UNITED STATES

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

Commission File Number 1-8787

 

 

 

American International Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

13-2592361

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

175 Water Street, New York, New York

10038

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (212) 770-7000

________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No ☐   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☑ 

Accelerated filer ☐ 

Non-accelerated filer ☐ 

Smaller reporting company ☐ 

Emerging growth company ☐ 

 

 

(Do not check if a

smaller reporting company)

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐      No   

 

As of May 1, 2017, there were 925,772,114 shares outstanding of the registrant’s common stock.

  

AMERICAN INTERNATIONAL GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED

March 31, 2017

Table of Contents

FORM 10-Q

 

Item Number
Description
Page
Part I — Financial Information
 

ITEM 1

Condensed Consolidated Financial Statements

2

 

Note 1.

Basis of Presentation

7

 

Note 2.

Summary of Significant Accounting Policies

8

 

Note 3.

Segment Information

11

 

Note 4.

Held-for-Sale Classification

13

 

Note 5.

Fair Value Measurements

14

 

Note 6.

Investments

27

 

Note 7.

Lending Activities

35

 

Note 8.

Variable Interest Entities

37

 

Note 9.

Derivatives and Hedge Accounting

38

 

Note 10.

Insurance Liabilities

42

 

Note 11.

Contingencies, Commitments and Guarantees

45

 

Note 12.

Equity

49

 

Note 13.

Earnings Per Share

52

 

Note 14.  

Employee Benefits

53

 

Note 15.

Income Taxes

54

 

Note 16.

Information Provided in Connection with Outstanding Debt

56

 

Note 17.

Subsequent Events

60

ITEM 2

Management’s Discussion and Analysis of Financial Condition and Results of

  

 

Operations

61

 

     Cautionary Statement Regarding Forward-Looking Information

61

 

     Use of Non-GAAP Measures

64

 

     Critical Accounting Estimates

66

 

     Executive Summary

67

 

     Consolidated Results of Operations

76

 

     Business Segment Operations

79

 

     Investments

105

 

     Insurance Reserves

122

 

     Liquidity and Capital Resources

129

 

     Enterprise Risk Management

141

 

     Regulatory Environment

146

 

     Glossary

147

 

     Acronyms

150

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

151  

ITEM 4

Controls and Procedures

151  

Part II — Other Information
 

ITEM 1

Legal Proceedings

152  

ITEM 1A

Risk Factors

152

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

152

ITEM 4

Mine Safety Disclosures

152

ITEM 6

Exhibits

152  

Signatures
153  

  

TABLE OF CONTENTS

 

Part I – Financial Information

Item 1. | Financial Statements

American International Group, Inc.

Condensed Consolidated Balance Sheets (unaudited)

 

March 31,

December 31,

(in millions, except for share data)

 

2017

 

2016

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value (amortized cost: 2017 - $220,629; 2016 - $232,241)

$

230,698

$

241,537

Other bond securities, at fair value (See Note 6)

 

13,605

 

13,998

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2017 - $1,604; 2016 - $1,697)

 

2,099

 

2,078

Other common and preferred stock, at fair value (See Note 6)

 

500

 

482

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2017 - $11; 2016 - $11)

 

33,878

 

33,240

Other invested assets (portion measured at fair value: 2017 - $7,094; 2016 - $6,946)

 

23,652

 

24,538

Short-term investments (portion measured at fair value: 2017 - $2,453; 2016 - $3,341)

 

11,073

 

12,302

Total investments

 

315,505

 

328,175

 

 

 

 

 

Cash

 

1,918

 

1,868

Accrued investment income

 

2,386

 

2,495

Premiums and other receivables, net of allowance

 

11,130

 

10,465

Reinsurance assets, net of allowance

 

34,140

 

21,901

Deferred income taxes

 

20,881

 

21,332

Deferred policy acquisition costs

 

11,091

 

11,042

Other assets, including restricted cash of $213 in 2017 and $193 in 2016

 

 

 

 

(portion measured at fair value: 2017 - $1,247; 2016 - $1,809)

 

10,606

 

10,815

Separate account assets, at fair value

 

85,917

 

82,972

Assets held for sale

 

6,588

 

7,199

Total assets

$

500,162

$

498,264

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

76,050

$

77,077

Unearned premiums

 

