The following table presents Policyholder contract deposits of the domestic Life Insurance Companies by product line:
Amounts assessed against the contract holders for mortality, administrative and other services are included in revenue. Net investment income, net investment gains and losses, changes in fair value of assets, and policyholder account deposits and withdrawals related to separate accounts are excluded from the Consolidated Statements of Income, Comprehensive Income (Loss) and Cash Flows.
Variable annuity contracts may include certain contractually guaranteed benefits to the contract holder. These guaranteed features include guaranteed minimum death benefits (GMDB) that are payable in the event of death, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits include guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum account value benefits (GMAV). A variable annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder can only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the features are mutually exclusive. A policyholder cannot purchase more than one living benefit on one contract. The net amount at risk for each feature is calculated irrespective of the existence of other features; as a result, the net amount at risk for each feature is not additive to that of other features.
Depending on the contract, the GMDB feature may provide a death benefit of either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in rare instances, no minimum return) or (b) the highest contract value attained, typically on any anniversary date minus any subsequent withdrawals following the contract anniversary. GMIB guarantees a minimum level of periodic income payments upon annuitization. GMDB is our most widely offered benefit; our contracts also include GMIB to a lesser extent.
The liabilities for GMDB and GMIB, which are recorded in Future policyholder benefits, represent the expected value of benefits in excess of the projected account value, with the excess recognized ratably over the accumulation period based on total expected assessments, through Policyholder benefits and losses incurred. The net amount at risk for GMDB represents the amount of benefits in excess of account value if death claims were filed on all contracts on the balance sheet date.
The following table presents details concerning our GMDB exposures, by benefit type:
• For certain products, mortality was assumed to be 85 percent of the 1983 variable annuity minimum guaranteed death benefit table, adjusted for recent experience. For other products, mortality was assumed to be 92 percent to 139 percent of the 2012 individual annuity mortality table.
• Lapse rates vary by contract type and duration and ranged zero percent to 37 percent.
• The discount rate ranged from 3.75 percent to 10 percent and is based on the growth rate assumption for the underlying contracts in effect at the time of policy issuance.
Certain of our variable annuity contracts contain optional GMWB benefits and, to a lesser extent, GMAV benefits, which are not currently offered. With a GMWB, the contract holder can monetize the excess of the guaranteed amount over the account value of the contract only through a series of withdrawals that do not exceed a specific percentage per year of the guaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder will receive a series of annuity payments equal to the remaining guaranteed amount, and, for lifetime GMWB products, the annuity payments continue as long as the covered person(s) is living. With a GMAV benefit, the contract holder can monetize the excess of the guaranteed amount over the account value of the contract, provided the contract holder persists until the maturity date.
The liabilities for GMWB and GMAV, which are recorded in Policyholder contract deposits, are accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in Other net realized capital gains (losses). The fair value of these embedded derivatives was a net liability of $957 million at December 31, 2014 and a net asset of $37 million at December 31, 2013. See Note 5 herein for discussion of the fair value measurement of guaranteed benefits that are accounted for as embedded derivatives. We had account values subject to GMWB and GMAV that totaled $35 billion and $28.6 billion at December 31, 2014 and 2013, respectively. The net amount at risk for GMWB represents the present value of minimum guaranteed withdrawal payments, in accordance with contract terms, in excess of account value, assuming no lapses. The net amount at risk for GMAV represents the present value of minimum guaranteed account value in excess of the current account balance, assuming no lapses. The net amount at risk related to these guarantees was $414 million and $63 million at December 31, 2014 and 2013, respectively. The increase in 2014 was primarily due to a decrease in interest rates. We use derivative instruments and other financial instruments to mitigate a portion of our exposure that arises from GMWB and GMAV benefits.
See Note 1 for discussion of presentation changes for policy fees that are related primarily to GMWB embedded derivatives.
