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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One) |
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
For the quarterly period ended March 31, 2010 |
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or |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to
|
Commission File Number 1-8787
American International Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
13-2592361 (I.R.S. Employer Identification No.) |
|
70 Pine Street, New York, New York |
10270 |
Registrant's telephone number, including area code: (212) 770-7000
Former name, former address and former fiscal year, if changed since last report: Not applicable
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 30, 2010, there were 135,070,621 shares outstanding of the registrant's common stock.
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2
American International Group, Inc., and Subsidiaries
3
American International Group, Inc., and Subsidiaries
Part I FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
(in millions) |
March 31, 2010 |
December 31, 2009 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets: |
||||||||||
Investments: |
||||||||||
Fixed maturity securities: |
||||||||||
Bonds available for sale, at fair value (amortized cost: 2010 $254,416; 2009 $364,491) |
$ | 256,870 | $ | 365,551 | ||||||
Bond trading securities, at fair value |
26,365 | 31,243 | ||||||||
Equity securities: |
||||||||||
Common and preferred stock available for sale, at fair value (cost: 2010 $4,882; 2009 $6,464) |
6,831 | 9,522 | ||||||||
Common and preferred stock trading, at fair value |
613 | 8,318 | ||||||||
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2010 $157; 2009 $119) |
22,533 | 27,461 | ||||||||
Finance receivables, net of allowance |
18,912 | 20,327 | ||||||||
Flight equipment primarily under operating leases, net of accumulated depreciation |
43,258 | 44,091 | ||||||||
Other invested assets (portion measured at fair value: 2010 $10,154; 2009 $18,888) |
33,250 | 45,235 | ||||||||
Securities purchased under agreements to resell, at fair value |
1,615 | 2,154 | ||||||||
Short-term investments (portion measured at fair value: 2010 $22,184; 2009 $23,975) |
38,800 | 47,263 | ||||||||
Total investments |
449,047 | 601,165 | ||||||||
Cash |
2,133 | 4,400 | ||||||||
Accrued investment income |
3,467 | 5,152 | ||||||||
Premiums and other receivables, net of allowance |
18,718 | 16,549 | ||||||||
Reinsurance assets, net of allowance |
25,791 | 22,425 | ||||||||
Current and deferred income taxes |
6,805 | 4,108 | ||||||||
Deferred policy acquisition costs |
19,064 | 40,814 | ||||||||
Real estate and other fixed assets, net of accumulated depreciation |
3,259 | 4,142 | ||||||||
Unrealized gain on swaps, options and forward transactions, at fair value |
7,383 | 9,130 | ||||||||
Goodwill |
2,565 | 6,195 | ||||||||
Other assets, including prepaid commitment asset of $6,460 in 2010 and $7,099 in 2009 (portion measured at fair value: 2010 $13; 2009 $288) |
17,072 | 18,976 | ||||||||
Separate account assets, at fair value |
51,953 | 58,150 | ||||||||
Assets of businesses held for sale |
256,440 | 56,379 | ||||||||
Total assets |
$ | 863,697 | $ | 847,585 | ||||||
See Accompanying Notes to Consolidated Financial Statements.
4
American International Group, Inc., and Subsidiaries
Consolidated Balance Sheet (Continued)
(in millions, except share data) |
March 31, 2010 |
December 31, 2009 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Liabilities: |
|||||||||
Liability for unpaid claims and claims adjustment expense |
$ | 86,489 | $ | 85,386 | |||||
Unearned premiums |
26,350 | 21,363 | |||||||
Future policy benefits for life and accident and health insurance contracts |
47,752 | 116,001 | |||||||
Policyholder contract deposits (portion measured at fair value: 2010 $641; 2009 $5,214) |
142,932 | 220,128 | |||||||
Other policyholder funds |
7,493 | 13,252 | |||||||
Commissions, expenses and taxes payable |
2,874 | 4,950 | |||||||
Insurance balances payable |
4,004 | 4,393 | |||||||
Funds held by companies under reinsurance treaties |
708 | 774 | |||||||
Securities sold under agreements to repurchase (portion measured at fair value: 2010 $3,418; 2009 $3,221) |
3,418 | 3,505 | |||||||
Securities and spot commodities sold but not yet purchased, at fair value |
458 | 1,030 | |||||||
Unrealized loss on swaps, options and forward transactions, at fair value |
6,296 | 5,403 | |||||||
Trust deposits and deposits due to banks and other depositors (portion measured at fair value: 2010 $16; 2009 $15) |
1,030 | 1,641 | |||||||
Other liabilities |
21,015 | 22,503 | |||||||
Federal Reserve Bank of New York Commercial Paper Funding Facility (portion measured at fair value: 2010 $2,285; 2009 $2,742) |
2,285 | 4,739 | |||||||
Federal Reserve Bank of New York credit facility |
27,400 | 23,435 | |||||||
Other long-term debt (portion measured at fair value: 2010 $12,800; 2009 $13,195) |
109,744 | 113,298 | |||||||
Separate account liabilities |
51,953 | 58,150 | |||||||
Liabilities of businesses held for sale |
217,837 | 48,599 | |||||||
Total liabilities |
760,038 | 748,550 | |||||||
Commitments, contingencies and guarantees (see Note 9) |
|||||||||
Redeemable noncontrolling interests in partially owned consolidated subsidiaries (including $1,270 and $211 associated with businesses held for sale in 2010 and 2009, respectively) |
1,940 | 959 | |||||||
AIG shareholders' equity: |
|||||||||
Preferred stock |
|||||||||
Series E; $5.00 par value; shares issued: 2010 and 2009 400,000, at aggregate liquidation value |
41,605 | 41,605 | |||||||
Series F; $5.00 par value; shares issued: 2010 and 2009 300,000, aggregate liquidation value: 2010 $7,543; 2009 $5,344 |
7,378 | 5,179 | |||||||
Series C; $5.00 par value; shares issued: 2010 and 2009 100,000, aggregate liquidation value: 2010 and 2009 $0.5 |
23,000 | 23,000 | |||||||
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2010 141,605,834; 2009 141,732,263 |
354 | 354 | |||||||
Treasury stock, at cost; 2010 6,661,350; 2009 6,661,356 shares of common stock |
(874 | ) | (874 | ) | |||||
Additional paid-in capital |
6,356 | 6,358 | |||||||
Accumulated deficit |
(9,871 | ) | (11,491 | ) | |||||
Accumulated other comprehensive income |
7,053 | 5,693 | |||||||
Total AIG shareholders' equity |
75,001 | 69,824 | |||||||
Noncontrolling interests: |
|||||||||
Noncontrolling nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York |
25,059 | 24,540 | |||||||
Other (including $374 and $2,234 associated with businesses held for sale in 2010 and 2009, respectively) |
1,659 | 3,712 | |||||||
Total noncontrolling interests |
26,718 | 28,252 | |||||||
Total equity |
101,719 | 98,076 | |||||||
Total liabilities and equity |
$ | 863,697 | $ | 847,585 | |||||
See Accompanying Notes to Consolidated Financial Statements.
5
American International Group, Inc., and Subsidiaries
Consolidated Statement of Income (Loss)
|
Three Months Ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
(dollars in millions, except per share data) |
2010 |
2009 |
||||||||
Revenues: |
||||||||||
Premiums and other considerations |
$ | 10,067 | $ | 12,841 | ||||||
Net investment income |
4,836 | 915 | ||||||||
Net realized capital losses: |
||||||||||
Total other-than-temporary impairments on available for sale securities |
(309 | ) | (3,672 | ) | ||||||
Portion of other-than-temporary impairments on available for sale fixed maturity securities recognized in Accumulated other comprehensive loss |
(521 | ) | - | |||||||
Net other-than-temporary impairments on available for sale securities recognized in net income (loss) |
(830 | ) | (3,672 | ) | ||||||
Other realized capital gains |
282 | 898 | ||||||||
Total net realized capital losses |
(548 | ) | (2,774 | ) | ||||||
Unrealized market valuation gains (losses) on AIGFP super senior credit default swap portfolio |
119 | (452 | ) | |||||||
Other income |
1,856 | 2,785 | ||||||||
Total revenues |
16,330 | 13,315 | ||||||||
Benefits, claims and expenses: |
||||||||||
Policyholder benefits and claims incurred |
8,519 | 11,353 | ||||||||
Policy acquisition and other insurance expenses |
3,262 | 3,576 | ||||||||
Interest expense |
1,734 | 2,587 | ||||||||
Restructuring expenses and related asset impairment and other expenses |
110 | 338 | ||||||||
Net loss (gain) on sale of divested businesses |
77 | (262 | ) | |||||||
Other expenses |
1,793 | 2,239 | ||||||||
Total benefits, claims and expenses |
15,495 | 19,831 | ||||||||
Income (loss) from continuing operations before income tax benefit |
835 | (6,516 | ) | |||||||
Income tax benefit |
(91 | ) | (1,303 | ) | ||||||
Income (loss) from continuing operations |
926 | (5,213 | ) | |||||||
Income (loss) from discontinued operations, net of income tax expense (benefit) (See Note 3) |
1,173 | 80 | ||||||||
Net income (loss) |
2,099 | (5,133 | ) | |||||||
Less: |
||||||||||
Net income (loss) from continuing operations attributable to noncontrolling interests: |
||||||||||
Noncontrolling nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York |
519 | - | ||||||||
Other |
129 | (774 | ) | |||||||
Total net income (loss) from continuing operations attributable to noncontrolling interests |
648 | (774 | ) | |||||||
Net loss from discontinued operations attributable to noncontrolling interests |
- | (6 | ) | |||||||
Total net income (loss) attributable to noncontrolling interests |
648 | (780 | ) | |||||||
Net income (loss) attributable to AIG |
$ | 1,451 | $ | (4,353 | ) | |||||
Net income (loss) attributable to AIG common shareholders |
$ | 294 | $ | (5,365 | ) | |||||
Income (loss) per common share attributable to AIG: |
||||||||||
Basic: |
||||||||||
Income (loss) from continuing operations |
$ | 0.41 | $ | (40.29 | ) | |||||
Income (loss) from discontinued operations |
$ | 1.75 | $ | 0.62 | ||||||
Diluted: |
||||||||||
Income (loss) from continuing operations |
$ | 0.41 | $ | (40.29 | ) | |||||
Income (loss) from discontinued operations |
$ | 1.75 | $ | 0.62 | ||||||
Weighted average shares outstanding: |
||||||||||
Basic |
135,658,680 | 135,252,869 | ||||||||
Diluted |
135,724,939 | 135,252,869 | ||||||||
See Accompanying Notes to Consolidated Financial Statements.
6
American International Group, Inc., and Subsidiaries
Consolidated Statement of Comprehensive Income (Loss)
|
Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
(in millions) |
2010 |
2009 |
|||||||
Net income (loss) |
$ | 2,099 | $ | (5,133 | ) | ||||
Other comprehensive income (loss): |
|||||||||
Unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken |
993 | - | |||||||
Income tax benefit (expense) on above changes |
(220 | ) | - | ||||||
Unrealized appreciation (depreciation) of all other investments net of reclassification adjustments |
2,531 | (3,372 | ) | ||||||
Income tax benefit (expense) on above changes |
(1,374 | ) | 1,392 | ||||||
Foreign currency translation adjustments |
(958 | ) | (941 | ) | |||||
Income tax benefit (expense) on above changes |
429 | 209 | |||||||
Net derivative gains (losses) arising from cash flow hedging activities net of reclassification adjustments |
24 | 26 | |||||||
Income tax benefit (expense) on above changes |
(2 | ) | 27 | ||||||
Change in retirement plan liabilities adjustment |
77 | 58 | |||||||
Income tax benefit (expense) on above changes |
(24 | ) | (18 | ) | |||||
Other comprehensive income (loss) |
1,476 | (2,619 | ) | ||||||
Comprehensive income (loss) |
3,575 | (7,752 | ) | ||||||
Comprehensive income (loss) attributable to noncontrolling interests |
(31 | ) | (867 | ) | |||||
Comprehensive income (loss) attributable to noncontrolling nonvoting, callable, junior and senior preferred interests held by Federal Reserve Bank of New York |
519 | - | |||||||
Comprehensive income (loss) attributable to AIG |
$ | 3,087 | $ | (6,885 | ) | ||||
See Accompanying Notes to Consolidated Financial Statements.
