AIG 2014 Annual Report Download - page 218

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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below the long-term annual rate assumption impacts the growth assumption applied to the five-year period subsequent to the
current balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth assumptions,
while also giving consideration to the effect of actual investment performance. When actual performance significantly deviates
from the annual long-term growth assumption, as evidenced by growth assumptions for the five-year reversion to the mean
period falling below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to
revise or “unlock” the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the
long-term annual growth assumption applied to subsequent periods. The use of a reversion to the mean assumption is
common within the industry; however, the parameters used in the methodology are subject to judgment and vary within the
industry.
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, because annual growth assumptions indicated for that period had fallen below our floor of zero
percent due to the favorable performance of equity markets. For this five-year reversion to the mean period, the growth rate
assumption was adjusted to a point between the long-term growth rate assumption and zero percent. This adjustment
increased Retirement pre-tax operating income by $35 million in 2013. Had we readjusted the growth rate assumption for the
five-year reversion to the mean period to use the long-term rate assumption of 8.5%, pre-tax income would have been higher
by approximately $30 million. Conversely, had the growth rate assumption for the five-year reversion to the mean period been
readjusted to a floor of zero percent, pre-tax income would have been lower by approximately $30 million. For variable
annuities in our Retirement Income Solutions product line, the assumed annual growth rate has remained above zero percent
for the five-year reversion to the mean period, so it has not met our criteria for adjustment; however, additional favorable equity
market performance in excess of long-term assumptions could also result in “unlocking” in this product line in future periods
with a positive effect on pre-tax income in the period of the unlocking.
The following table summarizes the sensitivity of changes in certain assumptions in the amortization of DAC, SIA,
guaranteed benefit reserves and URR, and the related hypothetical impact on year-end 2014 balances. The effect of
changes in net investment spread primarily affects our Fixed Annuities product line. Changes in equity returns,
volatility and interest rates primarily impact reserves for guarantee features of variable annuities in our Retirement
Income Solutions and Group Retirement product lines. The effect of changes in mortality primarily impacts the
universal life insurance business.
Guaranteed Unearned Net
December 31, 2014 Benefits Revenue Pre-Tax
(in millions) DAC/SIA Reserve Liability Earnings
Assumptions:
Net Investment Spread
Effect of an increase by 10 basis points $ 117 $ (5) $ 5 $ 117
Effect of a decrease by 10 basis points (120) 5 (5) (120)
Equity Return(a)
Effect of an increase by 1% 38 (55) - 93
Effect of a decrease by 1% (37) 56 - (93)
Volatility (b)
Effect of an increase by 1% - 14 - (14)
Effect of a decrease by 1% - (14) - 14
Interest Rate(c)
Effect of an increase by 10 basis points - (134) - 134
Effect of a decrease by 10 basis points - 134 - (134)
Mortality
Effect of an increase by 1% (9) 22 (2) (29)
Effect of a decrease by 1% 10 (22) 3 29
(a) Represents the net impact of 1 percent increase or decrease in long-term equity returns for GMDB and GMIB reserves and negligible net impact of 1 percent
increase or decrease in the S&P 500 index for living benefit reserves.
(b) Represents the net impact of 1 percentage point increase or decrease in implied volatility.
(c) Represents the net impact of 10 basis point parallel shift in the yield curve on the reserves for GMWB and GMAV living benefit features. Does not represent
interest rate spread compression on investment-oriented products.
The analysis of DAC, guaranteed benefits reserve and unearned revenue liability is a dynamic process that considers all
relevant factors and assumptions described above. We estimate each of the above factors individually, without the effect of