Our long-term debt is denominated in various currencies, with both fixed and variable interest rates. Long-term debt is carried at the principal amount borrowed, including unamortized discounts, hedge accounting valuation adjustments and fair value adjustments, when applicable. The interest rates presented in the following table reflect the range of contractual rates in effect at December 31, 2014, including fixed and variable rate issuances.
Debentures and our 4.875% Series A-3 Junior Subordinated Debentures. We covenanted in each New RCC that, subject to certain exceptions, we would not repay, redeem or purchase, and that none of our subsidiaries would purchase, the applicable series of junior subordinated debentures prior to the scheduled termination date of that New RCC, unless since the date 360 days prior to the date of that repayment, redemption or purchase, we have received a specified amount of net cash proceeds from the sale of common stock or certain other qualifying securities that have certain characteristics that are at least as equity-like as the applicable characteristics of the applicable series of junior subordinated debentures, or we or our subsidiaries have issued a specified amount of common stock in connection with the conversion or exchange of certain convertible or exchangeable securities. In the first quarter of 2013, our obligations under the New RCCs were effectively terminated because one of the termination provisions set forth in the New RCCs was triggered when it was determined that neither series of junior subordinated debentures received equity credit any longer for rating agency purposes.
The five-year syndicated credit facility that we entered into on June 19, 2014 (the Five-Year Facility) provides for $4.0 billion of unsecured revolving loans and/or standby letters of credit without any limits on the type of borrowings. As of December 31, 2014, a total of $4 billion remains available under the Five-Year Facility. We expect we may draw down on the Five-Year Facility from time to time, and may use the proceeds for general corporate purposes. The Five-Year Facility is summarized in the following table.
Overview. In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services industries in general, subject to litigation, including claims for punitive damages. In our insurance and mortgage guaranty operations, litigation arising from claims settlement activities is generally considered in the establishment of our liability for unpaid losses and loss adjustment expenses. However, the potential for increasing jury awards and settlements makes it difficult to assess the ultimate outcome of such litigation. AIG is also subject to derivative, class action and other claims asserted by its shareholders and others alleging, among other things, breach of fiduciary duties by its directors and officers and violations of insurance laws and regulations, as well as federal and state securities laws. In the case of any derivative action brought on behalf of AIG, any recovery would accrue to the benefit of AIG.
Consolidated 2008 Securities Litigation. Between May 21, 2008 and January 15, 2009, eight purported securities class action complaints were filed against AIG and certain directors and officers of AIG and AIGFP, AIG’s outside auditors, and the underwriters of various securities offerings in the United States District Court for the Southern District of New York (the Southern District of New York), alleging claims under the Securities Exchange Act of 1934, as amended (the Exchange Act), or claims under the Securities Act of 1933, as amended (the Securities Act). On March 20, 2009, the Court consolidated all eight of the purported securities class actions as In re American International Group, Inc. 2008 Securities Litigation (the Consolidated 2008 Securities Litigation).
On April 26, 2013, the Court dismissed all claims against the outside auditors in their entirety, and it also reduced the scope of the Securities Act claims against AIG and defendants other than the outside auditors.
On July 15, 2014, lead plaintiffs and all defendants except AIG’s outside auditors accepted a mediator’s proposal to settle the Consolidated 2008 Securities Litigation for a cash payment by AIG of $960 million (the AIG Settlement). On August 1, 2014, lead plaintiff and AIG’s outside auditors accepted a mediator’s proposal to resolve the Consolidated 2008 Securities Litigation for a cash payment by the outside auditors (the Auditor Settlement and, collectively with the AIG Settlement, the Settlement). On October 7, 2014, the Court granted lead plaintiff’s Motion for Preliminary Approval of Settlement and Approval of Notice to the Class and scheduled a final settlement approval hearing for March 20, 2015. The deadline for parties to exclude themselves from the Settlement passed on January 5, 2015. The Settlement remains subject to final approval by the Court. On October 22, 2014, AIG made a cash payment of $960 million, which is being held in escrow pending final approval of the AIG Settlement and which will be returned if the AIG Settlement is not approved. The AIG Settlement amount has been accrued.
