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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, 2019

OR

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

For the transition period from to

 

Commission File Number 1-8787

 

Picture 1

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

________________

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, Par Value $2.50 Per Share

AIG

New York Stock Exchange

Warrants (expiring January 19, 2021)

AIG WS

New York Stock Exchange

5.75% Series A-2 Junior Subordinated Debentures

AIG 67BP

New York Stock Exchange

4.875% Series A-3 Junior Subordinated Debentures

AIG 67EU

New York Stock Exchange

Stock Purchase Rights

 

New York Stock Exchange

Depositary Shares Each Representing a 1/1,000th Interest in a Share of Series A 5.85% Non-Cumulative Perpetual Preferred Stock

AIG PRA

New York Stock Exchange

 

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 25, 2019, there were 869,951,606 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, 2019

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

12

 

Note 4.

Business Combination

14

 

Note 5.

Fair Value Measurements

15

 

Note 6.

Investments

32

 

Note 7.

Lending Activities

41

 

Note 8.

Variable Interest Entities

43

 

Note 9.

Derivatives and Hedge Accounting

44

 

Note 10.

Insurance Liabilities

49

 

Note 11.

Contingencies, Commitments and Guarantees

52

 

Note 12.

Equity

54

 

Note 13.

Earnings Per Common Share

60

 

Note 14.

Employee Benefits

61

 

Note 15.

Income Taxes

62

 

Note 16.

Information Provided in Connection with Outstanding Debt

65

 

Note 17.

Subsequent Events

70

ITEM 2

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

 

 

Operations

71

 

Cautionary Statement Regarding Forward-Looking Information

71

 

Use of Non-GAAP Measures

73

 

Critical Accounting Estimates

75

 

Executive Summary

75

 

Consolidated Results of Operations

86

 

Business Segment Operations

92

 

Investments

127

 

Insurance Reserves

139

 

Liquidity and Capital Resources

152

 

Enterprise Risk Management

164

 

Regulatory Environment

164

 

Glossary

165

 

Acronyms

168

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

169

ITEM 4

Controls and Procedures

169

Part II — Other Information

 

ITEM 1

Legal Proceedings

170

ITEM 1A

Risk Factors

170

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

170

ITEM 4

Mine Safety Disclosures

170

ITEM 6

Exhibits

171

Signatures

172

AIG | Third Quarter 2019 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)

 

2019

 

2018

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value (amortized cost: 2019 - $233,345; 2018 - $225,780)

$

253,221

$

229,391

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

 

8,327

 

11,415

Equity securities, at fair value (See Note 6)

 

771

 

1,253

Mortgage and other loans receivable, net of allowance

 

45,075

 

43,135

Other invested assets (portion measured at fair value: 2019 - $6,060; 2018 - $5,894)

 

19,486

 

19,341

Short-term investments, including restricted cash of $64 in 2019 and $142 in 2018

 

 

 

 

(portion measured at fair value: 2019 - $5,577; 2018 - $3,015)

 

14,113

 

9,674

Total investments

 

340,993

 

314,209

 

 

 

 

 

Cash

 

3,361

 

2,873

Accrued investment income

 

2,391

 

2,389

Premiums and other receivables, net of allowance

 

11,786

 

11,011

Reinsurance assets, net of allowance

 

39,483

 

38,172

Deferred income taxes

 

13,054

 

15,221

Deferred policy acquisition costs

 

11,000

 

12,694

Other assets, including restricted cash of $345 in 2019 and $343 in 2018

 

 

 

 

(portion measured at fair value: 2019 - $1,185; 2018 - $973)

 

13,929

 

13,568

Separate account assets, at fair value

 

89,125

 

81,847

Total assets

$

525,122

$

491,984

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

79,883

$

83,639

Unearned premiums

 

19,959

 

19,248

Future policy benefits for life and accident and health insurance contracts

 

50,747

 

44,935

Policyholder contract deposits (portion measured at fair value: 2019 - $7,166; 2018 - $4,116)

 

151,964

 

142,262

Other policyholder funds

 

3,440

 

3,568

Other liabilities (portion measured at fair value: 2019 - $1,140; 2018 - $1,265)

 

27,297

 

24,636

Long-term debt (portion measured at fair value: 2019 - $2,287; 2018 - $2,213)

 

35,262

 

34,540

Separate account liabilities

 

89,125

 

81,847

Total liabilities

 

457,677

 

434,675

Contingencies, commitments and guarantees (See Note 11)

 

nil

 

nil

 

 

 

 

 

AIG shareholders’ equity:

 

 

 

 

Series A Non-cumulative preferred stock and additional paid in capital, $5.00 par value; 100,000,000 shares

 

 

 

 

authorized; shares issued: 2019 - 20,000 and 2018 - 0; liquidation preference $500

 

485

 

-

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2019 - 1,906,671,492 and

 

 

 

 

2018 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2019 - 1,036,722,246 shares; 2018 - 1,040,062,063 shares of common stock

 

(48,989)

 

(49,144)

Additional paid-in capital

 

81,287

 

81,268

Retained earnings

 

22,439

 

20,884

Accumulated other comprehensive income (loss)

 

5,615

 

(1,413)

Total AIG shareholders’ equity

 

65,603

 

56,361

Non-redeemable noncontrolling interests

 

1,842

 

948

Total equity

 

67,445

 

57,309

Total liabilities and equity

$

525,122

$

491,984

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2 AIG | Third Quarter 2019 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 common share data)

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

7,617

 

$

7,668

 

$

23,117

 

$

22,150

Policy fees

 

 

733

 

 

530

 

 

2,237

 

 

2,057

Net investment income

 

 

3,408

 

 

3,396

 

 

11,032

 

 

9,722

Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(15)

 

 

(13)

 

 

(119)

 

 

(116)

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

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income (loss)

 

 

(9)

 

 

(22)

 

 

(18)

 

 

(42)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income (loss)

 

 

(24)

 

 

(35)

 

 

(137)

 

 

(158)

Other realized capital gains (losses)

 

 

953

 

 

(476)

 

 

1,024

 

 

(207)

Total net realized capital gains (losses)

 

 

929

 

 

(511)

 

 

887

 

 

(365)

Other income

 

 

227

 

 

403

 

 

658

 

 

1,265

Total revenues

 

 

12,914

 

 

11,486

 

 

37,931

 

 

34,829

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

6,892

 

 

8,312

 

 

19,373

 

 

19,484

Interest credited to policyholder account balances

 

 

966

 

 

933

 

 

2,873

 

 

2,784

Amortization of deferred policy acquisition costs

 

 

1,252

 

 

1,118

 

 

3,980

 

 

3,813

General operating and other expenses

 

 

2,187

 

 

2,325

 

 

6,380

 

 

6,919

Interest expense

 

 

348

 

 

326

 

 

1,057

 

 

902

(Gain) loss on extinguishment of debt

 

 

-

 

 

1

 

 

13

 

 

10

Net (gain) loss on sale of divested businesses

 

 

9

 

 

(2)

 

 

4

 

 

(35)

Total benefits, losses and expenses

 

 

11,654

 

 

13,013

 

 

33,680

 

 

33,877

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

 

 

1,260

 

 

(1,527)

 

 

4,251

 

 

952

Income tax expense (benefit)

 

 

287

 

 

(307)

 

 

950

 

 

291

Income (loss) from continuing operations

 

 

973

 

 

(1,220)

 

 

3,301

 

 

661

Loss from discontinued operations, net of income tax expense

 

 

-

 

 

(39)

 

 

(1)

 

 

(40)

Net income (loss)

 

 

973

 

 

(1,259)

 

 

3,300

 

 

621

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

317

 

 

-

 

 

881

 

 

5

Net income (loss) attributable to AIG

 

 

656

 

 

(1,259)

 

 

2,419

 

 

616

Less: Dividends on preferred stock

 

 

8

 

 

-

 

 

15

 

 

-

Net income (loss) attributable to AIG common shareholders

 

$

648

 

$

(1,259)

 

$

2,404

 

$

616

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.74

 

$

(1.37)

 

$

2.74

 

$

0.72

Loss from discontinued operations

 

$

-

 

$

(0.04)

 

$

-

 

$

(0.04)

Net income (loss) attributable to AIG common shareholders

 

$

0.74

 

$

(1.41)

 

$

2.74

 

$

0.68

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.72

 

$

(1.37)

 

$

2.71

 

$

0.71

Loss from discontinued operations

 

$

-

 

$

(0.04)

 

$

-

 

$

(0.04)

Net income (loss) attributable to AIG common shareholders

 

$

0.72

 

$

(1.41)

 

$

2.71

 

$

0.67

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

877,009,495

 

 

895,237,359

 

 

876,262,372

 

 

902,081,555

Diluted

 

 

895,814,410

 

 

895,237,359

 

 

887,221,116

 

 

916,818,269

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

AIG | Third Quarter 2019 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)

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Net income (loss)

 

$

973

 

$

(1,259)

 

$

3,300

 

$

621

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

 

 

(2)

 

 

107

 

 

756

 

 

(1,089)

Change in unrealized appreciation (depreciation) of all other investments

 

 

656

 

 

(758)

 

 

6,278

 

 

(4,222)

Change in foreign currency translation adjustments

 

 

(34)

 

 

(129)

 

 

1

 

 

(181)

Change in retirement plan liabilities adjustment

 

 

7

 

 

14

 

 

14

 

 

66

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

 

 

 

 

 

 

 

 

 

 

 

 

own credit risk

 

 

1

 

 

-

 

 

(1)

 

 

1

Other comprehensive income (loss)

 

 

628

 

 

(766)

 

 

7,048

 

 

(5,425)

Comprehensive income (loss)

 

 

1,601

 

 

(2,025)

 

 

10,348

 

 

(4,804)

Comprehensive income (loss) attributable to noncontrolling interests

 

 

321

 

 

-

 

 

901

 

 

5

Comprehensive income (loss) attributable to AIG

 

$

1,280

 

$

(2,025)

 

$

9,447

 

$

(4,809)

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)

 

 

Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

Additional

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

 

Paid-in

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

(in millions)

 

Capital

 

Stock

 

Stock

 

Capital

 

Earnings

Income (Loss)

 

Equity

 

Interests

 

Equity

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

485

$

4,766

$

(48,991)

$

81,211

$

22,077

$

4,991

$

64,539

$

1,566

$

66,105

Preferred stock issued

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Common stock issued under stock plans

 

-

 

-

 

1

 

-

 

-

 

-

 

1

 

-

 

1

Purchase of common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

656

 

-

 

656

 

317

 

973

Dividends on preferred stock

 

-

 

-

 

-

 

-

 

(8)

 

-

 

(8)

 

-

 

(8)

Dividends on common stock

 

-

 

-

 

-

 

-

 

(278)

 

-

 

(278)

 

-

 

(278)

Other comprehensive income

 

-

 

-

 

-

 

-

 

-

 

624

 

624

 

4

 

628

Current and deferred income taxes

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net decrease due to acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(18)

 

(18)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

11

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(37)

 

(37)

Other

 

-

 

-

 

1

 

76

 

(8)

 

-

 

69

 

(1)

 

68

Balance, end of period

$

485

$

4,766

$

(48,989)

$

81,287

$

22,439

$

5,615

$

65,603

$

1,842

$

67,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

-

$

4,766

$

(49,144)

$

81,268

$

20,884

$

(1,413)

$

56,361

$

948

$

57,309

Preferred stock issued

 

485

 

-

 

-

 

-

 

-

 

-

 

485

 

-

 

485

Common stock issued under stock plans

 

-

 

-

 

154

 

(231)

 

-

 

-

 

(77)

 

-

 

(77)

Purchase of common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

2,419

 

-

 

2,419

 

881

 

3,300

Dividends on preferred stock

 

-

 

-

 

-

 

-

 

(15)

 

-

 

(15)

 

-

 

(15)

Dividends on common stock

 

-

 

-

 

-

 

-

 

(835)

 

-

 

(835)

 

-

 

(835)

Other comprehensive income

 

-

 

-

 

-

 

-

 

-

 

7,028

 

7,028

 

20

 

7,048

Current and deferred income taxes

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net increase due to acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

78

 

78

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

13

 

13

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(106)

 

(106)

Other

 

-

 

-

 

1

 

250

 

(14)

 

-

 

237

 

8

 

245

Balance, end of period

$

485

$

4,766

$

(48,989)

$

81,287

$

22,439

$

5,615

$

65,603

$

1,842

$

67,445

AIG | Third Quarter 2019 Form 10-Q 5

 

TABLE OF CONTENTS

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)(continued)

 

 

Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

Additional

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

 

Paid-in

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

(in millions)

 

Capital

 

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 loss attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

(1,259)

 

-

 

(1,259)

 

-

 

(1,259)

Dividends on common stock

 

-

 

-

 

-

 

-

 

(283)

 

-

 

(283)

 

-

 

(283)

Other comprehensive 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 on common stock

 

-

 

-

 

-

 

-

 

(858)

 

-

 

(858)

 

-

 

(858)

Other comprehensive loss

 

-

 

-

 

-

 

-

 

-

 

(5,425)

 

(5,425)

 

-

 

(5,425)

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

See accompanying Notes to Condensed Consolidated Financial Statements.

6 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

Nine Months Ended September 30,

(in millions)

 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

Net income

$

3,300

$

621

Loss from discontinued operations

 

1

 

40

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

 

(600)

 

(71)

Net (gain) loss on sale of divested businesses

 

4

 

(35)

Losses on extinguishment of debt

 

13

 

10

Unrealized (gains) losses in earnings - net

 

(273)

 

601

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

 

90

 

141

Depreciation and other amortization

 

3,833

 

3,813

Impairments of assets

 

237

 

269

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

(2,146)

 

96

Premiums and other receivables and payables - net

 

(42)

 

968

Reinsurance assets and funds held under reinsurance treaties

 

(1,200)

 

(2,057)

Capitalization of deferred policy acquisition costs

 

(4,181)

 

(4,366)

Current and deferred income taxes - net

 

757

 

224

Other, net

 

(582)

 

(292)

Total adjustments

 

(4,090)

 

(699)

Net cash used in operating activities

 

(789)

 

(38)

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

17,498

 

18,103

Other securities

 

5,230

 

3,258

Other invested assets

 

3,345

 

3,799

Divested businesses, net

 

2

 

10

Maturities of fixed maturity securities available for sale

 

18,165

 

18,305

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

 

4,233

 

3,068

Purchases of:

 

 

 

 

Available for sale securities

 

(41,612)

 

(32,807)

Other securities

 

(723)

 

(940)

Other invested assets

 

(2,662)

 

(2,263)

Mortgage and other loans receivable

 

(6,512)

 

(7,918)

Acquisition of businesses, net of cash and restricted cash acquired

 

-

 

(5,052)

Net change in short-term investments

 

(4,586)

 

2,411

Other, net

 

2,829

 

(891)

Net cash used in investing activities

 

(4,793)

 

(917)

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

17,297

 

18,150

Policyholder contract withdrawals

 

(12,474)

 

(13,004)

Issuance of long-term debt

 

2,564

 

4,059

Repayments of long-term debt

 

(2,421)

 

(2,788)

Issuance of preferred stock

 

485

 

-

Purchase of common stock

 

-

 

(994)

Dividends paid on preferred stock

 

(15)

 

-

Dividends paid on common stock

 

(835)

 

(858)

Other, net

 

1,354

 

(3,232)

Net cash provided by financing activities

 

5,955

 

1,333

Effect of exchange rate changes on cash and restricted cash

 

39

 

8

Net increase in cash and restricted cash

 

412

 

386

Cash and restricted cash at beginning of year

 

3,358

 

2,737

Cash and restricted cash at end of period

$

3,770

$

3,123

AIG | Third Quarter 2019 Form 10-Q 7

 

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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,

(in millions)

 

2019

 

2018

Cash

$

3,361

$

2,741

Restricted cash included in Short-term investments*

 

64

 

28

Restricted cash included in Other assets*

 

345

 

354

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

$

3,770

$

3,123

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,012

$

1,018

Taxes

$

193

$

67

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,507

$

2,525

 

 

 

 

 

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

See accompanying Notes to Condensed Consolidated Financial Statements.

8 AIG | Third Quarter 2019 Form 10-Q

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

Certain of our foreign subsidiaries included in the Condensed Consolidated Financial Statements report on the basis of fiscal period ending November 30. 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, 2019 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;

•valuation of embedded derivatives for fixed index annuity and life 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 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 2019 Form 10-Q 9

 

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

 

OUT OF PERIOD ADJUSTMENTS

For the three- and nine-month periods ended September 30, 2019, our results include out of period adjustments relating to prior periods that decreased net income attributable to AIG common shareholders by $134 million and $138 million, respectively, and decreased Income from continuing operations before income tax expense by $169 million and $170 million, respectively. The out of period adjustments for the three-month period are primarily related to increases in policyholder benefits and losses incurred reflecting updated 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 2019

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard that requires 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. Lessor accounting remained largely the same, with the exception of certain specified changes.

We adopted the standard on its effective date of January 1, 2019, using a modified retrospective approach and did not adjust prior comparative periods in accordance with the standard’s transition guidance. The majority of the Company’s lease obligations pertain to real estate utilized in the operation of our businesses. Consequently, the primary impact of adoption resulted in the recognition of discounted lease liabilities of $823 million and corresponding right-of-use assets of $724 million for operating leases pertaining to our real estate portfolio, which are reflected in Other Liabilities and Other Assets, respectively. The standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

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 adopted the standard using a modified retrospective approach on its effective date of January 1, 2019. The standard did not 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 standard 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 disclosures, and simplify the application of hedge accounting treatment.

We adopted the standard on its effective date of January 1, 2019. The standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Future Application of Accounting Standards

Financial Instruments - Credit Losses

In June 2016, the FASB issued an accounting standard that will change how entities account for current expected credit losses (CECL) for most financial assets, trade receivables, off-balance sheet exposures and reinsurance receivables. The standard requires an allowance for credit losses based on the expectation of lifetime credit losses related to such 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, is 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 allow for reversals of credit impairments in the event that the credit of an issuer improves. The standard also requires additional disclosures.

10 AIG | Third Quarter 2019 Form 10-Q

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

 

We plan to adopt the standard on its effective date of January 1, 2020 using a modified retrospective method, which requires a cumulative effect adjustment to retained earnings. We are finalizing the development of the credit loss models and related systems, processes and controls. As of September 30, 2019, we currently estimate the CECL allowance to be a reduction in opening retained earnings of approximately $625 million (pre-tax) primarily driven by commercial mortgage loans, and, to a lesser extent, reinsurance receivables and recoverables. This estimate will change, perhaps materially, as it is subject to further adjustments based upon ongoing reviews of models, methodologies and judgments. Moreover, the ultimate impact will be dependent on, among other things, our portfolios’ composition at the adoption date, as well as macroeconomic conditions and forecasts, and other management judgments 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 plan to adopt the standard on its effective date of January 1, 2020. Any impact of the standard will be dependent on the market conditions of the reporting units at the time of adoption.

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 standard prescribes significant and comprehensive changes to recognition, measurement, presentation and disclosure as 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, with the recognition and separate presentation of any resulting re-measurement gain or loss (except for discount rate changes as noted below) in the income statement.

Requires the discount rate assumption to be updated at the end of each reporting period using an 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 impact of those changes.

In October 2019, the FASB affirmed its decision to defer the effective date of the standard to January 1, 2022. We plan to adopt the standard on its updated effective date. We have started our implementation efforts and 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.

RECLASSIFICATIONS

In the first quarter of 2019, we began reporting investment income from our non-insurance subsidiaries in Net investment income instead of Other income on a prospective basis to be consistent with how we report investment income from our General Insurance and Life and Retirement reporting segments. This reclassification has no impact to our consolidated statements of operations.

goodwill

Effective July 1, 2019, we changed the date of our annual goodwill impairment testing from December 31 to July 1. This change does not represent a material change to our method of applying current accounting guidance and is preferable as it better aligns with our strategic planning and forecasting process. This change will not delay, accelerate or avoid any impairment charge and was applied prospectively. We performed our annual goodwill impairment tests of all reporting units using a combination of both qualitative and

AIG | Third Quarter 2019 Form 10-Q 11

 

TABLE OF CONTENTS

 

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

 

quantitative assessments and concluded that our goodwill was not impaired. Our goodwill balance was $4.1 billion at September 30, 2019. For further information on goodwill see Note 12 to the Consolidated Financial Statements in the 2018 Annual Report.

 

 

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., Western World Insurance Group, Inc. and Glatfelter Insurance Group as of their respective acquisition dates.

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 its 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 annuities, individual annuity and investment products, and 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.

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), 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).

12 AIG | Third Quarter 2019 Form 10-Q

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

 

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. Beginning in the first quarter of 2019, on a prospective basis, the changes in the fair value of equity securities are excluded from adjusted pre-tax income (loss). 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,

2019

 

2018

 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

Total

 

Pre-tax

 

 

Total

 

Pre-tax

(in millions)

 

Revenues

 

Income (Loss)

 

 

Revenues

 

Income (Loss)

General Insurance

 

 

 

 

 

 

 

 

 

North America

$

3,878

$

435

 

$

4,129

$

(160)

International

 

3,537

 

72

 

 

3,853

 

(665)

Total General Insurance

 

7,415

 

507

 

 

7,982

 

(825)

Life and Retirement

 

 

 

 

 

 

 

 

 

Individual Retirement

 

1,416

 

387

 

 

1,335

 

393

Group Retirement

 

726

 

203

 

 

718

 

242

Life Insurance

 

1,037

 

(7)

 

 

809

 

16

Institutional Markets

 

654

 

63

 

 

284

 

62

Total Life and Retirement

 

3,833

 

646

 

 

3,146

 

713

Other Operations

 

211

 

(454)

 

 

135

 

(417)

Legacy Portfolio

 

751

 

93

 

 

814

 

84

AIG Consolidation and elimination

 

(153)

 

(46)

 

 

(42)

 

29

Total AIG Consolidated adjusted revenues and adjusted pre-tax income (loss)

 

12,057

 

746

 

 

12,035

 

(416)

Reconciling items from adjusted pre-tax income to pre-tax income (loss):

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

25

 

12

 

 

(5)

 

(14)

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

 

 

 

 

 

 

 

 

 

net realized capital gains (losses)

 

-

 

(65)

 

 

-

 

76

Changes in the fair value of equity securities

 

(51)

 

(51)

 

 

-

 

-

Professional fees related to regulatory or accounting changes

 

-

 

(3)

 

 

-

 

-

Other income (expense) - net

 

16

 

-

 

 

(4)

 

-

Gain (loss) on extinguishment of debt

 

-

 

-

 

 

-

 

(1)

Net realized capital gains (losses)*

 

867

 

881

 

 

(540)

 

(524)

Income (loss) from divested businesses

 

-

 

(9)

 

 

-

 

2

Non-operating litigation reserves and settlements

 

-

 

(5)

 

 

-

 

(5)

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

59

 

 

-

 

(605)

Net loss reserve discount benefit (charge)

 

-

 

(235)

 

 

-

 

86

Integration and transaction costs associated with acquired businesses

 

-

 

(3)

 

 

-

 

(91)

Restructuring and other costs

 

-

 

(67)

 

 

-

 

(35)

Revenues and Pre-tax income (loss)

$

12,914

$

1,260

 

$

11,486

$

(1,527)

AIG | Third Quarter 2019 Form 10-Q 13

 

TABLE OF CONTENTS

 

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

 

Nine Months Ended September 30,

2019

 

2018

 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

Total

 

Pre-Tax

 

 

Total

 

Pre-Tax

(in millions)

 

Revenues

 

Income (Loss)

 

 

Revenues

 

Income (Loss)

General Insurance

 

 

 

 

 

 

 

 

 

North America

$

12,001

$

2,087

 

$

10,895

$

567

International

 

10,743

 

668

 

 

11,758

 

(314)

Total General Insurance

 

22,744

 

2,755

 

 

22,653

 

253

Life and Retirement

 

 

 

 

 

 

 

 

 

Individual Retirement

 

4,233

 

1,483

 

 

4,062

 

1,354

Group Retirement

 

2,225

 

728

 

 

2,209

 

774

Life Insurance

 

3,264

 

195

 

 

2,962

 

243

Institutional Markets

 

2,143

 

213

 

 

838

 

196

Total Life and Retirement

 

11,865

 

2,619

 

 

10,071

 

2,567

Other Operations

 

625

 

(1,256)

 

 

454

 

(1,133)

Legacy Portfolio

 

2,197

 

324

 

 

2,431

 

363

AIG Consolidation and elimination

 

(460)

 

(172)

 

 

(214)

 

28

Total AIG Consolidated adjusted revenues and adjusted pre-tax income

 

36,971

 

4,270

 

 

35,395

 

2,078

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

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

214

 

183

 

 

(109)

 

(127)

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

 

 

 

 

 

 

 

 

 

net realized capital gains (losses)

 

-

 

(39)

 

 

-

 

46

Changes in the fair value of equity securities

 

6

 

6

 

 

-

 

-

Professional fees related to regulatory or accounting changes

 

-

 

(5)

 

 

-

 

-

Other income (expense) - net

 

27

 

-

 

 

(29)

 

-

Loss on extinguishment of debt

 

-

 

(13)

 

 

-

 

(10)

Net realized capital gains (losses)*

 

713

 

758

 

 

(430)

 

(388)

Income (loss) from divested businesses

 

-

 

(4)

 

 

-

 

35

Non-operating litigation reserves and settlements

 

-

 

(6)

 

 

2

 

(30)

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

211

 

 

-

 

(607)

Net loss reserve discount benefit (charge)

 

-

 

(920)

 

 

-

 

305

Integration and transaction costs associated with acquired businesses

 

-

 

(16)

 

 

-

 

(91)

Restructuring and other costs

 

-

 

(174)

 

 

-

 

(259)

Revenues and Pre-tax income

$

37,931

$

4,251

 

$

34,829

$

952

*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.

4. Business Combination

 

On July 18, 2018, we completed the purchase of a 100 percent voting interest in Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash.

 

The purchase was accounted for under the acquisition method. Accordingly, the total purchase price was allocated to the estimated fair values of assets acquired and liabilities assumed. This allocation resulted in the purchase price exceeding the fair value of net assets acquired, which results in a difference recorded as goodwill. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities. Goodwill related to the purchase of Validus assigned to our General Insurance operating segments was $1.8 billion for North America and $157 million for International.

 

In addition, Validus participates in the market for insurance-linked securities (ILS) primarily through AlphaCat Managers, Ltd (AlphaCat Manager). AlphaCat Manager is an asset manager primarily for third party investors and in connection with the issuance of ILS invests in AlphaCat funds which are considered variable interest entities (VIEs). ILS are financial instruments for which the values are determined based on insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. We report the investment in AlphaCat funds, which is approximately $128 million at September 30, 2019, in Other Invested Assets in the Condensed Consolidated Balance Sheet.

14 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. Business Combination

 

The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition of Validus occurred as of January 1, 2018. The pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future.

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018*

 

 

2019

 

2018*

Total revenues

$

12,914

$

11,486

 

$

37,931

$

36,028

Net income (loss)

 

973

 

(1,259)

 

 

3,300

 

576

Net income (loss) attributable to AIG common shareholders

 

648

 

(1,259)

 

 

2,404

 

571

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG common shareholders:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to AIG common shareholders

 

0.74

 

(1.41)

 

 

2.74

 

0.63

Diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to AIG common shareholders

 

0.72

 

(1.41)

 

 

2.71

 

0.62

*Pro forma adjustments were made to Validus external reporting results prior to the acquisition date for the deconsolidation of certain asset management entities consistent with AIG’s post acquisition accounting, which had no impact on Net income attributable to Validus.

5. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

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

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

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

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

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

AIG | Third Quarter 2019 Form 10-Q 15

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. 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:

September 30, 2019

 

 

 

 

 

 

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

$

684

$

4,543

$

-

$

-

$

-

$

5,227

Obligations of states, municipalities and political subdivisions

 

-

 

13,638

 

2,107

 

-

 

-

 

15,745

Non-U.S. governments

 

94

 

15,269

 

13

 

-

 

-

 

15,376

Corporate debt

 

-

 

150,097

 

1,275

 

-

 

-

 

151,372

RMBS

 

-

 

19,235

 

13,560

 

-

 

-

 

32,795

CMBS

 

-

 

13,286

 

1,050

 

-

 

-

 

14,336

CDO/ABS

 

-

 

9,431

 

8,939

 

-

 

-

 

18,370

Total bonds available for sale

 

778

 

225,499

 

26,944

 

-

 

-

 

253,221

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

10

 

2,286

 

-

 

-

 

-

 

2,296

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

18

 

-

 

-

 

-

 

18

RMBS

 

-

 

482

 

815

 

-

 

-

 

1,297

CMBS

 

-

 

335

 

68

 

-

 

-

 

403

CDO/ABS

 

-

 

382

 

3,931

 

-

 

-

 

4,313

Total other bond securities

 

10

 

3,503

 

4,814

 

-

 

-

 

8,327

Equity securities

 

751

 

12

 

8

 

-

 

-

 

771

Other invested assets(b)

 

-

 

73

 

589

 

-

 

-

 

662

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

1

 

4,381

 

-

 

-

 

-

 

4,382

Foreign exchange contracts

 

-

 

1,661

 

1

 

-

 

-

 

1,662

Equity contracts

 

18

 

676

 

103

 

-

 

-

 

797

Credit contracts

 

-

 

-

 

1

 

-

 

-

 

1

Other contracts

 

-

 

-

 

15

 

-

 

-

 

15

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,795)

 

(2,937)

 

(5,732)

Total derivative assets

 

19

 

6,718

 

120

 

(2,795)

 

(2,937)

 

1,125

Short-term investments

 

2,988

 

2,589

 

-

 

-

 

-

 

5,577

Other assets

 

-

 

-

 

60

 

-

 

-

 

60

Separate account assets

 

84,707

 

4,418

 

-

 

-

 

-

 

89,125

Total

$

89,253

$

242,812

$

32,535

$

(2,795)

$

(2,937)

$

358,868

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

-

$

7,166

$

-

$

-

$

7,166

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

3

 

2,853

 

-

 

-

 

-

 

2,856

Foreign exchange contracts

 

-

 

940

 

-

 

-

 

-

 

940

Equity contracts

 

12

 

74

 

2

 

-

 

-

 

88

Credit contracts

 

-

 

18

 

103

 

-

 

-

 

121

Other contracts

 

-

 

-

 

8

 

-

 

-

 

8

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,795)

 

(133)

 

(2,928)

Total derivative liabilities

 

15

 

3,885

 

113

 

(2,795)

 

(133)

 

1,085

Other liabilities

 

-

 

55

 

-

 

-

 

-

 

55

Long-term debt

 

-

 

2,287

 

-

 

-

 

-

 

2,287

Total

$

15

$

6,227

$

7,279

$

(2,795)

$

(133)

$

10,593

16 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

December 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

$

53

$

3,207

$

-

$

-

$

-

$

3,260

Obligations of states, municipalities and political subdivisions

 

-

 

14,001

 

2,000

 

-

 

-

 

16,001

Non-U.S. governments

 

69

 

14,445

 

11

 

-

 

-

 

14,525

Corporate debt

 

-

 

129,836

 

864

 

-

 

-

 

130,700

RMBS

 

-

 

20,178

 

14,199

 

-

 

-

 

34,377

CMBS

 

-

 

11,784

 

917

 

-

 

-

 

12,701

CDO/ABS

 

-

 

8,725

 

9,102

 

-

 

-

 

17,827

Total bonds available for sale

 

122

 

202,176

 

27,093

 

-

 

-

 

229,391

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

11

 

2,654

 

-

 

-

 

-

 

2,665

Non-U.S. governments

 

-

 

45

 

-

 

-

 

-

 

45

Corporate debt

 

-

 

1,671

 

-

 

-

 

-

 

1,671

RMBS

 

-

 

424

 

1,290

 

-

 

-

 

1,714

CMBS

 

-

 

311

 

77

 

-

 

-

 

388

CDO/ABS

 

-

 

454

 

4,478

 

-

 

-

 

4,932

Total other bond securities

 

11

 

5,559

 

5,845

 

-

 

-

 

11,415

Equity securities

 

1,213

 

13

 

27

 

-

 

-

 

1,253

Other invested assets(b)

 

-

 

341

 

587

 

-

 

-

 

928

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

2

 

2,888

 

-

 

-

 

-

 

2,890

Foreign exchange contracts

 

-

 

1,159

 

5

 

-

 

-

 

1,164

Equity contracts

 

133

 

190

 

75

 

-

 

-

 

398

Credit contracts

 

-

 

-

 

1

 

-

 

-

 

1

Other contracts

 

-

 

-

 

15

 

-

 

-

 

15

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,713)

 

(1,840)

 

(3,553)

Total derivative assets

 

135

 

4,237

 

96

 

(1,713)

 

(1,840)

 

915

Short-term investments

 

2,416

 

599

 

-

 

-

 

-

 

3,015

Other assets

 

-

 

-

 

58

 

-

 

-

 

58

Separate account assets

 

77,202

 

4,645

 

-

 

-

 

-

 

81,847

Total

$

81,099

$

217,570

$

33,706

$

(1,713)

$

(1,840)

$

328,822

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

-

$

4,116

$

-

$

-

$

4,116

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

4

 

2,004

 

15

 

-

 

-

 

2,023

Foreign exchange contracts

 

-

 

858

 

-

 

-

 

-

 

858

Equity contracts

 

12

 

3

 

-

 

-

 

-

 

15

Credit contracts

 

-

 

8

 

228

 

-

 

-

 

236

Other contracts

 

-

 

-

 

6

 

-

 

-

 

6

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,713)

 

(187)

 

(1,900)

Total derivative liabilities

 

16

 

2,873

 

249

 

(1,713)

 

(187)

 

1,238

Other liabilities

 

16

 

11

 

-

 

-

 

-

 

27

Long-term debt

 

-

 

2,213

 

-

 

-

 

-

 

2,213

Total

$

32

$

5,097

$

4,365

$

(1,713)

$

(187)

$

7,594

 

(a)Represents netting of derivative exposures covered by qualifying master netting agreements.

 

(b)Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $5.4 billion and $5.0 billion as of September 30, 2019 and December 31, 2018, respectively.

 

AIG | Third Quarter 2019 Form 10-Q 17

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

Transfers of Level 1 and Level 2 Assets and Liabilities

 

 

Our policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market.

 

 

There were no transfers of securities issued by non-U.S. government entities from Level 1 to Level 2 in the three-month period ended September 30, 2019. During the nine-month period ended September 30, 2019, we transferred $62 million of securities issued by non-U.S. government entities from Level 1 to Level 2, because they are no longer considered actively traded. For similar reasons, during the three- and nine-month periods ended September 30, 2019, we transferred $111 million and $162 million, respectively, of securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2. We had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2019.

 

 

There were no transfers of securities issued by non-U.S. government entities from Level 1 to Level 2 in the three-month period ended September 30, 2018. During the nine-month period ended September 30, 2018, we transferred $16 million of securities issued by non-U.S. government entities from Level 1 to Level 2, because they were no longer considered actively traded. For similar reasons, during the three- and nine-month periods ended September 30, 2018, we transferred $52 million and $733 million, respectively, of securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2. We had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2018.

 

 

Changes in Level 3 Recurring Fair Value Measurements

 

 

The following tables present changes during the three- and nine-month periods ended September 30, 2019 and 2018 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets at September 30, 2019 and 2018:

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,162

$

(1)

$

119

$

92

$

-

$

(265)

$

2,107

$

-

Non-U.S. governments

 

2

 

6

 

-

 

-

 

5

 

-

 

13

 

-

Corporate debt

 

1,821

 

(36)

 

(2)

 

(535)

 

112

 

(85)

 

1,275

 

-

RMBS

 

13,863

 

166

 

15

 

(418)

 

16

 

(82)

 

13,560

 

-

CMBS

 

1,103

 

2

 

32

 

85

 

-

 

(172)

 

1,050

 

-

CDO/ABS

 

9,062

 

3

 

37

 

(170)

 

7

 

-

 

8,939

 

-

Total bonds available for sale

 

28,013

 

140

 

201

 

(946)

 

140

 

(604)

 

26,944

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

RMBS

 

830

 

9

 

-

 

(24)

 

-

 

-

 

815

 

1

CMBS

 

88

 

1

 

-

 

(17)

 

-

 

(4)

 

68

 

(2)

CDO/ABS

 

4,150

 

115

 

-

 

(334)

 

-

 

-

 

3,931

 

28

Total other bond securities

 

5,068

 

125

 

-

 

(375)

 

-

 

(4)

 

4,814

 

27

Equity securities

 

35

 

-

 

-

 

(29)

 

2

 

-

 

8

 

(2)

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other invested assets

 

605

 

6

 

-

 

(22)

 

-

 

-

 

589

 

7

Other assets

 

61

 

-

 

-

 

(1)

 

-

 

-

 

60

 

-

Total

$

33,782

$

271

$

201

$

(1,373)

$

142

$

(608)

$

32,415

$

32

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

6,065

$

861

$

-

$

240

$

-

$

-

$

7,166

$

(691)

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

16

 

(3)

 

-

 

(13)

 

-

 

-

 

-

 

-

Foreign exchange contracts

 

(4)

 

6

 

-

 

(3)

 

-

 

-

 

(1)

 

-

Equity contracts

 

(113)

 

12

 

-

 

-

 

-

 

-

 

(101)

 

(13)

Credit contracts

 

173

 

(24)

 

-

 

(47)

 

-

 

-

 

102

 

14

Other contracts

 

(7)

 

(17)

 

-

 

17

 

-

 

-

 

(7)

 

15

Total derivative liabilities, net(a)

 

65

 

(26)

 

-

 

(46)

 

-

 

-

 

(7)

 

16

Total

$

6,130

$

835

$

-

$

194

$

-

$

-

$

7,159

$

(675)

18 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,000

$

(2)

$

321

$

178

$

35

$

(425)

$

2,107

$

-

Non-U.S. governments

 

11

 

5

 

-

 

(4)

 

5

 

(4)

 

13

 

-

Corporate debt

 

864

 

(10)

 

79

 

(600)

 

1,155

 

(213)

 

1,275

 

-

RMBS

 

14,199

 

575

 

176

 

(1,234)

 

83

 

(239)

 

13,560

 

-

CMBS

 

917

 

8

 

62

 

381

 

58

 

(376)

 

1,050

 

-

CDO/ABS

 

9,102

 

15

 

204

 

(111)

 

103

 

(374)

 

8,939

 

-

Total bonds available for sale

 

27,093

 

591

 

842

 

(1,390)

 

1,439

 

(1,631)

 

26,944

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

RMBS

 

1,290

 

69

 

-

 

(544)

 

-

 

-

 

815

 

(18)

CMBS

 

77

 

5

 

-

 

-

 

-

 

(14)

 

68

 

3

CDO/ABS

 

4,478

 

299

 

-

 

(749)

 

-

 

(97)

 

3,931

 

128

Total other bond securities

 

5,845

 

373

 

-

 

(1,293)

 

-

 

(111)

 

4,814

 

113

Equity securities

 

27

 

-

 

-

 

(20)

 

2

 

(1)

 

8

 

2

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other invested assets

 

587

 

24

 

1

 

(23)

 

-

 

-

 

589

 

27

Other assets

 

58

 

-

 

-

 

2

 

-

 

-

 

60

 

-

Total

$

33,610

$

988

$

843

$

(2,724)

$

1,441

$

(1,743)

$

32,415

$

142

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

4,116

$

2,400

$

-

$

650

$

-

$

-

$

7,166

$

(2,044)

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

15

 

-

 

-

 

(15)

 

-

 

-

 

-

 

1

Foreign exchange contracts

 

(5)

 

(4)

 

-

 

8

 

-

 

-

 

(1)

 

-

Equity contracts

 

(75)

 

(8)

 

-

 

(18)

 

-

 

-

 

(101)

 

19

Credit contracts

 

227

 

(51)

 

-

 

(74)

 

-

 

-

 

102

 

13

Other contracts

 

(9)

 

(50)

 

-

 

52

 

-

 

-

 

(7)

 

50

Total derivative liabilities, net(a)

 

153

 

(113)

 

-

 

(47)

 

-

 

-

 

(7)

 

83

Total

$

4,269

$

2,287

$

-

$

603

$

-

$

-

$

7,159

$

(1,961)

AIG | Third Quarter 2019 Form 10-Q 19

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,056

$

-

$

(37)

$

(46)

$

54

$

(31)

$

-

$

1,996

$

-

Non-U.S. governments

 

-

 

-

 

(1)

 

1

 

4

 

-

 

-

 

4

 

-

Corporate debt

 

884

 

7

 

(10)

 

(28)

 

133

 

(44)

 

-

 

942

 

-

RMBS

 

15,377

 

213

 

5

 

(725)

 

-

 

(16)

 

7

 

14,861

 

-

CMBS

 

605

 

14

 

(14)

 

31

 

64

 

-

 

1

 

701

 

-

CDO/ABS

 

6,856

 

15

 

(31)

 

320

 

1,508

 

-

 

164

 

8,832

 

-

Total bonds available for sale

 

25,778

 

249

 

(88)

 

(447)

 

1,763

 

(91)

 

172

 

27,336

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

18

 

-

 

-

 

(18)

 

-

 

-

 

-

 

-

 

(2)

RMBS

 

1,338

 

18

 

-

 

(57)

 

50

 

-

 

-

 

1,349

 

(29)

CMBS

 

71

 

(2)

 

-

 

-

 

4

 

-

 

-

 

73

 

(2)

CDO/ABS

 

4,641

 

76

 

-

 

(267)

 

-

 

-

 

8

 

4,458

 

(6)

Total other bond securities

 

6,068

 

92

 

-

 

(342)

 

54

 

-

 

8

 

5,880

 

(39)

Equity securities

 

-

 

1

 

-

 

24

 

-

 

-

 

-

 

25

 

-

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other invested assets

 

399

 

-

 

-

 

(1)

 

-

 

-

 

-

 

398

 

-

Total

$

32,245

$

342

$

(88)

$

(766)

$

1,817

$

(91)

$

180

$

33,639

$

(39)

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

3,534

$

(242)

$

-

$

84

$

-

$

-

$

-

$

3,376

$

179

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

14

 

(1)

 

-

 

(1)

 

-

 

-

 

-

 

12

 

1

Foreign exchange contracts

 

5

 

2

 

-

 

(2)

 

-

 

-

 

-

 

5

 

(5)

Equity contracts

 

(79)

 

(12)

 

-

 

(12)

 

-

 

-

 

-

 

(103)

 

10

Credit contracts

 

246

 

(9)

 

-

 

(1)

 

-

 

-

 

-

 

236

 

10

Other contracts

 

(10)

 

(19)

 

-

 

17

 

-

 

-

 

-

 

(12)

 

14

Total derivative liabilities, net(a)

 

176

 

(39)

 

-

 

1

 

-

 

-

 

-

 

138

 

30

Total

$

3,710

$

(281)

$

-

$

85

$

-

$

-

$

-

$

3,514

$

209

20 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,404

$

1

$

(152)

$

(144)

$

54

$

(167)

$

-

$

1,996

$

-

Non-U.S. governments

 

8

 

(5)

 

5

 

(3)

 

4

 

(5)

 

-

 

4

 

-

Corporate debt

 

1,173

 

(58)

 

(7)

 

(174)

 

701

 

(693)

 

-

 

942

 

-

RMBS

 

16,136

 

632

 

5

 

(1,877)

 

8

 

(50)

 

7

 

14,861

 

-

CMBS

 

624

 

18

 

(35)

 

1

 

111

 

(19)

 

1

 

701

 

-

CDO/ABS

 

8,651

 

31

 

(116)

 

(334)

 

1,508

 

(1,072)

 

164

 

8,832

 

-

Total bonds available for sale

 

28,996

 

619

 

(300)

 

(2,531)

 

2,386

 

(2,006)

 

172

 

27,336

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

18

 

-

 

-

 

(18)

 

-

 

-

 

-

 

-

 

(1)

RMBS

 

1,464

 

73

 

-

 

(238)

 

50

 

-

 

-

 

1,349

 

124

CMBS

 

74

 

(5)

 

-

 

(1)

 

5

 

-

 

-

 

73

 

2

CDO/ABS

 

4,956

 

283

 

-

 

(780)

 

-

 

(9)

 

8

 

4,458

 

201

Total other bond securities

 

6,512

 

351

 

-

 

(1,037)

 

55

 

(9)

 

8

 

5,880

 

326

Equity securities

 

-

 

(2)

 

-

 

27

 

-

 

-

 

-

 

25

 

-

Mortgage and other loans receivable

 

5

 

-

 

-

 

(5)

 

-

 

-

 

-

 

-

 

-

Other invested assets

 

250

 

52

 

1

 

95

 

-

 

-

 

-

 

398

 

56

Total

$

35,763

$

1,020

$

(299)

$

(3,451)

$

2,441

$

(2,015)

$

180

$

33,639

$

382

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized and

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

Unrealized

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

(Losses) Included

 

 

Fair Value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

4,136

$

(986)

$

-

$

226

$

-

$

-

$

-

$

3,376

$

1,081

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

22

 

(5)

 

-

 

(5)

 

-

 

-

 

-

 

12

 

5

Foreign exchange contracts

 

-

 

(2)

 

-

 

7

 

-

 

-

 

-

 

5

 

(5)

Equity contracts

 

(82)

 

(3)

 

-

 

(20)

 

-

 

2

 

-

 

(103)

 

2

Credit contracts

 

262

 

(23)

 

-

 

(3)

 

-

 

-

 

-

 

236

 

23

Other contracts

 

(15)

 

(51)

 

-

 

54

 

-

 

-

 

-

 

(12)

 

42

Total derivative liabilities, net(a)

 

187

 

(84)

 

-

 

33

 

-

 

2

 

-

 

138

 

67

Total

$

4,323

$

(1,070)

$

-

$

259

$

-

$

2

$

-

$

3,514

$

1,148

(a)Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

 

AIG | Third Quarter 2019 Form 10-Q 21

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above are reported in the Condensed Consolidated Statements of Income as follows:

 

 

Net

 

Net Realized

 

 

 

 

 

 

Investment

 

Capital

 

Other

 

 

(in millions)

 

Income

Gains (Losses)

 

Income

 

Total

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

164

$

(24)

$

-

$

140

Other bond securities

 

110

 

15

 

-

 

125

Equity securities

 

-

 

-

 

-

 

-

Other invested assets

 

7

 

(1)

 

-

 

6

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

651

$

(60)

$

-

$

591

Other bond securities

 

306

 

67

 

-

 

373

Equity securities

 

-

 

-

 

-

 

-

Other invested assets

 

25

 

(1)

 

-

 

24

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

249

$

-

$

-

$

249

Other bond securities

 

35

 

1

 

56

 

92

Equity securities

 

1

 

-

 

-

 

1

Other invested assets

 

-

 

-

 

-

 

-

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

731

$

(112)

$

-

$

619

Other bond securities

 

92

 

(3)

 

262

 

351

Equity securities

 

(2)

 

-

 

-

 

(2)

Other invested assets

 

57

 

-

 

(5)

 

52

 

 

 

 

 

 

 

 

 

 

 

Net

 

Net Realized

 

 

 

 

 

 

Investment

 

Capital

 

Other

 

 

(in millions)

 

Income

(Gains) Losses

 

Income

 

Total

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

861

$

-

$

861

Derivative liabilities, net

 

-

 

(11)

 

(15)

 

(26)

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

2,400

$

-

$

2,400

Derivative liabilities, net

 

-

 

(64)

 

(49)

 

(113)

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

(242)

$

-

$

(242)

Derivative liabilities, net

 

-

 

(1)

 

(38)

 

(39)

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

(986)

$

-

$

(986)

Derivative liabilities, net

 

-

 

(3)

 

(81)

 

(84)

22 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for the three- and nine-month periods ended September 30, 2019 and 2018 related to Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

Issuances

 

Purchases, Sales,

 

 

 

 

 

 

and

 

Issuances and

(in millions)

 

Purchases

 

Sales

 

Settlements(a)

 

Settlements, Net(a)

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

109

$

-

$

(17)

$

92

Non-U.S. governments

 

-

 

-

 

-

 

-

Corporate debt

 

1

 

(128)

 

(408)

 

(535)

RMBS

 

253

 

-

 

(671)

 

(418)

CMBS

 

92

 

-

 

(7)

 

85

CDO/ABS

 

458

 

(198)

 

(430)

 

(170)

Total bonds available for sale

 

913

 

(326)

 

(1,533)

 

(946)

Other bond securities:

 

 

 

 

 

 

 

 

RMBS

 

-

 

-

 

(24)

 

(24)

CMBS

 

-

 

(16)

 

(1)

 

(17)

CDO/ABS

 

-

 

(153)

 

(181)

 

(334)

Total other bond securities

 

-

 

(169)

 

(206)

 

(375)

Equity securities

 

-

 

-

 

(29)

 

(29)

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

Other invested assets

 

21

 

-

 

(43)

 

(22)

Other assets

 

-

 

-

 

(1)

 

(1)

Total assets

$

934

$

(495)

$

(1,812)

$

(1,373)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

240

$

-

$

240

Derivative liabilities, net

 

(7)

 

-

 

(39)

 

(46)

Total liabilities

$

(7)

$

240

$

(39)

$

194

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

-

$

(8)

$

(38)

$

(46)

Non-U.S. governments

 

-

 

-

 

1

 

1

Corporate debt

 

25

 

-

 

(53)

 

(28)

RMBS

 

123

 

(2)

 

(846)

 

(725)

CMBS

 

58

 

(2)

 

(25)

 

31

CDO/ABS

 

394

 

(49)

 

(25)

 

320

Total bonds available for sale

 

600

 

(61)

 

(986)

 

(447)

Other bond securities:

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

(18)

 

(18)

RMBS

 

-

 

-

 

(57)

 

(57)

CMBS

 

-

 

-

 

-

 

-

CDO/ABS

 

-

 

-

 

(267)

 

(267)

Total other bond securities

 

-

 

-

 

(342)

 

(342)

Equity securities

 

24

 

-

 

-

 

24

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

Other invested assets

 

-

 

-

 

(1)

 

(1)

Other assets

 

-

 

-

 

-

 

-

Total assets

$

624

$

(61)

$

(1,329)

$

(766)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

148

$

(64)

$

84

Derivative liabilities, net

 

(18)

 

-

 

19

 

1

Total liabilities

$

(18)

$

148

$

(45)

$

85

AIG | Third Quarter 2019 Form 10-Q 23

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

 

 

 

 

 

 

Issuances

 

Purchases, Sales,

 

 

 

 

 

 

and

 

Issuances and

(in millions)

 

Purchases

 

Sales

 

Settlements(a)

 

Settlements, Net(a)

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

243

$

(16)

$

(49)

$

178

Non-U.S. governments

 

-

 

-

 

(4)

 

(4)

Corporate debt

 

58

 

(129)

 

(529)

 

(600)

RMBS

 

860

 

(26)

 

(2,068)

 

(1,234)

CMBS

 

455

 

-

 

(74)

 

381

CDO/ABS

 

1,628

 

(508)

 

(1,231)

 

(111)

Total bonds available for sale

 

3,244

 

(679)

 

(3,955)

 

(1,390)

Other bond securities:

 

 

 

 

 

 

 

 

RMBS

 

-

 

(437)

 

(107)

 

(544)

CMBS

 

18

 

(16)

 

(2)

 

-

CDO/ABS

 

-

 

(153)

 

(596)

 

(749)

Total other bond securities

 

18

 

(606)

 

(705)

 

(1,293)

Equity securities

 

9

 

-

 

(29)

 

(20)

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

Other invested assets

 

64

 

-

 

(87)

 

(23)

Other assets

 

-

 

-

 

2

 

2

Total assets

$

3,335

$

(1,285)

$

(4,774)

$

(2,724)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

616

$

34

$

650

Derivative liabilities, net

 

(29)

 

-

 

(18)

 

(47)

Total liabilities

$

(29)

$

616

$

16

$

603

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

24

$

(8)

$

(160)

$

(144)

Non-U.S. governments

 

2

 

-

 

(5)

 

(3)

Corporate debt

 

280

 

(216)

 

(238)

 

(174)

RMBS

 

630

 

(12)

 

(2,495)

 

(1,877)

CMBS

 

70

 

(2)

 

(67)

 

1

CDO/ABS

 

1,364

 

(962)

 

(736)

 

(334)

Total bonds available for sale

 

2,370

 

(1,200)

 

(3,701)

 

(2,531)

Other bond securities:

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

(18)

 

(18)

RMBS

 

1

 

(34)

 

(205)

 

(238)

CMBS

 

-

 

-

 

(1)

 

(1)

CDO/ABS

 

-

 

(4)

 

(776)

 

(780)

Total other bond securities

 

1

 

(38)

 

(1,000)

 

(1,037)

Equity securities

 

27

 

-

 

-

 

27

Mortgage and other loans receivable

 

-

 

(5)

 

-

 

(5)

Other invested assets

 

153

 

(29)

 

(29)

 

95

Other assets

 

-

 

-

 

-

 

-

Total assets

$

2,551

$

(1,272)

$

(4,730)

$

(3,451)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

391

$

(165)

$

226

Derivative liabilities, net

 

(37)

 

-

 

70

 

33

Total liabilities

$

(37)

$

391

$

(95)

$

259

(a)There were no issuances during the three- and nine-month periods ended September 30, 2019 and 2018.

