AIG 2014 Annual Report Download - page 105

ITEM 7 / RESULTS OF OPERATIONS / CONSUMER INSURANCE

88
RETIREMENT PRE-TAX OPERATING INCOME (in millions)
2014 and 2013 Comparison
Pre-tax operating income for Retirement in 2014 was comparable to 2013, as higher policy fees and the higher positive
impact of actuarial assumption updates were offset by lower net investment income from alternative investments. The increase
in policy fees was driven by growth in variable annuity separate account assets from positive net flows and favorable equity
markets. A higher volume of commissions and advisory fees included in Other income, net of related expenses, was driven by
increased assets under management.
Pre-tax operating income in both years included a net positive impact from the update of certain estimated gross profit
assumptions used to amortize DAC and related items in the investment-oriented product lines, which resulted in a $246 million
net increase in pre-tax operating income in 2014, compared to a $233 million net increase in pre-tax operating income in 2013.
See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for amounts by
product line and financial statement line item and additional discussion.
Net investment income for 2014 decreased compared to 2013, primarily due to a $158 million decrease in income from
alternative investments, including higher hedge fund income in 2013, which benefited from favorable equity market conditions
and several large hedge fund redemptions. The decrease in hedge fund income in 2014 compared to 2013 was partially offset
by an increase in private equity fund income.
Base net investment income for 2014 increased slightly compared to 2013, as participation income on a commercial mortgage
loan and income from the redemption of an invested asset in 2014 more than offset the effect of lower base yields from
reinvestment at rates below the weighted average yield of the overall portfolio. See Investments – Life Insurance Companies
for additional information on the investment strategy, asset-liability management process and invested assets of our Life
Insurance Companies, which include the invested assets of the Retirement business.
Overall, Retirement fixed maturity portfolio yields in 2014 declined compared to 2013, primarily as a result of investment
purchases and investment of portfolio cash flows at rates below the weighted average yield of the existing portfolio in the
historically low interest rate environment. The Fixed Annuities and Group Retirement product lines were able to maintain base
spreads in 2014 at a level comparable to 2013, and Retirement Income Solutions base spread increased, as a result of active
crediting rate management. See Spread Management below for additional discussion.
General operating expenses increased in 2014 compared to 2013, due in part to technology investments and the volume of
continued sales growth of annuities in the Retirement Income Solutions and Fixed Annuities product lines.