19,840

 

19,634

Future policy benefits for life and accident and health insurance contracts

 

42,719

 

42,204

Policyholder contract deposits (portion measured at fair value: 2017 - $3,097; 2016 - $3,058)

 

132,639

 

132,216

Other policyholder funds (portion measured at fair value: 2017 - $5; 2016 - $5)

 

3,719

 

3,989

Other liabilities (portion measured at fair value: 2017 - $1,261; 2016 - $2,016)

 

28,093

 

26,296

Long-term debt (portion measured at fair value: 2017 - $3,151; 2016 - $3,428)

 

30,747

 

30,912

Separate account liabilities

 

85,917

 

82,972

Liabilities held for sale

 

5,771

 

6,106

Total liabilities

 

425,495

 

421,406

Contingencies, commitments and guarantees (see Note 11)

 

 

 

 

 

 

 

 

 

AIG shareholders’ equity:

 

 

 

 

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2017 - 1,906,671,492 and

 

 

 

 

2016 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2017 - 964,191,466 shares; 2016 - 911,335,651 shares of common stock

 

(44,915)

 

(41,471)

Additional paid-in capital

 

80,846

 

81,064

Retained earnings

 

29,591

 

28,711

Accumulated other comprehensive income

 

3,781

 

3,230

Total AIG shareholders’ equity

 

74,069

 

76,300

Non-redeemable noncontrolling interests

 

598

 

558

Total equity

 

74,667

 

76,858

Total liabilities and equity

$

500,162

$

498,264

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

American International Group, Inc.

Condensed Consolidated Statements of Income (Loss) (unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(dollars in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Premiums

 

 

 

 

 

 

 

 

 

$

7,782

 

$

8,806

   Policy fees

 

 

 

 

 

 

 

 

 

 

724

 

 

687

   Net investment income

 

 

 

 

 

 

 

 

 

 

3,686

 

 

3,013

   Net realized capital losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Total other-than-temporary impairments on available for sale securities

 

 

 

 

 

 

 

 

 

 

(39)

 

 

(209)

      Portion of other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         fixed maturity securities recognized in Other comprehensive income

 

 

 

 

 

 

 

 

 

 

(21)

 

 

7

      Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         securities recognized in net income (loss)

 

 

 

 

 

 

 

 

 

 

(60)

 

 

(202)

      Other realized capital losses

 

 

 

 

 

 

 

 

 

 

(55)

 

 

(904)

         Total net realized capital losses

 

 

 

 

 

 

 

 

 

 

(115)

 

 

(1,106)

   Other income

 

 

 

 

 

 

 

 

 

 

555

 

 

379

Total revenues

 

 

 

 

 

 

 

 

 

 

12,632

 

 

11,779

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Policyholder benefits and losses incurred

 

 

 

 

 

 

 

 

 

 

6,047

 

 

6,387

   Interest credited to policyholder account balances

 

 

 

 

 

 

 

 

 

 

910

 

 

950

   Amortization of deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

1,108

 

 

1,262

   General operating and other expenses

 

 

 

 

 

 

 

 

 

 

2,443

 

 

3,003

   Interest expense

 

 

 

 

 

 

 

 

 

 

298

 

 

306

   (Gain) loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

(1)

 

 

83

   Net loss on sale of properties and divested businesses

 

 

 

 

 

 

 

 

 

 

100

 

 

2

Total benefits, losses and expenses

 

 

 

 

 

 

 

 

 

 

10,905

 

 

11,993

Income (loss) from continuing operations before income tax expense (benefit)

 

 

 

 

 

 

 

1,727

 

 

(214)

Income tax expense (benefit)

 

 

 

 

 

 

 

 

 

 

516

 

 

(58)

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

1,211

 

 

(156)

Loss from discontinued operations, net of income tax expense

 

 

 

 

 

 

 

 

 

 

-

 

 

(47)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

1,211

 

 

(203)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   noncontrolling interests

 

 

 

 

 

 

 

 

 

 

26

 

 

(20)

Net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

$

1,185

 

$

(183)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

$

1.21

 

$

(0.12)

      Loss from discontinued operations

 

 

 

 

 

 

 

 

 

$

-

 

$

(0.04)

