at December 31, 2012 included
$20.2 billion of credit exposures to European banks, of which $18.7 billion were
considered investment grade based on our internal ratings. Aggregate below
investment grade rated credit exposures to European banks were $1.4 billion. Our
credit exposures to banks domiciled in the Euro-Zone countries totaled
$8.0 billion at December 31, 2012, of which $4.4 billion were fixed maturity
securities. Credit exposures to banks based in the five countries of the
Euro-Zone periphery (Spain, Italy, Ireland, Greece, and Portugal) totaled
$993 million, of which $707 million were fixed maturity securities. These credit
exposures were primarily to the largest banks in Spain and Italy. Credit
exposures to banks based in France totaled $1.5 billion at December 31, 2012, of
which $833 million were fixed maturity securities. Our credit exposures were
predominantly to the largest banks in these countries.
In addition, our exposure at December 31, 2012 to European financial
institutions included $10.5 billion of aggregate credit exposure to non-bank
institutions, mostly insurers and reinsurers, with $7.6 billion, or 73 percent,
of credit exposure representing reinsurance recoverable balances. Reinsurance
recoverables were primarily to highly rated reinsurers based in Switzerland, the
United Kingdom and Germany. $1.3 billion of the aggregate credit exposure at
December 31, 2012 to non-banks was fixed maturity securities, of which
94 percent were considered investment grade based on our internal ratings.
Of the $19.3 billion of non-financial institution corporate exposure to
Euro-Zone countries at December 31, 2012, 93 percent was to fixed maturity
securities ($11.0 billion) and insurance-related products ($7.0 billion), with
the majority of the insurance exposures being captive fronting programs
($3.0 billion), trade credit insurance ($1.9 billion), and surety bonds
($1.5 billion). France's exposure of $6.6 billion at December 31, 2012
represented the largest single non-financial corporate country exposure within
the Euro-Zone, of which $2.6 billion were fixed maturity securities.
Approximately two-thirds of the French exposures were to issuers in the
utilities, oil and gas, and telecommunications industries. Euro-Zone periphery
non-financial institution corporate exposures ($5.0 billion) at December 31,
2012 were heavily weighted towards large multinational corporations or issuers
in relatively stable industries, such as regulated utilities (25 percent),
telecommunications (17 percent), and oil and gas (13 percent).
Of the $6.1 billion at December 31, 2012 of United Kingdom and European
structured product exposures (largely consisting of residential mortgage-backed,
commercial mortgage-backed and other asset-backed securities), United Kingdom
structured products accounted for 69 percent, while the Netherlands and Germany
comprised 23 percent and 2 percent, respectively. Structured product exposures
to the Euro-Zone periphery accounted for 4 percent of the total. Approximately
89 percent of the United Kingdom and European structured products exposures were
rated A or better at December 31, 2012 based on external rating agency ratings.
In addition, we had commercial real estate-related net equity investments in
Europe totaling $497 million at December 31, 2012 and related unfunded
commitments of $105 million.
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The following table presents our aggregate United Kingdom and European credit
exposures (excluding ILFC) by product type:
December 31, 2012
Fixed Cash and Insurance December 31,
Maturity Short-Term Credit Reinsurance 2011
(in millions) Securities(a) Investments(b) Exposures(c) Recoverables Other(d) Total Total
Euro-Zone countries:
France $ 4,834 $ 422 $ 3,349 $ 590 $ 1,338 $ 10,533 $ 8,612
Germany 4,655 633 1,976 1,755 229 9,248 14,696
Netherlands 5,817 56 1,745 619 96 8,333 8,650
Spain 1,872 135 2,041 18 1 4,067 4,909
Italy 1,616 2 1,151 59 20 2,848 2,816
Belgium 796 1 369 4 4 1,174 1,062
Ireland 784 61 172 - 1 1,018 1,644
Luxembourg 307 3 356 1 - 667 613
Austria 316 7 197 2 1 523 557
Finland 313 13 104 2 - 432 378
Other Euro-Zone 140 10 151 1 3 305 253
Total Euro-Zone $ 21,450 $ 1,343 $ 11,611 $ 3,051 $ 1,693 $ 39,148 $ 44,190
Remainder of Europe
United Kingdom $ 15,600 $ 1,822 $ 8,814 $ 2,189 $ 1,947 $ 30,372 $ 29,052
Switzerland 3,011 448 1,060 2,767 4 7,290 7,670
Sweden 1,550 1,804 286 3 - 3,643 5,584
Other remainder of Europe 3,228 613 1,310 90 371 5,612 5,492
Total remainder of Europe $ 23,389 $ 4,687 $ 11,470 $ 5,049 $ 2,322 $ 46,917 $ 47,798
Total $ 44,839 $ 6,030 $ 23,081 $ 8,100 $ 4,015 $ 86,065 $ 91,988
(a) Fixed maturity securities primarily includes available-for-sale and
trading securities reported at fair value of $41.4 billion ($41.4 billion
amortized cost), and $3.4 billion ($3.4 billion amortized cost), respectively.
(b) Cash and short-term investments include bank deposit placements
($3.8 billion), collateral posted to counterparties against structured products
($1.9 billion), securities purchased under agreements to resell ($187 million),
and operating accounts ($115 million).
(c) Insurance Credit Exposures primarily consist of captive fronting
management programs ($10.7 billion), trade credit insurance ($6.2 billion), and
surety bonds ($2.1 billion) and commercial letters of credit supporting
insurance credit exposures ($794 million).
(d) Other primarily consists of derivative transactions reported at fair
value.
At December 31, 2012, approximately 86 percent of fixed maturity securities in
the United Kingdom and European exposures were considered investment grade based
on our internal ratings. European financial institution fixed maturity
securities exposure was $10.2 billion, of which $1.1 billion were covered bonds
(debt securities secured by a pool of financial assets sufficient to cover any
bondholder claims and that have full recourse to the issuing bank). $4.4 billion
of fixed maturity securities were issued by banks domiciled in the Euro-Zone
countries. Our subordinated debt holdings and Tier 1 and preference share
securities in these banks totaled $901 million and $312 million, respectively,
at December 31, 2012. These exposures were predominantly to the largest banks in
those countries.
Other Credit Concentrations
We have a risk concentration in the U.S. municipal sector, primarily through the
investment portfolios of our insurance companies. A majority of these securities
were held in available-for-sale portfolios of our domestic property and casualty
insurance companies. See Investments - Available for Sale Investments herein for
further details. We had $464 million of additional exposure to the municipal
sector outside of our insurance company portfolios at December 31, 2012,
compared to $892 million at December 31, 2011. These exposures consisted of
derivatives and trading securities (at fair value), and exposure related to
other insurance and financial services operations.
We have a risk concentration in the residential mortgage sector in the form of
non-agency RMBS, CDO of RMBS as well as our mortgage guaranty insurance
business. See Investments - Available for Sale Investments herein for further
details on RMBS and CDO investments. The net risk-in-force for UGC was
$33.6 billion at December 31, 2012, of which exposure in the United States was
$30.4 billion.
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We also have a risk concentration in the commercial real estate sector in the
form of non-agency CMBS, CDO of CMBS as well as commercial mortgage whole loans.
See Investments - Available for Sale Investments and Investments - Commercial
Mortgage Loans herein for further details.
We also monitor our aggregate cross-border exposures by country and region.
Cross-border exposure is defined as an underlying risk that is taken within a
country or jurisdiction other than the country or jurisdiction in which an AIG
business unit taking the risk is domiciled. These cross-border exposures include
both aggregated cross-border credit exposures to unrelated third parties and
cross-border investments in our own international subsidiaries. Five countries
had cross-border exposures in excess of 10 percent of Total equity at
December 31, 2012 compared to six countries at December 31, 2011. Based on our
internal risk ratings, at December 31, 2012, three countries were rated AAA and
two were rated AA. The two largest cross-border exposures were to the United
Kingdom and Bermuda.
We regularly review concentration reports in the categories listed above as well
as credit trends by risk ratings and credit spreads. We periodically adjust
limits and review exposures for risk mitigation to provide reasonable assurance
that we do not incur excessive levels of credit risk and that our credit risk
profile is properly calibrated across business units.
Market Risk Management
Market risk is defined as the potential loss arising from adverse fluctuations
in interest rates, foreign currencies, equity and commodity prices, and their
levels of volatility. Market risk includes credit spread risk, the potential
loss arising from adverse fluctuations in credit spreads of securities or
counterparties.
We are exposed to market risks, primarily within our insurance and capital
markets businesses. In our insurance operations, market risk results primarily
from potential mismatches in our asset-liability exposures, rather than
speculative positioning. Specifically, our life insurance and retirement
businesses collect premiums or deposits from policyholders and invest the
proceeds in predominantly long-term, fixed maturity securities. We earn a spread
between the asset yield and the cost payable to policyholders. We manage the
business so that the cash flows from invested assets are sufficient to meet
policyholder obligations when they become due, without the need to sell assets
prematurely into a potentially distressed market. In periods of severe market
volatility, depressed and illiquid fair values on otherwise performing
investments diminish shareholders' equity even without actual credit event
related losses.
Our market exposures can be categorized as follows:
º •
º Benchmark interest rates. Benchmark interest rates are also known as
risk-free interest rates and are associated with either the
government/treasury yield curve or the swap curve. The fair value of our
significant fixed maturity securities portfolio changes as benchmark
interest rates change.
º •
º Credit spread or risk premium. Credit spread risk is the potential for loss
due to a change in an instrument's risk premium or yield relative to that
of a comparable duration, default-free instrument.
º •
º Equity and alternative investment prices. We are exposed to equity and
alternative investment prices affecting a variety of instruments. These
include direct investments in common stock and mutual funds, minimum
benefit guarantees embedded in the structure of certain variable annuity
and variable life insurance products and other equity-like investments,
such as hedge funds and private equity funds, private equity investments,
commercial real estate and real estate funds.
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º •
º Foreign currency exchange rates. We are a globally diversified enterprise
with significant income, assets and liabilities denominated in, and
significant capital deployed in, a variety of currencies.
We use a number of measures and approaches to measure and quantify our market
risk exposure, including:
•
Duration/key rate duration. Duration is the measure of the sensitivities of a
fixed-income instrument to the changes in the benchmark yield curve. Key rate
duration measures sensitivities to the movement at a given term point on the
yield curve.
•
Scenario analysis. Scenario analysis uses historical, hypothetical, or
forward-looking macroeconomic scenarios to assess and report exposures.
Examples of hypothetical scenarios include a 100 basis point parallel shift in
the yield curve or a 10 percent immediate and simultaneous decrease in
world-wide equity markets.
•
Stress testing. Stress testing is a special form of scenario analysis in which
the scenarios are designed to lead to a material adverse outcome. Examples of
such scenarios include the stock market crash of October 1987 or the widening
of yields or spread of RMBS or CMBS during 2008.
•
VaR. VaR is a summary statistical measure that uses the estimated volatility
and correlation of market factors, and a management-determined level of
confidence, to estimate how frequently a portfolio of risk exposures could be
expected to lose at least a specified amount.
Insurance Operations Portfolio Sensitivities
The following table provides estimates of our sensitivity to changes in yield
curves, equity prices and foreign currency exchange rates:
Exposure Effect
December 31, December 31, December 31, December 31,(dollars in millions) 2012 2011* Sensitivity Factor 2012 2011
Yield sensitive assets 100 bps parallel increase in
$ 305,809 $ 326,200 all yield curves $ (16,005 ) $ (15,800 )
Equity and alternative 20% decline in stock prices
investments exposure and value of alternative
$ 27,131 $ 39,000 investments $ (5,426 ) $ (7,800 )Foreign currency exchange 10% depreciation of all
rates net exposure foreign currency exchange
rates against the U.S.
$ 9,106 $ 5,900 dollar $ (911 ) $ (590 )
Exposures to yield curve movements include fixed maturity securities, loans,
finance receivables and short-term investments, but exclude consolidated
separate account assets. Total yield-sensitive assets decreased 6.2 percent or
approximately $20.4 billion compared to 2011, primarily due to a net decrease in
fixed income securities and other fixed assets of $15.6 billion, and a decrease
in cash equivalents of $4.8 billion.
Exposures to equity and alternative investment prices include investments in
common stock, preferred stocks, mutual funds, hedge funds, private equity funds,
commercial real estate and real estate funds, but exclude consolidated separate
account assets. Total exposure in these areas decreased 30.3 percent or
approximately $11.8 billion in 2012 compared to 2011. This was primarily due to
a decrease of $12.4 billion related to our sale of AIA equity securities as well
as decreases in mutual fund values of $129 million and other equity investments
of $18 million. The decrease was partially offset by increases in other common
equity securities of $125 million, partnership values of $197 million and real
estate investments of $397 million.
Exposures to foreign currency exchange rates reflect our consolidated non-U.S.
dollar net capital investments on a GAAP basis. Foreign currency exchange rates
net exposure increased 53.7 percent or $3.2 billion in 2012 compared to 2011.
This was primarily due to an increase in British pound exposure of $1.7 billion
as a result of AIG Europe's foreign currency exchange hedging and investment
strategy, an increase in market value of fixed maturity securities of
$188 million as well as unrealized investment appreciation and positive results
from AIG Europe Ltd operations of $99 million. Other increases included: changes
in Canadian-dollar denominated unearned premium reserves of
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$378 million and a net increase of Canadian-dollar exposure of $92 million due
to unrealized investment appreciation and positive results from operations; Euro
exposure as a result of a reduction in euro-denominated debt outstanding of
$231 million, additional purchases of the AIRE real estate investment vehicle of
$109 million as well as unrealized investment appreciation and positive results
from operations at AIG Europe SA of $147 million; and a net increase across
currencies of $258 million.
For illustrative purposes, we modeled our sensitivities based on a 100 basis
point increase in yield curves, a 20 percent decline in equities and alternative
assets, and a 10 percent depreciation of all foreign currency exchange rates
against the U.S. dollar. This should not be taken as a prediction, but only as a
demonstration of the potential effects of such events.
The sensitivity factors utilized for 2012 and presented above were selected
based on historical data from 1992 to 2012, as follows (see the table below):
º •
º a 100 basis point parallel shift in the yield curve is consistent with a
one standard deviation movement of the benchmark ten-year treasury yield;
º •
º a 20 percent drop for equity and alternative investments is broadly
consistent with a one standard deviation movement in the S&P 500; and
º • º a 10 percent depreciation of foreign currency exchange rates is consistent
with a one standard deviation movement in the U.S. dollar (USD)/Japanese
Yen (JPY) exchange rate.
