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, 2018

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 April 30, 2018, there were 897,683,367 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, 2018

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

8

 

Note 2.

Summary of Significant Accounting Policies

9

 

Note 3.

Segment Information

12

 

Note 4.

Fair Value Measurements

14

 

Note 5.

Investments

28

 

Note 6.

Lending Activities

37

 

Note 7.

Variable Interest Entities

39

 

Note 8.

Derivatives and Hedge Accounting

40

 

Note 9.

Insurance Liabilities

44

 

Note 10.

Contingencies, Commitments and Guarantees

46

 

Note 11.

Equity

49

 

Note 12.

Earnings Per Share

52

 

Note 13.  

Employee Benefits

53

 

Note 14.

Income Taxes

54

 

Note 15.

Information Provided in Connection with Outstanding Debt

58

 

Note 16.

Subsequent Events

62

ITEM 2

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

  

 

Operations

63

 

     Cautionary Statement Regarding Forward-Looking Information

63

 

     Use of Non-GAAP Measures

65

 

     Critical Accounting Estimates

67

 

     Executive Summary

68

 

     Consolidated Results of Operations

76

 

     Business Segment Operations

80

 

     Investments

107

 

     Insurance Reserves

119

 

     Liquidity and Capital Resources

127

 

     Enterprise Risk Management

140

 

     Regulatory Environment

147

 

     Glossary

148

 

     Acronyms

151

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

152  

ITEM 4

Controls and Procedures

152  

Part II — Other Information
 

ITEM 1

Legal Proceedings

153  

ITEM 1A

Risk Factors

153

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

153

ITEM 4

Mine Safety Disclosures

153

ITEM 6

Exhibits

154  

Signatures
155  

 

 

 

 

AIG | First Quarter 2018 Form 10-Q           1

 


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)

 

2018

 

2017

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value (amortized cost: 2018 - $225,352; 2017 - $225,461)

$

233,914

$

238,992

Other bond securities, at fair value (See  Note 5

 

12,397

 

12,772

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2017 - $1,305)

 

-

 

1,708

Other common and preferred stock, at fair value (See Note 5

 

1,725

 

589

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2018 - $0; 2017 - $5)

 

38,540

 

37,023

Other invested assets (portion measured at fair value: 2018 - $6,232; 2017 - $6,248)

 

21,183

 

20,822

Short-term investments, including restricted cash of 2018 - $47; 2017 - $58

 

 

 

 

(portion measured at fair value: 2018 - $3,094; 2017 - $2,615)

 

14,616

 

10,386

Total investments

 

322,375

 

322,292

 

 

 

 

 

Cash

 

2,103

 

2,362

Accrued investment income

 

2,390

 

2,356

Premiums and other receivables, net of allowance

 

11,107

 

10,248

Reinsurance assets, net of allowance

 

34,744

 

33,024

Deferred income taxes

 

14,558

 

14,033

Deferred policy acquisition costs

 

11,631

 

10,994

Other assets, including restricted cash of $221 in 2018 and $317 in 2017

 

 

 

 

(portion measured at fair value: 2018 - $774; 2017 - $922)

 

9,646

 

10,194

Separate account assets, at fair value

 

90,589

 

92,798

Total assets

$

499,143

$

498,301

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

78,098

$

78,393

Unearned premiums

 

20,038

 

19,030

Future policy benefits for life and accident and health insurance contracts

 

44,895

 

45,432

Policyholder contract deposits (portion measured at fair value: 2018 - $3,711; 2017 - $4,150)

 

138,153

 

135,602

Other policyholder funds

 

3,473

 

3,648

Other liabilities (portion measured at fair value: 2018 - $1,158; 2017 - $1,124)

 

26,921

 

26,050

Long-term debt (portion measured at fair value: 2018 - $2,820; 2017 - $2,888)

 

33,619

 

31,640

Separate account liabilities

 

90,589

 

92,798

Total liabilities

 

435,786

 

432,593

Contingencies, commitments and guarantees (See Note 10

 

 

 

 

 

 

 

 

 

AIG shareholders’ equity:

 

 

 

 

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2018 - 1,906,671,492 and

 

 

 

 

2017 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2018 - 1,008,989,984 shares; 2017 - 1,007,626,835 shares of common stock

 

(47,706)

 

(47,595)

Additional paid-in capital

 

80,841

 

81,078

Retained earnings

 

22,671

 

21,457

Accumulated other comprehensive income

 