ERISA Actions - Southern District of New York. Between June 25, 2008 and November 25, 2008, AIG, certain directors and officers of AIG, and members of AIG’s Retirement Board and Investment Committee were named as defendants in eight purported class action complaints asserting claims on behalf of participants in certain pension plans sponsored by AIG or its subsidiaries. The Court subsequently consolidated these eight actions as In re American International Group, Inc. ERISA Litigation II. On December 19, 2014, lead plaintiffs’ counsel filed under seal a third consolidated amended complaint. The action purports to be brought as a class action under the Employee Retirement Income Security Act of 1974, as amended (ERISA), on behalf of all participants in or beneficiaries of certain benefit plans of AIG and its subsidiaries that offered shares of AIG Common Stock. In the third consolidated amended complaint, plaintiffs allege, among other things, that the defendants breached their fiduciary responsibilities to plan participants and their beneficiaries under ERISA, by continuing to offer the AIG Stock Fund as an investment option in the plans after it allegedly became imprudent to do so. The alleged ERISA violations relate to, among other things, the defendants’ purported failure to monitor and/or disclose certain matters, including the Subprime Exposure Issues.
On January 6, 2015, the parties informed the Court that they had accepted a mediator’s proposal to settle the action for $40 million. On January 7, 2015, the Court removed all previously scheduled deadlines from the Court’s calendar, subject to the parties’ submission of settlement papers to the Court seeking an order preliminarily approving the proposed settlement and providing for notice to the class and a final settlement hearing. The entirety of the $40 million settlement is expected to be paid by AIG’s fiduciary liability insurance carriers.
On April 17, 2009, defendants filed a motion record in support of their motion to stay or dismiss for lack of jurisdiction and forum non conveniens. On July 12, 2010, the Court adjourned a hearing on the motion pending a decision by the Supreme Court of Canada in a pair of actions captioned Club Resorts Ltd. v. Van Breda 2012 SCC 17. On April 18, 2012, the Supreme Court of Canada clarified the standard for determining jurisdiction over foreign and out-of-province defendants, such as AIG, by holding that a defendant must have some form of “actual,” as opposed to a merely “virtual,” presence to be deemed to be “doing business” in the jurisdiction. The Supreme Court of Canada also suggested that in future cases, defendants may contest jurisdiction even when they are found to be doing business in a Canadian jurisdiction if their business activities in the jurisdiction are unrelated to the subject matter of the litigation. The matter has been stayed pending further developments in the Consolidated 2008 Securities Litigation. Plaintiff has not yet moved to lift the stay.
In plaintiff’s proposed statement of claim, plaintiff alleged general and special damages of $500 million and punitive damages of $50 million plus prejudgment interest or such other sums as the Court finds appropriate. As of February 20, 2015, the Court has not determined whether it has jurisdiction or granted plaintiff’s application to file a statement of claim, no merits discovery has occurred and the action has been stayed. As a result, we are unable to reasonably estimate the possible loss or range of losses, if any, arising from the litigation.
In rulings dated July 2, 2012 and September 17, 2012, the Court of Federal Claims largely denied the United States’ motion to dismiss in the SICO Treasury Action.
In the SICO Treasury Action, the only claims naming AIG as a party (as a nominal defendant) are derivative claims on behalf of AIG. On September 21, 2012, SICO made a pre-litigation demand on our Board demanding that we pursue the derivative claims or allow SICO to pursue the claims on our behalf. On January 9, 2013, our Board unanimously refused SICO’s demand in its entirety and on January 23, 2013, counsel for the Board sent a letter to counsel for SICO describing the process by which our Board considered and refused SICO’s demand and stating the reasons for our Board’s determination.
On March 11, 2013, SICO filed a second amended complaint in the SICO Treasury Action alleging that its demand was wrongfully refused. On June 26, 2013, the Court of Federal Claims granted AIG’s and the United States’ motions to dismiss SICO’s derivative claims in the SICO Treasury Action and denied the United States’ motion to dismiss SICO’s direct claims.
