On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2017, 2016, and 2015, we had accrued liabilities of $2.0 billion, $1.2 billion, and $1.2 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2017, 2016, and 2015, we accrued expense of $776 million, $26 million and $156 million, respectively, for the payment of interest and penalties. The current year activity is primarily related to a decrease in the expected federal benefit of interest due to the U.S. corporate tax rate reduction and to an increase in interest and penalties associated with cross border financing transactions.
We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.
* For the three months ended December 31, 2016, we recorded out of period adjustments related to prior periods that increased Net loss attributable to AIG by $154 million, increased AIG’s Loss from continuing operations before income taxes by $12 million and decreased adjusted pre-tax income by $1 million. The out of period adjustments are primarily related to income tax liabilities and ceded loss adjustment expenses. Had these adjustments, which were determined not to be material, been recorded in their appropriate periods, Net income attributable to AIG for the three-month periods ended September 30, 2016, June 30, 2016 and March 31, 2016 would have decreased by $65 million, increased by $66 million and increased by $19 million, respectively.
Cash (paid) received during the year ended December 31, 2017 for:
On January 21, 2018, we entered into an agreement to purchase Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for approximately $5.6 billion in cash. The transaction is expected to close mid-2018 and is subject to customary closing conditions, including, among others, obtaining the relevant regulatory approvals (including the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and receipt of the approval of the Bermuda Monetary Authority, the New Hampshire Department of Insurance, the Prudential Regulatory Authority, Lloyd’s, the Texas Department of Insurance and the Swiss Financial Market Supervisory Authority) and obtaining the approval of the shareholders of Validus. In connection with the transaction, the board of directors of Validus approved, and recommended that Validus’ shareholders approve, an amendment to Validus’ bye-laws that would reduce the Validus shareholder vote required to approve a merger with another company (including the transaction) from the affirmative vote of three-fourths of those voting at a general meeting of the shareholders to the affirmative vote of a majority of those voting at such general meeting (the Bye-Law Amendment). If the Bye-Law Amendment is approved by holders of a majority in voting power of the aggregate voting power of the common stock of Validus, Validus must then obtain the affirmative vote of a majority of its shareholders voting at a general meeting to approve and adopt the transaction. If the Bye-Law Amendment is not so approved, then Validus must obtain the affirmative vote of three-fourths of its shareholders voting at a general meeting to approve and adopt the transaction.
In February 2018, we closed a series of affiliated reinsurance transactions impacting the Legacy Portfolio. These transactions were designed to consolidate the bulk of the Legacy Insurance Run-Off Lines into a single legal entity, DSA Reinsurance Company, Ltd. (DSA Re), a Bermuda domiciled composite reinsurer, 100 percent owned by AIG. The transactions include the cession of approximately $32 billion of reserves from the Legacy Life and Retirement Run-off Lines and approximately $5 billion of reserves from the Legacy General Insurance Run-off Lines relating to business written by multiple AIG legal entities. This represented over 80 percent of the insurance reserves in the Legacy Portfolio as of December 31, 2017. DSA Re will have approximately $40 billion of invested assets, managed by AIG Investments and will become AIG’s main run-off reinsurer with its own dedicated management team.
As part of the transaction, AIG Parent has provided DSA Re with a CMA that requires AIG Parent to restore capital of each of the long term business fund and general business accounts of DSA Re to a specified minimum enhanced capital ratio measured for each fund on a quarterly basis. We will maintain the CMA so long as we have more than 50 percent voting control of DSA Re.