 

24 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at September 30, 2019 and 2018 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Transfers of Level 3 Assets and Liabilities

We record transfers of assets and liabilities into or out of Level 3 classification at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludes $(40) million of net losses related to assets and liabilities transferred into Level 3 during the nine-month period ended September 30, 2019, and includes $24 million and $28 million of net gains related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2019, respectively.

The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludes $17 million and $41 million of net gains related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2018, respectively, and includes $2 million and $(20) million of net gains (losses) related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2018, respectively.

Transfers of Level 3 Assets

During the three- and nine-month periods ended September 30, 2019 and 2018, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS and CDO/ABS. Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity. The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to diminished market transparency and liquidity for individual security types.

During the three- and nine-month periods ended September 30, 2019 and 2018, transfers out of Level 3 assets primarily included private placement and other corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. Transfers of certain investments in municipal securities, corporate debt, RMBS, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three- and nine-month periods ended September 30, 2019 and 2018.

AIG | Third Quarter 2019 Form 10-Q 25

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

 

Fair Value at

 

 

 

 

September 30,

Valuation

 

Range

(in millions)

2019

Technique

Unobservable Input(b)

(Weighted Average)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

and political subdivisions

$

1,590

Discounted cash flow

Yield

3.12% - 3.74% (3.43%)

 

 

 

 

 

 

Corporate debt

 

781

Discounted cash flow

Yield

2.95% - 7.03% (4.99%)

 

 

 

 

 

 

RMBS(a)

 

12,350

Discounted cash flow

Constant prepayment rate

3.87% - 12.23% (8.05%)

 

 

 

 

Loss severity

36.65% - 78.25% (57.45%)

 

 

 

 

Constant default rate

1.81% - 6.41% (4.11%)

 

 

 

 

Yield

2.29% - 4.47% (3.38%)

 

 

 

 

 

 

CDO/ABS(a)

 

5,903

Discounted cash flow

Yield

2.73% - 4.75% (3.74%)

 

 

 

 

 

 

CMBS

 

499

Discounted cash flow

Yield

2.48% - 4.82% (3.65%)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

Guaranteed minimum withdrawal benefits (GMWB)

 

3,168

Discounted cash flow

Equity volatility

6.15% - 48.65%

 

 

 

 

Base lapse rate

0.16% - 12.60%

 

 

 

 

Dynamic lapse multiplier

50.00% - 143.00%

 

 

 

 

Mortality multiplier(c)

38.00% - 155.00%

 

 

 

 

Utilization

90.00% - 100.00%

 

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

 

 

 

Index Annuities

 

3,470

Discounted cash flow

Lapse rate

0.31% - 50.00%

 

 

 

 

Mortality multiplier(c)

24.00% - 180.00%

 

 

 

 

Option Budget

1.00% - 4.00%

 

 

 

 

 

 

Indexed Life

 

502

Discounted cash flow

Base lapse rate

0.00% - 37.97%

 

 

 

 

Mortality rate

0.00% - 100.00%

26 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

 

 

 

 

 

 

 

 

Fair Value at

 

 

 

 

 

December 31,

Valuation

 

Range

(in millions)

 

2018

Technique

Unobservable Input(b)

(Weighted Average)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

and political subdivisions

$

1,473

Discounted cash flow

Yield

3.91% - 5.00% (4.46%)

 

 

 

 

 

 

Corporate debt

 

445

Discounted cash flow

Yield

4.35% - 5.99% (5.17%)

 

 

 

 

 

 

RMBS(a)

 

13,608

Discounted cash flow

Constant prepayment rate

4.58% - 14.00% (9.29%)

 

 

 

 

Loss severity

39.66% - 74.40% (57.03%)

 

 

 

 

Constant default rate

2.46% - 7.39% (4.92%)

 

 

 

 

Yield

3.31% - 5.50% (4.40%)

 

 

 

 

 

 

CDO/ABS(a)

 

5,461

Discounted cash flow

Yield

3.65% - 5.10% (4.37%)

 

 

 

 

 

 

CMBS

 

447

Discounted cash flow

Yield

3.29% - 6.07% (4.68%)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

GMWB

 

1,943

Discounted cash flow

Equity volatility

6.05% - 47.65%

 

 

 

 

Base lapse rate

0.16% - 12.60%

 

 

 

 

Dynamic lapse multiplier

20.00% - 180.00%

 

 

 

 

Mortality multiplier(c)

40.00% - 153.00%

 

 

 

 

Utilization

90.00% - 100.00%

 

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

 

 

 

Index Annuities

 

1,778

Discounted cash flow

Lapse rate

0.50% - 40.00%

 

 

 

 

Mortality multiplier(c)

42.00% - 162.00%

 

 

 

 

Option Budget

1.00% - 3.00%

 

 

 

 

 

 

Indexed Life

 

374

Discounted cash flow

Base lapse rate

0.00% - 13.00%

 

 

 

 

Mortality rate

0.00% - 100.00%

(a)Information received from third-party valuation service providers. The ranges of the unobservable inputs for constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us, because there are other factors relevant to the fair values of specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.

(b)Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities.

(c)Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table.

The ranges of reported inputs for Obligations of states, municipalities and political subdivisions, Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of one standard deviation in either direction from the value-weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these Level 3 assets and liabilities.

Sensitivity to Changes in Unobservable Inputs

We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following paragraphs provide a general description of sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply.

AIG | Third Quarter 2019 Form 10-Q 27

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

Obligations of States, Municipalities and Political Subdivisions

The significant unobservable input used in the fair value measurement of certain investments in obligations of states, municipalities and political subdivisions is yield. In general, increases in the yield would decrease the fair value of investments in obligations of states, municipalities and political subdivisions.

Corporate Debt

Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the security. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt.

RMBS and CDO/ABS

The significant unobservable inputs used in fair value measurements of RMBS and certain CDO/ABS valued by third-party valuation service providers are constant prepayment rates (CPR), loss severity, constant default rates (CDR) and yield. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in CPR, loss severity, CDR and yield, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.

CMBS

The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS.

Embedded derivatives within Policyholder contract deposits

Embedded derivatives reported within Policyholder contract deposits include GMWB within variable annuity products and interest crediting rates based on market indices within index annuities, indexed life and GICs. For any given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives measured at fair value:

•Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments. Therefore, the net change in the fair value of the liability may be either a decrease or an increase, depending on the relative changes in projected rider fees and projected benefit payments.

•Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB embedded derivatives. In general, a higher positive correlation assumes that equity markets and interest rates move in a more correlated fashion, which generally increases the fair value of the liability.

•Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value, as estimated by the company, is worth more than their underlying account value). Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. Increases in assumed lapse rates will generally decrease the fair value of the liability, as fewer policyholders would persist to collect guaranteed withdrawal amounts.

•Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement assumption. Increases in assumed mortality rates will decrease the fair value of the liability, while lower mortality rate assumptions will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.

28 AIG | Third Quarter 2019 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

•Utilization assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the age of the policyholder. Utilization assumptions are based on company experience, which includes partial withdrawal behavior. Increases in assumed utilization rates will generally increase the fair value of the liability.

•Option budget estimates the expected long-term cost of options used to hedge exposures associated with equity price changes. The level of option budgets determines future costs of the options, which impacts the growth in account value and the valuation of embedded derivatives.

Investments in Certain Entities Carried at Fair Value Using Net Asset Value Per Share

The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share to measure fair value.

 

 

September 30, 2019

 

December 31, 2018

 

 

 

Fair Value

 

 

 

Fair Value

 

 

 

 

 

Using NAV

 

 

 

Using NAV

 

 

 

 

 

Per Share (or

 

Unfunded

 

Per Share (or

 

Unfunded

(in millions)

Investment Category Includes

 

its equivalent)

 

Commitments

 

its equivalent)

 

Commitments

Investment Category

 

 

 

 

 

 

 

 

 

 

Private equity funds:

 

 

 

 

 

 

 

 

 

 

Leveraged buyout

Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage

$

1,152

$

1,326

 

$

847

$

1,327

 

 

 

 

 

 

 

 

 

 

 

Real Estate / Infrastructure

Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities

 

341

 

387

 

 

190

 

83

 

 

 

 

 

 

 

 

 

 

 

Venture capital

Early-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company

 

102

 

122

 

 

126

 

127

 

 

 

 

 

 

 

 

 

 

 

Growth Equity

Funds that make investments in established companies for the purpose of growing their businesses

 

411

 

72

 

 

362

 

28

 

 

 

 

 

 

 

 

 

 

 

Mezzanine

Funds that make investments in the junior debt and equity securities of leveraged companies

 

341

 

472

 

 

211

 

75

 

 

 

 

 

 

 

 

 

 

 

Other

Includes distressed funds that invest in securities of companies that are in default or under bankruptcy protection, as well as funds that have multi-strategy, and other strategies

 

739

 

249

 

 

514

 

307

Total private equity funds

 

3,086

 

2,628

 

 

2,250

 

1,947

Hedge funds:

 

 

 

 

 

 

 

 

 

 

Event-driven

Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations

 

753

 

-

 

 

787

 

-

 

 

 

 

 

 

 

 

 

 

 

Long-short

Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk

 

548

 

-

 

 

863

 

-

 

 

 

 

 

 

 

 

 

 

 

Macro

Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions

 

848

 

-

 

 

887

 

-

 

 

 

 

 

 

 

 

 

 

 

Distressed

Securities of companies that are in default, under bankruptcy protection or troubled

 

1

 

-

 

 

21

 

8

 

 

 

 

 

 

 

 

 

 

 

Other

Includes investments held in funds that are less liquid, as well as other strategies which allow for broader allocation between public and private investments

 

162

 

1

 

 

158

 

1

Total hedge funds

 

 

2,312

 

1

 

 

2,716

 

9

Total

 

$

5,398

$

2,629

 

$

4,966

$

1,956

AIG | Third Quarter 2019 Form 10-Q 29

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

Private equity fund investments included above are not redeemable, because distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-year increments. At September 30, 2019, assuming average original expected lives of 10 years for the funds, 15 percent of the total fair value using net asset value per share (or its equivalent) presented above would have expected remaining lives of three years or less, 40 percent between four and six years and 45 percent between seven and 10 years.

 

The hedge fund investments included above, which are carried at fair value, are generally redeemable subject to the redemption notices period.

Fair Value Option

The following table presents the gains or losses recorded related to the eligible instruments for which we elected the fair value option:

 

Gain (Loss) Three Months Ended September 30,

Gain (Loss) Nine Months Ended September 30,

 

(in millions)

 

2019

 

2018

 

2019

 

2018

Assets:

 

 

 

 

 

 

 

 

Bond and equity securities

$

333

$

122

$

971

$

274

Alternative investments(a)

 

92

 

131

 

473

 

355

Liabilities:

 

 

 

 

 

 

 

 

Long-term debt(b)

 

(75)

 

6

 

(228)

 

74

Total gain

$

350

$

259

$

1,216

$

703

(a)Includes certain hedge funds, private equity funds and other investment partnerships.

(b)Includes GIAs, notes, bonds and mortgages payable.

As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, we are required to record unrealized gains and losses attributable to the observable effect of changes in credit spreads on our liabilities for which the fair value option was elected in Other Comprehensive Income. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.

The following table presents the difference between fair values and the aggregate contractual principal amounts of mortgage and other loans receivable and long-term debt for which the fair value option was elected:

 

September 30, 2019

 

December 31, 2018

 

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

(in millions)

Fair Value

Principal Amount

Difference

 

Fair Value

Principal Amount

Difference

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt*

$

2,287

$

1,652

$

635

 

$

2,213

$

1,653

$

560

*Includes GIAs, notes, bonds, loans and mortgages payable.

30 AIG | Third Quarter 2019 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements

 

FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:

 

Assets at Fair Value

 

Impairment Charges

 

Non-Recurring Basis

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

Level 1

Level 2

Level 3

 

Total

 

 

2019

 

2018

 

 

2019

 

2018

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

253

$

253

 

$

7

$

-

 

$

65

$

89

Other assets

 

-

 

-

 

1

 

1

 

 

45

 

34

 

 

62

 

35

Total

$

-

$

-

$

254

$

254

 

$

52

$

34

 

$

127

$

124

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

315

$

315

 

 

 

 

 

 

 

 

 

 

Other assets

 

-

 

-

 

11

 

11

 

 

 

 

 

 

 

 

 

 

Total

$

-

$

-

$

326

$

326

 

 

 

 

 

 

 

 

 

 

FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:

 

Estimated Fair Value

 

Carrying

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Value

September 30, 2019

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

104

$

47,682

$

47,786

$

45,075

Other invested assets

 

-

 

707

 

6

 

713

 

714

Short-term investments

 

-

 

8,536

 

-

 

8,536

 

8,536

Cash

 

3,361

 

-

 

-

 

3,361

 

3,361

Other assets

 

208

 

137

 

-

 

345

 

345

Liabilities:

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

267

 

135,346

 

135,613

 

126,011

Other liabilities

 

-

 

2,787

 

-

 

2,787

 

2,787

Long-term debt

 

-

 

26,223

 

9,113

 

35,336

 

32,975

December 31, 2018

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

105

$

43,522

$

43,627

$

43,135

Other invested assets

 

-

 

731

 

6

 

737

 

737

Short-term investments

 

-

 

6,659

 

-

 

6,659

 

6,659

Cash

 

2,873

 

-

 

-

 

2,873

 

2,873

Other assets

 

308

 

35

 

-

 

343

 

343

Liabilities:

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

339

 

121,035

 

121,374

 

120,602

Other liabilities

 

-

 

1,154

 

-

 

1,154

 

1,154

Long-term debt

 

-

 

22,822

 

8,775

 

31,597

 

32,327

 

AIG | Third Quarter 2019 Form 10-Q 31

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

 

6. Investments

Securities Available for Sale

The following table presents the amortized cost or cost and fair value of our available for sale securities:

 

 

 

 

 

 

 

 

 

 

Other-Than-

 

 

Amortized

 

Gross

 

Gross

 

 

 

Temporary

 

 

Cost or

 

Unrealized

 

Unrealized

 

Fair

 

Impairments

(in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

in AOCI(a)

September 30, 2019

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

4,727

$

501

$

(1)

$

5,227

$

-

Obligations of states, municipalities and political subdivisions

 

14,122

 

1,640

 

(17)

 

15,745

 

-

Non-U.S. governments

 

14,456

 

999

 

(79)

 

15,376

 

-

Corporate debt

 

138,950

 

12,956

 

(534)

 

151,372

 

9

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

29,513

 

3,344

 

(62)

 

32,795

 

1,222

CMBS

 

13,577

 

771

 

(12)

 

14,336

 

34

CDO/ABS

 

18,000

 

449

 

(79)

 

18,370

 

17

Total mortgage-backed, asset-backed and collateralized

 

61,090

 

4,564

 

(153)

 

65,501

 

1,273

Total bonds available for sale(b)

$

233,345

$

20,660

$

(784)

$

253,221

$

1,282

December 31, 2018

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

3,170

$

132

$

(42)

$

3,260

$

-

Obligations of states, municipalities and political subdivisions

 

15,421

 

701

 

(121)

 

16,001

 

4

Non-U.S. governments

 

14,376

 

451

 

(302)

 

14,525

 

-

Corporate debt

 

130,436

 

3,911

 

(3,647)

 

130,700

 

4

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

31,940

 

2,754

 

(317)

 

34,377

 

1,155

CMBS

 

12,673

 

242

 

(214)

 

12,701

 

31

CDO/ABS

 

17,764

 

228

 

(165)

 

17,827

 

17

Total mortgage-backed, asset-backed and collateralized

 

62,377

 

3,224

 

(696)

 

64,905

 

1,203

Total bonds available for sale(b)

$

225,780

$

8,419

$

(4,808)

$

229,391

$

1,211

(a)Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income (loss). Amount includes unrealized gains and losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.

(b)At September 30, 2019 and December 31, 2018, bonds available for sale held by us that were below investment grade or not rated totaled $28.0 billion and $28.8 billion, respectively.

 

32 AIG | Third Quarter 2019 Form 10-Q

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

Securities Available for Sale in a Loss Position

The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

Fair

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Fair

 

Unrealized

(in millions)

 

Value

 

Losses

 

 

Value

 

Losses

 

 

Value

 

Losses

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

136

$

1

 

$

43

$

-

 

$

179

$

1

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

383

 

6

 

 

256

 

11

 

 

639

 

17

Non-U.S. governments

 

919

 

27

 

 

443

 

52

 

 

1,362

 

79

Corporate debt

 

8,794

 

294

 

 

3,244

 

240

 

 

12,038

 

534

RMBS

 

2,671

 

23

 

 

1,778

 

39

 

 

4,449

 

62

CMBS

 

640

 

4

 

 

343

 

8

 

 

983

 

12

CDO/ABS

 

3,979

 

51

 

 

1,892

 

28

 

 

5,871

 

79

Total bonds available for sale

$

17,522

$

406

 

$

7,999

$

378

 

$

25,521

$

784

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

574

$

13

 

$

873

$

29

 

$

1,447

$

42

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

1,965

 

51

 

 

1,530

 

70

 

 

3,495

 

121

Non-U.S. governments

 

3,851

 

149

 

 

2,422

 

153

 

 

6,273

 

302

Corporate debt

 

47,364

 

2,181

 

 

20,056

 

1,466

 

 

67,420

 

3,647

RMBS

 

5,231

 

94

 

 

5,641

 

223

 

 

10,872

 

317

CMBS

 

2,646

 

47

 

 

4,264

 

167

 

 

6,910

 

214

CDO/ABS

 

9,169

 

144

 

 

1,324

 

21

 

 

10,493

 

165

Total bonds available for sale

$

70,800

$

2,679

 

$

36,110

$

2,129

 

$

106,910

$

4,808

At September 30, 2019, we held 5,266 individual fixed maturity securities that were in an unrealized loss position, of which 1,361 individual fixed maturity securities were in a continuous unrealized loss position for 12 months or more. We did not recognize the unrealized losses in earnings on these fixed maturity securities at September 30, 2019 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

AIG | Third Quarter 2019 Form 10-Q 33

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

Contractual Maturities of Fixed Maturity Securities Available for Sale

The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

 

Total Fixed Maturity Securities

 

Fixed Maturity Securities in a Loss

 

Available for Sale

 

Position Available for Sale

(in millions)

 

Amortized Cost

 

Fair Value

 

 

Amortized Cost

 

Fair Value

September 30, 2019

 

 

 

 

 

 

 

 

 

Due in one year or less

$

10,910

$

11,107

 

$

1,373

$

1,339

Due after one year through five years

 

45,243

 

46,583

 

 

5,878

 

5,631

Due after five years through ten years

 

43,042

 

45,877

 

 

3,947

 

3,756

Due after ten years

 

73,060

 

84,153

 

 

3,651

 

3,492

Mortgage-backed, asset-backed and collateralized

 

61,090

 

65,501

 

 

11,456

 

11,303

Total

$

233,345

$

253,221

 

$

26,305

$

25,521

December 31, 2018

 

 

 

 

 

 

 

 

 

Due in one year or less

$

9,539

$

9,674

 

$

2,322

$

2,294

Due after one year through five years

 

47,400

 

47,905

 

 

17,382

 

16,844

Due after five years through ten years

 

42,363

 

42,045

 

 

27,724

 

26,517

Due after ten years

 

64,101

 

64,862

 

 

35,319

 

32,980

Mortgage-backed, asset-backed and collateralized

 

62,377

 

64,905

 

 

28,971

 

28,275

Total

$

225,780

$

229,391

 

$

111,718

$

106,910

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.

The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:

 

Three Months Ended September 30,

Nine Months Ended September 30,

 

 

2019

 

2018

2019

 

2018

 

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

(in millions)

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

 

Losses

Fixed maturity securities

$

198

$

70

$

82

$

71

$

464

$

280

$

252

$

244

Equity securities

 

-

 

-

 

-

 

-

 

-

 

-

 

16

 

-

Total

$

198

$

70

$

82

$

71

$

464

$

280

$

268

$

244

For the three- and nine-month periods ended September 30, 2019, the aggregate fair value of available for sale securities sold was $4.5 billion and $17.3 billion, respectively, which resulted in net realized capital gains of $128 million and $184 million, respectively.

 

For the three- and nine-month periods ended September 30, 2018, the aggregate fair value of available for sale securities sold was $6.0 billion and $18.1 billion, respectively, which resulted in net realized capital gains of $11 million and $24 million, respectively.

 

34 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

Other Securities Measured at Fair Value

The following table presents the fair value of other securities measured at fair value based on our election of the fair value option:

 

 

September 30, 2019

 

 

 

December 31, 2018

 

 

 

Fair

Percent

 

 

 

Fair

Percent

 

(in millions)

 

Value

of Total

 

 

 

Value

of Total

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

2,296

25

%

 

$

2,665

21

%

Non-U.S. governments

 

-

-

 

 

 

45

-

 

Corporate debt

 

18

-

 

 

 

1,671

13

 

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

RMBS

 

1,297

14

 

 

 

1,714

14

 

CMBS

 

403

5

 

 

 

388

3

 

CDO/ABS and other collateralized*

 

4,313

47

 

 

 

4,932

39

 

Total mortgage-backed, asset-backed and collateralized

 

6,013

66

 

 

 

7,034

56

 

Total fixed maturity securities

 

8,327

91

 

 

 

11,415

90

 

Equity securities

 

771

9

 

 

 

1,253

10

 

Total

$

9,098

100

%

 

$

12,668

100

%

*There were no U.S. government agency-backed ABS at September 30, 2019. Includes $178 million of U.S. government agency-backed ABS at December 31, 2018.

Other Invested Assets

The following table summarizes the carrying amounts of other invested assets:

 

 

September 30,

 

December 31,

(in millions)

 

2019

 

2018

Alternative investments(a) (b)

$

8,532

$

8,966

Investment real estate(c)

 

9,491

 

8,935

All other investments

 

1,463

 

1,440

Total

$

19,486

$

19,341

(a)At September 30, 2019, included hedge funds of $3.5 billion, private equity funds of $4.7 billion and affordable housing partnerships of $336 million. At December 31, 2018, included hedge funds of $4.2 billion, private equity funds of $4.3 billion and affordable housing partnerships of $438 million.

 

(b)At September 30, 2019, approximately 70 percent of our hedge fund portfolio is available for redemption in 2019. The remaining 30 percent will be available for redemption between 2020 and 2027.

 

(c)Net of accumulated depreciation of $710 million and $598 million at September 30, 2019 and December 31, 2018, respectively.

Net Investment Income

The following table presents the components of Net investment income:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Available for sale fixed maturity securities, including short-term investments

$

2,698

$

2,629

 

$

8,052

$

7,775

Other fixed maturity securities(a)

 

333

 

60

 

 

941

 

29

Equity securities

 

(51)

 

(21)

 

 

6

 

(50)

Interest on mortgage and other loans

 

495

 

455

 

 

1,511

 

1,352

Alternative investments(b)

 

115

 

329

 

 

879

 

837

Real estate

 

96

 

72

 

 

227

 

133

Other investments(a)

 

(143)

 

(13)

 

 

(203)

 

11

Total investment income

 

3,543

 

3,511

 

 

11,413

 

10,087

Investment expenses

 

135

 

115

 

 

381

 

365

Net investment income

$

3,408

$

3,396

 

$

11,032

$

9,722

(a)In the third quarter of 2019, we reclassified $96 million in net investment income of bonds recorded at fair value from Other investments to Other fixed maturity securities.

(b)Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds are recorded as of the balance sheet date. Private equity funds are generally reported on a one-quarter lag.

AIG | Third Quarter 2019 Form 10-Q 35

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

Net Realized Capital Gains and Losses

The following table presents the components of Net realized capital gains (losses):

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

 

2018

Sales of fixed maturity securities

$

128

$

11

 

$

184

 

$

8

Sales of equity securities

 

-

 

-

 

 

-

 

 

16

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

 

Change in intent

 

-

 

(3)

 

 

(3)

 

 

(52)

Foreign currency declines

 

(6)

 

(1)

 

 

(15)

 

 

(13)

Issuer-specific credit events

 

(17)

 

(30)

 

 

(113)

 

 

(92)

Adverse projected cash flows

 

(1)

 

(1)

 

 

(6)

 

 

(1)

Provision for loan losses

 

(25)

 

(23)

 

 

(35)

 

 

(73)

Foreign exchange transactions

 

(203)

 

(21)

 

 

(242)

 

 

(155)

Variable annuity embedded derivatives, net of related hedges

 

311

 

(185)

 

 

10

 

 

(2)

All other derivatives and hedge accounting

 

466

 

(1)

 

 

601

 

 

149

Loss on sale of private equity funds

 

-

 

(311)

 

 

-

 

 

(311)

Other

 

276

 

54

 

 

506

 

 

161

Net realized capital gains (losses)

$

929

$

(511)

 

$

887

 

$

(365)

Change in Unrealized Appreciation (Depreciation) of Investments

 

The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale securities and other investments:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Increase (decrease) in unrealized appreciation (depreciation) of investments:

 

 

 

 

 

 

 

 

 

Fixed maturity securities

$

4,377

$

(920)

 

$

16,265

$

(8,858)

Other investments

 

-

 

(31)

 

 

(68)

 

(59)

Total increase (decrease) in unrealized appreciation (depreciation) of investments

$

4,377

$

(951)

 

$

16,197

$

(8,917)

The following table summarizes the unrealized gains and losses recognized in Net Investment Income during the reporting period on equity securities still held at the reporting date:

Three Months Ended September 30,

2019

 

2018

 

 

 

 

Other

 

 

 

 

 

 

Other

 

 

 

 

 

Invested

 

 

 

 

 

Invested

 

 

(in millions)

 

Equities

 

Assets

 

Total

 

 

Equities

 

Assets

 

Total

Net gains and losses recognized during the period on equity securities

$

(51)

$

105

$

54

 

$

(13)

$

183

$

170

Less: Net gains and losses recognized during the period on equity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities sold during the period

 

18

 

13

 

31

 

 

28

 

18

 

46

Unrealized gains and losses recognized during the reporting

 

 

 

 

 

 

 

 

 

 

 

 

 

period on equity securities still held at the reporting date

$

(69)

$

92

$

23

 

$

(41)

$

165

$

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2019

 

2018

 

 

 

 

Other

 

 

 

 

 

 

Other

 

 

 

 

 

Invested

 

 

 

 

 

Invested

 

 

(in millions)

 

Equities

 

Assets

 

Total

 

 

Equities

 

Assets

 

Total

Net gains and losses recognized during the period on equity securities

$

6

$

615

$

621

 

$

(41)

$

497

$

456

Less: Net gains and losses recognized during the period on equity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities sold during the period

 

30

 

169

 

199

 

 

34

 

45

 

79

Unrealized gains and losses recognized during the reporting

 

 

 

 

 

 

 

 

 

 

 

 

 

period on equity securities still held at the reporting date

$

(24)

$

446

$

422

 

$

(75)

$

452

$

377

36 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

Evaluating Investments for Other-Than-Temporary Impairments

For a discussion of our policy for evaluating investments for other-than-temporary impairments see Note 6 to the Consolidated Financial Statements in the 2018 Annual Report.

Credit Impairments

The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Balance, beginning of period

$

34

$

188

 

$

-

$

526

Increases due to:

 

 

 

 

 

 

 

 

 

Credit impairments on new securities subject to impairment losses

 

10

 

15

 

 

105

 

32

Additional credit impairments on previously impaired securities

 

8

 

16

 

 

14

 

61

Reductions due to:

 

 

 

 

 

 

 

 

 

Credit impaired securities fully disposed for which there was no

 

 

 

 

 

 

 

 

 

prior intent or requirement to sell

 

(3)

 

(12)

 

 

(62)

 

(143)

Accretion on securities previously impaired due to credit*

 

(7)

 

(164)

 

 

(15)

 

(433)

Balance, end of period

$

42

$

43

 

$

42

$

43

*Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time.

Purchased Credit Impaired (PCI) Securities

We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determine whether it is probable at acquisition that we will not collect all contractually required payments for these PCI securities, including both principal and interest. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security is determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is accreted into Net investment income over their remaining lives on an effective yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.

The following tables present information on our PCI securities, which are included in bonds available for sale:

(in millions)

At Date of Acquisition

Contractually required payments (principal and interest)

$

35,522

Cash flows expected to be collected*

 

29,095

Recorded investment in acquired securities

 

19,648

*Represents undiscounted expected cash flows, including both principal and interest.

 

AIG | Third Quarter 2019 Form 10-Q 37

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

(in millions)

September 30, 2019

December 31, 2018

Outstanding principal balance

$

11,016

$

12,495

Amortized cost

 

7,434

 

8,646

Fair value

 

9,171

 

10,280

The following table presents activity for the accretable yield on PCI securities:

 

Three Months Ended

Nine Months Ended

 

September 30,

September 30,

(in millions)

 

2019

 

2018

 

2019

 

2018

Balance, beginning of period

$

6,402

$

7,461

$

7,210

$

7,501

Newly purchased PCI securities

 

4

 

5

 

17

 

32

Accretion

 

(172)

 

(176)

 

(495)

 

(553)

Effect of changes in interest rate indices

 

(278)

 

15

 

(678)

 

189

Net reclassification from (to) non-accretable difference,

 

 

 

 

 

 

 

 

including effects of prepayments

 

(162)

 

93

 

(260)

 

229

Balance, end of period

$

5,794

$

7,398

$

5,794

$

7,398

Pledged Investments

Secured Financing and Similar Arrangements

We enter into secured financing transactions whereby certain securities are sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. Our secured financing transactions also include those that involve the transfer of securities to financial institutions in exchange for cash (securities lending agreements). In all of these secured financing transactions, the securities transferred by us (pledged collateral) may be sold or repledged by the counterparties. These agreements are recorded at their contracted amounts plus accrued interest, other than those that are accounted for at fair value.

Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transactions. In the event of a decline in the fair value of the pledged collateral under these secured financing transactions, we may be required to transfer cash or additional securities as pledged collateral under these agreements. At the termination of the transactions, we and our counterparties are obligated to return the amounts borrowed and the securities transferred, respectively.

The following table presents the fair value of securities pledged to counterparties under secured financing transactions, including repurchase and securities lending agreements:

(in millions)

 

September 30, 2019

 

December 31, 2018

Fixed maturity securities available for sale

$

2,781

$

1,050

Other bond securities, at fair value

$

-

$

122

At September 30, 2019 and December 31, 2018, amounts borrowed under repurchase and securities lending agreements totaled $2.8 billion and $1.2 billion, respectively.

38 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

The following table presents the fair value of securities pledged under our repurchase agreements by collateral type and by remaining contractual maturity:

 

Remaining Contractual Maturity of the Agreements

(in millions)

Overnight and Continuous

 

up to

30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

64

$

61

$

-

$

-

$

-

$

125

Corporate debt

 

28

 

104

 

-

 

-

 

-

 

132

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

-

 

-

 

-

 

-

 

-

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

-

 

-

 

-

 

-

 

-

Total

$

92

$

165

$

-

$

-

$

-

$

257

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

25

$

35

$

-

$

-

$

-

$

60

Corporate debt

 

51

 

55

 

-

 

-

 

-

 

106

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

11

 

-

 

-

 

-

 

-

 

11

Non-U.S. governments

 

-

 

3

 

-

 

-

 

-

 

3

Corporate debt

 

17

 

38

 

53

 

-

 

-

 

108

Total

$

104

$

131

$

53

$

-

$

-

$

288

The following table presents the fair value of securities pledged under our securities lending agreements by collateral type and by remaining contractual maturity:

 

Remaining Contractual Maturity of the Agreements

(in millions)

 

Overnight and Continuous

 

up to

30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

-

$

262

$

128

$

-

$

390

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

1,062

 

635

 

437

 

-

 

2,134

Total

$

-

$

1,062

$

897

$

565

$

-

$

2,524

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

50

$

130

$

-

$

-

$

180

Non-U.S. governments

 

-

 

21

 

8

 

-

 

-

 

29

Corporate debt

 

-

 

330

 

345

 

-

 

-

 

675

Total

$

-

$

401

$

483

$

-

$

-

$

884

AIG | Third Quarter 2019 Form 10-Q 39

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments

 

We also enter into agreements in which securities are purchased by us under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge this collateral received.

The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:

(in millions)

 

September 30, 2019

 

December 31, 2018

Securities collateral pledged to us

$

2,075

$

426

Amount sold or repledged by us

 

35

 

106

At September 30, 2019 and December 31, 2018, amounts loaned under reverse repurchase agreements totaled $2.1 billion and $426 million, respectively.

We do not currently offset any secured financing transactions. All such transactions are collateralized and margined daily consistent with market standards and subject to enforceable master netting arrangements with rights of set off.

Insurance – Statutory and Other Deposits

The total carrying value of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, was $8.4 billion and $7.9 billion at September 30, 2019 and December 31, 2018, respectively.

Other Pledges and Restrictions

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $194 million and $202 million of stock in FHLBs at September 30, 2019 and December 31, 2018, respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with borrowings and funding agreements from FHLBs, with a fair value of $4.6 billion and $1.9 billion, respectively, at September 30, 2019 and $4.2 billion and $2.1 billion, respectively, at December 31, 2018.

Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations was approximately $1.6 billion at both September 30, 2019 and December 31, 2018. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.

Investments held in escrow accounts or otherwise subject to restriction as to their use were $273 million, comprised of bonds available for sale and short term investments at both September 30, 2019 and December 31, 2018.

40 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities

 

 

7. Lending Activities

The following table presents the composition of Mortgage and other loans receivable, net:

 

September 30,

 

December 31,

(in millions)

 

2019

 

2018

Commercial mortgages*

$

34,954

$

32,882

Residential mortgages

 

6,525

 

6,532

Life insurance policy loans

 

2,096

 

2,147

Commercial loans, other loans and notes receivable

 

1,930

 

1,971

Total mortgage and other loans receivable

 

45,505

 

43,532

Allowance for credit losses

 

(430)

 

(397)

Mortgage and other loans receivable, net

$

45,075

$

43,135

*Commercial mortgages primarily represent loans for apartments, offices and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 22 percent and 11 percent, respectively, at both September 30, 2019 and December 31, 2018).

Credit Quality of Commercial Mortgages

The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:

 

Debt Service Coverage Ratios(a)

(in millions)

 

>1.20X

 

1.00X - 1.20X

 

<1.00X

 

Total

September 30, 2019

 

 

 

 

 

 

 

 

Loan-to-Value Ratios(b)

 

 

 

 

 

 

 

 

Less than 65%

$

20,822

$

2,771

$

173

$

23,766

65% to 75%

 

9,744

 

677

 

93

 

10,514

76% to 80%

 

173

 

19

 

13

 

205

Greater than 80%

 

182

 

143

 

144

 

469

Total commercial mortgages

$

30,921

$

3,610

$

423

$

34,954

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

Loan-to-Value Ratios(b)

 

 

 

 

 

 

 

 

Less than 65%

$

19,204

$

2,543

$

250

$

21,997

65% to 75%

 

9,060

 

300

 

203

 

9,563

76% to 80%

 

476

 

20

 

15

 

511

Greater than 80%

 

596

 

103

 

112

 

811

Total commercial mortgages

$

29,336

$

2,966

$

580

$

32,882

(a)The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio was 1.9X for both periods ended September 30, 2019 and December 31, 2018.

 

(b)The loan-to-value ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 57 percent and 58 percent at September 30, 2019 and December 31, 2018, respectively.

AIG | Third Quarter 2019 Form 10-Q 41

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities

 

The following table presents the credit quality performance indicators for commercial mortgages:

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

of

 

Class

 

 

of

 

(dollars in millions)

Loans

 

Apartments

 

Offices

 

Retail

Industrial

 

Hotel

 

Others

 

Total(c)

Total $

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

747

 

$

13,263

$

9,903

$

5,479

$

3,348

$

2,337

$

519

$

34,849

100

%

Restructured(a)

2

 

 

-

 

90

 

-

 

-

 

15

 

-

 

105

-

 

90 days or less delinquent

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

Total(b)

749

 

$

13,263

$

9,993

$

5,479

$

3,348

$

2,352

$

519

$

34,954

100

%

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

 

$

-

$

2

$

1

$

-

$

6

$

-

$

9

-

%

General

 

 

 

93

 

141

 

44

 

28

 

15

 

5

 

326

1

 

Total allowance for credit losses

 

 

$

93

$

143

$

45

$

28

$

21

$

5

$

335

1

%

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

762

 

$

11,190

$

9,774

$

5,645

$

3,074

$

2,507

$

580

$

32,770

100

%

Restructured(a)

2

 

 

-

 

96

 

-

 

-

 

16

 

-

 

112

-

 

90 days or less delinquent

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

Total(b)

764

 

$

11,190

$

9,870

$

5,645

$

3,074

$

2,523

$

580

$

32,882

100

%

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

 

$

-

$

2

$

-

$

-

$

1

$

-

$

3

-

%

General

 

 

 

122

 

104

 

51

 

13

 

19

 

6

 

315

1

 

Total allowance for credit losses

 

 

$

122

$

106

$

51

$

13

$

20

$

6

$

318

1

%

(a)Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt restructurings see Note 7 to the Consolidated Financial Statements in the 2018 Annual Report.

(b)Does not reflect allowance for credit losses.

(c)Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.

Allowance for Credit Losses

For a discussion of our accounting policy for evaluating Mortgage and other loans receivable for impairment see Note 7 to the Consolidated Financial Statements in the 2018 Annual Report.

The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable:

Nine Months Ended September 30,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

Commercial

 

 

Other

 

 

 

 

Commercial

 

 

Other

 

 

(in millions)

 

 

 

 

 

 

 

Mortgages

 

 

Loans

 

Total

 

 

Mortgages

 

 

Loans

 

Total

Allowance, beginning of year

 

 

 

 

 

 

$

318

 

$

79

$

397

 

$

247

 

$

75

$

322

Loans charged off

 

 

 

 

 

 

 

(2)

 

 

-

 

(2)

 

 

(17)

 

 

-

 

(17)

Recoveries of loans previously charged off

 

 

 

 

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

-

Net charge-offs

 

 

 

 

 

 

 

(2)

 

 

-

 

(2)

 

 

(17)

 

 

-

 

(17)

Provision for loan losses

 

 

 

 

 

 

 

19

 

 

16

 

35

 

 

66

 

 

8

 

74

Allowance, end of period

 

 

 

 

 

 

$

335

*

$

95

$

430

 

$

296

*

$

83

$

379

*Of the total allowance, $10 million and $3 million relate to individually assessed credit losses on $151 million and $25 million of commercial mortgages at September 30, 2019 and 2018, respectively.

 

42 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities

 

There were no loans modified in troubled debt restructurings during the nine-month period ended September 30, 2019. During the nine-month period ended September 30, 2018, loans with a carrying value of $15 million were modified in troubled debt restructurings.

 

 

8. Variable Interest Entities

We enter into various arrangements with variable interest entities (VIEs) in the normal course of business and consolidate the VIEs when we determine we are the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and our involvement with the entity. When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the entity was designed to expose the variable interest holders to.

The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of our decision-making ability and our ability to influence activities that significantly affect the economic performance of the VIE.

Balance Sheet Classification and Exposure to Loss

The following table presents the total assets and total liabilities associated with our variable interests in consolidated VIEs, as classified in the Condensed Consolidated Balance Sheets:

 

 

Real Estate and

 

 

 

Affordable

 

 

 

 

 

 

Investment

 

Securitization

 

Housing

 

 

 

 

(in millions)

 

Entities(d)

 

Vehicles(e)

 

Partnerships

 

Other

 

Total

September 30, 2019

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

211

$

7,217

$

-

$

-

$

7,428

Other bond securities

 

-

 

3,641

 

-

 

-

 

3,641

Mortgage and other loans receivable

 

-

 

3,520

 

-

 

-

 

3,520

Other invested assets

 

5,774

 

-

 

3,518

 

33

 

9,325

Other(a)

 

444

 

1,934

 

498

 

49

 

2,925

Total assets(b)

$

6,429

$

16,312

$

4,016

$

82

$

26,839

Liabilities:

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

3,194

$

3,720

$

2,121

$

4

$

9,039

Other(c)

 

400

 

156

 

184

 

23

 

763

Total liabilities

$

3,594

$

3,876

$

2,305

$

27

$

9,802

December 31, 2018

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

-

$

7,662

$

-

$

-

$

7,662

Other bond securities

 

-

 

3,923

 

-

 

2

 

3,925

Mortgage and other loans receivable

 

-

 

3,693

 

-

 

-

 

3,693

Other invested assets

 

5,212

 

-

 

3,142

 

24

 

8,378

Other(a)

 

580

 

1,581

 

394

 

70

 

2,625

Total assets(b)

$

5,792

$

16,859

$

3,536

$

96

$

26,283

Liabilities:

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

2,577

$

3,154

$

1,834

$

4

$

7,569

Other(c)

 

227

 

165

 

159

 

24

 

575

Total liabilities

$

2,804

$

3,319

$

1,993

$

28

$

8,144

(a) Comprised primarily of Short-term investments and Other assets at September 30, 2019 and December 31, 2018.

(b) The assets of each VIE can be used only to settle specific obligations of that VIE.

(c) Comprised primarily of Other liabilities at September 30, 2019 and December 31, 2018.

(d) At September 30, 2019 and December 31, 2018, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $2.7 billion and $1.4 billion, respectively.

(e) At September 30, 2019 and December 31, 2018, $15.5 billion and $16.0 billion, respectively, of the total assets of consolidated securitization vehicles were owed to AIG Parent or its subsidiaries.

