UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
Commission File Number 1-8787
American International Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
13-2592361
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
175 Water Street, New York, New York
10038
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (212) 770-7000
________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 29, 2014, there were 1,446,648,914 shares outstanding of the registrant’s common stock.
AMERICAN INTERNATIONAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
March 31, 2014
Table of Contents
FORM 10-Q
Item Number
Description
Page
PART I — FINANCIAL INFORMATION
Item 1
Condensed Consolidated Financial Statements
2
Note 1.
Basis of Presentation
7
Note 2.
Summary of Significant Accounting Policies
8
Note 3.
Segment Information
10
Note 4.
Held-For-Sale Classification and Discontinued Operations
11
Note 5.
Fair Value Measurements
12
Note 6.
Investments
26
Note 7.
Lending Activities
32
Note 8.
Variable Interest Entities
33
Note 9.
Derivatives and Hedge Accounting
35
Note 10.
Contingencies, Commitments and Guarantees
41
Note 11.
Equity
49
Note 12.
Noncontrolling Interests
51
Note 13.
Earnings Per Share
52
Note 14.
Employee Benefits
53
Note 15.
Income Taxes
53
Note 16.
Information Provided in Connection with Outstanding Debt
56
Note 17.
Subsequent Events
60
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
61
· Cautionary Statement Regarding Forward-Looking Information
61
· Use of Non-GAAP Measures
64
· Executive Overview
65
· Results of Operations
76
· Liquidity and Capital Resources
117
· Investments
131
· Enterprise Risk Management
145
· Critical Accounting Estimates
150
· Regulatory Environment
151
· Glossary
152
· Acronyms
156
Item 3
Quantitative and Qualitative Disclosures About Market Risk
157
Item 4
Controls and Procedures
157
PART II — OTHER INFORMATION
Item 1
Legal Proceedings
158
Item 1A
Risk Factors
158
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
158
Item 4
Mine Safety Disclosures
158
Item 6
Exhibits
158
SIGNATURES
159
1
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
American International Group, Inc.
Condensed Consolidated Balance Sheets (unaudited)
March 31,
December 31,
(in millions, except for share data)
2014
2013
Assets:
Investments:
Fixed maturity securities:
Bonds available for sale, at fair value (amortized cost: 2014 – $249,200; 2013 – $248,531)
$
262,937
$
258,274
Other bond securities, at fair value (See Note 6)
21,718
22,623
Equity Securities:
Common and preferred stock available for sale, at fair value (cost: 2014 – $2,076; 2013 – $1,726)
3,878
3,656
Other common and preferred stock, at fair value (See Note 6)
725
834
Mortgage and other loans receivable, net of allowance
21,569
20,765
Other invested assets (portion measured at fair value: 2014 – $8,867; 2013 – $8,598)
29,050
28,659
Short-term investments (portion measured at fair value: 2014 – $3,753; 2013 – $6,313)
17,658
21,617
Total investments
357,535
356,428
Cash
2,490
2,241
Accrued investment income
2,924
2,905
Premiums and other receivables, net of allowance
14,269
12,939
Reinsurance assets, net of allowance
25,346
23,829
Deferred income taxes
21,631
21,925
Deferred policy acquisition costs
9,217
9,436
Derivative assets, at fair value
1,601
1,665
Other assets, including restricted cash of $862 in 2014 and $865 in 2013 (portion measured at fair value:
2014 – $0; 2013 – $418)
8,738
9,366
Separate account assets, at fair value
72,593
71,059
Assets held-for-sale
30,767
29,536
Total assets
$
547,111
$
541,329
Liabilities:
Liability for unpaid claims and claims adjustment expense
$
81,155
$
81,547
Unearned premiums
23,383
21,953
Future policy benefits for life and accident and health insurance contracts
41,419
40,653
Policyholder contract deposits (portion measured at fair value: 2014 – $831; 2013 – $384)
122,839
122,016
Other policyholder funds
4,802
5,083
Derivative liabilities, at fair value
3,039
2,511
Other liabilities (portion measured at fair value: 2014 – $538; 2013 – $933)
28,138
29,155
Long-term debt (portion measured at fair value: 2014 – $6,019; 2013 – $6,747)
39,508
41,693
Separate account liabilities
72,593
71,059
Liabilities held-for-sale
25,815
24,548
Total liabilities
442,691
440,218
Contingencies, commitments and guarantees (see Note 10)
Redeemable noncontrolling interests (see Note 12)
27
30
AIG shareholders’ equity:
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2014 – 1,906,655,640 and
2013 – 1,906,645,689
4,766
4,766
Treasury stock, at cost; 2014 – 460,007,853; 2013 – 442,582,366 shares of common stock
(15,386)
(14,520)
Additional paid-in capital
80,975
80,899
Retained earnings
24,393
22,965
Accumulated other comprehensive income
9,085
6,360
Total AIG shareholders’ equity
103,833
100,470
Non-redeemable noncontrolling interests (including $100 associated with businesses held for sale)
560
611
Total equity
104,393
101,081
Total liabilities and equity
$
547,111
$
541,329
See accompanying Notes to Condensed Consolidated Financial Statements.
