10-Q 1 a2214786z10-q.htm 10-Q

Table of Contents

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, 2013

  Commission File Number 1-8787

GRAPHIC

American International Group, Inc.
(Exact name of registrant as specified in its charter)

    Delaware
(State or other jurisdiction of
incorporation or organization)
  13-2592361
(I.R.S. Employer
Identification No.)
   

 

 

180 Maiden Lane, New York, New York
(Address of principal executive offices)

 

10038
(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 þ    No o

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 þ    No o

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 þ   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

As of April 25, 2013, there were 1,476,345,165 shares outstanding of the registrant's common stock.

   


Table of Contents

AMERICAN INTERNATIONAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2013
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

  8

 

Note 2.    Summary of Significant Accounting Policies

  9

 

Note 3.    Segment Information

  10

 

Note 4.    Held-For-Sale Classification and Discontinued Operations

  11

 

Note 5.    Fair Value Measurements

  13

 

Note 6.    Investments

  28

 

Note 7.    Lending Activities

  36

 

Note 8.    Variable Interest Entities

  37

 

Note 9.    Derivatives and Hedge Accounting

  39

 

Note 10.  Contingencies, Commitments and Guarantees

  44

 

Note 11.  Total Equity

  55

 

Note 12.  Noncontrolling Interests

  59

 

Note 13.  Earnings Per Share

  60

 

Note 14.  Employee Benefits

  61

 

Note 15.  Income Taxes

  61

 

Note 16.  Information Provided in Connection with Outstanding Debt

  63

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  68

 

        • Cautionary Statement Regarding Forward-Looking Information

  68

 

        • Use of Non-GAAP Measures

  71

 

        • Executive Overview

  72

 

        • Results of Operations

  80

 

        • Liquidity and Capital Resources

  119

 

        • Investments

  134

 

        • Enterprise Risk Management

  150

 

        • Critical Accounting Estimates

  158

 

        • Regulatory Environment

  161

 

        • Glossary

  163

 

        • Acronyms

  166

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

  167

Item 4

 

Controls and Procedures

  167

PART II — OTHER INFORMATION

  


Item 1

 

Legal Proceedings

  168

Item 1A

 

Risk Factors

  168

Item 4

 

Mine Safety Disclosures

  168

Item 6

 

Exhibits

  168

SIGNATURES

 
169

  


1


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. / FINANCIAL STATEMENTS

 

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)

 
 


   
 
   
(in millions, except for share data)
 

March 31,
2013

  December 31,
2012

 
   

Assets:

 
 
    
 
     

Investments:

 
 
    
 
     

Fixed maturity securities:

 
 
    
 
     

Bonds available for sale, at fair value (amortized cost: 2013 – $247,592; 2012 – $246,149)

 
$
270,251
 
$ 269,959  

Bond trading securities, at fair value

 
 
23,855
 
  24,584  

Equity securities:

 
 
    
 
     

Common and preferred stock available for sale, at fair value (cost: 2013 – $1,529; 2012 – $1,640)

 
 
3,108
 
  3,212  

Common and preferred stock trading, at fair value

 
 
696
 
  662  

Mortgage and other loans receivable, net of allowance  (portion measured at fair value: 2013 – $58; 2012 – $134)

 
 
19,488
 
  19,482  

Other invested assets (portion measured at fair value: 2013 – $7,317; 2012 – $7,056)

 
 
28,965
 
  29,117  

Short-term investments (portion measured at fair value: 2013 – $6,412; 2012 – $8,056)

 
 
23,336
 
  28,808
   

Total investments

 
 
369,699
 
  375,824  

 
 
    
 
     

Cash

 
 
1,227
 
  1,151  

Accrued investment income

 
 
3,093
 
  3,054  

Premiums and other receivables, net of allowance

 
 
15,310
 
  13,989  

Reinsurance assets, net of allowance

 
 
27,604
 
  25,595  

Deferred income taxes

 
 
17,741
 
  17,466  

Deferred policy acquisition costs

 
 
7,972
 
  8,182  

Derivative assets, at fair value

 
 
3,290
 
  3,671  

Other assets, including restricted cash of $1,886 in 2013 and $1,878 in 2012

 
 
     
 
        

(portion measured at fair value: 2013 – $694; 2012 – $696)

 
 
10,069
 
  10,399  

Separate account assets, at fair value

 
 
61,059
 
  57,337  

Assets held for sale

 
 
31,816
 
  31,965
   

Total assets

 
$
548,880
 
$ 548,633
   

Liabilities:

 
 
    
 
     

Liability for unpaid claims and claims adjustment expense

 
$
85,774
 
$ 87,991  

Unearned premiums

 
 
24,200
 
  22,537  

Future policy benefits for life and accident and health insurance contracts

 
 
40,443
 
  40,523  

Policyholder contract deposits (portion measured at fair value: 2013 – $1,047; 2012 – $1,257)

 
 
121,856
 
  122,980  

Other policyholder funds

 
 
5,728
 
  6,267  

Derivative liabilities, at fair value

 
 
3,711
 
  4,061  

Other liabilities (portion measured at fair value: 2013 – $924; 2012 – $1,080)

 
 
33,108
 
  32,068  

Long-term debt (portion measured at fair value: 2013 – $7,663; 2012 – $8,055)

 
 
45,266
 
  48,500  

Separate account liabilities

 
 
61,059
 
  57,337  

Liabilities held for sale

 
 
27,164
 
  27,366
   

Total liabilities

 
 
448,309
 
  449,630
   

Contingencies, commitments and guarantees (see Note 10)

 
 
    
 
     

 
 
    
 
     

Redeemable noncontrolling interests (see Note 12)

 
 
388
 
  334  

 
 
    
 
     

AIG shareholders' equity:

 
 
    
 
     

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2013 –

 
 
     
 
        

1,906,612,296 and 2012 – 1,906,611,680

 
 
4,766
 
  4,766  

Treasury stock, at cost; 2013 – 430,267,133; 2012 – 430,289,745 shares of common stock

 
 
(13,923
)
  (13,924 )

Additional paid-in capital

 
 
80,456
 
  80,410  

Retained earnings

 
 
16,382
 
  14,176  

Accumulated other comprehensive income

 
 
11,839
 
  12,574
   

Total AIG shareholders' equity

 
 
99,520
 
  98,002  

Non-redeemable noncontrolling interests (including $100 associated with businesses held for sale)

 
 
663
 
  667
   

Total equity

 
 
100,183
 
  98,669
   

Total liabilities and equity

 
$
548,880
 
$ 548,633
   

See accompanying Notes to Condensed Consolidated Financial Statements.