      Net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

$

1.21

 

$

(0.16)

   Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

$

1.18

 

$

(0.12)

      Loss from discontinued operations

 

 

 

 

 

 

 

 

 

$

-

 

$

(0.04)

      Net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

$

1.18

 

$

(0.16)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

 

 

 

 

 

 

 

 

980,777,243

 

 

1,156,548,459

   Diluted

 

 

 

 

 

 

 

 

 

 

1,005,315,030

 

 

1,156,548,459

Dividends declared per common share

 

 

 

 

 

 

 

 

 

$

0.320

 

$

0.320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

Three Months Ended March 31,

(in millions)

 

2017

 

 

2016

Net income (loss)

$

1,211

 

$

(203)

Other comprehensive income, net of tax

 

 

 

 

 

   Change in unrealized appreciation (depreciation) of fixed maturity securities on

 

 

 

 

 

      which other-than-temporary credit impairments were recognized

 

114

 

 

(349)

   Change in unrealized appreciation of all other investments

 

695

 

 

3,427

   Change in foreign currency translation adjustments

 

(276)

 

 

(92)

   Change in retirement plan liabilities adjustment

 

18

 

 

2

Other comprehensive income

 

551

 

 

2,988

Comprehensive income

 

1,762

 

 

2,785

Comprehensive income (loss) attributable to noncontrolling interests

 

26

 

 

(20)

Comprehensive income attributable to AIG

$

1,736

 

$

2,805

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

(in millions)

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Interests

 

Equity

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(41,471)

$

81,064

$

28,711

$

3,230

$

76,300

$

558

$

76,858

Common stock issued under stock plans

 

-

 

139

 

(302)

 

-

 

-

 

(163)

 

-

 

(163)

Purchase of common stock

 

-

 

(3,585)

 

-

 

-

 

-

 

(3,585)

 

-

 

(3,585)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

1,185

 

-

 

1,185

 

26

 

1,211

Dividends

 

-

 

-

 

-

 

(307)

 

-

 

(307)

 

-

 

(307)

Other comprehensive income

 

-

 

-

 

-

 

-

 

551

 

551

 

-

 

551

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

39

 

39

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(37)

 

(37)

Other

 

-

 

2

 

84

 

2

 

-

 

88

 

12

 

100

Balance, end of period

$

4,766

$

(44,915)

$

80,846

$

29,591

$

3,781

$

74,069

$

598

$

74,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(30,098)

$

81,510

$

30,943

$

2,537

$

89,658

$

552

$

90,210

Purchase of common stock

 

-

 

(3,486)

 

-

 

-

 

-

 

(3,486)

 

-

 

(3,486)

Net loss attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

(183)

 

-

 

(183)

 

(20)

 

(203)

Dividends

 

-

 

-

 

-

 

(363)

 

-

 

(363)

 

-

 

(363)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

2,988

 

2,988

 

-

 

2,988

Current and deferred income taxes

 

-

 

-

 

2

 

-

 

-

 

2

 

-

 

2

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

33

 

33

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

2

 

2

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(2)

 

(2)

Other

 

-

 

-

 

(97)

 

(1)

 

-

 

(98)

 

(2)

 

(100)

Balance, end of period

$

4,766

$

(33,584)

$

81,415

$

30,396

$

5,525

$

88,518

$

563

$

89,081

See accompanying Notes to Condensed Consolidated Financial Statements.

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

Three Months Ended March 31,

(in millions)

 

2017

 

2016

Cash flows from operating activities:

 

 

 

 

Net Income (loss)

$

1,211

$

(203)

Loss from discontinued operations

 

-

 

47

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

Noncash revenues, expenses, gains and losses included in income (loss):

 

 

 

 

Net (gains) losses on sales of securities available for sale and other assets

 

(112)

 

204

Net loss on sale of divested businesses

 

100

 

2

(Gains) losses on extinguishment of debt

 

(1)

 

83

Unrealized (gains) losses in earnings - net

 

(226)

 

672

Equity in (income) loss from equity method investments, net of dividends or distributions

 

(119)

 

346

Depreciation and other amortization

 

1,012

 

1,197

Impairments of assets

 

173

 

450

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

401

 

8

Premiums and other receivables and payables - net

 

(189)

 

(861)