2
Item 1 / Financial statements
American International Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended March 31,
(dollars in millions, except per share data)
2014
2013
Revenues:
Premiums
$
9,038
$
9,372
Policy fees
692
615
Net investment income
4,196
4,164
Net realized capital gains (losses):
Total other-than-temporary impairments on available for sale securities
(50)
(40)
Portion of other-than-temporary impairments on available for sale
fixed maturity securities recognized in Other comprehensive income (loss)
(4)
(1)
Net other-than-temporary impairments on available for sale
securities recognized in net income
(54)
(41)
Other realized capital gains (losses)
(159)
341
Total net realized capital gains (losses)
(213)
300
Aircraft leasing revenue
1,113
1,074
Other income
1,286
1,437
Total revenues
16,112
16,962
Benefits, claims and expenses:
Policyholder benefits and claims incurred
6,797
6,728
Interest credited to policyholder account balances
955
1,017
Amortization of deferred policy acquisition costs
1,305
1,286
Other acquisition and insurance expenses
2,117
2,238
Interest expense
479
577
Aircraft leasing expenses
1,096
1,031
Loss on extinguishment of debt
238
340
Net (gain) loss on sale of properties and divested businesses
(4)
-
Other expenses
856
870
Total benefits, claims and expenses
13,839
14,087
Income from continuing operations before income tax expense
2,273
2,875
Income tax expense
614
717
Income from continuing operations
1,659
2,158
Income (loss) from discontinued operations, net of income tax expense
(47)
73
Net income
1,612
2,231
Less:
Net income from continuing operations attributable to
noncontrolling interests
3
25
Net income attributable to AIG
$
1,609
$
2,206
Income per common share attributable to AIG:
Basic:
Income from continuing operations
$
1.13
$
1.44
Income (loss) from discontinued operations
$
(0.03)
$
0.05
Net income attributable to AIG
$
1.10
$
1.49
Diluted:
Income from continuing operations
$
1.12
$
1.44
Income (loss) from discontinued operations
$
(0.03)
$
0.05
Net income attributable to AIG
$
1.09
$
1.49
Weighted average shares outstanding:
Basic
1,459,249,393
1,476,471,097
Diluted
1,472,510,813
1,476,678,931
Dividends declared per common share
$
0.125
$
-
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Item 1 / Financial statements
American International Group, Inc.
cONDENSED Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended March 31,
(in millions)
2014
2013
Net income
$
1,612
$
2,231
Other comprehensive income (loss), net of tax
Change in unrealized appreciation of fixed maturity investments on
which other-than-temporary credit impairments were taken
89
282
Change in unrealized appreciation (depreciation) of all other investments
2,785
(788)
Change in foreign currency translation adjustments
(158)
(273)
Change in retirement plan liabilities adjustment
9
44
Other comprehensive income (loss)
2,725
(735)
Comprehensive income
4,337
1,496
Comprehensive income attributable to noncontrolling interests
3
25
Comprehensive income attributable to AIG
$
4,334
$
1,471
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Item 1 / Financial statements
American International Group, Inc.