7
American International Group, Inc., and Subsidiaries
Consolidated Statement of Cash Flows
|
Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
(in millions) |
2010 |
2009 |
|||||||
Summary: |
|||||||||
Net cash provided by (used in) operating activities |
$ | 3,195 | $ | 3,770 | |||||
Net cash provided by (used in) investing activities |
(4,516 | ) | 1,432 | ||||||
Net cash provided by (used in) financing activities |
(266 | ) | (9,644 | ) | |||||
Effect of exchange rate changes on cash |
(42 | ) | (171 | ) | |||||
Change in cash |
(1,629 | ) | (4,613 | ) | |||||
Cash at beginning of period |
4,400 | 8,642 | |||||||
Reclassification of assets held for sale |
(638 | ) | - | ||||||
Cash at end of period |
2,133 | 4,029 | |||||||
Cash flows from operating activities: |
|||||||||
Net income (loss) |
$ | 2,099 | $ | (5,133 | ) | ||||
(Income) loss from discontinued operations |
(1,173 | ) | (80 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|||||||||
Noncash revenues, expenses, gains and losses included in income (loss): |
|||||||||
Net (gains) losses on sales of securities available for sale and other assets |
(422 | ) | 57 | ||||||
Net (gains) losses on sales of divested businesses |
77 | (262 | ) | ||||||
Unrealized (gains) losses in earnings net |
591 | (373 | ) | ||||||
Equity in (income) loss from equity method investments, net of dividends or distributions |
(336 | ) | 2,084 | ||||||
Depreciation and other amortization |
2,529 | 3,050 | |||||||
Provision for mortgage, other loans and finance receivables |
344 | 1,019 | |||||||
Impairments of assets |
1,753 | 4,193 | |||||||
Amortization of costs and accrued interest and fees related to FRBNY Credit Facility |
856 | 1,495 | |||||||
Changes in operating assets and liabilities: |
|||||||||
General and life insurance reserves |
2,323 | (1,988 | ) | ||||||
Premiums and other receivables and payables net |
(1,002 | ) | (482 | ) | |||||
Reinsurance assets and funds held under reinsurance treaties |
(3,637 | ) | 1,772 | ||||||
Capitalization of deferred policy acquisition costs |
(1,914 | ) | (2,313 | ) | |||||
Other policyholder funds |
(63 | ) | (1 | ) | |||||
Current and deferred income taxes net |
(954 | ) | (1,761 | ) | |||||
Other assets and liabilities net |
(791 | ) | 49 | ||||||
Trading securities |
21 | 1,027 | |||||||
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell |
306 | 390 | |||||||
Securities and spot commodities sold but not yet purchased |
(572 | ) | (1,528 | ) | |||||
Finance receivables and other loans held for sale originations and purchases |
(5 | ) | (22 | ) | |||||
Sales of finance receivables and other loans held for sale |
48 | 32 | |||||||
Other, net |
267 | 371 | |||||||
Total adjustments |
(581 | ) | 6,809 | ||||||
Net cash provided by (used in) operating activities continuing operations |
345 | 1,596 | |||||||
Net cash provided by (used in) operating activities discontinued operations |
2,850 | 2,174 | |||||||
Net cash provided by (used in) operating activities |
$ | 3,195 | $ | 3,770 | |||||
See Accompanying Notes to Consolidated Financial Statements.
8
American International Group, Inc., and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
2010 |
2009 |
||||||
Cash flows from investing activities: |
||||||||
Proceeds from (payments for) |
||||||||
Sales of available for sale investments |
$ | 7,893 | $ | 12,263 | ||||
Maturities of fixed maturity securities available for sale and hybrid investments |
3,340 | 3,592 | ||||||
Sales of trading securities |
1,746 | 3,635 | ||||||
Sales or distributions of other invested assets (including flight equipment) |
2,157 | 2,711 | ||||||
Sales of divested businesses, net |
1,471 | 704 | ||||||
Principal payments received on mortgage and other loans receivable |
938 | 1,010 | ||||||
Principal payments received on and sales of finance receivables held for investment |
1,590 | 4,006 | ||||||
Purchases of available for sale investments |
(15,847 | ) | (9,974 | ) | ||||
Purchases of trading securities |
(356 | ) | (2,829 | ) | ||||
Purchases of other invested assets (including flight equipment) |
(1,915 | ) | (2,228 | ) | ||||
Acquisition, net of cash acquired |
(139 | ) | - | |||||
Mortgage and other loans receivable issued |
(303 | ) | (778 | ) | ||||
Finance receivables held for investment originations and purchases |
(746 | ) | (1,855 | ) | ||||
Change in securities lending invested collateral |
- | 969 | ||||||
Net additions to real estate, fixed assets, and other assets |
(64 | ) | (101 | ) | ||||
Net change in short-term investments |
(1,043 | ) | (7,778 | ) | ||||
Net change in non-AIGFP derivative assets and liabilities |
(129 | ) | (48 | ) | ||||
Other, net |
(49 | ) | (63 | ) | ||||
Net cash provided by (used in) investing activities continuing operations |
(1,456 | ) | 3,236 | |||||
Net cash provided by (used in) investing activities discontinued operations |
(3,060 | ) | (1,804 | ) | ||||
Net cash provided by (used in) investing activities |
$ | (4,516 | ) | $ | 1,432 | |||
Cash flows from financing activities: |
||||||||
Proceeds from (payments for) |
||||||||
Policyholder contract deposits |
$ | 4,394 | $ | 4,738 | ||||
Policyholder contract withdrawals |
(3,639 | ) | (8,316 | ) | ||||
Change in other deposits |
(122 | ) | 49 | |||||
Change in commercial paper and other short-term debt |
- | (421 | ) | |||||
Change in Federal Reserve Bank of New York Commercial Paper Funding Facility borrowings |
(3,565 | ) | (2,945 | ) | ||||
Federal Reserve Bank of New York credit facility borrowings |
8,300 | 10,900 | ||||||
Federal Reserve Bank of New York credit facility repayments |
(4,551 | ) | (4,600 | ) | ||||
Issuance of other long-term debt |
4,170 | 1,209 | ||||||
Repayments on other long-term debt |
(7,143 | ) | (5,953 | ) | ||||
Change in securities lending payable |
- | (490 | ) | |||||
Drawdown on the Department of the Treasury Commitment |
2,199 | - | ||||||
Other, net |
(462 | ) | (653 | ) | ||||
Net cash provided by (used in) financing activities continuing operations |
(419 | ) | (6,482 | ) | ||||
Net cash provided by (used in) financing activities discontinued operations |
153 | (3,162 | ) | |||||
Net cash provided by (used in) financing activities |
$ | (266 | ) | $ | (9,644 | ) | ||
Supplementary disclosure of cash flow information: |
||||||||
Cash (paid) received during the period for: |
||||||||
Interest |
$ | (1,047 | ) | $ | (1,466 | ) | ||
Taxes |
$ | (604 | ) | $ | (179 | ) | ||
Non-cash financing/investing activities: |
||||||||
Interest credited to policyholder contract deposits included in financing activities |
$ | 2,086 | $ | 1,598 | ||||
Long-term debt reduction due to deconsolidations |
$ | 829 | $ | - | ||||
Debt assumed on consolidation of variable interest entities |
$ | 2,591 | $ | - | ||||
Debt assumed on acquisition |
$ | 164 | $ | - | ||||
See Accompanying Notes to Consolidated Financial Statements.
9
American International Group, Inc., and Subsidiaries
Consolidated Statement of Equity
Three Months Ended March 31, 2010 (in millions) |
Preferred Stock |
Common Stock |
Treasury Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total AIG Share- holders' Equity |
Non- controlling Interests |
Total Equity |
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, beginning of year |
$ | 69,784 | $ | 354 | $ | (874 | ) | $ | 6,358 | $ | (11,491 | ) | $ | 5,693 | $ | 69,824 | $ | 28,252 | $ | 98,076 | ||||||||
Series F drawdowns |
2,199 | - | - | - | - | - | 2,199 | - | 2,199 | |||||||||||||||||||
Common stock issued under stock plans |
- | - | - | (5 | ) | - | - | (5 | ) | - | (5 | ) | ||||||||||||||||
Cumulative effect of change in accounting principle, net of tax |
- | - | - | - | 169 | (276 | ) | (107 | ) | - | (107 | ) | ||||||||||||||||
Net income(a) |
- | - | - | - | 1,451 | - | 1,451 | 133 | 1,584 | |||||||||||||||||||
Other comprehensive income (loss)(b) |
- | - | - | - | - | 1,636 | 1,636 | (165 | ) | 1,471 | ||||||||||||||||||
Net decrease due to deconsolidation |
- | - | - | - | - | - | - | (2,161 | ) | (2,161 | ) | |||||||||||||||||
Contributions from noncontrolling interest |
- | - | - | - | - | - | - | 210 | 210 | |||||||||||||||||||
Distributions to noncontrolling interests |
- | - | - | - | - | - | - | (87 | ) | (87 | ) | |||||||||||||||||
Net income (loss) attributable to noncontrolling nonvoting, callable, junior and senior preferred interests held by the Federal Reserve Bank of New York |
- | - | - | - | - | - | - | 519 | 519 | |||||||||||||||||||
Other |
- | - | - | 3 | - | - | 3 | 17 | 20 | |||||||||||||||||||
Balance, end of period |
$ | 71,983 | $ | 354 | $ | (874 | ) | $ | 6,356 | $ | (9,871 | ) | $ | 7,053 | $ | 75,001 | $ | 26,718 | $ | 101,719 | ||||||||
See Accompanying Notes to Consolidated Financial Statements.
10
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Summary of Significant Accounting Policies
These unaudited condensed consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States (GAAP) for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and the related notes included in the Annual Report on Form 10-K of American International Group, Inc. (AIG) for the year ended December 31, 2009 (2009 Annual Report on Form 10-K).
In the opinion of management, these consolidated financial statements contain the normal recurring adjustments necessary for a fair statement of the results presented herein. AIG evaluated the need to disclose events that occurred subsequent to the balance sheet date. All material intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the application of accounting policies that often involve a significant degree of judgment. AIG considers its accounting policies that are most dependent on the application of estimates and assumptions, and therefore viewed as critical accounting estimates, are those relating to items considered by management in the determination of:
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, AIG's consolidated financial condition, results of operations and cash flows would be materially affected.
Out of Period Adjustments
For the three months ended March 31, 2010, AIG recorded out of period adjustments relating to prior years that decreased Net income attributable to AIG by $158 million, primarily related to the effect of recording
11
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
impairments on certain consolidated investments held in the Institutional Asset Management operations, which affected the calculation of income taxes. While these adjustments were noteworthy for the quarter, after evaluating the quantitative and qualitative aspects of these corrections, AIG concluded that its prior period financial statements were not materially misstated and, therefore, no restatement was required.
Had these and all previously reported out of period adjustments been recorded in their appropriate periods, the net loss attributable to AIG for the year ended December 31, 2009 would have increased by $604 million, from $10.9 billion to $11.5 billion.
In the audited financial statements included in the 2009 Annual Report on Form 10-K, management disclosed the conditions and events that led management to conclude that AIG would have adequate liquidity to finance and operate AIG's businesses, execute its asset disposition plan and repay its obligations for at least the next twelve months.
Liquidity of Parent and Subsidiaries
AIG manages liquidity at both the parent and subsidiary levels. AIG Parent has not had access to its traditional sources of financing through the public debt markets. While no assurance can be given that AIG will be able to access its traditional sources of long-term or short-term financing through the public markets again, AIG periodically evaluates its ability to access the capital markets.
Historically, AIG depended on dividends, distributions, and other payments from subsidiaries to fund payments on its obligations. In light of AIG's current financial situation, certain of its regulated subsidiaries are restricted from making dividend payments, or advancing funds, to AIG. As a result, AIG has also been dependent on the Federal Reserve Bank of New York (FRBNY) Credit Facility (the FRBNY Credit Facility) provided by the FRBNY under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Agreement), between AIG and the FRBNY, and the FRBNY's Commercial Paper Funding Facility (CPFF), through April 26, 2010, as its primary sources of liquidity; and on the agreement by the United States Department of the Treasury (the Department of the Treasury) to provide up to $29.835 billion (Department of Treasury Commitment) in exchange for increases in the liquidation preference of the AIG Series F Fixed Rate Non-Cumulative Perpetual Preferred Stock, par value $5.00 per share (AIG Series F Preferred Stock), to support the capital needs of its insurance company subsidiaries. Primary uses of cash flow are debt service and subsidiary funding.
During the first four months of 2010, International Lease Finance Corporation (ILFC) and American General Finance, Inc. (AGF) made substantial progress in addressing their liquidity needs. During March and April of 2010, ILFC significantly increased its liquidity position through a combination of new secured and unsecured debt issuances of approximately $4.0 billion and an extension of the maturity date of $2.16 billion of its $2.5 billion revolving credit facility from October 2011 to October 2012. Availability of $550 million of the approximately $4.0 billion of debt issuances and the extension of $2.16 billion of the revolving credit facility are subject to the satisfaction of certain collateralization milestones. In addition, in April 2010, ILFC signed an agreement to sell 53 aircraft with an aggregate book value of approximately $2.3 billion, which is expected to generate approximately $2.0 billion in gross proceeds during 2010. As of March 31, 2010, none of these aircraft met the criteria to be recorded as held-for-sale. During March and April of 2010, AGF significantly enhanced its liquidity position through the following actions: AGF received cash proceeds of more than $500 million from a $1.0 billion asset securitization in March 2010 and executed and drew down fully a $3.0 billion secured term loan transaction in April 2010. AGF used a portion of the proceeds from these transactions, cash on hand and proceeds from AIG's repayment of two demand promissory notes to repay all of its outstanding obligations under its $2.45 billion one-year term loans in March 2010 and its $2.125 billion five-year revolving credit facility in April 2010 (both of which were due in July 2010).
12
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Certain subsidiaries also have been dependent on the FRBNY and the Department of the Treasury to meet collateral posting requirements, to make debt repayments as amounts come due, and to meet capital or liquidity requirements.
Progress on Management's Plans for Stabilization of AIG and Repayment of AIG's Obligations as They Come Due
Since September 2008, AIG has been working to protect and enhance the value of its key businesses, execute an orderly asset disposition plan, and position itself for the future. AIG continually reassesses this plan to maximize value while maintaining flexibility in managing its liquidity and capital, and expects to accomplish these objectives over a longer time frame than originally contemplated.