2


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited)

 
 


   
 
   
Three Months Ended March 31,
(dollars in millions, except per share data)
 

2013

  2012
 
   

Revenues:

 
 
 
 
     

Premiums

 
$
9,372
 
$ 9,470  

Policy fees

 
 
615
 
  584  

Net investment income

 
 
4,164
 
  7,105  

Net realized capital gains (losses):

 
 
 
 
     

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

 
 
(40
)
  (168 )

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

 
 
 
 
     

fixed maturity securities recognized in Other comprehensive
income (loss)

 
 
(1
)
  (285 )
   

Net other-than-temporary impairments on available for sale
securities recognized in net income

 
 
(41
)
  (453 )

Other realized capital gains

 
 
341
 
  202
   

Total net realized capital gains (losses)

 
 
300
 
  (251 )

Other income

 
 
1,437
 
  589
   

Total revenues

 
 
15,888
 
  17,497
   

Benefits, claims and expenses:

 
 
 
 
     

Policyholder benefits and claims incurred

 
 
6,728
 
  7,119  

Interest credited to policyholder account balances

 
 
1,017
 
  1,062  

Amortization of deferred acquisition costs

 
 
1,286
 
  1,347  

Other acquisition and insurance expenses

 
 
2,238
 
  2,258  

Interest expense

 
 
577
 
  565  

Loss on extinguishment of debt

 
 
340
 
   

Other expenses

 
 
870
 
  680
   

Total benefits, claims and expenses

 
 
13,056
 
  13,031
   

Income from continuing operations before income tax expense

 
 
2,832
 
  4,466  

Income tax expense

 
 
694
 
  1,081
   

Income from continuing operations

 
 
2,138
 
  3,385  

Income from discontinued operations, net of income tax expense

 
 
93
 
  64
   

Net income

 
 
2,231
 
  3,449
   

Less:

 
 
 
 
     

Net income from continuing operations attributable to
noncontrolling interests:

 
 
 
 
     

Nonvoting, callable, junior and senior preferred interests

 
 
 
  208  

Other

 
 
25
 
  33
   

Total net income from continuing operations attributable to
noncontrolling interests

 
 
25
 
  241
   

Net income attributable to AIG

 
$
2,206
 
$ 3,208
   

Income per common share attributable to AIG:

 
 
 
 
     

Basic and diluted:

 
 
 
 
     

Income from continuing operations

 
$
1.43
 
$ 1.68  

Income from discontinued operations

 
$
0.06
 
$ 0.03  

Net Income attributable to AIG

 
$
1.49
 
$ 1.71
   

Weighted average shares outstanding:

 
 
 
 
     

Basic

 
 
1,476,471,097
 
  1,875,972,970  

Diluted

 
 
1,476,678,931
 
  1,876,002,775
   

See accompanying Notes to Condensed Consolidated Financial Statements.

3


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

 
 


   
 
   
Three Months Ended March 31,
(in millions)
 

2013

  2012
 
   

Net income

 
$
2,231
 
$ 3,449
   

Other comprehensive income (loss), net of tax

 
 
     
 
     

Change in unrealized appreciation of fixed maturity investments on which
other-than-temporary credit impairments were taken

 
 
282
 
  613  

Change in unrealized appreciation (depreciation) of all other investments

 
 
(788
)
  981  

Change in foreign currency translation adjustments

 
 
(273
)
  91  

Change in net derivative gains arising from cash flow hedging activities

 
 
 
  22  

Change in retirement plan liabilities adjustment

 
 
44
 
  18
   

Other comprehensive income (loss)

 
 
(735
)
  1,725
   

Comprehensive income

 
 
1,496
 
  5,174  

Comprehensive income attributable to noncontrolling nonvoting, callable, junior and senior
preferred interests

 
 
 
  208  

Comprehensive income attributable to other noncontrolling interests

 
 
25
 
  38
   

Total comprehensive income attributable to noncontrolling interests

 
 
25
 
  246
   

Comprehensive income attributable to AIG

 
$
1,471
 
$ 4,928
   

   

See accompanying Notes to Condensed Consolidated Financial Statements.

4


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY (unaudited)

   
Three Months Ended
March 31, 2013

(in millions)
  Common
Stock

  Treasury
Stock

  Additional
Paid-in
Capital

  Retained
Earnings

  Accumulated
Other
Comprehensive
Income

  Total AIG
Share-
holders'
Equity

  Non
redeemable
Non-
controlling
Interests

  Total
Equity

 
   

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 )

Deferred income taxes

            (5 )           (5 )       (5 )

Contributions from
noncontrolling interests

                            8     8  

Distributions to noncontrolling
interests

                            (19 )   (19 )

Other

        1     51             52     (2 )   50
   

Balance, end of period

  $ 4,766   $ (13,923 ) $ 80,456   $ 16,382   $ 11,839   $ 99,520   $ 663   $ 100,183
   

*     Excludes gains of $15 million for the three months ended March 31, 2013 attributable to redeemable noncontrolling interests. See Note 12 to the Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

5


Table of Contents

ITEM 1. / FINANCIAL STATEMENTS

AMERICAN INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

 
 


   
 
   
Three Months Ended March 31,
(in millions)
 

2013

  2012
 
   

Cash flows from operating activities:

 
 
     
 
        

Net income

 
$
2,231
 
$ 3,449  

Income from discontinued operations

 
 
(93
)
  (64 )
   

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

 
 
(339
)
  (925 )

Net (gains) losses on extinguishment of debt

 
 
340
 
   

Unrealized gains in earnings — net

 
 
(769
)
  (3,425 )

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

 
 
(442
)
  (225 )

Depreciation and other amortization

 
 
1,180
 
  1,215  

Impairments of assets

 
 
139
 
  687  

Changes in operating assets and liabilities:

 
 
     
 
        

Property casualty and life insurance reserves

 
 
643
 
  271  

Premiums and other receivables and payables — net

 
 
(474
)
  (51 )

Reinsurance assets and funds held under reinsurance treaties

 
 
(2,035
)
  (1,059 )

Capitalization of deferred policy acquisition costs

 
 
(1,422
)
  (1,417 )

Current and deferred income taxes — net

 
 
590
 
  1,003  

Other, net

 
 
(326
)
  47
   

Total adjustments

 
 
(2,915
)
  (3,879 )
   

Net cash used in operating activities — continuing operations

 
 
(777
)
  (494 )

Net cash provided by operating activities — discontinued operations

 
 
628
 
  588
   

Net cash provided by (used in) operating activities

 
 
(149
)
  94
   

Cash flows from investing activities:

 
 
     
 
        

Proceeds from (payments for)

