AIG 2014 Annual Report Download - page 158

ITEM 7 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES
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DAC and Reserves Related to Unrealized Appreciation of Investments
DAC for universal life and investment-type products (collectively, investment-oriented products) is adjusted at each balance
sheet date to reflect the change in DAC as if fixed maturity and equity securities available for sale had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields (shadow DAC). The change in shadow DAC generally
moves in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio. In
addition, significant unrealized appreciation of investments in a prolonged low interest rate environment may cause additional
future policy benefit liabilities to be recorded (shadow loss reserves). The increase in the Life Insurance Companies’ unrealized
appreciation of investments in 2014 of $5.9 billion, which was driven by the decline in market interest rates, resulted in a
decrease in shadow DAC and an increase in shadow loss reserves in 2014. Shadow loss reserves were insignificant at
December 31, 2013 and increased to $1.2 billion at December 31, 2014. In 2013, shadow DAC increased and shadow loss
reserves decreased due to an increase in market interest rates. The change in shadow DAC and shadow loss reserves in
2014 was greater than the change in 2013, due to a larger movement in unrealized appreciation of investments.
Life Insurance Companies Reserves
The following table presents a rollforward of Life Insurance Companies’ insurance reserves, including separate
accounts and mutual fund assets under management, by operating segment:
Years Ended December 31,
(in millions) 2014 2013 2012
Institutional Markets:
Balance at beginning of year, gross $ 32,100 $ 32,242 $ 31,378
Premiums and deposits 3,797 991 774
Surrenders and withdrawals (766) (2,620) (1,128)
Death and other contract benefits (1,530) (1,371) (1,384)
Subtotal 1,501 (3,000) (1,738)
Change in fair value of underlying assets and reserve accretion, net of
policy fees 1,130 1,156 876
Cost of funds 410 413 571
Other reserve changes (61) 1,289 1,155
Balance at end of year 35,080 32,100 32,242
Reserves related to unrealized appreciation of investments 1,054 - 2,359
Reinsurance ceded (5) (5) (9)
Total insurance reserves $ 36,129 $ 32,095 $ 34,592
Retirement:
Balance at beginning of year, gross $ 195,493 $ 173,281 $ 164,127
Premiums and deposits 24,077 23,788 16,159
Surrenders and withdrawals (20,504) (16,459) (14,809)
Death and other contract benefits (3,690) (3,353) (3,506)
Subtotal (117) 3,976 (2,156)
Change in fair value of underlying assets and reserve accretion, net of
policy fees 6,390 14,482 7,785
Cost of funds 2,781 2,837 3,127
Other reserve changes 80 917 398
Balance at end of year 204,627 195,493 173,281
Reserves related to unrealized appreciation of investments 100 - 456
Reinsurance ceded (353) (366) (377)
Total insurance reserves and mutual fund assets under management $ 204,374 $ 195,127 $ 173,360
Life:
Balance at beginning of year, gross $ 32,810 $ 32,176 $ 31,354
Premiums and deposits 4,806 4,862 4,864
Surrenders and withdrawals (853) (896) (1,001)