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 September 30, 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 every Interactive Data File required to be submitted 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 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

 

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 October 29, 2018, there were 884,648,470 shares outstanding of the registrant’s common stock.

  

 

 

 


 

AMERICAN INTERNATIONAL GROUP, INC.

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

September 30, 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

9

 

Note 2.

Summary of Significant Accounting Policies

10

 

Note 3.

Segment Information

14

 

Note 4

Business Combination

17

 

Note 5.

Fair Value Measurements

18

 

Note 6.

Investments

36

 

Note 7.

Lending Activities

45

 

Note 8.

Variable Interest Entities

47

 

Note 9.

Derivatives and Hedge Accounting

48

 

Note 10.

Insurance Liabilities

53

 

Note 11.

Contingencies, Commitments and Guarantees

56

 

Note 12.

Equity

58

 

Note 13.

Earnings Per Share

63

 

Note 14.  

Employee Benefits

64

 

Note 15.

Income Taxes

65

 

Note 16.

Information Provided in Connection with Outstanding Debt and Preference Shares

70

 

Note 17.

Subsequent Events

76

ITEM 2

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

  

 

Operations

77

 

·        Cautionary Statement Regarding Forward-Looking Information

77

 

·        Use of Non-GAAP Measures

80

 

·        Critical Accounting Estimates

82

 

·        Executive Summary

83

 

·        Consolidated Results of Operations

93

 

·        Business Segment Operations

100

 

·        Investments

136

 

·        Insurance Reserves

149

 

·        Liquidity and Capital Resources

163

 

·        Enterprise Risk Management

175

 

·        Regulatory Environment

182

 

·        Glossary

183

 

·        Acronyms

186

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

187

ITEM 4

Controls and Procedures

187

Part II — Other Information
 

ITEM 1

Legal Proceedings

188

ITEM 1A

Risk Factors

188

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

188

ITEM 4

Mine Safety Disclosures

188

ITEM 5

Other Information

189

ITEM 6

Exhibits

190

Signatures
191

  

 

AIG | Third 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)

 

September 30,

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 - $228,047; 2017 - $225,461)

$

232,720

$

238,992

Other bond securities, at fair value (See  Note 6

 

11,420

 

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 6

 

1,443

 

589

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

 

41,878

 

37,023

Other invested assets (portion measured at fair value: 2018 - $6,144; 2017 - $6,248)

 

19,739

 

20,822

Short-term investments, including restricted cash of 2018 - $28; 2017 - $58

 

 

 

 

(portion measured at fair value: 2018 - $3,633; 2017 - $2,615)

 

8,863

 

10,386

Total investments

 

316,063

 

322,292

 

 

 

 

 

Cash

 

2,741

 

2,362

Accrued investment income

 

2,524

 

2,356

Premiums and other receivables, net of allowance

 

12,238

 

10,248

Reinsurance assets, net of allowance

 

37,178

 

33,024

Deferred income taxes

 

15,088

 

14,033

Deferred policy acquisition costs

 

12,683

 

10,994

Other assets, including restricted cash of $354 in 2018 and $317 in 2017

 

 

 

 

(portion measured at fair value: 2018 - $950; 2017 - $922)

 

13,300

 

10,194

Separate account assets, at fair value

 

93,045

 

92,798

Total assets

$

504,860

$

498,301

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

81,959

$

78,393

Unearned premiums

 

20,829

 

19,030

Future policy benefits for life and accident and health insurance contracts

 

44,374

 

45,432

Policyholder contract deposits (portion measured at fair value: 2018 - $3,376; 2017 - $4,150)

 

140,491

 

135,602

Other policyholder funds

 

3,738

 

3,648

Other liabilities (portion measured at fair value: 2018 - $1,491; 2017 - $1,124)

 

26,653

 

26,050

Long-term debt (portion measured at fair value: 2018 - $2,311; 2017 - $2,888)

 

34,594

 

31,640

Separate account liabilities

 

93,045

 

92,798

Total liabilities

 

445,683

 

432,593

Contingencies, commitments and guarantees (See Note 11

 

 

 

 

 

 

 

 

 

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 - 1,022,023,965 shares; 2017 - 1,007,626,835 shares of common stock

 

(48,401)

 

(47,595)