AIG | Third Quarter 2019 Form 10-Q 43

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 8. Variable Interest Entities

 

We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to us, except in limited circumstances when we have provided a guarantee to the VIE’s interest holders.

The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:

 

 

 

 

Maximum Exposure to Loss

 

 

Total VIE

 

On-Balance

 

Off-Balance

 

 

 

(in millions)

 

Assets

 

Sheet(b)

 

Sheet

 

 

Total

September 30, 2019

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

278,064

$

6,537

$

3,553

 

$

10,090

Affordable housing partnerships

 

3,358

 

462

 

-

 

 

462

Other

 

5,387

 

326

 

-

(c)

 

326

Total

$

286,809

$

7,325

$

3,553

 

$

10,878

December 31, 2018

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

309,598

$

6,820

$

2,501

 

$

9,321

Affordable housing partnerships

 

4,116

 

607

 

-

 

 

607

Other

 

2,813

 

284

 

1,222

(c)

 

1,506

Total

$

316,527

$

7,711

$

3,723

 

$

11,434

(a) Comprised primarily of hedge funds and private equity funds.

(b) At September 30, 2019 and December 31, 2018, $7.0 billion and $7.4 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.

(c) These amounts represent our estimate of the maximum exposure to loss under certain insurance policies issued to VIEs if a hypothetical loss occurred to the extent of the full amount of the insured value. Our insurance policies cover defined risks and our estimate of liability is included in our insurance reserves on the balance sheet.

For additional information on VIEs see Note 10 to the Consolidated Financial Statements in the 2018 Annual Report.

9. Derivatives and Hedge Accounting

We use derivatives and other financial instruments as part of our financial risk management programs and as part of our investment operations.

For a discussion of our accounting policies and procedures regarding derivatives and hedge accounting see Note 11 to the Consolidated Financial Statements in the 2018 Annual Report.

Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associated with embedded derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding medium- and long-term notes as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally foreign exchange forwards and swaps) are used to economically mitigate risk associated with non-U.S. dollar denominated debt, net capital exposures, and foreign currency transactions. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities and economically hedge certain investments. We use credit derivatives to manage our credit exposures. The derivatives are effective economic hedges of the exposures that they are meant to offset.

In addition to hedging activities, we also enter into derivative instruments with respect to investment operations, which may include, among other things, credit default swaps (CDSs) and purchases of investments with embedded derivatives, such as equity-linked notes and convertible bonds.

44 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. Derivatives and Hedge Accounting

 

The following table presents the notional amounts of our derivatives and the fair value of derivative assets and liabilities in the Condensed Consolidated Balance Sheets:

 

September 30, 2019

 

December 31, 2018

 

Gross Derivative Assets

 

Gross Derivative Liabilities

 

Gross Derivative Assets

 

Gross Derivative Liabilities

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

(in millions)

 

Amount

 

Value

 

 

Amount

 

Value

 

 

Amount

 

Value

 

 

Amount

 

Value

Derivatives designated as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging instruments:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

624

$

5

 

$

410

$

8

 

$

10

$

-

 

$

866

$

19

Foreign exchange contracts

 

6,614

 

558

 

 

2,212

 

78

 

 

6,357

 

363

 

 

2,536

 

147

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

as hedging instruments:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

60,452

 

4,377

 

 

32,595

 

2,848

 

 

42,821

 

2,890

 

 

27,329

 

2,004

Foreign exchange contracts

 

11,360

 

1,104

 

 

6,469

 

862

 

 

11,134

 

801

 

 

5,434

 

711

Equity contracts

 

20,218

 

797

 

 

8,073

 

88

 

 

17,807

 

398

 

 

2,399

 

15

Credit contracts(b)

 

44

 

1

 

 

943

 

121

 

 

8

 

1

 

 

1,406

 

236

Other contracts(c)

 

40,804

 

15

 

 

58

 

8

 

 

39,070

 

15

 

 

58

 

6

Total derivatives, gross

$

140,116

$

6,857

 

$

50,760

$

4,013

 

$

117,207

$

4,468

 

$

40,028

$

3,138

Counterparty netting(d)

 

 

 

(2,795)

 

 

 

 

(2,795)

 

 

 

 

(1,713)

 

 

 

 

(1,713)

Cash collateral(e)

 

 

 

(2,937)

 

 

 

 

(133)

 

 

 

 

(1,840)

 

 

 

 

(187)

Total derivatives on condensed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

consolidated balance sheets(f)

 

 

$

1,125

 

 

 

$

1,085

 

 

 

$

915

 

 

 

$

1,238

(a)Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.

(b)As of September 30, 2019 and December 31, 2018, included CDSs on super senior multi-sector CDOs with a net notional amount of $160 million and $592 million (fair value liability of $91 million and $224 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio.

(c)Consists primarily of stable value wraps and contracts with multiple underlying exposures.

(d)Represents netting of derivative exposures covered by a qualifying master netting agreement.

(e)Represents cash collateral posted and received that is eligible for netting.

(f)Freestanding derivatives only, excludes embedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities, respectively. Fair value of assets related to bifurcated embedded derivatives was zero at both September 30, 2019 and December 31, 2018. Fair value of liabilities related to bifurcated embedded derivatives was $7.2 billion and $4.1 billion, respectively, at September 30, 2019 and December 31, 2018. A bifurcated embedded derivative is generally presented with the host contract in the Condensed Consolidated Balance Sheets. Embedded derivatives are primarily related to guarantee features in variable annuity products, which include equity and interest rate components.

 

Collateral

We engage in derivative transactions that are not subject to a clearing requirement directly with unaffiliated third parties, in most cases, under International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements. Many of the ISDA Master Agreements also include Credit Support Annex provisions, which provide for collateral postings that may vary at various ratings and threshold levels. We attempt to reduce our risk with certain counterparties by entering into agreements that enable collateral to be obtained from a counterparty on an upfront or contingent basis. We minimize the risk that counterparties might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value and generally requiring additional collateral to be posted upon the occurrence of certain events or circumstances. In addition, certain derivative transactions have provisions that require collateral to be posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate the transaction. In the case of some of the derivative transactions, upon a downgrade of our long-term debt ratings, as an alternative to posting collateral and subject to certain conditions, we may assign the transaction to an obligor with higher debt ratings or arrange for a substitute guarantee of our obligations by an obligor with higher debt ratings or take other similar action. The actual amount of collateral required to be posted to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade.

Collateral posted by us to third parties for derivative transactions was $1.9 billion at September 30, 2019 and $1.7 billion at December 31, 2018. In the case of collateral posted under derivative transactions that are not subject to clearing, this collateral can generally be repledged or resold by the counterparties. Collateral provided to us from third parties for derivative transactions was $3.3 billion and $2.1 billion at September 30, 2019 and December 31, 2018, respectively. In the case of collateral provided to us under derivative transactions that are not subject to clearing, we generally can repledge or resell collateral.

AIG | Third Quarter 2019 Form 10-Q 45

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. Derivatives and Hedge Accounting

 

Offsetting

We have elected to present all derivative receivables and derivative payables, and the related cash collateral received and paid, on a net basis on our Condensed Consolidated Balance Sheets when a legally enforceable ISDA Master Agreement exists between us and our derivative counterparty. An ISDA Master Agreement is an agreement governing multiple derivative transactions between two counterparties. The ISDA Master Agreement generally provides for the net settlement of all, or a specified group, of these derivative transactions, as well as transferred collateral, through a single payment, and in a single currency, as applicable. The net settlement provisions apply in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions governed by the ISDA Master Agreement.

Hedge Accounting

We designated certain derivatives entered into with third parties as fair value hedges of available for sale investment securities held by our insurance subsidiaries. The fair value hedges include foreign currency forwards and cross currency swaps designated as hedges of the change in fair value of foreign currency denominated available for sale securities attributable to changes in foreign exchange rates. We also designated certain interest rate swaps entered into with third parties as fair value hedges of fixed rate GICs attributable to changes in benchmark interest rates.

We use foreign currency denominated debt and cross-currency swaps as hedging instruments in net investment hedge relationships to mitigate the foreign exchange risk associated with our non-U.S. dollar functional currency foreign subsidiaries. For net investment hedge relationships where issued debt is used as a hedging instrument, we assess the hedge effectiveness and measure the amount of ineffectiveness based on changes in spot rates. For net investment hedge relationships that use derivatives as hedging instruments, we assess hedge effectiveness and measure hedge ineffectiveness using changes in forward rates. For the three- and nine-month periods ended September 30, 2019, we recognized gains of $89 million and $146 million, respectively, and for the three- and nine-month periods ended September 30, 2018, we recognized gains of $28 million and $27 million, respectively, included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge relationships.

A qualitative methodology is utilized to assess hedge effectiveness for net investment hedges, while regression analysis is employed for all other hedges.

46 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. Derivatives and Hedge Accounting

 

The following table presents the gain (loss) recognized in earnings on our derivative instruments in fair value hedging relationships in the Condensed Consolidated Statements of Income:

 

Gains/(Losses) Recognized in Earnings for:

 

 

 

 

Hedging

Excluded

Hedged

 

 

 

(in millions)

Derivatives(a)

Components(b)

Items

 

Net Impact

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

-

$

-

$

-

 

$

-

Interest credited to policyholder account balances

 

4

 

-

 

(4)

 

 

-

Net investment income

 

-

 

-

 

-

 

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

228

 

41

 

(228)

 

 

41

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(1)

$

-

$

1

 

$

-

Interest credited to policyholder account balances

 

-

 

-

 

-

 

 

-

Net investment income

 

-

 

-

 

-

 

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(16)

 

5

 

16

 

 

5

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

-

$

-

$

-

 

$

-

Interest credited to policyholder account balances

 

18

 

-

 

(18)

 

 

-

Net investment income

 

(1)

 

-

 

1

 

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

278

 

84

 

(278)

 

 

84

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(9)

$

-

$

10

 

$

1

Interest credited to policyholder account balances

 

-

 

-

 

-

 

 

-

Net investment income

 

-

 

-

 

-

 

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

175

 

9

 

(175)

 

 

9

(a)Gains and losses on derivative instruments designated and qualifying in fair value hedges that are included in the assessment of hedge effectiveness.

(b)Gains and losses on derivative instruments designated and qualifying in fair value hedges that are excluded from the assessment of hedge effectiveness and recognized in earnings on a mark-to-market basis.

AIG | Third Quarter 2019 Form 10-Q 47

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. Derivatives and Hedge Accounting

 

Derivatives Not Designated as Hedging Instruments

The following table presents the effect of derivative instruments not designated as hedging instruments in the Condensed Consolidated Statements of Income:

 

Gains (Losses) Recognized in Earnings

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

By Derivative Type:

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

1,078

$

(270)

 

$

2,052

$

(892)

Foreign exchange contracts

 

342

 

43

 

 

545

 

295

Equity contracts

 

96

 

(199)

 

 

(23)

 

(386)

Credit contracts

 

26

 

6

 

 

35

 

18

Other contracts

 

14

 

18

 

 

48

 

52

Embedded derivatives

 

(756)

 

229

 

 

(2,037)

 

1,164

Total

$

800

$

(173)

 

$

620

$

251

By Classification:

 

 

 

 

 

 

 

 

 

Policy fees

$

16

$

17

 

$

51

$

51

Net investment income

 

(3)

 

-

 

 

(58)

 

(3)

Net realized capital gains (losses)

 

780

 

(223)

 

 

611

 

133

Other income

 

-

 

35

 

 

-

 

76

Policyholder benefits and claims incurred

 

7

 

(2)

 

 

16

 

(6)

Total

$

800

$

(173)

 

$

620

$

251

CREDIT RISK-RELATED CONTINGENT FEATURES

 

We estimate that at September 30, 2019, based on our outstanding financial derivative transactions, a downgrade of our long-term senior debt ratings to BBB or BBB– by Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc., and/or a downgrade to Baa2 or Baa3 by Moody’s Investors’ Service, Inc. would permit counterparties to make additional collateral calls and permit certain counterparties to elect early termination of contracts, resulting in corresponding collateral postings and termination payments in the total amount of up to approximately $65 million. The aggregate fair value of our derivatives that were in a net liability position and that contain such credit risk-related contingencies which can be triggered below our long-term senior debt ratings of BBB+ or Baa1 was approximately $391 million and $423 million at September 30, 2019 and December 31, 2018, respectively. The aggregate fair value of assets posted as collateral under these contracts at September 30, 2019 and December 31, 2018, was approximately $408 million and $453 million, respectively.

Hybrid Securities with Embedded Credit Derivatives

We invest in hybrid securities (such as credit-linked notes) with the intent of generating income, and not specifically to acquire exposure to embedded derivative risk. As is the case with our other investments in RMBS, CMBS, CDOs and ABS, our investments in these hybrid securities are exposed to losses only up to the amount of our initial investment in the hybrid security. Other than our initial investment in the hybrid securities, we have no further obligation to make payments on the embedded credit derivatives in the related hybrid securities.

We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fair value, with changes in fair value recognized in Net investment income and Other income. Our investments in these hybrid securities are reported as Other bond securities in the Condensed Consolidated Balance Sheets. The fair values of these hybrid securities were $3.7 billion and $3.9 billion at September 30, 2019 and December 31, 2018, respectively. These securities have par amounts of $8.1 billion and $8.5 billion at September 30, 2019 and December 31, 2018, respectively, and have remaining stated maturity dates that extend to 2052.

48 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities

 

 

10. Insurance Liabilities

 

 

Liability for Unpaid Losses and Loss Adjustment Expenses (Loss Reserves)

 

 

Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported (IBNR) and loss adjustment expenses (LAE), less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income, except to the extent such adjustment impacts a deferred gain under a retroactive reinsurance agreement, in which case the ceded portion would be amortized into pre-tax income in subsequent periods. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.

 

 

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.4 billion and $12.3 billion at September 30, 2019 and December 31, 2018, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. Thus, these recoverable amounts represent a credit exposure to us. At September 30, 2019 and December 31, 2018, we held collateral of approximately $9.0 billion and $9.2 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements.

The following table presents the roll-forward of activity in Loss Reserves:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Liability for unpaid loss and loss adjustment expenses, beginning of period

$

81,057

$

76,713

 

$

83,639

$

78,393

Reinsurance recoverable

 

(31,333)

 

(27,406)

 

 

(31,690)

 

(26,708)

Net Liability for unpaid loss and loss adjustment expenses, beginning of period

 

49,724

 

49,307

 

 

51,949

 

51,685

Losses and loss adjustment expenses incurred:

 

 

 

 

 

 

 

 

 

Current year

 

5,150

 

6,670

 

 

14,750

 

15,800

Prior years, excluding discount and amortization of deferred gain

 

(74)

 

949

 

 

(221)

 

884

Prior years, discount charge (benefit)

 

276

 

3

 

 

1,017

 

(174)

Prior years, amortization of deferred gain on retroactive reinsurance(a)

 

13

 

(175)

 

 

(129)

 

(283)

Total losses and loss adjustment expenses incurred

 

5,365

 

7,447

 

 

15,417

 

16,227

Losses and loss adjustment expenses paid:

 

 

 

 

 

 

 

 

 

Current year

 

(1,702)

 

(1,791)

 

 

(3,194)

 

(3,289)

Prior years

 

(4,652)

 

(4,526)

 

 

(15,334)

 

(14,312)

Total losses and loss adjustment expenses paid

 

(6,354)

 

(6,317)

 

 

(18,528)

 

(17,601)

Other changes:

 

 

 

 

 

 

 

 

 

Foreign exchange effect

 

(172)

 

(236)

 

 

(165)

 

(393)

Acquisitions(b)

 

-

 

3,020

 

 

-

 

3,020

Retroactive reinsurance adjustment (net of discount)(c)

 

96

 

(464)

 

 

(14)

 

(181)

Total other changes

 

(76)

 

2,320

 

 

(179)

 

2,446

Liability for unpaid loss and loss adjustment expenses, end of period:

 

 

 

 

 

 

 

 

 

Net liability for unpaid losses and loss adjustment expenses

 

48,659

 

52,757

 

 

48,659

 

52,757

Reinsurance recoverable

 

31,224

 

29,202

 

 

31,224

 

29,202

Total

$

79,883

$

81,959

 

$

79,883

$

81,959

(a) Includes $6 million and $9 million for the retroactive reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire), covering U.S. asbestos exposures for the three-month periods ended September 30, 2019 and 2018, respectively, and $21 million and $22 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

(b) Amounts relate to the acquisition of Validus in July 2018.

 

(c) Includes change in discount on retroactive reinsurance of $(43) million and $46 million for the three-month periods ended September 30, 2019 and 2018, respectively, and $(475) million and $154 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

 

AIG | Third Quarter 2019 Form 10-Q 49

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities

 

On January 20, 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the paid losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion. We account for this transaction as retroactive reinsurance. We paid total consideration, including interest, of $10.2 billion. The consideration was placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire has provided a parental guarantee to secure the obligations of NICO under the agreement. The total paid claims subject to the agreement as of September 30, 2019 were below the attachment point.

Discounting of Loss Reserves

At September 30, 2019 and December 31, 2018, the loss reserves reflect a net loss reserve discount of $1.6 billion and $2.0 billion, respectively, including tabular and non-tabular calculations based upon the following assumptions:

The discount for asbestos reserves has been fully amortized.

The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the mortality rate used in the 2007 U.S. Life Table.

The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state. For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns. For the Pennsylvania companies, the statute specifies discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.

In 2013, our Pennsylvania regulator approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania-domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios.

At September 30, 2019 and December 31, 2018, the discount consists of $505 million and $603 million of tabular discount, respectively, and $1.1 billion and $1.4 billion of non-tabular discount for workers’ compensation, respectively. During the nine-month periods ended September 30, 2019 and 2018, the benefit (charge) from changes in discount of $(920) million and $305 million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Condensed Consolidated Statement of Income.

 

The following table presents the components of the loss reserve discount discussed above:

 

September 30, 2019

 

December 31, 2018

 

North

 

 

 

 

 

North

 

 

 

 

 

America

 

 

 

 

 

America

 

 

 

 

 

Commercial

 

Legacy

 

 

 

Commercial

 

Legacy

 

 

(in millions)

Insurance

 

Portfolio

 

Total

 

Insurance

 

Portfolio

 

Total

U.S. workers' compensation

$

2,138

$

698

$

2,836

 

$

2,782

$

973

$

3,755

Retroactive reinsurance

 

(1,246)

 

-

 

(1,246)

 

 

(1,720)

 

-

 

(1,720)

Total reserve discount*

$

892

$

698

$

1,590

 

$

1,062

$

973

$

2,035

*Excludes $161 million and $163 million of discount related to certain long tail liabilities in the United Kingdom at September 30, 2019 and December 31, 2018, respectively.

50 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities

 

The following tables present the net loss reserve discount benefit (charge):

Three Months Ended September 30,

2019

 

2018

 

North

 

 

 

 

 

North

 

 

 

 

 

America

 

 

 

 

 

America

 

 

 

 

 

Commercial

 

Legacy

 

 

 

Commercial

 

Legacy

 

 

(in millions)

Insurance

 

Portfolio

 

Total

 

Insurance

 

Portfolio

 

Total

Current accident year

$

41

$

-

$

41

 

$

89

$

-

$

89

Accretion and other adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

to prior year discount

 

(26)

 

(56)

 

(82)

 

 

(7)

 

(12)

 

(19)

Effect of interest rate changes

 

(136)

 

(58)

 

(194)

 

 

13

 

3

 

16

Net reserve discount

 

 

 

 

 

 

 

 

 

 

 

 

 

benefit (charge)

 

(121)

 

(114)

 

(235)

 

 

95

 

(9)

 

86

Change in discount on loss reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

ceded under retroactive reinsurance

 

43

 

-

 

43

 

 

(46)

 

-

 

(46)

Net change in total reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

discount(a)

$

(78)

$

(114)

$

(192)

 

$

49

$

(9)

$

40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2019

 

2018

 

North

 

 

 

 

 

North

 

 

 

 

 

America

 

 

 

 

 

America

 

 

 

 

 

Commercial

 

Legacy

 

 

 

Commercial

 

Legacy

 

 

(in millions)

Insurance

 

Portfolio

 

Total

 

Insurance

 

Portfolio

 

Total

Current accident year

$

97

$

-

$

97

 

$

131

$

-

$

131

Accretion and other adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

to prior year discount

 

(269)

 

(80)

 

(349)

 

 

(95)

 

(42)

 

(137)

Effect of interest rate changes

 

(473)

 

(195)

 

(668)

 

 

232

 

79

 

311

Net reserve discount

 

 

 

 

 

 

 

 

 

 

 

 

 

benefit (charge)

 

(645)

 

(275)

 

(920)

 

 

268

 

37

 

305

Change in discount on loss reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

ceded under retroactive reinsurance

 

475

 

-

 

475

 

 

(154)

 

-

 

(154)

Net change in total reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

discount(b)

$

(170)

$

(275)

$

(445)

 

$

114

$

37

$

151

(a) Excludes $(27) million and $12 million discount related to certain long tail liabilities in the United Kingdom for the three-month periods ended September 30, 2019 and 2018, respectively.

 

(b) Excludes $(1) million and $10 million discount related to certain long tail liabilities in the United Kingdom for the nine-month periods ended September 30, 2019 and 2018, respectively.

During the three- and nine- month period ended September 30, 2019, effective interest rates declined due to a decrease in the forward yield curve component of the discount rates. This decrease reflects a decline in U.S. Treasury rates. The decrease together with certain changes in payout pattern assumptions resulted in a decrease in the loss reserve discount of $276 million and $1.0 billion in the three- and nine- month period ended September 30, 2019, respectively.

During the three- and nine-month period ended September 30, 2018, effective interest rates increased due to an increase in the forward yield curve component of the discount rates. This increase reflected an increase in U.S. Treasury rates. The increase together with changes in payout pattern assumptions resulted in a (decrease)/increase in the loss reserve discount of $(3) million and $174 million in the three- and nine- month period ended September 30, 2018, respectively.

 

AIG | Third Quarter 2019 Form 10-Q 51

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 11. Contingencies, Commitments and Guarantees

 

 

11. Contingencies, Commitments and Guarantees

In the normal course of business, various contingent liabilities and commitments are entered into by AIG and our subsidiaries. In addition, AIG Parent guarantees various obligations of certain subsidiaries.

Although AIG cannot currently quantify its ultimate liability for unresolved litigation and investigation matters, including those referred to below, it is possible that such liability could have a material adverse effect on AIG’s consolidated financial condition or its consolidated results of operations or consolidated cash flows for an individual reporting period.

Legal Contingencies

Overview. In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services industries in general, subject to regulatory and government investigations and actions, and litigation and other forms of dispute resolution in a large number of proceedings pending in various domestic and foreign jurisdictions. Certain of these matters involve potentially significant risk of loss due to potential for significant jury awards and settlements, punitive damages or other penalties. Many of these matters are also highly complex and seek recovery on behalf of a class or similarly large number of plaintiffs. It is therefore inherently difficult to predict the size or scope of potential future losses arising from these matters. In our insurance and reinsurance operations, litigation and arbitration concerning the scope of coverage under insurance and reinsurance contracts, and litigation and arbitration in which our subsidiaries defend or indemnify their insureds under insurance contracts, are generally considered in the establishment of our loss reserves. Separate and apart from the foregoing matters involving insurance and reinsurance coverage, AIG, our subsidiaries and their respective officers and directors are subject to a variety of additional types of legal proceedings brought by holders of AIG securities, customers, employees and others, alleging, among other things, breach of contractual or fiduciary duties, bad faith and violations of federal and state statutes and regulations. With respect to these other categories of matters not arising out of claims for insurance or reinsurance coverage, we establish reserves for loss contingencies when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. In many instances, we are unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from legal proceedings may exceed the amount of liabilities that we have recorded in our financial statements covering these matters. While such potential future charges could be material, based on information currently known to management, management does not believe, other than as may be discussed below, that any such charges are likely to have a material adverse effect on our financial position or results of operation.

Additionally, from time to time, various regulatory and governmental agencies review the transactions and practices of AIG and our subsidiaries in connection with industry-wide and other inquiries into, among other matters, the business practices of current and former operating insurance subsidiaries. Such investigations, inquiries or examinations could develop into administrative, civil or criminal proceedings or enforcement actions, in which remedies could include fines, penalties, restitution or alterations in our business practices, and could result in additional expenses, limitations on certain business activities and reputational damage. For example, among other matters, we are currently responding to governmental investigations and examinations pertaining to certain sales and compensation practices and payments and related disclosures in connection with financial planning services and the sale and distribution of related products, including 403(b) and similar retirement plans, by the Individual and Group Retirement business segments. We have cooperated, and will continue to cooperate, in producing documents and other information with respect to these matters.

Tax Litigation

We are party to pending tax litigation before the Southern District of New York. For additional information see Note 15 to the Condensed Consolidated Financial Statements.

Other Commitments

In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $7.8 billion at September 30, 2019.

52 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 11. Contingencies, Commitments and Guarantees

 

Guarantees

Subsidiaries

We have issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIG Financial Products Corp. and related subsidiaries (collectively AIGFP) and of AIG Markets, Inc. (AIG Markets) arising from transactions entered into by AIG Markets.

In connection with AIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at September 30, 2019 was $81 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of scheduled payments to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor’s rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay without reimbursement.

AIG Parent files a consolidated federal income tax return with certain subsidiaries and acts as an agent for the consolidated tax group when making payments to the Internal Revenue Service (IRS). AIG Parent and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated federal income taxes. Under an Amended and Restated Tax Payment Allocation Agreement dated June 6, 2011 between AIG Parent and one of its Bermuda-domiciled insurance subsidiaries, AIG Life of Bermuda, Ltd. (AIGB), AIG Parent has agreed to indemnify AIGB for any tax liability (including interest and penalties) resulting from adjustments made by the IRS or other appropriate authorities to taxable income, special deductions or credits in connection with investments made by AIGB in certain affiliated entities.

Asset Dispositions

We are subject to financial guarantees and indemnity arrangements in connection with the completed sales of businesses pursuant to our asset disposition plan. The various arrangements may be triggered by, among other things, declines in asset values, the occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or are not applicable.

We are unable to develop a reasonable estimate of the maximum potential payout under certain of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments related to completed sales under these arrangements, and no material liabilities related to these arrangements have been recorded in the Condensed Consolidated Balance Sheets.

Other

For additional discussion on commitments and guarantees associated with VIEs see Note 8.

For additional disclosures about derivatives see Note 9.

For additional disclosures about guarantees of outstanding debt of AIG Life Holdings, Inc. (AIGLH), see Note 16.

AIG | Third Quarter 2019 Form 10-Q 53

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

 

 

12. Equity

Shares Outstanding

Preferred Stock

On March 14, 2019, we issued 20,000 shares of 5.85% Series A Non-Cumulative Preferred Stock (Series A Preferred Stock) (equivalent to 20,000,000 Depositary Shares, each representing a 1/1,000th interest in a share of Series A Preferred Stock), $5.00 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, we received net proceeds of approximately $485 million.

We may redeem the Series A Preferred Stock at our option, (a) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Rating Agency Event,” at a redemption price equal to $25,500 per share of the Series A Preferred Stock (equivalent to $25.50 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date), or (b) (i) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Regulatory Capital Event,” or (ii) in whole or in part, from time to time, on or after March 15, 2024, in each case, at a redemption price equal to $25,000 per share of the Series A Preferred Stock (equivalent to $25.00 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date).

A “Rating Agency Event” is generally defined to mean that any nationally recognized statistical rating organization within the meaning of Section 3(a)(62) of the Exchange Act that then publishes a rating for us amends, clarifies or changes the criteria it uses to assign equity credit to securities such as the Series A Preferred Stock, which amendment, clarification or change results in the shortening of the length of time the Series A Preferred Stock is assigned a particular level of equity credit by that rating agency as compared to the length of time it would have been assigned that level of equity credit by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock, or the lowering of the equity credit (including up to a lesser amount) assigned to the Series A Preferred Stock by that rating agency as compared to the equity credit assigned by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock. A “Regulatory Capital Event” is generally defined to mean our good faith determination that as a result of a change in law, rule or regulation, or a proposed change or an official judicial or administrative pronouncement, there is more than an insubstantial risk that the full liquidation preference of the Series A Preferred Stock would not qualify as capital (or a substantially similar concept) for purposes of any group capital standard to which we are or will be subject.

Holders of the Series A Preferred Stock will be entitled to receive dividend payments only when, as and if declared by our board of directors (or a duly authorized committee of the board). Dividends will be payable from the original date of issue at a rate of 5.85% per annum, payable quarterly, in arrears, on the fifteenth day of March, June, September and December of each year, beginning on June 15, 2019. Dividends on the Series A Preferred Stock will be non-cumulative.

On May 21, 2019, our Board of Directors declared a cash dividend of $369.6875 per share on AIG’s Series A Preferred Stock. Holders of depositary shares each representing a 1/1,000th interest in a share of Series A Preferred Stock received $0.3696875 per depositary share. The dividend was paid on June 17, 2019 to holders of record at the close of business on May 31, 2019.

On August 7, 2019, our Board of Directors declared a cash dividend of $365.625 per share on AIG’s Series A Preferred Stock. Holders of depositary shares each representing a 1/1,000th interest in a share of Series A Preferred Stock received $0.365625 per depositary share. The dividend was paid on September 16, 2019 to holders of record at the close of business on August 30, 2019.

In the event of any liquidation, dissolution or winding-up of the affairs of AIG, whether voluntary or involuntary, before any distribution or payment out of our assets may be made to or set aside for the holders of any junior stock, holders of the Series A Preferred Stock will be entitled to receive out of our assets legally available for distribution to our stockholders, an amount equal to $25,000 per share of Series A Preferred Stock (equivalent to $25.00 per Depositary Share), together with an amount equal to all declared and unpaid dividends (if any), but no amount in respect of any undeclared dividends prior to such payment date. Distributions will be made only to the extent of our assets that are available for distribution to stockholders (i.e., after satisfaction of all our liabilities to creditors, if any).

The Series A Preferred Stock does not have voting rights, except in limited circumstances, including in the case of certain dividend non-payments.

 

54 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

 

Common Stock

The following table presents a rollforward of outstanding shares:

Nine Months Ended September 30, 2019

Common

Treasury

Common Stock

 

Stock Issued

Stock

Outstanding

Shares, beginning of year

1,906,671,492

(1,040,062,063)

866,609,429

Shares issued

-

3,339,817

3,339,817

Shares repurchased

-

-

-

Shares, end of period

1,906,671,492

(1,036,722,246)

869,949,246

Dividends

 

Dividends are payable on AIG Common Stock only when, as and if declared by our Board of Directors in its discretion, from funds legally available for this purpose. In considering whether to pay a dividend on or purchase shares of AIG Common Stock, our Board of Directors considers a number of factors, including, but not limited to: the capital resources available to support our insurance operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, regulatory standards for capital and capital distributions, and such other factors as our Board of Directors may deem relevant. The payment of dividends is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which no dividends may be declared or paid on any AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.

 

The following table presents declaration date, record date, payment date and dividends paid per share on AIG Common Stock:

 

 

 

 

 

Dividends Paid

Declaration Date

Record Date

Payment Date

 

 

Per Common Share

August 7, 2019

September 17, 2019

September 30, 2019

 

$

0.32

May 6, 2019

June 14, 2019

June 28, 2019

 

 

0.32

February 13, 2019

March 15, 2019

March 29, 2019

 

 

0.32

August 2, 2018

September 17, 2018

September 28, 2018

 

$

0.32

May 2, 2018

June 14, 2018

June 28, 2018

 

 

0.32

February 8, 2018

March 15, 2018

March 29, 2018

 

 

0.32

For a discussion of restrictions on payments of dividends to AIG Parent by its subsidiaries see Note 19 to the Consolidated Financial Statements in the 2018 Annual Report.

Repurchase of AIG Common Stock

 

The following table presents repurchases of AIG Common Stock and warrants to purchase shares of AIG Common Stock:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2019

 

2018

Aggregate repurchases of common stock

$

-

$

994

Total number of common shares repurchased

 

-

 

18

Aggregate repurchases of warrants

$

-

$

6

Total number of warrants repurchased*

 

-

 

-

*For the nine-month period ended September 30, 2019, we did not repurchase any warrants to purchase shares of AIG Common Stock. For the nine-month period ended September 30, 2018, we repurchased 366,253 warrants to purchase shares of AIG Common Stock.

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase of approximately $1.5 billion to its previous share repurchase authorization. As of September 30, 2019, $2.0 billion remained under our share repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.

AIG | Third Quarter 2019 Form 10-Q 55

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

 

We did not repurchase any shares of AIG Common Stock during the nine-month period ended September 30, 2019. The timing of any future repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors. The repurchase of AIG Common Stock is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which AIG may not (other than in limited circumstances) purchase, redeem or otherwise acquire AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.

Accumulated Other Comprehensive INCOME (LOSS)

The following table presents a rollforward of Accumulated other comprehensive income (loss):

 

 

Unrealized Appreciation

 

 

 

 

 

 

 

Fair Value of

 

 

 

 

(Depreciation) of Fixed

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

 

Maturity Securities on

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

 

Which Other-Than-

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

 

Temporary Credit

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Impairments Were Taken

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Balance, June 30, 2019, net of tax

$

720

$

8,034

$

(2,692)

$

(1,079)

$

8

$

4,991

Change in unrealized appreciation (depreciation) of

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

(9)

 

4,386

 

-

 

-

 

-

 

4,377

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

11

 

(522)

 

-

 

-

 

-

 

(511)

Change in future policy benefits

 

-

 

(3,042)

 

-

 

-

 

-

 

(3,042)

Change in foreign currency translation adjustments

 

-

 

-

 

(24)

 

-

 

-

 

(24)

Change in net actuarial loss

 

-

 

-

 

-

 

13

 

-

 

13

Change in prior service credit

 

-

 

-

 

-

 

(1)

 

-

 

(1)

Change in deferred tax liability

 

(4)

 

(166)

 

(10)

 

(5)

 

-

 

(185)

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

1

 

1

Total other comprehensive income (loss)

 

(2)

 

656

 

(34)

 

7

 

1

 

628

Noncontrolling interests

 

-

 

5

 

(1)

 

-

 

-

 

4

Balance, September 30, 2019, net of tax

$

718

$

8,685

$

(2,725)

$

(1,072)

$

9

$

5,615

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018, net of tax

$

(38)

$

2,426

$

(2,725)

$

(1,086)

$

10

$

(1,413)

Change in unrealized appreciation of investments

 

935

 

15,262

 

-

 

-

 

-

 

16,197

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(3)

 

(2,246)

 

-

 

-

 

-

 

(2,249)

Change in future policy benefits

 

-

 

(5,291)

 

-

 

-

 

-

 

(5,291)

Change in foreign currency translation adjustments

 

-

 

-

 

31

 

-

 

-

 

31

Change in net actuarial loss

 

-

 

-

 

-

 

29

 

-

 

29

Change in prior service credit

 

-

 

-

 

-

 

(2)

 

-

 

(2)

Change in deferred tax liability

 

(176)

 

(1,447)

 

(30)

 

(13)

 

-

 

(1,666)

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

(1)

 

(1)

Total other comprehensive income (loss)

 

756

 

6,278

 

1

 

14

 

(1)

 

7,048

Noncontrolling interests

 

-

 

19

 

1

 

-

 

-

 

20

Balance, September 30, 2019, net of tax

$

718

$

8,685

$

(2,725)

$

(1,072)

$

9

$

5,615

56 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

 

 

 

Unrealized Appreciation

 

 

 

 

 

 

 

Fair Value of

 

 

 

 

(Depreciation) of Fixed

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

 

Maturity Securities on

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

 

Which Other-Than-

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

 

Temporary Credit

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Impairments Were Taken

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Balance, June 30, 2018, net of tax

$

(234)

$

3,944

$

(2,426)

$

(1,062)

$

8

$

230

Cumulative effect of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

principles

 

-

 

-

 

-

 

-

 

-

 

-

Change in unrealized appreciation (depreciation) of

 

 

 

 

 

 

 

 

 

 

 

 

investments

 

350

 

(1,301)

 

-

 

-

 

-

 

(951)

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(205)

 

216

 

-

 

-

 

-

 

11

Change in future policy benefits

 

-

 

340

 

-

 

-

 

-

 

340

Change in foreign currency translation adjustments

 

-

 

-

 

(131)

 

-

 

-

 

(131)

Change in net actuarial loss

 

-

 

-

 

-

 

16

 

-

 

16

Change in prior service cost

 

-

 

-

 

-

 

-

 

-

 

-

Change in deferred tax asset (liability)

 

(38)

 

(13)

 

2

 

(2)

 

-

 

(51)

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

-

 

-

Total other comprehensive income (loss)

 

107

 

(758)

 

(129)

 

14

 

-

 

(766)

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2018, net of tax

$

(127)

$

3,186

$

(2,555)

$

(1,048)

$

8

$

(536)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017, net of tax

$

793

$

7,693

$

(2,090)

$

(931)

$

-

$

5,465

Cumulative effect of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

principles

 

169

 

(285)

 

(284)

 

(183)

 

7

 

(576)

Change in unrealized depreciation of investments

 

(1,258)

 

(7,659)

 

-

 

-

 

-

 

(8,917)

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(91)

 

1,121

 

-

 

-

 

-

 

1,030

Change in future policy benefits

 

-

 

1,464

 

-

 

-

 

-

 

1,464

Change in foreign currency translation adjustments

 

-

 

-

 

(154)

 

-

 

-

 

(154)

Change in net actuarial loss

 

-

 

-

 

-

 

54

 

-

 

54

Change in prior service credit

 

-

 

-

 

-

 

(2)

 

-

 

(2)

Change in deferred tax asset (liability)

 

260

 

852

 

(27)

 

14

 

-

 

1,099

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

1

 

1

Total other comprehensive income (loss)

 

(1,089)

 

(4,222)

 

(181)

 

66

 

1

 

(5,425)

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2018, net of tax

$

(127)

$

3,186

$

(2,555)

$

(1,048)

$

8

$

(536)

AIG | Third Quarter 2019 Form 10-Q 57

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

 

The following table presents the other comprehensive income reclassification adjustments for the three- and nine-month periods ended September 30, 2019 and 2018, respectively:

 

 

Unrealized Appreciation

 

 

 

 

 

 

 

 

 

 

 

 

(Depreciation) of Fixed

 

 

 

 

 

 

 

Fair Value of

 

 

 

 

Maturity Investments

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

 

on Which Other-Than-

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

 

Temporary Credit

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

 

Impairments Were

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Recognized

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

3

$

949

$

(24)

$

3

$

1

$

932

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

1

 

127

 

-

 

(9)

 

-

 

119

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense

 

2

 

822

 

(24)

 

12

 

1

 

813

Less: Income tax expense

 

4

 

166

 

10

 

5

 

-

 

185

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense

$

(2)

$

656

$

(34)

$

7

$

1

$

628

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

146

$

(705)

$

(131)

$

7

$

-

$

(683)

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

1

 

40

 

-

 

(9)

 

-

 

32

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

145

 

(745)

 

(131)

 

16

 

-

 

(715)

Less: Income tax expense (benefit)

 

38

 

13

 

(2)

 

2

 

-

 

51

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

107

$

(758)

$

(129)

$

14

$

-

$

(766)

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

929

$

7,912

$

31

$

3

$

(1)

$

8,874

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

(3)

 

187

 

-

 

(24)

 

-

 

160

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense

 

932

 

7,725

 

31

 

27

 

(1)

 

8,714

Less: Income tax expense

 

176

 

1,447

 

30

 

13

 

-

 

1,666

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense

$

756

$

6,278

$

1

$

14

$

(1)

$

7,048

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

(1,344)

$

(5,055)

$

(154)

$

26

$

1

$

(6,526)

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

5

 

19

 

-

 

(26)

 

-

 

(2)

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

(1,349)

 

(5,074)

 

(154)

 

52

 

1

 

(6,524)

Less: Income tax expense (benefit)

 

(260)

 

(852)

 

27

 

(14)

 

-

 

(1,099)

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

(1,089)

$

(4,222)

$

(181)

$

66

$

1

$

(5,425)

58 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity

 

The following table presents the effect of the reclassification of significant items out of Accumulated other comprehensive income on the respective line items in the Condensed Consolidated Statements of Income:

 

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

 

 

Three Months Ended September 30,

(in millions)

 

2019

2018

Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

1

$

1

 

 

Other realized capital gains

Total

 

 

1

 

1

 

 

 

Unrealized appreciation (depreciation) of all other investments

 

 

 

 

 

 

 

 

Investments

 

 

127

 

10

 

 

Other realized capital gains

Deferred acquisition costs adjustment

 

 

-

 

30

 

 

Amortization of deferred policy acquisition costs

Future policy benefits

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

Total

 

 

127

 

40

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

Prior-service credit

 

 

-

 

-

 

 

*

Actuarial losses

 

 

(9)

 

(9)

 

 

*

Total

 

 

(9)

 

(9)

 

 

 

Total reclassifications for the period

 

$

119

$

32

 

 

 

 

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

 

 

Nine Months Ended September 30,

(in millions)

 

2019

2018

Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

(3)

$

5

 

 

Other realized capital gains

Total

 

 

(3)

 

5

 

 

 

Unrealized appreciation (depreciation) of all other investments

 

 

 

 

 

 

 

 

Investments

 

 

187

 

19

 

 

Other realized capital gains

Deferred acquisition costs adjustment

 

 

-

 

-

 

 

Amortization of deferred policy acquisition costs

Future policy benefits

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

Total

 

 

187

 

19

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

Prior-service credit

 

 

-

 

1

 

 

*

Actuarial losses

 

 

(24)

 

(27)

 

 

*

Total

 

 

(24)

 

(26)

 

 

 

Total reclassifications for the period

 

$

160

$

(2)

 

 

 

*These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 14.

AIG | Third Quarter 2019 Form 10-Q 59

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 13. Earnings Per Common Share (EPS)

 

 

13. Earnings Per Common Share (EPS)

The basic EPS computation is based on the weighted average number of common shares outstanding, adjusted to reflect all stock dividends and stock splits. The diluted EPS computation is based on those shares used in the basic EPS computation plus common shares that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding and adjusted to reflect all stock dividends and stock splits.

The following table presents the computation of basic and diluted EPS:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(dollars in millions, except per common share data)

 

2019

 

2018

 

 

2019

 

2018

Numerator for EPS:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

973

$

(1,220)

 

$

3,301

$

661

Less: Net income from continuing operations attributable to noncontrolling interests

 

317

 

-

 

 

881

 

5

Less: Preferred stock dividends

 

8

 

-

 

 

15

 

-

Income (loss) attributable to AIG common shareholders

 

 

 

 

 

 

 

 

 

from continuing operations

 

648

 

(1,220)

 

 

2,405

 

656

Loss from discontinued operations, net of income tax expense

 

-

 

(39)

 

 

(1)

 

(40)

Net income (loss) attributable to AIG common shareholders

$

648

$

(1,259)

 

$

2,404

$

616

Denominator for EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

877,009,495

 

895,237,359

 

 

876,262,372

 

902,081,555

Dilutive common shares

 

18,804,915

 

-

 

 

10,958,744

 

14,736,714

Weighted average common shares outstanding — diluted(a)(b)

 

895,814,410

 

895,237,359

 

 

887,221,116

 

916,818,269

Income (loss) per common share attributable to AIG common

 

 

 

 

 

 

 

 

 

shareholders:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.74

$

(1.37)

 

$

2.74

$

0.72

Income (loss) from discontinued operations

$

-

$

(0.04)

 

$

-

$

(0.04)

Income (loss) attributable to AIG common shareholders

$

0.74

$

(1.41)

 

$

2.74

$

0.68

Diluted:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.72

$

(1.37)

 

$

2.71

$

0.71

Income (loss) from discontinued operations

$

-

$

(0.04)

 

$

-

$

(0.04)

Income (loss) attributable to AIG common shareholders

$

0.72

$

(1.41)

 

$

2.71

$

0.67

(a)Shares in the diluted EPS calculation represent basic common shares for the three-month period ended September 30, 2018 due to the net loss in that period. The number of common shares excluded from the calculation was 13,538,168 shares.

 

(b)Dilutive common shares include our share-based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011. The number of common shares excluded from diluted shares outstanding was 5.1 million and 24.9 million for the three- and nine-month periods ended September 30, 2019, respectively, and 5.8 million and 4.7 million for the three- and nine-month periods ended September 30, 2018, respectively, because the effect of including those common shares in the calculation would have been anti-dilutive.

60 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 14. Employee Benefits

 

 

14. Employee Benefits

We sponsor various defined benefit pension plans, post-retirement medical and life insurance plans for eligible employees and retirees in the U.S. and certain non-U.S. countries.

The following table presents the components of net periodic benefit cost (credit) with respect to pensions and other postretirement benefits:

 

Pension

 

Postretirement

 

 

U.S.

 

Non-U.S.

 

 

 

 

U.S.

 

Non-U.S.

 

 

(in millions)

 

Plans

 

Plans

 

Total

 

 

Plans

 

Plans

 

Total

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

2

$

6

$

8

 

$

-

$

-

$

-

Interest cost

 

44

 

3

 

47

 

 

2

 

-

 

2

Expected return on assets

 

(58)

 

(5)

 

(63)

 

 

-

 

-

 

-

Amortization of prior service cost

 

-

 

-

 

-

 

 

-

 

-

 

-

Amortization of net loss

 

9

 

1

 

10

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

 

(3)

 

5

 

2

 

 

2

 

-

 

2

Settlement charges

 

-

 

-

 

-

 

 

-

 

-

 

-

Net benefit cost (credit)

$

(3)

$

5

$

2

 

$

2

$

-

$

2

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

-

$

6

$

6

 

$

-

$

-

$

-

Interest cost

 

41

 

4

 

45

 

 

1

 

1

 

2

Expected return on assets

 

(72)

 

(6)

 

(78)

 

 

-

 

-

 

-

Amortization of prior service cost

 

-

 

-

 

-

 

 

-

 

-

 

-

Amortization of net loss

 

7

 

2

 

9

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

 

(24)

 

6

 

(18)

 

 

1

 

1

 

2

Settlement charges

 

-

 

-

 

-

 

 

-

 

-

 

-

Net benefit cost (credit)

$

(24)

$

6

$

(18)

 

$

1

$

1

$

2

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

7

$

16

$

23

 

$

1

$

-

$

1

Interest cost

 

131

 

11

 

142

 

 

5

 

1

 

6

Expected return on assets

 

(172)

 

(16)

 

(188)

 

 

-

 

-

 

-

Amortization of prior service cost (credit)

 

-

 

1

 

1

 

 

-

 

(1)

 

(1)

Amortization of net (gain) loss

 

25

 

4

 

29

 

 

(1)

 

-

 

(1)

Net periodic benefit cost (credit)

 

(9)

 

16

 

7

 

 

5

 

-

 

5

Settlement credit

 

-

 

(3)

 

(3)

 

 

-

 

-

 

-

Net benefit cost (credit)

$

(9)

$

13

$

4

 

$

5

$

-

$

5

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

4

$

17

$

21

 

$

1

$

1

$

2

Interest cost

 

122

 

12

 

134

 

 

4

 

2

 

6

Expected return on assets

 

(213)

 

(19)

 

(232)

 

 

-

 

-

 

-

Amortization of prior service cost (credit)

 

-

 

1

 

1

 

 

(1)

 

(1)

 

(2)

Amortization of net loss

 

21

 

6

 

27

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

 

(66)

 

17

 

(49)

 

 

4

 

2

 

6

Settlement charges

 

-

 

-

 

-

 

 

-

 

-

 

-

Net benefit cost (credit)

$

(66)

$

17

$

(49)

 

$

4

$

2

$

6

For the nine-month period ended September 30, 2019, we contributed $160 million to the U.S. AIG Retirement Plan.