 
 
     
 
        

Sales or distribution of:

 
 
     
 
        

Available for sale investments

 
 
7,346
 
  10,749  

Trading securities

 
 
1,728
 
  3,080  

Other invested assets

 
 
1,740
 
  6,781  

Maturities of fixed maturity securities available for sale

 
 
5,617
 
  4,853  

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

 
 
703
 
  709  

Purchases of:

 
 
     
 
        

Available for sale investments

 
 
(15,290
)
  (13,955 )

Trading securities

 
 
(822
)
  (924 )

Other invested assets

 
 
(1,269
)
  (1,196 )

Mortgage and other loans receivable issued and purchased

 
 
(788
)
  (794 )

Net change in restricted cash

 
 
(8
)
  (561 )

Net change in short-term investments

 
 
5,721
 
  1,480  

Other, net

 
 
(291
)
  (463 )
   

Net cash provided by investing activities — continuing operations

 
 
4,387
 
  9,759  

Net cash provided by (used in) investing activities — discontinued operations

 
 
(423
)
  222
   

Net cash provided by investing activities

 
 
3,964
 
  9,981
   

Cash flows from financing activities:

 
 
     
 
        

Proceeds from (payments for)

 
 
     
 
        

Policyholder contract deposits

 
 
3,262
 
  3,510  

Policyholder contract withdrawals

 
 
(4,458
)
  (3,930 )

Issuance of long-term debt

 
 
131
 
  2,230  

Repayments of long-term debt

 
 
(2,861
)
  (1,994 )

Repayment of Department of the Treasury SPV Preferred Interests

 
 
 
  (8,636 )

Purchase of Common Stock

 
 
 
  (3,000 )

Other, net

 
 
430
 
  1,345
   

Net cash used in financing activities — continuing operations

 
 
(3,496
)
  (10,475 )

Net cash provided by (used in) financing activities — discontinued operations

 
 
(222
)
  243
   

Net cash used in financing activities

 
 
(3,718
)
  (10,232 )
   

Effect of exchange rate changes on cash

 
 
(36
)
  (2 )
   

Net increase (decrease) in cash

 
 
61
 
  (159 )

Cash at beginning of period

 
 
1,151
 
  1,474  

Change in cash of businesses held for sale

 
 
15
 
 
   

Cash at end of period

 
$
1,227
 
$ 1,315
   

6


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ITEM 1. / FINANCIAL STATEMENTS

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 
 


   
 
   
Three Months Ended March 31,
(in millions)
 

2013

  2012
 
   

Cash paid during the period for:

 
 
     
 
        

Interest

 
$
983
 
$ 939  

Taxes

 
$
103
 
$ 97  

Non-cash investing/financing activities:

 
 
     
 
        

Interest credited to policyholder contract deposits included in financing activities

 
$
1,005
 
$ 1,100
   

See accompanying Notes to Condensed Consolidated Financial Statements.

7


Table of Contents

ITEM 1. / NOTE 1. BASIS OF PRESENTATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATION

 

American International Group, Inc. (AIG) is a leading 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 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, 2012 (2012 Annual Report). The condensed consolidated financial information as of December 31, 2012 included herein has been derived from audited consolidated financial statements in the 2012 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 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, 2013 and prior to the issuance of these consolidated financial statements.

Presentation Changes

 

Advisory fee income, and the related commissions and advisory fee expenses of AIG Life and Retirement's broker dealer business, are now being presented on a gross basis within Other income and Other expenses, respectively. Previously, these amounts were included on a net basis within Policy fees on AIG's Condensed Consolidated Statement of Income and in AIG Life and Retirement's segment results.

In addition, policyholder benefits related to certain payout annuities, primarily with life contingent features, are now being presented on the Condensed Consolidated Balance Sheet as Future policy benefits for life and accident and health insurance contracts instead of as Policyholder contract deposits.

Prior period amounts were conformed to the current period presentation. These changes did not affect Income from continuing operations before income tax expense, Net income attributable to AIG or Total liabilities.

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. We consider the accounting policies that are most dependent on the application of estimates and assumptions to be those relating to items considered by management in the determination of:

classification of International Lease Finance Corporation (ILFC) as held for sale;

insurance liabilities, including property 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;

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ITEM 1. / NOTE 1. BASIS OF PRESENTATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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.

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 2013

 

Testing Indefinite-Lived Intangible Assets for Impairment

 

In July 2012, the Financial Accounting Standards Board (FASB) issued an accounting standard that allows a company to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired. We are not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless we determine that it is more likely than not the asset is impaired.

The standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We adopted the standard on its required effective date of January 1, 2013. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.

Disclosures about Offsetting Assets and Liabilities

 

In February 2013, the FASB issued guidance that clarifies the scope of transactions subject to disclosures about offsetting assets and liabilities. The guidance applies to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are offset either in accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement.

The standard is effective for fiscal years and interim periods beginning on or after January 1, 2013, and was applied retrospectively to all comparative periods presented. The adoption of this standard had no material effect on our consolidated financial condition, results of operations or cash flows.

Presentation of Comprehensive Income

 

In February 2013, the FASB issued guidance on the presentation requirements for items reclassified out of Accumulated other comprehensive income. We are required to disclose the effect of significant items reclassified out of Accumulated other comprehensive income on the respective line items of net income or provide a cross-reference to other disclosures currently required under GAAP.

The standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The adoption of this standard had no effect on our consolidated financial condition, results of operations or cash flows.

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ITEM 1. / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Future Application of Accounting Standards

 

Certain Obligations Resulting from Joint and Several Liability Arrangements

 

In February 2013, the 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. The standard is effective for fiscal years and interim periods beginning after December 15, 2013, but earlier adoption is permitted. Upon adoption, the guidance should be applied retrospectively to all prior periods presented. We are assessing the effect of adopting this standard on our consolidated financial statements.

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 guidance about 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 guidance also resolves the diversity in practice for the cumulative translation adjustment treatment in business combinations achieved in stages involving foreign entities.

Under this guidance, the entire amount of the cumulative translation adjustment associated with the foreign entity would 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 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.

The standard is effective for fiscal years and interim periods beginning on or after January 1, 2014, and will be applied prospectively. We do not expect 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 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.

AIG Property Casualty Investment Income Allocation

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 and allocated capital. Starting with the first quarter of 2013, AIG Property Casualty began applying similar duration and risk-free yields (plus an illiquidity premium) to the allocated capital of Commercial Insurance and Consumer Insurance as is applied to reserves.

