The following table presents repurchases of AIG Common Stock and warrants to purchase shares of AIG Common Stock:
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock through a series of actions. On November 2, 2016, our Board of Directors authorized an additional increase of $3.0 billion to its previous share repurchase authorization, resulting in an aggregate remaining authorization on such date of approximately $4.4 billion. As of December 31, 2016, approximately $2.5 billion remained under our share repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.
The following table presents the other comprehensive income (loss) reclassification adjustments for the years ended December 31, 2016, 2015 and 2014:
Unrealized appreciation (depreciation) of fixed maturity investments on which other-than-temporary credit impairments were taken
Less: Net income (loss) from continuing operations attributable to noncontrolling interests
(a) Shares in the diluted EPS calculation represent basic shares for 2016 due to the net loss in that period. The shares excluded from the calculation were 30,326,772 shares.
(b) Dilutive shares included our share-based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011. The number of shares excluded from diluted shares outstanding were 0.2 million, 0.2 million and 0.3 million for the years ended December 31, 2016, 2015 and 2014, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.
(b) In aggregate, the 2015 Property Casualty Insurance Companies and Life Insurance Companies statutory net income decreased by $146 million and the 2015 Property Casualty Insurance Companies and Life Insurance Companies statutory capital and surplus increased by $3.2 billion, compared to the amounts previously reported in our Annual Report on Form 10-K for the year ended December 31, 2015, due to finalization of statutory filings, as well as inclusion of the finalized statutory net loss and statutory capital and surplus of Eaglestone of $3.4 million and $1.9 billion, respectively. The results of Eaglestone were excluded from the 2015 Property Casualty Insurance Companies statutory net income and statutory capital and surplus in our previously reported Form 10-K for the year ended December 31, 2015.
(c) Property Casualty Insurance Companies recognized $200 million and $2.9 billion of capital contributions from AIG Parent in their statutory financial statements as of December 31, 2016 and 2015, respectively, related to the reserve strengthening in the fourth quarter of each year. These capital contributions were received in February 2017 and January 2016, respectively.
and 2015, all domestic and foreign insurance subsidiaries individually exceeded the minimum required statutory capital and surplus requirements and all domestic insurance subsidiaries individually exceeded RBC minimum required levels.
At December 31, 2016 and 2015, our domestic insurance subsidiaries used the following permitted practices that resulted in reported statutory surplus or risk-based capital that is significantly different from the statutory surplus or risk based capital that would have been reported had NAIC statutory accounting practices or the prescribed regulatory accounting practices of their respective state regulator been followed in all respects:
Domestic life insurance subsidiaries manage the capital impact of statutory reserve requirements under Regulation XXX and Guideline AXXX through unaffiliated and affiliated reinsurance transactions. The affiliated life insurers providing reinsurance capacity for such transactions are fully licensed insurance companies and are not formed under captive insurance laws. One of these affiliated reinsurance arrangements, under which certain Regulation XXX and Guideline AXXX reserves related to new and in-force business were ceded to an affiliated U.S. life insurer, was recaptured effective December 31, 2016 and these reserves were ceded to an unaffiliated reinsurer.
Largely as a result of these restrictions, approximately $45.1 billion of the statutory capital and surplus of our consolidated insurance subsidiaries were restricted from transfer to AIG Parent without prior approval of state insurance regulators at December 31, 2016.
* We recognized $105 million, $147 million and $120 million for immediately vested stock-settled awards issued to retirement eligible employees in 2016, 2015 and 2014, respectively.
The Company grants annual Long Term Incentive (LTI) awards under the 2013 Long Term Incentive Plan (2013 LTIP), which is governed by the AIG 2013 Omnibus Incentive Plan (2013 Plan). The 2013 Plan replaced the AIG 2010 Stock Incentive Plan (2010 Plan) as of May 15, 2013 but does not affect the terms and conditions of any award issued under the 2010 Plan. The 2013 Plan is currently the only plan under which share-settled awards can be made. Our share-settled awards are settled with previously acquired shares held in AIG’s treasury.
The 2010 Plan was adopted at the 2010 Annual Meeting of Shareholders. The total number of shares of AIG Common Stock that could be granted under the 2010 Plan was 60 million. During 2013, we granted PSUs, DSUs and restricted stock units (RSUs) under the 2010 Plan. Each PSU, DSU and RSU awarded reduced the number of shares available for future grants by one share. Subsequent to the adoption of the 2013 Plan in May 2013, no additional grants were made under the 2010 Plan.