Sales of Businesses and Specific Asset Dispositions
AIA Sale
As of March 1, 2010, AIG and AIA Aurora LLC, a special purpose vehicle formed by AIG and the FRBNY (AIA Holdings), entered into a definitive agreement (the AIA Share Purchase Agreement) with Prudential plc (Prudential) and Prudential Group Limited (formerly known as Petrohue (UK) Investments Limited), for the sale of AIA Group Limited (AIA) to Prudential Group Limited for approximately $35.5 billion, consisting of $25 billion in cash, approximately $5.5 billion in face value of ordinary shares in the capital of Prudential Group Limited, $3 billion in face value of mandatory convertible securities of Prudential Group Limited, and $2 billion in face value of preferred stock of Prudential (or at Prudential's election, Prudential Group Limited), subject to closing adjustments. The obligations of Prudential Group Limited under the AIA Share Purchase Agreement are guaranteed by Prudential.
The cash portion of the proceeds from the sale will be paid to the FRBNY to redeem preferred interests with a liquidation preference of approximately $16 billion plus accrued but unpaid preferred returns held by the FRBNY in AIA Holdings, and, unless otherwise agreed with the FRBNY, to repay approximately $9 billion under the FRBNY Credit Facility. AIG intends to monetize the $10.5 billion in face value of Prudential securities over time, subject to market conditions, following the lapse of agreed-upon minimum holding periods. Unless otherwise agreed with the FRBNY, net cash proceeds from the monetization of these securities will be used to repay any outstanding debt under the FRBNY Credit Facility.
ALICO Sale
As of March 7, 2010, AIG and ALICO Holdings LLC, a special purpose vehicle formed by AIG and the FRBNY (ALICO Holdings), entered into a definitive agreement (the ALICO Stock Purchase Agreement) with MetLife, Inc. (MetLife) for the sale of American Life Insurance Company (ALICO) by ALICO Holdings to MetLife, and the sale of Delaware American Life Insurance Company by AIG to MetLife, for approximately $15.5 billion, consisting of $6.8 billion in cash and the remainder in equity securities of MetLife, subject to closing adjustments.
The cash portion of the proceeds from the sale will be paid to the FRBNY to reduce the liquidation preference of a portion of the preferred interests owned by the FRBNY in ALICO Holdings and ALICO Holdings will hold the remainder of the transaction consideration, consisting of 78,239,712 shares of MetLife common stock, 6,857,000 shares of newly issued participating preferred stock convertible into 68,570,000 shares of common stock upon the approval of MetLife shareholders, and 40,000,000 equity units of MetLife with an aggregate stated value of $3 billion. AIG intends to monetize these MetLife securities over time, subject to market conditions, following the lapse of agreed-upon minimum holding periods. Unless otherwise agreed with the FRBNY, net cash proceeds from the monetization of these securities will be used to reduce the liquidation preference of the preferred interests owned by the FRBNY in ALICO Holdings and thereafter to repay any outstanding debt under the FRBNY Credit Facility.
13
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Dispositions of certain businesses will be subject to regulatory approval. Unless a waiver is obtained from the FRBNY, net proceeds from these dispositions, to the extent they do not represent capital of AIG's insurance subsidiaries required for regulatory or ratings purposes or are not to be utilized to redeem the preferred interests held by the FRBNY in AIA Holdings and ALICO Holdings, are contractually required to be applied toward the repayment of the FRBNY Credit Facility as mandatory prepayments.
Since September 2008 and through April 28, 2010, AIG entered into agreements to sell or completed the sale of other operations and assets, excluding AIA, ALICO and the assets held by AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP), that had aggregate assets and liabilities with carrying values of $95.5 billion and $77.5 billion, respectively, at March 31, 2010 or the date of sale. Of these amounts, pending transactions with aggregate assets and liabilities of $54.7 billion and $49.2 billion, respectively, at March 31, 2010 are expected to generate approximately $709 million of aggregate net cash proceeds that will be available to reduce the amount of the FRBNY Credit Facility, after taking into account taxes, transaction expenses, settlement of intercompany loan facilities, and capital required to be retained for regulatory or ratings purposes. Gains and losses recorded in connection with the dispositions of businesses include estimates that are subject to subsequent adjustment. Based on the transactions closed to date, AIG does not believe that such adjustments will be material to future consolidated results of operations or cash flows.
Management's Assessment and Conclusion
In assessing AIG's current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of AIG's risks and uncertainties, including but not limited to:
14
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Based on the U.S. government's continuing commitment, the already completed transactions and the other expected transactions with the FRBNY, management's plans and progress made to stabilize AIG's businesses and dispose of certain assets, and after consideration of the risks and uncertainties of such plans, management believes that it will have adequate liquidity to finance and operate AIG's businesses, execute its asset disposition plan and repay its obligations for at least the next twelve months.
It is possible that the actual outcome of one or more of management's plans could be materially different, or that one or more of management's significant judgments or estimates about the potential effects of these risks and uncertainties could prove to be materially incorrect or that the transactions with the FRBNY discussed above fail to achieve the desired objectives. If one or more of these possible outcomes is realized and third party financing is not available, AIG may need additional U.S. government support to meet its obligations as they come due. Under these adverse assumptions, without additional support from the U.S. government in the future there could exist substantial doubt about AIG's ability to continue as a going concern.
In connection with making the going concern assessment and conclusion, management and the Board of Directors of AIG have confirmed in connection with the filing in February 2010 of the 2009 Annual Report on Form 10-K that "As first stated by the U.S. Treasury and the Federal Reserve in connection with the announcement of the AIG Restructuring Plan on March 2, 2009, the U.S. Government remains committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due."
AIG's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or relating to the amounts and classification of liabilities that may be necessary should AIG be unable to continue as a going concern.
Securities purchased (sold) under agreements to resell (repurchase), at contract value: Securities purchased under agreements to resell and Securities sold under agreements to repurchase (other than those entered into by AIGFP) generally are accounted for as collateralized borrowing or lending transactions and are recorded at their contracted resale or repurchase amounts plus accrued interest. AIGFP carries such agreements at fair value based on market observable interest rates and credit spreads. AIG's policy is to take possession of or obtain a security interest in securities purchased under agreements to resell.
When AIG does not obtain cash collateral sufficient to fund substantially all of the cost of purchasing identical replacement securities during the term of the contract, AIG accounts for the transaction as a sale of the security and reports the obligation to repurchase the security as a derivative contract. Where securities are carried in the available for sale category, AIG records a gain or loss in income. Where changes in fair value of securities are recognized through income, no additional gain or loss is recognized. The fair value of securities transferred under repurchase agreements accounted for as sales was $2.1 billion and $2.3 billion at March 31, 2010 and December 31, 2009, respectively, and the related cash collateral obtained was $1.7 billion and $1.5 billion at March 31, 2010 and December 31, 2009, respectively.
AIG minimizes the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and generally requiring additional collateral to be deposited with AIG when necessary.
15
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Securities lending invested collateral, at fair value and Securities lending payable: In 2008, AIG exited the domestic securities lending program, and as of March 31, 2010, AIG had exited its foreign securities lending activities.
Accounting Changes
AIG adopted the following accounting standards during the first quarter of 2010:
Accounting for Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board (FASB) issued an accounting standard addressing transfers of financial assets that removes the concept of a qualifying special-purpose entity (QSPE) from the FASB Accounting Standards Codification and removes the exception that exempted transferors from applying the consolidation rules to QSPEs. The new standard is effective for interim and annual periods beginning on January 1, 2010 for AIG. Earlier application is prohibited. The adoption of this standard increased both assets and liabilities by approximately $1.3 billion as a result of consolidating two previously unconsolidated QSPEs. The adoption of this new standard did not have a material effect on AIG's consolidated results of operations or cash flows.
Consolidation of Variable Interest Entities
In June 2009, the FASB issued an accounting standard that amends the rules addressing consolidation of certain variable interest entities with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly affect the entity's economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The new standard also requires enhanced financial reporting by enterprises involved with variable interest entities.
AIG adopted the new standard on January 1, 2010. The adoption of this standard resulted in an increase in excess of amounts previously recorded for assets, liabilities, redeemable noncontrolling interest, other noncontrolling interest and accumulated deficit of approximately $8.2 billion, $7.1 billion, $1.1 billion, $0.1 billion and $0.2 billion, respectively, and a net decrease in accumulated other comprehensive income of approximately $0.3 billion, as a result of consolidating previously unconsolidated VIEs.
The following table describes the two methods applied by AIG and the amount and classification in the Consolidated Balance Sheet of the assets and liabilities consolidated as a result of the adoption:
|
Transition Methods | |||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
Fair Value Option |
Carrying Value |
||||||
Assets: |
||||||||
Bond trading securities, at fair value |
$ | 1,239 | $ | 1,262 | ||||
Other invested assets |
- | 480 | ||||||
Mortgage and other loans receivable |
- | 1,980 | ||||||
Other asset accounts |
194 | 150 | ||||||
Assets of businesses held for sale |
4,630 | - | ||||||
Total Assets |
$ | 6,063 | $ | 3,872 | ||||
Liabilities: |
||||||||
FRBNY commercial paper funding facility |
$ | 1,088 | $ | - | ||||
Other long-term debt |
- | 1,533 | ||||||
Other liability accounts |
1 | 31 | ||||||
Liabilities of businesses held for sale |
4,525 | - | ||||||
Total Liabilities |
$ | 5,614 | $ | 1,564 | ||||
16
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The cumulative effect adjustment of electing the fair value option was not material to AIG's accumulated deficit.
In February 2010, the FASB also issued an update to the aforementioned accounting standard that defers the revised consolidation rules for variable interest entities with attributes of, or similar to, an investment company or money market fund. The primary effect of this deferral for AIG is that AIG will continue to apply the consolidation rules in effect before the amended guidance discussed above for its interests in eligible entities, such as certain mutual funds.
Future Application of Accounting Standards
In March 2010, the FASB issued an accounting standard that amends the scope for embedded credit derivative features related to the redistribution of credit risk in the form of subordination of one financial instrument to another in a securitization vehicle. The new standard clarifies how to determine which embedded credit derivative features, including those in collateralized debt obligations (CDOs), credit linked notes (CLNs) and synthetic CDOs and CLNs, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting. The new standard is effective for interim and annual periods beginning on July 1, 2010 for AIG. AIG is assessing the effect adopting this new standard will have on its consolidated financial condition, results of operations, and cash flows.
AIG reports the results of its operations through four reportable segments: General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, and Financial Services. AIG evaluates performance based on pre-tax income (loss), excluding results from discontinued operations and net gains (losses) on sales of divested businesses, because AIG believes that this provides more meaningful information on how its operations are performing.
The following table presents AIG's operations by reportable segment:
Three Months Ended March 31, (in millions) |
2010 |
2009 |
||||||
---|---|---|---|---|---|---|---|---|
Total revenues: |
||||||||
General Insurance |
$ | 8,849 | $ | 8,099 | ||||
Domestic Life Insurance & Retirement Services |
3,226 | 1,703 | ||||||
Foreign Life Insurance & Retirement Services* |
1,075 | 763 | ||||||
Financial Services |
1,508 | 1,265 | ||||||
Other |
2,062 | 2,180 | ||||||
Consolidation and eliminations |
(390 | ) | (695 | ) | ||||
Total revenues |
16,330 | 13,315 | ||||||
Pre-tax income (loss) from continuing operations: |
||||||||
General Insurance |
1,016 | 102 | ||||||
Domestic Life Insurance & Retirement Services |
327 | (1,827 | ) | |||||
Foreign Life Insurance & Retirement Services* |
85 | (128 | ) | |||||
Financial Services |
(439 | ) | (1,130 | ) | ||||
Other |
(294 | ) | (3,444 | ) | ||||
Consolidation and eliminations |
140 | (89 | ) | |||||
Total pre-tax income (loss) from continuing operations |
$ | 835 | $ | (6,516 | ) | |||
17
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table presents AIG's operations by operating segment:
Three Months Ended March 31, (in millions) |
2010 |
2009 |
||||||
---|---|---|---|---|---|---|---|---|
General Insurance |
||||||||
Total revenues: |
||||||||
Commercial Insurance |
$ | 5,403 | $ | 5,024 | ||||
Foreign General Insurance |
3,446 | 3,075 | ||||||
Total revenues |
$ | 8,849 | $ | 8,099 | ||||
Pre-tax income (loss): |
||||||||
Commercial Insurance |
$ | 730 | $ | (224 | ) | |||
Foreign General Insurance |
286 | 326 | ||||||
Total pre-tax income (loss) |
$ | 1,016 | $ | 102 | ||||
Domestic Life Insurance & Retirement Services |
||||||||
Total revenues: |
||||||||
Domestic Life Insurance |
$ | 1,934 | $ | 1,526 | ||||
Domestic Retirement Services |
1,292 | 177 | ||||||
Total revenues |
$ | 3,226 | $ | 1,703 | ||||
Pre-tax income (loss): |
||||||||
Domestic Life Insurance |
$ | 227 | $ | (298 | ) | |||
Domestic Retirement Services |
100 | (1,529 | ) | |||||
Total pre-tax income (loss) |
$ | 327 | $ | (1,827 | ) | |||
Financial Services |
||||||||
Total revenues: |
||||||||
Aircraft Leasing |
$ | 882 | $ | 1,281 | ||||
Capital Markets |
(234 | ) | (969 | ) | ||||
Consumer Finance |
779 | 813 | ||||||
Other, including intercompany adjustments |
81 | 140 | ||||||
Total revenues |
$ | 1,508 | $ | 1,265 | ||||
Pre-tax income (loss): |
||||||||
Aircraft Leasing |
$ | (81 | ) | $ | 316 | |||
Capital Markets |
(298 | ) | (1,121 | ) | ||||
Consumer Finance |
(25 | ) | (306 | ) | ||||
Other, including intercompany adjustments |
(35 | ) | (19 | ) | ||||
Total pre-tax income (loss) |
$ | (439 | ) | $ | (1,130 | ) | ||
Other |
||||||||
Total revenues: |
||||||||
Parent & Other |
$ | 1,119 | $ | 105 | ||||
Mortgage Guaranty |
298 | 317 | ||||||
Change in fair value of ML III |
751 | | ||||||
Noncore Asset Management |
(19 | ) | (239 | ) | ||||
Other noncore insurance |
(17 | ) | 1,997 | |||||
Consolidation and eliminations |
(70 | ) | - | |||||
Total revenues |
$ | 2,062 | $ | 2,180 | ||||
Pre-tax income (loss): |
||||||||
Parent & Other |
$ | (645 | ) | $ | (2,057 | ) | ||
Mortgage Guaranty |
96 | (480 | ) | |||||
Change in fair value of ML III |
751 | | ||||||
Noncore Asset Management |
(463 | ) | (1,012 | ) | ||||
Other noncore insurance |
(33 | ) | 105 | |||||
Total pre-tax income (loss) |
$ | (294 | ) | $ | (3,444 | ) | ||
18
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. Discontinued Operations and Held-for-Sale Classification
As discussed in Note 1 herein, during the first quarter of 2010, AIG entered into agreements to sell AIA and ALICO. Also, on October 12, 2009, AIG entered into an agreement to sell its 97.57 percent share of Nan Shan Life Insurance Company, Ltd. (Nan Shan) for approximately $2.15 billion. AIG expects each of these sales to close in 2010. These transactions met the criteria for held-for-sale and discontinued operations accounting.