2012 Scenario 2012 as a Original 2011
as a Multiple 2012 Multiple Scenario (based on
Standard Suggested of Standard Change/ of Standard Standard Deviation for
Period Deviation 2012 Scenario Deviation Return Deviation 1990-2011 Period)
10-Year Treasury 1992-2012 0.01 0.01 0.99 - 0.11 0.01
S&P 500 1992-2012 0.19 0.20 1.07 0.13 0.72 0.20
USD/JPY 1992-2012 0.11 0.10 0.88 (0.11) 1.00 0.10
Liquidity Risk Management
Liquidity risk is defined as the risk that our financial condition will be
adversely affected by the inability or perceived inability to meet our
short-term cash, collateral or other financial obligations.
The failure to appropriately manage liquidity risk can result in reduced
operating flexibility, increased costs, and reputational harm. Because liquidity
is critically important, our liquidity governance includes a number of liquidity
and funding policies and monitoring tools to address both AIG-specific, broader
industry and market related liquidity events.
Sources of Liquidity risk can include, but are not limited to:
º •
º financial market movements - significant changes in interest rates can
provide incentives for policyholders to surrender their policies. Changes
in markets can impact collateral posting requirements or create difficulty
to liquidate assets at reasonable values to meet liquidity needs due to
unfavorable market conditions, inadequate market depth, or other investors
seeking to sell the same or similar assets;
º •
º potential reputational events or credit downgrade - changes can have an
impact on policyholder cancellations and withdrawals or impact collateral
posting requirements; and
º •
º catastrophic events, including natural and man-made disasters, can increase
policyholder claims
The principal objective of ERM's liquidity risk framework is to protect AIG's
liquidity position and identify a diversity of funding sources available to meet
actual and contingent liabilities during both normal and stress periods.
We have structured our consolidated risk target to maintain a minimum liquidity
buffer. AIG Parent liquidity risk tolerance levels are established for base and
stress scenarios over a two-year time horizon designed to ensure that funding
needs are met under varying market conditions. If we project that we will breach
the tolerance, we will assess and determine the appropriate liquidity management
actions. However, the market conditions in effect at that time may not permit us
to achieve an increase in liquidity sources or a reduction in liquidity
requirements.
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Additionally, each business unit is responsible for managing liquidity within a
framework designed for the measurement and monitoring of liquidity risks
inherent to the business. Current cash and liquidity positions are reviewed for
changes and against minimum liquidity levels. Future cash inflows and outflows
are tracked through cash flow forecasting. If the business unit projects a
breach of the minimum liquidity levels, the amount of required liquidity
resources will be identified and we will determine any actions to be taken.
Business unit level key indicators are assessed to provide advance warning of
potential liquidity risks.
Operational Risk Management
Operational risk is defined as the risk of loss resulting from inadequate or
failed internal processes, people, systems, or from external events. Operational
risk includes legal risk and reputational harm.
Operational risk is inherent in each of our business units and corporate
functions. It may extend beyond financial losses, including errors, fraudulent
acts, business interruptions, inappropriate behavior of employees, or vendors
that do not perform in accordance with agreed upon terms.
Our Operational Risk Management (ORM) function, which supports AIG's ORC has the
responsibility to provide an aggregate view of our operational risk profile. AIG
ORM oversees our Operational Risk policy and framework, which includes risk
identification, measurement, monitoring and reporting.
Each Business Unit is primarily responsible for managing its operational risks
and implementing the components of the operational risk management program. In
addition, certain control functions have been assigned accountability for
enterprise-wide risk management oversight for their respective areas. These
control functions include: Sarbanes-Oxley (SOX), Business Continuity Management
(BCM), Information Technology Security Risk, Compliance, and Vendor Management.
Senior business operational risk executives report to their respective business
unit chief risk officer and to the Head of our ORM. This reporting structure
enables a close alignment with the businesses while ensuring consistent
implementation of operational risk management practices.
A strong operational risk management program facilitates the identification and
mitigation of operational risk issues. In order to accomplish this, our
operational risk management program is designed to:
•
pro-actively address potential operational risk issues;
•
create transparency at all levels of the organization; and
•
assign clear ownership and accountability for addressing identified issues.
As part of the ORM framework, we use a risk and control self assessment (RCSA)
process to identify key operational risks and evaluate the effectiveness of
existing controls to mitigate those risks. Corrective action plans are developed
to address identified issues. Businesses are accountable for tracking and
resolving these issues. A standard RCSA approach is also followed firm-wide for
certain key risk processes (for example, SOX, IT Security Risk, Compliance,
Business Continuity Management and Vendor Management).
Operational risk management reporting to senior management and operational risk
governance committees provides awareness of operational risk exposures,
identifies key risks and facilitates management decision making. Reporting
includes RCSA information such as operational risk events, self-assessment
results and the status of issue resolution to senior management.
Insurance Operations Risks
Except as described above, we manage our business risk oversight activities
through our insurance operations.
Our insurance businesses are conducted on a global basis and expose us to a wide
variety of risks with different time horizons. We manage these risks throughout
the organization, both centrally and locally, through a number of procedures:
º •
º pre-launch approval of product design, development and distribution;
º •
º underwriting approval processes and authorities;
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º •
º exposure limits with ongoing monitoring;
º •
º modeling and reporting of aggregations and limit concentrations at multiple
levels (policy, line of business, product group, country, individual/group,
correlation and catastrophic risk events);
º •
º compliance with financial reporting and capital and solvency targets;
º •
º use of reinsurance, both internal and third-party; and
º •
º review and establishment of reserves.
We closely manage insurance risk by monitoring and controlling the nature and
geographic location of the risks in each line of business underwritten, the
terms and conditions of the underwriting and the premiums we charge for taking
on the risk. We analyze concentrations of risk using various modeling
techniques, including both probability distributions (stochastic) and
single-point estimates (deterministic) approaches.
Our major categories of insurance risks are:
º •
º Property and Casualty (AIG Property Casualty) - risks covered include
property, casualty, fidelity/surety, accident and health, aviation and
management liability. We manage risks in the general insurance segment through aggregations and limitations of concentrations at multiple levels:
policy, line of business, geography, industry and legal entity.
º •
º Domestic Life Insurance & Retirement Service (AIG Life and Retirement) -
risks include mortality and morbidity in the insurance-oriented products
and insufficient cash flows to cover contract liabilities in the retirement
savings-oriented products. We manage risks through product design, sound
medical underwriting, external traditional reinsurance programs and
external catastrophe reinsurance programs.
º • º Mortgage Guaranty (United Guaranty Corporation) - We manage risks in the
mortgage insurance business through geographic location of the insured
properties, the relative economic conditions in the local housing markets,
credit attributes of the borrowers, and the loan amount relative to the
value of the respective collateral.
We purchase reinsurance for our insurance operations. Reinsurance facilitates
insurance risk management (retention, volatility, concentrations) and capital
planning. We may purchase reinsurance on a pooled basis. Pooling of our
reinsurance risks enables us to purchase reinsurance more efficiently at a
consolidated level, manage global counterparty risk and relationships and manage
global catastrophe risks, both for AIG Property Casualty and AIG Life and
Retirement.
AIG Property Casualty Key Insurance Risks
A primary goal in managing our AIG Property Casualty operations is to achieve an
acceptable return on equity. To achieve this goal, we must be disciplined in
risk selection, premium adequacy, and appropriate terms and conditions to cover
the risk accepted.
We manage insurance risks through risk review and selection processes, exposure
limitations, exclusions, deductibles, self-insured retentions, coverage limits
and reinsurance. This management is supported by sound underwriting practices,
pricing procedures and the use of actuarial analysis to help determine overall
adequacy of provisions for insurance. Underwriting practices and pricing
procedures incorporate historical experience, current regulation and judicial
decisions as well as proposed or anticipated regulatory changes.
For AIG Property Casualty, insurance risks primarily emanate from the following:
º •
º Unpaid Loss and Loss Expense Reserves - The potential inadequacy of the
liabilities we establish for unpaid losses and loss expenses is a key risk
faced by AIG Property Casualty. There is significant uncertainty in factors
that may drive the ultimate development of losses compared to the estimates
of losses and loss expenses. We manage this uncertainty through internal
controls and oversight of the loss reserve setting process, as well as
reviews by external experts. See Item 1 Business - A review of Liability
for unpaid claims and claims adjustment expense herein for further details.
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º •
º Underwriting - The potential inadequacy of premium charged for risks
underwritten in our portfolios can impact AIG Property Casualty's ability
to achieve an underwriting profit. We develop pricing based on our
estimates of losses and expenses, but factors such as market pressures and
the inherent uncertainty and complexity in estimating losses may result in
premiums that are inadequate to generate underwriting profit.
º •
º Catastrophe Exposure - Our business is exposed to various catastrophic
events in which multiple losses can occur and affect multiple lines of
business in any calendar year. Natural disasters, such as hurricanes,
earthquakes and other catastrophes, have the potential to adversely affect
our operating results. Other risks, such as a man-made catastrophes or
pandemic disease, could also adversely affect our business and operating
results to the extent they are covered by our insurance products.
º •
º Reinsurance - Since we use reinsurance to limit our losses, we are exposed
to risks associated with reinsurance including the unrecoverability of
expected payments from reinsurers either due to an inability or
unwillingness to pay, contracts do not respond as we intended, or that
actual reinsurance coverage is different than anticipated.
Catastrophe Exposures
To control catastrophe exposure, we use a combination of techniques, including
setting key business unit limits based on an aggregate PML, monitoring and
modeling accumulated exposures, and purchasing catastrophe reinsurance to
supplement our other reinsurance protections. The majority of policies exposed
to catastrophic events are one-year contracts allowing us to quickly adjust our
exposure to catastrophic events if climate changes or other events increase the
frequency or severity of catastrophes.
We use industry recognized models and other tools to evaluate catastrophic
events and assess the probability and magnitude of such events. We periodically
monitor the exposure risks of our worldwide AIG Property Casualty operations and
adjust the models accordingly.
The following is an overview of modeled losses for AIG Property Casualty
exposure associated with the more significant natural perils. The modeled
results assume that all reinsurers fulfill their obligations to AIG in
accordance with their terms.
AIG Property Casualty utilizes industry recognized catastrophe models. The use
of different methodologies and assumptions could materially change the projected
losses. Therefore, these modeled losses may not be comparable to estimates made
by other companies. These estimates are inherently uncertain and may not reflect
our maximum exposures to these events. It is highly likely that our losses will
vary, perhaps significantly, from these estimates.
The modeled results provided in the table below were based on the Aggregate
Exceedance Probability (AEP) losses which represent total property, workers'
compensation, and A&H losses that may occur in any single year from one or more
natural events. The values provided were based on 100-year return period losses,
which have a one percent likelihood of being exceeded in any single year. The
A&H data include exposures for United States and Japan earthquakes. These
exposures represent the largest share of A&H exposures to earthquakes. A&H
losses were modeled using April 2010 data. The property exposures were modeled
with data as of September 2012. All reinsurance program structures, domestic and
international, reflect the reinsurance programs in place as of January 1, 2013.
Losses include loss adjustment expenses and the net values include reinstatement
premiums.
Net of 2013
At December 31, 2012 Net of 2013 Reinsurance, Percent of
(in millions) Gross Reinsurance After Tax Total Equity
Natural Peril:
Earthquake $ 5,884 $ 3,766 $ 2,448 2.48 %
Tropical Cyclone* $ 6,190 $ 3,546 $ 2,305 2.34 %
* Includes hurricanes, typhoons and European windstorms.
Gross earthquake and tropical cyclone modeled losses decreased $926 million and
$2.3 billion, respectively, compared to 2011, while net losses decreased
$335 million and $1.7 billion, respectively, compared to 2011. Changes in both
gross and net losses are primarily due to underwriting decisions to actively
manage catastrophe exposure in the United States.
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In addition to the aggregate return period loss, we evaluate potential single
event earthquake and hurricane losses. The single events utilized are a subset
of potential events identified and utilized by Lloyd's (see Lloyd's Realistic
Disaster Scenarios, Scenario Specifications, January 2013) and referred to as
Realistic Disaster Scenarios (RDS).
The purpose of this type of analysis is to provide a frame of reference and
context for the model results. The specific events used for this analysis do not
necessarily represent the worst case loss that we could incur from this type of
an event in these regions. The losses associated with the RDS are included in
the following table.
Single-event modeled property and workers' compensation losses and loss
adjustment expenses to AIG's worldwide portfolio of risk for key geographic
areas are shown below.
At December 31, 2012 Net of 2013
(in millions) Gross(a) Reinsurance(b)
Natural Peril:
Northeast Hurricane $ 3,706 $ 1,721
Gulf Coast Hurricane $ 3,703 $ 1,857
Los Angeles Earthquake $ 4,987 $ 2,886
San Francisco Earthquake $ 5,425 $ 2,977
Miami Hurricane $ 3,275 $ 1,093
Japanese Earthquake $ 1,542 $ 968
European Windstorm $ 802 $ 483
Japanese Typhoon $ 1,125 $ 577
(a) After the application of policy limits and deductibles.
(b) Calculated using the AIG reinsurance program in effect as at January 1,
2013, including reinstatement premiums. AIG's reinsurance program includes
industry loss warranty (ILW) contracts under which there is basis risk between
AIG's losses and the total industry loss. The net of reinsurance amount in the
table above includes a positive impact from these ILWs, which may not be
indicative of actual experience.
We also monitor key international property risks utilizing industry recognized
natural catastrophe models. Based on the occurrence exceedance probabilities,
the 100-year return period loss for Japanese Earthquake is $1.1 billion gross
and $885 million net; the 100-year return period loss for European Windstorm is
$575 million gross and $503 million net; and the 100-year return period loss for
Japanese Typhoon is $1.7 billion gross and $842 million net.
ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY, PERHAPS MATERIALLY, FROM THE
MODELED SCENARIOS. THE OCCURRENCE OF ONE OR MORE SEVERE EVENTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY. See also Item 1A. Risk Factors - Reserves and Exposures for
additional information.