Reinsurance assets and funds held under reinsurance treaties

 

(12,237)

 

(846)

Capitalization of deferred policy acquisition costs

 

(1,201)

 

(1,360)

Current and deferred income taxes - net

 

446

 

(109)

Other, net

 

383

 

(598)

Total adjustments

 

(11,570)

 

(812)

Net cash used in operating activities

 

(10,359)

 

(968)

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

15,307

 

5,710

Other securities

 

888

 

1,681

Other invested assets

 

1,826

 

1,649

Divested businesses, net

 

24

 

-

Maturities of fixed maturity securities available for sale

 

7,145

 

6,069

Principal payments received on and sales of mortgage and other loans receivable

 

1,543

 

1,133

Purchases of:

 

 

 

 

Available for sale securities

 

(10,028)

 

(12,454)

Other securities

 

(185)

 

(173)

Other invested assets

 

(783)

 

(743)

Mortgage and other loans receivable

 

(2,181)

 

(2,432)

Net change in restricted cash

 

(22)

 

(59)

Net change in short-term investments

 

1,250

 

(577)

Other, net

 

(297)

 

581

Net cash provided by investing activities

 

14,487

 

385

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

4,002

 

4,812

Policyholder contract withdrawals

 

(3,682)

 

(3,178)

Issuance of long-term debt

 

151

 

3,289

Repayments of long-term debt

 

(602)

 

(958)

Purchase of common stock

 

(3,585)

 

(3,486)

Dividends paid

 

(307)

 

(363)

Other, net

 

(25)

 

337

Net cash provided by (used in) financing activities

 

(4,048)

 

453

Effect of exchange rate changes on cash

 

(82)

 

-

Net decrease in cash

 

(2)

 

(130)

Cash at beginning of year

 

1,868

 

1,629

Change in cash of businesses held for sale

 

52

 

-

Cash at end of period

$

1,918

$

1,499

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

354

$

362

Taxes

$

68

$

39

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

824

$

913

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

1. Basis of Presentation

American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 80 countries and jurisdictions. AIG companies serve commercial and individual customers through one of the most extensive worldwide property‑casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG) and the Tokyo Stock Exchange. Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.

These unaudited Condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited Consolidated Financial Statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the 2016 Annual Report). The condensed consolidated financial information as of December 31, 2016 included herein has been derived from the audited Consolidated Financial Statements in the 2016 Annual Report.

Certain of our foreign subsidiaries included in the Condensed Consolidated Financial Statements report on different fiscal-period bases. The effect on our consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these Condensed Consolidated Financial Statements has been considered for adjustment and/or disclosure. In the opinion of management, these Condensed Consolidated Financial Statements contain normal recurring adjustments, including eliminations of material intercompany accounts and transactions, necessary for a fair statement of the results presented herein.

Interim-period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to March 31, 2017 and prior to the issuance of these Condensed Consolidated Financial Statements.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and assumptions are considered our critical accounting estimates and are related to the determination of:

     income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset;

     liability for unpaid losses and loss adjustment expenses (loss reserves);

     reinsurance assets;

     valuation of future policy benefit liabilities and timing and extent of loss recognition;

     valuation of liabilities for guaranteed benefit features of variable annuity products;

     estimated gross profits to value deferred policy acquisition costs for investment-oriented products;

     impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets, including investments in life settlements, and goodwill impairment;

     liability for legal contingencies; and

     fair value measurements of certain financial assets and liabilities.

These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.

2. Summary of Significant Accounting Policies

Accounting Standards Adopted During 2017

Derivative Contract Novations

In March 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard that clarifies that a change in the counterparty (novation) to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. 

We adopted the standard on its required effective date of January 1, 2017. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Contingent Put and Call Options in Debt Instruments

In March 2016, the FASB issued an accounting standard that clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The standard requires an evaluation of embedded call (put) options solely on a four-step decision sequence that requires an entity to consider whether (1) the amount paid upon settlement is adjusted based on changes in an index, (2) the amount paid upon settlement is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount and (4) the put or call option is contingently exercisable.

We adopted the standard on its required effective date of January 1, 2017. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Simplifying the Transition to the Equity Method of Accounting

In March 2016, the FASB issued an accounting standard that eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods during which the investment had been held.