Additional paid-in capital

 

81,008

 

81,078

Retained earnings

 

21,749

 

21,457

Accumulated other comprehensive income (loss)

 

(536)

 

5,465

Total AIG shareholders’ equity

 

58,586

 

65,171

Non-redeemable noncontrolling interests

 

591

 

537

Total equity

 

59,177

 

65,708

Total liabilities and equity

$

504,860

$

498,301

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2          AIG | Third Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Income (Loss) (unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(dollars in millions, except per share data)

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

7,668

 

$

8,063

 

$

22,150

 

$

23,459

Policy fees

 

 

530

 

 

728

 

 

2,057

 

 

2,177

Net investment income

 

 

3,396

 

 

3,416

 

 

9,722

 

 

10,715

Net realized capital losses:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(13)

 

 

(66)

 

 

(116)

 

 

(138)

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

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income (loss)

 

 

(22)

 

 

(8)

 

 

(42)

 

 

(57)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income (loss)

 

 

(35)

 

 

(74)

 

 

(158)

 

 

(195)

Other realized capital losses

 

 

(476)

 

 

(848)

 

 

(207)

 

 

(911)

Total net realized capital losses

 

 

(511)

 

 

(922)

 

 

(365)

 

 

(1,106)

Other income

 

 

403

 

 

466

 

 

1,265

 

 

1,640

Total revenues

 

 

11,486

 

 

11,751

 

 

34,829

 

 

36,885

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

8,312

 

 

10,322

 

 

19,484

 

 

22,653

Interest credited to policyholder account balances

 

 

933

 

 

867

 

 

2,784

 

 

2,683

Amortization of deferred policy acquisition costs

 

 

1,118

 

 

912

 

 

3,813

 

 

3,135

General operating and other expenses

 

 

2,325

 

 

2,149

 

 

6,919

 

 

6,774

Interest expense

 

 

326

 

 

290

 

 

902

 

 

880

(Gain) loss on extinguishment of debt

 

 

1

 

 

1

 

 

10

 

 

(4)

Net (gain) loss on sale of divested businesses

 

 

(2)

 

 

13

 

 

(35)

 

 

173

Total benefits, losses and expenses

 

 

13,013

 

 

14,554

 

 

33,877

 

 

36,294

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense (benefit)

 

 

(1,527)

 

 

(2,803)

 

 

952

 

 

591

Income tax expense (benefit)

 

 

(307)

 

 

(1,091)

 

 

291

 

 

(18)

Income (loss) from continuing operations

 

 

(1,220)

 

 

(1,712)

 

 

661

 

 

609

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

 

 

(39)

 

 

(1)

 

 

(40)

 

 

7

Net income (loss)

 

 

(1,259)

 

 

(1,713)

 

 

621

 

 

616

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

-

 

 

26

 

 

5

 

 

40

Net income (loss) attributable to AIG

 

$

(1,259)

 

$

(1,739)

 

$

616

 

$

576

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(1.37)

 

$

(1.91)

 

$

0.72

 

$

0.60

Income (loss) from discontinued operations

 

$

(0.04)

 

$

-

 

$

(0.04)

 

$

0.01

Net income (loss) attributable to AIG

 

$

(1.41)

 

$

(1.91)

 

$

0.68

 

$

0.61

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(1.37)

 

$

(1.91)

 

$

0.71

 

$

0.59

Income (loss) from discontinued operations

 

$

(0.04)

 

$

-

 

$

(0.04)

 

$

0.01

Net income (loss) attributable to AIG

 

$

(1.41)

 

$

(1.91)

 

$

0.67

 

$

0.60

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

895,237,359

 

 

908,667,044

 

 

902,081,555

 

 

938,130,832

Diluted

 

 

895,237,359

 

 

908,667,044

 

 

916,818,269

 

 

961,295,946

Dividends declared per common share

 

$

0.32

 

$

0.32

 

$

0.96

 

$

0.96

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

AIG | Third Quarter 2018 Form 10-Q          3

 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

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

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Net income (loss)

 

$

(1,259)

 

$

(1,713)

 

$

621

 

$

616

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

 

 

107

 

 

97

 

 

(1,089)

 

 

330

Change in unrealized appreciation (depreciation) of all other investments

 

 

(758)