AIG Life and Retirement Operating Segment Change

In 2012, AIG Life and Retirement announced several key organizational structure and management changes intended to better serve the organization's distribution partners and customers. Key aspects of the new structure include distinct product manufacturing divisions, shared annuity and life operations platforms and a unified all-channel distribution organization with access to all AIG Life and Retirement products.

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ITEM 1. / NOTE 3. SEGMENT INFORMATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

In addition, during the first quarter of 2013, AIG Life and Retirement completed its previously announced reporting structure changes and now presents its results in the following two operating segments:

    Retail - product lines include life insurance and accident and health (A&H), fixed annuities, retirement income solutions (including variable and indexed annuities), brokerage services and retail mutual funds.

    Institutional - product lines include group retirement, group benefits and institutional markets. The institutional markets product line consists of stable value wrap products, structured settlement and terminal funding annuities, private placement variable life and annuities, guaranteed investment contracts (GICs), and corporate and bank-owned life insurance.

Prior to the first quarter of 2013, AIG Life and Retirement was presented as two operating segments: Life Insurance and Retirement Services. These changes align financial reporting with the manner in which AIG's chief operating decision makers review the business to assess performance and to allocate resources. Prior periods have been revised to reflect the new structure, which did not affect previously reported pre-tax income from continuing operations for AIG Life and Retirement.

The following table presents AIG's operations by reportable segment:

 
 


   
   
 
   
 
  2013   2012  
Three Months Ended March 31,
(in millions)
 

Total Revenues

 

Pre-tax Income from
continuing operations

  Total Revenues
  Pre-tax Income from
continuing operations

 
   

AIG Property Casualty

 
 
     
 
 
     
 
           

Commercial Insurance

 
$
5,773
 
$
1,041
 
$ 5,893   $ 645  

Consumer Insurance

 
 
3,506
 
 
153
 
  3,612     234  

Other

 
 
680
 
 
410
 
  293     31
   

Total AIG Property Casualty

 
$
9,959
 
$
1,604
 
$ 9,798   $ 910
   

AIG Life and Retirement

 
 
     
 
 
     
 
                 

Retail

 
 
3,003
 
 
996
 
  2,399     484  

Institutional

 
 
1,737
 
 
574
 
  1,503     378
   

Total AIG Life and Retirement

 
$
4,740
 
$
1,570
 
$ 3,902   $ 862
   

Other Operations

 
 
     
 
 
     
 
                 

Mortgage Guaranty

 
 
231
 
 
44
 
  200     8  

Global Capital Markets

 
 
273
 
 
227
 
  160     88  

Direct Investment Book

 
 
411
 
 
312
 
  344     248  

Retained Interests

 
 
 
 
 
  3,047     3,047  

Corporate & Other

 
 
402
 
 
(998
)
  262     (658 )

Consolidation and Elimination

 
 
(9
)
 
1
 
  (10 )   3
   

Total Other Operations

 
$
1,308
 
$
(414
)
$ 4,003   $ 2,736
   

AIG Consolidation and Elimination

 
 
(119
)
 
72
 
  (206 )   (42 )
   

Total AIG Consolidated

 
$
15,888
 
$
2,832
 
$ 17,497   $ 4,466
   

4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS

 

International Lease Finance Corporation Sale

 

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 $4.2 billion in cash (the ILFC Transaction). Jumbo Acquisition Limited may elect to purchase an additional 9.9 percent of the common stock of ILFC for $522.5 million (the Option) within ten days after approval of the ILFC Transaction and the Option by the Committee on Foreign Investment in the United States. We will retain a 10 percent ownership interest in ILFC if the Option is exercised, or a 19.9 percent ownership interest in ILFC if the Option is not exercised by Jumbo Acquisition Limited. If the Option is exercised, we expect our ownership at closing will be 9.4 percent due to immediate dilution from anticipated management issuances. The transaction is subject to required regulatory approvals and other customary closing conditions.

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ITEM 1. / NOTE 4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

We determined ILFC met the criteria for held for sale and discontinued operations accounting at March 31, 2013 and December 31, 2012. Depreciation and amortization expense is not recorded on the assets of a business after the business is classified as held for sale. At the closing of the transaction, AIG will return $1.1 billion to ILFC in connection with the termination of intercompany arrangements between AIG and ILFC.

The following table summarizes the components of assets and liabilities held-for-sale on the Condensed Consolidated Balance Sheet as of March 31, 2013 and December 31, 2012:

 
 


   
 
   
(in millions)
 

March 31,
2013

  December 31,
2012

 
   

Assets:

 
 
     
 
        

Equity securities

 
$
2
 
$ 1  

Mortgage and other loans receivable, net

 
 
118
 
  117  

Flight equipment primarily under operating leases, net of accumulated depreciation

 
 
34,810
 
  34,468  

Short-term investments

 
 
2,103
 
  1,861  

Cash

 
 
48
 
  63  

Premiums and other receivables, net of allowance

 
 
291
 
  308  

Other assets

 
 
1,714
 
  1,864
   

Assets of businesses held for sale

 
 
39,086
 
  38,682
   

Less: Loss accrual

 
 
(7,270
)
  (6,717 )
   

Total assets held for sale

 
$
31,816
 
$ 31,965
   

Liabilities:

 
 
     
 
        

Other liabilities

 
$
3,050
 
$ 3,043  

Other long-term debt

 
 
24,114
 
  24,323
   

Total liabilities held for sale

 
$
27,164
 
$ 27,366
   

The following table summarizes income from discontinued operations:

 
 


   
 
   
Three Months Ended March 31,
(in millions)
 

2013

  2012
 
   

Revenues:

 
 
     
 
        

Aircraft leasing revenue

 
$
1,078
 
$ 1,156  

Net realized capital gains

 
 
(1
)
  1  

Other income

 
 
(3
)
  (5 )
   

Total revenues

 
 
1,074
 
  1,152
   

Benefits, claims and expenses, excluding Aircraft leasing expenses*

 
 
388
 
  409  

Aircraft leasing expenses

 
 
90
 
  625
   

Income from discontinued operations

 
 
596
 
  118
   

Gain (loss) on sale

 
 
(436
)
  20
   

Income from discontinued operations, before tax income tax expense

 
 
160
 
  138
   

Income tax expense

 
 
67
 
  74
   

Income from discontinued operations, net of income tax

 
$
93
 
$ 64
   

We recorded a $4.4 billion after tax loss on the sale of ILFC for the year ended December 31, 2012. In the three month period ended March 31, 2013, we recorded an additional $553 million pre-tax loss on the sale of ILFC, largely offsetting ILFC operating results for the period. ILFC operating results did not include depreciation and amortization expense in the three month period ended March 31, 2013 as a result of its classification as held for sale.