Trial in the SICO Treasury Action began in the Court of Federal Claims on September 29, 2014, and witness testimony concluded on November 24, 2014. SICO argued during trial that the two classes are entitled to a total of approximately $40 billion in damages, plus interest. The parties are in the process of post-trial briefing.
While AIG is no longer a party to the SICO Treasury Action, the United States has alleged, as an affirmative defense in its answer, that AIG is obligated to indemnify the FRBNY and its representatives, including the Federal Reserve Board of Governors and the United States (as the FRBNY’s principal), for any recovery in the SICO Treasury Action, and seeks a contingent offset or recoupment for the value of net operating loss benefits the United States alleges that we received as a result of the government’s assistance. On November 8, 2013, the Court denied a motion by SICO to strike the United States’ affirmative defenses of indemnification and contingent offset or recoupment.
UGC has received a proposed consent order from the Minnesota Commissioner of Commerce (the MN Commissioner) which alleges that UGC violated the Real Estate Settlement Procedures Act and other state laws in connection with its practices with captive reinsurance companies owned by lenders. UGC is engaged in discussions with the MN Commissioner with respect to the terms of the proposed consent order. UGC cannot predict if or when a consent order may be entered into or, if entered into, what the terms of the final consent order will be. UGC has been subject to civil litigation relating to its placement of reinsurance with captives owned by lenders, and may be subject to additional litigation relating to the conduct of such business from time to time in the ordinary course.
On May 12, 2010, a complaint was filed under seal in the Southern District of New York by an individual (Relator) seeking to assert claims on behalf of the United States against AIG under the False Claims Act. The Relator filed also under seal a first amended complaint on July 28, 2011. The complaint and the first amended complaint were initially filed and maintained under seal while the United States considered whether to intervene in the action, and on or about October 29, 2013, after the United States declined to intervene, the District Court ordered the complaint be unsealed 30 days after the entry of the order. The case, however, was not unsealed until May 9, 2014. The Relator thereafter served his second amended complaint on AIG on May 23, 2014. The second amended complaint alleges that AIG made false statements relevant to the valuation of two of its former subsidiaries, ALICO and American International Assurance Limited (AIA), in connection with agreements under which interests in those subsidiaries were transferred to the FRBNY in exchange for a $25 billion decrease in the amount owed to the FRBNY under the FRBNY Credit Facility. Specifically, it alleges that AIG falsely told the federal government that ALICO and AIA had the licenses they needed to conduct their business and were in compliance with applicable laws and regulations. AIG moved to dismiss the Relator’s second amended complaint on December 22, 2014.
As previously disclosed in prior quarters, a state regulatory agency has requested additional information relating to the unwinding of a position on which we realized gains of $196 million for the year ended December 31, 2014.
Although we regularly review the adequacy of the established Liability for unpaid losses and loss adjustment expenses, there can be no assurance that our loss reserves will not develop adversely and have a material adverse effect on our results of operations. Estimation of ultimate net losses, loss expenses and loss reserves is a complex process, particularly for long-tail casualty lines of business, which include, but are not limited to, general liability, commercial automobile liability, environmental, workers’ compensation, excess casualty and crisis management coverages, insurance and risk management programs for large corporate customers and other customized structured insurance products, as well as excess and umbrella liability, directors and officers and products liability. Generally, actual historical loss development factors are used to project future loss development. However, there can be no assurance that future loss development patterns will be the same as in the past. Moreover, any deviation in loss cost trends or in loss development factors might not be identified for an extended period of time subsequent to the recording of the initial loss reserve estimates for any accident year. Reserves with respect to a number of years may be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves. These changes in loss cost trends or loss development factors could be attributable to changes in global
Rent expense was $471 million, $414 million and $445 million for the years ended December 31, 2014, 2013 and 2012, respectively. These amounts include $7 million for the year ended December 31, 2014 related to ILFC prior to the sale in 2014, and $15 million and $16 million attributable to businesses held for sale for the years ended December 31, 2013 and 2012, respectively.