The value of each award is based on the nature of the performance goals and the price per unit is fixed as of the grant date. PSUs granted in 2016 are measured based on AIG’s total shareholder return (TSR). PSUs granted in 2015 and 2014 are measured based on AIG’s TSR and credit default swap (CDS) spread, weighted 75 percent and 25 percent, respectively. PSUs granted in 2013 are measured based on AIG’s TSR and growth in tangible book value per common share (TBVPS) (excluding accumulated other comprehensive income) weighted 50 percent each.
The fair value of PSUs to be earned based on AIG’s CDS spreads and TBVPS was based on the closing price of AIG Common Stock on the grant date. However, PSUs granted in 2014 and 2013 that vest based on these goals were discounted by the present value of estimated dividends to be paid during the respective vesting periods as these awards do not accrue dividends or DEUs. The fair value of PSUs to be earned based on AIG’s TSR was determined on the grant date using a Monte Carlo simulation.
The following table presents the assumptions used to estimate the fair value of PSUs that vest based on AIG’s TSR:
(b) Except for the 2013 LTI award, represents target number of PSUs granted, and does not reflect potential increases or decreases that could result from the final outcome of the performance goals for the respective awards, which is determined in the quarter after the applicable performance period ends.
(c) The performance period for the 2013 LTI awards ended December 31, 2015. The number of earned PSUs was based on the results of the 2013 performance goals adjudicated in the first quarter of 2016 by the CMRC. This resulted in additional units being granted, but no additional expense was recognized for these units.
* Includes non-qualified unfunded plans of which the aggregate projected benefit obligation was $278 million and $299 million for the U.S. at December 31, 2016 and 2015, respectively, and $199 million for the non-U.S for both 2016 and 2015.
The projected benefit cash flows under the U.S. AIG Retirement Plan were discounted using the spot rates derived from the Mercer US Pension Discount Yield Curve at December 31, 2016 and 2015, which resulted in a single discount rate that would produce the same liability at the respective measurement dates. The discount rates were 4.15 percent at December 31, 2016 and 4.32 percent at December 31, 2015. The methodology was consistently applied for the respective years in determining the discount rates for the other U.S. pension plans.
The following table presents the asset allocation percentage by major asset class for non-U.S. pension plans and the target allocation:
The assets of AIG’s Japan pension plans represent approximately 56 percent and 54 percent of total non-U.S. assets at December 31, 2016 and 2015 respectively. The expected long term rate of return was 2.61 percent and 1.71 percent, for 2016 and 2015, respectively, and is evaluated by the Japanese Pension Investment Committee on a quarterly and annual basis along with various investment managers, and is revised to achieve the optimal allocation to meet targeted funding levels if necessary. In addition, the funding policy is revised in accordance with local regulation every five years.
(a) Includes passive and active U.S. Large Cap and Small Cap strategies, as well as mutual funds, and exchange traded funds.
(e) Comprised primarily of investments in U.S. government agency or U.S. government sponsored agency bonds.
(f) Comprised of private capital financing including private debt and private equity securities.
(g) Excludes investments that are measured at fair value using the NAV per share (or its equivalent), which totaled $960 million and $1.1 billion at December 31, 2016 and 2015, respectively.
We record transfers of assets into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. During the year ended December 31, 2016, we had no material transfers in or out of Level 3.
Funding for the qualified plan ranges from the minimum amount required by ERISA to the maximum amount that would be deductible for U.S. tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible under the Internal Revenue Code. There are no minimum required cash contributions in 2017 for the AIG Retirement Plan. The non-qualified and postretirement plans’ benefit payments are deductible when paid to participants.
We sponsor several defined contribution plans for U.S. employees that provide for pre-tax salary reduction contributions by employees. The most significant plan is the AIG Incentive Savings Plan, for which the matching contribution is 100 percent of the first six percent of a participant’s contributions, subject to the IRS-imposed limitations. Effective January 1, 2016, participants in the AIG Incentive Savings Plan receive an additional fully vested, non-elective, non-discretionary contribution equal to three percent of the participant’s annual base compensation for the plan year, paid each pay period regardless of whether the participant currently contributes to the plan, and subject to the IRS-imposed limitations. Our pre-tax expenses associated with these plans were $236 million, $166 million and $156 million in 2016, 2015 and 2014, respectively.