Accordingly, results of operations for these companies are included as discontinued operations in AIG's Consolidated Statement of Income (Loss) for all periods shown and their aggregated assets and liabilities are presented separately as single line items in the asset and liability sections of the Consolidated Balance Sheet at March 31, 2010 for AIA and ALICO and at March 31, 2010 and December 31, 2009 for Nan Shan. Each of these companies previously had been a component of the Foreign Life Insurance & Retirement Services reportable segment.
Income (loss) from discontinued operations includes interest expense, including periodic amortization of the prepaid commitment fee asset, on debt to be assumed by the buyers of AIA and ALICO and on debt required to be repaid as a result of the disposition transactions associated with the FRBNY Credit Facility totaling $183 million and $258 million in the three months ended March 31, 2010 and 2009, respectively. The interest expense allocated to discontinued operations for the three-month periods ended March 31, 2010 and 2009 was based on the estimated funds of $8.6 billion committed to repay the FRBNY Credit Facility multiplied by the daily interest rate. The periodic amortization of the prepaid commitment fee allocated to discontinued operations was determined based on the ratio of funds committed to repay the FRBNY Credit Facility to the total outstanding available amount under the FRBNY Credit Facility.
A summary of income (loss) from discontinued operations is as follows:
Three Months Ended March 31, (in millions) |
2010 |
2009 |
||||||
---|---|---|---|---|---|---|---|---|
Premiums and other considerations |
$ | 6,525 | $ | 6,024 | ||||
Net investment income |
2,252 | 1,449 | ||||||
Net realized capital gains (losses) |
63 | (587 | ) | |||||
Total revenues |
8,840 | 6,886 | ||||||
Income (loss) from discontinued operations |
1,142 |
152 |
||||||
Loss on sale |
(106 | ) | (3 | ) | ||||
Income (loss) from discontinued operations, before income tax expense (benefit) |
1,036 | 149 | ||||||
Income tax expense (benefit) |
(137 | ) | 69 | |||||
Income (loss) from discontinued operations, net of tax |
$ | 1,173 | $ | 80 | ||||
Certain other sales completed during 2010 and 2009 were not classified as discontinued operations due to AIG's continued involvement or because associated assets, liabilities and results of operations were not material to AIG's consolidated financial position or results of operations.
On September 5, 2009, AIG entered into an agreement to sell its investment advisory and third party asset management business for a $277 million cash payment at closing plus contingent consideration to be received over time. Prior to the closing of this transaction on March 26, 2010, these businesses were a component of the Noncore Asset Management business included within Other operations. This transaction met the criteria for held-for-sale accounting, and its assets and liabilities were included as single line items in the asset and liability sections of the Consolidated Balance Sheet at December 31, 2009. This transaction did not meet the criteria for
19
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
discontinued operations accounting because of a significant continuation of activities between AIG and the business sold.
On July 28, 2009, AIG entered into an agreement to combine its consumer finance business in Poland, conducted through AIG Bank Polska S.A., into the Polish consumer finance business of Santander Consumer Finance S.A. (SCB). In exchange, AIG will receive an equity interest in SCB. The closing is expected to occur in the second quarter of 2010. This transaction met the criteria for held-for-sale accounting and, as a result, its assets and liabilities are included as single line items in the asset and liability sections of the Consolidated Balance Sheet at March 31, 2010 and December 31, 2009. AIG Bank Polska is a component of the Financial Services reportable segment. This transaction did not meet the criteria for discontinued operations accounting because of AIG's retained equity interest in SCB.
A summary of assets and liabilities held for sale at March 31, 2010 and December 31, 2009 is as follows:
(in millions) |
March 31, 2010 |
December 31, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
Assets: |
||||||||
Fixed maturity securities |
$ | 163,336 | $ | 34,495 | ||||
Deferred policy acquisition costs |
24,204 | 3,322 | ||||||
Equity securities |
15,366 | 2,947 | ||||||
Other invested assets |
13,269 | 4,256 | ||||||
Short-term investments |
13,170 | 3,501 | ||||||
Separate account assets |
10,675 | 3,467 | ||||||
Mortgage and other loans receivable, net |
9,096 | 3,997 | ||||||
Goodwill |
3,457 | 25 | ||||||
Other assets |
3,867 | 369 | ||||||
Total Assets of businesses held for sale |
$ | 256,440 | $ | 56,379 | ||||
Liabilities: |
||||||||
Future policy benefits for life and accident and health insurance contracts |
$ | 108,812 | $ | 38,023 | ||||
Policyholder contract deposits |
79,312 | 3,133 | ||||||
Separate account liabilities |
10,675 | 3,467 | ||||||
Other liabilities |
19,038 | 3,976 | ||||||
Total Liabilities of businesses held for sale |
$ | 217,837 | $ | 48,599 | ||||
On March 31, 2010, AIG, through a Chartis International subsidiary, purchased additional voting shares in Fuji Fire & Marine Insurance Company Limited (Fuji), a publicly traded Japanese insurance company with general insurance and some life insurance operations. The acquisition of the additional voting shares for $145 million increased Chartis' total voting ownership interest in Fuji from 41.7 percent to 54.8 percent, which resulted in Chartis International obtaining control of Fuji. This acquisition was made to maintain Chartis International's share in the substantial Japanese market, which is undergoing significant consolidation.
The purchase was accounted for under the acquisition method. Chartis identified and estimated certain of the fair values of assets acquired, liabilities assumed, and noncontrolling interests of Fuji as of the acquisition date. Because the acquisition was completed on the last day of the quarter, Chartis has not obtained final appraisals of Fuji's insurance contracts, loans, certain real estate or intangible assets.
Based on the estimated fair values assigned to the assets acquired, liabilities assumed and noncontrolling interests, Chartis recorded an unallocated purchase price of $581 million in Other liabilities in the Consolidated Balance Sheet. Chartis is in the process of reassessing the recognition and measurement of identifiable assets acquired, including the value of the business acquired and other intangibles, and liabilities assumed. Upon
20
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
completion of the reassessment process, Chartis will adjust the fair value of the assets acquired and liabilities assumed for any significant differences to the provisional fair values. An adjustment to the purchase price allocation may also occur if new information on Fuji becomes known or discovered within one year from the acquisition date. To the extent an unallocated purchase price credit remains, AIG will record a bargain purchase gain. It is anticipated that any gain recognized will not be subject to U.S. or foreign income tax, because such gain would only be recognized for tax purposes upon sale of the Fuji shares.
The following table summarizes the estimated preliminary fair values of major classes of assets acquired and liabilities assumed and the unallocated purchase price at the date of acquisition:
(in millions) |
At March 31, 2010 |
||||||
---|---|---|---|---|---|---|---|
Identifiable net assets: |
|||||||
Investments |
$ | 10,121 | |||||
Cash |
6 | ||||||
Premiums and other receivables |
889 | ||||||
Reinsurance assets |
517 | ||||||
Real estate and other fixed assets |
428 | ||||||
Other assets |
108 | ||||||
Liability for unpaid claims and claims adjustment expense |
(1,561 | ) | |||||
Unearned premiums |
(3,139 | ) | |||||
Future policy benefits for life and accident and health insurance contracts |
(1,934 | ) | |||||
Other policyholder funds |
(3,536 | ) | |||||
Other liabilities |
(460 | ) | |||||
Total preliminary identifiable net assets acquired |
1,439 | ||||||
Less: |
|||||||
Cash consideration transferred |
145 | ||||||
Fair value of the noncontrolling interest |
421 | ||||||
Fair value of AIG's previous equity interest in Fuji |
292 | ||||||
Unallocated purchase price |
$ | 581 | |||||
In accordance with the acquisition method of accounting, Chartis remeasured its equity interest in Fuji, held prior to the acquisition of the additional shares, to fair value which resulted in a gain of $47 million offset by a $72 million charge resulting from the reversal through income of Chartis' share of Fuji's accumulated other comprehensive income. The loss was recorded in Other realized capital gains (losses) in the Consolidated Statement of Income (Loss). The fair value of AIG's previous equity interest and the noncontrolling interest were based on the publicly-traded share price on the Tokyo Stock Exchange as of the acquisition date. The acquisition-related costs, consisting primarily of legal and transaction fees, were recorded in Other expenses in the Consolidated Statement of Income (Loss).
The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition occurred as of January 1, 2009. The pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations which would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future.
Three Months Ended March 31, (in millions) |
2010 |
2009 |
|||||
---|---|---|---|---|---|---|---|
Total revenues |
$ | 17,327 | $ | 13,863 | |||
Net income (loss) |
2,181 | (5,416 | ) | ||||
Net income (loss) attributable to AIG |
1,471 | (4,500 | ) | ||||
21
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Fair Value Measurements on a Recurring Basis
AIG measures the following financial instruments at fair value on a recurring basis:
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date.
The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An active market is one in which transactions for the asset or liability being valued occur with sufficient frequency and volume to provide pricing information on an ongoing basis. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or in which little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and general market conditions.
Assets and liabilities recorded at fair value in the Consolidated Balance Sheet are measured and classified in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:
22
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
actively traded listed common stocks and derivative contracts, most separate account assets and most mutual funds.
The following is a description of the valuation methodologies used for instruments carried at fair value:
Incorporation of Credit Risk in Fair Value Measurements
Fair value measurements for embedded policy derivatives and policyholder contract deposits take into consideration that policyholder liabilities are senior in priority to general creditors of AIG and therefore are much less sensitive to changes in AIG credit default swap or cash issuance spreads.
23
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
A CDS is a derivative contract that allows the transfer of third party credit risk from one party to the other. The buyer of the CDS pays an upfront and/or annual premium to the seller. The seller's payment obligation is triggered by the occurrence of a credit event under a specified reference security and is determined by the loss on that specified reference security. The present value of the amount of the annual and/or upfront premium therefore represents a market-based expectation of the likelihood that the specified reference party will fail to perform on the reference obligation, a key market observable indicator of non-performance risk (the CDS spread).
Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly incorporate counterparty credit risk. Fair values for fixed maturity securities based on internal models incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information.
The cost of credit protection is determined under a discounted present value approach considering the market levels for single name CDS spreads for each specific counterparty, the mid market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to AIG by an independent third party. AIG utilizes an interest rate based on the benchmark London Interbank Offered Rate (LIBOR) curve to derive its discount rates.
While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, AIG believes this approach provides a reasonable estimate of the fair value of the assets and liabilities, including consideration of the impact of non-performance risk.
Fixed Maturity Securities Trading and Available for Sale
AIG maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Whenever available, AIG obtains quoted prices in active markets for identical assets at the balance sheet date to measure at fair value fixed maturity securities in its trading and available for sale portfolios. Market price data is generally obtained from dealer markets.
AIG estimates the fair value of fixed maturity securities not traded in active markets, including receivables (payables) arising from securities purchased (sold) under agreements to resell (repurchase), and mortgage and other loans receivable for which AIG elected the fair value option, by referring to traded securities with similar attributes, using dealer quotations, a matrix pricing methodology, discounted cash flow analyses and/or internal valuation models. This methodology considers such factors as the issuer's industry, the security's rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For certain fixed maturity instruments (for example, private placements) that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used.