2,220

 

5,465

Total AIG shareholders’ equity

 

62,792

 

65,171

Non-redeemable noncontrolling interests

 

565

 

537

Total equity

 

63,357

 

65,708

Total liabilities and equity

$

499,143

$

498,301

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2           AIG | First Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Income (unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(dollars in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Premiums

 

 

 

 

 

 

 

 

 

$

7,275

 

$

7,782

   Policy fees

 

 

 

 

 

 

 

 

 

 

764

 

 

724

   Net investment income

 

 

 

 

 

 

 

 

 

 

3,261

 

 

3,686

   Net realized capital losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

(75)

 

 

(39)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         fixed maturity securities recognized in Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

(12)

 

 

(21)

      Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         securities recognized in net income

 

 

 

 

 

 

 

 

 

 

(87)

 

 

(60)

      Other realized capital gains (losses)

 

 

 

 

 

 

 

 

 

 

68

 

 

(55)

         Total net realized capital losses

 

 

 

 

 

 

 

 

 

 

(19)

 

 

(115)

   Other income

 

 

 

 

 

 

 

 

 

 

431

 

 

555

Total revenues

 

 

 

 

 

 

 

 

 

 

11,712

 

 

12,632

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Policyholder benefits and losses incurred

 

 

 

 

 

 

 

 

 

 

5,667

 

 

6,047

   Interest credited to policyholder account balances

 

 

 

 

 

 

 

 

 

 

916

 

 

910

   Amortization of deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

1,358

 

 

1,108

   General operating and other expenses

 

 

 

 

 

 

 

 

 

 

2,271

 

 

2,443

   Interest expense

 

 

 

 

 

 

 

 

 

 

277

 

 

298

   (Gain) loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

4

 

 

(1)

   Net (gain) loss on sale of divested businesses

 

 

 

 

 

 

 

 

 

 

(8)

 

 

100

Total benefits, losses and expenses

 

 

 

 

 

 

 

 

 

 

10,485

 

 

10,905

Income from continuing operations before income tax expense

 

 

 

 

 

 

 

1,227

 

 

1,727

Income tax expense

 

 

 

 

 

 

 

 

 

 

277

 

 

516

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

950

 

 

1,211

Income (loss) from discontinued operations, net of income tax expense

 

 

 

 

 

 

 

 

 

 

(1)

 

 

-

Net income

 

 

 

 

 

 

 

 

 

 

949

 

 

1,211

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   noncontrolling interests

 

 

 

 

 

 

 

 

 

 

11

 

 

26

Net income attributable to AIG

 

 

 

 

 

 

 

 

 

$

938

 

$

1,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income from continuing operations

 

 

 

 

 

 

 

 

 

$

1.03

 

$

1.21

      Income from discontinued operations

 

 

 

 

 

 

 

 

 

$

-

 

$

-

      Net income attributable to AIG

 

 

 

 

 

 

 

 

 

$

1.03

 

$

1.21

   Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Income from continuing operations

 

 

 

 

 

 

 

 

 

$

1.01

 

$

1.18

      Income from discontinued operations

 

 

 

 

 

 

 

 

 

$

-

 

$

-

      Net income attributable to AIG

 

 

 

 

 

 

 

 

 

$

1.01

 

$

1.18

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

 

 

 

 

 

 

 

 

 

907,951,597

 

 

980,777,243

   Diluted

 

 

 

 

 

 

 

 

 

 

925,266,577

 

 

1,005,315,030

Dividends declared per common share

 

 

 

 

 

 

 

 

 

$

0.32

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

AIG | First Quarter 2018 Form 10-Q           3

 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

Three Months Ended March 31,

(in millions)

 

2018

 

 

2017

Net income

$

949

 

$

1,211

Other comprehensive income (loss), net of tax

 

 

 

 

 

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

 

 

 

 

 

other-than-temporary credit impairments were taken

 

(150)

 

 

114

   Change in unrealized appreciation (depreciation) of all other investments

 

(2,708)

 

 

695

   Change in foreign currency translation adjustments

 

158

 

 

(276)

   Change in retirement plan liabilities adjustment

 

29

 

 

18

Change in fair value of liabilities under fair value option attributable to changes in own credit risk

 

2

 

 

-

Other comprehensive income (loss)

 

(2,669)

 

 

551

Comprehensive income (loss)

 

(1,720)

 

 

1,762

Comprehensive income attributable to noncontrolling interests

 