 

 

492

 

 

(4,222)

 

 

1,840

Change in foreign currency translation adjustments

 

 

(129)

 

 

325

 

 

(181)

 

 

447

Change in retirement plan liabilities adjustment

 

 

14

 

 

63

 

 

66

 

 

92

Change in fair value of liabilities under fair value option attributable to changes in

 

 

 

 

 

 

 

 

 

 

 

 

own credit risk

 

 

-

 

 

-

 

 

1

 

 

-

Other comprehensive income (loss)

 

 

(766)

 

 

977

 

 

(5,425)

 

 

2,709

Comprehensive income (loss)

 

 

(2,025)

 

 

(736)

 

 

(4,804)

 

 

3,325

Comprehensive income attributable to noncontrolling interests

 

 

-

 

 

26

 

 

5

 

 

40

Comprehensive income (loss) attributable to AIG

 

$

(2,025)

 

$

(762)

 

$

(4,809)

 

$

3,285

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4          AIG | Third 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 (Loss)

 

Equity

 

Interests

 

Equity

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

4,766

$

(48,052)

$

80,924

$

23,318

$

230

$

61,186

$

611

$

61,797

Cumulative effect of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle, net of tax

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Common stock issued under stock plans

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Purchase of common stock

 

-

 

(348)

 

-

 

-

 

-

 

(348)

 

-

 

(348)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

(1,259)

 

-

 

(1,259)

 

-

 

(1,259)

Dividends

 

-

 

-

 

-

 

(283)

 

-

 

(283)

 

-

 

(283)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

(766)

 

(766)

 

-

 

(766)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

1

 

1

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

18

 

18

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(38)

 

(38)

Other

 

-

 

(1)

 

84

 

(27)

 

-

 

56

 

(1)

 

55

Balance, end of period

$

4,766

$

(48,401)

$

81,008

$

21,749

$

(536)

$

58,586

$

591

$

59,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 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

 

-

 

187

 

(337)

 

-

 

-

 

(150)

 

-

 

(150)

Purchase of common stock

 

-

 

(994)

 

-

 

-

 

-

 

(994)

 

-

 

(994)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

616

 

-

 

616

 

5

 

621

Dividends

 

-

 

-

 

-

 

(858)

 

-

 

(858)

 

-

 

(858)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

(5,425)

 

(5,425)

 

-

 

(5,425)

Current and deferred income taxes

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

99

 

99

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

21

 

21

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(65)

 

(65)

Other

 

-

 

1

 

267

 

(34)

 

-

 

234

 

(6)

 

228

Balance, end of period

$

4,766

$

(48,401)

$

81,008

$

21,749

$

(536)

$

58,586

$

591

$

59,177

AIG | Third Quarter 2018 Form 10-Q          5

 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

4,766

$

(47,329)

$

80,913

$

30,420

$

4,962

$

73,732

$

592

$

74,324

Common stock issued under stock plans

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Purchase of common stock

 

-

 

(275)

 

-

 

-

 

-

 

(275)

 

-

 

(275)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

(1,739)

 

-

 

(1,739)

 

26

 

(1,713)

Dividends

 

-

 

-

 

-

 

(287)

 

-

 

(287)

 

-

 

(287)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

977

 

977

 

-

 

977

Current and deferred income taxes

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

32

 

32

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(1)

 

(1)

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(49)

 

(49)

Other

 

-

 

2

 

63

 

(5)

 

-

 

60

 

(56)

 

4

Balance, end of period

$

4,766

$

(47,602)

$

80,976

$

28,389

$

5,939

$

72,468

$

544

$

73,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 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

 

-

 

140

 

(304)

 

-

 

-

 

(164)

 

-

 

(164)

Purchase of common stock

 

-

 

(6,275)

 

-

 

-

 

-

 

(6,275)

 

-

 

(6,275)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

576

 

-

 

576

 

40

 

616

Dividends

 

-

 

-

 

-

 

(884)

 

-

 

(884)

 

-

 

(884)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

2,709

 

2,709

 

-

 

2,709

Current and deferred income taxes

 

-

 

-

 

(4)

 

-

 

-

 

(4)

 

-

 

(4)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

78

 

78

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

13

 

13

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(131)

 

(131)

Other

 

-

 

4

 

220

 

(14)

 

-

 

210

 

(14)

 

196

Balance, end of period

$

4,766

$

(47,602)

$

80,976

$

28,389

$

5,939

$

72,468

$

544

$

73,012

See accompanying Notes to Condensed Consolidated Financial Statements.