CONDENSED Consolidated Statement of Equity (unaudited)
Non-
Accumulated
Total AIG
redeemable
Additional
Other
Share-
Non-
Common
Treasury
Paid-in
Retained
Comprehensive
holders'
controlling
Total
(in millions)
Stock
Stock
Capital
Earnings
Income
Equity
Interests
Equity
Three Months Ended March 31, 2014
Balance, beginning of year
$
4,766
$
(14,520)
$
80,899
$
22,965
$
6,360
$
100,470
$
611
$
101,081
Purchase of common stock
-
(867)
-
-
-
(867)
-
(867)
Net income attributable to AIG or other
noncontrolling interests
-
-
-
1,609
-
1,609
3
1,612
Dividends
-
-
-
(182)
-
(182)
-
(182)
Other comprehensive income (loss)
-
-
-
-
2,725
2,725
-
2,725
Net decrease due to consolidation
-
-
-
-
-
-
(34)
(34)
Contributions from noncontrolling interests
-
-
-
-
-
-
5
5
Distributions to noncontrolling interests
-
-
-
-
-
-
(22)
(22)
Other
-
1
76
1
-
78
(3)
75
Balance, end of period
$
4,766
$
(15,386)
$
80,975
$
24,393
$
9,085
$
103,833
$
560
$
104,393
Three Months Ended March 31, 2013
Balance, beginning of year
$
4,766
$
(13,924)
$
80,410
$
14,176
$
12,574
$
98,002
$
667
$
98,669
Net income attributable to AIG or other
noncontrolling interests
-
-
-
2,206
-
2,206
10
2,216
Other comprehensive loss
-
-
-
-
(735)
(735)
(1)
(736)
Contributions from noncontrolling interests
-
-
-
-
-
-
8
8
Distributions to noncontrolling interests
-
-
-
-
-
-
(19)
(19)
Other
-
1
46
-
-
47
(2)
45
Balance, end of period
$
4,766
$
(13,923)
$
80,456
$
16,382
$
11,839
$
99,520
$
663
$
100,183
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Item 1 / Financial statements
American International Group, Inc.
CONDENSED Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31,
(in millions)
2014
2013
Cash flows from operating activities:
Net income
$
1,612
$
2,231
(Income) loss from discontinued operations
47
(73)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Noncash revenues, expenses, gains and losses included in income:
Net gains on sales of securities available for sale and other assets
(246)
(339)
Net (gains) losses on sales of divested businesses
(4)
-
Net losses on extinguishment of debt
238
340
Unrealized (gains) losses in earnings – net
585
(765)
Equity in income from equity method investments, net of dividends or distributions
(441)
(442)
Depreciation and other amortization
1,121
1,203
Impairments of assets
138
139
Changes in operating assets and liabilities:
Property casualty and life insurance reserves
1,495
643
Premiums and other receivables and payables – net
(701)
(458)
Reinsurance assets and funds held under reinsurance treaties
(1,532)
(2,035)
Capitalization of deferred policy acquisition costs
(1,462)
(1,422)
Current and deferred income taxes – net
450
613
Other, net
(537)
216
Total adjustments
(896)
(2,307)
Net cash provided by (used in) operating activities
763
(149)
Cash flows from investing activities:
Proceeds from (payments for)
Sales or distribution of:
Available for sale investments
6,365
7,346
Other securities
1,725
1,728
Other invested assets
1,041
1,741
Maturities of fixed maturity securities available for sale
5,347
5,617
Principal payments received on and sales of mortgage and other loans receivable
765
712
Purchases of:
Available for sale investments
(11,592)
(15,290)
Other securities
(181)
(822)
Other invested assets
(1,218)
(1,762)
Mortgage and other loans receivable
(1,307)
(788)
Net change in restricted cash
(667)
296
Net change in short-term investments
3,588
5,479
Other, net
(83)
(293)
Net cash provided by investing activities
3,783
3,964
Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits
4,008
3,262
Policyholder contract withdrawals
(3,548)
(4,458)
Issuance of long-term debt
1,583
1,395
Repayments of long-term debt
(3,281)
(4,337)
Purchase of Common Stock
(867)
-
Dividends paid
(182)
-
Other, net
(2,002)
420
Net cash used in financing activities
(4,289)
(3,718)
Effect of exchange rate changes on cash
(11)
(36)
Net increase in cash
246
61
Cash at beginning of year
2,241
1,151
Change in cash of businesses held-for-sale
3
15
Cash at end of period
$
2,490
$
1,227
Supplementary Disclosure of Condensed Consolidated Cash Flow Information
Cash paid during the period for:
Interest
$
840
$
983
Taxes
$
165
$
103
Non-cash investing/financing activities:
Interest credited to policyholder contract deposits included in financing activities
$
1,052
$
1,005
See accompanying Notes to Condensed Consolidated Financial Statements.
