AIG 2014 Annual Report Download - page 156

ITEM 7 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES

139
The following table presents the increase (decrease) in pre-tax operating income resulting from the update of
actuarial assumptions for the domestic Life Insurance Companies, by product line:
Years Ended December 31,
(in millions) 2014 2013 2012
Unlocking of estimated gross profit assumptions:
Consumer Insurance:
Retirement
Fixed Annuities $196 $ 306 $ 64
Retirement Income Solutions 4 (28) -
Group Retirement 46 (45) 20
Total Retirement 246 233 84
Life (32) (80) (43)
Commercial Insurance:
Institutional Markets 2 --
Total increase (decrease) in pre-tax operating income from unlocking of estimated
gross profit assumptions 216 153 41
Loss recognition*:
Consumer Insurance - Life (87) - (67)
Total increase (decrease) in pre-tax operating income from update of assumptions $129 $ 153 $ (26)
* Excludes loss recognition expense that was attributable primarily to investment sales related to capital loss carryforward utilization, which was excluded from
pre-tax operating income and reported within changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses).
Estimated Gross Profits for Investment-Oriented Products
Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful acquisition of new
or renewal of existing contracts for investment-oriented products are deferred and amortized, with interest, in relation to the
incidence of estimated gross profits to be realized over a period that approximates the estimated lives of the contracts.
Estimated gross profits include net investment income and spreads, net realized capital gains and losses, fees, surrender
charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change significantly,
DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and URR) are recalculated using the
new assumptions, and any resulting adjustment is included in income. Updating such assumptions may result in acceleration
of amortization in some products and deceleration of amortization in other products.
Unlocking of Estimated Gross Profit Assumptions
The Life Insurance Companies review and update estimated gross profit assumptions used to amortize DAC and related items
for investment-oriented products at least annually. The increases (decreases) to pre-tax operating income and pre-tax income
of these assumption updates by product line and financial statement line item, respectively, are shown in the following tables.
These adjustments do not include loss recognition on certain long-term care products; see Loss Recognition below for
additional discussion of the update of assumptions for certain long-term care products.
In 2014, pre-tax operating income of the Life Insurance Companies in aggregate increased by $216 million as a result of the
update of estimated gross profit assumptions, the most significant of which was a net positive adjustment in Fixed Annuities,
primarily due to better investment spreads than previously assumed.
A net positive adjustment in the Retirement Income Solutions product line in 2014 was primarily due to improved mortality
assumptions. Additional adjustments in the Retirement Income Solutions product line, related to assumptions used to value
reserves and DAC for GMWB features that are accounted for as embedded derivatives and measured at fair value, were
recorded in net realized capital gains (losses). Adjustments reported in net realized capital gains (losses), and in change in
DAC related to net realized capital gains (losses), are included in the table of adjustments by reported line item below, and are
not reflected in pre-tax operating income.
A net positive adjustment in the Group Retirement product line in 2014 was primarily due to more favorable assumptions for
investment spreads and surrender rates than previously assumed.