AIG 2014 Annual Report Download - page 157

ITEM 7 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES
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A net negative adjustment in the Life product line in 2014 was due to lower investment spread and higher mortality
assumptions than previously assumed. The updated mortality assumptions are still within pricing assumptions.
In 2013, pre-tax operating income of the Life Insurance Companies in the aggregate increased by a net positive adjustment of
$153 million as a result of update of estimated gross profit assumptions, primarily due to a net positive adjustment in the Fixed
Annuities product line in 2013, as a result of active spread management of crediting rates and higher future investment yields
than those previously assumed.
Net negative adjustments in the Retirement Income Solutions and Group Retirement product lines in 2013 resulted primarily
from the update of variable annuity spreads and surrender rates. In Group Retirement, these negative adjustments were
partially offset by an increase in the assumption for separate account asset long-term growth rates under our reversion to the
mean methodology. A negative adjustment in the Life product line resulted from the update of mortality assumptions.
In 2012, pre-tax operating income of the Life Insurance Companies in aggregate increased by a net positive adjustment of $41
million as a result of the update of estimated gross profit assumptions. The net positive adjustment in 2012 was primarily due
to improved surrender assumptions for fixed annuities, partially offset by lower yield and spread assumptions for universal life
and for certain blocks of fixed annuities.
The following table presents the increase (decrease) in pre-tax income resulting from the unlocking of actuarial
assumptions for estimated gross profits of the domestic Life Insurance Companies, by line item as reported in
Results of Operations:
Years Ended December 31,
(in millions) 2014 2013 2012
Policy fees $27 $ 28 $ 22
Interest credited to policyholder account balances 90 63 29
Amortization of deferred policy acquisition costs 183 129 64
Policyholder benefits and losses incurred (84) (67) (74)
Increase in pre-tax operating income 216 153 41
Change in DAC related to net realized capital gains (losses) (12) (21) -
Net realized capital gains (losses) 51 82 -
Increase in pre-tax income $255 $ 214 $ 41
The net adjustments to DAC amortization from the unlocking of actuarial assumptions for estimated gross profits, including
change in DAC related to net realized capital gains (losses), represented two percent and one percent of the DAC balance
excluding the amount related to unrealized depreciation (appreciation) of investments as of December 31, 2014 and 2013,
respectively.
The increases in net realized capital gains (losses) in 2014 and 2013, which were partially offset by adjustments to change in
DAC related to net realized capital gains (losses), reflected updated mortality assumptions for GMWB embedded derivative
liabilities in Retirement Income Solutions.
Reversion to the Mean
In the fourth quarter of 2013, we revised the growth rate assumptions for the five-year reversion to the mean period for the
Group Retirement product line in our Retirement segment, because annual growth assumptions indicated for that period had
fallen below our floor of zero percent due to the favorable performance of equity markets. This adjustment increased
Retirement pre-tax operating income by $35 million in 2013. For variable annuities in the Retirement Income Solutions product
line, the assumed annual growth rate has remained above zero percent for the five-year reversion to the mean period and
therefore has not met the criteria for adjustment; however, additional favorable equity market performance in excess of long-
term assumptions could result in unlocking in this product line in the future, with a positive effect on pre-tax income in the
period of the unlocking. See Critical Account Estimates – Estimated Gross Profits for Investment-Oriented Products (Life
Insurance Companies) for additional discussion of assumptions related to our reversion to the mean methodology.