6
Item 1 / NOTE 1. BASIS OF PRESENTATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION
American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property‑casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG) and the Tokyo Stock Exchange. Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.
These unaudited condensed consolidated financial statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Annual Report). The condensed consolidated financial information as of December 31, 2013 included herein has been derived from audited consolidated financial statements in the 2013 Annual Report.
Certain of our foreign subsidiaries included in the condensed consolidated financial statements report on different fiscal-period bases. The effect on our condensed consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these condensed consolidated financial statements has been recorded. In the opinion of management, these condensed consolidated financial statements contain normal recurring adjustments, including eliminations of material intercompany accounts and transactions, necessary for a fair statement of the results presented herein.
Interim period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to March 31, 2014 and prior to the issuance of these condensed consolidated financial statements.
Sale of ILFC
On December 16, 2013, we entered into a definitive agreement with AerCap Holdings N.V. (AerCap) and AerCap Ireland Limited (Purchaser), a wholly‑owned subsidiary of AerCap, for the sale of 100 percent of the common stock of International Lease Finance Corporation (ILFC) (the AerCap Transaction) for consideration consisting of $3.0 billion in cash, a portion of which will be funded by a special dividend of $600 million to be paid by ILFC to AIG upon consummation of the AerCap Transaction, and approximately 97.6 million newly-issued AerCap common shares. The disposition of the AerCap common shares by AIG will be subject to certain restrictions as to the amount and timing of potential sales in accordance with the definitive agreement. ILFC’s results are reflected in Aircraft leasing revenue and Aircraft leasing expenses in the Condensed Consolidated Statements of Income. The assets and liabilities of ILFC are classified as held‑for‑sale at March 31, 2014 and December 31, 2013 in the Condensed Consolidated Balance Sheets. See Note 4 herein for further discussion.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and assumptions are considered our critical accounting estimates and are related to the determination of:
· classification of ILFC as held-for-sale and related fair value measurement;
7
Item 1 / NOTE 1. BASIS OF PRESENTATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
· income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset;
· liability for unpaid claims and claims adjustment expense;
· reinsurance assets;
· valuation of future policy benefit liabilities and timing and extent of loss recognition;
· valuation of liabilities for guaranteed benefit features of variable annuity products;
· estimated gross profits to value deferred acquisition costs for investment‑oriented products;
· impairment charges, including other‑than‑temporary impairments on available for sale securities, impairments on investments in life settlements and goodwill impairment;
· liability for legal contingencies; and
· fair value measurements of certain financial assets and liabilities.
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Standards Adopted During 2014
Certain Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the Financial Accounting Standards Board (FASB) issued an accounting standard that requires us to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of (i) the amount we agreed to pay on the basis of our arrangement among our co‑obligors and (ii) any additional amount we expect to pay on behalf of our co‑obligors.
We adopted the standard on its required effective date of January 1, 2014. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.
Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of an Investment within a Foreign Entity or of an Investment in a Foreign Entity
In March 2013, the FASB issued an accounting standard addressing whether consolidation guidance or foreign currency guidance applies to the release of the cumulative translation adjustment into net income when a parent sells all or a part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or net assets that are a business (other than a sale of in‑substance real estate) within a foreign entity. The standard also resolves the diversity in practice for the cumulative translation adjustment treatment in business combinations achieved in stages involving foreign entities.
Under this standard, the entire amount of the cumulative translation adjustment associated with the foreign entity should be released into earnings when there has been: (i) a sale of a subsidiary or group of net assets within a foreign entity and the sale represents a complete or substantially complete liquidation of the foreign entity in which the subsidiary or the net assets had
8
Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
resided; (ii) a loss of a controlling financial interest in an investment in a foreign entity; or (iii) a change in accounting method from applying the equity method to an investment in a foreign entity to consolidating the foreign entity.
We adopted the standard on its required effective date of January 1, 2014 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.