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ITEM 1. / NOTE 4. HELD-FOR-SALE CLASSIFICATION AND DISCONTINUED OPERATIONS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

We also recognized in the first quarter of 2013 a $117 million pre-tax gain in connection with the sale of American Life Insurance Company (ALICO) as a result of a refund of taxes, interest and penalties after a successful appeal to the Japanese tax authorities related to the deduction of unrealized foreign exchange losses on certain bond securities held by ALICO prior to its sale to MetLife, Inc. (MetLife) in 2010.

5. FAIR VALUE MEASUREMENTS

 

Fair Value Measurements on a Recurring Basis

 

We carry certain of our financial instruments at fair value. We define the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. You should read the following in conjunction with Note 6 to the Consolidated Financial Statements in the 2012 Annual Report for a complete discussion of our accounting policies and procedures regarding fair value measurements.

Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheet are measured and classified in accordance with a fair value hierarchy consisting of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

Level 1:  Fair value measurements that are quoted prices (unadjusted) in active markets that AIG has 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 as to 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 those cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

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ITEM 1. / NOTE 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, 2013
(in millions)
  Level 1
  Level 2
  Level 3
  Counterparty
Netting(a)

  Cash
Collateral(b)

  Total
 
   

Assets:

                                                       

Bonds available for sale:

                                                       

U.S. government and government sponsored entities

  $   $ 3,496   $   $   $   $ 3,496  

Obligations of states, municipalities and political subdivisions

        34,092     1,019             35,111  

Non-U.S. governments

    690     24,667     18             25,375  

Corporate debt

        148,857     1,449             150,306  

RMBS

        24,030     12,096             36,126  

CMBS

        5,096     5,315             10,411  

CDO/ABS

        3,849     5,577             9,426
   

Total bonds available for sale

    690     244,087     25,474             270,251
   

Bond trading securities:

                                                       

U.S. government and government sponsored entities

    174     6,165                 6,339  

Obligations of states, municipalities and political subdivisions

        183                 183  

Non-U.S. governments

        2                 2  

Corporate debt

        1,138                 1,138  

RMBS

        1,239     730             1,969  

CMBS

        1,143     776             1,919  

CDO/ABS

        3,463     8,842             12,305
   

Total bond trading securities

    174     13,333     10,348             23,855
   

Equity securities available for sale:

                                                       

Common stock

    2,899     1     22             2,922  

Preferred stock

        33     49             82  

Mutual funds

    81     23                 104
   

Total equity securities available for sale

    2,980     57     71             3,108
   

Equity securities trading

    614     82                 696  

Mortgage and other loans receivable

        58                 58  

Other invested assets

    129     1,721     5,467             7,317  

Derivative assets:

                                     

Interest rate contracts

    5     4,869     961             5,835  

Foreign exchange contracts

        81                 81  

Equity contracts

    132     51     69             252  

Commodity contracts

        146     1             147  

Credit contracts

            59             59  

Other contracts

            38             38  

Counterparty netting and cash collateral

                (2,234 )   (888 )   (3,122 )
   

Total derivative assets

    137     5,147     1,128     (2,234 )   (888 )   3,290
   

Short-term investments

    218     6,194                 6,412  

Separate account assets

    58,111     2,948                 61,059  

Other assets

        694                 694
   

Total

  $ 63,053   $ 274,321   $ 42,488   $ (2,234 ) $ (888 ) $ 376,740
   

Liabilities:

                                                       

Policyholder contract deposits

  $   $   $ 1,047   $   $   $ 1,047  

Derivative liabilities:

                                     

Interest rate contracts

        5,190     205             5,395  

Foreign exchange contracts

        128                 128  

Equity contracts

        109     3             112  

Commodity contracts

        148                 148  

Credit contracts

            1,834             1,834  

Other contracts

        6     177             183  

Counterparty netting and cash collateral

                (2,234 )   (1,855 )   (4,089 )
   

Total derivative liabilities

        5,581     2,219     (2,234 )   (1,855 )   3,711
   

Long-term debt

        7,256     407             7,663  

Other liabilities

    5     919                 924
   

Total

  $ 5   $ 13,756   $ 3,673   $ (2,234 ) $ (1,855 ) $ 13,345
   

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

   
December 31, 2012
(in millions)
  Level 1
  Level 2
  Level 3
  Counterparty
Netting(a)

  Cash
Collateral(b)

  Total
 
   

Assets:

                                     

Bonds available for sale:

                                     

U.S. government and government sponsored entities

  $   $ 3,483   $   $   $   $ 3,483  

Obligations of states, municipalities and political subdivisions

        34,681     1,024             35,705  

Non-U.S. governments

    1,004     25,782     14             26,800  

Corporate debt

        149,625     1,487             151,112  

RMBS

        22,730     11,662             34,392  

CMBS

        5,010     5,124             10,134  

CDO/ABS

        3,492     4,841             8,333
   

Total bonds available for sale

    1,004     244,803     24,152             269,959
   

Bond trading securities:

                                     

U.S. government and government sponsored entities

    266     6,528                 6,794  

Non-U.S. governments

        2                 2  

Corporate debt

        1,320                 1,320  

RMBS

        1,331     396             1,727  

CMBS

        1,424     812             2,236  

CDO/ABS

        3,969     8,536             12,505
   

Total bond trading securities

    266     14,574     9,744             24,584
   

Equity securities available for sale:

                                     

Common stock

    3,002     3     24             3,029  

Preferred stock

        34     44             78  

Mutual funds

    83     22                 105
   

Total equity securities available for sale

    3,085     59     68             3,212
   

Equity securities trading

    578     84                 662  

Mortgage and other loans receivable

        134                 134  

Other invested assets

    125     1,542     5,389             7,056  

Derivative assets:

                                     

Interest rate contracts

    2     5,521     956             6,479  

Foreign exchange contracts

        104                 104  

Equity contracts

    104     63     54             221  

Commodity contracts

        144     1             145  

Credit contracts

            60             60  

Other contracts

            38             38  

Counterparty netting and cash collateral

                (2,467 )   (909 )   (3,376 )
   

Total derivative assets

    106     5,832     1,109     (2,467 )   (909 )   3,671
   

Short-term investments

    285     7,771                 8,056  

Separate account assets

    54,430     2,907                 57,337  

Other assets

        696                 696
   

Total

  $ 59,879   $ 278,402   $ 40,462   $ (2,467 ) $ (909 ) $ 375,367
   

Liabilities:

                                     

Policyholder contract deposits

  $   $   $ 1,257   $   $   $ 1,257  

Derivative liabilities:

                                     

Interest rate contracts

        5,582     224             5,806  

Foreign exchange contracts

        174                 174  

Equity contracts

        114     7             121  

Commodity contracts

        146                 146  

Credit contracts

            2,051             2,051  

Other contracts

        6     200             206  

Counterparty netting and cash collateral

                (2,467 )   (1,976 )   (4,443 )
   

Total derivative liabilities

        6,022     2,482     (2,467 )   (1,976 )   4,061
   

Long-term debt

        7,711     344             8,055  

Other liabilities

    30     1,050                 1,080
   

Total

  $ 30   $ 14,783   $ 4,083   $ (2,467 ) $ (1,976 ) $ 14,453
   

(a)      Represents netting of derivative exposures covered by a qualifying master netting agreement.

