The liabilities for GMWB, 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 $1.8 billion and $1.2 billion at December 31, 2016 and 2015, respectively. See Note 5 for discussion of the fair value measurement of guaranteed benefits that are accounted for as embedded derivatives. We had account values subject to GMWB that totaled $41 billion and $38 billion at December 31, 2016 and 2015, 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 related to the GMWB guarantees was $834 million and $640 million at December 31, 2016 and 2015, respectively. We use derivative instruments and other financial instruments to mitigate a portion of our exposure that arises from GMWB benefits.
The following table lists our total debt outstanding at December 31, 2016 and 2015. The interest rates presented in the following table are the range of contractual rates in effect at December 31, 2016, including fixed and variable-rates:
(c) Includes debt issuance costs of $88 million and $101 million at December 31, 2016 and 2015, respectively.
On July 11, 2013, the AIGLH junior subordinated debentures were distributed to holders of the capital securities, the capital securities were cancelled and the trusts were dissolved. At December 31, 2016, the junior subordinated debentures outstanding consisted of $113 million of 8.5 percent junior subordinated debentures due July 2030, $211 million of 8.125 percent junior subordinated debentures due March 2046 and $37 million of 7.57 percent junior subordinated debentures due December 2045, each guaranteed by AIG Parent.
On August 25, 2015, SICO filed its appellate brief, in which it stated SICO does not appeal the dismissal of the derivative claims it asserted on behalf of AIG.
In connection with a multi-state examination of certain accident and health products, including travel products, issued by National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), AIG Property Casualty Inc. (formerly Chartis Inc.), on behalf of itself, National Union, and certain of AIG Property Casualty Inc.’s insurance and non-insurance companies (collectively, the AIG PC parties) entered into a Regulatory Settlement Agreement with regulators from 50 U.S. jurisdictions effective November 29, 2012. Under the agreement, and without admitting any liability for the issues raised in the examination, the AIG PC parties (i) paid a civil penalty of $50 million, (ii) entered into a corrective action plan describing agreed-upon specific steps and standards for evaluating the AIG PC parties’ ongoing compliance with laws and regulations governing the issues identified in the examination, and (iii) agreed to pay a contingent fine in the event that the AIG PC parties fail to satisfy certain terms of the corrective action plan. On April 29, 2016, National Union and other AIG companies achieved a settlement in principle of civil litigation relating to the conduct of their accident and health business, subject to formal documentation and court approval. Preliminary approval of the settlement was granted on October 14, 2016, and the settlement funds have been placed into escrow, pending final court approval of the settlement. We had previously accrued our estimate of loss with respect to this settlement. On May 23, 2016, the managing lead state in the multi-state examination ordered that the companies subject to the Regulatory Settlement Agreement have “complied with the terms” of the Regulatory Settlement Agreement and that no contingent fine or civil penalty would be due.
We recorded increases in our legal reserve liability of $14 million and $25 million in the years ended December 31, 2016 and 2015, respectively.
In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $3.2 billion at December 31, 2016.
ITEM 8 | Notes to Consolidated Financial Statements | 17. Equity
* The total number of shares of AIG Common Stock repurchased in 2015 includes (but the aggregate purchase price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an accelerated stock repurchase (ASR) agreement executed in the fourth quarter of 2014.
In the second, third and fourth quarters of 2014, we executed five ASR agreements with third-party financial institutions. The total number of shares of AIG Common Stock repurchased in the twelve-month period ended December 31, 2014, and the aggregate purchase price of those shares, each as set forth above, reflect our payment of approximately $3.1 billion in the aggregate under the ASR agreements and the receipt of approximately 53 million shares of AIG Common Stock in the aggregate, including the initial receipt of 70 percent of the total notional share equivalent, or approximately 9.2 million shares of AIG Common Stock, under an ASR agreement executed in December 2014. That ASR agreement settled in January 2015, at which time we received approximately 3.5 million additional shares of AIG Common Stock based on a formula specified by the terms of the ASR agreement.
The timing of any future repurchases will depend on market conditions, our financial condition, results of operations, liquidity and other factors.
ITEM 8 | Notes to Consolidated Financial Statements | 18. Earnings Per Share
The following table presents statutory net income (loss) and capital and surplus for our Property Casualty Insurance Companies and our Life Insurance Companies in accordance with statutory accounting practices:
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, 2016
ITEM 8 | Notes to Consolidated Financial Statements | 19. Statutory Financial Data and Restrictions
• In 2016 and 2015, a domestic life insurance subsidiary domiciled in Texas applied a permitted statutory accounting practice, initially adopted in 2015, to report derivatives used to hedge interest rate risk on product-related embedded derivatives at amortized cost instead of fair value. This permitted practice resulted in an increase in the statutory surplus of our subsidiary of $645 million at December 31, 2016 and a reduction of $366 million at December 31, 2015.
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. See Note 8 for additional information regarding these letters of credit.