Investment Company Guidance
In June 2013, the FASB issued an accounting standard that amends the criteria a company must meet to qualify as an investment company, clarifies the measurement guidance, and requires new disclosures for investment companies. An entity that is regulated by the Securities and Exchange Commission under the Investment Company Act of 1940 (the 1940 Act) qualifies as an investment company. Entities that are not regulated under the 1940 Act must have certain fundamental characteristics and must consider other characteristics to determine whether they qualify as investment companies. An entity’s purpose and design must be considered when making the assessment.
An entity that no longer meets the requirements to be an investment company as a result of this standard should present the change in its status as a cumulative‑effect adjustment to retained earnings as of the beginning of the period of adoption. An entity that is an investment company should apply the standard prospectively as an adjustment to opening net assets as of the effective date. The adjustment to net assets represents both the difference between the fair value and the carrying amount of the entity’s investments and any amount previously recognized in Accumulated other comprehensive income.
We adopted the standard on its required effective date of January 1, 2014 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.
Presentation of Unrecognized Tax Benefits
In July 2013, the FASB issued an accounting standard that requires a liability related to unrecognized tax benefits to be presented as a reduction to the related deferred tax asset for a net operating loss carryforward or a tax credit carryforward. When the carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset.
We adopted the standard on its required effective date of January 1, 2014 on a prospective basis. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.
Future Application of Accounting Standards
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January 2014, the FASB issued an accounting standard that clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, so that the loan is derecognized and the real estate property is recognized.
We plan to adopt the standard on its required effective date of January 1, 2015 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.
9
Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Reporting Discontinued Operations
In April 2014, the FASB issued an accounting standard that changes the requirements for presenting a component or group of components of an entity as a discontinued operation and requires new disclosures. Under the standard, the disposal of a component or group of components of an entity should be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Disposals of equity method investments, or those reported as held-for-sale, will be eligible for presentation as a discontinued operation if they meet the new definition. The standard also requires entities to provide specified disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation.
The standard is effective prospectively for all disposals of components (or classification of components as held-for-sale) of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications of components as held-for-sale) that have not been reported in financial statements previously issued. We plan to adopt the standard on its required effective date of January 1, 2015 and do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.
3. SEGMENT INFORMATION
We report the results of our operations consistent with the manner in which our chief operating decision makers review the business to assess performance and to allocate resources through two reportable segments: AIG Property Casualty and AIG Life and Retirement. We evaluate performance based on revenues and pre‑tax income (loss), excluding results from discontinued operations, because we believe this provides more meaningful information on how our operations are performing.
The following table presents our operations by reportable segment:
2014
2013
Three Months Ended March 31,
Pre-tax Income (Loss)
Pre-tax Income (Loss)
(in millions)
Total Revenues
from continuing operations
Total Revenues
from continuing operations
AIG Property Casualty
Commercial Insurance
$
5,642
$
713
$
5,773
$
1,041
Consumer Insurance
3,258
27
3,506
153
Other
766
569
689
420
Total AIG Property Casualty
9,666
1,309
9,968
1,614
AIG Life and Retirement
Retail
2,766
665
3,003
996
Institutional
1,585
567
1,737
574
Total AIG Life and Retirement
4,351
1,232
4,740
1,570
Other Operations
Mortgage Guaranty
249
77
231
44
Global Capital Markets
59
29
273
227
Direct Investment book
465
355
411
312
Corporate & Other
382
(824)
461
(1,008)
Aircraft Leasing
1,113
17
1,074
43
Consolidation and elimination
(8)
1
(9)
1
Total Other Operations
2,260
(345)
2,441
(381)
AIG Consolidation and elimination
(165)
77
(187)
72
Total AIG Consolidated
$
16,112
$
2,273
$
16,962
$
2,875
10
Item 1 / NOTE 4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS
Held-For-Sale Classification
On December 16, 2013, we entered into a definitive agreement with AerCap and Purchaser, a wholly‑owned subsidiary of AerCap, for the sale of 100 percent of the common stock of ILFC (the AerCap Transaction) for consideration consisting of $3.0 billion in cash, a portion of which will be funded by a special dividend of $600 million to be paid by ILFC to AIG upon consummation of the transaction, and approximately 97.6 million newly‑issued AerCap common shares. The consideration had a value of approximately $5.4 billion based on AerCap’s pre‑announcement closing price per share of $24.93 on December 13, 2013. The disposition of the AerCap common shares by AIG will be subject to certain restrictions as to the amount and timing of potential sales in accordance with the definitive agreement. In connection with the AerCap Transaction, we entered into a credit agreement for a senior unsecured revolving credit facility between the Purchaser as borrower and AIG as lender (the Revolving Credit Facility). The Revolving Credit Facility provides for an aggregate commitment of $1 billion and permits loans for general corporate purposes after the closing of the AerCap Transaction. The AerCap Transaction was approved by AerCap shareholders on February 13, 2014 and we expect it to close in the second quarter of 2014. We determined ILFC continued to meet the criteria for held‑for‑sale accounting at March 31, 2014. Because we expect to hold approximately 46 percent of the common stock of the combined company upon closing of the transaction, ILFC’s results are presented in continuing operations for all periods presented.