(b)      Represents cash collateral posted and received. Securities collateral posted for derivative transactions that is reflected in Fixed maturity securities in the Condensed Consolidated Balance Sheet, and collateral received, not reflected in the Condensed Consolidated Balance Sheet, was $1.7 billion and $163 million, respectively, at March 31, 2013 and $1.9 billion and $299 million, respectively, at December 31, 2012.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 period ended March 31, 2013, we transferred $239 million of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. For similar reasons, during the three month period ended March 31, 2013, we transferred $93 million of securities issued by the U.S. government and government-sponsored entities from Level 1 to Level 2. We had no material transfers from Level 2 to Level 1 during the three month period ended March 31, 2013.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Changes in Level 3 Recurring Fair Value Measurements

 

The following tables present changes during the three month periods ended March 31, 2013 and 2012 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 on the Condensed Consolidated Balance Sheet at March 31, 2013 and 2012:

   
(in millions)
  Fair Value
Beginning
of Period(a)

  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements, Net

  Gross
Transfers
in

  Gross
Transfers
out

  Fair Value
End
of Period

  Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Period

 
   

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     (262 )   10         12,096      

CMBS

    5,124     11     141     (75 )   154     (40 )   5,315      

CDO/ABS

    4,841     24     76     639     180     (183 )   5,577    
   

Total bonds available for
sale

    24,152     238     699     462     422     (499 )   25,474    
   

Bond trading securities:

                                                 

RMBS

    396     22         74     238         730     (17 )

CMBS

    812     12         (99 )   159     (108 )   776     (25 )

CDO/ABS

    8,536     284         (436 )   486     (28 )   8,842     82
   

Total bond trading
securities

    9,744     318         (461 )   883     (136 )   10,348     40
   

Equity securities
available for sale:

                                                 

Common stock

    24     9     (1 )   (10 )           22      

Preferred stock

    44         5                 49    
   

Total equity securities
available for sale

    68     9     4     (10 )           71    
   

Other invested assets

    5,389     61     (13 )   (3 )   127     (94 )   5,467    
   

Total

  $ 39,353   $ 626   $ 690   $ (12 ) $ 1,432   $ (729 ) $ 41,360   $ 40
   

Liabilities:

                                                 

Policyholder contract
deposits                            

  $ (1,257 ) $ 205   $   $ 5   $   $   $ (1,047 ) $ 28  

Derivative liabilities,
net:

                                                 

Interest rate
contracts

    732     11         13             756     (3 )

Equity contracts

    47     28         (7 )   (2 )       66     (12 )

Commodity contracts

    1     1         (1 )           1      

Credit contracts

    (1,991 )   175         41             (1,775 )   (214 )

Other contracts

    (162 )   7         16             (139 )   13
   

Total derivative liabilities,
net

    (1,373 )   222         62     (2 )       (1,091 )   (216 )
   

Long-term debt(b)

    (344 )   (80 )       19     (2 )       (407 )   8
   

Total

  $ (2,974 ) $ 347   $   $ 86   $ (4 ) $   $ (2,545 ) $ (180 )
   

17


Table of Contents

ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


   
(in millions)
  Fair value
Beginning
of Period(a)

  Net
Realized and
Unrealized
Gains (Losses)
Included
in Income

  Accumulated
Other
Comprehensive
Income (Loss)

  Purchases,
Sales,
Issues and
Settlements, Net

  Gross
Transfers
In

  Gross
Transfers
Out

  Fair value
End
of Period

  Changes in
Unrealized Gains
(Losses) Included
in Income on
Instruments Held
at End of Period

 
   

March 31, 2012

                                                 

Assets:

                                                 

Bonds available for
sale:

                                                 

Obligations of states,
municipalities and
political
subdivisions

  $ 960   $ 1   $ 16   $ 100   $   $ (23 ) $ 1,054   $  

Non-U.S.
governments

    9         8     (2 )           15      

Corporate debt

    1,935     (16 )   76     (3 )   291     (960 )   1,323      

RMBS

    10,877     (70 )   793     1,326     348     (34 )   13,240      

CMBS

    3,955     (69 )   287     11     31     (42 )   4,173      

CDO/ABS

    4,220     14     177     70     438     (37 )   4,882    
   

Total bonds available for
sale

    21,956     (140 )   1,357     1,502     1,108     (1,096 )   24,687    
   

Bond trading securities:

                                                 

Corporate debt

    7             (2 )           5      

RMBS

    303     33         (19 )       (3 )   314     39  

CMBS

    554     33         (135 )   32     (51 )   433     85  

CDO/ABS

    8,432     1,621         (1,637 )           8,416     2,122
   

Total bond trading
securities

    9,296     1,687         (1,793 )   32     (54 )   9,168     2,246
   

Equity securities
available for sale:

                                                 

Common stock

    57     14     (12 )   (14 )   5         50      

Preferred stock

    99     2     8     8         (11 )   106    
   

Total equity securities
available for sale

    156     16     (4 )   (6 )   5     (11 )   156    
   

Equity securities trading

    1                         1      

Mortgage and other
loans receivable

                                 

Other invested assets

    6,618     (147 )   210     101     742     (338 )   7,186     (4 )
   

Total

  $ 38,027   $ 1,416   $ 1,563   $ (196 ) $ 1,887   $ (1,499 ) $ 41,198   $ 2,242
   

Liabilities:

                                                 

Policyholder contract
deposits

  $ (918 ) $ 139   $   $ (3 ) $   $   $ (782 ) $ (144 )

Derivative liabilities, net:

                                                 

Interest rate contracts

    785             (7 )           778     (23 )

Foreign exchange
contracts

    2             (2 )                

Equity contracts

    28     12         2     (2 )       40     10  

Commodity contracts

    2                         2      

Credit contracts

    (3,273 )   (143 )       711             (2,705 )   (525 )

