AIG 2012 Annual Report Download - page 134

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2012 and 2011 Comparison
Change in Unrealized Appreciation of Investments
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The increase in 2012 was primarily attributable to appreciation in bonds available for sale due to lower interest rates
and narrowing spreads for investment grade and high-yield securities. The ten year U.S. Treasury rate started the
year at 1.88 percent, decreased to a historic low of 1.39 percent in the middle of the year, and ended the year at
1.76 percent. High yield and investment grade spreads were down approximately 200 basis points and 100 basis
points, respectively, during the year, with the narrowing spreads being the major contributor to unrealized
appreciation in bonds available for sale, which was almost double the amount recorded in 2011. Corporate bonds
and structured securities were major beneficiaries from this continued low rate environment as prices on these assets
increased significantly during the year. Non-agency securities provided the majority of the structured securities
improvement as high yield securities generally benefited from the significant narrowing of spreads during the year.
The significant majority of the unrealized appreciation occurred during the first three quarters of the year, as the
fourth quarter experienced less rate and spread volatility.
During 2011, the insurance operations portfolio experienced appreciation in bonds available for sale due to lower
rates, which more than offset widening spreads. The ten year U.S. Treasury rate started the year at 3.30 percent,
falling 188 basis points to end the year at 1.88 percent. Municipal bond rates also decreased, resulting in unrealized
appreciation in both the U.S. Government securities and municipal bond portfolio. The drop in U.S. Treasury rates
more than offset the widening of spreads on Investment grade securities, resulting in improved pricing and
corresponding unrealized appreciation in the corporate bond portfolio during the year.
The reclassification adjustments included in net income on unrealized appreciation of investments increased by
$1.0 billion in 2012 compared to 2011 as a result of realized gains and losses recognized on sales of securities
classified as available for sale.
See Investments – Investment Highlights – Securities available for sale herein for a table on the gross unrealized
gains (losses) of AIG’s available for sale securities by type of security.
Change in Deferred Acquisition Costs Adjustment and Other
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The change in DAC in 2012 compared to 2011 is primarily the result of increases in the unrealized appreciation of
investments supporting interest-sensitive products. DAC for investment-oriented products is adjusted for changes in
estimated gross profits that result from changes in the net unrealized gains or losses on fixed maturity and equity
securities available for sale. Because fixed maturity and equity securities available for sale are carried at aggregate
fair value, an adjustment is made to DAC equal to the change in DAC amortization that would have been recorded if
such securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields.
These adjustments, net of tax, are credited or charged directly to Accumulated other comprehensive income (loss).
Change in Future Policy Benefits
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We periodically evaluate the assumptions used to establish deferred acquisition costs and future policy benefits.
These assumptions may be adjusted based on actual experience and judgment. Key assumptions include mortality,
morbidity, persistency, maintenance expenses and investment returns.
Primarily as a result of the increase in unrealized appreciation of investments during 2012 and 2011, we recorded
additional future policy benefits through Other comprehensive income. This change in future policy benefits assumes
that the securities underlying certain traditional long-duration products are sold at their stated aggregate fair value
and reinvested at current yields. This increase in future policy benefits in other comprehensive income was partially
offset by loss reserve recognition in net income resulting from sales of securities in unrealized gain positions.
Change in Foreign Currency Translation Adjustment
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The change in foreign currency translation adjustment was a net loss in 2012 due to the strengthening of the U.S.
dollar against the Euro and Japanese Yen slightly offset by the weakening of the U.S. dollar against British pound.
Change in Net Derivative Gains (Losses) Arising from Cash Flow Hedging Activities
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The decline primarily reflects the gradual run-off of the cash flow hedge portfolio as well as the de-designations
resulting from ILFC, partially offset by a decline in the interest rate environment.
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AIG 2012 Form 10-K 117
ITEM 7 / RESULTS OF OPERATIONS