The following table summarizes the components of ILFC assets and liabilities held-for-sale:
March 31,
December 31,
(in millions)
2014
2013
Assets:
Equity securities
$
4
$
3
Mortgage and other loans receivable, net
262
229
Flight equipment primarily under operating leases, net of accumulated depreciation
35,612
35,508
Short-term investments
1,626
658
Cash
84
88
Premiums and other receivables, net of allowance
343
318
Other assets
2,798
2,066
Assets held-for-sale
40,729
38,870
Less: Loss accrual
(9,962)
(9,334)
Total assets held-for-sale
$
30,767
$
29,536
Liabilities:
Other liabilities
$
3,082
$
3,127
Long-term debt
22,733
21,421
Total liabilities held-for-sale
$
25,815
$
24,548
Discontinued Operations
In connection with the 2010 sale of American Life Insurance Company (ALICO) to MetLife, Inc. (MetLife), we recognized the following income (loss) from discontinued operations:
Three Months Ended March 31,
(in millions)
2014
2013
Revenues:
Gain (loss) on sale
$
(1)
$
117
Income from discontinued operations, before income tax expense
(1)
117
Income tax expense
46
44
Income (loss) from discontinued operations, net of income tax expense
$
(47)
$
73
11
Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
5. FAIR VALUE MEASUREMENTS
Fair Value Measurements on a Recurring Basis
Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three “levels” based on the observability of valuation inputs:
· Level 1: Fair value measurements based on quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.
· Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
· Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
12
Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:
March 31, 2014
Counterparty
Cash
(in millions)
Level 1
Level 2
Level 3
Netting*
Collateral
Total
Assets:
Bonds available for sale:
U.S. government and government sponsored entities
$
3
$
2,919
$
-
$
-
$
-
$
2,922
Obligations of states, municipalities and political subdivisions
-
28,547
2,042
-
-
30,589
Non-U.S. governments
629
21,238
17
-
-
21,884
Corporate debt
-
145,176
1,815
-
-
146,991
RMBS
-
21,540
15,764
-
-
37,304
CMBS
-
6,354
5,741
-
-
12,095
CDO/ABS
-
4,542
6,610
-
-
11,152
Total bonds available for sale
632
230,316
31,989
-
-
262,937
Other bond securities:
U.S. government and government sponsored entities
28
5,366
-
-
-
5,394
Obligations of states, municipalities and political subdivisions
-
122
-
-
-
122
Non-U.S. governments
-
2
-
-
-
2
Corporate debt
-
1,108
-
-
-
1,108
RMBS
-
1,282
1,069
-
-
2,351
CMBS
-
508
770
-
-
1,278
CDO/ABS
-
2,965
8,498
-
-
11,463
Total other bond securities
28
11,353
10,337
-
-
21,718
Equity securities available for sale:
Common stock
3,078
1
-
-
-
3,079
Preferred stock
-
28
-
-
-
28
Mutual funds
767
4
-
-
-
771
Total equity securities available for sale
3,845
33
-
-
-
3,878
Other equity securities
653
72
-
-
-
725
Other invested assets
24
2,853
5,990
-
-
8,867
Derivative assets:
Interest rate contracts
12
3,750
35
-
-
3,797
Foreign exchange contracts
-
37
-
-
-
37
Equity contracts
84
34
89
-
-
207
Commodity contracts
-
-
1
-
-
1
Credit contracts
-
-
41
-
-
41
Other contracts
-
-
36
-
-
36
Counterparty netting and cash collateral
-
-
-
(1,680)
(838)
(2,518)
Total derivative assets
96
3,821
202
(1,680)
(838)
1,601