11

 

 

26

Comprehensive income (loss) attributable to AIG

$

(1,731)

 

$

1,736

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

4           AIG | First Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

 

 

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, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(47,595)

$

81,078

$

21,457

$

5,465

$

65,171

$

537

$

65,708

Cumulative effect of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle, net of tax

 

-

 

-

 

-

 

568

 

(576)

 

(8)

 

-

 

(8)

Common stock issued under stock plans

 

-

 

186

 

(336)

 

-

 

-

 

(150)

 

-

 

(150)

Purchase of common stock

 

-

 

(298)

 

-

 

-

 

-

 

(298)

 

-

 

(298)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

938

 

-

 

938

 

11

 

949

Dividends

 

-

 

-

 

-

 

(289)

 

-

 

(289)

 

-

 

(289)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

(2,669)

 

(2,669)

 

-

 

(2,669)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

36

 

36

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

10

 

10

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(25)

 

(25)

Other

 

-

 

1

 

99

 

(3)

 

-

 

97

 

(4)

 

93

Balance, end of period

$

4,766

$

(47,706)

$

80,841

$

22,671

$

2,220

$

62,792

$

565

$

63,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (loss)

 

-

 

-

 

-

 

-

 

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

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | First Quarter 2018 Form 10-Q           5

 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

Three Months Ended March 31,

(in millions)

 

2018

 

2017

Cash flows from operating activities:

 

 

 

 

Net income

$

949

$

1,211

(Income) loss from discontinued operations

 

1

 

-

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

Noncash revenues, expenses, gains and losses included in income:

 

 

 

 

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

 

(120)

 

(112)

Net (gain) loss on sale of divested businesses

 

(8)

 

100

(Gains) losses on extinguishment of debt

 

4

 

(1)

Unrealized (gains) losses in earnings - net

 

268

 

(226)

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

 

(86)

 

(109)

Depreciation and other amortization

 

1,382

 

1,012

Impairments of assets

 

105

 

173

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

137

 

401

Premiums and other receivables and payables - net

 

400

 

(189)

Reinsurance assets and funds held under reinsurance treaties

 

(1,706)

 

(12,237)

Capitalization of deferred policy acquisition costs

 

(1,397)

 

(1,201)

Current and deferred income taxes - net

 

250

 

446

Other, net

 

(1,117)

 

396

Total adjustments

 

(1,888)

 

(11,547)

Net cash used in operating activities

 

(938)

 

(10,336)

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

5,638

 

15,307

Other securities

 

1,385

 

888

Other invested assets

 

1,064

 

1,816

Divested businesses, net

 

6

 

24

Maturities of fixed maturity securities available for sale

 

5,347

 

7,145

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

 

1,037

 

1,543

Purchases of:

 

 

 

 

Available for sale securities

 

(9,042)

 

(10,028)

Other securities

 

(384)

 

(185)

Other invested assets

 

(847)

 

(783)

Mortgage and other loans receivable

 

(2,490)

 

(2,181)

Net change in short-term investments

 

(3,040)

 

1,250

Other, net

 

(646)

 

(297)

Net cash provided by (used in) investing activities

 

(1,972)

 

14,499

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

7,069

 

4,002

Policyholder contract withdrawals

 

(4,160)

 

(3,682)

Issuance of long-term debt

 

3,039

 

151

Repayments of long-term debt

 

(1,327)

 

(602)

Purchase of common stock

 

(298)

 

(3,585)

Dividends paid

 

(289)

 

(307)

Other, net

 

(1,548)

 

(25)

Net cash provided by (used in) financing activities

 

2,486

 

(4,048)

Effect of exchange rate changes on cash and restricted cash

 

58

 

(82)

Net increase (decrease) in cash and restricted cash

 

(366)

 

33

Cash and restricted cash at beginning of year

 

2,737

 

2,107

Change in cash of businesses held for sale

 

-

 

52

Cash and restricted cash at end of period

$

2,371

$

2,192

6           AIG | First Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)(continued)

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

Three Months Ended March 31,

 

 

2018

 

2017

Cash

$

2,103

$

1,918

Restricted cash included in Short-term investments*

 

47

 

61

Restricted cash included in Other assets*

 

221

 

213

Total cash and restricted cash shown in the Condensed Consolidated Statements of Cash Flows

$

2,371

$

2,192

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

357

$

354

Taxes

$

28

$

68

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

825

$

824

 

 

 

 

 

*    Includes funds held for tax sharing payments to AIG Parent, security deposits for certain leased aircraft and escrow funds, security deposits and replacement reserve deposits related to our affordable housing investments.