Maiden Lane II and Maiden Lane III
At their inception, ML II and ML III were valued and recorded at the transaction prices of $1 billion and $5 billion, respectively. Subsequently, the Maiden Lane Interests are valued using a discounted cash flow methodology that uses the estimated future cash flows of the Maiden Lane assets. AIG applies model-determined market discount rates to its interests. These discount rates are calibrated to the changes in the estimated asset values for the underlying assets commensurate with AIG's interests in the capital structure of the respective entities. Estimated cash flows and discount rates used in the valuations are validated, to the extent possible, using market observable information for securities with similar asset pools, structure and terms.
The fair value methodology used assumes that the underlying collateral in the Maiden Lane Interests will continue to be held and generate cash flows into the foreseeable future and does not assume a current liquidation of the assets underlying the Maiden Lane Interests. Other methodologies employed or assumptions made in
24
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
determining fair value for these investments could result in amounts that differ significantly from the amounts reported.
Adjustments to the fair value of AIG's interest in ML II are recorded on the Consolidated Statement of Income (Loss) in Net investment income for AIG's Domestic Life Insurance companies. Adjustments to the fair value of AIG's interest in ML III are recorded on the Consolidated Statement of Income (Loss) in Net investment income and, beginning in the second quarter of 2009, were included in Other Noncore business results, reflecting the contribution to an AIG subsidiary. Prior to the second quarter of 2009, such amounts had been included in Other Parent company results. AIG's Maiden Lane Interests are included in bond trading securities, at fair value, on the Consolidated Balance Sheet.
As of March 31, 2010, AIG expected to receive cash flows (undiscounted) in excess of AIG's initial investment, and any accrued interest, in the Maiden Lane Interests over the remaining life of the investments after repayment of the first priority obligations owed to the FRBNY. AIG's cash flow methodology considers the capital structure of the collateral securities and their expected credit losses from the underlying asset pools. The fair values of the Maiden Lane Interests are most affected by changes in the discount rates and changes in the underlying estimated future collateral cash flow assumptions used in the valuation model.
The LIBOR interest rate curve changes are determined based on observable prices, interpolated or extrapolated to derive a LIBOR for a specific maturity term as necessary. The spreads over LIBOR for the Maiden Lane Interests (including collateral-specific credit and liquidity spreads) can change as a result of changes in market expectations about the future performance of these investments as well as changes in the risk premium that market participants would demand at the time of the transactions.
Changes in estimated future cash flows would primarily be the result of changes in expectations for defaults, recoveries, and prepayments on underlying loans.
Changes in the discount rate or the estimated future cash flows used in the valuation would alter AIG's estimate of the fair value of the Maiden Lane Interests as shown in the table below.
|
Fair Value Change | |||||||
---|---|---|---|---|---|---|---|---|
March 31, 2010 (in millions) |
||||||||
Maiden Lane II |
Maiden Lane III |
|||||||
Discount Rates: |
||||||||
200 basis point increase |
$ | (90 | ) | $ | (659 | ) | ||
200 basis point decrease |
101 | 769 | ||||||
400 basis point increase |
(170 | ) | (1,225 | ) | ||||
400 basis point decrease |
215 | 1,672 | ||||||
Estimated Future Cash Flows: |
||||||||
10% increase |
292 | 833 | ||||||
10% decrease |
(296 | ) | (831 | ) | ||||
20% increase |
579 | 1,661 | ||||||
20% decrease |
(588 | ) | (1,653 | ) | ||||
AIG believes that the ranges of discount rates used in these analyses are reasonable based on implied spread volatilities of similar collateral securities and implied volatilities of LIBOR interest rates. The ranges of estimated future cash flows were determined based on variability in estimated future cash flows implied by cumulative loss estimates for similar instruments. Because of these factors, the fair values of the Maiden Lane Interests are likely to vary, perhaps materially, from the amount estimated.
Equity Securities Traded in Active Markets Trading and Available for Sale
AIG maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Whenever available, AIG obtains quoted prices in active markets for identical assets at the balance sheet
25
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
date to measure at fair value marketable equity securities in its trading and available for sale portfolios. Market price data is generally obtained from exchange or dealer markets.
Direct Private Equity Investments Other Invested Assets
AIG initially estimates the fair value of equity instruments not traded in active markets, which includes direct private equity investments, by reference to the transaction price. This valuation is adjusted for changes in inputs and assumptions which are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity capital markets, and/or changes in financial ratios or cash flows. For equity securities that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used.
Hedge Funds, Private Equity Funds and Other Investment Partnerships Other Invested Assets
AIG initially estimates the fair value of investments in certain hedge funds, private equity funds and other investment partnerships by reference to the transaction price. Subsequently, AIG generally obtains the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are generally audited annually. AIG considers observable market data and performs diligence procedures in validating the appropriateness of using the net asset value as a fair value measurement.
Separate Account Assets
Separate account assets are composed primarily of registered and unregistered open-end mutual funds that generally trade daily and are measured at fair value in the manner discussed above for equity securities traded in active markets.
Freestanding Derivatives
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). AIG generally values exchange-traded derivatives using quoted prices in active markets for identical derivatives at the balance sheet date.
OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. AIG generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.
Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. When AIG does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, the transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so the model value at inception equals the transaction price. Subsequent to initial recognition, AIG updates valuation inputs when corroborated by evidence such as similar market
26
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
transactions, third party pricing services and/or broker or dealer quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used.
Embedded Policy Derivatives
The fair value of embedded policy derivatives contained in certain variable annuity and equity-indexed annuity and life contracts is measured based on actuarial and capital market assumptions related to projected cash flows over the expected lives of the contracts. These cash flow estimates primarily include benefits and related fees assessed, when applicable, and incorporate expectations about policyholder behavior. Estimates of future policyholder behavior are subjective and based primarily on AIG's historical experience. With respect to embedded policy derivatives in AIG's variable annuity contracts, because of the dynamic and complex nature of the expected cash flows, risk neutral valuations are used. Estimating the underlying cash flows for these products involves many estimates and judgments, including those regarding expected market rates of return, market volatility, correlations of market index returns to funds, fund performance, discount rates and policyholder behavior. With respect to embedded policy derivatives in AIG's equity-indexed annuity and life contracts, option pricing models are used to estimate fair value, taking into account assumptions for future equity index growth rates, volatility of the equity index, future interest rates, and determinations on adjusting the participation rate and the cap on equity indexed credited rates in light of market conditions and policyholder behavior assumptions. These methodologies incorporate an explicit risk margin to take into consideration market participant estimates of projected cash flows and policyholder behavior.
AIGFP's Super Senior Credit Default Swap Portfolio
AIGFP values its CDS transactions written on the super senior risk layers of designated pools of debt securities or loans using internal valuation models, third-party price estimates and market indices. The principal market was determined to be the market in which super senior credit default swaps of this type and size would be transacted, or have been transacted, with the greatest volume or level of activity. AIG has determined that the principal market participants, therefore, would consist of other large financial institutions who participate in sophisticated over-the-counter derivatives markets. The specific valuation methodologies vary based on the nature of the referenced obligations and availability of market prices.
The valuation of the super senior credit derivatives is challenging given the limitation on the availability of market observable information due to the lack of trading and price transparency in the structured finance market. These market conditions have increased the reliance on management estimates and judgments in arriving at an estimate of fair value for financial reporting purposes. Further, disparities in the valuation methodologies employed by market participants and the varying judgments reached by such participants when assessing volatile markets have increased the likelihood that the various parties to these instruments may arrive at significantly different estimates as to their fair values.
AIGFP's valuation methodologies for the super senior credit default swap portfolio have evolved over time in response to market conditions and the availability of market observable information. AIG has sought to calibrate the methodologies to available market information and to review the assumptions of the methodologies on a regular basis.
Regulatory capital portfolio: In the case of credit default swaps written to facilitate regulatory capital relief, AIGFP estimates the fair value of these derivatives by considering observable market transactions. The transactions with the most observability are the early terminations of these transactions by counterparties. AIGFP continues to reassess the expected maturity of the portfolio. AIGFP has not been required to make any payments as part of terminations initiated by counterparties. The regulatory benefit of these transactions for AIGFP's financial institution counterparties is generally derived from the terms of the Capital Accord of the Basel
27
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Committee on Banking Supervision (Basel I) that existed through the end of 2007 and which is in the process of being replaced by the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee on Banking Supervision (Basel II). It was expected that financial institution counterparties would have transitioned from Basel I to Basel II by the end of the two-year adoption period on December 31, 2009, after which they would have received little or no additional regulatory benefit from these CDS transactions, except in a small number of specific instances. However, the Basel Committee announced that it had agreed to keep in place the Basel I capital floors beyond the end of 2009, although it remains to be seen how this extension will be implemented by the various European Central Banking districts. Should certain counterparties continue to receive favorable regulatory capital benefits from these transactions, those counterparties may not exercise their options to terminate the transactions in the expected time frame. In assessing the fair value of the regulatory capital CDS transactions, AIGFP also considers other market data, to the extent relevant and available. For further discussion, see Note 8 herein.
Multi-sector CDO portfolios: AIGFP uses a modified version of the Binomial Expansion Technique (BET) model to value its credit default swap portfolio written on super senior tranches of multi-sector collateralized debt obligations (CDOs) of ABS, including maturity-shortening puts that allow the holders of the securities issued by certain CDOs to treat the securities as short-term 2a-7 eligible investments under the Investment Company Act of 1940 (2a-7 Puts). The BET model was developed in 1996 by a major rating agency to generate expected loss estimates for CDO tranches and derive a credit rating for those tranches, and remains widely used.
AIGFP has adapted the BET model to estimate the price of the super senior risk layer or tranche of the CDO. AIG modified the BET model to imply default probabilities from market prices for the underlying securities and not from rating agency assumptions. To generate the estimate, the model uses the price estimates for the securities comprising the portfolio of a CDO as an input and converts those estimates to credit spreads over current LIBOR-based interest rates. These credit spreads are used to determine implied probabilities of default and expected losses on the underlying securities. This data is then aggregated and used to estimate the expected cash flows of the super senior tranche of the CDO.
Prices for the individual securities held by a CDO are obtained in most cases from the CDO collateral managers, to the extent available. CDO collateral managers provided market prices for 63.4 percent of the underlying securities used in the valuation at March 31, 2010. When a price for an individual security is not provided by a CDO collateral manager, AIGFP derives the price through a pricing matrix using prices from CDO collateral managers for similar securities. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the relationship of the security to other benchmark quoted securities. Substantially all of the CDO collateral managers who provided prices used dealer prices for all or part of the underlying securities, in some cases supplemented by third-party pricing services.
The BET model also uses diversity scores, weighted average lives, recovery rates and discount rates. AIGFP employs a Monte Carlo simulation to assist in quantifying the effect on the valuation of the CDO of the unique aspects of the CDO's structure such as triggers that divert cash flows to the most senior part of the capital structure. The Monte Carlo simulation is used to determine whether an underlying security defaults in a given simulation scenario and, if it does, the security's implied random default time and expected loss. This information is used to project cash flow streams and to determine the expected losses of the portfolio.
In addition to calculating an estimate of the fair value of the super senior CDO security referenced in the credit default swaps using its internal model, AIGFP also considers the price estimates for the super senior CDO securities provided by third parties, including counterparties to these transactions, to validate the results of the model and to determine the best available estimate of fair value. In determining the fair value of the super senior CDO security referenced in the credit default swaps, AIGFP uses a consistent process which considers all available pricing data points and eliminates the use of outlying data points. When pricing data points are within a reasonable range an averaging technique is applied.
28
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Corporate debt/Collateralized loan obligation (CLO) portfolios: In the case of credit default swaps written on portfolios of investment-grade corporate debt, AIGFP uses a mathematical model that produces results that are closely aligned with prices received from third parties. This methodology is widely used by other market participants and uses the current market credit spreads of the names in the portfolios along with the base correlations implied by the current market prices of comparable tranches of the relevant market traded credit indices as inputs. One transaction, representing one percent of the total notional amount of the corporate arbitrage transactions, is valued using third party quotes given its unique attributes.
AIGFP estimates the fair value of its obligations resulting from credit default swaps written on CLOs to be equivalent to the par value less the current market value of the referenced obligation. Accordingly, the value is determined by obtaining third-party quotes on the underlying super senior tranches referenced under the credit default swap contract.
Policyholder Contract Deposits
Policyholder contract deposits accounted for at fair value are measured using an earnings approach by taking into consideration the following factors:
The change in fair value of these policyholder contract deposits is recorded as Policyholder benefits and claims incurred in the Consolidated Statement of Income (Loss).
Securities and spot commodities sold but not yet purchased
Fair values for securities sold but not yet purchased are based on current market prices. Fair values of spot commodities sold but not yet purchased are based on current market prices of reference spot futures contracts traded on exchanges.
Other long-term debt
When fair value accounting has been elected, the fair value of non-structured liabilities is generally determined by using market prices from exchange or dealer markets, when available, or discounting expected cash flows using the appropriate discount rate for the applicable maturity. The discount rate is based on an implicit rate determined with the use of observable CDS market spreads to determine the risk of non-performance for AIG. Such instruments are generally classified in Level 2 of the fair value hierarchy as substantially all inputs are readily observable. AIG determines the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) and hybrid financial instruments (performance linked to risks other than interest rates, inflation or currency risks) using the appropriate derivative valuation methodology (described above) given the nature of the embedded risk profile. Such instruments are classified in Level 2 or Level 3 depending on the observability of significant inputs to the model. In addition, adjustments are made to the valuations of both non-structured and structured liabilities to reflect AIG's own credit worthiness based on observable credit spreads of AIG.