We adopted the standard on its required effective date of January 1, 2017. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Interest Held through Related Parties that are under Common Control

In October 2016, the FASB issued an accounting standard that amends the consolidation analysis for a reporting entity that is the single decision maker of a variable interest entity (VIE).  The new guidance will require the decision maker’s evaluation of its interests held through related parties that are under common control on a proportionate basis (rather than in their entirety) when determining whether it is the primary beneficiary of that VIE.  The amendment does not change the characteristics of a primary beneficiary.

We adopted the standard on its required effective date of January 1, 2017. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Future Application of Accounting Standards

Revenue Recognition

In May 2014, the FASB issued an accounting standard that supersedes most existing revenue recognition guidance. The standard excludes from its scope the accounting for insurance contracts, leases, financial instruments, and certain other agreements that are governed under other GAAP guidance, but could affect the revenue recognition for certain of our other activities.

The standard is effective on January 1, 2018 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. Early adoption is permitted as of January 1, 2017, including interim periods. We are currently evaluating the impact to our revenue sources that are in scope of the standard. However, as the majority of our revenue sources are not in scope of the standard, we do not expect the adoption of the standard to have a material effect on our reported consolidated financial condition, results of operations or cash flows

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued an accounting standard that will require equity investments that do not follow the equity method of accounting or are not subject to consolidation to be measured at fair value with changes in fair value recognized in earnings, while financial liabilities for which fair value option accounting has been elected, changes in fair value due to instrument-specific credit risk will be presented separately in other comprehensive income. The standard allows the election to record equity investments without readily determinable fair values at cost, less impairment, adjusted for subsequent observable price changes with changes in the carrying value of the equity investments recorded in earnings. The standard also updates certain fair value disclosure requirements for financial instruments carried at amortized cost.

The standard is effective on January 1, 2018, with early adoption of certain provisions permitted.  We are assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.

Leases

In February 2016, the FASB issued an accounting standard that will require lessees with lease terms of more than 12 months to recognize a right of use asset and a corresponding lease liability on their balance sheets. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating leases or finance leases.

The standard is effective on January 1, 2019, with early adoption permitted using a modified retrospective approach. We are assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows. We are currently quantifying the expected gross up of our balance sheet for a right to use asset and a lease liability as required by the standard.

Financial Instruments - Credit Losses

In June 2016, the FASB issued an accounting standard that will change how entities account for credit losses for most financial assets, trade receivables and reinsurance receivables.  The standard will replace the existing incurred loss impairment model with a new “current expected credit loss model” and will apply to financial assets subject to credit losses, those trade receivables measured at amortized cost, reinsurance receivables and certain off-balance sheet credit exposures.  The impairment for available-for-sale debt securities, including purchase credit deteriorated securities, will be measured in a similar manner, except that losses will be recognized as allowances rather than reductions in the amortized cost of the securities.  The standard will also require additional information to be disclosed in the footnotes.

The standard is effective on January 1, 2020, with early adoption permitted on January 1, 2019.  We are assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows, but we expect an increase in our allowances for credit losses.  The amount of the increase will be impacted by our portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued an accounting standard that addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide clarity on the treatment of eight specifically defined types of cash inflows and outflows. The standard is effective on January 1, 2018, with early adoption permitted as long as all amendments are included in the same period.

The standard addresses presentation in the statement of cash flows only and will have no effect on our reported consolidated financial condition or results of operations.

Intra-Entity Transfers of Assets Other than Inventory

In October 2016, the FASB issued an accounting standard that will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to a third party.

The standard is effective on January 1, 2018, with early adoption permitted.  We are assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.   

Restricted Cash

In November 2016, the FASB issued an accounting standard that provides guidance on the presentation of restricted cash in the Statement of Cash Flows.  Entities will be required to explain the changes during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents in the statement of cash flows. 

The standard is effective on January 1, 2018, with early adoption permitted. The standard addresses presentation of restricted cash in the Statement of Cash Flows only and will have no effect on our reported consolidated financial condition or results of operations.

Clarifying the Definition of a Business

In January 2017, the FASB issued an accounting standard that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The new standard will require an entity to evaluate if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar assets; if so, the set of transferred assets and activities is not a business.  At a minimum, a set must include an input and a substantive process that together significantly contribute to the ability to create output. 

