AIG 2014 Annual Report Download - page 89

ITEM 7 / RESULTS OF OPERATIONS
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PRE-TAX INCOME COMPARISON FOR 2014 AND 2013
Pre-tax income increased in 2014 compared to 2013 primarily due to an increase in pre-tax operating income for Commercial
Insurance, a $2.3 billion increase in income from divested businesses associated with the gain recognized upon completion of
the sale of ILFC in 2014 and lower loss recognition expense reported in changes in benefit reserves and DAC, VOBA, and SIA
related to net realized capital gains. These increases were partially offset by higher loss on extinguishment of debt from on-going
debt management activities, a decrease in net realized capital gains driven by lower gains from sales of investments related to
capital loss carryforward utilization in 2013, and a decrease in legal settlements with financial institutions that participated in
the creation, offering and sale of RMBS from which we realized losses during the financial crisis.
The change in the fair value of GMWB and GMAV embedded policy derivatives, net of the change in fair value of all related
economic hedges, resulted in a $149 million decrease in pre-tax income in 2014 compared to 2013. In 2014, we reduced our
exposure to interest rate changes and consequently, the increase in the embedded policy derivative liability in 2014 was
largely offset by the change in the fair value of related hedges. In 2013, pre-tax income increased due to the decrease in the
embedded policy derivative liability driven by an increase in interest rates, which was only partially offset by hedging. The
changes in fair value of the embedded policy derivatives and the majority of the related economic hedges are reported in Net
realized gains (losses), and the change in fair value of certain U.S. Treasury bonds which hedge interest rate risk are reported
in Change in fair value of certain fixed maturity securities designated to hedge living benefit liabilities.
The increase in pre-tax income in 2014 compared to 2013 included an increase due to lower changes in certain benefit
reserves, DAC, VOBA and SIA related to net realized capital gains, which was primarily comprised of loss recognition expense
in the Institutional Markets and Retirement operating segments, totaling $30 million in 2014 and $1.5 billion in 2013,
attributable primarily to investment sales related to capital loss carryforward utilization with reinvestment of the sales proceeds
at lower yields. Changes in certain benefit reserves, DAC, VOBA and SIA related to net realized capital gains also included
loss recognition expense in Corporate and Other of $140 million in 2014 and $98 million in 2013.
PRE-TAX INCOME COMPARISON FOR 2013 AND 2012
Pre-tax income increased in 2013 compared to 2012 primarily due to an increase in pre-tax operating income for both
Commercial Insurance and Consumer Insurance, a $6.7 billion increase due to the loss associated with the announced sale of
ILFC in 2012, an increase in legal settlements related to legacy crisis matters and an increase in net realized capital gains,
driven by gains from sales of investments related to capital loss carryforward utilization in 2013, partially offset by impairments
on investments in life settlements, an increase in loss on extinguishment of debt from on-going debt management activities
and higher loss recognition expense reported in changes in benefit reserves and DAC, VOBA, and SIA related to net realized
capital gains.
The aggregate change in the fair value of GMWB and GMAV embedded policy derivatives net of the change in fair value of all
related economic hedges, reported within Net realized capital gains (losses) and Change in fair value of fixed maturity
securities designated to hedge living benefit liabilities, resulted in a $719 million increase in pre-tax income in 2013 compared
to 2012, primarily due to the increase in interest rates.
Change in certain benefit reserves, DAC, VOBA and SIA related to net realized capital gains was largely comprised of loss
recognition expense in the Institutional Markets and Retirement operating segments, totaling $1.5 billion in 2013 and $1.2
billion in 2012, that was attributable primarily to investment sales related to capital loss carryforward utilization with
reinvestment of the sales proceeds at lower yields. Change in certain benefit reserves, DAC, VOBA and SIA also included loss
recognition expense in Corporate and Other of $98 million in 2013.
Net Investment Income
Net investment income is attributed to the operating segments of Commercial Insurance and Consumer Insurance based on
internal models consistent with the nature of the underlying businesses.