AIG | Third Quarter 2019 Form 10-Q 61

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

 

 

15. Income Taxes

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.

The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and, while certain formal guidance was issued by the U.S. tax authority, there are still aspects of the Tax Act that remain unclear and additional guidance is expected later in 2019. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.

Interim Tax Calculation Method

We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions, and are recorded in the period in which the change occurs. While certain impacts of the Tax Act are included in our annual effective tax rate, we continue to refine our calculations as additional information becomes available, which may result in changes to the estimated annual effective tax rate.

Interim Tax Expense (Benefit)

For the three-month period ended September 30, 2019, the effective tax rate on income from continuing operations was 22.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges associated with the effect of foreign operations, changes in reserves for uncertain tax positions, a net tax charge due to the accrual of interest associated with IRS and other tax authority matters, state and local income taxes, non-deductible transfer pricing charges, and U.S. tax imposed on GILTI earned by certain foreign subsidiaries, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and valuation allowance activity related to certain foreign subsidiaries. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.

For the nine-month period ended September 30, 2019, the effective tax rate on income from continuing operations was 22.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges associated with the accrual of interest associated with IRS and other tax authority matters, the effect of foreign operations, changes in reserves for uncertain tax positions, state and local income taxes, excess tax charges related to share based compensation payments recorded through the income statement, non-deductible transfer pricing charges, and U.S. tax imposed on GILTI earned by certain foreign subsidiaries, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and valuation allowance activity related to certain foreign subsidiaries. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.

For the three-month period ended September 30, 2018, the effective tax rate on income from continuing operations was 20.1 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from accumulated other comprehensive income to income from continuing operations

62 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

 

related to the disposal of available for sale securities. We also recorded a measurement period tax charge of $62 million related to the effects of the deemed repatriation tax.

For the nine-month period ended September 30, 2018, the effective tax rate on income from continuing operations was 30.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement.

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings. For the nine-month period ended September 30, 2019, we consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

Assessment of Deferred Tax Asset Valuation Allowance

The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of the deferred tax asset requires us to consider all available evidence, including:

•the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;

•the sustainability of recent operating profitability of our subsidiaries;

•the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;

•the carryforward period for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and

•prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by our net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by foreign tax credit carryforwards. Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of September 30, 2019, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies and interpretations and assumptions related to the impact of the Tax Act could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

AIG | Third Quarter 2019 Form 10-Q 63

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes

 

For the nine-month period ended September 30, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in an increase to the deferred tax liability related to net unrealized tax capital gains. As of September 30, 2019, based on all available evidence, we concluded that no valuation allowance is required. For the nine-month period ended September 30, 2019, we released $290 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income. We released the full amount of valuation allowance previously recorded during the three-month period ended March 31, 2019 and no additional activity was recorded for the three-month periods ended June 30, 2019 and September 30, 2019.

For the nine-month period ended September 30, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in an increase to the deferred tax liability related to net unrealized tax capital gains. As of September 30, 2019, we continue to be in an overall unrealized tax gain position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.

For the three- and nine-month periods ended September 30, 2019, we recognized net decreases of $9 million and $40 million, respectively, in our deferred tax asset valuation allowance associated with certain foreign subsidiaries, primarily attributable to changes in projections and current year activity.

Tax Examinations and Litigation

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.

In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.

Accounting for Uncertainty in Income Taxes

At both September 30, 2019 and December 31, 2018, our unrecognized tax benefits, excluding interest and penalties, were $4.8 billion and $4.7 billion, respectively. At September 30, 2019 and December 31, 2018, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $43 million and $38 million, respectively. Accordingly, at both September 30, 2019 and December 31, 2018, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At September 30, 2019 and December 31, 2018, we had accrued liabilities of $2.4 billion and $2.2 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the nine-month periods ended September 30, 2019 and 2018, we accrued expense (benefit) of $181 million and $148 million, respectively, for the payment of interest and penalties.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.

64 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt

 

 

16. Information Provided in Connection with Outstanding Debt

The following Condensed Consolidating Financial Statements reflect the results of Validus Holdings, Ltd. and AIG Life Holdings, Inc. (AIGLH), each a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of the senior notes of Validus and all outstanding debt of AIGLH.

Condensed Consolidating Balance Sheets

 

 

American

 

 

 

 

 

 

 

 

 

 

 

 

International

 

Validus

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

Holdings,

 

 

 

Other

 

and

Consolidated

(in millions)

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments(a)

$

3,229

$

2

$

-

$

13,374

$

(2,492)

$

14,113

Other investments(b)

 

4,505

 

-

 

-

 

322,375

 

-

 

326,880

Total investments

 

7,734

 

2

 

-

 

335,749

 

(2,492)

 

340,993

Cash

 

3

 

20

 

1

 

3,337

 

-

 

3,361

Loans to subsidiaries(c)

 

35,142

 

-

 

-

 

752

 

(35,894)

 

-

Investment in consolidated subsidiaries(c)

 

40,115

 

3,814

 

33,315

 

-

 

(77,244)

 

-

Other assets, including deferred income taxes(d)

 

15,583

 

1,792

 

18

 

165,222

 

(1,847)

 

180,768

Total assets

$

98,577

$

5,628

$

33,334

$

505,060

$

(117,477)

$

525,122

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Insurance liabilities

$

-

$

-

$

-

$

305,993

$

-

$

305,993

Long-term debt

 

21,905

 

355

 

643

 

12,359

 

-

 

35,262

Other liabilities, including intercompany balances(b)

 

10,321

 

8

 

23

 

110,413

 

(4,343)

 

116,422

Loans from subsidiaries(c)

 

748

 

-

 

-

 

35,142

 

(35,890)

 

-

Total liabilities

 

32,974

 

363

 

666

 

463,907

 

(40,233)

 

457,677

Total AIG shareholders’ equity

 

65,603

 

5,265

 

32,668

 

39,311

 

(77,244)

 

65,603

Non-redeemable noncontrolling interests

 

-

 

-

 

-

 

1,842

 

-

 

1,842

Total equity

 

65,603

 

5,265

 

32,668

 

41,153

 

(77,244)

 

67,445

Total liabilities and equity

$

98,577

$

5,628

$

33,334

$

505,060

$

(117,477)

$

525,122

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments(a)

$

1,141

$

2

$

-

$

10,329

$

(1,798)

$

9,674

Other investments(b)

 

3,377

 

-

 

-

 

301,158

 

-

 

304,535

Total investments

 

4,518

 

2

 

-

 

311,487

 

(1,798)

 

314,209

Cash

 

2

 

9

 

9

 

2,853

 

-

 

2,873

Loans to subsidiaries(c)

 

34,963

 

-

 

-

 

615

 

(35,578)

 

-

Investment in consolidated subsidiaries(c)

 

33,300

 

4,029

 

26,321

 

-

 

(63,650)

 

-

Other assets, including deferred income taxes(d)

 

15,389

 

1,798

 

124

 

159,430

 

(1,839)

 

174,902

Total assets

$

88,172

$

5,838

$

26,454

$

474,385

$

(102,865)

$

491,984

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Insurance liabilities

$

-

$

-

$

-

$

293,652

$

-

$

293,652

Long-term debt

 

22,422

 

359

 

643

 

11,116

 

-

 

34,540

Other liabilities, including intercompany balances(b)

 

8,774

 

228

 

144

 

100,974

 

(3,637)

 

106,483

Loans from subsidiaries(c)

 

615

 

-

 

-

 

34,963

 

(35,578)

 

-

Total liabilities

 

31,811

 

587

 

787

 

440,705

 

(39,215)

 

434,675

Total AIG shareholders’ equity

 

56,361

 

5,251

 

25,667

 

32,732

 

(63,650)

 

56,361

Non-redeemable noncontrolling interests

 

-

 

-

 

-

 

948

 

-

 

948

Total equity

 

56,361

 

5,251

 

25,667

 

33,680

 

(63,650)

 

57,309

Total liabilities and equity

$

88,172

$

5,838

$

26,454

$

474,385

$

(102,865)

$

491,984

(a) At September 30, 2019, includes restricted cash of $1 million and $63 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $124 million and $18 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.

(b) Includes intercompany derivative positions, which are reported at fair value before credit valuation adjustment.

(c) Eliminated in consolidation.

(d) At September 30, 2019, includes restricted cash of $1 million and $344 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $1 million and $342 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.

 

 

AIG | Third Quarter 2019 Form 10-Q 65

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt

 

Condensed Consolidating Statements of Income

 

 

American

 

 

 

 

 

 

 

 

 

 

 

 

International

 

Validus

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

Holdings,

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

998

$

28

$

1,011

$

-

$

(2,037)

$

-

Other income

 

279

 

4

 

-

 

12,710

 

(79)

 

12,914

Total revenues

 

1,277

 

32

 

1,011

 

12,710

 

(2,116)

 

12,914

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

245

 

13

 

12

 

81

 

(3)

 

348

(Gain) loss on extinguishment of debt

 

-

 

(9)

 

-

 

9

 

-

 

-

Other expenses

 

188

 

7

 

1

 

11,185

 

(75)

 

11,306

Total expenses

 

433

 

11

 

13

 

11,275

 

(78)

 

11,654

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax expense (benefit)

 

844

 

21

 

998

 

1,435

 

(2,038)

 

1,260

Income tax expense (benefit)

 

187

 

-

 

(2)

 

102

 

-

 

287

Income (loss) from continuing operations

 

657

 

21

 

1,000

 

1,333

 

(2,038)

 

973

Income (loss) from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

(1)

 

-

 

-

 

1

 

-

 

-

Net income (loss)

 

656

 

21

 

1,000

 

1,334

 

(2,038)

 

973

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

317

 

-

 

317

Net income (loss) attributable to AIG

$

656

$

21

$

1,000

$

1,017

$

(2,038)

$

656

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

(989)

$

(93)

$

1,316

$

-

$

(234)

$

-

Other income

 

183

 

23

 

1

 

11,412

 

(133)

 

11,486

Total revenues

 

(806)

 

(70)

 

1,317

 

11,412

 

(367)

 

11,486

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

244

 

10

 

12

 

63

 

(3)

 

326

Loss on extinguishment of debt

 

-

 

-

 

-

 

1

 

-

 

1

Other expenses

 

132

 

2

 

1

 

12,513

 

38

 

12,686

Total expenses

 

376

 

12

 

13

 

12,577

 

35

 

13,013

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax expense (benefit)

 

(1,182)

 

(82)

 

1,304

 

(1,165)

 

(402)

 

(1,527)

Income tax expense (benefit)

 

38

 

-

 

(2)

 

(343)

 

-

 

(307)

Income (loss) from continuing operations

 

(1,220)

 

(82)

 

1,306

 

(822)

 

(402)

 

(1,220)

Loss from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

(39)

 

-

 

-

 

-

 

-

 

(39)

Net income (loss)

 

(1,259)

 

(82)

 

1,306

 

(822)

 

(402)

 

(1,259)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Net income (loss) attributable to AIG

$

(1,259)

$

(82)

$

1,306

$

(822)

$

(402)

$

(1,259)

66 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt

 

 

 

American

 

 

 

 

 

 

 

 

 

 

 

 

International

 

Validus

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

Holdings,

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

2,873

$

344

$

2,989

$

-

$

(6,206)

$

-

Other income

 

843

 

9

 

-

 

37,234

 

(155)

 

37,931

Total revenues

 

3,716

 

353

 

2,989

 

37,234

 

(6,361)

 

37,931

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

741

 

13

 

37

 

277

 

(11)

 

1,057

Loss on extinguishment of debt

 

-

 

-

 

-

 

13

 

-

 

13

Other expenses

 

556

 

12

 

2

 

32,183

 

(143)

 

32,610

Total expenses

 

1,297

 

25

 

39

 

32,473

 

(154)

 

33,680

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax expense (benefit)

 

2,419

 

328

 

2,950

 

4,761

 

(6,207)

 

4,251

Income tax expense (benefit)

 

(2)

 

-

 

(4)

 

956

 

-

 

950

Income (loss) from continuing operations

 

2,421

 

328

 

2,954

 

3,805

 

(6,207)

 

3,301

Income (loss) from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

(2)

 

-

 

-

 

1

 

-

 

(1)

Net income (loss)

 

2,419

 

328

 

2,954

 

3,806

 

(6,207)

 

3,300

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

881

 

-

 

881

Net income (loss) attributable to AIG

$

2,419

$

328

$

2,954

$

2,925

$

(6,207)

$

2,419

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

889

$

(93)

$

2,497

$

-

$

(3,293)

$

-

Other income

 

750

 

23

 

1

 

34,103

 

(48)

 

34,829

Total revenues

 

1,639

 

(70)

 

2,498

 

34,103

 

(3,341)

 

34,829

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

710

 

10

 

37

 

154

 

(9)

 

902

Loss on extinguishment of debt

 

-

 

-

 

-

 

10

 

-

 

10

Other expenses

 

643

 

2

 

2

 

32,357

 

(39)

 

32,965

Total expenses

 

1,353

 

12

 

39

 

32,521

 

(48)

 

33,877

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax expense (benefit)

 

286

 

(82)

 

2,459

 

1,582

 

(3,293)

 

952

Income tax expense (benefit)

 

(370)

 

-

 

-

 

661

 

-

 

291

Income (loss) from continuing operations

 

656

 

(82)

 

2,459

 

921

 

(3,293)

 

661

Loss from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

(40)

 

-

 

-

 

-

 

-

 

(40)

Net income (loss)

 

616

 

(82)

 

2,459

 

921

 

(3,293)

 

621

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

5

 

-

 

5

Net income (loss) attributable to AIG

$

616

$

(82)

$

2,459

$

916

$

(3,293)

$

616

*Eliminated in consolidation.

 

AIG | Third Quarter 2019 Form 10-Q 67

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt

 

Condensed Consolidating Statements of Comprehensive Income

 

 

American

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International

 

Validus

 

 

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

Holdings,

 

 

 

 

Other

 

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

Ltd.

 

AIGLH

 

 

Subsidiaries

 

 

Eliminations

 

AIG

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

656

$

21

$

1,000

 

$

1,334

 

$

(2,038)

$

973

Other comprehensive income (loss)

 

624

 

-

 

303

 

 

(1,436)

 

 

1,137

 

628

Comprehensive income (loss)

 

1,280

 

21

 

1,303

 

 

(102)

 

 

(901)

 

1,601

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

 

321

 

 

-

 

321

Comprehensive income (loss) attributable to AIG

$

1,280

$

21

$

1,303

 

$

(423)

 

$

(901)

$

1,280

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,259)

$

(82)

$

1,306

 

$

(822)

 

$

(402)

$

(1,259)

Other comprehensive income (loss)

 

(766)

 

-

 

(301)

 

 

(2,229)

(a)

 

2,530

(a)

(766)

Comprehensive income (loss)

 

(2,025)

 

(82)

 

1,005

 

 

(3,051)

 

 

2,128

 

(2,025)

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

 

-

 

 

-

 

-

Comprehensive income (loss) attributable to AIG

$

(2,025)

$

(82)

$

1,005

 

$

(3,051)

 

$

2,128

$

(2,025)

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

2,419

$

328

$

2,954

 

$

3,806

 

$

(6,207)

$

3,300

Other comprehensive income (loss)

 

7,028

 

1

 

5,521

 

 

3,593

 

 

(9,095)

 

7,048

Comprehensive income (loss)

 

9,447

 

329

 

8,475

 

 

7,399

 

 

(15,302)

 

10,348

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

 

901

 

 

-

 

901

Comprehensive income (loss) attributable to AIG

$

9,447

$

329

$

8,475

 

$

6,498

 

$

(15,302)

$

9,447

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

616

$

(82)

$

2,459

 

$

921

 

$

(3,293)

$

621

Other comprehensive income (loss)

 

(5,425)

 

-

 

(3,766)

(a)

 

(6,650)

(a)

 

10,416

(a)

(5,425)

Comprehensive income (loss)

 

(4,809)

 

(82)

 

(1,307)

 

 

(5,729)

 

 

7,123

 

(4,804)

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

 

5

 

 

-

 

5

Comprehensive income (loss) attributable to AIG

$

(4,809)

$

(82)

$

(1,307)

 

$

(5,734)

 

$

7,123

$

(4,809)

(a)The Other comprehensive income (loss) amounts for Other Subsidiaries and Reclassifications and Eliminations in the three months ended September 30, 2018, have been revised from $(1.4) billion to $(2.2) billion and from $1.7 billion to $2.5 billion, respectively, to correct Comprehensive income (loss) in the three months ended September 30, 2018. The Other comprehensive income (loss) amounts for AIGLH, Other Subsidiaries and Reclassifications and Eliminations in the nine months ended September 30, 2018, have been revised from $3.1 billion to $(3.8) billion, from $12.6 billion to $(6.7) billion and from $(15.7) billion to $10.4 billion, respectively, to correct Comprehensive income (loss) in the nine months ended September 30, 2018. These corrections in the three-and nine-month periods ended September 30, 2018 have no impact on AIG’s consolidated financial statements and is not considered material to previously issued financial statements.

 

68 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt

 

Condensed Consolidating Statements of Cash Flows

 

 

American

 

 

 

 

 

 

 

 

 

 

 

 

International

 

Validus

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

Holdings,

 

 

 

Other

 

and

 

Consolidated

(in millions)

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

$

2,755

$

101

$

1,462

$

(1,068)

$

(4,039)

$

(789)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of investments

 

2,090

 

-

 

-

 

46,921

 

(540)

 

48,471

Sales of divested businesses, net

 

-

 

-

 

-

 

2

 

-

 

2

Purchase of investments

 

(2,395)

 

-

 

-

 

(49,654)

 

540

 

(51,509)

Loans to subsidiaries - net

 

534

 

-

 

-

 

(127)

 

(407)

 

-

Contributions from (to) subsidiaries - net

 

(239)

 

-

 

-

 

-

 

239

 

-

Net change in short-term investments

 

(2,242)

 

-

 

-

 

(2,344)

 

-

 

(4,586)

Other, net

 

87

 

-

 

-

 

2,742

 

-

 

2,829

Net cash (used in) investing activities

 

(2,165)

 

-

 

-

 

(2,460)

 

(168)

 

(4,793)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

595

 

-

 

-

 

1,969

 

-

 

2,564

Repayments of long-term debt

 

(1,006)

 

-

 

-

 

(1,415)

 

-

 

(2,421)

Issuance of preferred stock

 

485

 

-

 

-

 

-

 

-

 

485

Purchase of common stock

 

-

 

-

 

-

 

-

 

-

 

-

Intercompany loans - net

 

127

 

-

 

-

 

(534)

 

407

 

-

Cash dividends paid on preferred stock

 

(15)

 

-

 

-

 

-

 

-

 

(15)

Cash dividends paid on common stock

 

(835)

 

(90)

 

(1,470)

 

(2,479)

 

4,039

 

(835)

Other, net

 

(63)

 

-

 

-

 

6,479

 

(239)

 

6,177

Net cash (used in) provided by financing activities

 

(712)

 

(90)

 

(1,470)

 

4,020

 

4,207

 

5,955

Effect of exchange rate changes on cash and

 

 

 

 

 

 

 

 

 

 

 

 

restricted cash

 

-

 

-

 

-

 

39

 

-

 

39

Change in cash and restricted cash

 

(122)

 

11

 

(8)

 

531

 

-

 

412

Cash and restricted cash at beginning of year

 

127

 

9

 

9

 

3,213

 

-

 

3,358

Cash and restricted cash at end of period

$

5

$

20

$

1

$

3,744

$

-

$

3,770

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

$

1,389

$

(40)

$

2,003

$

(433)

$

(2,957)

$

(38)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of investments

 

4,641

 

-

 

-

 

45,218

 

(3,326)

 

46,533

Sales of divested businesses, net

 

-

 

-

 

-

 

10

 

-

 

10

Purchase of investments

 

(1,680)

 

-

 

-

 

(45,574)

 

3,326

 

(43,928)

Loans to subsidiaries - net

 

878

 

-

 

-

 

(50)

 

(828)

 

-

Contributions from (to) subsidiaries - net

 

22

 

-

 

-

 

-

 

(22)

 

-

Acquisition of businesses, net of cash and

 

 

 

 

 

 

 

 

 

 

 

 

restricted cash acquired

 

(5,475)

 

112

 

-

 

311

 

-

 

(5,052)

Net change in short-term investments

 

1,267

 

-

 

-

 

1,144

 

-

 

2,411

Other, net

 

(55)

 

-

 

-

 

(836)

 

-

 

(891)

Net cash (used in) provided by investing activities

 

(402)

 

112

 

-

 

223

 

(850)

 

(917)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

2,470

 

-

 

-

 

1,589

 

-

 

4,059

Repayments of long-term debt

 

(1,493)

 

-

 

-

 

(1,295)

 

-

 

(2,788)

Purchase of common stock

 

(994)

 

-

 

-

 

-

 

-

 

(994)

Intercompany loans - net

 

50

 

-

 

-

 

(878)

 

828

 

-

Cash dividends paid on common stock

 

(858)

 

(6)

 

(2,020)

 

(931)

 

2,957

 

(858)

Other, net

 

(165)

 

-

 

-

 

2,057

 

22

 

1,914

Net cash (used in) provided by financing activities

 

(990)

 

(6)

 

(2,020)

 

542

 

3,807

 

1,333

Effect of exchange rate changes on cash and

 

 

 

 

 

 

 

 

 

 

 

 

restricted cash

 

-

 

-

 

-

 

8

 

-

 

8

Change in cash and restricted cash

 

(3)

 

66

 

(17)

 

340

 

-

 

386

Cash and restricted cash at beginning of year

 

8

 

-

 

20

 

2,709

 

-

 

2,737

Cash and restricted cash at end of period

$

5

$

66

$

3

$

3,049

$

-

$

3,123

AIG | Third Quarter 2019 Form 10-Q 69

 

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ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt

 

Supplementary Disclosure of Condensed Consolidating Cash Flow Information

 

 

American

 

 

 

 

 

 

 

 

 

 

 

 

International

 

Validus

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

Holdings,

 

 

 

Other

 

and

 

Consolidated

(in millions)

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

3

$

20

$

1

$

3,337

$

-

$

3,361

Restricted cash included in Short-term investments

 

1

 

-

 

-

 

63

 

-

 

64

Restricted cash included in Other assets

 

1

 

-

 

-

 

344

 

-

 

345

Total cash and restricted cash shown in the Condensed

 

 

 

 

 

 

 

 

 

 

 

 

Consolidating Statements of Cash Flows

$

5

$

20

$

1

$

3,744

$

-

$

3,770

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash (paid) received during the 2019 period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

Third party

$

(735)

$

(22)

$

(48)

$

(207)

$

-

$

(1,012)

Intercompany

 

(2)

 

31

 

-

 

(29)

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(12)

$

-

$

-

$

(181)

$

-

$

(193)

Intercompany

 

1,035

 

2

 

-

 

(1,037)

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

3

$

66

$

3

$

2,669

$

-

$

2,741

Restricted cash included in Short-term investments

 

1

 

-

 

-

 

27

 

-

 

28

Restricted cash included in Other assets

 

1

 

-

 

-

 

353

 

-

 

354

Total cash and restricted cash shown in the Condensed

 

 

 

 

 

 

 

 

 

 

 

 

Consolidating Statements of Cash Flows

$

5

$

66

$

3

$

3,049

$

-

$

3,123

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash (paid) received during the 2018 period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

Third party

$

(706)

$

14

$

(47)

$

(279)

$

-

$

(1,018)

Intercompany

 

(1)

 

-

 

(1)

 

2

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(23)

$

-

$

-

$

(44)

$

-

$

(67)

Intercompany

 

1,084

 

-

 

-

 

(1,084)

 

-

 

-

American International Group, Inc. (As Guarantor) Supplementary Disclosure of Non-Cash Activities:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2019

 

2018

Intercompany non-cash financing and investing activities:

 

 

 

 

Capital contributions

$

15

$

2,339

Dividends received in the form of securities

 

659

 

745

Return of capital

 

15

 

2,706

 

17. Subsequent Events

Dividends Declared

On October 31, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 26, 2019 to shareholders of record on December 12, 2019. On October 31, 2019, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on December 16, 2019 to holders of record on November 29, 2019.

70 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Glossary and Acronyms of Selected Insurance Terms and References

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.

American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 (the 2018 Annual Report) to assist readers seeking additional information related to a particular subject.

In this Quarterly Report on Form 10-Q, unless otherwise mentioned or unless the context indicates otherwise, we use the terms “AIG,” the “Company,” “we,” “us” and “our” to refer to American International Group, Inc., a Delaware corporation, and its consolidated subsidiaries. We use the term “AIG Parent” to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries.

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal” or “estimate.” These projections, goals, assumptions and statements may relate to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational, business or regulatory changes, anticipated sales, monetization and/or acquisitions of businesses or assets, or successful integration of acquired businesses, management succession and retention plans, exposure to risk, trends in operations and financial results.

It is possible that our actual results and financial condition will differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements. Factors that could cause our actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:

•changes in market and industry conditions;

•the occurrence of catastrophic events, both natural and man-made;

•our ability to successfully reorganize our businesses and execute on our initiatives to improve our underwriting capabilities and reinsurance programs, as well as improve profitability, without negatively impacting client relationships or our competitive position;

•our ability to successfully dispose of, monetize and/or acquire businesses or assets or successfully integrate acquired businesses;

•changes in judgments concerning potential cost saving opportunities;

•actions by credit rating agencies;

•changes in judgments concerning insurance underwriting and insurance liabilities;

•the impact of potential information technology, cybersecurity or data security breaches, including as a result of cyber-attacks or security vulnerabilities;

•disruptions in the availability of our electronic data systems or those of third parties;

•the effectiveness of our strategies to recruit and retain key personnel and our ability to implement effective succession plans;

•the requirements, which may change from time to time, of the global regulatory framework to which we are subject;

•negative impacts on customers, business partners and other stakeholders;

•our ability to successfully manage Legacy portfolios;

•significant legal, regulatory or governmental proceedings;

•concentrations in our investment portfolios;

•changes in judgments concerning the recognition of deferred tax assets and goodwill impairment; and

•such other factors discussed in:

–Part I, Item 2. MD&A of this Quarterly Report on Form 10-Q;

–Part I, Item 2. MD&A of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019

–Part I, Item 2. MD&A of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019; and

–Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the 2018 Annual Report.

We are not under any obligation (and expressly disclaim any obligation) to update or alter any projections, goals, assumptions or other statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise.

AIG | Third Quarter 2019 Form 10-Q 71

 

TABLE OF CONTENTS

 

INDEX TO ITEM 2

 

 

 

 

Page

Use of Non-GAAP Measures

 

73

Critical Accounting Estimates

 

75

Executive Summary

 

75

Overview

 

75

Financial Performance Summary

 

77

AIG's Outlook – Industry and Economic Factors

 

82

Consolidated Results of Operations

 

86

Business Segment Operations

 

92

General Insurance

 

93

Life and Retirement

 

105

Other Operations

 

123

Legacy Portfolio

 

124

Investments

 

127

Overview

 

127

Investment Highlights in the Nine Months Ended September 30, 2019

 

127

Investment Strategies

 

127

Credit Ratings

 

129

Impairments

 

136

Insurance Reserves

 

139

Loss Reserves

 

139

Life and Annuity Reserves and DAC

 

144

Liquidity and Capital Resources

 

152

Overview

 

152

Analysis of Sources and Uses of Cash

 

154

Liquidity and Capital Resources of AIG Parent and Subsidiaries

 

155

Credit Facilities

 

157

Contractual Obligations

 

158

Off-Balance Sheet Arrangements and Commercial Commitments

 

159

Debt

 

160

Credit Ratings

 

162

Financial Strength Ratings

 

163

Regulation and Supervision

 

163

Dividends

 

163

Repurchases of AIG Common Stock

 

163

Restrictions on Dividends from Subsidiaries

 

164

Enterprise Risk Management

 

164

Overview

 

164

Regulatory Environment

 

164

Overview

 

164

Glossary

 

165

Acronyms

 

168

 

72 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Use of Non-GAAP Measures

 

 

Use of Non-GAAP Measures

Throughout this MD&A, we present our financial condition and results of operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we use are “non-GAAP financial measures” under Securities and Exchange Commission rules and regulations. GAAP is the acronym for “generally accepted accounting principles” in the United States. The non-GAAP financial measures we present may not be comparable to similarly-named measures reported by other companies.

Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are used to show the amount of our net worth on a per-common share basis. We believe these measures are useful to investors because they eliminate items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency translation adjustments and U.S. tax attribute deferred tax assets. These measures also eliminate the asymmetrical impact resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the DTA utilized is included in these book value per common share metrics. Book value per common share, excluding AOCI, is derived by dividing total AIG common shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI and DTA (Adjusted Common Shareholders’ Equity), by total common shares outstanding. The reconciliation to book value per common share, the most comparable GAAP measure, is presented in the Executive Summary section of this MD&A.

Return on common equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted return on common equity) is used to show the rate of return on common shareholders’ equity. We believe this measure is useful to investors because it eliminates items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency translation adjustments and U.S. tax attribute deferred tax assets. This measure also eliminates the asymmetrical impact resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the DTA utilized is included in Adjusted return on common equity. Adjusted return on common equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted Common Shareholders’ Equity. The reconciliation to return on common equity, the most comparable GAAP measure, is presented in the Executive Summary section of this MD&A.

Adjusted after-tax income attributable to AIG common shareholders is derived by excluding the tax effected adjusted pre-tax income (APTI) adjustments described below, dividends on preferred stock, and the following tax items from net income attributable to AIG:

•deferred income tax valuation allowance releases and charges;

•changes in uncertain tax positions and other tax items related to legacy matters having no relevance to our current businesses or operating performance; and

•net tax charge related to the enactment of the Tax Cuts and Jobs Act (Tax Act);

and by excluding the net realized capital gains (losses) from noncontrolling interests.

We use the following operating performance measures because we believe they enhance the understanding of the underlying profitability of continuing operations and trends of our business segments. We believe they also allow for more meaningful comparisons with our insurance competitors. When we use these measures, reconciliations to the most comparable GAAP measure are provided on a consolidated basis in the Consolidated Results of Operations section of this MD&A.

Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.

AIG | Third Quarter 2019 Form 10-Q 73

 

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ITEM 2 | Use of Non-GAAP Measures

 

Adjusted pre-tax income is derived by excluding the items set forth below from income from continuing operations before income tax. This definition is consistent across our segments. These items generally fall into one or more of the following broad categories: legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the underlying economics of transactions; and measures that we believe to be common to the industry. APTI is a GAAP measure for our segments. Excluded items include the following:

•changes in fair value of securities used to hedge guaranteed living benefits;

•changes in benefit reserves and deferred policy acquisition costs (DAC), value of business acquired (VOBA), and sales inducement assets (SIA) related to net realized capital gains and losses;

•changes in the fair value of equity securities;

•loss (gain) on extinguishment of debt;

•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. Earned income on such economic hedges is reclassified from net realized capital gains and losses to specific APTI line items based on the economic risk being hedged (e.g. net investment income and interest credited to policyholder account balances);

•income or loss from discontinued operations;

•net loss reserve discount benefit (charge);

•pension expense related to a one-time lump sum payment to former employees;

•income and loss from divested businesses;

•non-operating litigation reserves and settlements;

•restructuring and other costs related to initiatives designed to reduce operating expenses, improve efficiency and simplify our organization;

•the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain;

•integration and transaction costs associated with acquired businesses;

•losses from the impairment of goodwill; and

•non-recurring external costs associated with the implementation of non-ordinary course legal or regulatory changes or changes to accounting principles.

General Insurance

–Ratios: We, along with most property and casualty insurance companies, use the loss ratio, the expense ratio and the combined ratio as measures of underwriting performance. These ratios are relative measurements that describe, for every $100 of net premiums earned, the amount of losses and loss adjustment expenses (which for General Insurance excludes net loss reserve discount), and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100 indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. Our ratios are calculated using the relevant segment information calculated under GAAP, and thus may not be comparable to similar ratios calculated for regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and associated ratios.

–Accident year loss and combined ratios, as adjusted: both the accident year loss and combined ratios, as adjusted, exclude catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that exceed the $10 million threshold. We believe that as adjusted ratios are meaningful measures of our underwriting results on an ongoing basis as they exclude catastrophes and the impact of reserve discounting which are outside of management’s control. We also exclude prior year development to provide transparency related to current accident year results.

Life and Retirement

–Premiums and deposits: includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, Federal Home Loan Bank (FHLB) funding agreements and mutual funds.

Results from discontinued operations are excluded from all of these measures.

74 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Critical Accounting Estimates

 

 

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment.

The accounting policies that we believe are most dependent on the application of estimates and assumptions, which are critical accounting estimates, are related to the determination of:

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;

valuation of embedded derivatives for fixed index annuity and life products;

estimated gross profits to value deferred 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 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.

For a complete discussion of our critical accounting estimates, see Part II, Item 7. MD&A — Critical Accounting Estimates in the 2018 Annual Report.

Executive Summary

Overview

This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with the 2018 Annual Report, in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

Beginning in the first quarter of 2019, on a prospective basis, the changes in the fair value of equity securities are excluded from adjusted pre-tax income (loss).

 

AIG | Third Quarter 2019 Form 10-Q 75

 

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ITEM 2 | Executive Summary

 

AIG’S OPERATING STRUCTURE

Our Core businesses include General Insurance, Life and Retirement and Other Operations. General Insurance consists of two operating segments – North America and International. Life and Retirement consists of four operating segments – Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s technology-driven subsidiary, is reported within Other Operations. We also report a Legacy Portfolio consisting of our run-off insurance lines and legacy investments that we consider non-core. Effective February 2018, our Bermuda-domiciled composite reinsurer, Fortitude Reinsurance Company Ltd (Fortitude Re.) is included in our Legacy Portfolio.

Consistent with how we manage our business, our General Insurance North America operating segment primarily includes insurance businesses in the United States, Canada and Bermuda. Our General Insurance International operating segment includes insurance businesses in Japan, the United Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and Africa. General Insurance results are presented before consideration of internal reinsurance agreements.

For further discussion on our business segments see Note 3 to the Condensed Consolidated Financial Statements.

Business Segments

 

 

 

 

 

General Insurance

General Insurance is a leading provider of insurance products and services for commercial and personal insurance customers. It includes one of the world’s most far-reaching property casualty networks. General Insurance offers a broad range of products to customers through a diversified, multichannel distribution network. Customers value General Insurance’s strong capital position, extensive risk management and claims experience and its ability to be a market leader in critical lines of the insurance business.

 

Picture 8 Picture 7

Life and Retirement

Life and Retirement is a unique franchise that brings together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. It holds long-standing, leading market positions in many of the markets it serves in the U.S. With its strong capital position, customer-focused service, breadth of product expertise and deep distribution relationships across multiple channels, Life and Retirement is well positioned to serve growing market needs.

 

 

Picture 1 Picture 2Picture 9 Picture 10

 

 

General Insurance includes the following major operating companies: National Union Fire Insurance Company of Pittsburgh, Pa. (National Union); American Home Assurance Company (American Home); Lexington Insurance Company (Lexington); AIG General Insurance Company, Ltd. (AIG Sonpo); AIG Asia Pacific Insurance, Pte, Ltd.; AIG Europe S.A.; American International Group UK Ltd.; Validus Reinsurance, Ltd. (Validus); Talbot Holdings Ltd.; Western World Insurance Group, Inc. and Glatfelter Insurance Group (Glatfelter).

Life and Retirement includes the following major operating companies: American General Life Insurance Company (American General Life); The Variable Annuity Life Insurance Company (VALIC); The United States Life Insurance Company in the City of New York (U.S. Life); Laya Healthcare Limited and AIG Life Limited.

 

 

 

 

 

 

 

 

 

 

Other Operations

Other Operations consists of businesses and items not attributed to our General Insurance and Life and Retirement segments or our Legacy Portfolio. It includes AIG Parent; Blackboard; deferred tax assets related to tax attributes; corporate expenses and intercompany eliminations.

Legacy Portfolio

Legacy Portfolio includes Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, Fortitude Re, our Bermuda-domiciled composite reinsurer, is included in our Legacy Portfolio.

 

 

 

 

76 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Executive Summary

 

Financial Performance Summary

Net Income (Loss) Attributable To AIG Common Shareholders

Three Months Ended September 30,

(in millions)

 

Chart 3

2019 and 2018 Quarterly Comparison

Net income attributable to AIG Common Shareholders increased due to:

•improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses and favorable prior year loss reserve development compared to unfavorable loss reserve development in the same period of the prior year in General Insurance;

•net realized capital gains in the three-month period ended September 30, 2019 compared to net realized capital losses in the same period in the prior year;

•lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs; and

•net investment income was flat compared to the same period in the prior year, reflecting higher interest and dividends and other investment income primarily offset by lower alternative investment returns.

These increases were partially offset by:

•a net loss reserve discount charge in the three-month period ended September 30, 2019 compared to a loss reserve discount benefit in the three-month period ended September 30, 2018; and

•the impact of noncontrolling interest attributed to Fortitude Re results in the three-month period ended September 30, 2019 as discussed in Consolidated Results of Operations.

For further discussion see Consolidated Results of Operations.

 

AIG | Third Quarter 2019 Form 10-Q 77

 

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ITEM 2 | Executive Summary

 

Net Income Attributable To AIG Common Shareholders

Nine Months Ended September 30,

(in millions)

 

Chart 4

 

2019 and 2018 Year-to-Date Comparison

Net income attributable to AIG Common Shareholders increased due to:

•higher investment returns in our alternative investments portfolio due to robust equity market returns in the nine-month period ended September 30, 2019, income from an initial public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity securities for which the fair value option was elected compared to the same period in the prior year where returns were lower as a result of an increase in interest rates and widening spreads that occurred, as well as negative performance of our fair value option equity securities portfolio;

•improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses and favorable prior year loss reserve development compared to unfavorable loss reserve development in the same period of the prior year in General Insurance;

•net realized capital gains in the nine-month period ended September 30, 2019 compared to net realized capital losses in the same period in the prior year; and

•lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs.

These increases were partially offset by:

•a net loss reserve discount charge in the nine-month period ended September 30, 2019 compared to a loss reserve discount benefit in the nine-month period ended September 30, 2018; and

•the impact of noncontrolling interest attributed to Fortitude Re results in the nine-month period ended September 30, 2019 as discussed in Consolidated Results of Operations.

For further discussion see Consolidated Results of Operations.

 

78 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Executive Summary

 

Adjusted Pre-Tax Income (Loss)*

Three Months Ended September 30,

(in millions)

Chart 4

 

 

2019 and 2018 Quarterly Comparison

Adjusted pre-tax income increased primarily due to:

•improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses and favorable prior year loss reserve development compared to unfavorable loss reserve development in the same period of the prior year in General Insurance;

•lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs; and

•net investment income was flat compared to the same period in the prior year, reflecting higher interest and dividends and other investment income primarily offset by lower alternative investment returns.

 

*Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.

Adjusted Pre-Tax Income*

Nine Months Ended September 30,

(in millions)

Chart 4

 

 

2019 and 2018 Year-to-Date Comparison

Adjusted pre-tax income increased primarily due to:

•higher investment returns in our alternative investments portfolio due to robust equity market returns in the nine-month period ended September 30, 2019, income from an initial public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity securities for which the fair value option was elected compared to the same period in the prior year where returns were lower as a result of an increase in interest rates and widening spreads that occurred;

•lower catastrophe losses and lower accident year losses as a result of underwriting discipline, increased use of reinsurance and a change in business mix and favorable prior year loss reserve development compared to unfavorable loss reserve development in the same period of the prior year; and

•lower general operating and other expenses as a result of ongoing strategic initiatives to reduce costs.

*Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.

 

AIG | Third Quarter 2019 Form 10-Q 79

 

TABLE OF CONTENTS

 

ITEM 2 | Executive Summary

 

General Operating and Other Expenses

Three Months Ended September 30,

(in millions)

Chart 1

2019 and 2018 Quarterly Comparison

General operating and other expenses declined primarily due to lower employee related expenses and professional fee reductions pertaining to expense reduction initiatives. The declines were partially offset by an increase in expenses caused by the acquisition of Glatfelter in the fourth quarter of 2018.

In keeping with our broad and ongoing efforts to transform for long-term competitiveness, general operating and other expenses for the three-month periods ended September 30, 2019 and 2018 included approximately $67 million and $35 million, respectively, of pre-tax restructuring and other costs which were primarily comprised of employee severance charges and other exit costs related to organizational simplification, operational efficiency, and business rationalization.

 

General Operating and Other Expenses

Nine Months Ended September 30,

(in millions)

Chart 1

 

2019 and 2018 Year-to-Date Comparison

General operating and other expenses declined primarily due to lower employee related expenses and professional fee reductions pertaining to expense reduction initiatives. The declines were partially offset by an increase in expenses caused by the acquisitions of Validus and Glatfelter in the third and fourth quarters of 2018, respectively.

In keeping with our broad and ongoing efforts to transform for long-term competitiveness, general operating and other expenses for the nine-month periods ended September 30, 2019 and 2018 included approximately $174 million and $259 million, respectively, of pre-tax restructuring and other costs which were primarily comprised of employee severance charges and other exit costs related to organizational simplification, operational efficiency, and business rationalization.

 

 

80 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Executive Summary

 

Return on Common Equity

 

Return on Common Equity

Chart 1

 

Chart 1

Adjusted Return on Common Equity*

 

Adjusted Return on Common Equity*

Chart 1

 

Chart 1

 

*Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.

 

Book Value Per Common Share

 

Adjusted Book Value Per Common Share*

Chart 1

 

Chart 1

*Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.

AIG | Third Quarter 2019 Form 10-Q 81

 

TABLE OF CONTENTS

 

ITEM 2 | Executive Summary

 

AIG’s Outlook – Industry and economic factors

Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in the first nine months of 2019, characterized by factors such as the impact of historically low interest rates, uncertainties in the annuity marketplace resulting from legislative and regulatory initiatives aimed at re-evaluating the standard of care for sales of investment products and services, slowing global economic growth, global trade tensions and the UK’s pending withdrawal from its membership in the European Union (the EU) (commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.

Impact of Changes in the Interest Rate Environment

While many benchmark U.S. interest rates had risen to recent period highs in 2018, more recent concerns about weakness in U.S. economic expansion have led to declining interest rates over the first nine months of 2019, with key benchmark rates in the U.S. and in many developed markets close to historic lows and, in some international jurisdictions, negative. The low interest rate environment negatively affects sales of interest rate sensitive products in our industry and may negatively impact the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios. On the other hand, if rates rise, some of these impacts may abate while there may be different impacts, some of which are highlighted below. We actively manage our exposure to the interest rate environment through portfolio selection and asset-liability management, including spread management strategies for our investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index annuities.

Additionally, sustained low interest rates may result in higher pension expense due to the impact on discounting of projected benefit cash flows.

Annuity Sales and Surrenders

The sustained low interest rate environment has a significant impact on the annuity industry. Low long-term interest rates put pressure on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits on certain existing fixed rate products. However, our disciplined rate setting has helped to mitigate some of the pressure on investment spreads. Rapidly rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Customers are, however, currently buying fixed annuities with surrender charge periods of four to seven years in pursuit of higher returns, which may help mitigate increased early surrenders in a rising rate environment. In addition, older contracts that have higher minimum interest rates and continue to be attractive to the contract holders have driven better than expected persistency in Fixed Annuities, although the reserves for such contracts have continued to decrease over time in amount and as a percentage of the total annuity portfolio. We will closely monitor surrenders of Fixed Annuities as contracts with lower minimum interest rates come out of the surrender charge period in a more attractive rate environment. Low interest rates have also driven growth in our fixed index annuity products, which provide additional interest crediting, tied to favorable performance in certain equity market indices and the availability of guaranteed living benefits. Changes in interest rates significantly impact the valuation of our liabilities for annuities with guaranteed income features and the value of the related hedging portfolio.

Reinvestment and Spread Management

We actively monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. We also frequently review our interest rate assumptions and actively manage the crediting rates used for new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in light of the interest rate environment. A low interest rate environment puts margin pressure on pricing of new business and on existing products, due to the challenge of investing new money or recurring premiums and deposits, and reinvesting investment portfolio cash flows, in the low interest rate environment. In addition, there is investment risk associated with future premium receipts from certain in-force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.

The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially mitigated through the asset-liability management process, product design elements and crediting rate strategies, a sustained low interest rate environment may negatively affect future profitability.

For additional information on our investment and asset-liability management strategies see Investments.

 

82 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Executive Summary

 

For investment-oriented products in our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets businesses, our spread management strategies include disciplined pricing and product design for new business, modifying or limiting the sale of products that do not achieve targeted spreads, using asset-liability management to match assets to liabilities to the extent practicable, and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-established intervals. As interest rates rise, we may need to raise crediting rates on in-force business for competitive and other reasons potentially reducing the impact of investing in a higher interest rate environment.

Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 64 percent were crediting at the contractual minimum guaranteed interest rate at September 30, 2019. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 62 percent and 66 percent at September 30, 2019 and December 31, 2018, respectively. These businesses continue to focus on pricing discipline and strategies to manage the minimum guaranteed interest crediting rates offered on new sales in the context of regulatory requirements and competitive positioning. In the core universal life business in our Life Insurance business, 63 percent of the account values were crediting at the contractual minimum guaranteed interest rate at September 30, 2019.

The following table presents fixed annuity and universal life account values of our Individual Retirement, Group Retirement and Life Insurance operating segments by contractual minimum guaranteed interest rate and current crediting rates:

 

Current Crediting Rates

September 30, 2019

 

 

1-50 Basis

More than 50

 

 

 

Contractual Minimum Guaranteed

At Contractual

Points Above

Basis Points

 

 

 

Interest Rate

Minimum

Minimum

Above Minimum

 

 

 

(in millions)

Guarantee

Guarantee

Guarantee

 

Total

 

Individual Retirement*

 

 

 

 

 

 

 

 

 

<=1%

$

4,038

$

3,102

$

21,008

$

28,148

 

> 1% - 2%

 

5,607

 

112

 

1,875

 

7,594

 

> 2% - 3%

 

11,828

 

248

 

70

 

12,146

 

> 3% - 4%

 

9,234

 

42

 

6

 

9,282

 

> 4% - 5%

 

522

 

-

 

4

 

526

 

> 5% - 5.5%

 

34

 

-

 

5

 

39

 

Total Individual Retirement

$

31,263

$

3,504

$

22,968

$

57,735

 

Group Retirement*

 

 

 

 

 

 

 

 

 

1%

$

1,496

$

2,581

$

4,307

$

8,384

 

> 1% - 2%

 

5,363

 

930

 

652

 

6,945

 

> 2% - 3%

 

14,832

 

4

 

-

 

14,836

 

> 3% - 4%

 

814

 

-

 

-

 

814

 

> 4% - 5%

 

7,102

 

-

 

-

 

7,102

 

> 5% - 5.5%

 

174

 

-

 

-

 

174

 

Total Group Retirement

$

29,781

$

3,515

$

4,959

$

38,255

 

Universal life insurance

 

 

 

 

 

 

 

 

 

1%

$

-

$

-

$

-

$

-

 

> 1% - 2%

 

92

 

24

 

371

 

487

 

> 2% - 3%

 

271

 

586

 

1,063

 

1,920

 

> 3% - 4%

 

1,470

 

485

 

80

 

2,035

 

> 4% - 5%

 

2,922

 

230

 

38

 

3,190

 

> 5% - 5.5%

 

207

 

-

 

-

 

207

 

Total universal life insurance

$

4,962

$

1,325

$

1,552

$

7,839

 

Total

$

66,006

$

8,344

$

29,479

$

103,829

 

Percentage of total

 

64

%

8

%

28

%

100

%

*Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.