We are subject to financial guarantees and indemnity arrangements in connection with the sales of businesses that occurred pursuant to our asset disposition plan. The various arrangements may be triggered by, among other things, declines in asset values, the occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of representations, warranties or covenants made by us. These arrangements are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or are not applicable.
On February 13, 2014, June 5, 2014 and October 31, 2014, our Board of Directors authorized increases to the August 1, 2013 repurchase authorization of AIG Common Stock of an aggregate of $4.5 billion. For the year ended December 31, 2014, we repurchased approximately 88 million shares of AIG Common Stock for an aggregate purchase price of approximately $4.9 billion.
AIG Common Stock Offerings by the Department of the Treasury and AIG Purchases of AIG Common Stock in 2012
* These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 22 to the Consolidated Financial Statements.
Nonvoting, callable, junior preferred interests held by the Department of Treasury represented preferred interests in the AIA SPV and ALICO SPV. In connection with the execution of our orderly asset disposition plan, as well as the repayment of the FRBNY Credit Facility, we transferred two of our wholly-owned businesses, AIA and ALICO, to two newly created SPVs in exchange for all the common and preferred interests (the SPV Preferred Interests) of those SPVs. On December 1, 2009, AIG transferred the SPV Preferred Interests to the FRBNY in consideration for a $25 billion reduction of the outstanding loan balance and of the maximum amount of credit available under the FRBNY Credit Facility and amended the terms of the FRBNY Credit Facility. As part of the closing of the Recapitalization, the remaining SPV Preferred Interests, with an aggregate liquidation preference of approximately $20.3 billion at January 14, 2011, were purchased from the FRBNY by AIG and transferred to the Department of the Treasury as part of the consideration for the exchange of our Series F Preferred Stock.
For the years ended December 31, 2014 and 2013, the Noncontrolling interests balance declined by $237 million and $56 million, respectively, primarily caused by distributions to noncontrolling interest.
(b) Non-Life Insurance Companies did not recognize material statutory gains related to legal entity simplification (restructuring) in 2014. Non-Life Insurance Companies include approximately $8.0 billion of recognized statutory gains related to legal entity simplification (restructuring) in 2013. These recognized gains were largely offset by reductions in unrealized gains; therefore, there was no material impact to total surplus.
(c) In aggregate, the 2013 Non-Life Insurance Companies and Life Insurance Companies statutory net income (loss) and statutory capital and surplus amounts increased by $1.1 billion and $557 million, respectively, compared to the amounts previously reported in our Annual Report on Form 10-K for the year ended December 31, 2013, due to finalization of statutory filings.
For domestic insurance subsidiaries, aggregate minimum required statutory capital and surplus is based on the greater of the RBC level that would trigger regulatory action or minimum requirements per state insurance regulation. Capital and surplus requirements of our foreign subsidiaries differ from those prescribed in the U.S., and can vary significantly by jurisdiction. At both December 31, 2014 and 2013, 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, 2014 and 2013, the use of prescribed or permitted statutory accounting practices by our domestic and foreign insurance subsidiaries did not result 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 foreign regulatory authority been followed in all respects for domestic and foreign insurance entities. As described in Note 13, our domestic insurance subsidiaries domiciled in New York and Pennsylvania discount non-tabular workers’ compensation reserves based on the prescribed or approved regulations in each of those states. While these practices differ from applicable NAIC statutory accounting practices, such practices do not have a material impact on our statutory surplus and statutory net income (loss) or risk based capital.
The NAIC Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) requires U.S. life insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). In addition, NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs.