Other contracts

    33     (410 )   9     412     (81 )       (37 )   24
   

Total derivatives liabilities,
net

    (2,423 )   (541 )   9     1,116     (83 )       (1,922 )   (514 )
   

Long-term debt(b)

    (508 )   (110 )   (77 )   114         6     (575 )   (104 )
   

Total

  $ (3,849 ) $ (512 ) $ (68 ) $ 1,227   $ (83 ) $ 6   $ (3,279 ) $ (762 )
   

(a)  Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

(b)  Includes guaranteed investment agreements (GIAs), notes, bonds, loans and mortgages payable.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Net realized and unrealized gains and losses related to Level 3 items shown above are reported in the Condensed Consolidated Statement of Income as follows:

   
(in millions)
  Net
Investment
Income

  Net Realized
Capital
Gains (Losses)

  Other
Income

  Total
 
   

March 31, 2013

                         

Bonds available for sale

  $ 210   $ 7   $ 21   $ 238  

Bond trading securities

    33         285     318  

Equity securities

        9         9  

Other invested assets

    47     (7 )   21     61  

Policyholder contract deposits

        205         205  

Derivative liabilities, net

        22     200     222  

Other long-term debt

            (80 )   (80 )
   

March 31, 2012

                         

Bonds available for sale

  $ 231   $ (375 ) $ 4   $ (140 )

Bond trading securities

    1,549         138     1,687  

Equity securities

        16         16  

Other invested assets

    (14 )   (132 )   (1 )   (147 )

Policyholder contract deposits

        139         139  

Derivative liabilities, net

    (1 )   19     (559 )   (541 )

Other long-term debt

            (110 )   (110 )
   

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Table of Contents

ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following tables present the gross components of purchases, sales, issues and settlements, net, shown above:

   
(in millions)
  Purchases
  Sales
  Settlements
  Purchases,
Sales, Issues and
Settlements, Net(a)

 
   

March 31, 2013

                         

Assets:

                         

Bonds available for sale:

                         

Obligations of states, municipalities and political
subdivisions

  $ 158   $ (22 ) $   $ 136  

Non-U.S. governments

    3         (1 )   2  

Corporate debt

    97         (75 )   22  

RMBS

    603     (231 )   (634 )   (262 )

CMBS

    373     (146 )   (302 )   (75 )

CDO/ABS

    798     (159 )       639
   

Total bonds available for sale

    2,032     (558 )   (1,012 )   462
   

Bond trading securities:

                         

RMBS

    105         (31 )   74  

CMBS

    19     (58 )   (60 )   (99 )

CDO/ABS

    188         (624 )   (436 )
   

Total bond trading securities

    312     (58 )   (715 )   (461 )
   

Equity securities

    1     (10 )   (1 )   (10 )

Other invested assets

    243     (30 )   (216 )   (3 )
   

Total assets

  $ 2,588   $ (656 ) $ (1,944 ) $ (12 )
   

Liabilities:

                         

Policyholder contract deposits

  $   $ (6 ) $ 11   $ 5  

Derivative liabilities, net

    3     (4 )   63     62  

Other long-term debt(b)

            19     19
   

Total liabilities

  $ 3   $ (10 ) $ 93   $ 86
   

March 31, 2012

                         

Assets:

                         

Bonds available for sale:

                         

Obligations of states, municipalities and political
subdivisions

  $ 108   $ (8 ) $   $ 100  

Non-U.S. governments

        (2 )       (2 )

Corporate debt

    61     (1 )   (63 )   (3 )

RMBS

    1,912     (94 )   (492 )   1,326  

CMBS

    126     (64 )   (51 )   11  

CDO/ABS

    317     (4 )   (243 )   70
   

Total bonds available for sale

    2,524     (173 )   (849 )   1,502
   

Bond trading securities:

                         

Corporate debt

            (2 )   (2 )

RMBS

            (19 )   (19 )

CMBS

    113     (57 )   (191 )   (135 )

CDO/ABS

        (310 )   (1,327 )   (1,637 )
   

Total bond trading securities

    113     (367 )   (1,539 )   (1,793 )
   

Equity securities

    11     (14 )   (3 )   (6 )

Other invested assets

    266     (4 )   (161 )   101
   

Total assets

  $ 2,914   $ (558 ) $ (2,552 ) $ (196 )
   

Liabilities:

                         

Policyholder contract deposits

  $   $ (6 ) $ 3   $ (3 )

Derivative liabilities, net

    2         1,114     1,116  

Other long-term debt(b)

            114     114
   

Total liabilities

  $ 2   $ (6 ) $ 1,231   $ 1,227
   

(a)  There were no issuances during the three month periods ended March 31, 2013 and 2012.

(b)  Includes GIAs, notes, bonds, loans and mortgages payable.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at March 31, 2013 and 2012 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Transfers of Level 3 Assets and Liabilities

 

We record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. As a result, the Net realized and unrealized gains (losses) included in income or other comprehensive income and as shown in the table above excludes $72 million of net losses related to assets and liabilities transferred into Level 3 during the three month period ended March 31, 2013, and includes $2 million of net gains related to assets and liabilities transferred out of Level 3 during the three month period ended March 31, 2013.

Transfers of Level 3 Assets

During the three month period ended March 31, 2013, transfers into Level 3 assets included certain residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligation (CDO)/asset-backed securities (ABS), and investments in certain hedge funds.

The transfers of investments in certain RMBS, CMBS and CDO/ABS into Level 3 assets were due to decreases in market transparency and liquidity for certain individual security types.

Certain hedge fund investments were transferred into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.

Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable or a long-term interest rate significant to a valuation becoming short-term and thus observable. In addition, transfers out of Level 3 assets also occur when investments are no longer carried at fair value as the result of a change in the applicable accounting methodology, given changes in the nature and extent of our ownership interest.

During the three month period ended March 31, 2013, transfers out of Level 3 assets primarily related to certain investments in municipal securities, private placement corporate debt, CMBS, CDO/ABS and hedge funds.

Transfers of certain investments in municipal securities, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments.

Transfers of private placement corporate debt out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

The removal of fund-imposed redemption restrictions resulted in the transfer of certain hedge fund investments out of Level 3 assets.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three month period ended March 31, 2013.