6          AIG | Third Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

Nine Months Ended September 30,

(in millions)

 

2018

 

2017

Cash flows from operating activities:

 

 

 

 

Net income

$

621

$

616

(Income) loss from discontinued operations

 

40

 

(7)

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 on sales of securities available for sale and other assets

 

(71)

 

(404)

Net (gain) loss on sale of divested businesses

 

(35)

 

173

(Gains) losses on extinguishment of debt

 

10

 

(4)

Unrealized losses in earnings - net

 

601

 

251

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

 

141

 

(16)

Depreciation and other amortization

 

3,813

 

2,806

Impairments of assets

 

269

 

669

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

96

 

4,448

Premiums and other receivables and payables - net

 

968

 

300

Reinsurance assets and funds held under reinsurance treaties

 

(2,057)

 

(12,705)

Capitalization of deferred policy acquisition costs

 

(4,366)

 

(3,593)

Current and deferred income taxes - net

 

224

 

(508)

Other, net

 

(292)

 

(888)

Total adjustments

 

(699)

 

(9,471)

Net cash used in operating activities

 

(38)

 

(8,862)

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

18,103

 

27,733

Other securities

 

3,258

 

2,647

Other invested assets

 

3,799

 

4,074

Divested businesses, net

 

10

 

605

Maturities of fixed maturity securities available for sale

 

18,305

 

22,126

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

 

3,068

 

3,932

Purchases of:

 

 

 

 

Available for sale securities

 

(32,807)

 

(38,717)

Other securities

 

(940)

 

(355)

Other invested assets

 

(2,263)

 

(2,359)

Mortgage and other loans receivable

 

(7,918)

 

(6,517)

Acquisition of businesses, net of cash and restricted cash acquired

 

(5,052)

 

-

Net change in short-term investments

 

2,411

 

2,815

Other, net

 

(891)

 

(1,509)

Net cash provided by (used in) investing activities

 

(917)

 

14,475

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

18,150

 

13,164

Policyholder contract withdrawals

 

(13,004)

 

(11,363)

Issuance of long-term debt

 

4,059

 

2,405

Repayments of long-term debt

 

(2,788)

 

(2,751)

Purchase of common stock

 

(994)

 

(6,275)

Dividends paid

 

(858)

 

(884)

Other, net

 

(3,232)

 

578

Net cash provided by (used in) financing activities

 

1,333

 

(5,126)

Effect of exchange rate changes on cash and restricted cash

 

8

 

(22)

Net increase in cash and restricted cash

 

386

 

465

Cash and restricted cash at beginning of year

 

2,737

 

2,107

Change in cash of businesses held for sale

 

-

 

133

Cash and restricted cash at end of period

$

3,123

$

2,705

AIG | Third Quarter 2018 Form 10-Q          7

 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

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

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

Nine Months Ended September 30,

 

 

2018

 

2017

Cash

$

2,741

$

2,433

Restricted cash included in Short-term investments*

 

28

 

53

Restricted cash included in Other assets*

 

354

 

219

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

$

3,123

$

2,705

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,018

$

1,046

Taxes

$

67

$

490

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,525

$

2,494

 

 

 

 

 

*    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.

 

8          AIG | Third Quarter 2018 Form 10-Q 


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 September 30, 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. 

AIG | Third Quarter 2018 Form 10-Q          9

 


TABLE OF CONTENTS 

 

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

 

Acquisition of Validus

On July 18, 2018, we completed the purchase of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash. The results of Validus following the date of the acquisition are included in our General Insurance segment starting in the third quarter of 2018. Our North America results include the results of Validus Reinsurance, Ltd. and Western World Insurance Group, Inc., while our International results include the results of Talbot Holdings Ltd.

For additional information relating to the acquisition of Validus, see Note 4.