The standard is effective on January 1, 2018, with early adoption permitted.  We are assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.  Because the standard requires prospective adoption, the impact is dependent on future acquisitions, dispositions and those entities that we consolidate due to obtaining a controlling financial interest.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued an accounting standard that eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value not to exceed the total amount of goodwill allocated to that reporting unit.  An entity should also consider income tax effects from tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  

The standard is effective on January 1, 2020 with early adoption permitted on testing dates after January 1, 2017.  We are currently reviewing the standard and assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.

Gains and Losses from the Derecognition of Nonfinancial Assets

In February 2017, the FASB issued an accounting standard that clarifies the scope and application of Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets, to the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The standard clarifies that a parent transferring its ownership interest in a consolidated subsidiary is within the scope of the accounting standard if substantially all of the fair value of the assets within that subsidiary are nonfinancial assets. The standard also clarifies that the derecognition of all businesses and nonprofit activities should be accounted for in accordance with the derecognition and deconsolidation guidance. The standard also eliminates the exception in the financial asset guidance for transfers of investments (including equity method investments) in real estate entities. An entity is required to apply the amendments in this update at the same time that it applies the amendments in revenues from contracts with customers. 

The standard is effective on January 1, 2018 and may be applied retrospectively to each period presented or through a cumulative effect adjustment to retained earnings at the date of adoption (modified retrospective approach). Early adoption is permitted as of January 1, 2017, including interim periods. We are currently reviewing the standard and assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.

Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost

In March 2017, the FASB issued an accounting standard that requires entities to report the service cost component of net periodic pension and postretirement benefit costs in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit costs are required to be separately presented in the income statement. The amendments also allow only the service cost component to be eligible for capitalization when applicable.

The standard is effective on January 1, 2018, with early adoption permitted. The amendments should be applied retrospectively for the presentation of the service cost and other components, and prospectively for the capitalization of the service cost component. The standard addresses presentation of net periodic benefit costs in the income statement and will have no effect on our reported consolidated financial condition, results of operations or cash flows.

Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued an accounting standard that shortens the amortization period for certain callable debt securities held at a premium. Specifically, the standard requires the premium to be amortized to the earliest call date.  The standard does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. 

The standard is effective January 1, 2018, with early adoption permitted as of January 1, 2017, including for interim periods. We are currently reviewing the standard and assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.

 

3. Segment Information

We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources.

We report our results of operations as follows:

·      Commercial Insurance business is presented as two operating segments:

-   Liability and Financial Lines

-    Property and Special Risks

·      Consumer Insurance business is presented as four operating segments:

-    Individual Retirement

-    Group Retirement

-    Life Insurance

-    Personal Insurance

·      The Other Operations category consists of:

-    Institutional Markets

-    Income from assets held by AIG Parent and other corporate subsidiaries

-    General operating expenses not attributable to specific reporting segments

-    Interest expense

-    United Guaranty — The sale of this business was completed on December 31, 2016 

-    Fuji Life — On November 14, 2016, we entered into an agreement to sell our Japan life insurance business, AIG Fuji Life Insurance Company, Ltd. (Fuji Life), to FWD Group, the insurance arm of Pacific Century Group. The sale of this business was completed on April 30, 2017.

·      The Legacy Portfolio segment consists of:

-    Legacy Property and Casualty Run-Off Insurance Lines

-    Legacy Life Insurance Run-Off Lines

-    Legacy Investments

We evaluate segment performance based on operating revenues and pre-tax operating income (loss).  Operating revenues and pre-tax operating income (loss) is derived by excluding certain items from total revenues and net income (loss) attributable to AIG, respectively. See the table below for the items excluded from operating revenues and pre-tax operating income (loss).