29
American International Group, Inc., and Subsidiaries
NOTES TO 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 levels of the inputs used:
At March 31, 2010 (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 |
$ | 100 | $ | 4,756 | $ | - | $ | - | $ | - | $ | 4,856 | |||||||||
Obligations of states, municipalities and Political subdivisions |
320 | 50,885 | 948 | - | - | 52,153 | |||||||||||||||
Non-U.S. governments |
197 | 23,615 | 5 | - | - | 23,817 | |||||||||||||||
Corporate debt |
- | 130,435 | 3,917 | - | - | 134,352 | |||||||||||||||
Residential mortgage-backed securities (RMBS) |
- | 20,387 | 6,832 | - | - | 27,219 | |||||||||||||||
Commercial mortgage-backed securities (CMBS) |
- | 3,549 | 4,396 | - | - | 7,945 | |||||||||||||||
Collateralized Debt Obligations/Asset Backed Securities (CDO/ABS) |
- | 1,952 | 4,576 | - | - | 6,528 | |||||||||||||||
Total bonds available for sale |
617 | 235,579 | 20,674 | - | - | 256,870 | |||||||||||||||
Bond trading securities: |
|||||||||||||||||||||
U.S. government and government sponsored entities |
433 | 6,313 | - | - | - | 6,746 | |||||||||||||||
Obligations of states, municipalities and Political subdivisions |
- | 348 | - | - | - | 348 | |||||||||||||||
Non-U.S. governments |
1 | 395 | 2 | - | - | 398 | |||||||||||||||
Corporate debt |
- | 1,658 | 7 | - | - | 1,665 | |||||||||||||||
RMBS |
- | 2,534 | 5 | - | - | 2,539 | |||||||||||||||
CMBS |
- | 2,282 | 294 | - | - | 2,576 | |||||||||||||||
CDO/ABS |
- | 4,198 | 7,895 | - | - | 12,093 | |||||||||||||||
Total bond trading securities |
434 | 17,728 | 8,203 | - | - | 26,365 | |||||||||||||||
Equity securities available for sale: |
|||||||||||||||||||||
Common stock |
4,219 | 7 | 36 | - | - | 4,262 | |||||||||||||||
Preferred stock |
- | 685 | 52 | - | - | 737 | |||||||||||||||
Mutual funds |
1,800 | 32 | - | - | - | 1,832 | |||||||||||||||
Total equity securities available for sale |
6,019 | 724 | 88 | - | - | 6,831 | |||||||||||||||
Equity securities trading: |
|||||||||||||||||||||
Common stock |
416 | 95 | 1 | - | - | 512 | |||||||||||||||
Mutual funds |
101 | - | - | - | - | 101 | |||||||||||||||
Total equity securities trading |
517 | 95 | 1 | - | - | 613 | |||||||||||||||
Mortgage and other loans receivable |
- | 157 | - | - | - | 157 | |||||||||||||||
Other invested assets(c) |
1,432 | 2,869 | 5,853 | - | - | 10,154 | |||||||||||||||
Unrealized gain on swaps, options and forward transactions: |
|||||||||||||||||||||
Interest rate contracts |
- | 26,308 | 207 | - | - | 26,515 | |||||||||||||||
Foreign exchange contracts |
- | 393 | 32 | - | - | 425 | |||||||||||||||
Equity contracts |
59 | 567 | 202 | - | - | 828 | |||||||||||||||
Commodity contracts |
- | 46 | 20 | - | - | 66 | |||||||||||||||
Credit contracts |
- | 3 | 556 | - | - | 559 | |||||||||||||||
Other contracts |
4 | 562 | 72 | - | - | 638 | |||||||||||||||
Counterparty netting and cash collateral |
- | - | - | (16,816 | ) | (4,832 | ) | (21,648 | ) | ||||||||||||
Total unrealized gain on swaps, options and forward transactions |
63 | 27,879 | 1,089 | (16,816 | ) | (4,832 | ) | 7,383 | |||||||||||||
Securities purchased under agreements to resell |
- | 1,615 | - | - | - | 1,615 | |||||||||||||||
Short-term investments |
3,986 | 18,198 | - | - | - | 22,184 | |||||||||||||||
Separate account assets |
49,740 | 2,213 | - | - | - | 51,953 | |||||||||||||||
Other assets |
- | 13 | - | - | - | 13 | |||||||||||||||
Total |
$ | 62,808 | $ | 307,070 | $ | 35,908 | $ | (16,816 | ) | $ | (4,832 | ) | $ | 384,138 | |||||||
Liabilities: |
|||||||||||||||||||||
Policyholder contract deposits |
$ | - | $ | - | $ | 641 | $ | - | $ | - | $ | 641 | |||||||||
Securities sold under agreements to repurchase |
- | 3,418 | - | - | - | 3,418 | |||||||||||||||
Securities and spot commodities sold but not yet purchased |
303 | 155 | - | - | - | 458 | |||||||||||||||
Unrealized loss on swaps, options and forward transactions: |
|||||||||||||||||||||
Interest rate contracts |
- | 20,214 | 1,493 | - | - | 21,707 | |||||||||||||||
Foreign exchange contracts |
- | 702 | 3 | - | - | 705 | |||||||||||||||
Equity contracts |
3 | 631 | 147 | - | - | 781 | |||||||||||||||
Commodity contracts |
- | 53 | - | - | - | 53 | |||||||||||||||
Credit contracts(d) |
- | 41 | 5,466 | - | - | 5,507 | |||||||||||||||
Other contracts |
- | 218 | 202 | - | - | 420 | |||||||||||||||
Counterparty netting and cash collateral |
- | - | - | (16,816 | ) | (6,061 | ) | (22,877 | ) | ||||||||||||
Total unrealized loss on swaps, options and forward transactions |
3 | 21,859 | 7,311 | (16,816 | ) | (6,061 | ) | 6,296 | |||||||||||||
Trust deposits and deposits due to banks and other depositors |
- | 16 | - | - | - | 16 | |||||||||||||||
Federal Reserve Bank of New York Commercial Paper Funding Facility |
- | 2,285 | - | - | - | 2,285 | |||||||||||||||
Other long-term debt |
- | 11,677 | 1,123 | - | - | 12,800 | |||||||||||||||
Total |
$ | 306 | $ | 39,410 | $ | 9,075 | $ | (16,816 | ) | $ | (6,061 | ) | $ | 25,914 | |||||||
30
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
At December 31, 2009 (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 |
$ | 146 | $ | 5,077 | $ | - | $ | - | $ | - | $ | 5,223 | |||||||||
Obligations of states, municipalities and Political subdivisions |
219 | 53,270 | 613 | - | - | 54,102 | |||||||||||||||
Non-U.S. governments |
312 | 64,519 | 753 | - | - | 65,584 | |||||||||||||||
Corporate debt |
10 | 187,337 | 4,791 | - | - | 192,138 | |||||||||||||||
Residential mortgage-backed securities (RMBS) |
- | 21,670 | 6,654 | - | - | 28,324 | |||||||||||||||
Commercial mortgage-backed securities (CMBS) |
- | 8,350 | 4,939 | - | - | 13,289 | |||||||||||||||
Collateralized Debt Obligations/Asset Backed Securities (CDO/ABS) |
- | 2,167 | 4,724 | - | - | 6,891 | |||||||||||||||
Total bonds available for sale |
687 | 342,390 | 22,474 | - | - | 365,551 | |||||||||||||||
Bond trading securities: |
|||||||||||||||||||||
U.S. government and government sponsored entities |
394 | 6,317 | 16 | - | - | 6,727 | |||||||||||||||
Obligations of states, municipalities and Political subdivisions |
- | 371 | - | - | - | 371 | |||||||||||||||
Non-U.S. governments |
2 | 1,363 | 56 | - | - | 1,421 | |||||||||||||||
Corporate debt |
- | 5,205 | 121 | - | - | 5,326 | |||||||||||||||
RMBS |
- | 3,671 | 4 | - | - | 3,675 | |||||||||||||||
CMBS |
- | 2,152 | 325 | - | - | 2,477 | |||||||||||||||
CDO/ABS |
- | 4,381 | 6,865 | - | - | 11,246 | |||||||||||||||
Total bond trading securities |
396 | 23,460 | 7,387 | - | - | 31,243 | |||||||||||||||
Equity securities available for sale: |
|||||||||||||||||||||
Common stock |
7,254 | 9 | 35 | - | - | 7,298 | |||||||||||||||
Preferred stock |
- | 760 | 54 | - | - | 814 | |||||||||||||||
Mutual funds |
1,348 | 56 | 6 | - | - | 1,410 | |||||||||||||||
Total equity securities available for sale |
8,602 | 825 | 95 | - | - | 9,522 | |||||||||||||||
Equity securities trading: |
|||||||||||||||||||||
Common stock |
1,254 | 104 | 1 | - | - | 1,359 | |||||||||||||||
Mutual funds |
6,460 | 492 | 7 | - | - | 6,959 | |||||||||||||||
Total equity securities trading |
7,714 | 596 | 8 | - | - | 8,318 | |||||||||||||||
Mortgage and other loans receivable |
- | 119 | - | - | - | 119 | |||||||||||||||
Other invested assets(c) |
3,322 | 8,656 | 6,910 | - | - | 18,888 | |||||||||||||||
Unrealized gain on swaps, options and forward transactions |
123 | 32,617 | 1,761 | (19,054 | ) | (6,317 | ) | 9,130 | |||||||||||||
Securities purchased under agreements to resell |
- | 2,154 | - | - | - | 2,154 | |||||||||||||||
Short-term investments |
1,898 | 22,077 | - | - | - | 23,975 | |||||||||||||||
Separate account assets |
56,165 | 1,984 | 1 | - | - | 58,150 | |||||||||||||||
Other assets |
- | 18 | 270 | - | - | 288 | |||||||||||||||
Total |
$ | 78,907 | $ | 434,896 | $ | 38,906 | $ | (19,054 | ) | $ | (6,317 | ) | $ | 527,338 | |||||||
Liabilities: |
|||||||||||||||||||||
Policyholder contract deposits |
$ | - | $ | - | $ | 5,214 | $ | - | $ | - | $ | 5,214 | |||||||||
Securities sold under agreements to repurchase |
- | 3,221 | - | - | - | 3,221 | |||||||||||||||
Securities and spot commodities sold but not yet purchased |
159 | 871 | - | - | - | 1,030 | |||||||||||||||
Unrealized loss on swaps, options and forward transactions(d) |
8 | 24,789 | 7,826 | (19,054 | ) | (8,166 | ) | 5,403 | |||||||||||||
Trust deposits and deposits due to banks and other depositors |
- | 15 | - | - | - | 15 | |||||||||||||||
Federal Reserve Bank of New York Commercial Paper Funding Facility |
- | 2,742 | - | - | - | 2,742 | |||||||||||||||
Other long-term debt |
- | 12,314 | 881 | - | - | 13,195 | |||||||||||||||
Total |
$ | 167 | $ | 43,952 | $ | 13,921 | $ | (19,054 | ) | $ | (8,166 | ) | $ | 30,820 | |||||||
Transfers of Level 1 and Level 2 Assets and Liabilities
AIG had no significant transfers between Level 1 and Level 2 during the three-month period ended March 31, 2010.