Terrorism
We actively monitor terrorism risk and strive to control exposure to loss from
terrorist attack by limiting the aggregate accumulation insurance that is
underwritten in defined target locations. We use modeling to provide projections
of Probable Maximum Loss (PML) by target location based upon the actual
exposures of our policyholders.
We also share our exposures to terrorism risks under the Terrorism Risk
Insurance Program Reauthorization Act of 2007 (TRIPRA). TRIPRA covers terrorist
attacks in the United States only and excludes, as specified by applicable law,
certain commercial lines of business as well as A&H, group life and personal
lines. In 2012 and beginning January 1, 2013, our deductible under TRIPRA was
approximately $3.0 billion and $2.8 billion, respectively, with a 15 percent
coinsurance retention of certified terrorism losses in excess of the deductible
for each period.
We offer terrorism coverage in many other countries through various insurance
products and participate in country terrorism pools when applicable.
International terrorism exposure is managed through active aggregation control
and targeted reinsurance purchases for lines of business such as commercial
property, political risk, aviation and A&H.
Reinsurance Recoverables
AIG's reinsurance recoverable assets are comprised of:
º •
º Paid losses recoverable - balances due from reinsurers for losses and loss
expenses paid by our subsidiaries and billed, but not yet collected.
º •
º Ceded loss reserves - ultimate ceded reserves for losses and loss expenses,
including reserves for claims reported but not yet paid and estimates for
IBNR.
º •
º Ceded reserves for unearned premiums.
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At December 31, 2012, total reinsurance recoverable assets were $25.6 billion.
These assets include general reinsurance paid losses recoverable of
$1.3 billion, ceded loss reserves of $19.2 billion including reserves for
incurred but not reported (IBNR) claims, and ceded reserves for unearned
premiums of $3.6 billion, as well as life reinsurance recoverables of
$1.5 billion. The methods used to estimate IBNR and to establish the resulting
ultimate losses involve projecting the frequency and severity of losses over
multiple years. These methods are continually reviewed and updated by
management. Any adjustments are reflected in income. We believe that the amount
recorded for ceded loss reserves at December 31, 2012 reflect a reasonable
estimate of the ultimate losses recoverable. Actual losses may, however, differ
from the reserves currently ceded.
The Reinsurance Credit Department (RCD) conducts periodic detailed assessments
of the financial strength and condition of current and potential reinsurers,
both foreign and domestic. The RCD monitors both the financial condition of
reinsurers as well as the total reinsurance recoverable ceded to reinsurers, and
set limits with regard to the amount and type or exposure we are willing to take
with reinsurers. As part of these assessments, we attempt to identify whether a
reinsurer is appropriately licensed, assess its financial capacity and
liquidity; and evaluate the local economic and financial environment in which a
foreign reinsurer operates. The RCD reviews the nature of the risks ceded and
the need for measures, including collateral to mitigate credit risk. For
example, in our treaty reinsurance contracts, we frequently include provisions
that require a reinsurer to post collateral or use other measures to reduce
exposure when a referenced event occurs. Furthermore, we limit our unsecured
exposure to reinsurers through the use of credit triggers such as insurer
financial strength rating downgrades, declines in regulatory capital, or
relevant risk-based capital (RBC) ratios fall below certain levels. We also set
maximum limits for reinsurance recoverable exposure, which in some cases is the
recoverable amount plus an estimate of the maximum potential exposure from
unexpected events for a reinsurer. In addition, credit executives within ERM
review reinsurer exposures and credit limits and approve reinsurer credit limits
above specified levels. Finally, even where we conclude that uncollateralized
credit risk is acceptable, we require collateral from active reinsurance
counterparties where it is necessary for our subsidiaries to recognize the
reinsurance recoverable assets for statutory accounting purposes. At
December 31, 2012, we held $8.6 billion of collateral, in the form of funds
withheld, securities in reinsurance trust accounts and/or irrevocable letters of
credit, in support of reinsurance recoverable assets from unaffiliated
reinsurers. We believe that no exposure to a single reinsurer represents an
inappropriate concentration of risk to AIG, nor is our business substantially
dependent upon any single reinsurance contract.
The following table presents information for each reinsurer representing in
excess of five percent of our total reinsurance recoverable assets:
At December 31, 2012 A.M. Gross Percent of Uncollateralized
S&P Best Reinsurance Reinsurance Collateral Reinsurance
(in millions) Rating(a) Rating(a) Assets Assets(b) Held(c) Assets
Reinsurer:
Berkshire Hathaway Group of
Companies AA + A ++ $ 2,185 (d) 8.5 % $ 1,648 $ 537
Munich Reinsurance Group of
Companies AA - A + $ 1,771 6.9 % $ 813 $ 958
Swiss Reinsurance Group of
Companies AA - A + $ 1,727 6.8 % $ 565 $ 1,162
(a) The financial strength ratings reflect the ratings of the various
reinsurance subsidiaries of the companies listed as of February 6, 2013.
(b) Total reinsurance assets include both Property Casualty and Life and
Retirement reinsurance recoverable.
(c) Excludes collateral held in excess of applicable treaty balances.
(d) Includes $1.6 billion recoverable under the 2011 transaction pursuant to
which a large portion of AIG Property Casualty's net domestic asbestos
liabilities were transferred to NICO. Does not include reinsurance assets ceded
to other reinsurers for which NICO has assumed the collection risk. See
Liability for Unpaid Claims and Claim Adjustment Expenses - Transfer of Domestic
Asbestos Liabilities.
The estimation of reinsurance recoverables involves a significant amount of
judgment, particularly for asbestos exposures, due to their long-tail nature. We
assess the collectability of its reinsurance recoverable balances through
detailed reviews of the underlying nature of the reinsurance balance, including:
º •
º paid and unpaid recoverable;
º •
º whether the balance is in dispute or a legal collection status;
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º •
º whether the reinsurer is financially troubled (i.e., liquidated, insolvent,
in receivership or otherwise subject to formal or informal regulatory
restriction);
º •
º whether collateral and collateral arrangements exist; and
º •
º the credit quality of the underlying reinsurer.
We record adjustments to reflect the results of the detailed review through an
allowance for uncollectable reinsurance. At December 31, 2012, the allowance for
estimated unrecoverable reinsurance was $338 million. At December 31, 2012, we
had no significant general reinsurance recoverables due from any individual
reinsurer that was financially troubled. In the current environment of weaker
economic conditions and strained financial markets, certain reinsurers are
reporting losses and could be subject to rating downgrades. Our reinsurance
recoverable exposures are primarily to the regulated subsidiaries of such
companies which are subject to minimum regulatory capital requirements. The RCD,
in conjunction with the credit executives within ERM, reviews these
developments, monitors compliance with credit triggers that may require the
reinsurer to post collateral, and will seek to use other appropriate means to
mitigate any material risks arising from these developments. See Note 9 to the
Consolidated Financial Statements for additional information on reinsurance.
AIG Life and Retirement Key Insurance Risks
For AIG Life and Retirement, the primary risks are the following:
º •
º Pricing risk - represents the potential exposure to loss if actual policy
experience emerges adversely in comparison to the assumptions made in
product pricing. These assumptions include investment results, mortality,
morbidity, surrenders, other observed policyholder behavior and expenses;
º •
º Investment risk - represents the exposure to loss if the cash flows from
the invested assets are less than required to meet the obligations of the
expected policy and contract liabilities and the necessary return on
investments;
º • º Interest rate risk - represents the exposure to loss due to the sensitivity
of the liabilities and assets to changes in interest rates; and
º •
º Equity market risk - represents the potential exposure to higher claim
costs for guaranteed benefits associated with variable annuities and the
potential reduction in expected fee revenue.
AIG Life and Retirement manages these risks through product design, exposure
limitations and active management of the relationships between assets and
liabilities. The emergence of significant adverse experience would require an
adjustment to DAC and benefit reserves which could have a material adverse
effect on our consolidated results of operations for a particular period. For a
further discussion of this risk, see Item 1A. Risk Factors - Business and
Operations.
AIG Life and Retirement companies generally limit their maximum underwriting
exposure on life insurance of a single life to $15 million or less of coverage.
In certain circumstances, this is achieved by using yearly renewable term
reinsurance. For the AIG Life and Retirement companies, the reinsurance programs
provide risk mitigation per life for individuals and group and for catastrophic
risk events.
United Guaranty Corporation Key Insurance Risks
For United Guaranty Corporation (UGC), risks emanate primarily from the
following:
º •
º Residential Housing Market risk - represents the potential exposure to loss
due to borrower default on a first-lien residential mortgage; the primary
drivers of this risk are home price depreciation, changes in the
unemployment rate, changes in mortgage rates, and a borrower's willingness
to pay.
º •
º Pricing risk - represents the potential exposure to loss if actual policy
experience emerges adversely in comparison to the assumptions made in
product pricing. This may be related to adverse economic conditions,
prepayment of policies, investment results, and expenses;
UGC manages the quality of the loans it insures through use of a proprietary
risk quality index. UGC uses this index to determine an insurability threshold
as well as to manage the risk distribution of its new business. Along with
traditional mortgage underwriting variables, UGC's risk-based pricing model uses
rating factors such as geography and the quality of a lender's origination
process to establish premium rates.
UGC's risk appetite statement establishes various concentration limits on the
business UGC insures (for example, geography), and defines underwriting
characteristics for which UGC will not insure loans.
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Other Operations
Global Capital Markets
GCM actively manages its exposures to limit potential economic losses, and in
doing so, GCM must continually manage a variety of exposures including credit,
market, liquidity, operational and legal risks. The senior management of AIG
defines the policies and establishes general operating parameters for GCM's
operations. Our senior management has established various oversight committees
to regularly monitor various financial market, operational and credit risks
related to GCM's operations. The senior management of GCM reports the results of
its operations to and reviews future strategies with AIG's senior management.
GCM Derivative Transactions
A counterparty may default on any obligation to us, including a derivative
contract. Credit risk is a consequence of extending credit and/or carrying
trading and investment positions. Credit risk exists for a derivative contract
when that contract has a positive fair value to AIG. The maximum potential
exposure will increase or decrease during the life of the derivative commitments
as a function of maturity and market conditions. To help manage this risk, GCM's
credit department operates within the guidelines set by the credit function
within ERM. Transactions that fall outside these pre-established guidelines
require the specific approval of the ERM. It is also AIG's policy to record
credit valuation adjustments for potential counterparty default when necessary.
In addition, GCM utilizes various credit enhancements, including letters of
credit, guarantees, collateral, credit triggers, credit derivatives, margin
agreements and subordination to reduce the credit risk relating to its
outstanding financial derivative transactions. GCM requires credit enhancements
in connection with specific transactions based on, among other things, the
creditworthiness of the counterparties, and the transaction's size and maturity.
Furthermore, GCM generally seeks to enter into agreements that have the benefit
of set-off and close-out netting provisions. These provisions provide that, in
the case of an early termination of a transaction, GCM can set off its
receivables from a counterparty against its payables to the same counterparty
arising out of all covered transactions. As a result, where a legally
enforceable netting agreement exists, the fair value of the transaction with the
counterparty represents the net sum of estimated fair values.
The fair value of GCM's interest rate, currency, credit, commodity and equity
swaps, options, swaptions, and forward commitments, futures, and forward
contracts reported in Derivative assets, at fair value, was approximately
$3.2 billion at December 31, 2012 and $3.9 billion at December 31, 2011. Where
applicable, these amounts have been determined in accordance with the respective
master netting agreements.
GCM evaluates the counterparty credit quality by reference to ratings from
rating agencies or, where such ratings are not available, by internal analysis
consistent with the risk rating policies of the ERM. In addition, GCM's credit
approval process involves pre-set counterparty and country credit exposure
limits subject to approval by the ERM and, for particularly credit-intensive
transactions, requires approval from the ERM.
The following table presents the fair value of GCM's derivatives portfolios by
counterparty credit rating:
At December 31,
(in millions) 2012 2011
Rating:
AAA $ 145 $ 260
AA 168 58
A 745 1,218
BBB 1,907 2,081
Below investment grade 199 247
Total $ 3,164 $ 3,864
See Critical Accounting Estimates below and Note 12 to the Consolidated
Financial Statements for additional discussion related to derivative
transactions.
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Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires the
application of accounting policies that often involve a significant degree of
judgment.
The accounting policies that we believe are most dependent on the application of
estimates and assumptions, which are critical accounting estimates, are related
to the determination of:
•
classification of ILFC as held for sale;
•
insurance liabilities, including property and casualty and mortgage guaranty
unpaid claims and claims adjustment expenses and future policy benefits for life
and accident and health contracts;
•
income tax assets and liabilities, including recoverability of our net deferred
tax asset and the predictability of future tax operating profitability of the
character necessary to realize the net deferred tax asset;
•
recoverability of assets including reinsurance assets;
•
estimated gross profits for investment-oriented products;
•
impairment charges, including other-than-temporary impairments of financial
instruments and goodwill impairments;
•
liabilities for legal contingencies; and
•
fair value measurements of certain financial assets and liabilities.
See Note 1 to Consolidated Financial Statements for additional information.
These accounting estimates require the use of assumptions about matters, some of
which are highly uncertain at the time of estimation. To the extent actual
experience differs from the assumptions used, our consolidated financial
condition, results of operations and cash flows could be materially affected.
The major categories for which assumptions are developed and used to establish
each critical accounting estimate are highlighted below.
Classification of ILFC as Held for Sale
We report a business as held for sale when management has approved or received
approval to sell the business and is committed to a formal plan, the business is
available for immediate sale, the business is being actively marketed, the sale
is anticipated to occur during the next 12 months, which may require significant
judgment, and certain other specified criteria are met. A business classified as
held for sale is recorded at the lower of its carrying amount or estimated fair
value less cost to sell. If the carrying amount of the business exceeds its
estimated fair value, a loss is recognized.
On December 9, 2012, we entered into a definitive agreement with Jumbo
Acquisition Limited for the sale of 80.1 percent of the common stock of ILFC for
approximately $4.23 billion in cash. Jumbo Acquisition Limited may elect to
purchase an additional 9.9 percent of the common stock of ILFC for
$522.5 million (the Option) by the later of March 15, 2013 and ten days after
approval of the ILFC Transaction and the Option by the Committee on Foreign
Investment in the United States. The transaction is subject to required
regulatory approvals and other customary closing conditions. We determined ILFC
met the criteria at December 31, 2012 for held for sale accounting and,
consequently, we recorded a $4.4 billion after tax loss for the year ended
December 31, 2012, which is reported in Income (loss) from discontinued
operations in the Consolidated Statement of Operations.