AIG | Third Quarter 2019 Form 10-Q 83

 

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ITEM 2 | Executive Summary

 

General Insurance

The impact of low interest rates on our General Insurance segment is primarily on our long-tail Casualty line of business. We expect limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities. Sustained low interest rates would potentially impact new and renewal business for the long-tail Casualty line as we may not be able to adjust our future pricing consistent with our profitability objectives to fully offset the impact of investing at lower rates. However, we will continue to maintain pricing discipline and risk selection.

In addition, for our General Insurance segment and General Insurance Run-Off Lines reported within the Legacy Portfolio, sustained low interest rates may unfavorably affect the net loss reserve discount for workers’ compensation, and to a lesser extent could favorably impact assumptions about future medical costs, the combined net effect of which could result in higher net loss reserves.

Standard of Care Developments

The SEC, federal and state lawmakers and state insurance regulators continue their efforts at evaluating what is an appropriate regulatory framework around a standard of care for the sale of investment products and services, with the SEC having recently adopted in June 2019 a set of final rules and interpretations on this topic that include Regulation Best Interest.

On July 17, 2018, the New York State Department of Financial Services adopted a best interest standard of care regulation applicable to annuity and life transactions through issuance of the First Amendment to Insurance Regulation 187 – Suitability and Best Interests in Life Insurance and Annuity Transactions (Regulation 187). The compliance date for Regulation 187 was August 1, 2019 for annuity products and will be February 1, 2020 for life products. As amended, Regulation 187 requires producers to act in their client’s best interest when making point-of-sale and in-force recommendations, and provide in writing the basis for the recommendation, as well as the facts and analysis to support the recommendation. The amended regulation also imposes additional duties on life insurance companies in relation to these transactions, such as requiring insurers to establish and maintain procedures designed to prevent financial exploitation and abuse. We will implement and enhance processes and procedures, where needed, to comply with this regulation.

Additionally, on June 5, 2019, the SEC adopted a package of final rulemakings and interpretations, which include Regulation Best Interest (Regulation BI) and the creation of a new disclosure tool called Form CRS Relationship Summary (Form CRS). Regulation BI establishes new rules regarding the standard of care a broker must meet when making a recommendation to a retail customer in connection with the sale of a security or other covered recommendation. Form CRS requires enhanced disclosure by broker-dealers and investment advisors regarding client relationships and certain conflicts of interest issues. The compliance date for Regulation BI and Form CRS is June 30, 2020.

At the same time, the SEC issued two interpretations under the Investment Advisers Act of 1940. The first addressed the standard of conduct applicable to SEC-registered investment advisors, including details regarding the fiduciary duty owed to clients, required disclosures and the advisor’s continuous monitoring obligations. The second interpretation clarified when investment advice would be considered “solely incidental” to brokerage activity for purposes of the broker-dealer exclusion from SEC investment advisor registration. These two SEC interpretations became final upon publication. We expect that the SEC will continue to release guidance regarding these final rules and will further clarify its interpretations through the issuance of FAQs and other publications. We are evaluating the scope and full impact of this package of final rulemakings and interpretations on us and our customers, distribution partners, and financial advisors, while preparing for compliance with them. We will implement and enhance processes and procedures, where needed, to comply with the final rules and interpretations.

Other states, such as Nevada, New Jersey, and Massachusetts have also proposed similar standard of care regulations applicable to insurance producers and/or insurance companies. Additionally, the NAIC is expected to complete its revisions to the NAIC Suitability in Annuity Transactions Model Regulation later this year in regards to the standard of care that would be applicable in a sale or recommendation of an annuity.

We continue to closely follow these efforts and other relevant federal and state-level regulatory and legislative developments in this area. While we cannot predict the long-term impact of these developments on our Life and Retirement businesses, we believe our diverse product offerings and distribution relationships position us to compete effectively in this evolving marketplace.

84 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Executive Summary

 

Impact of Currency Volatility

Currency volatility remains acute. Such volatility affected line item components of income for those businesses with substantial international operations. In particular, growth trends in net premiums written reported in U.S. dollars can differ significantly from those measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and expenses are similarly affected.

These currencies may continue to fluctuate, in either direction, especially as a result of the UK’s announced exit from the EU, and such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item comparability.

General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our businesses:

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

Rate for 1 USD

 

2019

2018

 

Change

 

 

2019

2018

 

Change

 

Currency:

 

 

 

 

 

 

 

 

 

 

 

 

GBP

 

0.80

0.77

 

4

%

 

0.78

0.74

 

5

%

EUR

 

0.89

0.86

 

3

%

 

0.89

0.84

 

6

%

JPY

 

107.53

111.48

 

(4)

%

 

109.67

109.95

 

-

%

Unless otherwise noted, references to the effects of foreign exchange in the General Insurance discussion of results of operations are with respect to movements in the Major Currencies included in the preceding table.

Other Industry Developments

On September 7, 2017, the UK Ministry of Justice announced a proposal to increase the Ogden rate from negative 0.75 percent to between zero and one percent. Following this announcement, on December 20, 2018 the UK Parliament passed the Civil Liability Act 2018 which implements a new framework for determining the Ogden rate and requires the UK Ministry of Justice to start a review of the Ogden rate within 90 days of its commencement and review periodically thereafter. The Ministry of Justice concluded a public call for evidence on January 30, 2019 prior to beginning its first review. On July 15, 2019, the UK Ministry of Justice announced a change in the Ogden rate from negative 0.75 percent to negative 0.25 percent with an effective date of August 5, 2019.

 

AIG | Third Quarter 2019 Form 10-Q 85

 

TABLE OF CONTENTS

 

ITEM 2 | Consolidated Results of Operations

 

 

Consolidated Results of Operations

The following section provides a comparative discussion of our Consolidated Results of Operations on a reported basis for the three- and nine-month periods ended September 30, 2019 and 2018. Factors that relate primarily to a specific business are discussed in more detail within the business segment operations section.

For a discussion of the Critical Accounting Estimates that affect our results of operations see the Critical Accounting Estimates section of this MD&A and Part II, Item 7. MD&A — Critical Accounting Estimates in the 2018 Annual Report.

The following table presents our consolidated results of operations and other key financial metrics:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

7,617

$

7,668

 

(1)

%

 

$

23,117

$

22,150

 

4

%

Policy fees

 

733

 

530

 

38

 

 

 

2,237

 

2,057

 

9

 

Net investment income

 

3,408

 

3,396

 

-

 

 

 

11,032

 

9,722

 

13

 

Net realized capital gains (losses)

 

929

 

(511)

 

NM

 

 

 

887

 

(365)

 

NM

 

Other income

 

227

 

403

 

(44)

 

 

 

658

 

1,265

 

(48)

 

Total revenues

 

12,914

 

11,486

 

12

 

 

 

37,931

 

34,829

 

9

 

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

6,892

 

8,312

 

(17)

 

 

 

19,373

 

19,484

 

(1)

 

Interest credited to policyholder account balances

 

966

 

933

 

4

 

 

 

2,873

 

2,784

 

3

 

Amortization of deferred policy acquisition costs

 

1,252

 

1,118

 

12

 

 

 

3,980

 

3,813

 

4

 

General operating and other expenses

 

2,187

 

2,325

 

(6)

 

 

 

6,380

 

6,919

 

(8)

 

Interest expense

 

348

 

326

 

7

 

 

 

1,057

 

902

 

17

 

Loss on extinguishment of debt

 

-

 

1

 

NM

 

 

 

13

 

10

 

30

 

Net (gain) loss on sale of divested businesses

 

9

 

(2)

 

NM

 

 

 

4

 

(35)

 

NM

 

Total benefits, losses and expenses

 

11,654

 

13,013

 

(10)

 

 

 

33,680

 

33,877

 

(1)

 

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense (benefit)

 

1,260

 

(1,527)

 

NM

 

 

 

4,251

 

952

 

347

 

Income tax expense (benefit)

 

287

 

(307)

 

NM

 

 

 

950

 

291

 

226

 

Income (loss) from continuing operations

 

973

 

(1,220)

 

NM

 

 

 

3,301

 

661

 

399

 

Loss from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

 

-

 

(39)

 

NM

 

 

 

(1)

 

(40)

 

98

 

Net income (loss)

 

973

 

(1,259)

 

NM

 

 

 

3,300

 

621

 

431

 

Less: Net income (loss) attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

317

 

-

 

NM

 

 

 

881

 

5

 

NM

 

Net income (loss) attributable to AIG

 

656

 

(1,259)

 

NM

 

 

 

2,419

 

616

 

293

 

Less: Dividends on preferred stock

 

8

 

-

 

NM

 

 

 

15

 

-

 

NM

 

Net income (loss) attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

$

648

$

(1,259)

 

NM

%

 

$

2,404

$

616

 

290

%

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in millions, except per common share data)

 

 

 

 

 

 

 

 

2019

 

 

2018

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

$

525,122

 

$

491,984

 

Long-term debt

 

 

 

 

 

 

 

 

35,262

 

 

34,540

 

Total AIG shareholders’ equity

 

 

 

 

 

 

 

 

65,603

 

 

56,361

 

Book value per common share

 

 

 

 

 

 

 

 

74.85

 

 

65.04

 

Book value per common share, excluding AOCI

 

 

 

 

 

 

 

 

68.40

 

 

66.67

 

Adjusted book value per common share

 

 

 

 

 

 

 

 

57.60

 

 

54.95

 

86 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Consolidated Results of Operations

 

 

The following table presents a reconciliation of Book value per common share to Book value per common share, excluding AOCI and Book value per common share, excluding AOCI and DTA (Adjusted book value per common share), which are non-GAAP measures. For additional information see Use of Non-GAAP Measures.

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions, except per common share data)

 

 

 

 

 

 

2019

 

2018

Total AIG shareholders' equity

 

 

 

 

 

$

65,603

$

56,361

Preferred equity

 

 

 

 

 

 

485

 

-

Total AIG common shareholders' equity

 

 

 

 

 

 

65,118

 

56,361

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

5,615

 

(1,413)

Total AIG common shareholders' equity, excluding AOCI

 

 

 

 

 

 

59,503

 

57,774

Deferred tax assets

 

 

 

 

 

 

9,393

 

10,153

Adjusted common shareholders' equity

 

 

 

 

 

$

50,110

$

47,621

 

 

 

 

 

 

 

 

 

 

Total common shares outstanding

 

 

 

 

 

 

869,949,246

 

866,609,429

Book value per common share

 

 

 

 

 

$

74.85

$

65.04

Book value per common share, excluding AOCI

 

 

 

 

 

 

68.40

 

66.67

Adjusted book value per common share

 

 

 

 

 

 

57.60

 

54.95

The following table presents a reconciliation of Return on common equity to Adjusted return on common equity, which is a non-GAAP measure. For additional information see Use of Non-GAAP Measures.

 

Three Months Ended

 

Nine Months Ended

 

 

Year Ended

 

 

September 30,

 

September 30,

 

 

December 31,

 

(dollars in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

2018

 

Actual or annualized net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders

$

2,592

 

$

(5,036)

 

$

3,205

 

$

821

 

 

$

(6)

 

Actual or annualized adjusted after-tax income attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to AIG common shareholders

 

2,020

 

 

(1,204)

 

 

4,220

 

 

2,164

 

 

 

1,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average AIG common shareholders' equity

$

64,586

 

$

59,886

 

$

61,459

 

$

61,934

 

 

$

60,819

 

Average AOCI

 

5,303

 

 

(153)

 

 

2,831

 

 

1,845

 

 

 

1,193

 

Average AIG common shareholders' equity, excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

average AOCI

 

59,283

 

 

60,039

 

 

58,628

 

 

60,089

 

 

 

59,626

 

Average DTA

 

9,485

 

 

9,903

 

 

9,762

 

 

10,128

 

 

 

10,133

 

Average adjusted AIG common shareholders' equity

$

49,798

 

$

50,136

 

$

48,866

 

$

49,961

 

 

$

49,493

 

Return on common equity

 

4.0

%

 

(8.4)

%

 

5.2

%

 

1.3

%

 

 

0.0

%

Adjusted return on common equity

 

4.1

%

 

(2.4)

%

 

8.6

%

 

4.3

%

 

 

2.1

%

AIG | Third Quarter 2019 Form 10-Q 87

 

TABLE OF CONTENTS

 

ITEM 2 | Consolidated Results of Operations

 

The following table presents a reconciliation of pre-tax income/net income (loss) attributable to AIG to adjusted pre-tax income/adjusted after-tax income attributable to AIG:

Three Months Ended September 30,

2019

 

2018

 

 

 

 

Total Tax

 

 

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

 

 

(Benefit)

Noncontrolling

 

After

 

 

 

 

(Benefit)

Noncontrolling

 

After

(in millions, except per common share data)

 

Pre-tax

 

Charge

 

Interests(b)

 

Tax

 

 

Pre-tax

 

Charge

 

Interests

 

Tax

Pre-tax income (loss)/net income (loss), including

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

$

1,260

$

287

$

-

$

973

 

$

(1,527)

$

(307)

$

-

$

(1,259)

Noncontrolling interests

 

 

 

 

 

(317)

 

(317)

 

 

 

 

 

 

 

 

-

Pre-tax income (loss)/net income (loss) attributable to AIG

$

1,260

$

287

$

(317)

$

656

 

$

(1,527)

$

(307)

$

-

$

(1,259)

Dividends on preferred stock

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

-

Net income (loss) attributable to AIG common shareholders

 

 

 

 

 

 

$

648

 

 

 

 

 

 

 

$

(1,259)

Changes in uncertain tax positions and other tax adjustments

 

 

 

(8)

 

-

 

8

 

 

 

 

(54)

 

-

 

54

Deferred income tax valuation allowance (releases) charges

 

 

 

9

 

-

 

(9)

 

 

 

 

(5)

 

-

 

5

Changes in fair value of securities used to hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

guaranteed living benefits

 

(12)

 

(2)

 

-

 

(10)

 

 

14

 

3

 

-

 

11

Changes in benefit reserves and DAC, VOBA and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIA related to net realized capital gains (losses)

 

65

 

13

 

-

 

52

 

 

(76)

 

(16)

 

-

 

(60)

Changes in the fair value of equity securities

 

51

 

11

 

-

 

40

 

 

-

 

-

 

-

 

-

Unfavorable (favorable) prior year development and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

related amortization changes ceded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

(59)

 

(13)

 

-

 

(46)

 

 

605

 

128

 

-

 

477

(Gain) loss on extinguishment of debt

 

-

 

-

 

-

 

-

 

 

1

 

-

 

-

 

1

Net realized capital (gains) losses(a)

 

(881)

 

(176)

 

-

 

(705)

 

 

524

 

127

 

-

 

397

Loss from discontinued operations

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

39

(Income) loss from divested businesses

 

9

 

2

 

-

 

7

 

 

(2)

 

(1)

 

-

 

(1)

Non-operating litigation reserves and settlements

 

5

 

1

 

-

 

4

 

 

5

 

2

 

-

 

3

Net loss reserve discount (benefit) charge

 

235

 

50

 

-

 

185

 

 

(86)

 

(18)

 

-

 

(68)

Integration and transaction costs associated with acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

businesses

 

3

 

-

 

-

 

3

 

 

91

 

19

 

-

 

72

Restructuring and other costs

 

67

 

14

 

-

 

53

 

 

35

 

6

 

-

 

29

Professional fees related to regulatory or accounting changes

 

3

 

1

 

-

 

2

 

 

-

 

-

 

-

 

-

Noncontrolling interests primarily related to net realized capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses) of Fortitude Holdings' standalone results(b)

 

 

 

 

 

273

 

273

 

 

 

 

 

 

(1)

 

(1)

Adjusted pre-tax income (loss)/Adjusted after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income (loss) attributable to AIG common shareholders

$

746

$

189

$

(44)

$

505

 

$

(416)

$

(116)

$

(1)

$

(301)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

 

 

895.8

 

 

 

 

 

 

 

 

895.2

Income (loss) per common share attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to AIG common shareholders (diluted)

 

 

 

 

 

 

$

0.72

 

 

 

 

 

 

 

$

(1.41)

Adjusted after-tax income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

.

attributable to AIG common shareholders (diluted)(c)

 

 

 

 

 

 

$

0.56

 

 

 

 

 

 

 

$

(0.34)

88 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Consolidated Results of Operations

 

Nine Months Ended September 30,

2019

 

2018

 

 

 

 

Total Tax

 

 

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

 

 

(Benefit)

Noncontrolling

 

After

 

 

 

 

(Benefit)

Noncontrolling

 

After

(in millions, except per common share data)

 

Pre-tax

 

Charge

 

Interests(b)

 

Tax

 

 

Pre-tax

 

Charge

 

Interests

 

Tax

Pre-tax income/net income, including

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

$

4,251

$

950

$

-

$

3,300

 

$

952

$

291

$

-

$

621

Noncontrolling interests

 

 

 

 

 

(881)

 

(881)

 

 

 

 

 

 

(5)

 

(5)

Pre-tax income/net income attributable to AIG

$

4,251

$

950

$

(881)

$

2,419

 

$

952

$

291

$

(5)

$

616

Dividends on preferred stock

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

-

Net income attributable to AIG common shareholders

 

 

 

 

 

 

$

2,404

 

 

 

 

 

 

 

$

616

Changes in uncertain tax positions and other tax adjustments

 

 

 

(23)

 

-

 

23

 

 

 

 

(53)

 

-

 

53

Deferred income tax valuation allowance (releases) charges

 

 

 

40

 

-

 

(40)

 

 

 

 

(42)

 

-

 

42

Changes in fair value of securities used to hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

guaranteed living benefits

 

(183)

 

(38)

 

-

 

(145)

 

 

127

 

27

 

-

 

100

Changes in benefit reserves and DAC, VOBA and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIA related to net realized capital gains (losses)

 

39

 

8

 

-

 

31

 

 

(46)

 

(10)

 

-

 

(36)

Changes in the fair value of equity securities

 

(6)

 

(1)

 

-

 

(5)

 

 

-

 

-

 

-

 

-

Unfavorable (favorable) prior year development and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

related amortization changes ceded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

(211)

 

(45)

 

-

 

(166)

 

 

607

 

128

 

-

 

479

Loss on extinguishment of debt

 

13

 

3

 

-

 

10

 

 

10

 

2

 

-

 

8

Net realized capital (gains) losses(a)

 

(758)

 

(153)

 

-

 

(605)

 

 

388

 

97

 

-

 

291

Loss from discontinued operations

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

40

(Income) loss from divested businesses

 

4

 

1

 

-

 

3

 

 

(35)

 

(8)

 

-

 

(27)

Non-operating litigation reserves and settlements

 

6

 

1

 

-

 

5

 

 

30

 

7

 

-

 

23

Net loss reserve discount (benefit) charge

 

920

 

194

 

-

 

726

 

 

(305)

 

(64)

 

-

 

(241)

Integration and transaction costs associated with acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

businesses

 

16

 

3

 

-

 

13

 

 

91

 

19

 

-

 

72

Restructuring and other costs

 

174

 

37

 

-

 

137

 

 

259

 

54

 

-

 

205

Professional fees related to regulatory or accounting changes

 

5

 

1

 

-

 

4

 

 

-

 

-

 

-

 

-

Noncontrolling interests primarily related to net realized capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses) of Fortitude Holdings' standalone results(b)

 

 

 

 

 

769

 

769

 

 

 

 

 

 

(2)

 

(2)

Adjusted pre-tax income/Adjusted after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income attributable to AIG common shareholders

$

4,270

$

978

$

(112)

$

3,165

 

$

2,078

$

448

$

(7)

$

1,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

 

 

887.2

 

 

 

 

 

 

 

 

916.8

Income per common share attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to AIG common shareholders (diluted)

 

 

 

 

 

 

$

2.71

 

 

 

 

 

 

 

$

0.67

Adjusted after-tax income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to AIG common shareholders (diluted)

 

 

 

 

 

 

$

3.57

 

 

 

 

 

 

 

$

1.77

(a)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.

(b)Noncontrolling interests is primarily due to the 19.9 percent investment in Fortitude Group Holdings, LLC (Fortitude Holdings) by an affiliate of The Carlyle Group L.P. (Carlyle), which occurred in the fourth quarter of 2018. Carlyle is allocated 19.9 percent of Fortitude Holdings’ standalone financial results. Fortitude Holdings’ results are mostly eliminated in AIG’s consolidated income from continuing operations given that its results arise from intercompany transactions. Noncontrolling interests is calculated based on the standalone financial results of Fortitude Holdings. The most significant component of Fortitude Holdings’ standalone results concerns gains related to the change in fair value of embedded derivatives, which moved materially in the quarter due to lower rates and tightening credit spreads, and which are recorded in net realized capital gains and losses of Fortitude Holdings. In accordance with AIG's adjusted after-tax income definition, realized capital gains and losses are excluded from noncontrolling interests.

Fortitude Holdings’ summarized financial information (standalone results) is presented below:

 

Three Months Ended September 30, 2019

 

Nine Months Ended September 30, 2019

 

 

Fortitude

 

AIG Noncontrolling

 

 

Fortitude

 

AIG Noncontrolling

(in millions)

 

Holdings

 

Interest

 

 

Holdings

 

Interest

Revenues

$

617

$

123

 

$

1,788

$

356

Expenses

 

559

 

111

 

 

1,480

 

294

Adjusted pre-tax income

 

58

 

12

 

 

308

 

62

Taxes on adjusted pre-tax income

 

12

 

2

 

 

64

 

13

Adjusted after-tax income, excluding realized capital gains

 

46

 

10

 

 

244

 

49

 

 

 

 

 

 

 

 

 

 

Net realized capital gains

 

1,744

 

347

 

 

4,916

 

978

Taxes on realized capital gains

 

367

 

73

 

 

1,033

 

206

After-tax net realized capital gains

 

1,377

 

274

 

 

3,883

 

772

Net income

$

1,423

$

284

 

$

4,127

$

821

AIG | Third Quarter 2019 Form 10-Q 89

 

TABLE OF CONTENTS

 

ITEM 2 | Consolidated Results of Operations

 

(c) For the three-month period ended September 30, 2018, because we reported a net loss and an after-tax operating loss, all common stock equivalents are anti-dilutive and are therefore excluded from the calculation of diluted shares and diluted per share amounts. The shares excluded from this calculation were 13,538,168 shares.

QUARTERLY pre-tax income Comparison for 2019 and 2018

Increase in pre-tax income in the three-month period ended September 30, 2019 compared to the same period in 2018 is the result of:

•improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses and favorable prior year loss reserve development compared to unfavorable loss reserve development in the same period of the prior year in General Insurance;

•net realized capital gains in the three-month period ended September 30, 2019 compared to net realized capital losses in the same period in the prior year due primarily to derivative gains in the three-month period ended September 30, 2019 compared to derivative losses in the same period in the prior year, lower other-than-temporary impairments, and higher gains on sales of invested assets;

•lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs; and

•net investment income was flat compared to the same period in the prior year, reflecting higher interest and dividends and other investment income primarily offset by lower alternative investment returns.

These increases were partially offset by:

•a net loss reserve discount charge in the three-month period ended September 30, 2019 compared to a loss reserve discount benefit in the three-month period ended September 30, 2018.

Year-TO-Date pre-tax income Comparison for 2019 and 2018

Increase in pre-tax income in the nine-month period ended September 30, 2019 compared to the same period in 2018 is the result of:

•higher investment returns in our alternative investments portfolio due to robust equity market returns in the nine-month period ended September 30, 2019, income from an initial public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity securities for which the fair value option was elected. This compares to the same period in the prior year where returns were lower as a result of an increase in interest rates and widening spreads that occurred, as well as negative performance of our fair value option equity securities portfolio;

•improvement in accident year losses in General Insurance as a result of underwriting discipline , increased use of reinsurance and a change in business mix as well as lower catastrophe losses and favorable prior year loss reserve development compared to unfavorable loss reserve development in the same period of the prior year in General Insurance;

•net realized capital gains in the nine-month period ended September 30, 2019 compared to net realized capital losses in the same period in the prior year due primarily to higher derivative gains, lower other-than-temporary impairments, and higher gains on sales of invested assets; and

•lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs.

These increases were partially offset by:

•a net loss reserve discount charge in the nine-month period ended September 30, 2019 compared to a loss reserve discount benefit in the nine-month period ended September 30, 2018.

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry. Changes specific to the insurance industry include the calculation of insurance tax reserves and related transition adjustments, amortization of specified policy acquisition expenses, treatment of separate account dividends received deductions and computation of pro-ration adjustments. Provisions of the Tax Act with broader application include reductions or elimination of deductions for certain items, e.g., reductions to corporate dividends received deductions, disallowance of entertainment expenses and limitations on the deduction of certain executive compensation costs. These provisions, generally, result in an increase in AIG’s taxable income.

 

90 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Consolidated Results of Operations

 

The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and, while certain formal guidance was issued by the U.S. tax authority, there are still aspects of the Tax Act that remain unclear and additional guidance is expected later in 2019. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.

Repatriation Assumptions

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, foreign earnings not taxed as part of the one-time deemed repatriation (or otherwise taxed currently under the GILTI or subpart F regimes) will generally be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings. For 2019, we consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.

Interim Tax Calculation Method

We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions and are recorded in the period in which the change occurs. While certain impacts of the Tax Act are included in our annual effective tax rate, we continue to refine our calculations as additional information becomes available, which may result in changes to the estimated annual effective tax rate.

Income Tax expense analysis

For the three-month period ended September 30, 2019, the effective tax rate on income from continuing operations was 22.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges associated with the effect of foreign operations, changes in reserves for uncertain tax positions, a net tax charge due to the accrual of interest associated with IRS and other tax authority matters, state and local income taxes, non-deductible transfer pricing charges, and U.S. tax imposed on GILTI earned by certain foreign subsidiaries, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and valuation allowance activity related to certain foreign subsidiaries. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.

For the nine-month period ended September 30, 2019, the effective tax rate on income from continuing operations was 22.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges associated with the accrual of IRS interest associated with IRS and other tax authority matters, the effect of foreign operations, changes in reserves for uncertain tax positions, state and local income taxes, excess tax charges related to share based compensation payments recorded through the income statement, non-deductible transfer pricing charges, and U.S. tax imposed on GILTI earned by certain foreign subsidiaries, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and valuation allowance activity related to certain foreign subsidiaries. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.

AIG | Third Quarter 2019 Form 10-Q 91

 

TABLE OF CONTENTS

 

ITEM 2 | Consolidated Results of Operations

 

For the three-month period ended September 30, 2018, the effective tax rate on loss from continuing operations was 20.1 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. We also recorded a measurement period tax charge of $62 million related to the effects of the deemed repatriation tax.

For the nine-month period ended September 30, 2018, the effective tax rate on income from continuing operations was 30.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and state jurisdictions and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement.

Business Segment Operations

Our business operations consist of General Insurance, Life and Retirement, Other Operations, and a Legacy Portfolio.

General Insurance consists of two operating segments: North America and International. Life and Retirement consists of four operating segments: Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Other Operations consists of businesses and items not allocated to our other businesses, which are primarily AIG Parent and Blackboard. Our Legacy Portfolio consists of our Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, Fortitude Re is included in our Legacy Portfolio.

The following table summarizes Adjusted pre-tax income (loss) from our business segment operations. See also Note 3 to the Condensed Consolidated Financial Statements.

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

 

2019

 

2018

 

 

2019

 

2018

Core business:

 

 

 

 

 

 

 

 

 

 

General Insurance

 

 

 

 

 

 

 

 

 

 

North America

 

$

435

$

(160)

 

$

2,087

$

567

International

 

 

72

 

(665)

 

 

668

 

(314)

General Insurance

 

 

507

 

(825)

 

 

2,755

 

253

Life and Retirement

 

 

 

 

 

 

 

 

 

 

Individual Retirement

 

 

387

 

393

 

 

1,483

 

1,354

Group Retirement

 

 

203

 

242

 

 

728

 

774

Life Insurance

 

 

(7)

 

16

 

 

195

 

243

Institutional Markets

 

 

63

 

62

 

 

213

 

196

Life and Retirement

 

 

646

 

713

 

 

2,619

 

2,567

Other Operations

 

 

(454)

 

(417)

 

 

(1,256)

 

(1,133)

Consolidations, eliminations and other adjustments

 

 

(46)

 

29

 

 

(172)

 

28

Total Core

 

 

653

 

(500)

 

 

3,946

 

1,715

Legacy Portfolio

 

 

93

 

84

 

 

324

 

363

Adjusted pre-tax income (loss)

 

$

746

$

(416)

 

$

4,270

$

2,078

 

92 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | General Insurance

 

 

General Insurance

General Insurance is managed by our geographic markets of North America and International. Our global presence is reflected in our multinational capabilities to provide our Commercial Lines and Personal Insurance products within these geographic markets.

PRODUCTS AND DISTRIBUTION

Picture 4

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Liability: Products include general liability, environmental, commercial automobile liability, workers’ compensation, excess casualty and crisis management insurance products. Casualty also includes risk- sharing and other customized structured programs for large corporate and multinational customers.

Financial Lines: Products include professional liability insurance for a range of businesses and risks, including directors and officers liability (D&O), mergers and acquisitions (M&A), fidelity, employment practices, fiduciary liability, cyber risk, kidnap and ransom, and errors and omissions insurance (E&O).

Property: Products include commercial and industrial property insurance products and services that cover exposures to man-made and natural disasters, including business interruption.

Special Risks: Products include aerospace, political risk, trade credit, portfolio solutions, energy-related property insurance products, surety, marine and crop insurance.

Personal Lines: Products include personal auto and property in selected markets and insurance for high net worth individuals offered through AIG Private Client Group (PCG) in the U.S. that covers auto, homeowners, umbrella, yacht, fine art and collections. In addition, we offer extended warranty insurance and services covering electronics, appliances, and HVAC.

Accident & Health: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations, as well as a broad range of travel insurance products and services for leisure and business travelers.

General Insurance products in North America and International markets are distributed through various channels, including captive and independent agents, brokers, affinity partners, airlines and travel agents, and retailers. Our distribution network is aided by our competitive position to write multiple-national and cross-border risks in both Commercial Lines and Personal Insurance.

BUSINESS STRATEGY

Profitable Growth: Deploy capital efficiently to act opportunistically and optimize diversity within the portfolio to grow in profitable lines, geographies and customer segments. Look to inorganic growth opportunities in profitable markets and segments to expand our capabilities and footprint.

Reinsurance Optimization: Strategically partner with reinsurers to reduce exposure to losses arising from frequency of large catastrophic events and the severity from individual risk losses. We strive to optimize our reinsurance program to manage volatility and protect the balance sheet from tail events and unpredictable net losses in support of our profitable growth objectives.

Underwriting Excellence: Empower and increase accountability of the underwriter and continue to integrate underwriting, claims and actuarial to enable better decision making. Focus on enhancing risk selection, driving consistent underwriting best practices and building robust monitoring standards to improve underwriting results.

AIG | Third Quarter 2019 Form 10-Q 93

 

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ITEM 2 | Business Segment Operations | General Insurance

 

COMPETITION and challenges

Operating in a highly competitive industry, General Insurance competes against several hundred companies, specialty insurance organizations, mutual companies and other underwriting organizations in the U.S. In international markets, we compete for business with the foreign insurance operations of large global insurance groups and local companies in specific market areas and product types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. General Insurance seeks to distinguish itself in the insurance industry primarily based on its well-established brand, global franchise, multinational capabilities, financial and capital strength, innovative products, claims expertise to handle complex claims, expertise in providing specialized coverages and customer service.

We serve our business and individual customers on a global basis — from the largest multinational corporations to local businesses and individuals. Our clients benefit from our substantial underwriting expertise.

Our challenges include:

•long-tail Commercial Lines exposures that create added challenges to pricing and risk management;

•over capacity in certain lines of business that creates downward market pressure on pricing;

•tort environment volatility in certain jurisdictions and lines of business; and

•volatility in claims arising from natural and man-made catastrophes.

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

Below is a discussion of the industry and economic factors impacting our operating segments:

General Insurance – North America

Commercial Lines over recent years has experienced challenging market conditions, with widespread excess capacity increasing competition and suppressing rates across multiple classes of business. However, in more recent periods we are seeing growing market support for rate increases in challenged segments where major carriers are reducing their risk appetite and market capacity is contracting as a result. We are seeing rate increases across U.S. Liability segments (outside of workers’ compensation), with a common driver being higher industry-wide claims severity trends, as well as within our Property portfolio. We continue to achieve positive rate increases across a number of lines and classes of business as a result of our disciplined underwriting strategy and focus on risk selection. Further, we continue to achieve growth in several of our Commercial Lines high margin businesses, although these market segments remain highly competitive.

Personal Insurance growth prospects are supported by the need for full life cycle products and coverage, increases in personal wealth accumulation, and awareness of insurance protection and risk management. We compete in the high net worth market, accident and health insurance, travel insurance, and warranty services and will continue to expand our innovative products and services to distribution partners and clients.

General Insurance – International

We believe our global presence provides Commercial Lines and Personal Insurance a distinct competitive advantage, as the demand for multinational cross-border coverage and services increases due to the growing number of international customers, while giving us the ability to respond quickly to local market conditions and build client relationships.

The Commercial Lines market continues to be highly competitive, due to increased market capacity and ample availability of capital. Despite this, we continue to grow our most profitable segments and diversify our portfolio across all regions by expanding into new product lines (e.g., cyber), new client segments (e.g., middle market) and new distribution channels (e.g., digital and national brokers) while remaining a market leader in key developed and developing markets. Overall, Commercial lines are showing positive rate increases in selective products and markets where market events or withdrawal of capability have favorably impacted pricing. We are maintaining our underwriting discipline and continuing our risk selection strategy to improve profitability.

Personal Insurance focuses on individual customers, as well as group and corporate clients. Although market competition within Personal Insurance has increased, we continue to benefit from the underwriting quality, portfolio diversity, and generally low volatility of the short-tailed risk in these business lines, although some product classes are exposed to catastrophe losses.

94 AIG | Third Quarter 2019 Form 10-Q

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General INSURANCE RESULTS

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

6,648

$

6,835

 

(3)

%

 

$

19,262

$

19,983

 

(4)

%

Decrease in unearned premiums(a)

 

11

 

246

 

(96)

 

 

 

804

 

351

 

129

 

Net premiums earned

 

6,659

 

7,081

 

(6)

 

 

 

20,066

 

20,334

 

(1)

 

Losses and loss adjustment expenses incurred(b)

 

4,618

 

6,276

 

(26)

 

 

 

13,066

 

15,081

 

(13)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

1,123

 

1,223

 

(8)

 

 

 

3,436

 

3,381

 

2

 

Other acquisition expenses

 

339

 

313

 

8

 

 

 

976

 

995

 

(2)

 

Total acquisition expenses

 

1,462

 

1,536

 

(5)

 

 

 

4,412

 

4,376

 

1

 

General operating expenses

 

828

 

995

 

(17)

 

 

 

2,511

 

2,943

 

(15)

 

Underwriting income (loss)

 

(249)

 

(1,726)

 

86

 

 

 

77

 

(2,066)

 

NM

 

Net investment income

 

756

 

901

 

(16)

 

 

 

2,678

 

2,319

 

15

 

Adjusted pre-tax income (loss)

$

507

$

(825)

 

NM

%

 

$

2,755

$

253

 

NM

%

Loss ratio(b)

 

69.3

 

88.6

 

(19.3)

 

 

 

65.1

 

74.2

 

(9.1)

 

Acquisition ratio

 

22.0

 

21.7

 

0.3

 

 

 

22.0

 

21.5

 

0.5

 

General operating expense ratio

 

12.4

 

14.1

 

(1.7)

 

 

 

12.5

 

14.5

 

(2.0)

 

Expense ratio

 

34.4

 

35.8

 

(1.4)

 

 

 

34.5

 

36.0

 

(1.5)

 

Combined ratio(b)

 

103.7

 

124.4

 

(20.7)

 

 

 

99.6

 

110.2

 

(10.6)

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(7.5)

 

(22.0)

 

14.5

 

 

 

(4.2)

 

(10.3)

 

6.1

 

Prior year development, net of (additional) return premium on loss sensitive business

 

-

 

(2.7)

 

NM

 

 

 

0.6

 

(0.2)

 

0.8

 

Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other

 

(0.3)

 

(0.3)

 

-

 

 

 

0.1

 

0.3

 

(0.2)

 

Accident year loss ratio, as adjusted

 

61.5

 

63.6

 

(2.1)

 

 

 

61.6

 

64.0

 

(2.4)

 

Accident year combined ratio, as adjusted

 

95.9

 

99.4

 

(3.5)

 

 

 

96.1

 

100.0

 

(3.9)

 

(a) In the nine-month period ended September 30, 2018, the underwriting loss included an additional $115 million of net premium earned for multi-year policies related to earlier accident years.

(b) Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.

The following table presents General Insurance net premiums written by operating segment, showing change on both reported and constant dollar basis:

 

Three Months Ended September 30,

 

Percentage Change in

 

Nine Months Ended September 30,

 

Percentage Change in

(in millions)

 

2019

 

2018

 

U.S. dollars

 

Original

Currency

 

 

 

2019

 

2018

 

U.S. dollars

 

Original

Currency

 

North America(a)(b)

$

3,404

$

3,164

 

8

%

8

%

 

$

9,289

$

8,439

 

10

%

10

%

International(a)(c)

 

3,244

 

3,671

 

(12)

 

(11)

 

 

 

9,973

 

11,544

 

(14)

 

(11)

 

Total net premiums written

$

6,648

$

6,835

 

(3)

%

(2)

%

 

$

19,262

$

19,983

 

(4)

%

(2)

%

(a)Includes $553 million and $2,083 million of Validus Net premiums written for North America in the three- and nine-month periods ended September 30, 2019, respectively, and $186 million and $596 million of Validus Net premiums written for International in the three- and nine-month periods ended September 30, 2019, respectively.

(b)Includes $117 million and $258 million of Glatfelter Net premiums written for North America in the three- and nine-month periods ended September 30, 2019, respectively.

(c)As a result of the merger of AIUI Japan and Fuji Fire and Marine Insurance Company (Fuji), Fuji’s fiscal reporting period was conformed to that of AIUI Japan (Japan Merger Impact). Therefore, the nine-month period ended September 30, 2018 included approximately $300 million for two additional months of Net premiums written.

AIG | Third Quarter 2019 Form 10-Q 95

 

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ITEM 2 | Business Segment Operations | General Insurance

 

The following tables present General Insurance accident year catastrophes by geography(a) and number of events:

Catastrophes(b)

 

# of

 

 

North

 

 

 

 

(in millions)

Events

 

 

America

 

International

 

Total

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Flooding

2

 

$

14

$

4

$

18

Windstorms and hailstorms

7

 

 

216

 

263

 

479

Tropical cyclone

-

 

 

-

 

-

 

-

Total catastrophe-related charges

9

 

$

230

$

267

$

497

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Flooding

1

 

$

4

$

106

$

110

Windstorms and hailstorms

11

 

 

754

 

672

 

1,426

Wildfire

2

 

 

26

 

-

 

26

Earthquakes

-

 

 

-

 

(3)

 

(3)

Volcanic eruptions

-

 

 

7

 

1

 

8

Total catastrophe-related charges

14

 

$

791

$

776

$

1,567

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Flooding

3

 

$

14

$

14

$

28

Windstorms and hailstorms

21

 

 

544

 

274

 

818

Tropical cyclone

-

 

 

-

 

-

 

-

Total catastrophe-related charges

24

 

$

558

$

288

$

846

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Flooding

1

 

$

4

$

106

$

110

Windstorms and hailstorms

19

 

 

1,126

 

708

 

1,834

Wildfire

3

 

 

37

 

-

 

37

Earthquakes

2

 

 

13

 

81

 

94

Volcanic eruptions

1

 

 

17

 

1

 

18

Total catastrophe-related charges

26

 

$

1,197

$

896

$

2,093

(a)Geography: North America primarily includes insurance businesses in the United States, Canada and Bermuda. International includes insurance businesses in Japan, the United Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and Africa. General Insurance results are presented before consideration of internal reinsurance agreements.

(b)Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that exceed the $10 million threshold.

96 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | General Insurance

 

North america Results

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

3,404

$

3,164

 

8

%

 

$

9,289

$

8,439

 

10

%

(Increase) decrease in unearned premiums(a)

 

(146)

 

138

 

NM

 

 

 

424

 

447

 

(5)

 

Net premiums earned

 

3,258

 

3,302

 

(1)

 

 

 

9,713

 

8,886

 

9

 

Losses and loss adjustment expenses incurred(b)

 

2,499

 

3,264

 

(23)

 

 

 

6,974

 

7,532

 

(7)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

509

 

534

 

(5)

 

 

 

1,544

 

1,322

 

17

 

Other acquisition expenses

 

122

 

92

 

33

 

 

 

371

 

348

 

7

 

Total acquisition expenses

 

631

 

626

 

1

 

 

 

1,915

 

1,670

 

15

 

General operating expenses

 

313

 

399

 

(22)

 

 

 

1,025

 

1,126

 

(9)

 

Underwriting loss(a)

 

(185)

 

(987)

 

81

 

 

 

(201)

 

(1,442)

 

86

 

Net investment income

 

620

 

827

 

(25)

 

 

 

2,288

 

2,009

 

14

 

Adjusted pre-tax income

$

435

$

(160)

 

NM

%

 

$

2,087

$

567

 

268

%

Loss ratio(b)

 

76.7

 

98.8

 

(22.1)

 

 

 

71.8

 

84.8

 

(13.0)

 

Acquisition ratio

 

19.4

 

19.0

 

0.4

 

 

 

19.7

 

18.8

 

0.9

 

General operating expense ratio

 

9.6

 

12.1

 

(2.5)

 

 

 

10.6

 

12.7

 

(2.1)

 

Expense ratio

 

29.0

 

31.1

 

(2.1)

 

 

 

30.3

 

31.5

 

(1.2)

 

Combined ratio(b)

 

105.7

 

129.9

 

(24.2)

 

 

 

102.1

 

116.3

 

(14.2)

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(7.1)

 

(23.7)

 

16.6

 

 

 

(5.8)

 

(13.4)

 

7.6

 

Prior year development, net of (additional) return premium on loss sensitive business

 

0.5

 

(4.8)

 

5.3

 

 

 

1.4

 

(0.5)

 

1.9

 

Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other

 

(0.6)

 

(0.5)

 

(0.1)

 

 

 

0.1

 

0.8

 

(0.7)

 

Accident year loss ratio, as adjusted

 

69.5

 

69.8

 

(0.3)

 

 

 

67.5

 

71.7

 

(4.2)

 

Accident year combined ratio, as adjusted

 

98.5

 

100.9

 

(2.4)

 

 

 

97.8

 

103.2

 

(5.4)

 

(a)In the nine-month period ended September 30, 2018, the underwriting loss included an additional $115 million of net premium earned for multi-year policies related to earlier accident years.

(b)Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.

Business and Financial Highlights

The North America General Insurance business is focused on making progress towards improved underwriting results and efficiencies. This includes strengthening our talent base; ongoing investment in pricing and monitoring tools; managing limits on both a gross and net basis with enhanced focus on portfolio management and individual business strategy; and increased use of reinsurance to reduce volatility.

We recorded adjusted pre-tax income in the three-month period ended September 30, 2019 compared to an adjusted pre-tax loss in the same period in the prior year, primarily due to the lower loss ratio and lower general operating expenses as a result of ongoing efforts to reduce expenses. The loss ratio decreased due to lower catastrophe losses on net basis and higher favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior-year period. This was partially offset by lower net investment income.

Adjusted pre-tax income increased in the nine-month period ended September 30, 2019 compared to the same period in the prior year, primarily due to lower loss ratio, higher net investment income and lower general operating expenses as a result of ongoing efforts to reduce expenses. The loss ratio decreased due to lower catastrophe losses, higher favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior-year period and lower current accident year loss ratio, as adjusted.

AIG | Third Quarter 2019 Form 10-Q 97

 

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Net premiums written increased in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year due growth within the Validus business and the Glatfelter acquisition, partially offset by underwriting actions taken to strengthen our portfolio and to maintain pricing discipline and higher ceded premiums due to the changes in 2019 reinsurance programs. The increase in net premiums written in the nine-month period ended September 30, 2019 compared to the same period in the prior year was also due to the Validus acquisition.

For a discussion of 2019 reinsurance programs see Part II, Item 7 MD&A - Enterprise Risk Management in our 2018 Annual Report.

 

North America Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

Chart 4

Quarterly 2019 and 2018 Comparison

Adjusted pre-tax income in 2019 compared to adjusted pre-tax loss in 2018 reflected:

•significantly lower catastrophe losses on net basis;

•favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior-year period; and

•lower general operating expenses as a result of ongoing expense reduction initiatives.

These were partially offset by lower net investment income reflecting lower income on alternative investments.

 

North America Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2019 and 2018 Comparison

Adjusted pre-tax income increased primarily due to:

•significantly lower catastrophe losses on net basis;

•the lower accident year loss ratio, as adjusted primarily driven by a change in business mix including the Validus and Glatfelter acquisitions, improved new business and renewal terms, reduced net severity of loss events and changes in 2019 reinsurance programs which have reduced volatility;

•higher net investment income reflecting higher income on fixed income securities and alternative investments;

•favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior-year period; and

•lower general operating expenses as a result of ongoing expense reduction initiatives.

These were partially offset by higher acquisition expenses due to a change in business mix.

 

 

 

98 AIG | Third Quarter 2019 Form 10-Q

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North America Net Premiums Written

Three Months Ended September 30,

(in millions)

Chart 2

Quarterly 2019 and 2018 Comparison

Net Premiums Written increased due to:

•growth within the Validus business; and

•the inclusion of the Glatfelter acquisition.

This increase was partially offset by:

•lower production primarily in Primary and Excess Casualty, Retail Property, Financial Lines and Construction due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline; and

•higher ceded premiums due to the changes in 2019 reinsurance programs.

 

North America Net Premiums Written

Nine Months Ended September 30,

(in millions)

Chart 1

Year-to-Date 2019 and 2018 Comparison

Net premiums written increased primarily due to the inclusion of the Validus and Glatfelter acquisitions as well as growth within the Validus business.

This increase was partially offset by:

•lower production primarily in Excess Casualty, Retail Property, Excess and Surplus Commercial Property, Construction and Private Client Group due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline; and

•higher ceded premiums due to the changes in 2019 reinsurance programs.

 

 

 

AIG | Third Quarter 2019 Form 10-Q 99

 

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ITEM 2 | Business Segment Operations | General Insurance

 

North America Combined Ratios

Three Months Ended September 30,

Chart 10

Quarterly 2019 and 2018 Comparison

The decrease in the combined ratio reflected a decrease in both the loss ratio and the expense ratio.