The following table presents AIG’s continuing operations by operating segment:

Three Months Ended March 31,

2017

 

2016

 

 

 

 

Pre-Tax

 

 

 

 

Pre-Tax

 

 

Total

 

Operating

 

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

2,848

$

574

 

$

3,311

$

569

Property and Special Risks

 

1,835

 

275

 

 

1,987

 

93

      Total Commercial Insurance

 

4,683

 

849

 

 

5,298

 

662

Consumer Insurance

 

 

 

 

 

 

 

 

 

Individual Retirement

 

1,373

 

539

 

 

1,493

 

302

Group Retirement

 

718

 

243

 

 

629

 

191

Life Insurance

 

1,013

 

54

 

 

953

 

1

Personal Insurance

 

2,838

 

212

 

 

2,816

 

210

      Total Consumer Insurance

 

5,942

 

1,048

 

 

5,891

 

704

Other Operations

 

1,090

 

(246)

 

 

998

 

(239)

Legacy Portfolio

 

1,084

 

342

 

 

681

 

(202)

AIG Consolidation and elimination

 

(64)

 

48

 

 

(131)

 

20

Total AIG Consolidated revenues and pre-tax operating income

 

12,735

 

2,041

 

 

12,737

 

945

Reconciling Items from revenues and pre-tax operating income to

 

 

 

 

 

 

 

 

 

revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

11

 

11

 

 

133

 

133

Changes in benefit reserves and DAC, VOBA and SIA related to

 

 

 

 

 

 

 

 

 

net realized capital gains

 

-

 

53

 

 

-

 

40

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

(14)

 

 

-

 

7

Gain (Loss) on extinguishment of debt

 

-

 

1

 

 

-

 

(83)

Net realized capital losses

 

(115)

 

(115)

 

 

(1,106)

 

(1,106)

Loss from divested businesses

 

-

 

(100)

 

 

-

 

(2)

Non-operating litigation reserves and settlements

 

10

 

6

 

 

34

 

31

Net loss reserve discount benefit (charge)

 

-

 

25

 

 

-

 

9

Restructuring and other costs

 

-

 

(181)

 

 

-

 

(188)

Other

 

(9)

 

-

 

 

(19)

 

-

Revenues and Pre-tax income (loss)

$

12,632

$

1,727

 

$

11,779

$

(214)

4. Held-For-Sale Classification

Held-For-Sale Classification

We report a business as held-for-sale when management has approved the sale or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next 12 months and certain other specified criteria are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized.

Assets and liabilities related to the businesses classified as held-for-sale are separately reported in our Consolidated Balance Sheets beginning in the period in which the business is classified as held-for-sale.

At March 31, 2017, the following businesses were reported as held-for-sale:

United Guaranty Asia

On August 15, 2016, we entered into a definitive agreement to sell our 100 percent interest in United Guaranty Corporation (UGC) and certain related affiliates to Arch Capital Group Ltd. (Arch). This transaction closed on December 31, 2016 and we received proceeds of approximately $3.3 billion, consisting of $2.2 billion of cash, and approximately $1.1 billion of newly issued Arch convertible non-voting common-equivalent preferred stock. We also received $261 million in pre-closing dividends from UGC in the fourth quarter of 2016.  However, due to pending regulatory approvals, United Guaranty Asia was not included in the December 31, 2016 closing and $40 million of cash consideration was retained by Arch. The closing with respect to United Guaranty Asia is expected to occur prior to year-end 2017, at which time AIG will receive the remaining consideration. 

Sale of Certain Insurance Subsidiary Operations to Fairfax

On October 18, 2016, we entered into agreements to sell certain insurance operations to Fairfax Financial Holdings Limited (Fairfax). The agreements include the sale of our subsidiary operations in Argentina, Chile, Colombia, Uruguay and Venezuela, as well as insurance operations in Turkey. Fairfax will also acquire renewal rights for the portfolios of local business written by our operations in Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovakia, and assume certain of our operating assets and employees. Total cash consideration to us is expected to be approximately $234 million. The closing of the sales in Czech Republic, Hungary and Slovakia occurred on April 30, 2017, and the sale of the operations in Turkey closed on May 2, 2017. The remaining sales are subject to obtaining the relevant regulatory approvals and other customary closing conditions.

AIG Fuji Life Insurance

On November 14, 2016, we entered into an agreement to sell Fuji Life to FWD Group, the insurance arm of Pacific Century Group. The transaction closed on April 30, 2017.

