AIG 2014 Annual Report Download - page 121

ITEM 7 / RESULTS OF OPERATIONS / CORPORATE AND OTHER
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104
Global Capital Markets Results
2014 and 2013 Comparison
GCM’s pre-tax operating income decreased in 2014 compared to 2013 primarily due to declines in unrealized market valuation
gains related to the super senior credit default swap (CDS) portfolio and declines in net credit valuation adjustments on
derivative assets and liabilities, partially offset by gains realized upon unwinding certain positions and a decrease in operating
expenses. As previously disclosed in prior quarters, a state regulatory agency has requested additional information relating to
the unwinding of a position on which we realized gains of $196 million in 2014.
Unrealized market valuation gains on the CDS portfolio of $256 million and $550 million were recognized in 2014 and 2013,
respectively. The decline resulted primarily from amortization and price movements within the CDS portfolio.
Net credit valuation adjustment losses of $98 million were recognized in 2014 compared to net credit valuation adjustment
gains of $195 million in the prior year. The decline resulted primarily from the recognition of credit valuation losses on
derivative assets in 2014 due to higher exposure of uncollateralized derivative assets compared to credit valuation gains on
uncollateralized derivative assets in the prior year due to the tightening of counterparty credit spreads.
2013 and 2012 Comparison
GCM’s pre-tax operating income increased in 2013 compared to 2012 primarily due to an improvement in net credit valuation
adjustments on derivative assets and liabilities, partially offset by a decline in unrealized market valuation gains related to the
super senior CDS portfolio and an increase in operating expenses.
Net credit valuation adjustment gains of $195 million were recognized in 2013 compared to net credit valuation adjustment
losses of $30 million in 2012. The improvement resulted primarily from lower losses on derivative liabilities due to less
significant tightening of AIG’s credit spreads in 2013 compared to 2012 and higher gains on derivative assets due to more
significant tightening of counterparty credit spreads in 2013 compared to 2012.
Unrealized market valuation gains on the CDS portfolio of $550 million and $617 million were recognized in 2013 and 2012,
respectively. The decline resulted primarily from amortization, price movements, terminations and maturities within the CDS
portfolio.
Run-off Insurance Lines Results
2014 and 2013 Comparison
Run-off insurance lines reported a pre-tax operating loss of $445 million in 2014 compared to income of $403 million in 2013,
primarily as a result of a $407 million charge from a decrease in reserve discount in 2014 compared to a $631 million benefit
from an increase in discount in 2013. This discounting-related charge was partially offset by a $98 million decrease in net
adverse prior year loss reserve development and an improvement in current accident year loss experience, particularly in the
environmental liability business (2004 and prior). The discount charge was primarily due to the decline in risk free rates during
2014 used under Pennsylvania and Delaware prescribed or permitted practices, change in payout pattern assumptions,
including the effect of commutations and accelerated settlements for the certain Excess Workers’ Compensation reserves, as
well as accretion. See Insurance Reserves - Discounting of Reserves for additional information.
2013 and 2012 Comparison
Run-off insurance lines reported pre-tax operating income of $403 million in 2013 compared to a loss of $135 million in 2012,
primarily as a result of a $631 million benefit in reserve discount compared to a $37 million charge in 2012, partially offset by a
$98 million increase in net adverse prior year loss reserve development. The discount benefit was primarily due the use of
permitted practices from state regulators to use payout patterns specific to the excess workers compensation reserves and a
discount rate based on the forward U.S Treasury curve plus a liquidity premium (as opposed to the previously prescribed
discount factors.