The decrease in loss ratio reflected:

•significantly lower catastrophe losses on net basis; and

•favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior-year period.

The decrease in the expense ratio reflected lower general operating expense ratio driven by ongoing expense reduction initiatives, partially offset by higher acquisition ratio primarily due to changes in business mix.

 

North America Combined Ratios

Nine Months Ended September 30,

Chart 4

Year-to-Date 2019 and 2018 Comparison

The decrease in the combined ratio reflected a decrease in both the loss ratio and the expense ratio.

The decrease in loss ratio reflected:

•significantly lower catastrophe losses on net basis;

•favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior-year period; and

•lower accident year loss ratio, as adjusted, primarily driven by a change in business mix including the Validus and Glatfelter acquisitions, improved new business and renewal terms, reduced net severity of loss events and changes in 2019 reinsurance programs which have reduced volatility.

The decrease in the expense ratio reflected lower general operating expense ratio driven by ongoing expense reduction initiatives, partially offset by higher acquisition ratio primarily due to changes in business mix.

100 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | General Insurance

 

International Results

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

3,244

$

3,671

 

(12)

%

 

$

9,973

$

11,544

 

(14)

%

(Increase) decrease in unearned premiums

 

157

 

108

 

45

 

 

 

380

 

(96)

 

NM

 

Net premiums earned

 

3,401

 

3,779

 

(10)

 

 

 

10,353

 

11,448

 

(10)

 

Losses and loss adjustment expenses incurred

 

2,119

 

3,012

 

(30)

 

 

 

6,092

 

7,549

 

(19)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

614

 

689

 

(11)

 

 

 

1,892

 

2,059

 

(8)

 

Other acquisition expenses

 

217

 

221

 

(2)

 

 

 

605

 

647

 

(6)

 

Total acquisition expenses

 

831

 

910

 

(9)

 

 

 

2,497

 

2,706

 

(8)

 

General operating expenses

 

515

 

596

 

(14)

 

 

 

1,486

 

1,817

 

(18)

 

Underwriting income (loss)(a)

 

(64)

 

(739)

 

91

 

 

 

278

 

(624)

 

NM

 

Net investment income

 

136

 

74

 

84

 

 

 

390

 

310

 

26

 

Adjusted pre-tax income (loss)

$

72

$

(665)

 

NM

%

 

$

668

$

(314)

 

NM

%

Loss ratio

 

62.3

 

79.7

 

(17.4)

 

 

 

58.8

 

65.9

 

(7.1)

 

Acquisition ratio

 

24.4

 

24.1

 

0.3

 

 

 

24.1

 

23.6

 

0.5

 

General operating expense ratio

 

15.1

 

15.8

 

(0.7)

 

 

 

14.4

 

15.9

 

(1.5)

 

Expense ratio

 

39.5

 

39.9

 

(0.4)

 

 

 

38.5

 

39.5

 

(1.0)

 

Combined ratio

 

101.8

 

119.6

 

(17.8)

 

 

 

97.3

 

105.4

 

(8.1)

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(8.0)

 

(20.5)

 

12.5

 

 

 

(2.8)

 

(7.8)

 

5.0

 

Prior year development, net of (additional) return premium on loss sensitive business

 

(0.4)

 

(1.0)

 

0.6

 

 

 

-

 

-

 

NM

 

Adjustment for ceded premiums under reinsurance contracts related to prior accident years

 

-

 

-

 

NM

 

 

 

-

 

-

 

NM

 

Accident year loss ratio, as adjusted

 

53.9

 

58.2

 

(4.3)

 

 

 

56.0

 

58.1

 

(2.1)

 

Accident year combined ratio, as adjusted

 

93.4

 

98.1

 

(4.7)

 

 

 

94.5

 

97.6

 

(3.1)

 

(a)As result of the Japan Merger Impact, the nine-month period ended September 30, 2018 includes two additional months of operating earnings increasing Net premiums written, Net premiums earned, Losses and loss adjustment expenses incurred, and Adjusted pre-tax income by approximately $300 million, $300 million, $200 million and $15 million, respectively.

Business and Financial Highlights

The International General Insurance business is focused on underwriting profits and improved efficiency, further improving underwriting margins, and growing profitably in segments and geographies that support our growth strategy.

We recorded adjusted pre-tax income in the three- and nine-month periods ended September 30, 2019 compared to an adjusted pre-tax loss the same periods in the prior year primarily due to lower catastrophe losses on net basis, lower general operating expenses, lower accident year loss ratio and inclusion of the Validus acquisition.

Net premiums written, excluding the impact of foreign exchange, decreased in the three-month period ended September 30, 2019 compared to the same period in the prior year primarily due to lower Accident & Health business in Asia Pacific and lower production primarily due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline. In addition, net premiums written, excluding the impact of foreign exchange, decreased in the nine-month period ended September 30, 2019 compared to the same period in the prior year due to the Japan Merger Impact in 2018 and higher ceded premiums due to changes in 2019 reinsurance programs, partially offset by inclusion of the Validus acquisition.

For a discussion of 2019 reinsurance programs see Part II, Item 7 MD&A - Enterprise Risk Management in our 2018 Annual Report.

 

AIG | Third Quarter 2019 Form 10-Q 101

 

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ITEM 2 | Business Segment Operations | General Insurance

 

International Adjusted Pre-Tax Income (Loss)

Three Months Ended September 30,

(in millions)

Chart 2

Quarterly 2019 and 2018 Comparison

Adjusted pre-tax income in 2019 compared to adjusted pre-tax loss in 2018 reflected:

lower catastrophe losses on net basis;

lower accident year loss ratio, as adjusted primarily driven by change in business mix and reduced net severity of loss events; and

lower general operating expense driven by ongoing expense reduction initiatives.

 

 

International Adjusted Pre-Tax Income (Loss)

Nine Months Ended September 30,

(in millions)

Chart 1

Year-to-Date 2019 and 2018 Comparison

Adjusted pre-tax income in 2019 compared to adjusted pre-tax loss in 2018 reflected:

lower catastrophe losses on net basis;

lower general operating expense driven by the Japan Merger Impact in 2018 and ongoing expense reduction initiatives;

lower accident year loss ratio, as adjusted primarily driven by reduced net severity of loss events; and

inclusion of the Validus acquisition.

 

 

 

 

 

102 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | General Insurance

 

International Net Premiums Written

Three Months Ended September 30,

(in millions)

Chart 2

Quarterly 2019 and 2018 Comparison

Net premiums written, excluding the impact of foreign exchange, decreased due to:

lower Accident & Health business in Asia Pacific; and

lower production primarily due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline.

 

International Net Premiums Written

Nine Months Ended September 30,

(in millions)

Chart 1

Year-to-Date 2019 and 2018 Comparison

Net premiums written, excluding the impact of foreign exchange, decreased due to:

lower Accident & Health business in Asia Pacific;

the Japan Merger Impact in 2018;

lower production primarily due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline; and

higher ceded premiums due to changes in 2019 reinsurance programs.

This decrease was partially offset by:

inclusion of the Validus acquisition.

 

AIG | Third Quarter 2019 Form 10-Q 103

 

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ITEM 2 | Business Segment Operations | General Insurance

 

International Combined Ratios

Three Months Ended September 30,

Chart 10

Quarterly 2019 and 2018 Comparison

The decrease in the combined ratio reflected a decrease in both the loss ratio and expense ratio.

This decrease in the loss ratio was primarily driven by:

lower catastrophe losses on net basis; and

lower accident year loss ratio, as adjusted primarily driven by a change in business mix and reduced net severity of loss events.

This slight decrease in the expense ratio reflected a lower general operating expense ratio driven by ongoing expense reduction initiatives, partially offset by a higher acquisition ratio mainly due to changes in business mix.

 

 

International Combined Ratios

Nine Months Ended September 30,

Chart 4

Year-to-Date 2019 and 2018 Comparison

The decrease in the combined ratio reflected a decrease in both the loss ratio and expense ratio.

This decrease in the loss ratio was primarily driven by:

lower catastrophe losses on net basis; and

lower accident year loss ratio, as adjusted primarily driven by reduced net severity of loss events.

This decrease in the expense ratio reflected a lower general operating expense ratio driven by ongoing expense reduction initiatives partially offset by a higher acquisition ratio mainly due to changes in business mix.

 

104 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

 

Life and Retirement

 

PRODUCTS AND DISTRIBUTION

Picture 6

Variable Annuities: Products include variable annuities that offer a combination of growth potential, death benefit features and income protection features. Variable annuities are distributed primarily through banks, wirehouses, and regional and independent broker-dealers.

Index Annuities: Products include fixed index annuities that provide growth potential based in part on the performance of a market index. Certain fixed index annuity products offer optional income protection features. Fixed index annuities are distributed primarily through banks, broker dealers, independent marketing organizations and independent insurance agents.

Fixed Annuities: Products include single premium fixed annuities, immediate annuities and deferred income annuities. Certain fixed deferred annuity products offer optional income protection features. The Fixed Annuities product line maintains an industry-leading position in the U.S. bank distribution channel by designing products collaboratively with banks and offering an efficient and flexible administration platform.

Retail Mutual Funds: Includes our mutual fund offerings and related administration and servicing operations. Retail Mutual Funds are distributed primarily through broker-dealers.

Picture 7

Group Retirement: Products and services consist of group mutual funds, group annuities, individual annuity and investment products, and financial planning and advisory services.

In March 2019, the products and services marketed by The Variable Annuity Life Insurance Company (VALIC), which include investment offerings and plan administrative and compliance services, were rebranded under the AIG Retirement Services name to allow the business to fully leverage the strength and scale of the AIG brand. Legal entity names, however, remain unchanged: The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.

AIG Retirement Services career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services.

Picture 8

Life Insurance: In the U.S., products primarily include term life and universal life insurance distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing. International operations include the distribution of life and health products in the UK and Ireland.

Picture 9

Institutional Markets: Products primarily include stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs). Institutional Markets products are primarily distributed through specialized marketing and consulting firms and structured settlement brokers.

AIG | Third Quarter 2019 Form 10-Q 105

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Federal Home Loan Bank (FHLB) Funding Agreements are issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments. Funding agreements are issued by our U.S. Life and Retirement companies to FHLBs in their respective districts at floating rates over specified periods, which can be prepaid at our discretion. Proceeds are generally invested in fixed income securities and other suitable investments to generate spread income. These investment contracts do not have mortality or morbidity risk and are similar to GICs.

BUSINESS STRATEGY

Deliver client-centric solutions through our unique franchise by bringing together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. Life and Retirement focuses on ease of doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.

Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and digital capabilities while using data and analytics in an innovative manner to improve customer experience.

 

 

 

 

 

 

 

Individual Retirement will continue to capitalize on the opportunity to meet consumer demand for guaranteed income by maintaining innovative variable and index annuity products, while also managing risk from guarantee features through risk-mitigating product design and well-developed economic hedging capabilities.

Our fixed annuity products provide diversity in our annuity product suite by offering stable returns for retirement savings.

 

 

Group Retirement continues to enhance its technology platform to improve the customer experience for plan sponsors and individual participants. AIG Retirement Services’ (formerly VALIC) self-service tools paired with its career financial advisors provide a compelling service platform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their need for income in retirement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life Insurance in the U.S. will continue to position itself for growth and changing market dynamics while continuing to execute strategies to enhance returns. Our focus is on materializing success from a multi-year effort of building state-of-the-art platforms and underwriting innovations, which are expected to bring process improvements and cost efficiencies.

In the UK, AIG Life Insurance will continue to focus on growing the business organically and through potential acquisition opportunities.

 

 

Institutional Markets continues to grow its assets under management (AUM) across multiple product lines, including stable value wrap, GICs and pension risk transfer annuities. Our growth strategy is opportunistic and allows us to pursue select transactions that meet our risk-adjusted return requirements.

 

 

 

 

 

 

 

Enhance Operational Effectiveness by simplifying processes and operating environments to increase competitiveness, improve service and product capabilities and facilitate delivery of our target customer experience. We continue to invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. We believe that simplifying our operating models will enhance productivity and support further profitable growth.

Manage our Balance Sheet through a rigorous approach to our products and portfolio. We match our product design and high quality investments with our asset and liability exposures to maximize our ability to meet cash and liquidity needs under various operating scenarios.

Deliver Value Creation and Manage Capital by striving to deliver solid earnings through disciplined pricing, sustainable underwriting improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance entities to enhance return on common equity.

106 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

COMPETITION and challenges

Life and Retirement operates in the highly competitive insurance and financial services industry in the U.S. and select international markets, competing against various financial services companies, including banks and other life insurance and mutual fund companies. Competition is primarily based on product pricing and design, distribution, financial strength, customer service and ease of doing business.

Our business remains competitive due to its long-standing market leading positions, innovative products, distribution relationships across multiple channels, customer-focused service and strong financial ratings.

Our primary challenges include:

a sustained low interest rate environment, which makes it difficult to profitably price new products and puts margin pressure on existing business due to lower reinvestment yields;

increased competition in our primary markets, including aggressive pricing of annuities by private equity-backed annuity writers, increased competition and consolidation of employer groups in the group retirement planning market, and competitors with different profitability targets in the pension risk transfer space;

increasingly complex new and proposed regulatory requirements, which have affected industry growth; and

upgrading our technology and underwriting processes while managing general operating expenses.

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

Below is a discussion of the industry and economic factors impacting our specific operating segments:

Individual Retirement

Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income securities are leading Americans to seek additional financial security as they approach retirement. The strong demand for individual variable and fixed index annuities with guaranteed income features has attracted increased competition in this product space. In response to the continued low interest rate environment, which has added pressure to profit margins, we have developed guaranteed income benefits for both variable and fixed index annuities with margins that are less sensitive to the level of interest rates.

Changes in the interest rate environment can have a significant impact on sales, surrender rates, investment returns, guaranteed income features, and spreads in the annuity industry.

Group Retirement

Group Retirement competes in the defined contribution market under the AIG Retirement Services brand. AIG Retirement Services is a leading retirement plan provider in the U.S. for K-12 schools and school districts, higher education, healthcare, government and other not-for-profit institutions. The defined contribution market is a highly efficient and competitive market that requires support for both plan sponsors and individual participants. To meet this challenge, AIG Retirement Services is investing in a client-focused technology platform to support improved compliance and self-service functionality. AIG Retirement Services’ model pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.

Changes in the interest rate environment can have a significant impact on investment returns, guaranteed income features, and spreads, and a moderate impact on sales and surrender rates.

AIG | Third Quarter 2019 Form 10-Q 107

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Life Insurance

Consumers have a significant need for life insurance, whether it is used for income replacement for their surviving family, estate planning or wealth transfer. Additionally, consumers use life insurance to provide living benefits in case of chronic, critical or terminal illnesses, and to supplement retirement income.

In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio will continue to promote products with lower long-duration interest rate risk and mitigate exposure to products that have long-duration interest rate risk through sales levels and hedging strategies.

As life insurance ownership remains at historical lows in the U.S. and the UK, efforts to expand the reach and increase the affordability of life insurance are critical. The industry is investing in consumer-centric efforts to reduce traditional barriers to securing life protection by simplifying the sales and service experience. Digitally enabled processes and tools provide a fast, friendly and simple path to life insurance protection.

Institutional Markets

Institutional Markets serves a variety of needs for corporate clients. Demand is driven by a number of factors including the macroeconomic and regulatory environment. We expect to see continued growth in the pension risk transfer market as corporate plan sponsors look to transfer asset or liability, longevity, administrative and operational risks associated with their defined benefit plans.

Changes in the interest rate environment can have a significant impact on investment returns and net investment spreads, as well as reduce the tax efficiency associated with institutional life insurance products, dampening organic growth opportunities.

For additional discussion of the impact of market interest rate movement on our Life and Retirement business see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Impact of Changes in the Interest Rate Environment.

life and retirement RESULTS

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

Percentage

 

 

September 30,

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

826

$

443

 

86

%

 

$

2,653

$

1,379

 

92

%

Policy fees

 

703

 

500

 

41

 

 

 

2,145

 

1,965

 

9

 

Net investment income

 

2,078

 

1,960

 

6

 

 

 

6,390

 

6,001

 

6

 

Other income

 

226

 

243

 

(7)

 

 

 

677

 

726

 

(7)

 

Total adjusted revenues

 

3,833

 

3,146

 

22

 

 

 

11,865

 

10,071

 

18

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

1,576

 

962

 

64

 

 

 

4,163

 

2,562

 

62

 

Interest credited to policyholder account balances

 

909

 

877

 

4

 

 

 

2,696

 

2,600

 

4

 

Amortization of deferred policy acquisition costs

 

42

 

(60)

 

NM

 

 

 

442

 

411

 

8

 

General operating and other expenses*

 

619

 

607

 

2

 

 

 

1,825

 

1,806

 

1

 

Interest expense

 

41

 

47

 

(13)

 

 

 

120

 

125

 

(4)

 

Total operating expenses

 

3,187

 

2,433

 

31

 

 

 

9,246

 

7,504

 

23

 

Adjusted pre-tax income

$

646

$

713

 

(9)

%

 

$

2,619

$

2,567

 

2

%

*Includes general operating expenses, non-deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.

For information on the impact of actuarial assumptions on our Life and Retirement results, see Update of Actuarial Assumptions – Life and Annuity Reserves and DAC – Business Segment Operations.

Our insurance companies generate significant revenues from investment activities. As a result, the operating segments in Life and Retirement are subject to variances in net investment income on the asset portfolios that support insurance liabilities and surplus.

For additional information on our investment strategy, asset-liability management process and invested asset composition see Investments.

108 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Individual Retirement Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

38

$

9

 

322

%

 

$

65

$

37

 

76

%

Policy fees

 

204

 

204

 

-

 

 

 

602

 

610

 

(1)

 

Net investment income

 

1,021

 

956

 

7

 

 

 

3,114

 

2,915

 

7

 

Advisory fee and other income

 

153

 

166

 

(8)

 

 

 

452

 

500

 

(10)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

237

 

52

 

356

 

 

 

319

 

184

 

73

 

Interest credited to policyholder account balances

 

429

 

420

 

2

 

 

 

1,289

 

1,247

 

3

 

Amortization of deferred policy acquisition costs

 

95

 

196

 

(52)

 

 

 

334

 

460

 

(27)

 

Non deferrable insurance commissions

 

78

 

81

 

(4)

 

 

 

233

 

242

 

(4)

 

Advisory fee expenses

 

55

 

62

 

(11)

 

 

 

165

 

183

 

(10)

 

General operating expenses

 

115

 

107

 

7

 

 

 

352

 

329

 

7

 

Interest expense

 

20

 

24

 

(17)

 

 

 

58

 

63

 

(8)

 

Adjusted pre-tax income

$

387

$

393

 

(2)

%

 

$

1,483

$

1,354

 

10

%

Fixed Annuities base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield

 

4.57

%

4.57

%

-

bps

 

 

4.60

%

4.63

%

(3)

bps

Cost of funds

 

2.67

 

2.64

 

3

 

 

 

2.69

 

2.65

 

4

 

Fixed Annuities base net investment spread

 

1.90

%

1.93

%

(3)

bps

 

 

1.91

%

1.98

%

(7)

bps

Business and Financial Highlights

The market environment continues to reflect uncertainties in the annuity business resulting from a sustained low interest rate environment. Interest rates declined in the three- and nine-month periods ended September 30, 2019 and are near historical lows. Excluding prior year deposits from FHLB funding agreements, premiums and deposits increased in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year. Net flows in the three- and nine-month periods ended September 30, 2019 remained negative but improved compared to the same periods in the prior year primarily due to higher deposits driven by increased Fixed and Index Annuities sales, offset by lower sales for the Variable Annuities and Retail Mutual Funds.

Adjusted pre-tax income decreased in the three-month period ended September 30, 2019 compared to the same period in the prior year, primarily driven by impact from lower base investment yields due to the decline in interest rates, and increases in Variable Annuity DAC amortization due to weaker equity market performance relative to the prior year. Partially offsetting these decreases were higher investment returns income from base portfolio due to growth in invested assets from increased sales. Adjusted pre-tax income increased in the nine-month period ended September 30, 2019 compared to the same period in the prior year, primarily driven by higher gains on securities for which the fair value option was elected, growth in income from base portfolio due to higher invested assets and decreases in Variable Annuity DAC amortization and reserves due to stronger equity market performances and prior year DAC and reserve model adjustment. Partially offsetting these increases were lower Variable Annuity policy and advisory fee income, net of expenses due to Variable Annuity and Retail Mutual Fund negative net flows.

AIG | Third Quarter 2019 Form 10-Q 109

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Individual Retirement Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

Chart 3

Quarterly 2019 and 2018 Comparison

Adjusted pre-tax income decreased primarily due to:

•lower equity market performance relative to prior year that contributed to increases in Variable Annuity DAC amortization offset by lower Fixed Annuity DAC amortization due to lower lapse assumptions; and

•lower policy and advisory fee income net of expenses principally driven by negative Variable Annuity and Retail Mutual Fund net flows.

Partially offsetting these decreases were:

•higher net investment returns which included growth in income from the base portfolio due to higher invested assets from increased sales partially offset by lower base investment yields due to the decline in interest rates.

Excluding the impact of the review and update of actuarial assumptions, adjusted pre-tax income slightly increased.

Individual Retirement Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

Chart 6

Year-to-Date 2019 and 2018 Comparison

Adjusted pre-tax income increased primarily due to:

•higher net investment returns including higher gains on securities for which the fair value option was elected, growth in income from base portfolio due to higher invested assets, driven by increased sales, and income from an initial public offering of a holding in the private equity portfolio, partially offset by lower affordable housing returns, and prior-year non-recurring payments on structured securities; and

•stronger equity market performance, which contributed to decreases in Variable Annuity DAC amortization and reserves, prior year DAC and reserve model adjustment, and lower Fixed Annuity DAC amortization due to policyholders reaching the end of the surrender charge period, partially offset by higher Index Annuity DAC amortization and reserves driven by growth in sales and DAC model adjustments.

Partially offsetting these increases were:

•lower policy and advisory fee income net of expenses due to negative Variable Annuity and Retail Mutual Fund net flows and a decrease in Variable Annuity and Retail Mutual Fund average AUM related to the equity market decline at the end of 2018; and

•higher general operating expenses due to higher sales and continued investment in people and technology.

110 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

 

Individual Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows

For Individual Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums increased in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year.

Premiums and deposits is a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration.

Net flows for annuity products in Individual Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreements were excluded from net flows of Individual Retirement, as net flows from these funding agreements are not considered part of the metric to measure Individual Retirement’s core recurring performance.

The following table presents a reconciliation of Individual Retirement GAAP premiums to premiums and deposits:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Premiums

$

38

$

9

 

$

65

$

37

Deposits

 

3,656

 

3,609

 

 

11,683

 

11,364

Other

 

(2)

 

(2)

 

 

(5)

 

(5)

Premiums and deposits

$

3,692

$

3,616

 

$

11,743

$

11,396

The following table presents surrenders as a percentage of average reserves:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2019

 

2018

 

 

2019

 

2018

 

Surrenders as a percentage of average reserves

 

 

 

 

 

 

 

 

 

Fixed Annuities

6.1

%

8.2

%

 

7.4

%

7.9

%

Variable and Index Annuities

6.2

 

6.3

 

 

6.3

 

6.3

 

The following table presents reserves for Fixed Annuities and Variable and Index Annuities by surrender charge category:

 

September 30, 2019

 

December 31, 2018

 

 

 

 

Variable

 

 

 

 

Variable

 

 

 

Fixed

 

and Index

 

 

Fixed

 

and Index

 

(in millions)

 

Annuities

 

Annuities

 

 

Annuities

 

Annuities

 

No surrender charge

$

28,264

$

23,187

 

$

30,036

$

19,036

 

Greater than 0% - 2%

 

1,707

 

8,672

 

 

1,037

 

6,229

 

Greater than 2% - 4%

 

3,369

 

13,628

 

 

2,429

 

9,781

 

Greater than 4%

 

16,460

 

32,595

 

 

15,217

 

33,244

 

Non-surrenderable

 

1,658

 

519

 

 

1,608

 

474

 

Total reserves

$

51,458

$

78,601

 

$

50,327

$

68,764

 

Individual Retirement annuities are typically subject to a four- to seven-year surrender charge period, depending on the product. For Fixed Annuities, the proportion of reserves subject to surrender charge at September 30, 2019 has increased compared to December 31, 2018 due to improved net flows driven by higher Fixed Annuity sales, combined with fewer policyholders reaching the end of the surrender charge period in 2019 compared to 2018. The increase in reserves with no surrender charge for Variable and Index Annuities at September 30, 2019 compared to December 31, 2018 is due to normal aging of business.

AIG | Third Quarter 2019 Form 10-Q 111

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

A discussion of the significant variances in premiums and deposits and net flows for each product line follows:

Individual Retirement Premiums and Deposits (P&D) and Net Flows

Three Months Ended September 30,

(in millions)

Chart 4

Quarterly 2019 and 2018 Comparison

•Fixed Annuities premiums and deposits increased primarily due to higher broker dealer distribution sales mostly from sales of products with living benefits. Net flows continued to be negative but improved primarily due to lower surrenders and higher premiums and deposits.

•Variable and Index Annuities premiums and deposits increased primarily due to higher index annuity sales driven by growth in all key distribution channels partially offset by a decline in variable annuity premiums and deposits driven by lower broker dealer and bank distribution sales. Index annuity net flows increased primarily due to higher sales partially offset by higher surrenders. Variable annuity net flows remained negative and deteriorated primarily due to a decline in sales and higher surrenders.

•Retail Mutual Funds net flows remained negative and deteriorated reflecting lower deposits and higher surrenders and withdrawals due to industry trends in the U.S. and the impact of underperformance within our largest fund.

Individual Retirement Premiums and Deposits (P&D) and Net Flows

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2019 and 2018 Comparison

•Fixed Annuities premiums and deposits increased primarily due to higher broker dealer and bank distribution sales driven by favorable market conditions. Net flows improved primarily due to higher premiums and deposits, and lower surrenders.

•Variable and Index Annuities premiums and deposits increased primarily due to higher index annuity sales driven by growth in all key distribution channels partially offset by a decline in variable annuity premiums and deposits driven by lower broker dealer and bank distribution sales. Index annuity net flows increased primarily due to higher sales partially offset by higher surrenders. Variable annuity net flows remained negative and deteriorated primarily due to a decline in sales.

•Funding Agreements premiums and deposits in the nine-month period ended September 30, 2018 reflected deposits from the FHLB funding agreements, which were excluded from reported net flows.

•Retail Mutual Funds net flows remained negative and deteriorated reflecting lower deposits, offset by lower surrenders and withdrawals due to industry trends in the U.S. and the impact of underperformance within our largest fund.

 

 

 

112 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Group Retirement Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

5

$

9

 

(44)

%

 

$

14

$

30

 

(53)

%

Policy fees

 

111

 

115

 

(3)

 

 

 

317

 

339

 

(6)

 

Net investment income

 

544

 

531

 

2

 

 

 

1,703

 

1,655

 

3

 

Advisory fee and other income

 

66

 

63

 

5

 

 

 

191

 

185

 

3

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

20

 

25

 

(20)

 

 

 

47

 

63

 

(25)

 

Interest credited to policyholder account balances

 

292

 

275

 

6

 

 

 

859

 

826

 

4

 

Amortization of deferred policy acquisition costs

 

31

 

7

 

343

 

 

 

65

 

58

 

12

 

Non deferrable insurance commissions

 

30

 

30

 

-

 

 

 

85

 

87

 

(2)

 

Advisory fee expenses

 

26

 

26

 

-

 

 

 

73

 

67

 

9

 

General operating expenses

 

112

 

101

 

11

 

 

 

334

 

301

 

11

 

Interest expense

 

12

 

12

 

-

 

 

 

34

 

33

 

3

 

Adjusted pre-tax income

$

203

$

242

 

(16)

%

 

$

728

$

774

 

(6)

%

Base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield

 

4.51

%

4.49

%

2

bps

 

 

4.57

%

4.53

%

4

bps

Cost of funds

 

2.72

 

2.68

 

4

 

 

 

2.73

 

2.70

 

3

 

Base net investment spread

 

1.79

%

1.81

%

(2)

bps

 

 

1.84

%

1.83

%

1

bps

Business and Financial Highlights

Group Retirement is focused on implementing initiatives to grow its business. However, external factors, including increased competition and the consolidation of healthcare providers and other employers in target markets, continue to impact Group Retirement’s customer retention. Excluding deposits from FHLB funding agreement, premiums and deposits decreased in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year. Premiums and deposits in 2018 included deposits from FHLB funding agreement. Net flows remained negative but improved in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year primarily due to lower surrenders, partially offset by decreased premiums and deposits.

Adjusted pre-tax income decreased in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year primarily driven by lower fee income, higher general operating expenses, prior year receipt of non-recurring payments on structured securities and a net unfavorable adjustment from the review and update of actuarial assumptions compared to a net favorable adjustment in the same period in the prior year. Partially offsetting these decreases were gains on securities for which the fair value option was elected and an increase in base net investment spread primarily due to higher average invested assets and higher reinvestment yields, lower Variable Annuity DAC amortization and reserves due to higher equity market performance and higher investment returns in our alternative investment portfolio due to gains from an initial public offering of a holding in the private equity portfolio in the second quarter of 2019.

AIG | Third Quarter 2019 Form 10-Q 113

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Group Retirement Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

Chart 3

Quarterly 2019 and 2018 Comparison

Adjusted pre-tax income decreased primarily due to:

•a net unfavorable adjustment from the review and update of actuarial assumptions compared to a net favorable adjustment in the same period in the prior year; and

•higher general operating expenses primarily due to continued investment in people and technology.

Partially offsetting these decreases were:

•higher net investment income driven by higher gains on securities for which the fair value option was elected, partially offset by lower gains on alternative investment portfolio; and

•an increase in base net investment spread primarily due to higher average invested assets, partially offset by higher interest credited.

Group Retirement Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2019 and 2018 Comparison

Adjusted pre-tax income decreased primarily due to:

•a net unfavorable adjustment from the review and update of actuarial assumptions compared to a net favorable adjustment in the same period in the prior year;

•lower policy fees primarily driven by decrease in average separate account and mutual fund assets; and

•higher general operating expenses primarily due to continued investment in people and technology.

Partially offsetting these decreases were:

•higher net investment returns in our alternative investment portfolio, including income from an initial public offering of a holding in the private equity portfolio and higher gains on securities for which the fair value option was elected, partially offset by the prior year receipt of non-recurring payments on structured securities;

•an increase in base net investment spread primarily due to higher average invested assets and higher reinvestment yields, partially offset by higher interest credited; and

•lower variable annuity DAC amortization and reserves due to stronger equity market performance.

114 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Group Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows

For Group Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums in the three- and nine-month periods ended September 30, 2019, which primarily represents immediate annuities, decreased compared to the same periods in the prior year. Overall, premiums is not a significant driver of the Group Retirement results.

Premiums and deposits is a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts and mutual funds under administration. Premiums and deposits included FHLB funding agreement in 2018.

Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreement was excluded from net flows of Group Retirement in 2018, as net flows from this funding agreement is not considered part of the metric to measure Group Retirement’s core recurring performance.

The following table presents a reconciliation of Group Retirement GAAP premiums to premiums and deposits:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Premiums

$

5

$

9

 

$

14

$

30

Deposits

 

1,919

 

2,107

 

 

6,020

 

6,503

Premiums and deposits

$

1,924

$

2,116

 

$

6,034

$

6,533

The following table presents Group Retirement surrenders as a percentage of average reserves and mutual funds under administration:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2019

 

2018

 

 

2019

 

2018

 

Surrenders as a percentage of average reserves and mutual funds

10.3

%

12.0

%

 

10.3

%

11.0

%

The following table presents reserves for Group Retirement annuities by surrender charge category:

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2019

(a)

 

2018

(a)

No surrender charge(b)

$

70,283

 

$

65,500

 

Greater than 0% - 2%

 

908

 

 

650

 

Greater than 2% - 4%

 

570

 

 

1,115

 

Greater than 4%

 

5,942

 

 

5,868

 

Non-surrenderable

 

615

 

 

612

 

Total reserves

$

78,318

 

$

73,745

 

(a)Excludes mutual fund assets under administration of $20.3 billion and $17.9 billion at September 30, 2019 and December 31, 2018, respectively.

(b)Group Retirement amounts in this category include General Account reserves of approximately $6.2 billion and $6.3 billion, September 30, 2019 and December 31, 2018, respectively, which are subject to 20 percent annual withdrawal limitations at the participant level and General Account reserves of $4.9 billion and $4.7 billion at September 30, 2019 and December 31, 2018, respectively, which are subject to 20 percent annual withdrawal limitations at the plan level.

Group Retirement annuities are typically subject to a five- to seven-year surrender charge period, depending on the product. At September 30, 2019, Group Retirement annuity reserves increased compared to December 31, 2018 primarily due to higher equity market performance. The surrender rate in the three- and nine-month periods ended September 30, 2019 decreased due to lower surrenders compared to large plan surrenders in the same periods in the prior year.

AIG | Third Quarter 2019 Form 10-Q 115

 

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | Life and Retirement

 

A discussion of the significant variances in premiums and deposits and net flows follows:

Group Retirement Premiums and Deposits and Net Flows

Three Months Ended September 30,

(in millions)

Chart 5

Quarterly 2019 and 2018 Comparison

Net flows remained negative but improved primarily due to lower surrenders partially offset by decreased deposits. External factors including consolidation of healthcare providers and other employers in target markets continue to impact Group Retirement customer retention.

 

Group Retirement Premiums and Deposits and Net Flows

Nine Months Ended September 30,

(in millions)

Chart 5

Year-to-Date 2019 and 2018 Comparison

Net flows remained negative but improved primarily due to lower surrenders partially offset by decreased deposits. There were approximately $1 billion of large plan surrenders for the nine-month period ended September 30, 2019 compared to approximately $1.5 billion of large plan surrenders for the nine-month period ended September 30, 2018. External factors including consolidation of healthcare providers and other employers in target markets continue to impact Group Retirement customer retention. Premiums and deposits in 2018 reflected deposits from FHLB funding agreement, which were excluded from reported net flows.

 

116 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

 

Life Insurance Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

394

$

379

 

4

%

 

$

1,214

$

1,176

 

3

%

Policy fees

 

348

 

141

 

147

 

 

 

1,102

 

895

 

23

 

Net investment income

 

289

 

275

 

5

 

 

 

915

 

850

 

8

 

Other income

 

6

 

14

 

(57)

 

 

 

33

 

41

 

(20)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

848

 

780

 

9

 

 

 

2,217

 

1,997

 

11

 

Interest credited to policyholder account balances

 

93

 

92

 

1

 

 

 

277

 

281

 

(1)

 

Amortization of deferred policy acquisition costs

 

(86)

 

(265)

 

68

 

 

 

39

 

(111)

 

NM

 

Non deferrable insurance commissions

 

27

 

27

 

-

 

 

 

67

 

69

 

(3)

 

General operating expenses

 

155

 

152

 

2

 

 

 

449

 

464

 

(3)

 

Interest expense

 

7

 

7

 

-

 

 

 

20

 

19

 

5

 

Adjusted pre-tax income (loss)

$

(7)

$

16

 

NM

%

 

$

195

$

243

 

(20)

%

Business and Financial Highlights

Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. Results for the three- and nine-month periods ended September 30, 2019 reflect growth in international life, health and group premiums primarily due to the acquisition of Ellipse in the UK. On December 31, 2018, AIG Life Ltd., a U.K. AIG Life and Retirement company, completed the acquisition of Ellipse, a specialist provider of group life risk protection in the U.K. Adjusted pre-tax income decreased in the three-month period ended September 30, 2019 compared to the same period in the prior year primarily due to elevated mortality. Adjusted pre-tax income decreased in the nine-month period ended September 30, 2019 compared to the same period in the prior year primarily due to prior year favorable actuarial adjustments to universal life and prior year non-recurring favorable ceded premium reinsurance adjustments, and current period unfavorable reinsurance valuation allowance adjustment offset by favorable mortality and higher net investment income including gains on alternative investments due to higher private equity income, and higher gains on calls.

Life Insurance Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

Chart 1

Quarterly 2019 and 2018 Comparison

Adjusted pre-tax income decreased primarily due to:

•elevated mortality experience in the U.S.

Partially offsetting these decreases were:

•higher net investment income primarily due to higher base portfolio income driven by growth in invested assets.

 

AIG | Third Quarter 2019 Form 10-Q 117

 

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | Life and Retirement

 

Life Insurance Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2019 and 2018 Comparison

Adjusted pre-tax income decreased primarily due to:

•prior year favorable U.S. reserve and reinsurance adjustments and an unfavorable reinsurance valuation allowance adjustment in 2019.

Partially offsetting these decreases were:

•Favorable mortality experience in the U.S.; and

•higher investment income primarily due to higher base portfolio income driven by growth in invested assets, higher returns in our alternative investment portfolio, including income from an initial public offering of a holding in the private equity portfolio, and higher gains on calls.

Life Insurance GAAP Premiums and Premiums and Deposits

Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life, international life and health and group benefits. Premiums, excluding the effect of foreign exchange, increased in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year. Premiums and deposits for Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.

The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Premiums

$

394

$

379

 

$

1,214

$

1,176

Deposits

 

404

 

410

 

 

1,223

 

1,232

Other

 

214

 

189

 

 

602

 

519

Premiums and deposits

$

1,012

$

978

 

$

3,039

$

2,927

118 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | Life and Retirement

 

A discussion of the significant variances in premiums and deposits follows:

Life Insurance Premiums and Deposits

Three Months Ended September 30,

(in millions)

Chart 1

Quarterly 2019 and 2018 Comparison

Premiums and deposits, excluding the effect of foreign exchange, increased primarily due to growth in domestic term life and international life, including the acquisition of Ellipse in the U.K.

Life Insurance Premiums and Deposits

Nine Months Ended September 30,

(in millions)

Chart 2

Year-to-Date 2019 and 2018 Comparison

Premiums and deposits, excluding the effect of foreign exchange, increased primarily due to growth in domestic term life and international life, including the acquisition of Ellipse in the U.K. These increases were partially offset by lower U.S. group premiums as a result of the strategic decision to refocus the business at the end of 2016.

AIG | Third Quarter 2019 Form 10-Q 119

 

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | Life and Retirement

 

Institutional markets Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

389

$

46

 

NM

%

 

$

1,360

$

136

 

NM

%

Policy fees

 

40

 

40

 

-

 

 

 

124

 

121

 

2

 

Net investment income

 

224

 

198

 

13

 

 

 

658

 

581

 

13

 

Other income

 

1

 

-

 

NM

 

 

 

1

 

-

 

NM

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

471

 

105

 

349

 

 

 

1,580

 

318

 

397

 

Interest credited to policyholder account balances

 

95

 

90

 

6

 

 

 

271

 

246

 

10

 

Amortization of deferred policy acquisition costs

 

2

 

2

 

-

 

 

 

4

 

4

 

-

 

Non deferrable insurance commissions

 

6

 

7

 

(14)

 

 

 

21

 

21

 

-

 

General operating expenses

 

15

 

14

 

7

 

 

 

46

 

43

 

7

 

Interest expense

 

2

 

4

 

(50)

 

 

 

8

 

10

 

(20)

 

Adjusted pre-tax income

$

63

$

62

 

2

%

 

$

213

$

196

 

9

%

Business and Financial Highlights

Institutional Markets continued to opportunistically grow its AUM, which drove the increase in net investment income over recent years. Product distribution continues to be strong and the business is focused on maintaining pricing discipline to achieve attractive risk adjusted returns.

Institutional Markets Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

 

 

Chart 1

Quarterly 2019 and 2018 Comparison

Increase in premiums and policyholder benefits was primarily due to pension risk transfer business written in the third quarter of 2019. Growth in reserves and AUM drove the increase in net investment income with similar impact to policyholder benefits and interest credited.

Adjusted pre-tax income increased primarily due to:

•higher net investment income due to higher invested assets resulting from growth in Pension Risk Transfer and GICs.

 

120 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Institutional Markets Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

 

 

Chart 3

Year-to-Date 2019 and 2018 Comparison

Increase in premiums and policyholder benefits was primarily due to pension risk transfer business written during 2018 and 2019. Growth in reserves and AUM drove the increase in net investment income with similar impact to policyholder benefits and interest credited.

Adjusted pre-tax income increased primarily due to:

•higher net investment income due to higher invested assets resulting from growth in Pension Risk Transfer and GICs, higher gains on securities for which the fair value option was elected, higher gains on calls and tender income and gains from an initial public offering of a holding in the private equity portfolio.

 

Institutional markets GAAP Premiums and Premiums and Deposits

Premiums for Institutional Markets primarily represent amounts received on pension risk transfer or structured settlement annuities with life contingencies. Premiums increased in the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year primarily driven by the pension risk transfer business written in 2019.

Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct premiums as well as deposits received on investment-type annuity contracts, including GICs. Deposits also include FHLB funding agreements.

The following table presents a reconciliation of Institutional Markets GAAP premiums to premiums and deposits:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Premiums

$

389

$

46

 

$

1,360

$

136

Deposits

 

437

 

17

 

 

831

 

1,990

Other

 

7

 

6

 

 

22

 

58

Premiums and deposits

$

833

$

69

 

$

2,213

$

2,184

AIG | Third Quarter 2019 Form 10-Q 121

 

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | Life and Retirement

 

A discussion of the significant variances in premiums and deposits follows:

Institutional Markets Premiums and Deposits

Three Months Ended September 30,

(in millions)

Chart 1

Quarterly 2019 and 2018 Comparison

Premiums and deposits increased due to higher pension risk transfer sales and GIC deposits. The increase in premium and deposits is consistent with Institutional Markets’ strategy to opportunistically grow and diversify its portfolio.

Institutional Markets Premiums and Deposits

Nine Months Ended September 30,

(in millions)

Chart 2

Year-to-Date 2019 and 2018 Comparison

Premiums and deposits increased due to higher pension risk transfer sales and GIC deposits. Premiums and deposits in 2018 include $1.4 billion of FHLB agreements. The shift in premium and deposit mix is consistent with Institutional Markets’ strategy to opportunistically grow and diversify its portfolio.

 

122 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Other Operations

 

Other Operations

 

The following table presents Other Operations results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Adjusted pre-tax income (loss) by activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent and Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate general operating expenses

$

(244)

 

(182)

 

(34)

%

 

$

(625)

$

(519)

 

(20)

%

Interest expense

 

(306)

 

(289)

 

(6)

 

 

 

(929)

 

(785)

 

(18)

 

All other income (expense), net

 

96

 

54

 

78

 

 

 

298

 

171

 

74

 

Total Parent and Other

 

(454)

 

(417)

 

(9)

 

 

 

(1,256)

 

(1,133)

 

(11)

 

Consolidation, eliminations and other adjustments

 

(46)

 

29

 

NM

 

 

 

(172)

 

28

 

NM

 

Adjusted pre-tax loss

$

(500)

$

(388)

 

(29)

%

 

$

(1,428)

$

(1,105)

 

(29)

%

quaRterly 2019 and 2018 Comparison

Parent and Other adjusted pre-tax loss increased compared to the same period in the prior year primarily due to increased corporate general operating expenses and higher interest expense in part due to consolidated non-recourse debt and Global Real Estate investments.

Year-To-date 2019 and 2018 Comparison

Parent and Other adjusted pre-tax loss increased compared to the same period in the prior year due to higher interest expense driven by debt issuances at the end of the first quarter of 2019 and 2018, and higher corporate general operating expenses. This increase was partially offset by higher income from investments.

AIG | Third Quarter 2019 Form 10-Q 123

 

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | Legacy Portfolio

 

Legacy Portfolio

 

Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our Bermuda-domiciled composite reinsurer, Fortitude Re, 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.

BUSINESS STRATEGY

For Legacy insurance lines, securing the interests of our policyholders and insureds is paramount. We have considered and continue to evaluate the following strategies for these lines:

•Third-party and affiliated reinsurance and retrocessions to improve capital efficiency.

•Commutations of assumed reinsurance and direct policy buy-backs.

•Enhanced insured policyholder options and claims resolution strategies.

•Enhanced asset liability management and expense management.

For Legacy investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while sourcing for our insurance companies attractive assets for their portfolios.

SALE OF NONCONTROLLING INTEREST IN FORTITUDE

Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of September 30, 2019, the affiliated transactions included the cession of approximately $31 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $4 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. In the second quarter of 2018, we formed Fortitude Holdings to act as a holding company for Fortitude Re.

On November 13, 2018, we completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG, an affiliate of The Carlyle Group L.P. Fortitude Holdings owns 100 percent of the outstanding common shares of Fortitude Re and AIG has an 80.1 percent ownership interest in Fortitude Holdings.

The affiliated reinsurance transactions executed in the first quarter of 2018 with Fortitude Re resulted in prepaid insurance assets on the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax) and related deferred acquisition costs of $0.5 billion (after-tax) at inception of the contract. The prepaid insurance assets have been eliminated in AIG’s consolidated financial statements since the counterparties were wholly owned.

In the event of a sale of a controlling interest in Fortitude Holdings, our Legacy Portfolio would recognize a loss for the portion of the unamortized balance of these assets that are not recoverable, if any, when we are no longer a controlling shareholder in Fortitude Holdings. As of September 30, 2019, the unamortized balances of the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.4 billion (after-tax) and $0.4 billion (after-tax), respectively. This combined loss of $2.8 billion would be incremental to any gain or loss recognized on the sale of our controlling interest in Fortitude Holdings. The incremental gain or loss we will recognize on the sale of our controlling interest in Fortitude Holdings would be impacted, perhaps significantly, by market conditions existing at that time.

 

124 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Business Segment Operations | Legacy Portfolio

 

LEGACY PORTFOLIO RESULTS

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2019

 

2018

 

Change

 

 

 

2019

 

2018

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

122

$

131

 

(7)

%

 

$

367

$

406

 

(10)

%

Policy fees

 

30

 

30

 

-

 

 

 

92

 

92

 

-

 

Net investment income

 

614

 

610

 

1

 

 

 

1,792

 

1,798

 

-

 

Other income (loss)

 

(15)

 

43

 

NM

 

 

 

(54)

 

135

 

NM

 

Total adjusted revenues

 

751

 

814

 

(8)

 

 

 

2,197

 

2,431

 

(10)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses and loss adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses incurred

 

516

 

545

 

(5)

 

 

 

1,422

 

1,504

 

(5)

 

Interest credited to policyholder account balances

 

53

 

57

 

(7)

 

 

 

161

 

179

 

(10)

 

Amortization of deferred policy acquisition costs

 

19

 

25

 

(24)

 

 

 

51

 

62

 

(18)

 

General operating and other expenses

 

66

 

96

 

(31)

 

 

 

225

 

300

 

(25)

 

Interest expense

 

4

 

7

 

(43)

 

 

 

14

 

23

 

(39)

 

Total benefits and expenses

 

658

 

730

 

(10)

 

 

 

1,873

 

2,068

 

(9)

 

Adjusted pre-tax income

$

93

$

84

 

11

%

 

$

324

$

363

 

(11)

%

Adjusted pre-tax income (loss) by type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Insurance Run-Off Lines

$

27

$

(37)

 

NM

%

 

$

85

$

69

 

23

%

Life and Retirement Run-Off Lines

 

16

 

68

 

(76)

 

 

 

141

 

154

 

(8)

 

Legacy Investments

 

50

 

53

 

(6)

 

 

 

98

 

140

 

(30)

 

Adjusted pre-tax income

$

93

$

84

 

11

%

 

$

324

$

363

 

(11)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

Selected Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Investments, net of related debt

 

 

 

 

 

 

 

 

 

 

$

2,074

$

2,529

 

Legacy General Insurance run-off reserves

 

 

 

 

 

 

 

 

 

 

 

5,624

 

5,498

 

Legacy Life and Retirement run-off reserves

 

 

 

 

 

 

 

 

 

 

 

39,441

 

36,614

 

Business and Financial Highlights

Legacy insurance lines, including those ceded to Fortitude Re, continue to run-off as anticipated for Legacy General Insurance and Legacy Life and Retirement Run-Off Lines. Legacy investments have been reduced significantly over the last several years declining from $6.7 billion at December 31, 2016 to $2.1 billion at September 30, 2019. The remaining Legacy investments primarily include structured credit junior notes for which we have elected the fair value option and real estate investments.