To our knowledge, no AIG insurance company is currently on any regulatory or similar “watch list” with regard to solvency.
At December 31, 2016, our ability to pay dividends is not subject to any significant contractual restrictions, but remains subject to regulatory restrictions. See Note 17 herein for additional information about our ability to pay dividends to our shareholders.
During 2016, performance share units (PSUs) and deferred stock units (DSUs) were granted under the 2013 Plan and 43,510,168 shares are available for future grants as of December 31, 2016. PSUs were issued to employees as part of our long-term incentive program in March 2016 and are also issued for off-cycle grants, which are made from time to time during the year as sign-on awards to new hires or as a result of a change in employee status.
The 2013 LTIP provides for the annual grant of PSUs to certain employees, including our senior executive officers and other highly compensated employees. Each recipient of an award is granted a number of PSUs (the target) that provides the opportunity to receive shares of AIG Common Stock based on AIG achieving specified performance goals at the end of a three-year performance period. These performance goals are pre-established by AIG’s Compensation and Management Resources Committee (CMRC) for each annual grant and may differ from year to year. For each award, the actual number of PSUs earned can vary from zero to 150 percent of the target depending on AIG’s performance relative to a specified peer group. Vesting occurs in three equal installments beginning on January 1 of the year immediately following the end of a performance period and January 1 of each of the next two years. Recipients must be employed at each vesting date to be entitled to share delivery, except upon the occurrence of an accelerated vesting event, such as an involuntary termination without cause, disability, retirement eligibility or death during the vesting period.
ITEM 8 | Notes to Consolidated Financial Statements | 20. Share-Based And Other Compensation Plans
Beginning in 2015, LTI awards granted accrue dividend equivalent units (DEUs) in the form of additional PSUs whenever a cash dividend is declared on shares of AIG Common Stock; the DEUs are subject to the same vesting terms and conditions as the underlying PSUs.
(a) The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.
(b) The expected volatility is based on the implied volatilities of actively traded stock options from the valuation date through the end of the PSU performance period as estimated by Bloomberg Professional service.
(d) At December 31, 2016, the total unrecognized compensation cost (net of expected forfeitures) for the unvested PSUs was $163 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 1.26 years and 4 years.
Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested DSUs with delivery deferred until retirement from the Board. DSUs granted in 2016, 2015 and 2014 accrue DEUs equal to the amount of any regular quarterly dividend that would have been paid by AIG if the shares of AIG Common Stock underlying the DSUs had been outstanding. In 2016, 2015 and 2014, we granted to non-employee directors 41,974, 32,342 and 28,477 DSUs, respectively, under the 2013 Plan, and recognized expense of $2.4 million, $1.9 million and $1.5 million, respectively.
During 2016, 2015 and 2014, we paid $29 million, $101 million and $155 million, respectively, to settle outstanding TARP-related awards. As of December 31, 2016, all TARP-related awards have been settled.
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 on or before December 1, 2014 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. 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. Employees satisfying certain age and service requirements (i.e. grandfathered employees) remain covered under the average pay formula that was in effect prior to the conversion to the cash balance formula. The final average pay formula is based upon a percentage of final average compensation multiplied by years of credited service, up to 44 years. Grandfathered employees will receive the higher of the benefit under the cash balance formula or the final average pay formula at retirement. Non-U.S. defined benefit plans generally are either based on the employee’s years of credited service and compensation in the years preceding retirement or on points accumulated based on the employee’s job grade and other factors during each year of service.
The following table presents the funded status of the plans reconciled to the amount reported in the Consolidated Balance Sheets. The measurement date for most of the non-U.S. defined benefit pension and postretirement plans is November 30, consistent with the fiscal year end of the sponsoring companies. For all other plans, measurement occurs as of December 31.
The following table presents the accumulated benefit obligations for U.S. and non-U.S. pension benefit plans:
The estimated net loss and prior service credit that will be amortized from Accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $41 million and $0.3 million, respectively, for our combined defined benefit pension plans. For the defined benefit postretirement plans, the estimated amortization from Accumulated other comprehensive income for net loss and prior service credit that will be amortized into net periodic benefit cost over the next fiscal year is a $0.8 million credit in the aggregate.
(b) Compensation increases are no longer applicable due to the plan freeze that became effective January 1, 2016.
The projected benefit obligation for AIG’s Japan pension plans represents approximately 54 percent and 50 percent of the total projected benefit obligations for our non-U.S. pension plans at December 31, 2016 and 2015, respectively. The weighted average discount rate of 0.47 percent and 0.99 percent at December 31, 2016 and 2015, respectively, was selected by reference to the Mercer Yield Curve (Japan) based on the duration of the plans’ liabilities.
There were no shares of AIG Common Stock included in the U.S. and non-U.S. pension plans assets at December 31, 2016 or 2015.