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

AIG | First Quarter 2018 Form 10-Q           7

 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  1. Basis of Presentation

 

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, 2017 (the 2017 Annual Report). The condensed consolidated financial information as of December 31, 2017 included herein has been derived from the audited Consolidated Financial Statements in the 2017 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, 2018 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:

     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;

     allowances for loan losses;

     liability for legal contingencies;

     fair value measurements of certain financial assets and liabilities; and

     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 and provisional estimates associated with the Tax Act.

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.

8           AIG | First Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  2. Summary of Significant Accounting Policies 

 

2. Summary of Significant Accounting Policies

Accounting Standards Adopted During 2018

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.

We adopted the standard using the modified retrospective approach on its required effective date of January 1, 2018.  Our analysis of revenues indicated that substantially all of our revenues were from sources excluded from the scope of the standard.  For those revenue sources within the scope of the standard, there were no material changes in the timing or measurement of revenues based upon the guidance.  As substantially all of our revenue sources were excluded from the scope of the standard, the adoption of the standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

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.

We adopted the standard on its effective date of January 1, 2018 using the modified retrospective approach. The impact of the adoption is primarily related to the reclassification of unrealized gains of equity securities resulting in a net decrease to beginning Accumulated other comprehensive income and a corresponding net increase to beginning Retained earnings of $824 million.   

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.

We adopted the standard retrospectively on its effective date of January 1, 2018. The standard addresses presentation in the statement of cash flows only and did not have a material impact on our reported consolidated financial condition, results of operations or required disclosures.  

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.

We adopted the standard on its effective date of January 1, 2018 using a modified retrospective approach.  The adoption of this standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

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. 

We adopted the standard retrospectively on its effective date of January 1, 2018. The standard addresses presentation of restricted cash in the Statement of Cash Flows only and had no effect on our reported consolidated financial condition, results of operations or required disclosures.

AIG | First Quarter 2018 Form 10-Q           9

 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  2. Summary of Significant Accounting Policies 

 

Gains and Losses from the Derecognition of Nonfinancial Assets

In February 2017, the FASB issued an accounting standard that clarifies the scope of the derecognition guidance for the sale, transfer and derecognition of non-financial assets to noncustomers that aligns with the new revenue recognition principles.  The standard also adds new accounting for partial sales of nonfinancial assets (including real estate) that requires an entity to derecognize a nonfinancial asset when it 1) ceases to have a controlling financial interest in the legal entity that holds the asset based on the consolidation model and 2) transfers control of the asset based on the revenue recognition model.

We adopted this standard on its effective date of January 1, 2018 under the modified retrospective approach. Based on our evaluation, the standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

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.

We adopted this standard on its effective date of January 1, 2018. The standard primarily addresses the presentation of the service cost component of net periodic benefit costs in the income statement. AIG’s U.S. pension plans are frozen and no longer accrue benefits, which are reflected as service costs. Therefore, the standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Modification of Share-Based Payment Awards

In May 2017, the FASB issued an accounting standard that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  

We prospectively adopted this standard on its effective date of January 1, 2018 and the standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.         

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act). The amount of the reclassification would reflect the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax effects of the Tax Act on items remaining in accumulated other comprehensive income.

We adopted the standard effective January 1, 2018. The impact of the adoption of the standard resulted in an increase to beginning Accumulated other comprehensive income and a corresponding decrease to beginning Retained earnings of $248 million. For more information on the adoption of the Tax Act, see Note 14.          

Future Application of Accounting Standards

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.

We plan to adopt the standard on its effective date of January 1, 2019 using a modified retrospective approach upon adoption. We are currently quantifying the expected recognition on our balance sheet for a right to use asset and a lease liability as required by the standard. We do not expect the impact of the standard to have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

10           AIG | First Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  2. Summary of Significant Accounting Policies 

 

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” that generally will result in earlier recognition of credit losses.  The standard will apply to financial assets subject to credit losses, including loans measured at amortized cost, reinsurance receivables and certain off-balance sheet credit exposures.  Additionally, the impairment of available-for-sale debt securities, including purchased credit deteriorated securities, are subject to the new guidance and 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 continuing to develop our implementation plan to adopt the standard and are assessing the impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.  While we expect an increase in our allowances for credit losses for the financial instruments within scope of the standard, given the objective of the new standard, the amount of any change will be dependent on our portfolios’ composition and quality at the adoption date as well as economic conditions and forecasts at that time.