OUT OF PERIOD ADJUSTMENTS

For the three- and nine-month periods ended September 30, 2018, our results include out of period adjustments relating to prior periods that decreased net income attributable to AIG by $205 million and $28 million, respectively, and decreased Income from continuing operations before income taxes by $253 million and $15 million, respectively. The out of period adjustments for the three-month period are primarily related to decreases in deferred policy acquisition costs and increases in policyholder contract deposits due to the update of actuarial assumptions. 

We determined that these adjustments were not material to the current quarter or to any previously reported quarterly or annual financial statements.

 

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 requires 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 are 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.  

10          AIG | Third Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

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

 

Intra-Entity Transfers of Assets Other than Inventory

In October 2016, the FASB issued an accounting standard that requires 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 are 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.

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 15.            

AIG | Third Quarter 2018 Form 10-Q          11

 


TABLE OF CONTENTS 

 

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

 

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, January 1, 2019, using the additional (and optional) transition method and recognizing a cumulative-effect adjustment to the opening balance of retained earnings, at the adoption date. 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.

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 will adopt the standard on its effective date. The standard’s impact is immaterial to our reported consolidated financial condition, results of operations, cash flows and required disclosures.          

12          AIG | Third Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

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

 

Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the FASB issued an accounting standard update with the objective of making targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The changes to the measurement, recognition and disclosure as provided by the new accounting standard update are summarized below:

·       Requires the review and if necessary update of future policy benefit assumptions at least annually for traditional and limited pay long duration contracts.

·       Requires the discount rate assumption to be updated at the end of each reporting period using a upper medium grade (low-credit risk) fixed income instrument yield that maximizes the use of observable market inputs and recognizes the impact of changes to discount rates in other comprehensive income.

·       Simplifies the amortization of deferred acquisition costs (DAC) to a constant level basis over the expected term of the related contracts with adjustments for unexpected terminations, but no longer requires an impairment test.

·       Requires the measurement of all market risk benefits associated with deposit (or account balance) contracts at fair value through the income statement with the exception of instrument-specific credit risk changes, which will be recognized in other comprehensive income.

·       Increased disclosures of disaggregated roll-forwards of policy benefits, account balances, market risk benefits, separate account liabilities and information about significant inputs, judgments and methods used in measurement and changes thereto and effect of those changes.

We plan to adopt the standard on its effective date, January 1, 2021. We are evaluating the method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.  The adoption of this standard is expected to have a significant impact on our consolidated financial condition, results of operations, cash flows and required disclosures, as well as systems, processes and controls.

 

AIG | Third Quarter 2018 Form 10-Q          13

 


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. This also includes the results of Validus Reinsurance, Ltd. and Western World Insurance Group, Inc. as of the acquisition date.

·       International  — consists of insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America, Puerto Rico, Australia, the Middle East and Africa. This also includes the results of Talbot Holdings, Ltd. as of the acquisition date.

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 subsidiary focused on delivering commercial insurance 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.

14          AIG | Third Quarter 2018 Form 10-Q 


TABLE OF CONTENTS 

 

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

 

Legacy Portfolio

Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our Bermuda domiciled composite reinsurer, Fortitude Reinsurance Company Ltd. (Fortitude Re), formerly known as DSA Reinsurance Company, Ltd., is included in our Legacy Portfolio.

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

·       Legacy General Insurance Run-Off Lines - Reserves consist of excess workers’ compensation, environmental exposures and exposures to other products within General Insurance that are no longer actively marketed.  Also includes the remaining reserves in Eaglestone Reinsurance Company (Eaglestone). 

·       Legacy Investments – Includes investment classes that we have placed into run-off including holdings in direct investments as well as investments in global capital markets and global real estate.

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 September 30,

2018

 

2017

 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

Adjusted

 

Pre-tax

 

 

Adjusted

 

Pre-tax

(in millions)

 

 Revenues 

 

Income (Loss)

 

 

 Revenues 

 

Income (Loss)

General Insurance

 

 

 

 

 

 

 

 

 

North America

$

4,129

$

(160)

 

$

3,634

$

(2,193)

International

 

3,853

 

(665)

 

 

3,867

 

(740)

      Total General Insurance

 

7,982

 

(825)

 

 

7,501

 

(2,933)

Life and Retirement

 

 

 

 

 

 

 

 

 

Individual Retirement

 

1,335

 

393

 

 

1,343

 

718

Group Retirement

 

718

 

242