AIG | Third Quarter 2019 Form 10-Q 125

 

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ITEM 2 | Business Segment Operations | Legacy Portfolio

 

Legacy Portfolio Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

Chart 2

Quarterly 2019 and 2018 Comparison

Adjusted pre-tax income increased due to:

•Higher Legacy General Insurance earnings compared to the three-month period ended September 30, 2018 due to Japanese catastrophe losses in the three-month period ended September 30, 2018.

This increase was partially offset by:

•Lower Legacy Investment earnings compared to the three-month period ended September 30, 2018 due to the continued decrease in net assets of the Legacy Investments Portfolio; and

•Lower Legacy Life and Retirement earnings compared to the three-month period ended September 30, 2018 due to a decrease in net investment income and an increase in policyholder benefits and losses incurred.

Legacy Portfolio Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

Chart 2

Year-to-Date 2019 and 2018 Comparison

Adjusted pre-tax income decreased due to:

•Lower Legacy Investment earnings compared to the nine-month period ended September 30, 2018 due to the continued decrease in net assets of the Legacy Investments Portfolio; and

•Lower Legacy Life and Retirement earnings compared to nine-month period ended September 30, 2018 due to lower net investment income.

These decreases were partially offset by:

•Higher Legacy General Insurance earnings compared to the nine-month period ended September 30, 2018 due to Japanese catastrophe losses in the three-month period ended September 30, 2018; partially offset by lower net investment income and lower premiums driven by the continued run-off of the Legacy General Insurance portfolio.

 

126 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Investments

 

 

Investments

Overview

Our investment strategies are tailored to the specific business needs of each operating unit by targeting an asset allocation mix that provides diversification from an asset class, sector, issuer, and geographic perspective. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus. The majority of assets backing our insurance liabilities consist of fixed maturity securities.

Investment Highlights in the Nine Months Ended September 30, 2019

•A drop in interest rates and narrowing credit spreads resulted in a net unrealized gain in our investment portfolio. Net unrealized gains in our available for sale portfolio increased to approximately $19.9 billion as of September 30, 2019 from approximately $3.6 billion as of December 31, 2018.

•We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in mortgage loans with favorable risk compared to return characteristics to improve yields and increase net investment income.

•We experienced higher investment returns in our alternative investments portfolio due to robust equity market returns in the nine-month period ended September 30, 2019, income from an initial public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity securities for which the fair value option was elected. This compares to the same period in the prior year where returns were lower as a result of an increase in rates and widening spreads that occurred, as well as negative performance of our fair value option equity securities portfolio.

•During the first quarter of 2019, we sold our remaining investment in People’s Insurance Company (Group) of China Limited and PICC Property & Casualty Company Limited.

•Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called.

Investment Strategies

Investment strategies are assessed at the business segment level and involve considerations that include local and general market conditions, duration and cash flow management, risk appetite and volatility constraints, rating agency and regulatory capital considerations, tax and legal investment limitations.

Some of our key investment strategies are as follows:

•Our fundamental strategy across the portfolios is to seek investments that have similar characteristics with respect to the insurance liabilities they are associated with, to the extent practicable. This includes considerations for cash flow variability as a function of changes in various factors, including interest rates, foreign exchange rates, equity markets, and inflation.

•We seek to originate investments that offer enhanced yield through liquidity premiums, such as private placements and commercial mortgage loans, which also add portfolio diversification. These assets typically afford credit protections through covenants, ability to customize structures that meet our insurance liability needs, and deeper due diligence given information access.

•Given our global presence, we have access to assets that provide diversification from local markets. To the extent we purchase these investments, we generally hedge the currency risk using derivatives, which could provide opportunities to earn higher risk adjusted returns compared to risk assets in the functional currency.

•AIG Parent, included in Other Operations, actively manages its assets and liabilities in terms of products, counterparties and duration. AIG Parent’s liquidity sources are held primarily in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities. Based upon an assessment of its immediate and longer-term funding needs, AIG Parent purchases publicly traded, investment grade rated fixed maturity securities that can be readily monetized through sales or repurchase agreements. These securities allow us to diversify sources of liquidity while reducing the cost of maintaining sufficient liquidity.

AIG | Third Quarter 2019 Form 10-Q 127

 

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ITEM 2 | Investments

 

•Within the US, the Life and Retirement and General Insurance investments are generally split between reserve backing and surplus portfolios.

–Insurance reserves are backed by mainly investment grade fixed maturity securities that meet our current risk-return, tax, liquidity, credit quality and diversification objectives. We assess fixed maturity asset classes based on their fundamental risk, including credit (public and private), commercial mortgages and residential mortgages regardless of whether such investments are bonds, loans, or structured products.

–Surplus accounts seek to enhance portfolio returns through a mix of fixed maturity (investment grade and high yield) and various alternative asset classes, including private equity, real estate equity, and hedge funds. Over the past few years, hedge fund investments have been reduced with more emphasis given to private equity, real estate and leveraged capital (for example, we are currently focused on purchasing directly originated, middle market loans with strong covenant packages).

•Outside of the U.S., fixed maturity securities held by insurance companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.

Asset Liability Management

The investment strategy within the General Insurance companies focuses on growth of surplus, maintenance of sufficient liquidity for unanticipated insurance claims, and preservation of capital. Assets with varying degrees of liquidity and volatility are allocated based on whether backing reserves, required surplus or excess surplus, subject to capital, liquidity, and regulatory constraints. General Insurance invests primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans. Fixed maturity securities of the General Insurance companies’ domestic operations have an average duration of 3.5 years. Fixed maturity securities of the General Insurance companies’ foreign operations have an average duration of 3.6 years.

While invested assets backing reserves of the General Insurance companies are primarily invested in conventional liquid fixed maturity securities, we have continued to allocate to asset classes that offer higher yields through structural and liquidity premiums, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments to manage our exposure to potential changes in interest rates and inflation. We seek to diversify the portfolio across asset classes, sectors, and issuers to mitigate idiosyncratic portfolio risks.

In addition, a portion of the surplus of General Insurance is invested in a diversified portfolio of alternative investments which seek to balance liquidity, volatility and growth. There is a higher allocation to equity-oriented investments in General Insurance relative to other AIG portfolios given the underlying inflation risks inherent in that business. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio.

The investment strategy of the Life and Retirement companies is to provide net investment income to back liabilities that result in stable distributable earnings and enhance portfolio value for surplus accounts, subject to asset liability management, capital, and regulatory constraints.

The Life and Retirement companies use asset-liability management as a primary tool to monitor and manage risk in their businesses. The Life and Retirement companies maintain a diversified, high to medium quality portfolio of fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans that, to the extent practicable, match the duration characteristics of the liabilities. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, duration varies between distinct portfolios. The interest rate environment has a direct impact on the Asset Liability Management profile of the businesses, and an extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio. A further lengthening of the portfolio will be assessed in the context of available market opportunities as longer duration markets may not provide similar diversification benefits as shorter markets.

Fixed maturity securities of the Life and Retirement companies’ domestic operations have an average duration of 7.9 years. We seek to diversify the portfolio across asset class, sectors, and issuers to mitigate idiosyncratic portfolio risks.

In addition, the Life and Retirement companies seek to enhance surplus portfolio returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.

128 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Investments

 

NAIC Designations of Fixed Maturity Securities

The Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC) evaluates the investments of U.S. insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called ‘NAIC Designations.’ In general, NAIC Designations of ‘1’ highest quality, or ‘2’ high quality, include fixed maturity securities considered investment grade, while NAIC Designations of ‘3’ through ‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The following tables summarize the ratings distribution of AIG subsidiaries fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies.

For a full description of the composite AIG credit ratings see Credit Ratings.

The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

NAIC Designation

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

Other fixed maturity securities

$

95,569

$

76,764

$

172,333

 

$

7,035

$

6,484

$

1,706

$

233

$

15,458

$

187,791

Mortgage-backed, asset-backed and collateralized

 

62,845

 

3,575

 

66,420

 

 

530

 

519

 

67

 

3,863

 

4,979

 

71,399

Total*

$

158,414

$

80,339

$

238,753

 

$

7,565

$

7,003

$

1,773

$

4,096

$

20,437

$

259,190

* Excludes $2.4 billion of fixed maturity securities for which no NAIC Designation is available.

The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

CCC and

 

Investment

 

 

Composite AIG Credit Rating

 

AAA/AA/A

 

BBB

 

Grade

 

 

BB

 

B

 

Lower

 

Grade

 

Total

Other fixed maturity securities

$

95,224

$

77,467

$

172,691

 

$

6,792

$

6,920

$

1,388

$

15,100

$

187,791

Mortgage-backed, asset-backed and collateralized

 

51,175

 

4,385

 

55,560

 

 

882

 

740

 

14,217

 

15,839

 

71,399

Total*

$

146,399

$

81,852

$

228,251

 

$

7,674

$

7,660

$

15,605

$

30,939

$

259,190

*Excludes $2.4 billion of fixed maturity securities for which no NAIC Designation is available.

Credit Ratings

At September 30, 2019, approximately 89 percent of our fixed maturity securities were held by our domestic entities. Approximately 16 percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 13 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in the internal analysis.

Moody’s Investors Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At September 30, 2019, approximately 24 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 7 percent were below investment grade or not rated. Approximately 29 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

AIG | Third Quarter 2019 Form 10-Q 129

 

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ITEM 2 | Investments

 

Composite AIG Credit Ratings

With respect to our fixed maturity securities, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (99 percent of total fixed maturity securities), or (b) our equivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC. The “Non-rated” category in those tables consists of fixed maturity securities that have not been rated by any of the major rating agencies, the NAIC or us.

For a discussion of credit risks associated with Investments see Enterprise Risk Management.

The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their fair value:

 

Available for Sale

 

Other

 

Total

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

(in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

12,298

 

$

11,170

 

$

2,245

 

$

2,619

 

$

14,543

 

$

13,789

 

AA

 

31,637

 

 

27,766

 

 

51

 

 

106

 

 

31,688

 

 

27,872

 

A

 

49,308

 

 

40,142

 

 

11

 

 

1,356

 

 

49,319

 

 

41,498

 

BBB

 

77,797

 

 

69,564

 

 

-

 

 

300

 

 

77,797

 

 

69,864

 

Below investment grade

 

15,244

 

 

14,511

 

 

7

 

 

-

 

 

15,251

 

 

14,511

 

Non-rated

 

1,436

 

 

1,333

 

 

-

 

 

-

 

 

1,436

 

 

1,333

 

Total

$

187,720

 

$

164,486

 

$

2,314

 

$

4,381

 

$

190,034

 

$

168,867

 

Mortgage-backed, asset-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed and collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

29,146

 

$

28,859

 

$

470

 

$

481

 

$

29,616

 

$

29,340

 

AA

 

13,930

 

 

12,019

 

 

515

 

 

911

 

 

14,445

 

 

12,930

 

A

 

6,858

 

 

6,964

 

 

274

 

 

290

 

 

7,132

 

 

7,254

 

BBB

 

4,230

 

 

4,058

 

 

155

 

 

152

 

 

4,385

 

 

4,210

 

Below investment grade

 

11,307

 

 

12,923

 

 

4,505

 

 

5,096

 

 

15,812

 

 

18,019

 

Non-rated

 

30

 

 

82

 

 

94

 

 

104

 

 

124

 

 

186

 

Total

$

65,501

 

$

64,905

 

$

6,013

 

$

7,034

 

$

71,514

 

$

71,939

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

41,444

 

$

40,029

 

$

2,715

 

$

3,100

 

$

44,159

 

$

43,129

 

AA

 

45,567

 

 

39,785

 

 

566

 

 

1,017

 

 

46,133

 

 

40,802

 

A

 

56,166

 

 

47,106

 

 

285

 

 

1,646

 

 

56,451

 

 

48,752

 

BBB

 

82,027

 

 

73,622

 

 

155

 

 

452

 

 

82,182

 

 

74,074

 

Below investment grade

 

26,551

 

 

27,434

 

 

4,512

 

 

5,096

 

 

31,063

 

 

32,530

 

Non-rated

 

1,466

 

 

1,415

 

 

94

 

 

104

 

 

1,560

 

 

1,519

 

Total

$

253,221

 

$

229,391

 

$

8,327

 

$

11,415

 

$

261,548

 

$

240,806

 

130 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Investments

 

 

Available-for-Sale Investments

The following table presents the fair value of our available-for-sale securities:

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

2019

 

2018

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

 

 

 

 

 

$

5,227

$

3,260

Obligations of states, municipalities and political subdivisions

 

 

 

 

 

 

 

15,745

 

16,001

Non-U.S. governments

 

 

 

 

 

 

 

15,376

 

14,525

Corporate debt

 

 

 

 

 

 

 

151,372

 

130,700

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

 

32,795

 

34,377

CMBS

 

 

 

 

 

 

 

14,336

 

12,701

CDO/ABS

 

 

 

 

 

 

 

18,370

 

17,827

Total mortgage-backed, asset-backed and collateralized

 

 

 

 

 

 

 

65,501

 

64,905

Total bonds available for sale*

 

 

 

 

 

 

$

253,221

$

229,391

*At September 30, 2019 and December 31, 2018, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $28.0 billion and $28.8 billion, respectively.

The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity securities:

 

September 30,

 

December 31,

(in millions)

 

2019

 

 

2018

Japan

$

1,832

 

$

1,645

Canada

 

1,046

 

 

1,038

France

 

1,021

 

 

905

Germany

 

673

 

 

783

United Kingdom

 

564

 

 

794

United Arab Emirates

 

523

 

 

454

Indonesia

 

513

 

 

453

Singapore

 

457

 

 

373

Norway

 

438

 

 

380

Israel

 

396

 

 

316

Other

 

7,913

 

 

7,429

Total

$

15,376

 

$

14,570

AIG | Third Quarter 2019 Form 10-Q 131

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:

 

September 30, 2019

 

 

 

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2018

(in millions)

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

Euro-Zone countries:

 

 

 

 

 

 

 

 

 

 

 

 

France

$

1,021

$

1,860

$

1,653

$

-

$

4,534

$

4,442

Germany

 

673

 

163

 

2,642

 

-

 

3,478

 

3,246

Netherlands

 

353

 

1,128

 

1,092

 

112

 

2,685

 

2,571

Ireland

 

62

 

127

 

470

 

1,047

 

1,706

 

1,494

Belgium

 

204

 

126

 

989

 

-

 

1,319

 

1,175

Spain

 

41

 

277

 

807

 

-

 

1,125

 

1,068

Italy

 

1

 

91

 

399

 

-

 

491

 

507

Luxembourg

 

-

 

29

 

344

 

-

 

373

 

377

Finland

 

101

 

51

 

44

 

-

 

196

 

228

Austria

 

159

 

3

 

5

 

-

 

167

 

156

Other - EuroZone

 

543

 

76

 

249

 

-

 

868

 

929

Total Euro-Zone

$

3,158

$

3,931

$

8,694

$

1,159

$

16,942

$

16,193

Remainder of Europe:

 

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

$

564

$

4,175

$

8,823

$

2,477

$

16,039

$

16,139

Switzerland

 

33

 

1,263

 

735

 

-

 

2,031

 

2,010

Norway

 

438

 

44

 

143

 

-

 

625

 

566

Sweden

 

140

 

330

 

125

 

-

 

595

 

639

Russian Federation

 

164

 

28

 

200

 

-

 

392

 

240

Other - Remainder of Europe

 

84

 

29

 

125

 

-

 

238

 

271

Total - Remainder of Europe

$

1,423

$

5,869

$

10,151

$

2,477

$

19,920

$

19,865

Total

$

4,581

$

9,800

$

18,845

$

3,636

$

36,862

$

36,058

Investments in Municipal Bonds

At September 30, 2019, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-exempt bonds with 92 percent of the portfolio rated A or higher.

132 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

The following table presents the fair values of our available for sale U.S. municipal bond portfolio by state and municipal bond type:

 

September 30, 2019

 

 

 

 

State

 

Local

 

 

 

Total

December 31,

 

 

General

 

General

 

 

 

Fair

 

2018

(in millions)

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

State:

 

 

 

 

 

 

 

 

 

 

New York

$

7

$

406

$

2,698

$

3,111

$

3,134

California

 

728

 

401

 

1,881

 

3,010

 

2,813

Texas

 

153

 

558

 

914

 

1,625

 

1,692

Illinois

 

48

 

148

 

870

 

1,066

 

979

Massachusetts

 

440

 

-

 

325

 

765

 

811

Virginia

 

9

 

1

 

491

 

501

 

541

Ohio

 

47

 

2

 

429

 

478

 

485

Georgia

 

107

 

71

 

292

 

470

 

445

Washington

 

168

 

-

 

251

 

419

 

473

Florida

 

10

 

-

 

361

 

371

 

542

Pennsylvania

 

126

 

-

 

229

 

355

 

353

Washington, D.C.

 

11

 

-

 

323

 

334

 

340

Missouri

 

-

 

-

 

286

 

286

 

248

All other states(a)

 

463

 

335

 

2,156

 

2,954

 

3,145

Total(b)(c)

$

2,317

$

1,922

$

11,506

$

15,745

$

16,001

(a)We did not have material credit exposure to the government of Puerto Rico.

(b)Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.

(c)Includes $339 million of pre-refunded municipal bonds.

Investments in Corporate Debt Securities

The following table presents the industry categories of our available for sale corporate debt securities:

 

 

Fair Value at

 

Fair Value at

Industry Category

 

September 30,

 

December 31,

(in millions)

 

2019

 

2018

Financial institutions:

 

 

 

 

Money Center/Global Bank Groups

$

11,209

$

9,602

Regional banks — other

 

691

 

630

Life insurance

 

3,639

 

3,201

Securities firms and other finance companies

 

320

 

389

Insurance non-life

 

5,235

 

4,648

Regional banks — North America

 

7,000

 

6,263

Other financial institutions

 

13,278

 

9,966

Utilities

 

19,648

 

17,542

Communications

 

10,158

 

9,249

Consumer noncyclical

 

20,257

 

16,410

Capital goods

 

8,271

 

7,237

Energy

 

13,857

 

12,350

Consumer cyclical

 

10,653

 

9,498

Basic

 

5,613

 

5,271

Other

 

21,543

 

18,444

Total*

$

151,372

$

130,700

*At September 30, 2019 and December 31, 2018, respectively, approximately 90 and 89 percent of these investments were rated investment grade.

Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.5 percent and 5.4 percent at September 30, 2019 and December 31, 2018, respectively. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.

AIG | Third Quarter 2019 Form 10-Q 133

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Investments in RMBS

The following table presents AIG’s RMBS available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

2019

 

2018

Agency RMBS

 

 

 

 

 

 

 

 

 

$

15,321

$

14,695

Alt-A RMBS

 

 

 

 

 

 

 

 

 

 

8,716

 

9,780

Subprime RMBS

 

 

 

 

 

 

 

 

 

 

2,768

 

2,982

Prime non-agency

 

 

 

 

 

 

 

 

 

 

4,800

 

6,211

Other housing related

 

 

 

 

 

 

 

 

 

 

1,190

 

709

Total RMBS(a)(b)

 

 

 

 

 

 

 

 

 

$

32,795

$

34,377

(a)Includes approximately $9.2 billion and $10.3 billion at September 30, 2019 and December 31, 2018, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. For additional discussion on Purchased Credit Impaired (PCI) Securities see Note 6.

(b)The weighted average expected life was six years at September 30, 2019 and seven years at December 31 2018.

Our underwriting practices for investing in RMBS, other asset-backed securities (ABS) and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction.

Investments in CMBS

The following table presents our CMBS available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

CMBS (traditional)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

11,367

$

9,975

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,212

 

2,047

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

757

 

679

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14,336

$

12,701

The fair value of CMBS holdings remained stable during the third quarter of 2019. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.

Investments in CDOs

The following table presents our CDO available for sale securities by collateral type:

 

 

 

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

2019

 

2018

Collateral Type:

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans (CLO)

 

 

 

 

 

 

 

 

$

9,097

$

8,164

Other

 

 

 

 

 

 

 

 

 

51

 

56

Total

 

 

 

 

 

 

 

 

$

9,148

$

8,220

134 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Commercial Mortgage Loans

At September 30, 2019, we had direct commercial mortgage loan exposure of $35.0 billion. All commercial mortgage loans were current or performing according to their restructured terms.

The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

of

 

Class

 

 

of

 

(dollars in millions)

Loans

 

Apartments

 

Offices

 

Retail

Industrial

Hotel

 

Others

 

Total

Total

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

100

 

$

2,380

$

4,449

$

524

$

377

$

99

$

-

$

7,829

22

%

California

75

 

 

666

 

1,369

 

336

 

525

 

821

 

41

 

3,758

11

 

New Jersey

46

 

 

1,569

 

44

 

372

 

76

 

27

 

33

 

2,121

6

 

Texas

51

 

 

427

 

1,165

 

181

 

100

 

144

 

-

 

2,017

6

 

Florida

84

 

 

382

 

212

 

554

 

221

 

217

 

32

 

1,618

4

 

Massachusetts

13

 

 

540

 

246

 

551

 

26

 

-

 

-

 

1,363

4

 

Illinois

19

 

 

506

 

442

 

10

 

19

 

-

 

22

 

999

3

 

Washington, D.C.

13

 

 

442

 

305

 

-

 

-

 

18

 

-

 

765

2

 

Pennsylvania

24

 

 

81

 

20

 

547

 

47

 

25

 

-

 

720

2

 

Georgia

21

 

 

517

 

19

 

56

 

4

 

37

 

-

 

633

2

 

Other states

222

 

 

1,873

 

758

 

1,418

 

968

 

417

 

49

 

5,483

16

 

Foreign

81

 

 

3,880

 

964

 

930

 

985

 

547

 

342

 

7,648

22

 

Total*

749

 

$

13,263

$

9,993

$

5,479

$

3,348

$

2,352

$

519

$

34,954

100

%

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

98

 

$

2,009

$

4,082

$

512

$

393

$

100

$

-

$

7,096

22

%

California

78

 

 

490

 

1,308

 

283

 

535

 

831

 

48

 

3,495

11

 

Texas

53

 

 

344

 

1,256

 

185

 

102

 

125

 

5

 

2,017

6

 

New Jersey

45

 

 

1,049

 

45

 

422

 

41

 

28

 

33

 

1,618

5

 

Florida

87

 

 

358

 

159

 

589

 

224

 

218

 

35

 

1,583

5

 

Massachusetts

14

 

 

635

 

243

 

549

 

26

 

-

 

-

 

1,453

4

 

Illinois

18

 

 

456

 

444

 

11

 

19

 

-

 

22

 

952

3

 

Pennsylvania

25

 

 

80

 

21

 

567

 

47

 

25

 

-

 

740

2

 

Washington, D.C.

12

 

 

401

 

311

 

-

 

-

 

19

 

-

 

731

2

 

Ohio

27

 

 

179

 

10

 

199

 

235

 

-

 

5

 

628

2

 

Other states

228

 

 

1,869

 

790

 

1,326

 

773

 

460

 

73

 

5,291

16

 

Foreign

79

 

 

3,320

 

1,201

 

1,002

 

679

 

717

 

359

 

7,278

22

 

Total*

764

 

$

11,190

$

9,870

$

5,645

$

3,074

$

2,523

$

580

$

32,882

100

%

*Does not reflect allowance for credit losses.

For additional discussion on commercial mortgage loans see Note 7 to the Consolidated Financial Statements in the 2018 Annual Report.

AIG | Third Quarter 2019 Form 10-Q 135

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Impairments

The following table presents impairments by investment type:

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

 

September 30,

(in millions)

 

 

 

 

 

 

2019

 

2018

 

 

2019

 

2018

Other-than-temporary Impairments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities, available for sale

 

 

 

 

 

$

24

$

35

 

$

137

$

158

Other impairments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

 

 

 

 

 

-

 

-

 

 

1

 

-

Real estate

 

 

 

 

 

 

1

 

-

 

 

33

 

71

Total

 

 

 

 

 

$

25

$

35

 

$

171

$

229

Other-Than-Temporary Impairments

To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.

The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.

Other-than-temporary impairment charges by investment type and impairment type:

 

 

 

 

 

 

Other Fixed

 

 

(in millions)

RMBS

CDO/ABS

CMBS

Maturity

 

Total

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

Change in intent

$

-

$

-

$

-

$

-

$

-

Foreign currency declines

 

-

 

-

 

-

 

6

 

6

Issuer-specific credit events

 

6

 

-

 

5

 

6

 

17

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

1

Total

$

7

$

-

$

5

$

12

$

24

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

Change in intent

$

-

$

-

$

-

$

3

$

3

Foreign currency declines

 

-

 

-

 

-

 

1

 

1

Issuer-specific credit events

 

25

 

-

 

1

 

4

 

30

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

1

Total

$

26

$

-

$

1

$

8

$

35

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

Change in intent

$

-

$

-

$

-

$

3

$

3

Foreign currency declines

 

-

 

-

 

-

 

15

 

15

Issuer-specific credit events

 

18

 

1

 

15

 

79

 

113

Adverse projected cash flows

 

6

 

-

 

-

 

-

 

6

Total

$

24

$

1

$

15

$

97

$

137

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

Change in intent

$

-

$

-

$

-

$

52

$

52

Foreign currency declines

 

-

 

-

 

-

 

13

 

13

Issuer-specific credit events

 

49

 

2

 

14

 

27

 

92

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

1

Total

$

50

$

2

$

14

$

92

$

158

136 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

We recorded other-than-temporary impairment charges in the nine months ended September 30, 2019 and 2018 related to:

issuer-specific credit events;

securities that we intend to sell or for which it is more likely than not that we will be required to sell;

declines due to foreign exchange rates;

adverse changes in estimated cash flows on certain structured securities; and

securities that experienced severe market valuation declines.

In addition, impairments are recorded on real estate.

In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $100 million and $164 million in the three-month periods ended September 30, 2019 and 2018, respectively, and $350 million and $433 million in the nine-month periods ended September 30, 2019 and 2018, respectively.

For a discussion of our other-than-temporary impairment accounting policy see Note 6 to the Consolidated Financial Statements in the 2018 Annual Report.

The following table shows the aging of the pre-tax unrealized losses of fixed maturity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:

September 30, 2019

Less Than or Equal

 

 

Greater Than 20%

 

 

Greater Than 50%

 

 

 

 

 

to 20% of Cost(b)

 

 

to 50% of Cost(b)

 

 

of Cost(b)

 

 

Total

Aging(a)

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

(dollars in millions)

 

Cost(c)

 

Loss

Items(e)

 

 

Cost(c)

 

Loss

Items(e)

 

 

Cost(c)

 

Loss

Items(e)

 

 

Cost(c)

 

Loss(d)

Items(e)

Investment grade

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

7,609

$

72

1,478

 

$

1

$

-

2

 

$

-

$

-

-

 

$

7,610

$

72

1,480

7-11 months

 

4,227

 

68

646

 

 

36

 

8

1

 

 

-

 

-

-

 

 

4,263

 

76

647

12 months or more

 

6,697

 

162

942

 

 

167

 

67

20

 

 

17

 

11

5

 

 

6,881

 

240

967

Total

$

18,533

$

302

3,066

 

$

204

$

75

23

 

$

17

$

11

5

 

$

18,754

$

388

3,094

Below investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

grade bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

5,230

$

117

1,534

 

$

305

$

107

25

 

$

12

$

10

7

 

$

5,547

$

234

1,566

7-11 months

 

482

 

17

201

 

 

24

 

6

10

 

 

2

 

1

1

 

 

508

 

24

212

12 months or more

 

1,371

 

77

351

 

 

57

 

19

20

 

 

68

 

42

23

 

 

1,496

 

138

394

Total

$

7,083

$

211

2,086

 

$

386

$

132

55

 

$

82

$

53

31

 

$

7,551

$

396

2,172

Total bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

12,839

$

189

3,012

 

$

306

$

107

27

 

$

12

$

10

7

 

$

13,157

$

306

3,046

7-11 months

 

4,709

 

85

847

 

 

60

 

14

11

 

 

2

 

1

1

 

 

4,771

 

100

859

12 months or more

 

8,068

 

239

1,293

 

 

224

 

86

40

 

 

85

 

53

28

 

 

8,377

 

378

1,361

Total(e)

$

25,616

$

513

5,152

 

$

590

$

207

78

 

$

99

$

64

36

 

$

26,305

$

784

5,266

(a)Represents the number of consecutive months that fair value has been less than cost by any amount.

(b)Represents the percentage by which fair value is less than cost at September 30, 2019.

(c)For bonds, represents amortized cost.

(d)The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.

(e)Item count is by CUSIP by subsidiary.

AIG | Third Quarter 2019 Form 10-Q 137

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Change in Unrealized Gains and Losses on Investments

The change in net unrealized gains and losses on investments in the three- and nine-month periods ended September 30, 2019 was primarily attributable to increases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2019, net unrealized gains related to fixed maturity securities increased by $16.3 billion due primarily to a decrease in rates and a narrowing of credit spreads.

The change in net unrealized gains and losses on investments in the three- and nine-month periods ended September 30, 2018 was primarily attributable to decreases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2018, net unrealized losses related to fixed maturity securities decreased by $8.9 billion due primarily to an increase in rates and a widening of credit spreads.

For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.

Net Realized Capital Gains and Losses

The following table presents the components of Net realized capital gains (losses):

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

 

2018

Sales of fixed maturity securities

$

128

$

11

 

$

184

 

$

8

Sales of equity securities

 

-

 

-

 

 

-

 

 

16

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

 

Change in intent

 

-

 

(3)

 

 

(3)

 

 

(52)

Foreign currency declines

 

(6)

 

(1)

 

 

(15)

 

 

(13)

Issuer-specific credit events

 

(17)

 

(30)

 

 

(113)

 

 

(92)

Adverse projected cash flows

 

(1)

 

(1)

 

 

(6)

 

 

(1)

Provision for loan losses

 

(25)

 

(23)

 

 

(35)

 

 

(73)

Foreign exchange transactions

 

(203)

 

(21)

 

 

(242)

 

 

(155)

Variable annuity embedded derivatives, net of related hedges

 

311

 

(185)

 

 

10

 

 

(2)

All other derivatives and hedge accounting

 

466

 

(1)

 

 

601

 

 

149

Loss on sale of private equity funds

 

-

 

(311)

 

 

-

 

 

(311)

Other

 

276

 

54

 

 

506

 

 

161

Net realized capital gains (losses)

$

929

$

(511)

 

$

887

 

$

(365)

Net realized capital gains in the three-month period ended September 30, 2019 compared to net realized capital losses in the same period in the prior year due primarily to derivative gains in the three-month period ended September 30, 2019 versus losses in the same period in the prior year, lower impairments, and higher gains on sales of invested assets versus the prior comparable period. Net realized capital gains in the nine-month period ended September 30, 2019 compared to losses in the same period in the prior year due to higher derivative gains, lower impairments and higher gains on sales versus the prior period.

Net realized capital losses in the three-month periods ended September 30, 2018 was primarily related to derivative losses and impairments. Net realized capital losses in the nine-month period ended September 30, 2018 was primarily related to foreign exchange losses and impairments.

Variable annuity embedded derivatives, net of related hedges, reflected losses in the three- and nine-month periods ended of September 30, 2019 compared to gains in the same periods in the prior year primarily due to changes in the non-performance or “own credit” risk adjustment used in the valuation of the variable annuities with guaranteed minimum withdrawal benefits (GMWB) embedded derivative, which are not hedged as part of our economic hedging program.

For additional discussion of market risk management related to these product features see MD&A – Enterprise Risk Management – Insurance Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Programs in the 2018 Annual Report. For more information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.

For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.

138 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Insurance Reserves

 

 

Insurance Reserves

Liability for unpaid losses and loss adjustment expenses (Loss Reserves)

The following table presents the components of our gross and net loss reserves by segment and major lines of business:

 

September 30, 2019

 

December 31, 2018

 

Net liability for

Reinsurance

Gross liability

 

Net liability for

Reinsurance

Gross liability

 

unpaid losses

recoverable on

for unpaid

 

unpaid losses

recoverable on

for unpaid

 

and loss

unpaid losses and

losses and

 

and loss

unpaid losses and

losses and

 

adjustment

loss adjustment

loss adjustment

 

adjustment

loss adjustment

loss adjustment

(in millions)

expenses

expenses

expenses

 

expenses

expenses

expenses

General Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

$

4,275

$

5,820

$

10,095

 

$

4,772

$

5,318

$

10,090

U.S. Excess Casualty

 

4,457

 

5,070

 

9,527

 

 

4,715

 

4,576

 

9,291

U.S. Other Casualty

 

4,440

 

4,744

 

9,184

 

 

4,288

 

4,661

 

8,949

U.S. Financial Lines

 

5,248

 

1,936

 

7,184

 

 

5,315

 

1,960

 

7,275

U.S. Property and Special risks

 

5,253

 

2,520

 

7,773

 

 

6,534

 

2,748

 

9,282

U.S. Personal Insurance

 

1,305

 

1,006

 

2,311

 

 

1,706

 

1,001

 

2,707

UK/Europe Casualty and Financial Lines

 

5,867

 

1,454

 

7,321

 

 

7,022

 

1,789

 

8,811

UK/Europe Property and Special risks

 

2,743

 

1,239

 

3,982

 

 

2,988

 

1,251

 

4,239

UK/Europe and Japan Personal Insurance

 

2,205

 

561

 

2,766

 

 

2,264

 

553

 

2,817

Other product lines

 

6,128

 

2,144

 

8,272

 

 

6,105

 

2,522

 

8,627

Unallocated loss adjustment expenses

 

2,178

 

848

 

3,026

 

 

1,834

 

1,307

 

3,141

Total General Insurance

 

44,099

 

27,342

 

71,441

 

 

47,543

 

27,686

 

75,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Run-off Long Tail Insurance lines

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

 

3,963

 

3,600

 

7,563

 

 

3,862

 

3,689

 

7,551

Other run-off product lines

 

150

 

66

 

216

 

 

104

 

66

 

170

Unallocated loss adjustment expenses

 

399

 

114

 

513

 

 

397

 

115

 

512

Total Legacy Portfolio - Run-off Lines

 

4,512

 

3,780

 

8,292

 

 

4,363

 

3,870

 

8,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operations (Blackboard)

 

48

 

102

 

150

 

 

43

 

134

 

177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

48,659

$

31,224

$

79,883

 

$

51,949

$

31,690

$

83,639

*Includes loss reserve discount of $1.6 billion and $2.0 billion as of September 30, 2019 and December 31, 2018, respectively. For discussion of loss reserve discount see Note 10 to the Condensed Consolidated Financial Statements.

AIG | Third Quarter 2019 Form 10-Q 139

 

TABLE OF CONTENTS

 

ITEM 2 | Insurance Reserves

 

PRIOR YEAR DEVELOPMENT

The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

2019

 

2018

General Insurance:

 

 

 

 

 

 

 

 

North America*

$

(17)

$

134

$

(138)

$

2

International

 

14

 

38

 

(3)

 

1

Total General Insurance

$

(3)

$

172

$

(141)

$

3

Legacy Portfolio - Run-off Lines

 

(1)

 

(2)

 

-

 

(6)

Total prior year (favorable) unfavorable development

$

(4)

$

170

$

(141)

$

(3)

*Includes the amortization attributed to the deferred gain at inception from the National Indemnity Company (NICO) adverse development reinsurance agreement of $58 million and $57 million for the three-month periods ended September 30, 2019 and 2018, respectively, and $174 million and $176 million for the nine-month periods ended September 30, 2019 and 2018, respectively. Consistent with our definition of APTI, the amount excludes the portion of (favorable)/unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreements of $(129) million and $722 million for the three-month periods ended September 30, 2019 and 2018, respectively, and $(253) million and $712 million for the nine-month periods ended September 30, 2019 and 2018, respectively. The related changes in amortization of the deferred gain were $(71) million and $118 million for the three-month periods ended September 30, 2019 and 2018, respectively, and $(45) million and $108 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

Net Loss Development

In the three- and nine-month periods ended September 30, 2019, we recognized favorable prior year loss reserve development of $(4) million and $(141) million, respectively.

The development in the three-month period ended September 30, 2019 was primarily driven by:

North America

•Favorable development from amortization of the deferred gain on the adverse development reinsurance agreement with NICO for accident years 2015 and prior;

•Favorable development on U.S. Workers’ Compensation business, specifically guaranteed cost business and Defense Base Act business (covering government contractors serving at military bases overseas); and

•Adverse development in U.S. Financial Lines, notably errors & omissions business where we reacted to increasing frequency and severity in recent accident years.

International

•Adverse development on European Casualty & Financial Lines, notably Commercial Auto, Employers Liability, Directors & Officers, and Financial Institutions business; and

•Favorable development on Europe Property and Special Risks, Europe and Japan Personal Insurance and Other product lines.

The development in the nine month-period ended September 30, 2019 was primarily driven by:

North America

•Amortization of the deferred gain from the adverse development reinsurance agreement with NICO for accident years 2015 and prior;

•Favorable development from U.S. Workers’ Compensation and Property and Special Risks business; and

•Adverse development from U.S. Financial Lines errors and omissions business and U.S. Other Casualty lines, specifically Commercial Auto and General Liability.

International

•Adverse development on Europe Casualty and Financial Lines; and

•Favorable development on Europe Property and Special Risks, Europe and Japan Personal Insurance, and Other product lines.

In the three-month period ended September 30, 2018, we recognized unfavorable prior year loss reserve development of $170 million. The key components of this development were as follows:

•Unfavorable development in U.S. Excess Casualty lines, driven by adverse activity on construction defects claims and multi-year construction projects that cover all contractors on the site (“wrap business”), where we continue to observe significant loss activity, primarily from accident years 2015 and prior, including a meaningful proportion from accident years 2009 and prior. In aggregate, we strengthened U.S. Excess Casualty reserves by $1.3 billion, before applying the 80% cession to accident years 2015 and prior which are covered by the adverse development reinsurance agreement with NICO. For accident years 2015 and prior, unfavorable

140 AIG | Third Quarter 2019 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Insurance Reserves

 

development, before applying the 80% cession of the adverse development reinsurance agreement with NICO was $1.1 billion. We have also seen higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident years of $163 million;

•Favorable development on 2017 catastrophe events in U.S Property and Special Risks from lower than expected development from Hurricanes Harvey, Irma, and Maria, partially offset by adverse development in U.S. Personal Insurance, notably from the California wildfires and Hurricane Irma;

•Unfavorable development in Europe Casualty and Financial Lines driven by increased large loss activity in recent accident years, particularly related to directors and officers class action suits against insureds with global exposure; and

•Favorable development in Europe and Japan Personal Insurance, which was primarily a result of improved experience in European Accident & Health business.

In the nine-month period ended September 30, 2018, we recognized favorable prior year loss reserve development of $3 million. In addition to the items noted above, there were various items that occurred during the first half of 2018 that largely offset each other, including:

•Favorable development on prior year catastrophes in U.S. Property and Special Risks;

•Favorable development in Europe and Japan Personal Insurance;

•Unfavorable development on catastrophe events in U.S. Personal Insurance; and

•Within the Legacy portfolio, $150 million of unfavorable development in pre-1986 environmental liability entirely offset by favorable development in casualty trucking business, with smaller favorable contributions from runoff medical malpractice and post-1986 environmental liability.

The following tables summarize incurred (favorable) unfavorable prior year development net of reinsurance, by segment and major lines of business, and by accident year groupings:

Three Months Ended September 30, 2019

 

 

 

 

 

 

(in millions)

 

Total

 

2018

 

2017 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(98)

$

1

$

(99)

U.S. Excess casualty

 

(15)

 

(42)

 

27

U.S. Other casualty

 

(17)

 

(3)

 

(14)

U.S. Financial lines

 

103

 

19

 

84

U.S. Property and special risks

 

(24)

 

26

 

(50)

U.S. Personal insurance

 

25

 

7

 

18

Other product lines

 

9

 

12

 

(3)

Total General Insurance North America

$

(17)

$

20

$

(37)

General Insurance International:

 

 

 

 

 

 

UK/Europe casualty and financial lines

$

94

$

85

$

9

UK/Europe property and special risks

 

(43)

 

(4)

 

(39)

UK/Europe and Japan Personal insurance

 

(18)

 

(9)

 

(9)

Other product lines

 

(19)

 

(3)

 

(16)

Total General Insurance International

$

14

$

69

$

(55)

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

(1)

 

-

 

(1)

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

(4)

$

89

$

(93)

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

(in millions)

 

Total

 

2017

 

2016 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

10

$

24

$

(14)

U.S. Excess casualty

 

370

 

144

 

226

U.S. Other casualty

 

(34)

 

5

 

(39)

U.S. Financial lines

 

(12)

 

(1)

 

(11)

U.S. Property and special risks

 

(351)

 

(305)

 

(46)

U.S. Personal insurance

 

149

 

155

 

(6)

Other product lines

 

2

 

(4)

 

6

Total General Insurance North America

$

134

$

18

$

116

AIG | Third Quarter 2019 Form 10-Q 141

 

TABLE OF CONTENTS

 

ITEM 2 | Insurance Reserves

 

General Insurance International:

 

 

 

 

 

 

UK/Europe casualty and financial lines

$

75

$

(13)

$

88

UK/Europe property and special risks

 

5

 

-

 

5

UK/Europe and Japan Personal insurance

 

(30)

 

(13)

 

(17)

Other product lines

 

(12)

 

(1)

 

(11)

Total General Insurance International

$

38

$

(27)

$

65

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

(2)

 

-

 

(2)

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

170

$

(9)

$

179

Nine Months Ended September 30, 2019

 

 

 

 

 

 

(in millions)

 

Total

 

2018

 

2017 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(274)

$

1

$

(275)

U.S. Excess casualty

 

40

 

(1)

 

41

U.S. Other casualty

 

53

 

15

 

38

U.S. Financial lines

 

83

 

19

 

64

U.S. Property and special risks

 

(100)

 

21

 

(121)

U.S. Personal insurance

 

43

 

1

 

42

Other product lines

 

17

 

11

 

6

Total General Insurance North America

$

(138)

$

67

$

(205)

General Insurance International:

 

 

 

 

 

 

UK/Europe casualty and financial lines

$

148

$

88

$

60

UK/Europe property and special risks

 

(71)

 

13

 

(84)

UK/Europe and Japan Personal insurance

 

(69)

 

(54)

 

(15)

Other product lines

 

(11)

 

(19)

 

8

Total General Insurance International

$

(3)

$

28

$

(31)

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

-

 

49

 

(49)

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

(141)

$

144

$

(285)

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

(in millions)

 

Total

 

2017

 

2016 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(35)

$

24

$

(59)

U.S. Excess casualty

 

340

 

144

 

196

U.S. Other casualty

 

(51)

 

26

 

(77)

U.S. Financial lines

 

(34)

 

(4)

 

(30)

U.S. Property and special risks

 

(471)

 

(421)

 

(50)

U.S. Personal insurance

 

248

 

257

 

(9)

Other product lines

 

5

 

1

 

4

Total General Insurance North America

$

2

$

27

$

(25)

General Insurance International:

 

 

 

 

 

 

UK/Europe casualty and financial lines

$

76

$

(13)

$

89

UK/Europe property and special risks

 

3

 

(13)

 

16

UK/Europe and Japan Personal insurance

 

(93)

 

(57)

 

(36)

Other product lines

 

15

 

26

 

(11)

Total General Insurance International

$

1

$

(57)

$

58

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

(6)

 

43

 

(49)

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

(3)

$

13

$

(16)

We note that for certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to us.

142 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Insurance Reserves

 

Significant Reinsurance Agreements

In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. We account for this transaction as retroactive reinsurance. This transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred and amortized into income over the settlement period. NICO created a collateral trust account as security for their claim payment obligations to us, into which they deposited the consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO’s obligations under the agreement.

For a description of AIG’s catastrophe reinsurance protection for 2019, see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – General Insurance Companies’ Key Risks – Natural Catastrophe Risk in our 2018 Annual Report.

The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of September 30, 2019 and as of December 31, 2018, showing the effect of discounting of loss reserves and amortization of the deferred gain.

 

 

September 30,

 

December 31,

(in millions)

 

2019

 

2018

Gross Covered Losses

 

 

 

 

Covered reserves before discount

$

19,944

$

23,033

Inception to date losses paid

 

22,103

 

19,331

Attachment point

 

(25,000)

 

(25,000)

Covered losses above attachment point

$

17,047

$

17,364

 

 

 

 

 

Deferred Gain Development

 

 

 

 

Covered losses above attachment ceded to NICO (80%)

$

13,638

$

13,891

Consideration paid including interest

 

(10,188)

 

(10,188)

Pre-tax deferred gain before discount and amortization

 

3,450

 

3,703

Discount on ceded losses(a)

 

(1,246)

 

(1,719)

Pre-tax deferred gain before amortization

 

2,204

 

1,984

Inception to date amortization of deferred gain at inception

 

(635)

 

(461)

Inception to date amortization attributed to changes in deferred gain(b)

 

(76)

 

(141)

Deferred gain liability reflected in AIG's balance sheet

$

1,493

$

1,382

(a)For the period from inception to September 30, 2019, the accretion of discount and a reduction in effective interest rates was offset by changes in estimates of the amount and timing of future recoveries under the adverse development reinsurance agreement.

(b)Excluded from our definition of APTI.

The following table presents the rollforward of activity in the deferred gain from the adverse development reinsurance agreement:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

2019

 

2018

Balance at beginning of year, net of discount

$

1,562

$

957

$

1,382

$

1,167

Unfavorable prior year reserve development ceded to NICO(a)

 

(129)

 

723

 

(253)

 

716

Amortization attributed to deferred gain at inception(b)

 

(58)

 

(57)

 

(174)

 

(176)

Amortization attributed to changes in deferred gain(c)

 

77

 

(109)

 

65

 

(85)

Changes in discount on ceded loss reserves

 

41

 

(46)

 

473

 

(154)

Balance at end of period, net of discount

$

1,493

$

1,468

$

1,493

$

1,468

(a)Prior year reserve development ceded to NICO under the retroactive reinsurance agreement is deferred under U.S. GAAP.

(b)Represents amortization of the deferred gain recognized in APTI.

(c)Excluded from APTI and included in U.S. GAAP.

The lines of business subject to this agreement have been the source of the majority of the prior year adverse development charges over the past several years. The agreement is expected to result in lower capital charges for reserve risks at our U.S. insurance subsidiaries. In addition, we would expect future net investment income to decline as a result of lower invested assets.