A Schedule 13G/A filed on January 19, 2017 reports aggregate ownership of 64,426,821 shares, or approximately 6.5 percent (based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2016, by Blackrock, Inc. and various subsidiaries thereof.
A Schedule 13G filed on February 13, 2017 reports aggregate ownership of 77,926,159 shares, or approximately 7.8 percent (based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2016, by Capital Research Global Investors, a division of Capital Research and Management Company.
For the year ended December 31, 2016, the effective tax rate on loss from continuing operations was not meaningful. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax charges of $234 million associated with effect of foreign operations, $216 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, $118 million related to disposition of subsidiaries, $102 million related to non-deductible transfer pricing charges, and $83 million related to increases in the deferred tax asset valuation allowances associated with U.S. federal and certain foreign jurisdictions, partially offset by tax benefits of $253 million of tax exempt income, $164 million associated with a portion of the U.S. Life Insurance Companies capital loss carryforwards previously treated as expired that was restored and utilized, $116 million related to the impact of an agreement reached with the Internal Revenue Service (IRS) related to certain tax issues under audit, and $132 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. Effect of foreign operations is primarily related to foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.
income to income from continuing operations related to the disposal of available for sale securities, $58 million associated with the effect of foreign operations, and $109 million related to the partial completion of the IRS examination covering tax year 2006, partially offset by $324 million of tax charges and related interest associated with increases in uncertain tax positions related to cross border financing transactions, and $110 million related to increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions.
The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2016.
We have U.S. federal consolidated net operating loss and tax credit carryforwards of approximately $14.9 billion. The carryforward periods for our foreign tax credits begin to expire in 2019. As detailed in the Assessment of Deferred Tax Asset Valuation Allowance section of this footnote, we determined that it is more likely than not that our U.S. federal consolidated tax attribute carryforwards will be realized prior to their expiration.
• the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;
• prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.
For both the three-month period and the year ended December 31, 2016, recent changes in market conditions and sales of securities that resulted in the reclassification of gains into continuing operations, impacted the unrealized tax gains and losses in the non-life companies’ available for sale securities portfolio, resulting in an increase to the net deferred tax asset related to net unrealized tax capital losses. As a result, we established $260 million of valuation allowance associated with the unrealized tax losses in the non-life companies’ available for sale securities portfolio, all of which was recognized in other comprehensive income.
During the year ended December 31, 2016, we recognized a net increase of $69 million in our deferred tax asset valuation allowance associated with certain foreign jurisdictions, primarily attributable to current year losses, changes in projections of taxable income and changes in tax law.
During the year ended December 31, 2016, we recognized a net increase of $170 million in our deferred tax asset valuation allowance associated with certain state jurisdictions, primarily attributable to current year losses, legislative state tax law changes and changes to state effective tax rates.
Subtotal - Net U.S., foreign, state and local deferred tax assets
We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.
The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently under examination for the tax years 2000 through 2010.
The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2016, 2015, and 2014, we had accrued liabilities of $1.2 billion, $1.2 billion, and $1.1 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2016, 2015, and 2014, we accrued expense of $26 million, $156 million and $21 million, respectively, for the payment of interest (net of the federal benefit) and penalties. The reduction in interest accrued during 2016 as compared to 2015 is primarily related to benefits associated with an agreement reached with the IRS related to certain tax issues under audit, partially offset by an increase associated with cross border financing transactions.
We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2016, such proposed adjustments would not have resulted in a material change to our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next 12 months, based on the information currently available, we do not expect any change to be material to our consolidated financial condition.
Cash (paid) received during the year ended December 31, 2014 for:
On February 14, 2017, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 29, 2017 to shareholders of record on March 15, 2017.
On January 20, 2017, we announced that we have entered into an adverse development reinsurance agreement with NICO, a subsidiary of Berkshire Hathaway Inc., under which we ceded to NICO 80 percent of reserve risk above an attachment point on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of net paid losses on subject business on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion. We will account for this transaction as retroactive reinsurance. The consideration for this agreement is $9.8 billion plus interest at 4 percent per annum from January 1, 2016 to date of payment, which was paid in full as of February 17, 2017. The consideration paid to NICO will be placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO’s obligations under the agreement.