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, through a hypothetical purchase price allocation, 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. We are evaluating the timing of our adoption. Any impact of the standard will be dependent on the market conditions of the reporting units at the time of adoption.

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 by requiring the premium to be amortized to the earliest call date.  The standard does not require an accounting change for securities held at a discount, which continue to be amortized to maturity. 

We plan to adopt the standard retrospectively on its effective date, January 1, 2019. We do not expect the standard to have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Derivatives and Hedging

In August 2017, the FASB issued an accounting standard that improves and expands hedge accounting for both financial and commodity risks. The provisions of the amendment are intended to better align the accounting with an entity’s risk management activities, enhance the transparency on how the economic results are presented in the financial statements and the footnote, and simplify the application of hedge accounting treatment.

The standard is effective on January 1, 2019, with early adoption permitted. We are evaluating the timing of adoption and are assessing the impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.                                                       

 

AIG | First Quarter 2018 Form 10-Q           11

 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  3. Segment Information 

 

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, as follows.

General Insurance

General Insurance business is presented as two operating segments:

·      North America — consists of insurance businesses in the United States, Canada and Bermuda.

·      International  — consists of insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America, Puerto Rico, Australia, the Middle East and Africa.

Results are presented before internal reinsurance transactions.  North America and International operating segments consist of the following products:

–     Commercial Lines — consists of Liability, Financial Lines, Property and Special Risks.

–     Personal Insurance — consists of Personal Lines and Accident and Health.

Life and Retirement

Life and Retirement business is presented as four operating segments:

·      Individual Retirement — consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.

·      Group Retirement — consists of group mutual funds, group fixed annuities, group variable annuities, individual annuity and investment products, financial planning and advisory services.

·      Life Insurance — primary products in the U.S. include term life and universal life insurance. International operations include distribution of life and health products in the UK and Ireland.

·      Institutional Markets — consists of stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs).

Other Operations

Other Operations category consists of:

·      Income from assets held by AIG Parent and other corporate subsidiaries.

·      General operating expenses not attributable to specific reporting segments.

·      Interest expense.

·      Blackboard  —  a data-enabled, digital subsidiary that provides the commercial insurance industry with alternative solutions using digital technology, data analytics and automation.

·      Fuji Life — consists of term insurance, life insurance, endowment policies and annuities. The sale of this business was completed on April 30, 2017.

12           AIG | First Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  3. Segment Information 

 

Legacy Portfolio

Legacy Portfolio segment consists of:

Legacy Insurance Lines represent exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our newly formed Bermuda domiciled composite reinsurer, DSA Reinsurance Company, Ltd. (DSA Re) is included in our Legacy Portfolio.

·      Legacy General Insurance Run-Off Lines — consists of asbestos and environmental exposures and other exposures within certain Property and Casualty profit centers no longer actively marketed, including excess workers’ compensation, environmental impairment liability, public entity liability, accident & health, physicians and surgeons professional liability, and various other workers’ compensation and general liability exposures.

·      Legacy Life and Retirement Run-Off Lines — include whole life, long-term care and exited accident & health product lines. Also includes certain structured settlement, pension risk transfer annuities and single premium immediate annuities written prior to April 2012.

·      Legacy Investments include investment classes that we have placed into run-off.

We evaluate segment performance based on adjusted revenues and adjusted pre-tax income (loss). Adjusted revenues and adjusted pre-tax income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG, respectively. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.

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

Three Months Ended March 31,

2018

 

2017

 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

Total

 

Pre-tax

 

 

Total

 

Pre-tax

(in millions)

 

 Revenues 

 

Income (Loss)

 

 

 Revenues 

 

Income (Loss)

General Insurance

 

 

 

 

 

 

 

 

 

North America

$

3,340

$

320

 

$

3,840

$

828

International

 

4,104

 

190

 

 

3,698

 

233

      Total General Insurance

 

7,444

 

510

 

 

7,538

 

1,061

Life and Retirement

 

 

 

 

 

 

 

 

 

Individual Retirement

 

1,361

 

499

 

 

1,373

 

539

Group Retirement

 

761

 

282

 

 

718

 

243

Life Insurance

 

1,061

 

52

 

 

1,013

 

