AIG 2014 Annual Report Download - page 111

ITEM 7 / RESULTS OF OPERATIONS / CONSUMER INSURANCE
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Overall, mortality experience for 2014 was similar to 2013 and within pricing assumptions. Policyholder benefit expense in
2014 included an increase of approximately $104 million to the estimated reserves for IBNR death claims, which reflected
continuing efforts to identify deceased insureds and their beneficiaries who have not presented a valid claim, pursuant to the
2012 resolution of a multi-state audit and market conduct examination. The 2014 increase in the IBNR reserve was related
primarily to a legacy block of in-force and lapsed small face amount policies, for which the personal data elements to effect a
match against the Social Security Death Master File are unavailable or incomplete, such as full legal name, date of birth or
Social Security number. In 2014, in the process of reviewing these policies as required under the terms of the regulatory
agreement, we have refined our estimate of the ultimate cost of these claims. The $104 million reserve increase in 2014 was in
addition to amounts previously provided for IBNR claims in 2011 and 2012, which totaled $259 million. While we believe that
we are adequately reserved for such claims, there can be no assurance that the ultimate cost will not vary from the current
estimate.
Net investment income decreased in 2014 compared to 2013, primarily due to lower income from alternative investments and
lower yields on the base portfolio due to investment of portfolio cash flows at rates below the weighted average yield of the
existing portfolio. See Investments – Life Insurance Companies for additional discussion of the investment strategy, asset-
liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the
Life business.
General operating expenses increased in 2014 compared to 2013 primarily due to strategic investments in technology and
service platforms in the U.S. and Japan.
2013 and 2012 Comparison
Pre-tax operating income increased in 2013 compared to 2012, primarily due to additional expenses recorded in 2012, which
included $67 million of loss recognition reserves for long-term care products, $57 million of additional IBNR claim reserves and
an $11 million regulatory assessment related to the resolution of multi-state regulatory examinations of death claims practices,
and an accrual of $20 million from consolidation of certain life operations and administrative systems. The increase in pre-tax
operating income in 2013 due to the absence of these prior year expenses was partially offset by a $28 million increase in
equity indexed universal life reserves in 2013, as well as a higher net negative adjustment of $80 million in 2013, compared to
$43 million in 2012, to update certain gross profit assumptions used to amortize DAC and related items for universal life
products.
Net investment income in 2013 decreased slightly compared to 2012, due to the absence of ML II fair value gains recognized
in 2012 and reinvestment of investment proceeds at lower rates, partially offset by higher income from alternative investments.
General operating expenses decreased in 2013 compared to 2012 primarily due to operational efficiencies driven by
technology improvements and process consolidation efforts.
Spread Management
Disciplined pricing on new business is used to continue to pursue new sales of life products at targeted net investment
spreads in a low interest rate environment. Life has a dynamic product management process to ensure that new business
offerings appropriately reflect the current interest rate environment. To the extent that Life cannot achieve targeted net
investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing
products with higher minimum rate guarantees have been re-filed with lower crediting rates as permitted under state insurance
laws for new sales. Universal life insurance interest rate guarantees are generally 2 to 3 percent on new non-indexed products
and zero to 2 percent on new indexed products, and are designed to be sufficiently low to meet targeted net investment
spreads.
In-force Management. Crediting rates for in-force policies are adjusted in accordance with contractual provisions that were
designed to allow crediting rates to be reset subject to minimum crediting rate guarantees.