Under the other intercompany reinsurance arrangement, certain Regulation XXX and Guideline AXXX reserves related to a closed block of in-force business are ceded to an affiliated off-shore life insurer, which is licensed as a class E insurer under Bermuda law. Bermuda law permits the off-shore life insurer to record an asset that effectively reduces the statutory reserves for the assumed reinsurance to the level that would be required under U.S. GAAP. Letters of credit are used to support the credit for reinsurance provided by the affiliated off-shore life insurer. The letters of credit are subject to reimbursement by AIG Parent in the event of a drawdown. See Note 8 for additional information regarding these letters of credit.
Our ability to pay dividends has not been subject to any contractual restrictions since the cancellation of our Series G Preferred Stock in May 2011. See Note 17 herein for additional information about our ability to pay dividends to our shareholders.
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 and 2012, 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.
SICO Plan awards issued in the form of restricted stock were valued based on the closing price of AIG’s Common Stock on the grant date. Although none of the costs of the various benefits provided under the SICO Plans have been paid by us, we have
recorded compensation expense for the deferred compensation amounts payable to our employees by SICO, with an offsetting amount credited to Additional paid-in capital reflecting amounts deemed contributed by SICO.
Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested deferred stock units (DSUs) with delivery deferred until retirement from the Board. In 2014 and 2013, we granted to non-employee directors 28,477 and 25,735 DSUs, respectively, under the 2013 Plan and recognized expense of $1.5 million and $1.2 million, respectively; in 2012, we granted 19,434 DSUs, under the 2010 Plan and recognized $0.6 million of expense.
The performance goals for long-term incentive awards granted in 2014 are AIG’s total shareholder return (TSR) and change in credit default swap (CDS) spread, weighted 75 percent and 25 percent, respectively, in each case relative to a specified peer group. The goals for the 2013 awards are AIG’s growth in tangible book value per share (TBVPS) (excluding accumulated other comprehensive income) and TSR, weighted 50 percent each, in each case relative to a specified peer group. The fair value of PSUs to be earned based on AIG’s achieving growth in TBVPS and change in CDS spreads was based on the closing price of AIG Common Stock on the grant date, discounted by the present value of estimated dividends to be paid during the respective vesting periods. The fair value of PSUs to be earned based on AIG’s TSR relative to a specified peer group was determined on the grant date using a Monte Carlo simulation.
(a) Excludes DSUs and options, which are discussed under the Non-Employee Plans and Stock Options sections, respectively.
At December 31, 2014, the total unrecognized compensation cost (net of expected forfeitures) for the unvested PSUs and unvested restricted stock was $185 million and $19 million, respectively, and the weighted-average and expected period of years over which those costs are expected to be recognized are 1.28 years and 4 years for the PSUs, and 5.28 years and 25 years for the restricted stock, respectively.
TARP RSUs awarded require the achievement of objective performance metrics as a condition to entitlement. An award would have been settled in 25 percent installments in proportion to the repayment of our TARP obligations. As a result of the repayment of our TARP obligations in December 2012, outstanding awards vest and settle in two 50 percent installments on the second and third anniversary of the date of grant, along with other cash-settled RSUs granted and issued in March 2013 and 2012.
Certain employees were provided the opportunity to receive additional compensation in the form of cash and cash-settled SARs under the 2011 LTIP or 100 percent cash for the 2012 LTIP if certain performance measures were met. The ultimate value of these awards was contingent on AIG achieving performance measures over a two-year performance period and such value could range from zero to twice the target amount. Subsequent to the performance period, the earned awards were subject to an additional time-vesting period. This results in a graded vesting schedule for the cash portion of up to two years, while the SARs portion cliff-vests two years after the end of performance period.
