AIG 2014 Annual Report Download - page 160

ITEM 7 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES
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Sales of investment securities in connection with the program to utilize capital loss carryforwards and other investment sales
with subsequent reinvestment at lower yields triggered loss recognition expense, primarily on certain long-term payout annuity
contracts in the Institutional Markets and Retirement segments, of $30 million in 2014, $1.5 billion in 2013 and $1.2 billion in
2012, which was not reflected in pre-tax operating income.
Shadow loss reserves of the Life Insurance Companies were not significant at December 31, 2013 and increased to $1.2
billion at December 31, 2014 primarily due to the increase in unrealized appreciation of investments during the year.
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and
unencumbered assets that can be monetized in a short period of time at a reasonable cost. We manage our liquidity prudently
through various risk committees, policies and procedures, and a stress testing and liquidity framework established by
Enterprise Risk Management (ERM). Our liquidity framework is designed to measure both the amount and composition of our
liquidity to meet financial obligations in both normal and stressed markets. See Enterprise Risk Management — Risk Appetite,
Identification, and Measurement and Enterprise Risk Management — Liquidity Risk Management below for additional
information.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth,
and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital
generation is the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital
positions. These constraints drive the requirements for capital adequacy for both AIG and the individual businesses and are
based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business
needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the
capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of
both AIG and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to
policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or
events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable
capital resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory
surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in
significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal
restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability
and capital management actions. Liability management actions may include, but are not limited, to repurchasing or redeeming
outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not
limited to, paying dividends to our shareholders and share repurchases.