The following table summarizes the components of assets and liabilities held-for-sale on the Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016:

 

 

March 31,

December 31,

(in millions)

 

2017

 

2016

Assets:

 

 

 

 

   Fixed maturity securities

$

5,438

$

6,045

   Equity securities

 

14

 

149

   Mortgage and other loans receivable, net

 

121

 

137

   Other invested assets

 

244

 

2

   Short-term investments

 

181

 

130

   Cash

 

81

 

133

Accrued investment income

 

22

 

21

   Premiums and other receivables, net of allowance

 

393

 

351

Reinsurance assets, net of allowance

 

13

 

8

   Deferred policy acquisition costs

 

422

 

471

   Other assets

 

264

 

273

Assets of businesses held for sale

 

7,193

 

7,720

Less: Loss Accrual

 

(605)

 

(521)

Total assets held for sale

$

6,588

$

7,199

Liabilities:

 

 

 

 

   Liability for unpaid losses and loss adjustment expenses

$

489

$

402

   Unearned premiums

 

333

 

297

Future policy benefits for life and accident and health insurance contracts

 

4,140

 

4,579

Other policyholder funds

 

327

 

378

   Long-term debt

 

108

 

-

   Other liabilities

 

374

 

450

Total liabilities held for sale

$

5,771

$

6,106

5. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three “levels” based on the observability of valuation inputs:

     Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities.  Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.

     Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

     Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:

March 31, 2017

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

51

$

2,311

$

-

$

-

$

-

$

2,362

Obligations of states, municipalities and political subdivisions

 

-

 

17,662

 

2,041

 

-

 

-

 

19,703

Non-U.S. governments

 

183

 

14,108

 

16

 

-

 

-

 

14,307

Corporate debt

 

-

 

128,251

 

1,079

 

-

 

-

 

129,330

RMBS

 

-

 

18,800

 

16,487

 

-

 

-

 

35,287

CMBS

 

-

 

12,606

 

1,003

 

-

 

-

 

13,609

CDO/ABS

 

-

 

8,345

 

7,755

 

-

 

-

 

16,100

Total bonds available for sale

 

234

 

202,083

 

28,381

 

-

 

-

 

230,698

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

2,931

 

-

 

-

 

-

 

2,931

Non-U.S. governments

 

-

 

50

 

-

 

-

 

-

 

50

Corporate debt

 

-

 

1,755

 

18

 

-

 

-

 

1,773

RMBS

 

-

 

469

 

1,502

 

-

 

-

 

1,971

CMBS

 

-

 

471

 

65

 

-

 

-

 

536

CDO/ABS

 

-

 

836

 

5,508

 

-

 

-

 

6,344

Total other bond securities

 

-

 

6,512

 

7,093

 

-

 

-

 

13,605

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

978

 

-

 

8

 

-

 

-

 

986

Preferred stock

 

825

 

-

 

-

 

-

 

-

 

825

Mutual funds

 

286

 

2

 

-

 

-

 

-

 

288

Total equity securities available for sale

 

2,089

 

2

 

8

 

-

 

-

 

2,099

Other equity securities

 

500

 

-

 

-

 

-

 

-

 

500

Mortgage and other loans receivable

 

-

 

-

 

11

 

-

 

-

 

11

Other invested assets(a)

 

-

 

404

 

180

 

-

 

-

 

584

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

2,349

 

-

 

-

 

-

 

2,349

Foreign exchange contracts

 

-

 

1,111

 

-

 

-

 

-

 

1,111

Equity contracts

 

274

 

111

 

62

 

-

 

-

 

447

Credit contracts

 

-

 

-

 

2

 

-

 

-

 

2

Other contracts

 

-

 

4

 

17

 

-

 

-

 

21

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,269)

 

(1,414)

 

(2,683)

Total derivative assets

 

274

 

3,575

 

81

 

(1,269)

 

(1,414)

 

1,247

Short-term investments

 

2,110

 

343

 

-

 

-

 

-

 

2,453

Separate account assets

 

80,323

 

5,594

 

-

 

-

 

-

 

85,917

Total

$

85,530

$

218,513

$

35,754

$

(1,269)

$

(1,414)

$

337,114

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

25

$

3,072

$

-

$

-

$

3,097

Other policyholder funds

 

5

 

-

 

-

 

-

 

-

 

5

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

2

 

2,481

 

32

 

-

 

-

 

2,515

Foreign exchange contracts

 

-

 

1,099