The U.S. AIG Retirement Plan (the qualified plan) is a noncontributory defined benefit plan, that is subject to the provisions of ERISA. U.S. salaried employees who are employed by a participating company and who have completed 12 months of continuous service are eligible to participate in the plan. Effective April 1, 2012, the qualified plan was converted to a cash balance formula comprised of pay credits based on six percent of a plan participant’s annual compensation (subject to IRS limitations) and annual interest credits. In addition, employees can take their vested benefits when they leave AIG as a lump sum or an annuity option after completing at least three years of service. However, employees satisfying certain age and service requirements (i.e. grandfathered employees) remain covered under the old plan formula, which is based upon a
The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement benefits:
The annual pension expense in 2015 for the AIG U.S. and non-U.S. defined benefit pension plans is expected to be approximately $289 million. A 100 basis point increase in the discount rate or expected long-term rate of return would decrease the 2015 expense by approximately $95 million and $47 million, respectively, with all other items remaining the same. Conversely, a 100 basis point decrease in the discount rate or expected long-term rate of return would increase the 2015 expense by approximately $104 million and $47 million, respectively, with all other items remaining the same.
There were no shares of AIG Common Stock included in the U.S. and non-U.S. pension plans assets at December 31, 2014 or 2013.
The long-term strategic asset allocation is reviewed and revised approximately every three years. The plan’s assets are monitored by the investment committee and actively managed by the investment managers, which includes allocating the plan’s assets among approved asset classes within pre-approved ranges permitted by the strategic allocation.
The following table presents the asset allocation percentage by major asset class for the U.S. qualified plan and the target allocation:
The expected long-term rate of return for the plan was 7.25 percent for both 2014 and 2013. The expected rate of return is an aggregation of expected returns within each asset class category and incorporates the current and target asset allocations. The combination of the expected asset return and any contributions made by us are expected to maintain the plan’s ability to meet all required benefit obligations. The expected asset return for each asset class was developed based on an approach that considers key fundamental drivers of the asset class returns in addition to historical returns, current market conditions, asset volatility and the expectations for future market returns.
The assets of AIG’s Japan pension plans represent approximately 55 percent and 60 percent of total non-U.S. assets at December 31, 2014 and 2013 respectively. The expected long term rate of return was 1.24 percent and 1.15 percent, for 2014 and 2013, 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.
The expected weighted average long-term rate of return for all our non-U.S. pension plans was 2.93 percent and 2.60 percent for the years ended December 31, 2014 and 2013, respectively. It is an aggregation of expected returns within each asset class that was generally developed based on the building block approach that considers historical returns, current market conditions, asset volatility and the expectations for future market returns.
(c) Represents investments in U.S. and non-U.S. government issued bonds, U.S. government agency or sponsored agency bonds, and investment grade corporate bonds.
The U.S. pension plan holds a group annuity contract with U.S. Life, one of our subsidiaries, which totaled $26 million and $27 million at December 31, 2014 and 2013, 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, 2014, we transferred certain investments in hedge funds into Level 3 as a result of limited market activity due to fund-imposed redemption restrictions.
Our annual pension contribution in 2015 is expected to be approximately $173 million for our U.S. and non-U.S. plans, including a $100 million contribution to the AIG Retirement Plan. These estimates are subject to change, since contribution decisions are affected by various factors including our liquidity, market performance and management’s discretion.
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 Company’s matching contribution is 100 percent of the first six percent of a participant’s contributions, subject to the IRS-imposed limitations. Our pre-tax expenses associated with these plans were $156 million, $155 million and $133 million in 2014, 2013 and 2012 respectively.
The calculation of ownership interest for purposes of the AIG Tax Asset Protection Plan and Article 13 of our Restated Certificate of Incorporation is different than beneficial ownership for Schedule 13G.
asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.
• the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and,
We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Several U.S. subsidiaries included in the consolidated financial statements previously filed separate U.S. federal income tax returns and were not part of our U.S. consolidated income tax group. 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.
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. On March 29, 2013, the U.S District Court for the Southern District of New York denied our motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions. On March 17, 2014, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) granted our petition for an immediate appeal of the partial summary judgment decision. Accordingly, we are presenting our position to the Second Circuit.
We regularly evaluate adjustments proposed by taxing authorities. At December 31, 2014, 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.
* The changes in the previously and currently reported total revenues did not have an impact on Net income or Earnings (loss) per common share attributable to AIG common shareholders.