54

Institutional Markets

 

277

 

59

 

 

599

 

62

      Total Life and Retirement

 

3,460

 

892

 

 

3,703

 

898

Other Operations

 

150

 

(342)

 

 

474

 

(308)

Legacy Portfolio

 

836

 

145

 

 

1,084

 

342

AIG Consolidation and elimination

 

(62)

 

11

 

 

(64)

 

48

Total AIG Consolidated adjusted revenues and adjusted pre-tax income

 

11,828

 

1,216

 

 

12,735

 

2,041

Reconciling Items from adjusted pre-tax income to pre-tax income:

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

(77)

 

(77)

 

 

11

 

11

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

 

 

 

 

 

 

 

 

 

net realized capital gains

 

-

 

(31)

 

 

-

 

53

Other income (expense) - net

 

(11)

 

-

 

 

(9)

 

-

Gain (Loss) on extinguishment of debt

 

-

 

(4)

 

 

-

 

1

Net realized capital losses*

 

(29)

 

(19)

 

 

(115)

 

(115)

Income (loss) from divested businesses

 

-

 

8

 

 

-

 

(100)

Non-operating litigation reserves and settlements

 

1

 

(13)

 

 

10

 

6

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

(34)

 

 

-

 

(14)

Net loss reserve discount benefit (charge)

 

-

 

205

 

 

-

 

25

Restructuring and other costs

 

-

 

(24)

 

 

-

 

(181)

Revenues and Pre-tax income

$

11,712

$

1,227

 

$

12,632

$

1,727

*   Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication.

 

AIG | First Quarter 2018 Form 10-Q           13

 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  4. Fair Value Measurements

 

4. 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.

14           AIG | First Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  4. Fair Value Measurements

 

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, 2018

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(a)

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

-

$

2,833

$

-

$

-

$

-

$

2,833

Obligations of states, municipalities and political subdivisions

 

-

 

15,550

 

2,261

 

-

 

-

 

17,811

Non-U.S. governments

 

25

 

15,689

 

9

 

-

 

-

 

15,723

Corporate debt

 

-

 

129,468

 

1,871

 

-

 

-

 

131,339

RMBS

 

-

 

20,050

 

15,839

 

-

 

-

 

35,889

CMBS

 

-

 

13,025

 

584

 

-

 

-

 

13,609

CDO/ABS

 

-

 

8,864

 

7,846

 

-

 

-

 

16,710

Total bonds available for sale

 

25

 

205,479

 

28,410

 

-

 

-

 

233,914

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

594

 

2,183

 

-

 

-

 

-

 

2,777

Non-U.S. governments

 

-

 

54

 

-

 

-

 

-

 

54

Corporate debt

 

-

 

1,784

 

19

 

-

 

-

 

1,803

RMBS

 

-

 

391

 

1,427

 

-

 

-

 

1,818

CMBS

 

-

 

493

 

73

 

-

 

-

 

566

CDO/ABS

 

-

 

603

 

4,776

 

-

 

-

 

5,379

Total other bond securities

 

594

 

5,508

 

6,295

 

-

 

-

 

12,397

Other equity securities(b)

 

1,716

 

6

 

3

 

-

 

-

 

1,725

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

 

-

 

-

Other invested assets(c)

 

5

 

1

 

292

 

-

 

-

 

298

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

2,549

 

-

 

-

 

-

 

2,549

Foreign exchange contracts

 

-

 

792

 

3

 

-

 

-

 

795

Equity contracts

 

48

 

142

 

78

 

-

 

-

 

268

Credit contracts

 

-

 

-

 

2

 

-

 

-

 

2

Other contracts

 

-

 

-

 

17

 

-

 

-

 

17

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,589)

 

(1,268)

 

(2,857)

Total derivative assets

 

48

 

3,483

 

100

 

(1,589)

 

(1,268)

 

774

Short-term investments

 

2,611

 

483

 

-

 

-

 

-

 

3,094

Separate account assets

 

85,362

 

5,227

 

-

 

-

 

-

 

90,589

Total

$

90,361

$

220,187

$

35,100

$

(1,589)

$

(1,268)

$

342,791

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

15

$

3,696

$

-

$

-

$

3,711

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

1

 

2,185

 

17

 

-

 

-

 

2,203

Foreign exchange contracts

 

-

 

1,213

 

4

 

-

 

-

 

1,217

Equity contracts

 

-

 

13

 

-

 

-