AIG 2015 Annual Report Download - page 78

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 changes in benefit reserves and DAC, VOBA, and SIA related to net realized capital gains, which were primarily
affected by loss recognition expense in the Life Insurance Companies of $30 million in 2014 compared to $1.5 billion in
2013. The loss recognition in 2013 was primarily attributable to investment sales in the Institutional Markets and Retirement
operating segments related to capital loss carryforward utilization, with reinvestment of the sales proceeds at lower yields.
Loss recognition expense in Corporate and Other was $140 million in 2014 and $98 million in 2013.
These increases were partially offset by decreases from:
• 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;
• 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, which is reflected in Non-operating litigation reserves and settlements;
and
• a $149 million change in the fair value of GMWB and GMAB embedded derivatives related to variable annuity guaranteed
living benefits, net of the change in fair value of all related economic hedges.
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.
For Commercial Insurance — Property Casualty and Consumer Insurance — Personal Insurance, we estimate investable
funds based primarily on loss reserves, unearned premiums and a capital allocation for each operating segment. The net
investment income allocation is calculated based on the estimated investable funds and risk-free yields (plus a liquidity
premium) consistent with the approximate duration of the liabilities, and excludes net investment income associated with the
run-off insurance lines reported in Corporate and Other. The remaining excess is attributed to Commercial Insurance —
Property Casualty and Consumer Insurance — Personal Insurance based on the relative net investment income previously
allocated.
For Commercial Insurance — Institutional Markets, Consumer Insurance — Retirement and Consumer Insurance — Life, net
investment income is attributed based on invested assets from segregated product line portfolios. Invested assets in excess of
liabilities are allocated to product lines based on internal capital estimates.