AIG 2014 Annual Report Download - page 167

ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES
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Certain of our domestic Life Insurance Companies have programs, which began in 2012, that lend securities from their
investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs,
these domestic Life Insurance Companies lend securities to financial institutions and receive cash as collateral equal to 102
percent of the fair value of the loaned securities. Cash collateral received is invested in short-term investments. Additionally,
the aggregate amount of securities that a Life Insurance Company is able to lend under its program at any time is limited to
five percent of its general account statutory-basis admitted assets. There were no outstanding securities lent under these
programs by our domestic Life Insurance Companies as of December 31, 2014. The liability of our Life Insurance Companies
to borrowers for collateral received was zero as of December 31, 2014 and $4.0 billion as of December 31, 2013.
AIG generally manages capital between AIG Parent and our Life Insurance Companies through internal, Board-approved
policies and guidelines. In addition, AIG Parent is party to a CMA with AGC Life Insurance Company. Among other things, the
CMA provides that AIG Parent will maintain the total adjusted capital of AGC Life Insurance Company at or above a specified
minimum percentage of its projected NAIC Company Action Level Risk-Based Capital (RBC), which as of December 31, 2014,
was 250 percent. As a result of managing capital through internal, Board-approved policies and guidelines, AIG Parent agreed
with certain other domestic Life Insurance Companies to terminate their CMAs effective October 31, 2014.
Dividends and loan repayments from our domestic Life Insurance Companies to AIG Parent in 2014 totaled $7.4 billion, which
was comprised of $6.8 billion of cash and fixed maturity securities and $642 million of preferred equity interests in two aircraft
trust entities, and included approximately $829 million of legal settlement proceeds. The fixed maturity securities included
investment-grade government, corporate and sovereign bonds, as well as agency RMBS. In addition, our domestic Life
Insurance Companies paid $2.2 billion in dividends and loan repayments, in the form of cash and fixed maturity securities, to
AIG Parent in January 2015, which represented the remainder of dividends that were declared by our domestic operating Life
Insurance Companies in the fourth quarter of 2014.
Other Operations
Direct Investment Book
The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintains the liquidity
we believe is necessary to meet all of its liabilities as they come due, even under stress scenarios, and to maximize returns
consistent with our risk management objectives. We are focused on meeting the DIB’s liquidity needs, including the need for
contingent liquidity arising from collateral posting for debt positions of the DIB, without relying on resources beyond the DIB. As
part of this program management, we may from time to time access the capital markets, including issuing and repurchasing
debt, and selling assets on an opportunistic basis, in each case subject to market conditions. If the DIB’s risk target is
breached, we expect to take appropriate actions to increase the DIB’s liquidity sources or reduce liquidity requirements to
maintain the risk target, although no assurance can be given that this can be achieved under then-prevailing market
conditions. Any additional liquidity shortfalls would need to be funded by AIG Parent.
From time to time, we may utilize cash allocated to the DIB that is not required to meet the risk target for the DIB for general
corporate purposes unrelated to the DIB.
The DIB’s assets consist primarily of cash, short-term investments, fixed maturity securities issued by corporations, U.S.
government and government sponsored entities and mortgage and asset backed securities. The value of these assets is
impacted by macro-economic trends in U.S. and core European markets, including corporate credit spreads, commercial and
residential real estate markets, and to a lesser extent, interest rates and foreign exchange rates, among other factors. The
majority of these assets are carried at fair value. The DIB’s liabilities consist primarily of notes and other borrowings supported
by assets as well as other short-term financing obligations. The DIB has both liabilities held at cost and liabilities held at fair
value. The liabilities held at fair value vary in price based on changes in AIG’s credit spreads. As of December 31, 2014 and
2013, the DIB had total assets of $15.1 billion and $23.3 billion, respectively, and total liabilities of $9.7 billion and $20.0 billion,
respectively.
The overall hedging activity for the assets and liabilities of the DIB is executed by GCM. The value of hedges related to the
non-derivative assets and liabilities of AIGFP in the DIB is included within the assets, liabilities and operating results of GCM
and is not included within the DIB’s assets, liabilities or operating results.