Short-term investments
392
3,361
-
-
-
3,753
Separate account assets
69,216
3,377
-
-
-
72,593
Other assets
-
-
-
-
-
-
Total
$
74,886
$
255,186
$
48,518
$
(1,680)
$
(838)
$
376,072
Liabilities:
Policyholder contract deposits
$
-
$
66
$
765
$
-
$
-
$
831
Derivative liabilities:
Interest rate contracts
-
4,213
133
-
-
4,346
Foreign exchange contracts
-
254
-
-
-
254
Equity contracts
-
92
1
-
-
93
Commodity contracts
-
4
-
-
-
4
Credit contracts
-
-
1,226
-
-
1,226
Other contracts
-
26
145
-
-
171
Counterparty netting and cash collateral
-
-
-
(1,680)
(1,375)
(3,055)
Total derivative liabilities
-
4,589
1,505
(1,680)
(1,375)
3,039
Long-term debt
-
5,616
403
-
-
6,019
Other liabilities
87
451
-
-
-
538
Total
$
87
$
10,722
$
2,673
$
(1,680)
$
(1,375)
$
10,427
13
Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
December 31, 2013
Counterparty
Cash
(in millions)
Level 1
Level 2
Level 3
Netting*
Collateral
Total
Assets:
Bonds available for sale:
U.S. government and government sponsored entities
$
133
$
3,062
$
-
$
-
$
-
$
3,195
Obligations of states, municipalities and political subdivisions
-
28,300
1,080
-
-
29,380
Non-U.S. governments
508
21,985
16
-
-
22,509
Corporate debt
-
143,297
1,255
-
-
144,552
RMBS
-
21,207
14,941
-
-
36,148
CMBS
-
5,747
5,735
-
-
11,482
CDO/ABS
-
4,034
6,974
-
-
11,008
Total bonds available for sale
641
227,632
30,001
-
-
258,274
Other bond securities:
U.S. government and government sponsored entities
78
5,645
-
-
-
5,723
Obligations of states, municipalities and political subdivisions
-
121
-
-
-
121
Non-U.S. governments
-
2
-
-
-
2
Corporate debt
-
1,169
-
-
-
1,169
RMBS
-
1,326
937
-
-
2,263
CMBS
-
509
844
-
-
1,353
CDO/ABS
-
3,158
8,834
-
-
11,992
Total other bond securities
78
11,930
10,615
-
-
22,623
Equity securities available for sale:
Common stock
3,218
-
1
-
-
3,219
Preferred stock
-
27
-
-
-
27
Mutual funds
408
2
-
-
-
410
Total equity securities available for sale
3,626
29
1
-
-
3,656
Other equity securities
750
84
-
-
-
834
Other invested assets
1
2,667
5,930
-
-
8,598
Derivative assets:
Interest rate contracts
14
3,716
41
-
-
3,771
Foreign exchange contracts
-
52
-
-
-
52
Equity contracts
151
106
49
-
-
306
Commodity contracts
-
-
1
-
-
1
Credit contracts
-
-
55
-
-
55
Other contracts
-
1
33
-
-
34
Counterparty netting and cash collateral
-
-
-
(1,734)
(820)
(2,554)
Total derivative assets
165
3,875
179
(1,734)
(820)
1,665
Short-term investments
332
5,981
-
-
-
6,313
Separate account assets
67,708
3,351
-
-
-
71,059
Other assets
-
418
-
-
-
418
Total
$
73,301
$
255,967
$
46,726
$
(1,734)
$
(820)
$
373,440
Liabilities:
Policyholder contract deposits
$
-
$
72
$
312
$
-
$
-
$
384
Derivative liabilities:
Interest rate contracts
-
3,661
141
-
-
3,802
Foreign exchange contracts
-
319
-
-
-
319
Equity contracts
-
101
-
-
-
101
Commodity contracts
-
5
-
-
-
5
Credit contracts
-
-
1,335
-
-
1,335
Other contracts
-
25
142
-
-
167
Counterparty netting and cash collateral
-
-
-
(1,734)
(1,484)
(3,218)
Total derivative liabilities
-
4,111
1,618
(1,734)
(1,484)
2,511
Long-term debt
-
6,377
370
-
-
6,747
Other liabilities
42
891
-
-
-
933
Total
$
42
$
11,451
$
2,300
$
(1,734)
$
(1,484)
$
10,575
* Represents netting of derivative exposures covered by a qualifying master netting agreement.