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Recoverability of Net Deferred Tax Asset
The evaluation of the recoverability of our net deferred tax asset and the need
for a valuation allowance requires us to weigh all positive and negative
evidence to reach a conclusion that it is more likely than not that all or some
portion of the net deferred tax asset will not be realized. The weight given to
the evidence is commensurate with the extent to which it can be objectively
verified. The more negative evidence that exists, the more positive evidence is
necessary and the more difficult it is to support a conclusion that a valuation
allowance is not needed.
We take a number of factors into account in order to reliably estimate future
taxable income, so that we can determine the extent of our ability to realize
net operating losses (NOLs), foreign tax credits (FTCs) and nonlife capital loss
carryforwards. These factors include forecasts of future income for each of our
businesses, actual and planned business and operational changes, which includes
assumptions about future macroeconomic and AIG-specific conditions and events.
We also subject the forecasts to stresses of key assumptions and evaluate the
effect on tax attribute utilization. We also apply stresses to our assumptions
about the effectiveness of relevant prudent and feasible tax planning
strategies. Our income forecasts, coupled with our tax planning strategies and
stressed scenarios, all resulted in sufficient taxable income to achieve
realization of the tax attributes (other than life-insurance-business capital
loss carryforwards) prior to their expiration.
For additional discussion of the recoverability of our net deferred tax asset,
see Note 24 to the Consolidated Financial Statements.
U.S. Income Taxes on Earnings of Certain Foreign Subsidiaries
The U.S. federal income tax laws applicable to determining the amount of income
taxes related to differences between the book carrying values and tax bases of
subsidiaries are complex. Determining the amount also requires significant
judgment and reliance on reasonable assumptions and estimates.
Liability for Unpaid Claims and Claims Adjustment Expenses (AIG Property
Casualty and Mortgage Guaranty)
The estimate of Unpaid Claims and Claims Adjustment Expenses consists of several
key judgments:
º •
º the determination of the actuarial models used as the basis for these
estimates;
º •
º the relative weights given to these models by class;
º •
º the underlying assumptions used in these models; and
º • º the determination of the appropriate groupings of similar classes and, in
some cases, the segmentation of dissimilar claims within a class.
We use numerous assumptions in determining the best estimate of reserves for
each class of business. The importance of any specific assumption can vary by
both class of business and accident year. Because actual experience can differ
from key assumptions used in establishing reserves, there is potential for
significant variation in the development of loss reserves. This is particularly
true for long-tail casualty classes of business such as excess casualty,
asbestos, D&O, and primary or excess workers' compensation.
All of our methods to calculate net reserves include assumptions about estimated
reinsurance recoveries and their collectability. Reinsurance collectability is
evaluated independently of the reserving process and appropriate allowances for
uncollectible reinsurance are established.
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In some of our estimation processes we rely on the claims department estimates
of our case reserves as an input to our best estimate of the ultimate loss cost.
Overview of Loss Reserving Process and Methods
AIG Property Casualty loss reserves can generally be categorized into two
distinct groups. Short-tail classes of business consist principally of property,
personal lines and certain casualty classes. Long-tail casualty classes of
business include excess and umbrella liability, D&O, professional liability,
medical malpractice, workers' compensation, general liability, products
liability and related classes.
Short-Tail Reserves
For operations writing short-tail coverages, such as property coverages, the
process of recording quarterly loss reserves is generally geared toward
maintaining an appropriate reserve for the outstanding exposure, rather than
determining an expected loss ratio for current business. For example, the IBNR
reserve required for a class of property business might be expected to
approximate 20 percent of the latest year's earned premiums. This level of
reserve would generally be maintained regardless of the loss ratio emerging in
the current quarter. The 20 percent factor would be adjusted to reflect changes
in rate levels, loss reporting patterns, known exposure to unreported losses, or
other factors affecting the particular class of business. For some classes, a
loss development factor method may be used.
Long-Tail Reserves
Estimation of ultimate net losses and loss expenses (net losses) for To estimate net losses for
long-tail casualty classes of business is a complex process and long-tail casualty classes of
depends on a number of factors, including the class and volume of business, we use a variety of
business, as well as estimates of the reinsurance recoverable. actuarial methods and
Experience in the more recent accident years shows limited
assumptions.
statistical credibility in reported net losses on long-tail casualty
classes of business. That is because a relatively low proportion of
net incurred losses represent reported claims and expenses, and an
even smaller percentage represent net losses paid. Therefore, IBNR
constitutes a relatively high proportion of net losses.
To estimate net losses for long-tail casualty classes of business, we use a
variety of actuarial methods and assumptions and other analytical techniques as
described below. A detailed reserve review is generally performed at least once
per year to allow for comprehensive actuarial evaluation and collaboration with
claims, underwriting, business unit management, risk management and senior
management.
We generally make a number of actuarial assumptions in the review of reserves
for each class of business.
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For longer-tail classes of business, we generally make actuarial assumptions
with respect to the following:
•
Loss cost trend factors which are used to establish expected loss ratios for
subsequent accident years based on the projected loss ratios for prior accident
years.
•
Expected loss ratios for the latest accident year (i.e., accident year 2012 for
the year-end 2012 loss reserve analysis) and, in some cases for accident years
prior to the latest accident year. The expected loss ratio generally reflects
the projected loss ratio from prior accident years, adjusted for the loss trend
and the effect of rate changes and other quantifiable factors on the loss
ratio. For low-frequency, high-severity classes such as excess casualty,
expected loss ratios generally are used for at least the three most recent
accident years.
•
Loss development factors which are used to project the reported losses for each
accident year to an ultimate basis. Generally, the actual loss development
factors observed from prior accident years would be used as a basis to
determine the loss development factors for the subsequent accident years.
We record quarterly changes in loss reserves for each of AIG Property Casualty's
classes of business. The overall change in our loss reserves is based on the sum
of the changes for all classes of business. For most long-tail classes of
business, the quarterly loss reserve changes are based on the estimated current
loss ratio for each class of coverage less any amounts paid. Also, any change in
estimated ultimate losses from prior accident years deemed to be necessary based
on the results of our latest reserve studies or large loss analysis, either
positive or negative, is reflected in the loss reserve for the current quarter.
Details of the Loss Reserving Process
The process of determining the current loss ratio for each class of business is
based on a variety of factors. These include considerations such as: prior
accident year and policy year loss ratios; rate changes; and changes in
coverage, reinsurance, or mix of business. Other considerations include actual
and anticipated changes in external factors such as trends in loss costs or in
the legal and claims environment. The current loss ratio for each class of
business is intended to represent our best estimate of the current loss ratio
after reflecting all of the relevant factors. At the close of each quarter, the
assumptions underlying the loss ratios are reviewed to determine if the loss
ratios remain appropriate. This process includes a review of the actual claims
experience in the quarter, actual rate changes achieved, actual changes in
coverage, reinsurance or mix of business, and changes in other factors that may
affect the loss ratio. When this review suggests that the initially determined
loss ratio is no longer appropriate, the loss ratio for current business is
changed to reflect the revised assumptions.
We conduct a comprehensive loss reserve review at least annually for each AIG
Property Casualty subsidiary and class of business. The reserve analysis for
each class of business is performed by the actuarial personnel who are most
familiar with that class of business. In this process, the actuaries are
required to make numerous assumptions, including the selection of loss
development factors and loss cost trend factors. They are also required to
determine and select the most appropriate actuarial methods for each business
class. Additionally, they must determine the segmentation of data that will
enable the most suitable test of reserve adequacy. In the course of these
detailed reserve reviews an actuarial central estimate of the loss reserve is
determined. The sum of these central estimates for each class of business
provides an overall actuarial central estimate of the loss reserve for that
class.
In 2012, the third party actuarial reviews covered the majority of reserves held
for our US Commercial long-tail classes of business, the majority of our US
Consumer classes of business and included several material international
Commercial and Consumer classes of business. In addition we consulted with third
party environmental litigation and engineering specialists, third party toxic
tort claims professionals, third party clinical and public health specialists,
third party workers' compensation claims adjusters and third party actuarial
advisors to corroborate our conclusions.
In 2011 we significantly expanded the scope of our 2010 third-party actuarial
reviews to cover a larger number of U.S. and international classes of business
from the more complex reserves of long-tail classes of business. In 2010,
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third-party actuarial reserve reviews were generally limited to certain U.S.
long-tail lines of business and were concentrated in the fourth quarter of 2010.
These detailed reviews are conducted for each class of business for each
subsidiary, and consist of hundreds of individual analyses.
In determining the actual carried reserves, we consider both the internal
actuarial central estimate and numerous other internal and external factors,
including:
•
an assessment of economic conditions;
•
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 including attachment points and
policy limits;
•
claims handling processes and enhancements; and
•
third-party actuarial reviews that are periodically performed for key classes of
business.
Loss reserve development can also be affected by commutations of assumed and
ceded reinsurance agreements.
Actuarial and Other Methods for Major Classes of Business
In testing the reserves for each class of business, our actuaries determine the
most appropriate actuarial methods. This determination is based on a variety of
factors including the nature of the claims associated with the class of
business, such as the frequency or severity of the claims. Other factors
considered include the loss development characteristics associated with the
claims, the volume of claim data available for the applicable class, and the
applicability of various actuarial methods to the class. In addition to
determining the actuarial methods, the actuaries determine the appropriate loss
reserve groupings of data. For example, we write many unique subclasses of
professional liability. For pricing or other purposes, it is appropriate to
evaluate the profitability of each subclass individually. However, for purposes
of estimating the loss reserves for professional liability, we believe it is
appropriate to combine the subclasses into larger groups to produce a greater
degree of credibility in the claims experience. This determination of data
segmentation and actuarial methods is carefully considered for each class of
business. The segmentation and actuarial methods chosen are those which together
are expected to produce the most robust estimate of the loss reserves.
The actuarial methods we use for most long-tail casualty classes of business
include loss development methods, expected loss ratio methods, including
"Bornhuetter Ferguson" methods described below, and frequency/severity models.
Loss development methods utilize the actual loss development patterns from prior
accident years to project the reported losses to an ultimate basis for
subsequent accident years. Loss development methods generally are most
appropriate for classes of business which exhibit a stable pattern of loss
development from one accident year to the next, and for which the components of
the classes have similar development characteristics. For example, property
exposures would generally not be combined into the same class as casualty
exposures, and primary casualty exposures would generally not be combined into
the same class as excess casualty exposures. We generally use expected loss
ratio methods in cases where the reported loss data lacks sufficient credibility
to utilize loss development methods, such as for new classes of business or for
long-tail classes at early stages of loss development. Frequency/severity models
may be used where sufficient frequency counts are available to apply such
approaches.
Expected loss ratio methods rely on the application of an expected loss ratio to
the earned premium for the class of business to determine the loss reserves. For
example, an expected loss ratio of 70 percent applied to an earned premium base
of $10 million for a class of business would generate an ultimate loss estimate
of $7 million. Subtracting any reported paid losses and loss expense would
result in the indicated loss reserve for this class. Under the "Bornhuetter
Ferguson" methods, the expected loss ratio is applied only to the expected
unreported portion of the losses. For example, for a long-tail class of business
for which only 10 percent of the losses are expected to be reported at the end
of the accident year, the expected loss ratio would be applied to the 90 percent
of the losses still unreported. The actual reported losses at the end of the
accident year would be added to determine the total ultimate loss estimate for
the accident year. Subtracting the reported paid losses and loss expenses would
result in the indicated loss reserve. In the example above, the expected loss
ratio of 70 percent would be multiplied by
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90 percent. The result of 63 percent would be applied to the earned premium of
$10 million resulting in an estimated unreported loss of $6.3 million. Actual
reported losses would be added to arrive at the total ultimate losses. If the
reported losses were $1 million, the ultimate loss estimate under the
"Bornhuetter Ferguson" method would be $7.3 million versus the $7 million amount
under the expected loss ratio method described above. Thus, the "Bornhuetter
Ferguson" method gives partial credibility to the actual loss experience to date
for the class of business. Loss development methods generally give full
credibility to the reported loss experience to date. In the example above, loss
development methods would typically indicate an ultimate loss estimate of
$10 million, as the reported losses of $1 million would be estimated to reflect
only 10 percent of the ultimate losses.
A key advantage of loss development methods is that they respond quickly to any
actual changes in loss costs for the class of business. Therefore, if loss
experience is unexpectedly deteriorating or improving, the loss development
method gives full credibility to the changing experience. Expected loss ratio
methods would be slower to respond to the change, as they would continue to give
more weight to the expected loss ratio, until enough evidence emerged to modify
the expected loss ratio to reflect the changing loss experience. On the other
hand, loss development methods have the disadvantage of overreacting to changes
in reported losses if the loss experience is not credible. For example, the
presence or absence of large losses at the early stages of loss development
could cause the loss development method to overreact to the favorable or
unfavorable experience by assuming it will continue at later stages of
development. In these instances, expected loss ratio methods such as
"Bornhuetter Ferguson" have the advantage of recognizing large losses without
extrapolating unusual large loss activity onto the unreported portion of the
losses for the accident year.
Frequency/severity methods generally rely on the determination of an ultimate
number of claims and an average severity for each claim for each accident year.
Multiplying the estimated ultimate number of claims for each accident year by
the expected average severity of each claim produces the estimated ultimate loss
for the accident year. Frequency/severity methods generally require a sufficient
volume of claims in order for the average severity to be predictable. Average
severity for subsequent accident years is generally determined by applying an
estimated annual loss cost trend to the estimated average claim severity from
prior accident years. In certain cases, a structural approach may also be used
to predict the ultimate loss cost. Frequency/severity methods have the advantage
that ultimate claim counts can generally be estimated more quickly and
accurately than can ultimate losses. Thus, if the average claim severity can be
accurately estimated, these methods can more quickly respond to changes in loss
experience than other methods. However, for average severity to be predictable,
the class of business must consist of homogeneous types of claims for which loss
severity trends from one year to the next are reasonably consistent. Generally
these methods work best for high frequency, low severity classes of business
such as personal auto.