31
American International Group, Inc., and Subsidiaries
NOTES TO 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, 2010 and 2009 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) recorded in the Consolidated Statement of Income (Loss) during those periods related to the Level 3 assets and liabilities that remained on the Consolidated Balance Sheet at March 31, 2010 and 2009:
(in millions) |
Balance Beginning of Period(a) |
Net Realized and Unrealized Gains (Losses) Included in Income(b) |
Accumulated Other Comprehensive Income (Loss) |
Purchases, Sales, Issuances and Settlements-Net |
Transfers(c) |
Activity of Discontinued Operations |
Reclassified to Assets of Businesses Held for Sale |
Balance End of Period |
Changes in Unrealized Gains (Losses) on Instruments Held at End of Period |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended March 31, 2010 |
||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||
Bonds available for sale: |
||||||||||||||||||||||||||||||
Obligations of states, municipalities and political subdivisions |
$ | 613 | $ | (14 | ) | $ | (7 | ) | $ | 109 | $ | 257 | $ | (10 | ) | $ | - | $ | 948 | $ | - | |||||||||
Non-U.S. governments |
753 | - | - | - | - | 35 | (783 | ) | 5 | - | ||||||||||||||||||||
Corporate debt |
4,791 | (19 | ) | 86 | (67 | ) | (660 | ) | (47 | ) | (167 | ) | 3,917 | - | ||||||||||||||||
RMBS |
6,654 | (119 | ) | 442 | (142 | ) | 31 | (3 | ) | (31 | ) | 6,832 | - | |||||||||||||||||
CMBS |
4,939 | (480 | ) | 816 | (133 | ) | 509 | 306 | (1,561 | ) | 4,396 | - | ||||||||||||||||||
CDO/ABS |
4,724 | 21 | 234 | (16 | ) | 31 | 27 | (445 | ) | 4,576 | - | |||||||||||||||||||
Total bonds available for sale |
22,474 | (611 | ) | 1,571 | (249 | ) | 168 | 308 | (2,987 | ) | 20,674 | - | ||||||||||||||||||
Bond trading securities: |
||||||||||||||||||||||||||||||
U.S. government and government sponsored entities |
16 | - | - | - | - | (16 | ) | - | - | - | ||||||||||||||||||||
Non-U.S. governments |
56 | - | - | (50 | ) | 2 | - | (6 | ) | 2 | - | |||||||||||||||||||
Corporate debt |
121 | 1 | - | - | - | (5 | ) | (110 | ) | 7 | 1 | |||||||||||||||||||
RMBS |
4 | 1 | - | - | - | - | - | 5 | 1 | |||||||||||||||||||||
CMBS |
325 | 40 | - | (7 | ) | 34 | 2 | (100 | ) | 294 | 101 | |||||||||||||||||||
CDO/ABS |
6,865 | 1,117 | - | (87 | ) | - | 20 | (20 | ) | 7,895 | 549 | |||||||||||||||||||
Total bond trading securities |
7,387 | 1,159 | - | (144 | ) | 36 | 1 | (236 | ) | 8,203 | 652 | |||||||||||||||||||
Equity securities available for sale: |
||||||||||||||||||||||||||||||
Common stock |
35 | (2 | ) | 5 | 1 | - | - | (3 | ) | 36 | - | |||||||||||||||||||
Preferred stock |
54 | (5 | ) | 2 | - | 1 | - | - | 52 | - | ||||||||||||||||||||
Mutual funds |
6 | - | - | - | - | - | (6 | ) | - | - | ||||||||||||||||||||
Total equity securities available for sale |
95 | (7 | ) | 7 | 1 | 1 | - | (9 | ) | 88 | - | |||||||||||||||||||
Equity securities trading: |
||||||||||||||||||||||||||||||
Common stock |
1 | - | - | - | - | - | - | 1 | - | |||||||||||||||||||||
Mutual funds |
7 | - | - | - | - | (1 | ) | (6 | ) | - | - | |||||||||||||||||||
Total equity securities trading |
8 | - | - | - | - | (1 | ) | (6 | ) | 1 | - | |||||||||||||||||||
Other invested assets |
6,910 | (131 | ) | 283 | (926 | ) | (98 | ) | (3 | ) | (182 | ) | 5,853 | (28 | ) | |||||||||||||||
Other assets |
270 | - | - | (270 | ) | - | - | - | - | - | ||||||||||||||||||||
Separate account assets |
1 | - | - | - | - | - | (1 | ) | - | - | ||||||||||||||||||||
Total |
$ | 37,145 | $ | 410 | $ | 1,861 | $ | (1,588 | ) | $ | 107 | $ | 305 | $ | (3,421 | ) | $ | 34,819 | $ | 624 | ||||||||||
Liabilities: |
||||||||||||||||||||||||||||||
Policyholder contract deposits |
$ | (5,214 | ) | $ | 152 | $ | - | $ | (38 | ) | $ | - | $ | 32 | $ | 4,427 | $ | (641 | ) | $ | (141 | ) | ||||||||
Unrealized loss on swaps, options and forward transactions, net: |
||||||||||||||||||||||||||||||
Interest rate contracts |
(1,469 | ) | 98 | - | 96 | (11 | ) | - | - | (1,286 | ) | (167 | ) | |||||||||||||||||
Foreign exchange contracts |
29 | - | - | - | - | - | - | 29 | 3 | |||||||||||||||||||||
Equity contracts |
74 | (10 | ) | - | - | (9 | ) | - | - | 55 | (6 | ) | ||||||||||||||||||
Commodity contracts |
22 | (2 | ) | - | - | - | - | - | 20 | (2 | ) | |||||||||||||||||||
Credit contracts |
(4,545 | ) | 164 | - | (529 | ) | - | - | - | (4,910 | ) | 165 | ||||||||||||||||||
Other contracts |
(176 | ) | 41 | - | (3 | ) | - | 1 | 7 | (130 | ) | (3 | ) | |||||||||||||||||
Total unrealized loss on swaps, options and forward transactions, net |
(6,065 | ) | 291 | - | (436 | ) | (20 | ) | 1 | 7 | (6,222 | ) | (10 | ) | ||||||||||||||||
Other long-term debt |
(881 | ) | (135 | ) | - | 555 | (662 | ) | - | - | (1,123 | ) | 136 | |||||||||||||||||
Total |
$ | (12,160 | ) | $ | 308 | $ | - | $ | 81 | $ | (682 | ) | $ | 33 | $ | 4,434 | $ | (7,986 | ) | $ | (15 | ) | ||||||||
32
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(in millions) |
Balance Beginning of Period(a) |
Net Realized and Unrealized Gains (Losses) Included in Income(b) |
Accumulated Other Comprehensive Income (Loss) |
Purchases, Sales, Issuances and Settlements-Net |
Transfers(c) |
Activity of Discontinued Operations |
Balance End of Period |
Changes in Unrealized Gains (Losses) on Instruments Held at End of Period |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended March 31, 2009 |
||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||
Bonds available for sale |
$ | 18,826 | $ | (1,019 | ) | $ | 614 | $ | (898 | ) | $ | 272 | $ | 58 | $ | 17,853 | $ | - | ||||||||
Bond trading securities |
6,987 | (2,544 | ) | - | (197 | ) | 49 | (15 | ) | 4,280 | (1,586 | ) | ||||||||||||||
Common and preferred stock available for sale |
111 | (3 | ) | - | (3 | ) | 7 | (12 | ) | 100 | - | |||||||||||||||
Common and preferred stock trading |
3 | - | - | - | - | 3 | 6 | - | ||||||||||||||||||
Other invested assets |
11,168 | (936 | ) | (687 | ) | 252 | (109 | ) | - | 9,688 | (980 | ) | ||||||||||||||
Other assets |
325 | 6 | - | (20 | ) | - | - | 311 | 6 | |||||||||||||||||
Separate account assets |
830 | - | - | 1 | - | (34 | ) | 797 | - | |||||||||||||||||
Total |
$ | 38,250 | $ | (4,496 | ) | $ | (73 | ) | $ | (865 | ) | $ | 219 | $ | - | $ | 33,035 | $ | (2,560 | ) | ||||||
Liabilities: |
||||||||||||||||||||||||||
Policyholder contract deposits |
$ | (5,458 | ) | $ | 217 | $ | - | $ | (19 | ) | $ | - | $ | (297 | ) | $ | (5,557 | ) | $ | 2,094 | ||||||
Securities sold under agreements to repurchase |
(85 | ) | 2 | - | 36 | - | - | (47 | ) | (12 | ) | |||||||||||||||
Unrealized loss on swaps, options and forward transactions, net |
(10,570 | ) | (1,312 | ) | - | 277 | (252 | ) | 1 | (11,856 | ) | (1,069 | ) | |||||||||||||
Other long-term debt |
(1,147 | ) | 442 | - | 122 | 52 | - | (531 | ) | (420 | ) | |||||||||||||||
Total |
$ | (17,260 | ) | $ | (651 | ) | $ | - | $ | 416 | $ | (200 | ) | $ | (296 | ) | $ | (17,991 | ) | $ | 593 | |||||
Major Category of Assets/Liabilities |
Consolidated Statement of Income (Loss) Line Items |
|
---|---|---|
Bonds available for sale |
Net realized capital gains (losses) |
|
Bond trading securities |
Net investment income |
|
|
Other income |
|
Other invested assets |
Net realized capital gains (losses) |
|
|
Other income |
|
Policyholder contract deposits |
Policyholder benefits and claims incurred |
|
|
Net realized capital gains (losses) |
|
Unrealized loss on swaps, options and forward transactions, net |
Unrealized market valuation gains (losses) on AIGFP super senior credit default swap portfolio |
|
|
Net realized capital gains (losses) |
|
|
Other income |
|
33
American International Group, Inc., and Subsidiaries
NOTES TO 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, 2010 and March 31, 2009 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
AIG's policy is to transfer assets and liabilities into Level 3 when a significant input cannot be corroborated with market observable data. This may include: circumstances in which market activity has dramatically decreased and transparency to underlying inputs cannot be observed, current prices are not available, and substantial price variances in quotations among market participants exist.
In certain cases, the inputs used to measure the 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. AIG's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, AIG considers factors specific to the asset or liability.
During the three-month period ended March 31, 2010, AIG transferred into Level 3 approximately $1.2 billion of assets, consisting of certain ABS, CMBS and RMBS, as well as private placement corporate debt and certain municipal bonds related to SunAmerica Affordable Housing partnerships. A majority of the transfers into Level 3 related to investments in ABS, RMBS and CMBS and was due to a decrease in market transparency and downward credit migration in these securities. Transfers into Level 3 for private placement corporate debt are primarily the result of AIG overriding third party matrix pricing information downward to better reflect the additional risk premium associated with those securities that AIG believes was not captured in the matrix. Certain municipal bonds were transferred into Level 3 based on limited market activity for the particular issuances and related limitations on observable inputs for their valuation.
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 when a long-term interest rate significant to a valuation becomes short-term and thus observable. During the three-month period ended March 31, 2010, AIG transferred approximately $1.1 billion of assets out of Level 3. These transfers out of Level 3 are primarily related to investments in private placement corporate debt, as well as investments in certain ABS and RMBS. Transfers out of Level 3 for private placement corporate debt and for ABS were primarily the result of AIG using observable pricing information or a third party pricing quote that appropriately reflects the fair value of those securities, without the need for adjustment based on AIG's own assumptions regarding the characteristics of a specific security or the current liquidity in the market. Transfers out of Level 3 for RMBS investments were primarily due to increased usage of pricing from valuation service providers that were reflective of market activity, where previously an internally adjusted price had been used.
During the three-month period ended March 31, 2010, AIG transferred into Level 3 approximately $710 million of liabilities related to term notes and hybrid term notes, primarily due to an unobservable credit linked component comprising a significant amount of the valuations. The remaining $64 million transfer in was due to movement in market variables. A majority of the transfers out of Level 3 liabilities, which totaled $92 million, were due to recognition of the cash flow variability on interest rate and cross currency swaps with securitization vehicles. Other transfers out of Level 3 liabilities were due to movement in market variables.
AIG uses 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.
34
American International Group, Inc., and Subsidiaries
NOTES TO 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 AIG's 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 or non-recurring basis, AIG uses the net asset value per share as a practical expedient for fair value.
|
|
March 31, 2010(a) | December 31, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Investment Category Includes |
Fair Value Using Net Asset Value |
Unfunded Commitments |
Fair Value Using Net Asset Value |
Unfunded Commitments |
|||||||||||
Investment Category |
||||||||||||||||
Private equity funds: |
||||||||||||||||
Leveraged buyout |
Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage. | $ | 2,538 | $ | 1,532 | $ | 3,166 | $ | 1,553 | |||||||
Non-U.S. |
Investments that focus primarily on Asian and European based buyouts, expansion capital, special situations, turnarounds, venture capital, mezzanine and distressed opportunities strategies. |
360 |
105 |
543 |
103 |
|||||||||||
Venture capital |
Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company. |
281 |
47 |
427 |
48 |
|||||||||||
Fund of funds |
Funds that invest in other funds, which invest in various diversified strategies |
794 |
166 |
616 |
40 |
|||||||||||
Distressed |
Securities of companies that are already in default, under bankruptcy protection, or troubled. |
215 |
94 |
238 |
91 |
|||||||||||
Other |
Real estate, energy, multi-strategy, mezzanine, and industry-focused strategies. |
230 |
130 |
223 |
117 |
|||||||||||
Total private equity funds |
4,418 | 2,074 | 5,213 | 1,952 | ||||||||||||
Hedge funds: |
||||||||||||||||
Event-driven |
Securities of companies undergoing material structural changes, including. mergers, acquisitions, and other reorganizations. | 718 | - | 1,373 | - | |||||||||||
Long-short |
Securities the manager believes are undervalued, with corresponding short positions to hedge market risk. |
352 |
- |
825 |
- |
|||||||||||
Fund of funds |
Funds that invest in other funds, which invest in various diversified strategies. |
290 |
- |
304 |
- |
|||||||||||
Relative value |
Simultaneous long and short positions in closely related markets. |
9 |
- |
286 |
- |
|||||||||||
Distressed |
Securities of companies that are already in default, under bankruptcy protection, or troubled. |
297 |
- |
272 |
- |
|||||||||||
Other |
Non-U.S. companies, futures and commodities, and multi-strategy and industry-focused strategies. |
225 |
- |
394 |
- |
|||||||||||
Total hedge funds |
1,891 | - | 3,454 | - | ||||||||||||
Global real estate funds |
U.S. and Non-U.S. commercial real estate. | 899 | 87 | 929 | 64 | |||||||||||
Total |
$ | 7,208 | (b) | $ | 2,161 | $ | 9,596 | (b) | $ | 2,016 | ||||||
At March 31, 2010, private equity fund investments included above are not redeemable during the lives of the funds, and have expected remaining lives that extend in some cases more than 10 years. At that date, 43 percent of the total above have expected remaining lives of less than three years, 35 percent between 3 and 7 years, and
35
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
22 percent between 7 and 10 years. Expected lives are based upon legal maturity, which can be extended at the general manager's discretion, typically in one year increments.
At March 31, 2010, hedge fund investments included above are redeemable monthly (11 percent), quarterly (34 percent), semi-annually (11 percent) and annually (44 percent), with redemption notices ranging from 1 day to 180 days. More than 77 percent require redemption notices of less than 90 days. Investments representing approximately 14 percent of the value of the hedge fund investments cannot be redeemed because the investments include restrictions that do not allow for redemptions within a pre-defined timeframe. These restrictions expire no later than December 31, 2012. Funds that equate to 62 percent of the total value of hedge funds hold at least one investment that the general manager deems to be illiquid. In order to treat investors fairly and to accommodate subsequent subscription and redemption requests, the general manager isolates these illiquid assets from the rest of the fund until the assets become liquid.