Transfers of Level 1 and Level 2 Assets and Liabilities
Our policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. During the three month periods ended March 31, 2014 and 2013, we transferred $62 million and $239 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, respectively, as they are no longer considered actively traded. For similar reasons, during the three
14
Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
month periods ended March 31, 2014 and 2013, we transferred $103 million and $93 million, respectively, of securities issued by the U.S. government and U.S. government‑sponsored entities from Level 1 to Level 2. We had no material transfers from Level 2 to Level 1 during the three month periods ended March 31, 2014 and 2013.
Changes in Level 3 Recurring Fair Value Measurements
The following tables present changes during the three-month periods ended March 31, 2014 and 2013 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets at March 31, 2014 and 2013:
Net
Changes in
Realized and
Unrealized Gains
Unrealized
Purchases,
(Losses) Included
Fair Value
Gains (Losses)
Other
Sales,
Gross
Gross
Fair Value
in Income on
Beginning
Included
Comprehensive
Issues and
Transfers
Transfers
End
Instruments Held
(in millions)
of Period(a)
in Income
Income (Loss)
Settlements, Net
in
out
of Period
at End of Period
Three Months Ended March 31, 2014
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions(b)
$
1,080
$
-
$
117
$
846
$
-
$
(1)
$
2,042
$
-
Non-U.S. governments
16
-
(1)
2
-
-
17
-
Corporate debt
1,255
(3)
20
4
648
(109)
1,815
-
RMBS
14,941
244
133
557
-
(111)
15,764
-
CMBS
5,735
6
111
(50)
-
(61)
5,741
-
CDO/ABS
6,974
34
2
8
66
(474)
6,610
-
Total bonds available for sale
30,001
281
382
1,367
714
(756)
31,989
-
Other bond securities:
RMBS
937
28
-
104
-
-
1,069
16
CMBS
844
17
-
(91)
-
-
770
14
CDO/ABS
8,834
335
-
(451)
-
(220)
8,498
166
Total other bond securities
10,615
380
-
(438)
-
(220)
10,337
196
Equity securities available for sale:
Common stock
1
-
-
-
-
(1)
-
-
Preferred stock
-
-
-
-
-
-
-
-
Total equity securities available for sale
1
-
-
-
-
(1)
-
-
Other invested assets
5,930
79
54
49
85
(207)
5,990
-
Total
$
46,547
$
740
$
436
$
978
$
799
$
(1,184)
$
48,316
$
196
Liabilities:
Policyholder contract deposits
$
(312)
$
(474)
$
(8)
$
29
$
-
$
-
$
(765)
$
(82)
Derivative liabilities, net:
-
Interest rate contracts
(100)
(6)
-
8
-
-
(98)
(1)
Equity contracts
49
(3)
-
(5)
47
-
88
(6)
Commodity contracts
1
-
-
-
-
-
1
-
Credit contracts
(1,280)
80
-
15
-
-
(1,185)
94
Other contracts
(109)
16
(1)
(15)
-
-
(109)
12
Total derivative liabilities, net
(1,439)
87
(1)
3
47
-
(1,303)
99
Long-term debt(c)
(370)
(3)
-
19
(70)
21
(403)
7
Total
$
(2,121)
$
(390)
$
(9)
$
51
$
(23)
$
21
$
(2,471)
$
24
Net
Changes in
Realized and
Unrealized Gains
Unrealized
Purchases,
(Losses) Included
Fair Value
Gains (Losses)
Other
Sales,
Gross
Gross
Fair Value
in Income on
Beginning
Included
Comprehensive
Issues and
Transfers
Transfers
End
Instruments Held
(in millions)
of Period(a)
in Income
Income (Loss)
Settlements, Net
in
out
of Period
at End of Period
Three Months Ended March 31, 2013
Assets:
Bonds available for sale:
Obligations of states, municipalities
and political subdivisions
$
1,024
$
1
$
(5)
$
136
$
-
$
(137)
$
1,019
$
-
Non-U.S. governments
14
1
-
2
1
-
18
-
Corporate debt
1,487
(4)
6
22
77
(139)
1,449
-
RMBS
11,662
205
481 <