We use various hedging techniques to manage risks associated with certain positions, including those classified within Level 3. Such techniques may include the purchase or sale of financial instruments that are classified within Level 1 and/or Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities classified within Level 3 presented in the table above do not reflect the related realized or unrealized gains (losses) on hedging instruments that are classified within Level 1 and/or Level 2.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Quantitative Information About Level 3 Fair Value Measurements

 

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from pricing vendors and from internal valuation models. Because input information with respect to certain Level 3 instruments may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

   
(in millions)
 

Fair Value at
March 31,
2013

  Valuation
Technique

  Unobservable Input(a)
  Range
(Weighted Average)(a)

 
   

Assets:

 
 
     
 
                    

 
 
     
 
                    

Corporate debt

 
$
796
 
Discounted cash flow   Yield(b)   2.81% – 9.59% (6.20%)  

    

 
 
         
 
                                

RMBS

 
 
11,241
 
Discounted cash flow   Constant prepayment rate(c)   0.00% – 10.34% (4.84%)  

    

 
 
     
 
       Loss severity(c)   41.70% – 79.63% (60.66%)  

    

 
 
     
 
       Constant default rate(c)   4.04% – 13.20% (8.62%)  

    

 
 
     
 
       Yield(c)   2.18% – 7.66% (4.92%)  

    

 
 
     
 
                    

Certain CDO/ABS(d)

 
 
5,869
 
Discounted cash flow   Constant prepayment rate(c)   4.08% – 7.78% (5.93%)  

    

 
 
     
 
       Loss severity(c)   56.61% – 67.23% (61.93%)  

    

 
 
     
 
       Constant default rate(c)   6.42% – 14.10% (10.41%)  

    

 
 
     
 
       Yield(c)   7.04% – 10.52% (8.78%)  

    

 
 
     
 
                    

Commercial mortgage backed securities

 
 
3,948
 
Discounted cash flow   Yield(b)   0.00% – 17.12% (6.92%)  

    

 
 
     
 
                    

CDO/ABS — Direct

 
 
     
 
Binomial Expansion   Recovery rate(b)   4% – 63% (27%)  

Investment Book

 
 
997
 
Technique (BET)   Diversity score(b)   4 – 42 (14)  

    

 
 
     
 
       Weighted average life(b)   1.28 – 9.76 years (4.99 years)
 

Liabilities:

 
 
     
 
                    

    

 
 
     
 
                    

Policyholder contract deposits — GMWB

 
 
1,047
 
Discounted cash flow   Equity implied volatility(b)   6.0% – 39.0%  

    

 
 
     
 
       Base lapse rates(b)   1.00% – 40.0%  

    

 
 
     
 
       Dynamic lapse rates(b)   0.2% – 60.0%  

    

 
 
     
 
       Mortality rates(b)   0.5% – 40.0%  

    

 
 
     
 
       Utilization rates(b)   0.5% – 25.0%  

    

 
 
     
 
                    

Derivative Liabilities — Credit contracts

 
 
1,324
 
BET   Recovery rates(b)   4% – 36% (18%)  

    

 
 
     
 
       Diversity score(b)   9 – 41 (13)  

    

 
 
     
 
       Weighted average life(b)   5.05 – 9.72 years (5.93 years)
 

(a)     The unobservable inputs and ranges for the constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us because there are other factors relevant to the specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.

(b)     Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities.

(c)     Information received from independent third-party valuation service providers.

(d)     Yield was the only input available for $297 million of total fair value at March 31, 2013.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The ranges of reported inputs for Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of plus/minus one standard deviation in either direction from the value-weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these investments.

Sensitivity to Changes in Unobservable Inputs

 

We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following is a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply.

Corporate Debt

 

Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the securities. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt.

RMBS and Certain CDO/ABS

 

The significant unobservable inputs used in fair value measurements of RMBS and certain CDO/ABS valued by third-party valuation service providers are constant prepayment rates (CPR), constant default rates (CDR), loss severity, and yield. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in yield, CPR, CDR, and loss severity, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.

CMBS

 

The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

CDO/ABS — Direct Investment book

 

The significant unobservable inputs used for certain CDO/ABS securities valued using the BET are recovery rates, diversity score, and the weighted average life of the portfolio. An increase in recovery rates and diversity score will have a directionally similar corresponding impact on the fair value of the portfolio. An increase in the weighted average life will decrease the fair value.

Policyholder contract deposits

 

The significant unobservable inputs used for embedded derivatives in policyholder contract deposits measured at fair value, mainly guaranteed minimum withdrawal benefits (GMWB) for variable annuity products, are equity volatility, mortality rates, lapse rates and utilization rates. Mortality, lapse and utilization rates may vary significantly depending upon age groups and duration. In general, increases in volatility and utilization rates will increase the fair value of the liability associated with GMWB, while increases in lapse rates and mortality rates will decrease the fair value of the liability.

Derivative liabilities — credit contracts

 

The significant unobservable inputs used for Derivatives liabilities — credit contracts are recovery rates, diversity scores, and the weighted average life of the portfolio. Our non-performance risk is also considered in the measurement of those liabilities. See Note 6 to the Consolidated Financial Statements in the 2012 Annual Report for a discussion of our accounting policies and procedures regarding incorporation of our credit risk in fair value measurements.

An increase in recovery rates and diversity score will decrease the fair value of the liability. An increase in the weighted average life will have a directionally similar corresponding effect on the fair value measurement of the liability.

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ITEM 1. / NOTE 5. FAIR VALUE MEASUREMENTS


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Investments in Certain Entities Carried at Fair Value Using Net Asset Value Per Share

 

The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share as a practical expedient to measure fair value.

     
   
   
  March 31, 2013   December 31, 2012  
  (in millions)
  Investment Category Includes
 

Fair Value
Using Net
Asset Value
Per Share (or
its equivalent)

 

Unfunded
Commitments

  Fair Value
Using Net
Asset Value
Per Share (or
its equivalent)

  Unfunded
Commitments

 
     
 

Investment Category

        
 
     
 
 
     
 
                 
 

Private equity funds:

        
 
     
 
 
     
 
                 
 

Leveraged buyout

  Debt and/or equity investments made as part  
$
2,487
 
$
646
 
$ 2,529   $ 669  
 

    

  of a transaction in which assets of mature  
 
     
 
 
     
 
                 
 

    

  companies are acquired from the current  
 
     
 
 
     
 
                 
 

    

  shareholders, typically with the use of  
 
     
 
 
     
 
                 
 

    

  financial leverage  
 
     
 
 
     
 
                 
 

    

        
 
     
 
 
     
 
              
 

Real Estate /

  Investments in real estate properties and  
 
263
 
 
51
 
  251     52  
 

Infrastructure

  infrastructure positions, including power plants  
 
     
 
 
     
 
                 
 

    

  and other energy generating facilities  
 
     
 
 
     
 
                 
 

    

        
 
     
 
 
     
 
              
 

Venture capital

  Early-stage, high-potential, growth companies  
 
150
 
 
16
 
  157     16  
 

    

  expected to generate a return through an  
 
     
 
<