Structural drivers analytics seek to explain the underlying drivers of
frequency/severity. A structural drivers analysis of frequency/severity is
particularly useful for understanding the key drivers of uncertainty in the
ultimate loss cost. For example, for the excess workers' compensation class of
business, we have attempted to corroborate our judgment by considering the
impact on severity of the future propensity for deterioration of an injured
worker's medical condition, the impact of price inflation on the various
categories of medical expense and cost of living adjustments on indemnity
benefits, the impact of injured worker mortality and claim specific settlement
and loss mitigation strategies, etc., using the following:
º •
º Claim by claim reviews to determine the stability and likelihood of
settling an injured worker's indemnity and medical benefits - the claim
file review was facilitated by a third party expert experienced in workers'
compensation claims;
º •
º Analysis of the potential for future deterioration in medical condition
unlikely to be picked up by a claim file review and associated with
potentially costly medical procedures (i.e., increases in both utilization
and intensity of medical care) over the course of the injured worker's
lifetime;
º •
º Analysis of the cost of medical price inflation for each category of medical spend (services and devices) and for cost of living adjustments in
line with statutory requirements;
º •
º Portfolio specific mortality level and mortality improvement assumptions
based on a mortality study conducted for AIG's primary and excess workers'
compensation portfolios and AIG's opinion of future longevity trends for
the open reported cases;
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º •
º Ground-up consideration of the reinsurance recoveries expected for the
class of business for reported claims with extrapolation for unreported
claims;
º •
º The effects of various runoff claims management strategies that have been
developed by AIG's newly created run-off unit.
Overall, our loss reserve reviews for long-tail classes typically utilize a
combination of both loss development and expected loss ratio methods,
supplemented by structural drivers analysis of frequency/severity where
available. Loss development methods are generally given more weight for accident
years and classes of business where the loss experience is highly credible.
Expected loss ratio methods are given more weight where the reported loss
experience is less credible, or is driven more by large losses. Expected loss
ratio methods require sufficient information to determine the appropriate
expected loss ratio. This information generally includes the actual loss ratios
for prior accident years, and rate changes as well as underwriting or other
changes which would affect the loss ratio. Further, an estimate of the loss cost
trend or loss ratio trend is required in order to allow for the effect of
inflation and other factors which may increase or otherwise change the loss
costs from one accident year to the next.
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. This is 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 or have expanded
theories of liability. In addition, reinsurance recoverable balances relating to
asbestos and environmental loss reserves are subject to greater uncertainty due
to the underlying age of the claim, underlying legal issues surrounding the
nature of the coverage, and determination of proper policy period. For these
reasons, these balances tend to be subject to increased levels of disputes and
legal collection activity when actually billed. The insurance industry as a
whole is engaged in extensive litigation over these coverage and liability
issues and is thus confronted with a continuing uncertainty in its efforts to
quantify these exposures.
We continue to receive claims asserting injuries and damages from toxic waste,
hazardous substances, and other environmental pollutants and alleged claims to
cover the cleanup costs of hazardous waste dump sites, referred to collectively
as environmental claims, and indemnity claims asserting injuries from asbestos.
The vast majority of these asbestos and environmental claims emanate from
policies written in 1984 and prior years. Commencing in 1985, standard policies
contained an absolute exclusion for pollution-related damage. An absolute
asbestos exclusion was also implemented. The current AIG Property Casualty
Environmental policies that we specifically price and underwrite for
environmental risks on a claims-made basis have been excluded from the analysis.
The majority of our exposures for asbestos and environmental claims are excess
casualty coverages, not primary coverages. The litigation costs are treated in
the same manner as indemnity amounts, with litigation expenses included within
the limits of the liability we incur. Individual significant claim liabilities,
where future litigation costs are reasonably determinable, are established on a
case-by-case basis.
Reserve Estimation for Asbestos and Environmental Claims
Estimation of asbestos and environmental claims loss reserves is a subjective
process. Reserves for asbestos and environmental claims cannot be estimated
using conventional reserving techniques such as those that rely on historical
accident year loss development factors. The methods used to determine asbestos
and environmental loss estimates and to establish the resulting reserves are
continually reviewed and updated by management.
Various factors contribute to the complexity and difficulty in determining the
future development of asbestos and environmental claims. Significant factors
that influence the asbestos and environmental claims estimation process include
court resolutions and judicial interpretations which broaden the intent of the
policies and scope of coverage. The current case law can be characterized as
still evolving, and there is little likelihood that any firm direction will
develop in the near future. Additionally, the exposures for cleanup costs of
hazardous waste dump sites involve issues such as allocation of responsibility
among potentially responsible parties and the government's refusal to release
parties from liability. Future claims development also will be affected by the
changes in Superfund and waste dump site coverage and liability issues.
If the asbestos and environmental reserves develop deficiently, resulting
deficiencies could have an adverse effect on our future results of operations
for an individual reporting period.
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With respect to known environmental claims, we established over two decades ago
a specialized environmental claims unit, which investigates and adjusts all such
environmental claims. This unit evaluates environmental claims utilizing a
claim-by-claim approach that involves a detailed review of individual policy
terms and exposures. Because each policyholder presents different liability and
coverage issues, we generally evaluate exposure on a policy-by-policy basis,
considering a variety of factors such as known facts, current law, jurisdiction,
policy language and other factors that are unique to each policy. Quantitative
techniques must be supplemented by subjective considerations, including
management judgment. Each claim is reviewed at least semi-annually utilizing the
aforementioned approach and adjusted as necessary to reflect the current
information.
The environmental claims unit also actively manages and pursues early resolution
with respect to these claims in an attempt to mitigate its exposure to the
unpredictable development of these claims. We attempt to mitigate our known
long-tail environmental exposures through a combination of proactive
claim-resolution techniques, including policy buybacks, complete environmental
releases, compromise settlements, and, when appropriate, litigation.
Known asbestos claims are managed in a similar manner. Over two decades ago we
established a specialized toxic tort claims unit, which historically
investigated and adjusted all such asbestos claims. As part of the above
mentioned NICO transaction, effective January 1, 2011, NICO assumed
responsibility for claims handling related to the majority of AIG's domestic
asbestos liabilities.
The following is a discussion of actuarial methods applied by major class of
business:
Class of Business or Category and Actuarial Method Application of Actuarial Method
-------------------------------------------------- -------------------------------------
Excess Casualty
We generally use a combination of loss development Expected loss ratio methods are
methods and expected loss ratio methods for excess generally used for at least the three
casualty classes. latest accident years, due to the
Frequency/severity methods are generally not used relatively low credibility of the
in isolation to determine ultimate loss costs as reported losses. The loss experience
the vast majority of reported claims do not result is generally reviewed separately for
in claim payment. (However, frequency/severity lead umbrella classes and for other
methods assist in the regular monitoring of the excess classes, due to the relatively
adequacy of carried reserves to support incurred shorter tail for lead umbrella
but not reported claims). In addition, the average business. Automobile-related claims
severity varies significantly from accident year are generally reviewed separately
to accident year due to large losses which from non-auto claims, due to the
characterize this class of business, as well as shorter-tail nature of the
changing proportions of claims which do not result automobile-related claims. Claims
in a claim payment. In order to gain more relating to certain latent exposures
stability in the projection, the claims amenable such as construction defects or
to loss development methods are analyzed in two exhaustion of underlying product
layers: the layer capped at $10 million and the aggregate limits are reviewed
layer above $10 million. The expected loss ratio separately due to the unique
for the layer above $10 million is derived from emergence patterns of losses relating
the expected relationship between the layers, to these claims. The expected loss
reflecting the attachment point and limit by ratios used for recent accident years
accident year. are based on the projected ultimate
In addition, we leverage case reserving based loss ratios of prior years, adjusted
methodologies for complex claims/ latent exposures for rate changes, estimated loss cost
such as those involving toxic tort and other trends and all other changes that can
claims accumulations. be quantified.
During 2012, we also completed a
third party review of certain
insureds exposed to a specific class
of toxic tort claims. That review
considered the prior claims history
for each insured account, AIG's
exposed limits and the insured's role
with the specific toxicant reviewed
as well as a legal analysis of the
exposures presented by these claims.
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Class of Business or Category and Actuarial Method Application of Actuarial Method
-------------------------------------------------- -------------------------------------
D&O and Related Management Liability Classes of Business
We generally use a combination of loss development Expected loss ratio methods are given
methods and expected loss ratio methods for D&O more weight in the two most recent
and related management liability classes of accident years, whereas loss
business. development methods are given more
Frequency/severity methods are generally not used weight in more mature accident years.
in isolation for these classes as the overall For the year-end 2012 loss reserve
losses are driven by large losses more than by review, claims projections for
claim frequency. Severity trends have varied accident years 2011 and prior were
significantly from accident year to accident year used. These classes of business
and care is required in analyzing these trends by reflect claims made coverage, and
claim type. We also give weight to claim losses are characterized by low
department ground-up projections of ultimate loss frequency and high severity.
on a claim by claim basis as these may be more
predictive of ultimate loss values especially for
older accident years.
Workers' Compensation
We generally use a combination of loss development Expected loss ratio methods generally
methods and expected loss ratio methods for are given significant weight only in
workers' compensation. We segment the data by the most recent accident year.
state and industry class to the extent that Workers' compensation claims are
meaningful differences are determined to exist. generally characterized by high
frequency, low severity, and
relatively consistent loss
development from one accident year to
the next. We historically have been a
leading writer of workers'
compensation, and thus have
sufficient volume of claims
experience to use development
methods. We generally segregate
California business from other
business in evaluating workers'
compensation reserves. In 2012, we
segmented out New York from the other
states to reflect its different
development pattern and changing
percentage of the mix by state. We
also revised our assumptions to
reflect changes in our claims
management activities. Certain
classes of workers' compensation,
such as construction, are also
evaluated separately. Additionally,
we write a number of very large
accounts which include workers'
compensation coverage. These accounts
are generally priced by our
actuaries, and to the extent
appropriate, the indicated losses
based on the pricing analysis may be
used to record the initial estimated
loss reserves for these accounts.
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Class of Business or Category and Actuarial Method Application of Actuarial Method
-------------------------------------------------- -------------------------------------
Excess Workers' Compensation
We historically have used a combination of loss Excess workers' compensation is an
development methods and expected loss ratio extremely long-tail class of
methods for excess workers' compensation. For the business, with loss emergence
year-end 2012 loss reserve review, our actuaries extending for decades. The class is
supplemented the methods used historically by highly sensitive to small changes in
applying a structural drivers approach to inform assumptions - in the rate of medical
their judgment of the ultimate loss costs for open inflation or the longevity of injured
reported claims from accident years 2003 and prior workers, for example - which can have
(representing approximately 95% of all open a significant effect on the ultimate
reported claims) and used the refined analysis to reserve estimate. Claims estimates
inform their judgment of the ultimate loss cost for this line also are highly
for claims that have not yet been reported using a sensitive to:
frequency/severity approach for these accident •
years. the assumed future rate of inflation
and other economic conditions in the
United States;
•
changes in the legal, regulatory,
judicial and social environment;
•
the expected impact of recently
enacted health care reform on
workers' compensation costs;
•
underlying policy pricing, terms and
conditions;
•
claims settlement trends that can
materially alter the mix and ultimate
cost of claims;
•
changes in claims reporting and
management practices of insureds and
their third-party administrators;
•
the cost of new and additional
treatment specialties, such as "pain
management";
•
the propensity for severely injured
workers' medical conditions to
deteriorate in the future;
•
changes in injured worker longevity;
and
•
territorial experience differences
(across states and within regions in
a state).
Expected loss ratio methods are given
the greater weight for the more
recent accident years. For the
year-end 2012 loss reserve review,
the structural drivers approach which
was applied to open reported claims
from accident years 2003 and prior,
was deemed to be most suitable for
informing our judgment of the
ultimate loss cost for injured
workers whose medical conditions had
largely stabilized (i.e., at least 9
to 10 years have elapsed since the
date of injury). The reserve for
unreported claims is approximately
41 percent of the total estimated
reserve requirement for accident
years 2003 and prior. The reserve for
accident years 2004 and subsequent
was determined using a Bornhuetter
Ferguson expected loss ratio method
and constitute approximately
13 percent of the total reserve
requirements for this class of
business.
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Class of Business or Category and Actuarial Method Application of Actuarial Method
-------------------------------------------------- -------------------------------------
General Liability
We generally use a combination of loss development For certain classes of business with
methods and expected loss ratio methods for sufficient loss volume, loss
primary general liability or products liability development methods may be given
classes. We also supplement the standard actuarial significant weight for all but the
techniques by using evaluations of the ultimate most recent one or two accident
losses on unusual claims or claim accumulations by years. For smaller or more volatile
external experts on those classes of claims. The classes of business, loss development
segmentation of the data reflects state methods may be given limited weight
differences, industry classes, for the five or more most recent
deductible/non-deductible programs and type of accident years. Expected loss ratio
claim. methods are used for the more recent
accident years for these classes. The
loss experience for primary general
liability business is generally
reviewed at a level that is believed
to provide the most appropriate data
for reserve analysis. Additionally,
certain sub-classes, such as
construction, are generally reviewed
separately from business in other
subclasses. Due to the fairly
long-tail nature of general liability
business, and the many subclasses
that are reviewed individually, there
is less credibility given to the
reported losses and increased
reliance on expected loss ratio
methods for recent accident years.
Commercial Automobile Liability
We generally use loss development methods for all Expected loss ratio methods are
but the most recent accident year for commercial generally given significant weight
automobile classes of business. only in the most recent accident
year.
Healthcare
We generally use a combination of loss development The largest component of the
methods and expected loss ratio methods for healthcare business consists of
healthcare classes of business. coverage written for hospitals and
Frequency/severity methods are sometimes used for other healthcare facilities. We test
pricing certain healthcare accounts or business. reserves for excess coverage
However, in testing loss reserves the business is separately from those for primary
generally combined into larger groupings to coverage. For primary coverages, loss
enhance the credibility of the loss experience. development methods are generally
We also supplement the standard actuarial given the majority of the weight for
techniques by using evaluations of the ultimate all but the latest three accident
losses on unusual claims by experts on those years, and are given some weight for
classes of claims. all years other than the latest
accident year. For excess coverages,
expected loss methods are generally
given all the weight for the latest
three accident years, and are also
given considerable weight for
accident years prior to the latest
three years. For other classes of
healthcare coverage, an analogous
weighting between loss development
and expected loss ratio methods is
used. The weights assigned to each
method are those that are believed to
result in the best combination of
responsiveness and credibility.