At March 31, 2010, global real estate fund investments included above are not redeemable during the lives of the funds, and have expected remaining lives that extend in some cases more than 10 years. Twelve percent of these funds have expected remaining lives of less than three years, 69 percent between 3 and 7 years, and 19 percent between 7 and 10 years. Expected lives are based upon legal maturity, which can be extended at the general manager's discretion, typically in one year increments.
Fair Value Measurements on a Non-Recurring Basis
AIG also measures the fair value of certain assets on a non-recurring basis, generally quarterly, annually, or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include cost and equity-method investments, life settlement contracts, flight equipment primarily under operating leases, collateral securing foreclosed loans and real estate and other fixed assets, goodwill, and other intangible assets. AIG uses a variety of techniques to measure the fair value of these assets when appropriate, as described below:
36
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table presents assets measured at fair value on a non-recurring basis on which impairment charges were recorded, and the related impairment charges:
|
Assets at Fair Value | Impairment Charges | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Non-Recurring Basis | Three Months Ended March 31, |
||||||||||||||||||
(in millions) |
Level 1 |
Level 2 |
Level 3 |
Total |
2010 |
2009 |
||||||||||||||
At March 31, 2010 |
||||||||||||||||||||
Investment real estate |
$ | - | $ | - | $ | 2,804 | $ | 2,804 | $ | 284 | $ | 158 | ||||||||
Other investments |
- | - | 757 | 757 | 73 | 290 | ||||||||||||||
Aircraft |
- | - | 1,881 | 1,881 | 347 | - | ||||||||||||||
Other assets |
- | - | 173 | 173 | 18 | 72 | ||||||||||||||
Total |
$ | - | $ | - | $ | 5,615 | $ | 5,615 | $ | 722 | $ | 520 | ||||||||
At December 31, 2009 |
||||||||||||||||||||
Investment real estate |
$ | - | $ | - | $ | 3,148 | $ | 3,148 | ||||||||||||
Finance receivables |
- | - | 694 | 694 | ||||||||||||||||
Other investments |
99 | - | 1,005 | 1,104 | ||||||||||||||||
Aircraft |
- | - | 62 | 62 | ||||||||||||||||
Other assets |
- | 85 | 227 | 312 | ||||||||||||||||
Total |
$ | 99 | $ | 85 | $ | 5,136 | $ | 5,320 | ||||||||||||
The fair value disclosed in the table above is unadjusted for transaction costs. The amounts recorded on the consolidated balance sheet are net of transaction costs.
37
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
AIG may choose to measure at fair value many financial instruments and certain other assets and liabilities that are not required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in earnings. Unrealized gains and losses on financial instruments in AIG's insurance businesses and in AIGFP for which the fair value option was elected are classified in Other income in the Consolidated Statement of Income (Loss).
The following table presents the gains or losses recorded during the three-month periods ended March 31, 2010 and 2009 related to the eligible instruments for which AIG elected the fair value option:
|
Gain (Loss) Three Months Ended March 31, | |||||||
---|---|---|---|---|---|---|---|---|
(in millions) |
2010 |
2009 |
||||||
Assets: |
||||||||
Mortgage and other loans receivable |
$ | 40 | $ | (47 | ) | |||
Trading securities |
1,437 | (1,671 | ) | |||||
Trading Maiden Lane Interests |
911 | (2,194 | ) | |||||
Securities purchased under agreements to resell |
(4 | ) | (16 | ) | ||||
Other invested assets |
(10 | ) | (22 | ) | ||||
Short-term investments |
- | (2 | ) | |||||
Liabilities: |
||||||||
Securities sold under agreements to repurchase |
52 | 121 | ||||||
Securities and spot commodities sold but not yet purchased |
(18 | ) | (34 | ) | ||||
Trust deposits and deposits due to banks and other depositors |
- | 11 | ||||||
Debt |
(485 | ) | 2,587 | |||||
Other liabilities |
- | 138 | ||||||
Total gain (loss)(a)(b) |
$ | 1,923 | $ | (1,129 | ) | |||
Interest income and expense and dividend income on assets and liabilities elected under the fair value option are recognized and classified in the Consolidated Statement of Income (Loss) depending on the nature of the instrument and related market conventions. For AIGFP related activity, interest, dividend income, and interest expense are included in Other income. Otherwise, interest and dividend income are included in Net investment income in the Consolidated Statement of Income (Loss). See Note 1(a) to the Consolidated Financial Statements in the 2009 Annual Report on Form 10-K for additional information about AIG's policies for recognition, measurement, and disclosure of interest and dividend income and interest expense.
During the three-month periods ended March 31, 2010 and 2009, AIG recognized a loss of $378 million and a gain of $1.2 billion, respectively, attributable to the observable effect of changes in credit spreads on AIG's own liabilities for which the fair value option was elected. AIG calculates the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, AIG's observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as collateral posted.
38
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table presents the difference between fair values and the aggregate contractual principal amounts of mortgage and other loans receivable and long-term borrowings, for which the fair value option was elected:
|
At March 31, 2010 | At December 31, 2009 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Fair Value |
Outstanding Principal Amount |
Difference |
Fair Value |
Outstanding Principal Amount |
Difference |
||||||||||||||
Assets: |
||||||||||||||||||||
Mortgage and other loans receivable |
$ | 157 | $ | 258 | $ | (101 | ) | $ | 119 | $ | 253 | $ | (134 | ) | ||||||
Liabilities: |
||||||||||||||||||||
Long-term debt |
$ | 11,094 | $ | 9,755 | $ | 1,339 | $ | 11,308 | $ | 10,111 | $ | 1,197 | ||||||||
At March 31, 2010 and December 31, 2009, there were no significant mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due and in non-accrual status.
Fair Value Information about Financial Instruments Not Measured at Fair Value
Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding insurance contracts and lease contracts) is discussed below:
39
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
AIG's current market-observable implicit-credit-spread rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.
The following table presents the carrying value and estimated fair value of AIG's financial instruments:
|
March 31, 2010 | December 31, 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||
Assets: |
||||||||||||||
Fixed maturities |
$ | 283,235 | $ | 283,235 | $ | 396,794 | $ | 396,794 | ||||||
Equity securities |
7,444 | 7,444 | 17,840 | 17,840 | ||||||||||
Mortgage and other loans receivable |
22,533 | 21,536 | 27,461 | 25,957 | ||||||||||
Finance receivables, net of allowance |
18,912 | 17,234 | 20,327 | 18,974 | ||||||||||
Other invested assets* |
31,784 | 30,776 | 43,737 | 42,474 | ||||||||||
Securities purchased under agreements to resell |
1,615 | 1,615 | 2,154 | 2,154 | ||||||||||
Short-term investments |
38,800 | 38,800 | 47,263 | 47,263 | ||||||||||
Cash |
2,133 | 2,133 | 4,400 | 4,400 | ||||||||||
Unrealized gain on swaps, options and forward transactions |
7,383 | 7,383 | 9,130 | 9,130 | ||||||||||
Liabilities: |
||||||||||||||
Policyholder contract deposits associated with investment-type contracts |
108,096 | 115,581 | 168,846 | 175,612 | ||||||||||
Securities sold under agreements to repurchase |
3,418 | 3,418 | 3,505 | 3,505 | ||||||||||
Securities and spot commodities sold but not yet purchased |
458 | 458 | 1,030 | 1,030 | ||||||||||
Unrealized loss on swaps, options and forward transactions |
6,296 | 6,296 | 5,403 | 5,403 | ||||||||||
Trust deposits and deposits due to banks and other depositors |
1,030 | 1,030 | 1,641 | 1,641 | ||||||||||
Federal Reserve Bank of New York Commercial Paper Funding Facility |
2,285 | 2,285 | 4,739 | 4,739 | ||||||||||
Federal Reserve Bank of New York credit facility |
27,400 | 27,916 | 23,435 | 23,390 | ||||||||||
Other long-term debt |
109,744 | 108,707 | 113,298 | 94,458 | ||||||||||
40
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table presents the amortized cost or cost and fair value of AIG's available for sale securities:
(in millions) |
Amortized Cost or Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
Other-Than- Temporary Impairments in AOCI(a) |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2010 |
||||||||||||||||||
Bonds available for sale: |
||||||||||||||||||
U.S. government and government sponsored entities |
$ | 4,777 | $ | 106 | $ | (27 | ) | $ | 4,856 | $ | - | |||||||
Obligations of states, municipalities and political subdivisions |
50,427 | 2,018 | (292 | ) | 52,153 | - | ||||||||||||
Non-U.S. governments |
23,305 | 725 | (213 | ) | 23,817 | (1 | ) | |||||||||||
Corporate debt |
127,707 | 8,507 | (1,862 | ) | 134,352 | 14 | ||||||||||||
Mortgage-backed, asset-backed and collateralized: |
||||||||||||||||||
RMBS |
30,089 | 1,027 | (3,897 | ) | 27,219 | (1,595 | ) | |||||||||||
CMBS |
10,869 | 256 | (3,180 | ) | 7,945 | (451 | ) | |||||||||||
CDO/ABS |
7,242 | 324 | (1,038 | ) | 6,528 | 64 | ||||||||||||
Total mortgage-backed, asset-backed and collateralized |
48,200 | 1,607 | (8,115 | ) | 41,692 | (1,982 | ) | |||||||||||
Total bonds available for sale(b) |
254,416 | 12,963 | (10,509 | ) | 256,870 | (1,969 | ) | |||||||||||
Equity securities available for sale: |
||||||||||||||||||
Common stock |
2,511 | 1,770 | (19 | ) | 4,262 | - | ||||||||||||
Preferred stock |
635 | 103 | (1 | ) | 737 | - | ||||||||||||
Mutual funds |
1,736 | 102 | (6 | ) | 1,832 | - | ||||||||||||
Total equity securities available for sale |
4,882 | 1,975 | (26 | ) | 6,831 | - | ||||||||||||
Total(c) |
$ | 259,298 | $ | 14,938 | $ | (10,535 | ) | $ | 263,701 | $ | (1,969 | ) | ||||||
December 31, 2009 |
||||||||||||||||||
Bonds available for sale: |
||||||||||||||||||
U.S. government and government sponsored entities |
$ | 5,098 | $ | 174 | $ | (49 | ) | $ | 5,223 | $ | - | |||||||
Obligations of states, municipalities and political subdivisions |
52,324 | 2,163 | (385 | ) | 54,102 | - | ||||||||||||
Non-U.S. governments |
63,080 | 3,153 | (649 | ) | 65,584 | (1 | ) | |||||||||||
Corporate debt |
185,188 | 10,826 | (3,876 | ) | 192,138 | 119 | ||||||||||||
Mortgage-backed, asset-backed and collateralized: |
||||||||||||||||||
RMBS |
32,173 | 991 | (4,840 | ) | 28,324 | (2,121 | ) | |||||||||||
CMBS |
18,717 | 195 | (5,623 | ) | 13,289 | (739 | ) | |||||||||||
CDO/ABS |
7,911 | 284 | (1,304 | ) | 6,891 | (63 | ) | |||||||||||
Total mortgage-backed, asset-backed and collateralized |
58,801 | 1,470 | (11,767 | ) | 48,504 | (2,923 | ) | |||||||||||
Total bonds available for sale(b) |
364,491 | 17,786 | (16,726 | ) | 365,551 | (2,805 | ) | |||||||||||
Equity securities available for sale: |
||||||||||||||||||
Common stock |
4,460 | 2,913 | (75 | ) | 7,298 | - | ||||||||||||
Preferred stock |
740 | 94 | (20 | ) | 814 | - | ||||||||||||
Mutual funds |
1,264 | 182 | (36 | ) | 1,410 | - | ||||||||||||
Total equity securities available for sale |
6,464 | 3,189 | (131 | ) | 9,522 | - | ||||||||||||
Total(c) |
$ | 370,955 | $ | 20,975 | $ | (16,857 | ) | $ | 375,073 | $ | (2,805 | ) | ||||||
41
American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Unrealized losses on Securities Available for Sale
The following table summarizes the fair value and gross unrealized losses on AIG's available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:
|
12 Months or Less | More than 12 Months | Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in millions) |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||||
March 31, 2010* |
||||||||||||||||||||
Bonds available for sale: |
||||||||||||||||||||
U.S. government and government sponsored entities |
$ | 2,088 | $ | 21 | $ | 123 | $ | 6 | $ | 2,211 | $ | 27 | ||||||||
Obligations of states, municipalities and political subdivisions |
4,885 | 100 | 3,003 | 192 | 7,888 | 292 | ||||||||||||||
Non-U.S. governments |
3,851 | 110 | 824 | 103 | 4,675 | 213 | ||||||||||||||
Corporate debt |
16,165 | 640 | 13,341 | 1,222 | 29,506 | 1,862 | ||||||||||||||
RMBS |
4,876 | 1,609 | 7,572 | 2,288 | 12,448 | 3,897 | ||||||||||||||
CMBS |
1,854 | 1,224 | 3,428 | 1,956 | 5,282 | 3,180 | ||||||||||||||
CDO/ABS |
1,441 | 379 | 2,443 | 659 | 3,884 | 1,038 | ||||||||||||||
Total bonds available for sale |
35,160 | 4,083 | 30,734 | 6,426 | 6 |