AIG 2015 Annual Report Download - page 152

ITEM 7 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES
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152
Reversion to the Mean
In 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 in 2015, 2014 or 2013; 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 Accounting Estimates – Estimated Gross Profits for Investment-Oriented Products (Life
Insurance Companies) for additional discussion of assumptions related to our reversion to the mean methodology.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC for universal life and investment-type products (collectively, investment-oriented products) is adjusted at each balance
sheet date to reflect the change in DAC as if fixed maturity and equity securities available for sale had been sold at their stated
aggregate fair value and the proceeds reinvested at current yields (shadow DAC). The change in shadow DAC generally
moves in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio. In
addition, significant unrealized appreciation of investments in a prolonged low interest rate environment may cause additional
future policy benefit liabilities to be recorded (shadow loss reserves). Market interest rates increased as a result of widening
spreads in 2015. As a result, the Life Insurance Companies’ unrealized appreciation of investments at December 31, 2015
decreased by $7.4 billion compared to December 31, 2014, which resulted in an increase in shadow DAC and a decrease in
shadow loss reserves. Shadow loss reserves decreased to $18 million at December 31, 2015 compared to $1.2 billion at
December 31, 2014.
Life Insurance Companies Reserves
The following table presents a rollforward of Life Insurance Companies’ insurance reserves, including separate
accounts and mutual fund assets under management, by operating segment:
Years Ended December 31,
(in millions)
2015 2014 2013
Institutional Markets:
Balance at beginning of year, gross $ 35,080 $ 32,100 $ 32,242
Premiums and deposits 1,782 3,797 991
Surrenders and withdrawals (674) (766) (2,620)
Death and other contract benefits (1,628) (1,530) (1,371)
Subtotal (520) 1,501 (3,000)
Change in fair value of underlying assets and reserve accretion, net of
policy fees 982 1,130 1,156
Cost of funds 408 410 413
Other reserve changes (127) (61) 1,289
Balance at end of year 35,823 35,080 32,100
Reserves related to unrealized appreciation of investments - 1,054 -
Reinsurance ceded (5) (5) (5)
Total insurance reserves $ 35,818 $ 36,129 $ 32,095
Retirement:
Balance at beginning of year, gross $ 204,627 $ 195,493 $ 173,281
Premiums and deposits 25,297 24,077 23,788
Surrenders and withdrawals (18,251) (20,504) (16,459)
Death and other contract benefits (3,894) (3,690) (3,353)
Subtotal 3,152 (117) 3,976