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Class of Business or Category and Actuarial Method Application of Actuarial Method
-------------------------------------------------- -------------------------------------
Professional Liability
We generally use a combination of loss development Loss development methods are used for
methods and expected loss ratio methods for the more mature accident years.
professional liability classes of business. Greater weight is given to expected
Frequency/severity methods are used in pricing and loss ratio methods in the more recent
profitability analyses for some classes of accident years. Reserves are tested
professional liability; however, for loss reserve separately for claims made classes
adequacy testing, the need to ensure sufficient and classes written on occurrence
credibility generally results in segmentations policy forms. Further segmentations
that are not sufficiently homogenous to utilize are made in a manner believed to
frequency/severity methods. provide an appropriate
balance
We also use claim department projections of the between credibility and homogeneity
ultimate value of each reported claim to
of the data.
supplement and inform the standard actuarial
approaches.
Catastrophic Casualty
We use expected loss ratio methods for all The expected loss ratios and loss
accident years for catastrophic casualty business. development assumptions used are
This class of business consists of casualty or based upon the results of prior
financial lines coverage that attach in excess of accident years for this business as
very high attachment points; thus the claims well as for similar classes of
experience is marked by very low frequency and business written above lower
high severity. Because of the limited number of attachment points. The business can
claims, loss development methods are not used. be written on a claims-made or
occurrence basis. We use ground-up
claim projections provided by our
claims staff to assist in developing
the appropriate reserve.
Aviation
We generally use a combination of loss development Expected loss ratio methods are used
methods and expected loss ratio methods for to determine the loss reserves for
aviation exposures. Aviation claims are not very the latest accident year.
long-tail in nature; however, they are driven by
claim severity. Thus a combination of both
development and expected loss ratio methods are
used for all but the latest accident year to
determine the loss reserves.
Frequency/severity methods are not employed due to
the high severity nature of the claims and
different mix of claims from year to year.
Personal Auto
We generally use frequency/severity methods and For many classes of business, greater
loss development methods for domestic personal reliance is placed on
auto classes. frequency/severity methods as claim
counts emerge quickly for personal
auto and allow for more immediate
analysis of resulting loss trends and
comparisons to industry and other
diagnostic metrics.
Fidelity/Surety
We generally use loss development methods for Expected loss ratio methods are also
fidelity exposures for all but the latest accident given weight for the more recent
year. For surety exposures, we generally use the accident years. For the latest
same method as for short-tail classes (discussed accident year they may be given
below). 100 percent weight.
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Class of Business or Category and Actuarial Method Application of Actuarial Method
-------------------------------------------------- -------------------------------------
Mortgage Guaranty
We test mortgage guaranty reserves using loss The reserve analysis projects
development methods, supplemented by an internal ultimate losses for claims within
claim analysis by actuaries and staff who each of several categories of
specialize in the mortgage guaranty business. delinquency based on actual
historical experience, using
primarily a frequency/severity loss
development approach. Additional
reserve tests are also employed, such
as tests measuring losses as a
percent of risk in force. Reserves
are reviewed separately for each line
of business considering the loss
development characteristics, volume
of claim data available and
applicability of various actuarial
methods to each line.
Reserves for mortgage guaranty
insurance losses and loss adjustment
expenses are established for reported
mortgage loan delinquencies and
estimates of delinquencies that have
been incurred but have not been
reported by loan servicers, based
upon historical reporting trends. We
establish reserves using a percentage
of the contractual liability (for
each delinquent loan reported) that
is based upon projected claim
experience for each category of
delinquency, consistent in total with
the overall reserve estimate.
Mortgage Guaranty losses and loss
adjustment expenses have been
adversely affected by macroeconomic
events, such as declining home prices
and increasing unemployment. Because
these macroeconomic events are
subject to adverse or favorable
change, the determination of the
ultimate losses and loss adjustment
expenses requires a high degree of
judgment. Responding to these adverse
macroeconomic influences, numerous
government and lender loan
modification programs have been
implemented to mitigate mortgage
losses. The loan modification
programs have produced additional
cures of delinquent loans in 2012
that may not continue in 2013 as some
modification programs are phased out
or retired. In addition, these loan
modifications may re-default
resulting in new losses for Mortgage
Guaranty.
Occurrences of fraudulent loans,
underwriting violations, and other
deviations from contractual terms,
mostly related to the 2006 and 2007
blocks of business, have resulted in
historically high levels of claim
rescissions and denials (collectively
referred to as rescissions) during
2011. As a result, many lenders have
increased their rescission appeals
activity as well as the success rate
on those appeals by focusing
additional resources on the process.
The increased lender attention on
tracking down missing loan documents
along with the heightened focus on
appeals of rescissions caused the
estimated ultimate rescission rate
(net of appeals) assumed in the loss
reserves to be lower than the
rescission level projected in 2011.
If this trend continues it may
unfavorably affect future results. We
believe we have provided appropriate
reserves for currently delinquent
loans, consistent with industry
practices.
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Class of Business or Category and Actuarial Method Application of Actuarial Method
-------------------------------------------------- -------------------------------------
Other Short-Tail Classes
We generally use either loss development methods Where a factor is used, it generally
or IBNR factor methods to set reserves for represents a percent of earned
short-tail classes such as property coverages. premium or other exposure measure.
The factor is determined based on
prior accident year experience. For
example, the IBNR for a class of
property coverage might be expected
to approximate 20 percent of the
latest year's earned premium. The
factor is continually reevaluated in
light of emerging claim experience as
well as rate changes or other factors
that could affect the adequacy of the
IBNR factor being employed.
International
Business written by AIG Property Casualty We maintain a database of detailed
internationally includes both long-tail and historical premium and loss
short-tail classes of business. For long-tail transactions in original currency for
classes of business, the actuarial methods used business written by AIG Property
are comparable to those described above. However, Casualty internationally. This allows
the majority of business written by AIG Property our actuaries to determine the
Casualty internationally is short-tail, high current reserves without any
frequency and low severity in nature. For this distortion from changes in exchange
business, loss development methods are generally rates over time. Our actuaries
employed to test the loss reserves. segment the international data by
region, country or class of business
as appropriate to determine an
optimal balance between homogeneity
and credibility.
Loss Adjustment Expenses
We determine reserves for legal defense and cost We generally determine reserves for
containment loss adjustment expenses for each adjuster loss adjustment expenses
class of business by one or more actuarial or based on calendar year ratios of
structural driver methods. The methods generally adjuster expenses paid to losses paid
include development methods comparable to those for the particular class of business.
described for loss development methods. The We generally determine reserves for
development could be based on either the paid loss other unallocated loss adjustment
adjustment expenses or the ratio of paid loss expenses based on the ratio of the
adjustment expenses to paid losses, or both. Other calendar year expenses paid to
methods include the utilization of expected overall losses paid. This
ultimate ratios of paid loss expense to paid determination is generally done for
losses, based on actual experience from prior all classes of business combined, and
accident years or from similar classes of reflects costs of home office claim
business. overhead as a percent of losses paid.
Catastrophes
We conduct special analyses in response to major These analyses may include a
catastrophes in order to estimate our gross and combination of approaches, including
net loss and loss expense liability from those modeling estimates, ground-up claim
events. analysis, loss evaluation reports
from on-site field adjusters, and
market share estimates.
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Alternative Loss Cost Trend and Loss Development Factor Assumptions by Class of
Business
For classes of business other than the classes discussed below, there is
generally some potential for deviation in both the loss cost trend and loss
development factor assumptions.
The effect of these deviations is expected to be less material compared to the
effect on the classes noted below
•
Loss cost trends: The percentage deviations noted in the table below are not
considered the highest possible deviations that might be expected, but rather
what we consider to reflect a reasonably likely range of potential deviation.
Actual loss cost trends in the early 1990s were negative for several years
whereas actual loss cost trends exceeded the figures cited above for several
other years. Loss trends may deviate by more than the amounts noted above and
discussed below.
•
Loss development factors: The percentage deviations noted in the table below
are not considered the highest possible deviations that might be expected, but
rather what we consider to reflect a reasonably likely range of potential
deviation. Except for excess workers' compensation, the assumed loss
development factors are a key assumption. Generally, actual historical loss
development factors are used to project future loss development. Future loss
development patterns may be different from those in the past, or may deviate by
more than the amounts noted above and discussed below.
AIG's loss reserve analyses do not generally provide a range of loss reserve
estimates. A large portion of the loss reserves from AIG Property Casualty
business relates to longer-tail casualty classes of business, such as excess
casualty and D&O, which are driven by severity rather than frequency of claims.
Using the reserving methodologies described above, our actuaries determine their
actuarial central estimates of the loss reserves and advise management on their
final recommendation for management's best estimate of the recorded reserves.
Subject matter experts from underwriting and claims play an important part in
informing the actuarial assumptions and methods. The governance process over the
establishment of loss reserves also ensures robust considerations of the changes
in the loss trends, terms and conditions, claims handling practices, and large
loss impact when determining the methods, assumptions and the estimations. This
multi-disciplinary process engages underwriting, claims, risk management,
business unit executives and senior management and involves several iterative
levels of feedback and response during the regular reserving process.
The sensitivity analysis below addresses each major class of business for which
there is a possibility of a material deviation from our overall reserve
position. The analysis uses what we believe is a reasonably likely range of
potential deviation for each class. Actual reserve development may not be
consistent with either the original or the adjusted loss trend or loss
development factor assumptions, and other assumptions made in the reserving
process may materially affect reserve development for a particular class of
business.
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Class of Business Loss Cost Trend Loss Development
Factor
----------------- ------------------------------ ------------------------------
Excess Casualty
The assumed loss cost trend After evaluating the
was approximately five historical loss development
percent. After evaluating the factors from prior accident
historical loss cost trends years since the early 1990s,
from prior accident years in our judgment, it is
since the early 1990s, in our reasonably likely that actual
judgment, it is reasonably loss development factors will
likely that actual loss cost range from approximately
trends applicable to the 3.3 percent below those
year-end 2012 loss reserve actually utilized in the
review for excess casualty year-end 2012 reserve review
will range from 0 percent to to approximately 4.6 percent
positive 10 percent, or above those factors actually
approximately 5 percent lower utilized. Excess casualty is a
or higher than the assumption long-tail class of business
actually utilized in the and any deviation in loss
year-end 2012 reserve review. development factors might not
The loss cost trend assumption be discernible for an extended
is critical for the excess period of time subsequent to
casualty class of business due the recording of the initial
to the long-tail nature of the loss reserve estimates for any
claims and therefore is accident year. Thus, there is
applied across many accident the potential for the reserves
years. Thus, there is the with respect to a number of
potential for the reserves accident years to be
with respect to a number of significantly affected by
accident years (the expected changes in loss development
loss ratio years) to be factors that were initially
significantly affected by relied upon in setting the
changes in loss cost trends reserves. These changes in
that were initially relied loss development factors could
upon in setting the reserves. be attributable to changes in
These changes in loss trends inflation or in the judicial
could be attributable to environment, or in other
changes in inflation or in the social or economic conditions
judicial environment, or in affecting claims.
other social or economic
conditions affecting claims.
D&O and Related Management Liability Classes of
Business
The assumed loss cost trend The assumed loss development
was approximately half of one factors are also an important
percent. After evaluating the assumption but less critical
historical loss cost trends than for excess casualty.
from prior accident years Because these classes are
since the early 1990s, written on a claims made
including the potential effect basis, the loss reporting and
of recent claims relating to development tail is much
the credit crisis, in our shorter than for excess
judgment, it is reasonably casualty. However, the high
likely that actual loss cost severity nature of the claims
trends applicable to the does create the potential for
year-end 2012 loss reserve significant deviations in loss
review for these classes will development patterns from one
range from negative 25 percent year to the next. After
to positive 27 percent, or evaluating the historical loss
approximately 25.5 percent development factors for these
lower or 26.5 percent higher classes of business for
than the assumption actually accident years since the early
utilized in the year-end 2012 1990s, in our judgment, it is
reserve review. Because the reasonably likely that actual
D&O class of business has loss development factors will
exhibited highly volatile loss range from approximately
trends from one accident year 6.8 percent lower to
to the next, there is the 11 percent higher than those
possibility of an factors actually utilized in
exceptionally high deviation. the year-end 2012 loss reserve
review for these classes.
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Class of Business Loss Cost Trend Loss Development
Factor
----------------- ------------------------------ ------------------------------
Primary Workers' Compensation
The loss cost trend assumption Generally, our actual
is not believed to be material historical workers'
with respect to our loss compensation loss development
reserves. This is primarily factors would be expected to
because our actuaries are provide a reasonably accurate
generally able to use loss predictor of future loss
development projections for development. However, workers'
all but the most recent compensation is a long-tail
accident year's reserves, so class of business, and our
there is limited need to rely business reflects a very
on loss cost trend assumptions significant volume of losses,
for primary workers' particularly in recent
compensation business. accident years. After
evaluating the actual
historical loss development
since the 1980s for this
business, in our judgment, it
is reasonably likely that
actual loss development
factors will fall within the
range of approximately
3.1 percent below to
6.9 percent above those
actually utilized in the
year-end 2012 loss reserve
review.
Excess Workers' Compensation
Loss costs were trended at six Excess workers' compensation
percent per annum. After is an extremely long-tail
reviewing actual industry loss class of business, with a much
trends for the past ten years, greater than normal
in our judgment, it is uncertainty as to the
reasonably likely that actual appropriate loss development
loss cost trends applicable to factors for the tail of the
the year-end 2012 loss reserve loss development. After
review for excess workers' evaluating the historical loss
compensation will range five development factors for prior
percent lower or higher than accident years since the 1980s
this estimated loss trend. as well as the development
over the past several years of
the ground up claim
projections utilized to help
select the loss development
factors in the tail for this
class of business, in our
judgment, it is reasonably
likely that actual loss
development for excess
workers' compensation could
increase the current reserves
by up to approximately
$1.3 billion or decrease them
by approximately $850 million.
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The following sensitivity analysis table summarizes the effect on the loss
reserve position of using certain alternative loss cost trend (for accident
years where we use expected loss ratio methods) or loss development factor
assumptions rather than the assumptions actually used in determining our
estimates in the year-end loss reserve analyses in 2012.