The following table presents the asset allocation percentage by major asset class for the U.S. qualified plan and the target allocation for 2017 based on the plan’s funded status at December 31, 2016:
The expected long-term rate of return for the plan was 7.0 percent and 7.25 percent for 2016 and 2015, respectively. The expected rate of return is an aggregation of expected returns within each asset class category, weighted for the investment mix of the assets. 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 expected weighted average long-term rate of return for all our non-U.S. pension plans was 3.28 percent and 3.33 percent for the years ended December 31, 2016 and 2015, 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.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Based on our investment strategy, we had no significant concentrations of risks at December 31, 2016.
The U.S. pension plan holds a group annuity contract with U.S. Life, one of our subsidiaries, which totaled $21 million and $23 million at December 31, 2016 and 2015, respectively.
Our annual pension contribution in 2017 is expected to be approximately $70 million for our U.S. and non-U.S. pension plans. This estimate is subject to change, since contribution decisions are affected by various factors including our liquidity, market performance and management’s discretion.
A Schedule 13G/A filed on February 9, 2017 reports aggregate ownership of 62,619,185 shares, or approximately 6.3 percent (based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2016, by The Vanguard Group, Inc. and various subsidiaries thereof.
For the year ended December 31, 2016, our repatriation assumptions with respect to certain European operations remain unchanged and related foreign earnings continue to be indefinitely reinvested. Our repatriation assumptions related to certain operations in Canada, South Africa and Asia Pacific region have changed and related foreign earnings are now considered to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active non-U.S. business operations. Further, we do not intend to repatriate these earnings to fund U.S. operations. As a result, U.S. deferred taxes have not been provided on $2 billion of accumulated earnings, including accumulated other comprehensive income, of these non-U.S. affiliates. Potential U.S. income tax liabilities related to such earnings would be offset, in whole or in part, by allowable foreign tax credits resulting from foreign taxes paid to foreign jurisdictions in which such operations are located. As a result, we currently believe that any incremental U.S. income tax liabilities relating to indefinitely reinvested foreign earnings would not be significant. Deferred taxes have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
For the year ended December 31, 2015, the effective tax rate on income from continuing operations was 32.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits of $195 million associated with tax exempt interest income, $127 million related to reclassifications from accumulated other comprehensive
* Includes other carryforwards, e.g. general business credits, of $96 million on a U.S. GAAP basis.
For the year ended December 31, 2016, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a decrease to the net deferred tax asset related to net unrealized tax capital losses. As a result, for the year ended December 31, 2016, we released $682 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies, all of which was allocated to other comprehensive income.
As of December 31, 2016, based on all available evidence, we concluded that a valuation allowance of $728 million should remain on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized.
At December 31, 2016 and 2015, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $20.9 billion and $20.0 billion, respectively. At December 31, 2016 and 2015, our U.S. consolidated income tax group had valuation allowances of $874 million and $1.3 billion, respectively.
At December 31, 2016 and 2015, we had net deferred tax liabilities of $164 million and $90 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.
We will vigorously defend our position and continue to believe that we have adequate reserves for any liability that could result from these government actions. We continue to monitor legal and other developments in this area, including recent decisions affecting other taxpayers, and evaluate their effect, if any, on our position.
At December 31, 2016, 2015 and 2014, our unrecognized tax benefits, excluding interest and penalties, were $4.5 billion, $4.3 billion and $4.4 billion, respectively. The activity includes increases for amounts associated with cross border financing transactions partially offset by certain benefits realized due to an agreement reached with the Internal Revenue Service (IRS) related to certain tax issues under audit. At December 31, 2016, 2015 and 2014, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $0.1 billion, $0.1 billion and $0.3 billion, respectively. Accordingly, at December 31, 2016, 2015 and 2014, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.4 billion, $4.2 billion and $4.1 billion, respectively.
Listed below are the tax years that remain subject to examination by major tax jurisdictions:
* 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 pre-tax operating 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. Net income attributable to AIG for the three-month periods ended December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015 would have decreased by $88 million, increased by $22 million, increased by $5 million, and decreased by $5 million, respectively.
For the three months ended December 31, 2015, we recorded out of period adjustments related to prior periods that decreased Net income attributable to AIG by $193 million, decreased AIG’s Income from continuing operations before income taxes by $308 million and decreased pre-tax operating income by $122 million. The out of period adjustments primarily related to impairments of Other invested assets and changes in loss reserves and income tax liabilities. 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, 2015, June 30, 2015 and March 31, 2015 would have decreased by $36 million, increased by $15 million and decreased by $16 million, respectively.
(a) Includes intercompany derivative positions, which are reported at fair value before credit valuation adjustment.
Cash (paid) received during the year ended December 31, 2015 for:
* Includes $4.8 billion return of capital from AIG Capital Corporation related to the sale of ILFC.
On February 14, 2017, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of $3.5 billion, resulting in an aggregate remaining authorization on such date of approximately $4.7 billion.