Effect on Effect on
December 31, 2012 Loss Loss
(in millions) Reserves Reserves
Loss cost trends: Loss development factors:
Excess casualty: Excess casualty:
5 percent increase $ 1,500 4.6 percent increase $ 1,100
5 percent decrease (1,100 ) 3.3 percent decrease (700 )
D&O: D&O:
26.5 percent increase 1,000 11 percent increase 650
25.5 percent decrease (700 ) 6.8 percent decrease (400 )
Excess workers'
compensation: Excess workers' compensation:
5 percent increase 400 Increase(b) 1,300
5 percent decrease (250 ) Decrease(b) (850 )
Primary workers'
compensation(a): Primary workers' compensation:
6.9 percent increase 2,200
3.1 percent decrease (1,000 )
(a) Loss cost trend assumption does not have a material impact for this line
of business.
(b) Percentages not applicable due to extremely long-tailed nature of workers'
compensation.
Future Policy Benefits for Life and Accident and Health Insurance Contracts (AIG
Life and Retirement)
Periodically, we evaluate estimates used in establishing liabilities for future
policy benefits for life and accident and health insurance contracts, which
include liabilities for certain payout annuities. We also evaluate estimates
used in amortizing Deferred Policy Acquisition Costs (DAC), Value of Business
Acquired (VOBA) and Sales Inducement Assets (SIA) for these products. We
evaluate these estimates against actual experience and adjust them based on
management judgment regarding mortality, morbidity, persistency, maintenance
expenses, and investment returns.
For long duration traditional business, a "lock-in" principle applies. The
assumptions used to calculate the benefit liabilities and DAC are set when a
policy is issued and do not change with changes in actual experience, unless a
loss recognition event occurs. These assumptions include margins for adverse
deviation in the event that actual experience might deviate from these
assumptions.
As we experience changes over time, we update the The key
assumptions
assumptions to reflect these observed changes. Because of used in estimating
the long term nature of many of our liabilities subject to future policy benefit
the "lock-in" principle, small changes in certain reserves are:
assumptions may cause large changes in the degree of •
reserve adequacy. In particular, changes in estimates of Investment
future invested asset returns have a large effect on the returns: which vary
degree of reserve deficiency. If observed changes in by year of issuance
actual experience or estimates result in projected future and products.
losses under loss recognition testing, we adjust DAC •
through amortization expense, and may record additional Mortality, morbidity
liabilities through a charge to policyholder benefit and surrender
expense. Loss recognition testing is performed at an rates: based upon
aggregate AIG Life and Retirement reporting segment level. actual experience
Once loss recognition has been recorded for a block of modified to allow for
business, the old assumption set is replaced (i.e., a DAC variation in policy
unlocking), and the assumption set used for the loss form, risk
recognition would then be subject to the lock-in classification
and
principle. See Note 10 to the Consolidated Financial distribution channel.
Statements for additional information.
•
Premium rate
increases
(Long-term care)
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We also use these estimates to determine whether to adjust DAC and record
additional liabilities when unrealized gains or losses on fixed maturity and
equity securities available for sale are recognized through accumulated other
comprehensive income. The determination is made at each balance sheet date, as
if the securities had been sold at their stated aggregate fair value and the
proceeds reinvested at current yields. Significant unrealized appreciation on
investments in a prolonged low interest rate environment may cause DAC to be
adjusted and additional future policy benefit liabilities to be recorded through
a charge directly to accumulated other comprehensive income (ie. Shadow DAC).
This is included, net of tax, with the change in net unrealized appreciation
(depreciation) of investments.
Our future policy benefits include guaranteed minimum death benefits (GMDB). We
determine the GMDB liability each period end by estimating the expected value of
death benefits in excess of the projected account balance and recognizing the
excess ratably over the accumulation period based on total expected fees. The
estimates include assumptions about interest rates, mortality rates, lapse rates
and a randomly generated model of investment returns. In addition to GMDB, our
future policy benefits include, to a lesser extent, guaranteed minimum income
benefits (GMIB). We determine GMIB liability each period end by estimating the
expected value of the periodic income payments from annuities in excess of the
projected account balance. We derive this estimate at the date the annuity
converts to regular payments, and we recognize the excess ratably over the
accumulation period based on total expected assessments. We periodically
evaluate estimates used and adjust the additional liability balance, with a
related charge or credit to benefit expense, if actual experience or other
evidence suggests that earlier assumptions should be revised.
We also issue certain variable annuity products that offer optional guaranteed
minimum withdrawal benefits (GMWB) and guaranteed minimum account value benefits
(GMAV). These living benefits are embedded derivatives that are required to be
bifurcated from the host contract and carried at fair value. The fair value
estimates of the living benefit guarantees include assumptions such as equity
market returns, interest rates, market volatility and policyholder behavior. We
also incorporate our own risk of non-performance in the valuation of the
embedded policy derivatives. See Note 6 to the Consolidated Financial Statements
for information on how AIG incorporates its own non-performance risk.
We have a dynamic hedging program designed to manage economic risk exposure
associated with changes in the fair value of GMWB and GMAV liabilities caused by
changes in the equity markets, interest rates and market implied volatilities.
The program utilizes hedging instruments, including derivatives such as equity
options, futures contracts and interest rate swap contracts, and is designed so
that changes in value of the hedging instruments move in the opposite direction
of changes in the GMWB and GMAV embedded derivative liabilities. We monitor the
hedging positions on a daily basis in relation to the change in valuation of
GMWB and GMAV embedded derivative liabilities, and rebalance those positions as
needed. Differences between the change in fair value of GMWB and GMAV embedded
derivative liabilities and the hedging instruments can be caused by extreme and
unanticipated movements in the equity markets, interest rates and market
volatility, policyholder behavior, statutory capital considerations and
constraints and the ability to purchase hedging instruments at prices consistent
with the desired risk and return trade-off. None of the derivative instruments
described above are designated for hedge accounting.
Approximately 56 percent of our individual variable annuity account values
contain either a GMWB rider or a GMAV rider as of December 31, 2012. Declines in
the equity markets, increased volatility and a sustained low interest rate
environment increase our exposure to potential benefits under the GMWB and GMAV
contracts, leading to an increase in the existing liability for those benefits.
Our exposure to the guaranteed amounts is equal to the amount by which the
contract holder's account balance is below the guaranteed withdrawal or account
value amount. As of December 31, 2012, our exposure to the guaranteed withdrawal
and account value amount under GMWB and GMAV was $0.9 billion and $10 million,
respectively.
The only way the GMWB contract holder can monetize the excess of the guaranteed
amount over the account value of the contract is through a series of withdrawals
that do not exceed a specific percentage per year of the guaranteed amount. If,
after the series of withdrawals, the account value is exhausted, the contract
holder will receive a series of annuity payments equal to the remaining
guaranteed amount, and, for lifetime GWWB products, the annuity payments can
continue beyond the guaranteed amount. The account value can also fluctuate with
equity market returns on a daily basis resulting in increases or decreases in
the excess of the guaranteed amount over account value.
The net impact of the change in the fair value of the embedded derivative
liabilities, as well as the change in the fair value of the derivative
instruments is included in Net Realized Capital Gains (Losses).
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For a further discussion of the risks of AIG's unhedged exposures, see
Item 1A. - Risk Factors - Business and Operations.
Estimated Gross Profits for Interest-Sensitive Products (AIG Life and
Retirement)
Estimated gross profits (EGP) are subject to differing market returns and
interest rate environments in any single period. EGP is composed of net
investment income, net realized investment gains and losses, fees, surrender
charges, expenses, and mortality and morbidity gains and losses. When
assumptions are changed, the percentage of EGP used to amortize DAC may also
change.
The following table summarizes the sensitivity of changes in certain assumptions
in the amortization of DAC/SIA, guaranteed benefits reserve and unearned revenue
liability and the related hypothetical impact on year-end 2012 balances. The
effect of changes in the equity markets, volatility and interest rates primarily
impacts individual variable annuities (SunAmerica Retirement Markets) and group
retirement products (VALIC). The effect of changes in mortality primarily
impacts the universal life insurance business.
Guaranteed Unearned Net
December 31, 2012 Benefits Revenue Pre-Tax
(in millions) DAC/SIA Reserve Liability Earnings
Assumptions:
Equity Return(a)
Effect of an increase by 1% $ 67 $ - $ (23 ) $ 90
Effect of a decrease by 1% (67 ) - 54 (121 )
Volatility(b)
Effect of an increase by 1% (10 ) 1 2 (13 )
Effect of a decrease by 1% 9 (1 ) (2 ) 12
Interest Rate(c)
Effect of an increase by 10 basis
points 9 1 - 8
Effect of a decrease by 10 basis
points (9 ) (1 ) - (8 )
Mortality
Effect of an increase by 1% (15 ) (6 ) 13 (22 )
Effect of a decrease by 1% 13 5 (13 ) 21
(a) Represents the net impact of 1 percent increase or decrease in long-term
equity returns for GMDB and GMIB reserves and negligible net impact of 1 percent
increase or decrease in the S&P 500 index for living benefit reserves.
(b) Represents the net impact of 1 percentage point increase or decrease in
implied volatility.
(c) Represents the net impact of a 10 basis point parallel shift in the yield
curve. Does not represent interest rate spread compression.
The analysis of DAC, guaranteed benefits reserve and unearned revenue liability
is a dynamic process that considers all relevant factors and assumptions
described above. We estimate each of the above factors individually, without the
effect of any correlation among the key assumptions. An assessment of
sensitivity associated with changes in any single assumption would not
necessarily be an indicator of future results.
Other-Than-Temporary Impairments on Available For Sale Securities
At each balance sheet date, we evaluate our available for sale securities
holdings with unrealized losses.
See the discussion in Note 7 to the Consolidated Financial Statements for
additional information on the methodology and significant inputs, by security
type, that we use to determine the amount of other-than-temporary impairment on
fixed maturity and equity securities.
Goodwill Impairment
For a discussion of goodwill impairment, see Note 2 to the Consolidated
Financial Statements.
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Liability for Legal Contingencies
We estimate and record a liability for potential losses that may arise from
litigation and regulatory proceedings to the extent such losses are probable and
can be estimated. Determining a reasonable estimate of the amount of such losses
requires significant management judgment. In many cases, it is not possible to
determine whether a liability has been incurred or to estimate the ultimate or
minimum amount of that liability until the matter is close to resolution. In
view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which claimants seek substantial or indeterminate
damages, we often cannot predict the outcome or estimate the eventual loss or
range of reasonably possible losses related to such matters.
See Note 16 to the Consolidated Financial Statements.
Fair Value Measurements of Certain Financial Assets and Liabilities
See Note 6 to the Consolidated Financial Statements for more detailed
information about the measurement of fair value of financial assets and
financial liabilities and how our accounting policy incorporates credit risk in
fair value measurements.
The following table presents the fair value of fixed maturity and equity
securities by source of value determination:
December 31, 2012
(in billions) Fair Value Percent of Total
Fair value based on external sources(a) $ 280 94 %
Fair value based on internal sources 18 6
Total fixed maturity and equity securities(b) $ 298 100 %
(a) Includes $28.7 billion for which the primary source is broker quotes.
(b) Includes available for sale and trading securities.
Level 3 Assets and Liabilities
Assets and liabilities recorded at fair value in the Consolidated Balance Sheet
are measured and classified in a hierarchy for disclosure purposes consisting of
three "levels" based on the observability of inputs available in the marketplace
used to measure the fair value. See Note 6 to the Consolidated Financial
Statements for additional information.
The following table presents the amount of assets and liabilities measured at
fair value on a recurring basis and classified as Level 3:
December 31, Percentage December 31, Percentage
(in billions) 2012 of Total 2011 of Total
Assets $ 40.5 7.4 % $ 39.4 7.1 %
Liabilities 4.1 0.9 5.3 1.2
Level 3 fair value measurements are based on valuation techniques that use at
least one significant input that is unobservable. We consider unobservable
inputs to be those for which market data is not available and that are developed
using the best information available about the assumptions that market
participants would use when valuing the asset or liability. Our assessment of
the significance of a particular input to the fair value measurement in its
entirety requires judgment.
We classify fair value measurements for certain assets and liabilities as
Level 3 when they require significant unobservable inputs in their valuation,
including contractual terms, prices and rates, yield curves, credit curves,
measures of volatility, prepayment rates, default rates, mortality rates and
correlations of such inputs.
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The following paragraphs describe the methods we use to measure fair value on a
recurring basis for certain classes of assets and liabilities classified in
Level 3. See Note 6 to the Consolidated Financial Statements for discussion of
the valuation methodologies for other assets classified in Level 3, including
certain fixed maturity securities and certain other invested assets, as well as
discussion of transfers of Level 3 assets and liabilities.
Super Senior Credit Default Swap Portfolio
The entities included in GCM wrote credit protection on the super senior risk
layer of collateralized loan obligations (CLOs), multi-sector CDOs and
diversified portfolios of corporate debt, and prime residential mortgages
through 2006. In these transactions, AIG is at risk of credit performance on the
super senior risk layer related to such assets. To a lesser extent, those
entities also wrote protection on tranches below the super senior risk layer,
primarily related to regulatory capital relief transactions.
See Notes 6 and 12 to the Consolidated Financial Statements for information
about the Regulatory Capital, Multi-Sector CDO, Corporate Debt/Collateralized
Debt Obligation (CLO) and other portfolios.
AIG utilizes sensitivity analyses that estimate the effects of using alternative
pricing and other key inputs on our calculation of the unrealized market
valuation loss related to the super senior credit default swap portfolio. While
we believe that the ranges used in these analyses are reasonable, we are unable
to predict which of the scenarios is most likely to occur. As recent experience
demonstrates, actual results in any period are likely to vary, perhaps
materially, from the modeled scenarios, and there can be no assurance that the
unrealized market valuation loss related to the super senior credit default swap
portfolio will be consistent with any of the sensitivity analyses. On average,
prices for CDOs increased during 2012. Further, it is difficult to extrapolate
future experience based on current market conditions.
For the purposes of estimating sensitivities for the super senior multi-sector
CDO credit default swap portfolio, the change in valuation derived using the
Binomial Expansion Technique (BET) model is used to estimate the change in the
fair value of the derivative liability. Of the total $3.9 billion net notional
amount of CDS written on multi-sector CDOs outstanding at December 31, 2012, a
BET value is available for $2.6 billion net notional amount. No BET value is
determined for $1.3 billion of CDS written on European multi-sector CDOs as
prices on the underlying securities held by the CDOs are not provided by
collateral managers; instead these CDS are valued using counterparty prices.
Therefore, sensitivities disclosed below apply only to the net notional amount
of $2.6 billion.
The most significant assumption used in the BET model is the estimated price of
the securities within the CDO collateral pools. If the actual price of the
securities within the collateral pools differs from the price used in estimating
the fair value of the super senior credit default swap portfolio, there is
potential for material variation in the fair value estimate. Any declines in the
value of the underlying collateral securities held by a CDO will similarly
affect the value of the super senior CDO securities. While the models attempt to
predict changes in the prices of underlying collateral securities held within a
CDO, the changes are subject to actual market conditions which have proved to be
highly volatile. We cannot predict reasonably likely changes in the prices of
the underlying collateral securities held within a CDO at this time.
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The following table presents key inputs used in the BET model, and the potential
increase (decrease) to the fair value of the derivative liability by ABS
category at December 31, 2012 corresponding to changes in these key inputs:
Average Increase (Decrease) to Fair Value of Derivative Liability
Inputs Used at Entire RMBS RMBS RMBS
(dollars in millions) December 31, 2012 Change Portfolio Prime Alt-A Subprime CMBS CDOs Other
Bond prices 41 points Increase of 5 points $ (152 ) $ (2 ) $ (10 ) $ (72 ) $ (44 ) $ (15 ) $ (9 )
Decrease of 5 points 146 2 9 62 45 14 14
Weighted Increase of 1 year 15 1 - 11 2 - 1
average life 5.75 years Decrease of 1 year (23 ) (1 ) - (18 ) (3 ) (1 ) -
Recovery rates 17% Increase of 10% (13 ) - (2 ) (8 ) (1 ) (1 ) (1 )
Decrease of 10% 15 - 2 9 3 1 -
Diversity score(a) 14 Increase of 5 (4 )
Decrease of 5 11
Discount curve(b) N/A Increase of 100bps 10
(a) The diversity score is an input at the CDO level. A calculation of
sensitivity to this input by type of security is not possible.
(b) The discount curve is an input at the CDO level. A calculation of
sensitivity to this input by type of security is not possible. Furthermore, for
this input it is not possible to disclose a weighted average input as a discount
curve consists of a series of data points.
These results are calculated by stressing a particular assumption independently
of changes in any other assumption. No assurance can be given that the actual
levels of the key inputs will not exceed, perhaps significantly, the ranges
assumed by us for purposes of the above analysis. No assumption should be made
that results calculated from the use of other changes in these key inputs can be
interpolated or extrapolated from the results set forth above.
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GLOSSARY
Accident year The annual calendar accounting period in which loss events
occurred, regardless of when the losses are actually reported, booked or paid.
Accident year combined ratio, as adjusted the combined ratio excluding
catastrophe losses and related reinstatement premiums, prior year development,
net of premium adjustments, and the impact of reserve discounting.
Accident year loss ratio, as adjusted the loss ratio excluding catastrophe
losses and related reinstatement premiums, prior year development, net of
premium adjustments and the impact of reserve discount. Catastrophe losses are
generally weather or seismic events having a net impact on AIG Property Casualty
in excess of $10 million each.
Acquisition ratio acquisition costs divided by net premiums earned. Acquisition
costs are those costs incurred to acquire new and renewal insurance contracts
and also include the amortization of VOBA. Acquisition costs vary with sales and
include, but are not limited to, commissions, premium taxes, direct marketing
costs, certain costs of personnel engaged in sales support activities such as
underwriting, and the change in deferred acquisition costs. Acquisition costs
that are incremental and directly related to successful sales efforts are
deferred and recognized over the coverage periods of related insurance
contracts. Acquisition costs that are not incremental and directly related to
successful sales efforts are recognized as incurred.
Admitted insurer A company licensed to transact insurance business within a
state.
AIG - After-tax operating income (loss) is derived by excluding the following
items from net income (loss): income (loss) from discontinued operations, net
loss (gain) on sale of divested businesses, income from divested businesses,
legacy FIN 48 and other tax adjustments, legal reserves (settlements) related to
"legacy crisis matters," deferred income tax valuation allowance (releases)
charges, amortization of the Federal Reserve Bank of New York prepaid commitment
fee asset, changes in fair value of AIG Life and Retirement fixed income
securities designated to hedge living benefit liabilities, change in benefit
reserves and deferred policy acquisition costs (DAC), value of business acquired
(VOBA), and sales inducement assets (SIA) related to net realized capital
(gains) losses, (gain) loss on extinguishment of debt, net realized capital
(gains) losses, non-qualifying derivative hedging activities, excluding net
realized capital (gains) losses and bargain purchase gain. "Legacy crisis
matters" include favorable and unfavorable settlements related to events leading
up to and resulting from our September 2008 liquidity crisis. It also includes
legal fees incurred by AIG as the plaintiff in connection with such legal
matters.
AIG Life and Retirement - Operating income (loss) Operating income (loss) is
derived by excluding the following items from net income (loss): legal
settlements related to legacy crisis matters, changes in fair values of fixed
maturity securities designated to hedge living benefit liabilities, net realized
capital (gains) losses, and changes in benefit reserves and DAC, VOBA, and SIA
related to net realized capital (gains) losses.
AIG Life and Retirement - Premiums, deposits and other considerations includes
life insurance premiums and deposits on annuity contracts and mutual funds.
AIG Property Casualty - Net premiums written represent 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 Unearned premium reserves in the
Consolidated Balance Sheet.
AIG Property Casualty - Operating income (loss) In 2012, AIG Property Casualty
revised its non-GAAP income measure from underwriting income (loss) to operating
income (loss), which includes both underwriting income (loss) and net investment
income, but not net realized capital (gains) losses or other (income) expense,
legal settlements related to legacy crisis matters and bargain purchase gain.
Underwriting income (loss) is derived by reducing net premiums earned by claims
and claims adjustment expense and underwriting expenses, which consist of the
acquisition costs and general operating expenses.
Assume, assumed reinsurance, assuming company An insurance company that accepts
all or part of a ceding company's insurance or reinsurance on a risk or exposure
is referred to as the assuming company.
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Basel I, Basel II and Basel III set of capital and liquidity standards for
international financial institution established by the Basel Committee on
Banking Supervision.
BET Binomial Expansion Technique A model that generates expected loss estimates
for CDO tranches and derives a credit rating for those tranches.
Book Value Per Share Excluding Accumulated Other Comprehensive Income (loss)
(AOCI) is used to show the amount of our net worth on a per-share basis. Book
Value Per Share Excluding AOCI is derived by dividing Total AIG shareholders'
equity, excluding AOCI, by Total common shares outstanding.
Case reserves Claim department estimates of anticipated future payments to be
made on each specific individual reported claim.
Casualty insurance Insurance that is primarily associated with the losses caused
by injuries to third persons, i.e., not the insured, and the legal liability
imposed on the insured as a result.
Cede, ceded reinsurance, ceding company An insurance company that reinsures its
risk with another, is referred to as the ceding company.
Combined ratio Sum of the loss ratio and the acquisition and general operating
expense ratios.
CSA Credit Support Annex A legal document that provides for collateral postings
at various ratings and threshold levels.
DAC Deferred Policy Acquisition Costs Deferred costs that are incremental and
directly related to the successful acquisition of new business or renewal of
existing business.
Expense ratio Sum of acquisition costs and general operating expenses, divided
by net premiums earned.
First-Lien Priority over all other liens or claims on a property in the event of
default on a mortgage.
General operating expense ratio general operating expenses divided by net
premiums earned. General operating expenses are those costs that are generally
attributed to the support infrastructure of the organization and include but are
not limited to personnel costs, projects and bad debt expenses. General
operating expenses exclude claims adjustment expenses, acquisition expenses, and
investment expenses.
GIC/GIA Guaranteed Investment Contract/Guaranteed Investment Agreement A
contract whereby the seller provides a guaranteed repayment of principal and a
fixed or floating interest rate for a predetermined period of time.
IBNR Incurred But Not Reported Estimates of claims that have been incurred but
not reported to us.
IFS Insurer Financial Strength ratings IFS ratings measure the ability of an
insurance company to meet its obligations to contract holders and policyholders.
LAE Loss Adjustment Expenses The expenses of settling claims, including legal
and other fees and the portion of general expenses allocated to claim settlement
costs.
Long-Tail Reserves Reserves for claims that may be reported or settled several
years after the coverage period has expired for these classes of businesses.
Long-tail casualty classes of business include excess and umbrella liability,
D&O, professional liability, medical malpractice, workers' compensation, general
liability, products liability and related classes.
Loss Ratio Claims and claims adjustment expenses incurred divided by net
premiums earned. Claims adjustment expenses are directly attributed to settling
and paying claims of insureds and include, but are not limited to, legal fees,
adjuster's fees, and claims department personnel costs.
Loss reserve development The increase or decrease in incurred claims and claim
adjustment expenses as a result of the re-estimation of claims and claim
adjustment expense reserves at successive valuation dates for a given group of
claims.
Loss reserves Liability for unpaid claims and claims adjustment expense. The
estimated ultimate cost of settling claims relating to insured events that have
occurred on or before the balance sheet date, whether or not reported to the
insurer at that date.
LTV Loan-to-Value Ratio Principal amount of loan amount divided by appraised
value of collateral securing the loan.
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Net premiums written Represent 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 Unearned premium reserves in the Consolidated Balance
Sheet.
Noncontrolling interest The portion of equity ownership in a consolidated
subsidiary not attributable to the controlling parent company.
Other Operations - Operating income (loss): income (loss) excluding certain
legal reserves (settlements) related to legacy crisis matters, loss on
extinguishment of debt, amortization of prepaid commitment fee asset, Net
realized capital (gains) losses, net (gains) losses on sale of divested
businesses and properties, and income from divested businesses.
Overturns The reversal of a rescinded mortgage guarantee policy.
Policy fees An amount added to a policy premium, or deducted from a policy cash
value or contract holder account, to reflect the cost of issuing a policy,
establishing the required records, sending premium notices and other related
expenses.
Prior year development Increase or decrease in estimates of losses and loss
expenses for prior years that is included in earnings.
RBC Risk-Based Capital A formula designed to measure the adequacy of an
insurer's statutory surplus compared to the risks inherent in its business.
Reinstatement premium Additional premiums payable to reinsurers to restore
coverage limits that have been exhausted as a result of reinsured losses under
certain excess of loss reinsurance treaties.
Reinsurance The practice whereby one insurer, the reinsurer, in consideration of
a premium paid to that insurer, agrees to indemnify another insurer, the ceding
company, for part or all of the liability of the ceding company under one or
more policies or contracts of insurance which it has issued.
Rescission Denial of claims and termination of coverage on loans related to
fraudulent or undocumented claims, underwriting guideline violations and other
deviations from contractual terms.
Reserve deficiency When actual reported reserves are lower than the expected
reserves. This is also referred to as unfavorable loss development.
Reserve redundancy When actual reported reserves exceed expected reserves. This
is also referred to as favorable loss development.
Retained Interest Category within AIG's Other operations that includes the fair
value gains or losses, prior to their sale, of the AIA ordinary shares retained
following the AIA initial public offering and the MetLife, Inc. (MetLife)
securities that were received as consideration from the sale of American Life
Insurance Company (ALICO) and the fair value gains or losses, prior to the FRBNY
liquidation of ML III assets, on the retained interest in ML III.
Second-lien Subordinate in ranking to the first-lien holder on a property in the
event of default on a mortgage.
Severe losses Individual non-catastrophe first party losses greater than
$10 million, net of related reinsurance.
Short-Tail Reserves Reserves for claims that are generally reported and paid
within a relatively short period of time during and following the policy
coverage period. Short-tail classes of business consist principally of property,
personal lines and certain casualty classes.
SIA Sales Inducement Asset Represents amounts that are credited to policyholder
account balances related to the enhanced crediting rates that a seller offers on
certain of its annuity products.
SIFI Systemically Important Financial Institutions Financial institutions are
deemed systemically important (that is, the failure of the financial institution
could pose a threat to the financial stability of the United States) by the
Financial Stability Oversight Council (FSOC) based on a three-stage analytical
process.
Solvency II Legislation in the European Union which reforms the insurance
industry's solvency framework, including minimum capital and solvency
requirements, governance requirements, risk management and public reporting
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standards. The Solvency II Directive (2009/138/EEC), was adopted on November 25,
2009 and is expected to become effective in January 2014.
SSDMF Social Security Death Master File A database of deceased individuals, most
of whom were issued a social security number during their lifetimes, maintained
by the U.S. Social Security Administration.
Surrender charge A charge levied against an investor for the early withdrawal of
funds from a life insurance or annuity contract, or for the cancellation of the
agreement.
Unearned premium reserve Liabilities established by insurers and reinsurers to
reflect unearned premiums which are usually refundable to policyholders if an
insurance or reinsurance contract is canceled prior to expiration of the
contract term.
VaR Value-at-Risk A summary statistical measure that uses the estimated
volatility and correlation of market factors to calculate the maximum loss that
could occur over a defined period of time with a specified level of statistical
confidence.
VOBA Value of Business Acquired Present value of projected future gross profits
from in-force policies from acquired businesses.
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ACRONYMS
A&H Accident and Health Insurance GMWB Guaranteed Minimum
Withdrawal
ABS Asset-Backed Security Benefits
CDO Collateralized Debt Obligation IFRS International Financial Reporting
CDS Credit Default Swap
Standards
CLO Collateralized Loan Obligations ISDA International Swaps and
CMA Capital Maintenance Agreement
Derivatives Association, Inc.
CMBS Commercial Mortgage Backed NAIC National Association of
Insurance
Securities Commissioners
FASB Financial Accounting Standards NM Not Meaningful
Board
OTC Over-the-Counter
FRBNY Federal Reserve Bank of New York OTTI Other-Than-Temporary Impairment
GAAP Accounting principles generally RMBS Residential Mortgage Backed
accepted in the United States of Securities
America S&P Standard & Poor's Financial
GMAV Guaranteed Minimum Account Value Services LLC
Benefits
SEC Securities and Exchange
Commission
GMDB Guaranteed Minimum Death Benefits TARP Troubled Asset Relief Program of
GMIB Guaranteed Minimum Income
the Department of the Treasury
Benefits VIE Variable Interest Entity
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ITEM 7A / QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth in the Enterprise Risk
Management section of Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and is incorporated herein by reference.
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