AIG | Third Quarter 2019 Form 10-Q 143

 

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ITEM 2 | Insurance Reserves

 

For a summary of significant reinsurers see Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Reinsurance Activities – Reinsurance Recoverable in our 2018 Annual Report.

LIFE AND ANNUITY reserves and dac

The following section provides discussion of life and annuity reserves and deferred policy acquisition costs.

Update of Actuarial Assumptions

The life insurance companies review and update actuarial assumptions at least annually, generally in the third quarter. Assumption setting standards vary between investment-oriented products and traditional long-duration products.

Investment-oriented products

The Life Insurance Companies review and update estimated gross profit projections used to amortize DAC and related items (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserves) for investment-oriented products at least annually. Estimated gross profit projections include assumptions for investment-related returns and spreads, product-related fees and expenses, mortality gains and losses, policyholder behavior and other factors. In estimating future gross profits, lapse assumptions require judgment and can have a material impact on DAC amortization. If the assumptions used for estimated gross profits change significantly, DAC and related reserves are recalculated using the new projections, and any resulting adjustment is included in income. Updating such projections may result in acceleration of amortization in some products and deceleration of amortization in other products.

The Life Insurance Companies also review assumptions related to their respective GMWB living benefits that are accounted for as embedded derivatives and measured at fair value. The fair value of these embedded derivatives is based on actuarial assumptions, including policyholder behavior, as well as capital market assumptions.

Various assumptions were updated, including the following effective September 30, 2019:

•We increased our reversion to the mean rates of return (gross of fees) to 3.62 percent from 2.92 percent for the Variable Annuity product line in Individual Retirement and to 3.29 percent from 1.90 percent for the Variable Annuity product line in Group Retirement primarily due to the recent rise in equity market growth. Our separate account long-term asset growth rate assumption related to equity market performance remained unchanged at 7.0 percent; and

•Our ultimate projected yields on invested assets changed on most annuity deposits with some increasing by up to 9 basis points and others decreasing by up to 34 basis points and lowered by up to 40 basis points on some life insurance deposits. Projected yields are graded from a weighted average net GAAP book yield of existing assets supporting the business based on the value of the assets to a weighted average yield based on the duration of the assets excluding assets that mature during the grading period. The grading period is three years for deferred annuity products and five years for life insurance products due to deferred annuities having a shorter duration than life products.

Traditional long-duration products

For long-duration traditional products discussed below, which include whole life insurance, term life insurance, accident and health insurance, long-term care insurance, and life-contingent single premium immediate annuities and structured settlements, a “lock-in” principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. Underlying assumptions are reviewed periodically and updated as appropriate.

The net increases (decreases) to adjusted pre-tax income and pre-tax income as a result of the update of actuarial assumptions for the three- and nine-month periods ended September 30, 2019 and 2018 are shown in the following tables.

144 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Insurance Reserves

 

The following table presents the increase (decrease) in adjusted pre-tax income resulting from the update of actuarial assumptions for the domestic life insurance companies, by segment and product line:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2019

 

2018

Life and Retirement:

 

 

 

 

Individual Retirement

 

 

 

 

Fixed Annuities

$

82

$

40

Variable and Indexed Annuities

 

(145)

 

(92)

Total Individual Retirement

 

(63)

 

(52)

Group Retirement

 

(17)

 

17

Life Insurance

 

(63)

 

(63)

Institutional Markets

 

-

 

-

Total Life and Retirement

 

(143)

 

(98)

Legacy Life and Retirement Run-off

 

(30)

 

(5)

Total increase (decrease) in adjusted pre-tax income from update of assumptions

$

(173)

$

(103)

The following table presents the increase (decrease) in pre-tax income resulting from the update of actuarial assumptions in the domestic life insurance companies, by line item as reported in Results of Operations:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2019

 

2018

Policy fees

$

(32)

$

(237)

Interest credited to policyholder account balances

 

19

 

-

Amortization of deferred policy acquisition costs

 

203

 

301

Policyholder benefits and losses incurred

 

(363)

 

(167)

Increase (decrease) in adjusted pre-tax income

 

(173)

 

(103)

Change in DAC related to net realized capital gains (losses)

 

(17)

 

35

Net realized capital gains (losses)

 

180

 

(55)

Increase (decrease) in pre-tax income

$

(10)

$

(123)

In the three- and nine-month periods ended September 30, 2019, adjusted pre-tax income included a net unfavorable adjustment of $173 million, primarily in Index Annuities driven by an update to lapses, and in Life Insurance primarily due to methodology enhancements related to projected premium, certain riders and death benefit features, and reinsurance reserving. The unfavorable adjustments were partially offset by favorable updates to full surrender assumptions in Individual Retirement Fixed Annuities.

In the three- and nine-month periods ended September 30, 2018, adjusted pre-tax income included a net unfavorable adjustment of $103 million, primarily in Variable Annuities driven by reductions to the GMWB full surrender assumption, and in Life Insurance primarily due to additional reserves for certain riders and interest crediting model refinements. The unfavorable adjustments were partially offset by favorable adjustments in Life Insurance primarily due to lower lapse and mortality assumptions and a reduction in IBNR reserves and in Individual Retirement due to lower lapse assumptions in Fixed Annuities and refinements to partial withdrawal assumptions in Variable Annuities.

The adjustments related to the update of actuarial assumptions in each period are discussed by business segment below.

Update of Actuarial Assumptions by Business Segment

Individual Retirement

The update of actuarial assumptions resulted in a net unfavorable adjustment to adjusted pre-tax income of Individual Retirement of $63 million in the three- and nine-month periods ended September 30, 2019 compared to net unfavorable adjustment to adjusted pre-tax income of Individual Retirement of $52 million in the three- and nine-month periods ended September 30, 2018.

In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net favorable adjustment of $82 million and $40 million in the three- and nine-month periods ended September 30, 2019 and 2018, respectively, both of which reflected lower lapse assumptions including the economic impact to competitor rate on the interest sensitive lapse component, partially offset by lower interest spread assumptions.

AIG | Third Quarter 2019 Form 10-Q 145

 

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ITEM 2 | Insurance Reserves

 

In Variable and Index Annuities, the update of estimated gross profit assumptions resulted in a net unfavorable adjustment of $145 million in the three- and nine-month periods ended September 30, 2019, primarily due to lapse updates in Index Annuities and updated general account earned rates on Variable Annuities. The unfavorable adjustments were partially offset by updated lapse assumptions in Variable Annuities.

In the three- and nine-month periods ended September 30, 2018 for Variable and Index Annuities, the update of estimated gross profit assumptions resulted in a net unfavorable adjustment of $92 million primarily due to refinements to the guaranteed benefit partial withdrawal assumptions in Variable Annuities and the multi-year index strategy crediting parameters in Index Annuities. The unfavorable adjustments were partially offset by lower guaranteed benefit lapse assumptions in Variable Annuities.

Group Retirement

In Group Retirement, the update of estimated gross profit assumptions resulted in an unfavorable adjustment of $17 million in the three- and nine-month periods ended September 30, 2019, primarily due to lapse updates in Index Annuities and Variable Annuities.

In the three- and nine-month periods ended September 30, 2018, the update of estimated gross profit assumptions resulted in a favorable adjustment of $17 million primarily due to improved premium persistency assumptions.

Life Insurance

In Life Insurance, the update of actuarial assumptions resulted in a net unfavorable adjustment of $63 million in the three- and nine-month periods ended September 30, 2019, primarily due to methodology enhancements related to projected premium, certain riders and death benefit features, and reinsurance reserving. The unfavorable adjustments were partially offset by favorable adjustments driven by updates to mortality assumptions.

In the three- and nine-month periods ended September 30, 2018, the update of actuarial assumptions resulted in a net unfavorable adjustment of $63 million primarily due to additional reserves for certain riders, decreased lapses and interest crediting model refinements. The unfavorable adjustments were partially offset by favorable adjustments driven by updates to mortality assumptions and a reduction to IBNR reserves.

Legacy Portfolio

In the Legacy Portfolio, the update of actuarial assumptions resulted in a net unfavorable adjustment of $30 million in the three- and nine-month periods ended September 30, 2019, reflecting updates to loss recognition reserves and minor methodology enhancements for universal life insurance.

In the three- and nine-month periods ended September 30, 2018, the update of actuarial assumptions resulted in a net unfavorable adjustment of $5 million, reflecting updates to mortality and lapse assumptions.

Variable Annuity Guaranteed Benefits and Hedging Results

Our Individual Retirement and Group Retirement businesses offer variable annuity products with GMWB riders that provide guaranteed living benefit features. The liabilities for GMWB are accounted for as embedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads, market volatility, policyholder behavior and other factors.

In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage market risk from GMWB, including exposures to changes in interest rates, equity prices, credit spreads and volatility. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election.

For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Programs in our 2018 Annual Report.

146 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Insurance Reserves

 

Differences in Valuation of Embedded Derivatives and Economic Hedge Target

The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic risks in our GMWB riders. The economic hedge target differs from the U.S. GAAP valuation of the GMWB embedded derivatives primarily due to the following:

•The economic hedge target includes 100 percent of rider fees in present value calculations; the U.S. GAAP valuation reflects only those fees attributed to the embedded derivative such that the initial value at contract issue equals zero;

•The economic hedge target uses best estimate actuarial assumptions and excludes explicit risk margins used for U.S. GAAP valuation, such as margins for policyholder behavior, mortality, and volatility; and

•The economic hedge target excludes the non-performance or “own credit” risk adjustment used in the U.S. GAAP valuation, which reflects a market participant’s view of our claims-paying ability by incorporating an additional spread (the NPA spread) to the swap curve used to discount projected benefit cash flows. Because the discount rate includes the NPA spread and other explicit risk margins, the U.S. GAAP valuation is generally less sensitive to movements in interest rates and other market factors, and to changes from actuarial assumption updates, than the economic hedge target. For more information on our valuation methodology for embedded derivatives within policyholder contract deposits see Note 5 to the Condensed Consolidated Financial Statements.

The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life and Retirement companies have cash and invested assets available to cover future claims payable under these guarantees. The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:

•Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;

•Realized volatility versus implied volatility;

•Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder behavior; and

•Risk exposures that we have elected not to explicitly or fully hedge.

The following table presents a reconciliation between the fair value of the U.S. GAAP embedded derivatives and the value of our economic hedge target:

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

2019

 

2018

Reconciliation of embedded derivatives and economic hedge target:

 

 

 

 

 

 

 

 

 

Embedded derivative liability

 

 

 

 

 

$

3,168

$

1,943

Exclude non-performance risk adjustment

 

 

 

 

 

 

(3,474)

 

(2,615)

Embedded derivative liability, excluding NPA

 

 

 

 

 

 

6,642

 

4,558

Adjustments for risk margins and differences in valuation

 

 

 

 

 

 

(3,440)

 

(2,377)

Economic hedge target liability

 

 

 

 

 

$

3,202

$

2,181

Impact on Pre-tax Income (Loss)

The impact on our pre-tax income (loss) of the variable annuity guaranteed living benefits and related hedging results includes changes in the fair value of the GMWB embedded derivatives, and changes in the fair value of related derivative hedging instruments, both of which are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of fixed maturity securities used in the hedging program, are excluded from adjusted pre-tax income of Individual Retirement and Group Retirement.

The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to the differences in valuation between the economic hedge target, the U.S. GAAP embedded derivatives and the fair value of the hedging portfolio, as discussed above. When corporate credit spreads widen, the change in the NPA spread generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA spread generally increases the fair value of the embedded derivative liabilities, resulting in a loss. In addition to changes driven by credit market-related movements in the NPA spread, the NPA balance also reflects changes in business activity and in the net amount at risk from the underlying guaranteed living benefits.

AIG | Third Quarter 2019 Form 10-Q 147

 

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ITEM 2 | Insurance Reserves

 

The following table presents the net increase (decrease) to consolidated pre-tax income (loss) from changes in the fair value of the GMWB embedded derivatives and related hedges, excluding related DAC amortization:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA

$

(1,481)

$

553

 

$

(1,941)

$

1,477

Change in fair value of variable annuity hedging portfolio:

 

 

 

 

 

 

 

 

 

Fixed maturity securities*

 

15

 

(13)

 

 

187

 

(127)

Interest rate derivative contracts

 

826

 

(257)

 

 

1,661

 

(847)

Equity derivative contracts

 

(15)

 

(332)

 

 

(787)

 

(412)

Change in fair value of variable annuity hedging portfolio

 

826

 

(602)

 

 

1,061

 

(1,386)

Change in fair value of embedded derivatives excluding update of actuarial assumptions and NPA, net of hedging portfolio

 

(655)

 

(49)

 

 

(880)

 

91

Change in fair value of embedded derivatives due to NPA spread

 

306

 

(168)

 

 

180

 

4

Change in fair value of embedded derivatives due to change in NPA volume

 

457

 

(19)

 

 

679

 

(262)

Change in fair value of embedded derivatives due to update of actuarial assumptions

 

219

 

38

 

 

219

 

38

Total change due to update of actuarial assumptions and NPA

 

982

 

(149)

 

 

1,078

 

(220)

Net impact on pre-tax income (loss)

$

327

$

(198)

 

$

198

$

(129)

 

 

 

 

 

 

 

 

 

 

By Consolidated Income Statement line

 

 

 

 

 

 

 

 

 

Net investment income

$

15

$

(13)

 

$

187

$

(127)

Net realized capital gains (losses)

 

312

 

(185)

 

 

11

 

(2)

Net impact on pre-tax income (loss)

$

327

$

(198)

 

$

198

$

(129)

*Beginning in July 2019, the fixed maturity securities portfolio used in the hedging program was rebalanced to reposition the portfolio from a duration, sector, and issuer perspective. As part of this rebalancing fixed maturity securities where we elected the fair value option were sold. Later in the quarter, as new fixed maturity securities were purchased they were classified as available for sale. The change in fair value of available-for-sale fixed maturity securities recognized as a component of other comprehensive income was $78 million for the three- and nine-month periods ended September 30, 2019.

The net impact on pre-tax income from the GMWB embedded derivatives and related hedges in the three- and nine-month periods ended September 30, 2019 (excluding related DAC amortization) was driven by widening of credits spreads on the NPA spread, impact of lower interest rates that resulted in NPA volume gains from higher expected GMWB payments, and gains from the review and update of actuarial assumptions, offset by the impact of lower interest rates on the change in the fair value of embedded derivatives excluding NPA, net of the hedging portfolio. The net impact on pre-tax loss from the GMWB embedded derivatives and related hedges in the three-month period ended September 30, 2018 (excluding related DAC amortization) was primarily driven by losses from the impact of tightening credit spreads on the NPA spread, partially offset by higher interest rates, and equity market volatility. In the three- and nine-month periods ended September 30, 2018 increases in interest rates resulted in NPA volume losses from lower expected GMWB payments.

The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in the three- and nine-month periods ended September 30, 2019 reflected losses from decreases in interest rates, offset by gains from higher equity markets and widening crediting spreads. The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in the three- and nine-month periods ended September 30, 2018 reflected gains from equity market volatility and reductions in risk margins due to decreased GMWB claims driven by higher interest rates, partially offset by losses from the related hedging portfolio in the three- and nine-month periods ended September 30, 2018. In the nine-month period ended September 30, 2018 fair value gains on embedded derivatives, excluding NPA and actuarial assumption update, was fully offset by fair value losses on the related hedging portfolio.

Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a U.S. GAAP basis, due to the NPA and other risk margins used for U.S. GAAP valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio. On an economic basis, the changes in the fair value of the hedge portfolio were partially offset by the decrease in the economic hedge target, as discussed below.

148 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Insurance Reserves

 

Change in Economic Hedge Target

The increase in the economic hedge target liability in the first nine months of 2019 was primarily due to lower interest rates, offset by higher equity markets and gains from the review and update of actuarial assumptions.

Change in Fair Value of the Hedging Portfolio

The changes in the fair value of the economic hedge target and, to a lesser extent, the embedded derivative valuation under U.S. GAAP, were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:

•Changes in the fair value of fixed maturity securities, primarily corporate bonds, are used as a capital-efficient way to economically hedge interest rate and credit spread-related risk. The change in the fair value of the corporate bond hedging program in the three- and nine-month periods ended September 30, 2019 reflected gains due to decreases in interest rates, partially offset by widening of credit spreads. The change in the fair value of the corporate bond hedging program in the three- and nine-month periods ended September 30, 2018 reflected losses due to increases in interest rates, partially offset by the tightening of credit spreads. The change in the fair value of the hedging bonds where we elected the fair value option, which is excluded from the adjusted pre-tax income of the Individual Retirement and Group Retirement segments, is reported in net investment income on the Condensed Consolidated Statements of Income (Loss).The change in the fair value of available-for-sale hedging bonds is reported as a component of comprehensive income in the Condensed Consolidated Statements of Comprehensive Income (Loss).

•Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in gains driven by lower interest rates in the three- and nine-month periods ended September 30, 2019 compared to losses in the same periods in the prior year, which was driven by higher interest rates.

•The change in the fair value of equity derivative contracts, which included futures and options, reflected losses in the three- and nine-month periods ended September 30, 2019 compared to lower losses in the same periods in the prior year, which varied based on the relative change in equity market returns in the respective periods.

DAC

The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and Retirement companies, excluding DAC of the Legacy Portfolio:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2019

 

2018

Balance, beginning of year

$

9,133

$

7,637

Acquisition costs deferred

 

931

 

850

Amortization expense:

 

 

 

 

Update of assumptions included in adjusted pre-tax income

 

203

 

307

Related to realized capital gains and losses

 

(40)

 

47

All other operating amortization

 

(645)

 

(718)

Increase (decrease) in DAC due to foreign exchange

 

(18)

 

(14)

Change related to unrealized depreciation (appreciation) of investments

 

(1,895)

 

873

Balance, end of period*

$

7,669

$

8,982

* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.8 billion and $9.4 billion at September 30, 2019 and 2018, respectively.

AIG | Third Quarter 2019 Form 10-Q 149

 

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ITEM 2 | Insurance Reserves

 

DAC and Reserves Related to Unrealized Appreciation of Investments

DAC and Reserves for universal life and investment-type products (collectively, investment-oriented products) are adjusted at each balance sheet date to reflect the change in DAC, unearned revenue, and benefit reserves with an offset to Other comprehensive income (OCI) as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow Investment-Oriented Adjustments). Similarly, for long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities (shadow Loss Adjustments) with an offset to OCI to be recorded.

Shadow adjustments to DAC and unearned revenue generally move in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio, reducing the reported DAC and unearned revenue balance when market interest rates decline. Conversely, shadow adjustments to benefit reserves generally move in the same direction as the change in unrealized appreciation of the available for sale securities portfolio, increasing reported future policy benefit liabilities balance when market interest rates decline.

Market interest rates decreased in the nine-month period ended September 30, 2019, which drove a $14 billion increase in the unrealized appreciation of fixed maturity securities held to support businesses in the Life and Retirement companies at September 30, 2019 compared to December 31, 2018. At September 30, 2019, the shadow Investment-Oriented Adjustments reflected decreases in DAC and unearned revenues and an increase in future policy benefit liabilities compared to December 31, 2018, while the shadow Loss Adjustments reflected an increase in future policy benefit liabilities.

Reserves

The following table presents a rollforward of insurance reserves by operating segments for Life and Retirement, including future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2019

 

2018

 

 

2019

 

2018

Individual Retirement

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

141,521

$

137,134

 

$

132,729

$

138,571

Premiums and deposits

 

3,692

 

3,616

 

 

11,743

 

11,396

Surrenders and withdrawals

 

(3,216)

 

(3,369)

 

 

(9,791)

 

(10,106)

Death and other contract benefits

 

(806)

 

(792)

 

 

(2,455)

 

(2,556)

Subtotal

 

(330)

 

(545)

 

 

(503)

 

(1,266)

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

835

 

2,215

 

 

8,825

 

941

Cost of funds*

 

425

 

386

 

 

1,242

 

1,141

Other reserve changes

 

314

 

(26)

 

 

472

 

(223)

Balance at end of period

 

142,765

 

139,164

 

 

142,765

 

139,164

Reinsurance ceded

 

(312)

 

(319)

 

 

(312)

 

(319)

Total Individual Retirement insurance reserves and mutual fund assets

$

142,453

$

138,845

 

$

142,453

$

138,845

Group Retirement

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

98,923

$

97,548

 

$

91,685

$

97,306

Premiums and deposits

 

1,924

 

2,116

 

 

6,034

 

6,533

Surrenders and withdrawals

 

(2,535)

 

(2,957)

 

 

(7,377)

 

(8,062)

Death and other contract benefits

 

(177)

 

(145)

 

 

(494)

 

(462)

Subtotal

 

(788)

 

(986)

 

 

(1,837)

 

(1,991)

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

213

 

2,129

 

 

7,939

 

2,841

Cost of funds*

 

286

 

275

 

 

844

 

816

Other reserve changes

 

(10)

 

4

 

 

(7)

 

(2)

Balance at end of period

 

98,624

 

98,970

 

 

98,624

 

98,970

Total Group Retirement insurance reserves and mutual fund assets

$

98,624

$

98,970

 

$

98,624

$

98,970

150 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Insurance Reserves

 

Life Insurance

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

20,699

$

19,647

 

$

19,719

$

19,424

Premiums and deposits

 

922

 

887

 

 

2,772

 

2,663

Surrenders and withdrawals

 

(157)

 

(286)

 

 

(449)

 

(600)

Death and other contract benefits

 

(121)

 

(140)

 

 

(385)

 

(346)

Subtotal

 

644

 

461

 

 

1,938

 

1,717

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

(305)

 

(229)

 

 

(856)

 

(771)

Cost of funds*

 

92

 

92

 

 

277

 

281

Other reserve changes

 

894

 

87

 

 

946

 

(593)

Balance at end of period

 

22,024

 

20,058

 

 

22,024

 

20,058

Reinsurance ceded

 

(1,122)

 

(1,232)

 

 

(1,122)

 

(1,232)

Total Life Insurance reserves

$

20,902

$

18,826

 

$

20,902

$

18,826

Institutional Markets

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

21,022

$

19,694

 

$

19,839

$

18,580

Premiums and deposits

 

833

 

69

 

 

2,213

 

2,184

Surrenders and withdrawals

 

(187)

 

(183)

 

 

(583)

 

(1,189)

Death and other contract benefits

 

(154)

 

(112)

 

 

(478)

 

(387)

Subtotal

 

492

 

(226)

 

 

1,152

 

608

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

118

 

81

 

 

445

 

158

Cost of funds*

 

95

 

90

 

 

271

 

246

Other reserve changes

 

30

 

63

 

 

50

 

110

Balance at end of period

 

21,757

 

19,702

 

 

21,757

 

19,702

Reinsurance ceded

 

(43)

 

(43)

 

 

(43)

 

(43)

Total Institutional Markets reserves

$

21,714

$

19,659

 

$

21,714

$

19,659

Total insurance reserves and mutual fund assets

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

282,165

$

274,023

 

$

263,972

$

273,881

Premiums and deposits

 

7,371

 

6,688

 

 

22,762

 

22,776

Surrenders and withdrawals

 

(6,095)

 

(6,795)

 

 

(18,200)

 

(19,957)

Death and other contract benefits

 

(1,258)

 

(1,189)

 

 

(3,812)

 

(3,751)

Subtotal

 

18

 

(1,296)

 

 

750

 

(932)

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

861

 

4,196

 

 

16,353

 

3,169

Cost of funds*

 

898

 

843

 

 

2,634

 

2,484

Other reserve changes

 

1,228

 

128

 

 

1,461

 

(708)

Balance at end of period

 

285,170

 

277,894

 

 

285,170

 

277,894

Reinsurance ceded

 

(1,477)

 

(1,594)

 

 

(1,477)

 

(1,594)

Total insurance reserves and mutual fund assets

$

283,693

$

276,300

 

$

283,693

$

276,300

*Excludes amortization of deferred sales inducements.

Insurance reserves of Life and Retirement, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration, were comprised of the following balances:

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

2019

 

2018

Future policy benefits

 

 

$

17,415

$

14,739

Policyholder contract deposits

 

 

 

147,689

 

137,718

Other policy funds

 

 

 

268

 

295

Separate account liabilities

 

 

 

87,097

 

79,960

Total insurance reserves*

 

 

 

252,469

 

232,712

Mutual fund assets

 

 

 

32,701

 

31,260

Total insurance reserves and mutual fund assets

 

 

$

285,170

$

263,972

*Excludes reserves related to the Legacy Portfolio.

AIG | Third Quarter 2019 Form 10-Q 151

 

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ITEM 2 | Liquidity and Capital Resources

 

 

Liquidity and Capital Resources

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We endeavor to manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by our Treasury group with oversight by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity at both AIG Parent and its subsidiaries to meet our financial obligations for a minimum of six months under a liquidity stress scenario.

See Part II, Item 7. MD&A — Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement and Enterprise Risk Management — Liquidity Risk Management in the 2018 Annual Report for additional information.

Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is derived from the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy at AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.

We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.

Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.

Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, issuing preferred stock, paying dividends to our shareholders and AIG Common Stock and/or warrant repurchases.

152 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

LIQUIDITY AND CAPITAL RESOURCES ACTIVITY FOR the niNe Months ended September 30, 2019

Sources

AIG Parent Funding from Subsidiaries

During the nine-month period ended September 30, 2019, AIG Parent received $3.2 billion in dividends from subsidiaries. Of this amount, $1.7 billion consisted of dividends in the form of cash and fixed maturity securities from our General Insurance companies and $1.5 billion consisted of dividends and loan repayments in the form of cash from our Life and Retirement companies.

AIG Parent also received a net amount of $1.0 billion in tax sharing payments in the form of cash and fixed maturity securities from our insurance businesses in the nine-month period ended September 30, 2019, including $340 million of such payments in the third quarter of 2019. The tax sharing payments may be subject to further adjustment in future periods.

Preferred Stock Issuance

In March 2019, we issued 20,000 shares of Series A 5.85% Non-Cumulative Preferred Stock (Series A Preferred Stock), with a par value of $5.00 per share and a liquidation preference of $25,000 per share, for net proceeds of approximately $485 million.

Debt Issuance

In March 2019, we issued $600 million aggregate principal amount of 4.250% Notes Due 2029.

Uses

Debt Reduction

We made repurchases of and repayments on debt instruments of approximately $2.5 billion during the nine-month period ended September 30, 2019. AIG Parent made interest payments on our debt instruments totaling $735 million during the nine-month period ended September 30, 2019.

Dividend

We paid a cash dividend of $369.6875 per share and $365.625 per share on AIG’s Series A Preferred Stock during the second and third quarters of 2019, respectively, totaling $15 million.

We paid a cash dividend of $0.32 per share on AIG Common Stock during each of the first, second, and third quarters of 2019 totaling $835 million.

AIG Parent Funding to Subsidiaries

In February 2019, AIG Parent made a capital contribution of $300 million to our General Insurance companies.

 

AIG | Third Quarter 2019 Form 10-Q 153

 

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ITEM 2 | Liquidity and Capital Resources

 

Analysis of Sources and Uses of Cash

The following table presents selected data from AIG's Condensed Consolidated Statements of Cash Flows:

Nine Months Ended September 30,

 

 

 

 

 

 

(in millions)

 

 

 

2019

 

2018

Sources:

 

 

 

 

 

 

Net cash provided by other investing activities

 

 

$

-

$

4,135

Changes in policyholder contract balances

 

 

 

4,823

 

5,146

Issuance of long-term debt

 

 

 

2,564

 

4,059

Issuance of preferred stock

 

 

 

485

 

-

Net cash provided by other financing activities

 

 

 

1,354

 

-

Total sources

 

 

 

9,226

 

13,340

Uses:

 

 

 

 

 

 

Net cash used in operating activities

 

 

 

(789)

 

(38)

Acquisition of businesses, net of cash and restricted cash acquired

 

 

 

-

 

(5,052)

Net cash used in other investing activities

 

 

 

(4,793)

 

-

Repayments of long-term debt

 

 

 

(2,421)

 

(2,788)

Purchase of common stock

 

 

 

-

 

(994)

Dividends paid on preferred stock

 

 

 

(15)

 

-

Dividends paid on common stock

 

 

 

(835)

 

(858)

Net cash used in other financing activities

 

 

 

-

 

(3,232)

Total uses

 

 

 

(8,853)

 

(12,962)

Effect of exchange rate changes on cash and restricted cash

 

 

 

39

 

8

Increase (decrease) in cash and restricted cash

 

 

$

412

$

386

The following table presents a summary of AIG’s Condensed Consolidated Statement of Cash Flows:

Nine Months Ended September 30,

 

 

 

 

 

 

 

(in millions)

 

 

 

 

2019

 

2018

Summary:

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

 

$

(789)

$

(38)

Net cash provided by (used in) investing activities

 

 

 

 

(4,793)

 

(917)

Net cash provided by (used in) financing activities

 

 

 

 

5,955

 

1,333

Effect of exchange rate changes on cash and restricted cash

 

 

 

 

39

 

8

Increase (decrease) in cash and restricted cash

 

 

 

 

412

 

386

Cash and restricted cash at beginning of year

 

 

 

 

3,358

 

2,737

Cash and restricted cash at end of period

 

 

 

$

3,770

$

3,123

Operating Cash Flow Activities

Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates and operating expenses.

Interest payments totaled $1.0 billion in the nine-month period ended September 30, 2019 compared to $1.0 billion in the same period in the prior year. Excluding interest payments, AIG had operating cash inflows of $224 million in the nine-month period ended September 30, 2019 compared to operating cash inflows of $980 million in the same period in the prior year.

Investing Cash Flow Activities

Net cash used in investing activities in the nine-month period ended September 30, 2019 was $4.8 billion compared to net cash used in investing activities of $917 million in the nine-month period ended September 30, 2018. The nine-month period ended September 30, 2018 included our acquisition of Validus for approximately $5.5 billion in cash.

154 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

Financing Cash Flow Activities

Net cash provided by financing activities in the nine-month period ended September 30, 2019 reflected:

•approximately $835 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each of the first, second, and third quarters of 2019;

•approximately $15 million to pay a dividend of $369.6875 per share and $365.625 per share on AIG’s Series A Preferred Stock in the second and third quarters of 2019, respectively;

•approximately $143 million in net inflows from the issuance and repayment of long-term debt; and

•approximately $485 million inflow from the issuance of preferred stock.

Net cash provided by financing activities in the nine-month period ended September 30, 2018 reflected:

•approximately $858 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each of the first, second, and third quarters of 2018;

•approximately $994 million to repurchase approximately 18.5 million shares of AIG Common Stock; and

•approximately $1.3 billion in net inflows from the issuance and repayment of long-term debt.

Liquidity and Capital Resources of AIG Parent and Subsidiaries

AIG Parent

As of September 30, 2019, AIG Parent had approximately $11.7 billion in liquidity sources. AIG Parent’s liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities and also includes a committed, revolving syndicated credit facility. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized through sales or repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent liquidity is monitored through the use of various internal liquidity risk measures. AIG Parent’s primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries and credit facilities. AIG Parent’s primary uses of liquidity are for debt service, capital and liability management, and operating expenses.

We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt and preferred equity markets from time to time to meet funding requirements as needed.

We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or AIG Common Stock repurchase authorizations or deploy such capital towards liability management.

In the normal course, it is expected that a portion of the capital released by our insurance operations, by our other operations or through the utilization of AIG’s deferred tax assets may be available to support our business strategies, for distribution to shareholders or for liability management.

In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: AIG’s business and strategic plans, expectations for capital generation and utilization, AIG’s funding capacity and capital resources in comparison to internal benchmarks, as well as rating agency expectations, regulatory standards and internal stress tests for capital.

AIG | Third Quarter 2019 Form 10-Q 155

 

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ITEM 2 | Liquidity and Capital Resources

 

The following table presents AIG Parent's liquidity sources:

 

As of

As of

(In millions)

September 30, 2019

December 31, 2018

Cash and short-term investments(a)

$

2,808

$

626

Unencumbered fixed maturity securities(b)

 

4,382

 

3,168

Total AIG Parent liquidity

 

7,190

 

3,794

Available capacity under committed, syndicated credit facility(c)

 

4,500

 

4,500

Total AIG Parent liquidity sources

$

11,690

$

8,294

(a)Cash and short-term investments include reverse repurchase agreements totaling $1.7 billion and $22 million as of September 30, 2019 and December 31, 2018, respectively.

(b)Unencumbered securities consist of publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.

(c)For additional information relating to this committed, syndicated credit facility see Credit Facilities below.

Insurance Companies

We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our insurance companies’ liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.

Each of our material insurance companies’ liquidity is monitored through various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment purchases and collateral requirements.

Our General Insurance companies may require additional funding to meet capital or liquidity needs under certain circumstances. Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non-renewals or cancellations by policyholders and adversely affect a subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.

Management believes that because of the size and liquidity of our Life and Retirement companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life and Retirement companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, in times of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life and Retirement companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity position and facilitate their ability to maintain a fully invested asset portfolio.

Certain of our U.S. insurance companies are members of the FHLBs in their respective districts. Borrowings from FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. General Insurance companies had no outstanding borrowings from FHLBs at September 30, 2019 and aggregate outstanding borrowings of approximately $115 million at December 31, 2018. Our U.S. Life and Retirement companies had no outstanding borrowings in the form of cash advances from FHLBs at both September 30, 2019 and December 31, 2018. In addition, $3.5 billion and $3.4 billion were due to FHLBs in the respective districts of our U.S. Life and Retirement companies at September 30, 2019 and December 31, 2018, respectively, under funding agreements issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments, which were reported in Policyholder contract deposits.

Certain of our U.S. Life and Retirement companies have programs, which began in 2012, that lend securities from their investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life and Retirement companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of the loaned securities. Cash collateral received is invested in short-term investments or partially used for short-term liquidity purposes. Additionally, the aggregate amount of securities that a Life and Retirement company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. Our U.S. Life and Retirement companies had $2.5 billion and $884 million of securities subject to these agreements at September 30, 2019 and December 31, 2018, respectively, and $2.6 billion and $904 million of liabilities to borrowers for collateral received at September 30, 2019 and December 31, 2018, respectively.

156 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

AIG generally manages capital between AIG Parent and our insurance companies through internal, Board-approved policies and limits, as well as management standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.

In February 2018, AIG Parent entered into a CMA with Fortitude Re. Among other things, the CMA provides that AIG Parent will maintain available statutory capital and surplus in each of Fortitude Re’s long term business fund and general business account at or above a stress threshold percentage of its projected enhanced capital requirement in respect of the applicable fund, as defined under Bermuda law. As of September 30, 2019, the stress threshold percentage under this CMA was 125 percent.

AIG Parent and/or certain subsidiaries are parties to several letter of credit agreements with various financial institutions, which issue letters of credit from time to time in support of our insurance companies. Letters of credit issued in support of the General Insurance companies totaled approximately $3.5 billion at September 30, 2019. Letters of credit issued in support of the Life and Retirement companies totaled approximately $851 million at September 30, 2019. Letters of credit issued in support of Fortitude Re totaled $550 million at September 30, 2019.

In the nine-month period ended September 30, 2019, our General Insurance companies collectively paid a total of approximately $1.7 billion in dividends in the form of cash and fixed maturity securities to AIG Parent. The fixed maturity securities primarily included U.S. agency mortgage-backed securities, municipal bonds and certain other highly rated securities.

In the nine-month period ended September 30, 2019, our Life and Retirement companies collectively paid a total of approximately $1.5 billion in dividends and loan repayments in the form of cash to AIG Parent.

Tax Matters

If the settlement agreements in principle are concluded in our ongoing dispute related to the disallowance of foreign tax credits associated with cross border financing transactions, we will be required to make a payment to the U.S. Treasury. Although we can provide no assurance regarding whether the non-binding settlements will be finalized, the amount we currently expect to pay based on current proposed settlement terms is approximately $1.7 billion, including obligations of AIG Parent and subsidiaries. This amount is net of payments previously made with respect to cross border financing transactions involving matters dating back to 1997 and other matters largely related to the same tax years. There remains uncertainty with regard to whether the settlements in principle will ultimately be approved by the relevant authorities as well as the amount and timing of any potential payment(s) or prepayment(s), one or more of which could be made as early as the fourth quarter of 2019 even if not due until 2020.

For additional information regarding this matter see Note 15 to the Condensed Consolidated Financial Statements.

Credit Facilities

We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.

As of September 30, 2019, a total of $4.5 billion remains available under the Facility. Our ability to utilize the Facility is not contingent on our credit ratings. However, our ability to utilize the Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Facility would restrict our access to the Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to utilize the Facility from time to time, and may use the proceeds for general corporate purposes.

AIG | Third Quarter 2019 Form 10-Q 157

 

TABLE OF CONTENTS

 

ITEM 2 | Liquidity and Capital Resources

 

Contractual Obligations

The following table summarizes contractual obligations in total, and by remaining maturity:

September 30, 2019

 

 

Payments due by Period

 

 

Total

Remainder of

 

2020 -

 

2022 -

 

 

 

 

(in millions)

 

Payments

 

2019

 

2021

 

2023

 

2024

 

Thereafter

Insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

Loss reserves(a)

$

82,719

$

5,316

$

23,157

$

12,106

$

3,858

$

38,282

Insurance and investment contract liabilities

 

266,654

 

7,042

 

33,854

 

30,195

 

14,709

 

180,854

Borrowings

 

1,352

 

-

 

354

 

-

 

-

 

998

Interest payments on borrowings

 

803

 

1

 

99

 

99

 

50

 

554

Other long-term obligations

 

-

 

-

 

-

 

-

 

-

 

-

Total

$

351,528

$

12,359

$

57,464

$

42,400

$

18,617

$

220,688

Other

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

$

24,193

$

96

 

3,026

 

3,219

 

1,138

 

16,714

Interest payments on borrowings

 

14,563

 

238

 

1,994

 

1,725

 

778

 

9,828

Other long-term obligations

 

453

 

54

 

198

 

133

 

45

 

23

Total

$

39,209

$

388

$

5,218

$

5,077

$

1,961

$

26,565

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

Loss reserves(a)

$

82,719

$

5,316

$

23,157

$

12,106

$

3,858

$

38,282

Insurance and investment contract liabilities

 

266,654

 

7,042

 

33,854

 

30,195

 

14,709

 

180,854

Borrowings

 

25,545

 

96

 

3,380

 

3,219

 

1,138

 

17,712

Interest payments on borrowings

 

15,366

 

239

 

2,093

 

1,824

 

828

 

10,382

Other long-term obligations(b)

 

453

 

54

 

198

 

133

 

45

 

23

Total(c)

$

390,737

$

12,747

$

62,682

$

47,477

$

20,578

$

247,253

(a)Represents undiscounted loss reserves.

(b)Primarily includes contracts to purchase future services and other capital expenditures.

(c)Does not reflect unrecognized tax benefits of $4.8 billion. See Note 15 to the Condensed Consolidated Financial Statements for additional information.

Loss Reserves

Loss reserves relate to our General Insurance companies and represent estimates of future loss and loss adjustment expense payments based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our General Insurance companies maintain adequate financial resources to meet the actual required payments under these obligations.

Insurance and Investment Contract Liabilities

Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.

We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Condensed Consolidated Balance Sheets.

We believe that our Life and Retirement companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life and Retirement companies maintain significant levels of investment grade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.

158 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

Borrowings

Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt or preferred stock issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.

Off-Balance Sheet Arrangements and Commercial Commitments

The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:

September 30, 2019

 

 

 

Amount of Commitment Expiring

 

 

Total Amounts

 

Remainder

 

2020 -

 

2022 -

 

 

 

 

(in millions)

 

Committed

 

of 2019

 

2021

 

2023

 

2024

 

Thereafter

Insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

Standby letters of credit

$

284

$

265

$

8

$

-

$

-

$

11

Guarantees of indebtedness

 

72

 

59

 

13

 

-

 

-

 

-

All other guarantees(a)

 

65

 

-

 

30

 

28

 

7

 

-

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(b)

 

7,596

 

2,080

 

2,662

 

2,448

 

258

 

148

Commitments to extend credit

 

4,485

 

2,164

 

926

 

1,178

 

120

 

97

Letters of credit

 

3

 

-

 

3

 

-

 

-

 

-

Total(c)

$

12,505

$

4,568

$

3,642

$

3,654

$

385

$

256

Other

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity facilities(d)

$

74

$

-

$

-

$

-

$

-

$

74

Standby letters of credit

 

82

 

82

 

-

 

-

 

-

 

-

All other guarantees

 

49

 

49

 

-

 

-

 

-

 

-

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(b)

 

182

 

26

 

73

 

56

 

2

 

25

Commitments to extend credit

 

-

 

-

 

-

 

-

 

-

 

-

Letters of credit

 

13

 

-

 

13

 

-

 

-

 

-

Total(c)(e)

$

400

$

157

$

86

$

56

$

2

$

99

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity facilities(d)

$

74

$

-

$

-

$

-

$

-

$

74

Standby letters of credit

 

366

 

347

 

8

 

-

 

-

 

11

Guarantees of indebtedness

 

72

 

59

 

13

 

-

 

-

 

-

All other guarantees(a)

 

114

 

49

 

30

 

28

 

7

 

-

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(b)

 

7,778

 

2,106

 

2,735

 

2,504

 

260

 

173

Commitments to extend credit

 

4,485

 

2,164

 

926

 

1,178

 

120

 

97

Letters of credit

 

16

 

-

 

16

 

-

 

-

 

-

Total(c)(e)

$

12,905

$

4,725

$

3,728

$

3,710

$

387

$

355

(a)Excludes potential amounts for indemnification obligations included in asset sales agreements. For further information on indemnification obligations see Note 11 to the Condensed Consolidated Financial Statements.

(b)Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.

(c)Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.

(d)Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.

(e)Excludes commitments with respect to pension plans. The remaining annual pension contribution for 2019 is expected to be approximately $12 million for U.S. and non-U.S. plans.

AIG | Third Quarter 2019 Form 10-Q 159

 

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ITEM 2 | Liquidity and Capital Resources

 

Arrangements with Variable Interest Entities

We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE when we are the primary beneficiary of the entity.

For a further discussion of our involvement with VIEs see Note 8 to the Condensed Consolidated Financial Statements.

Indemnification Agreements

We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations.

For additional information regarding our indemnification agreements see Note 11 to the Condensed Consolidated Financial Statements.

We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.

Debt

The following table provides the rollforward of AIG’s total debt outstanding:

 

 

Balance at

 

 

 

Maturities

 

Effect of

 

 

 

 

Balance at

Nine Months Ended September 30, 2019

 

December 31,

 

 

 

and

 

Foreign

 

Other

 

September 30,

(in millions)

 

2018

 

Issuances

Repayments

 

Exchange

 

Changes

 

 

2019

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

$

20,853

$

595

$

(1,000)

$

(119)

$

25

 

$

20,354

Junior subordinated debt

 

1,548

 

-

 

(6)

 

(11)

 

-

 

 

1,531

AIG Japan Holdings Kabushiki Kaisha

 

331

 

-

 

-

 

23

 

-

 

 

354

Validus notes and bonds payable

 

359

 

-

 

-

 

-

 

(4)

 

 

355

AIGLH notes and bonds payable

 

282

 

-

 

-

 

-

 

-

 

 

282

AIGLH junior subordinated debt

 

361

 

-

 

-

 

-

 

-

 

 

361

Total AIG general borrowings

 

23,734

 

595

 

(1,006)

 

(107)

 

21

 

 

23,237

AIG borrowings supported by assets:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

Series AIGFP matched notes and bonds payable

 

21

 

-

 

-

 

-

 

-

 

 

21

GIAs, at fair value

 

2,164

 

101

 

(291)

 

-

 

255

(b)

 

2,229

Notes and bonds payable, at fair value

 

49

 

-

 

(3)

 

-

 

12

(b)

 

58

Total AIG borrowings supported by assets

 

2,234

 

101

 

(294)

 

-

 

267

 

 

2,308

Total debt issued or guaranteed by AIG

 

25,968

 

696

 

(1,300)

 

(107)

 

288

 

 

25,545

Debt not guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Other subsidiaries' notes, bonds, loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgages payable(c)

 

168

 

4

 

(122)

 

-

 

1

 

 

51

Debt of consolidated investments(d)

 

8,404

 

1,864

 

(1,072)

 

(21)

 

491

(e)

 

9,666

Total debt not guaranteed by AIG

 

8,572

 

1,868

 

(1,194)

 

(21)

 

492

 

 

9,717

Total debt

$

34,540

$

2,564

$

(2,494)

$

(128)

$

780

 

$

35,262

(a)AIG Parent guarantees all such debt, except for Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $1.5 billion at both September 30, 2019 and December 31, 2018. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.

(b)Primarily represents adjustments to the fair value of debt.

(c)Includes primarily borrowings with Federal Home Loan Banks by our U.S. insurance companies. These borrowings are short term in nature and related activity is presented net of issuances and maturities and repayments.

(d)At September 30, 2019, includes debt of consolidated investment vehicles related to real estate investments of $3.8 billion, affordable housing partnership investments of $2.1 billion and other securitization vehicles of $3.8 billion. At December 31, 2018, includes debt of consolidated investment vehicles related to real estate investments of $3.7 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $2.9 billion.

(e)Includes the effect of consolidating previously unconsolidated partnerships.

160 AIG | Third Quarter 2019 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

TOTAL DEBT OUTSTANDING

(in millions)

 

Chart 1

 

Debt Maturities

The following table summarizes maturing debt at September 30, 2019 of AIG (excluding $9.7 billion of borrowings of consolidated investments) for the next four quarters:

 

 

Fourth

 

First

 

Second

 

Third

 

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

(in millions)

 

2019

 

2020

 

2020

 

2020

 

Total

AIG general borrowings

$

-

$

-

$

-

$

638

$

638

AIG borrowings supported by assets

 

96

 

-

 

9

 

20

 

125

Other subsidiaries' notes, bonds, loans and

 

 

 

 

 

 

 

 

 

 

mortgages payable

 

-

 

1

 

-

 

-

 

1

Total

$

96

$

1

$

9

$

658

$

764

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ITEM 2 | Liquidity and Capital Resources

 

The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting valuation adjustments and fair value adjustments, when applicable), excluding $9.7 billion in borrowings of debt of consolidated investments:

September 30, 2019

 

 

 

Remainder

Year Ending

(in millions)

 

 

Total

 

of 2019

 

2020

 

2021

 

2022

 

2023

 

2024

Thereafter

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

 

$

20,354

$

-

$

1,345

$

1,498

$

1,510

$

1,537

$

998

$

13,466

Junior subordinated debt

 

 

1,531

 

-

 

-

 

-

 

-

 

-

 

-

 

1,531

AIG Japan Holdings Kabushiki Kaisha

 

 

354

 

-

 

122

 

232

 

-

 

-

 

-

 

-

Validus notes and bonds payable

 

 

355

 

-

 

-

 

-

 

-

 

-

 

-

 

355

AIGLH notes and bonds payable

 

 

282

 

-

 

-

 

-

 

-

 

-

 

-

 

282

AIGLH junior subordinated debt

 

 

361

 

-

 

-

 

-

 

-

 

-

 

-

 

361

Total AIG general borrowings

 

 

23,237

 

-

 

1,467

 

1,730

 

1,510

 

1,537

 

998

 

15,995

AIG borrowings supported by assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series AIGFP matched notes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds payable

 

 

21

 

-

 

-

 

-

 

-

 

-

 

-

 

21

GIAs, at fair value

 

 

2,229

 

96

 

31

 

152

 

50

 

122

 

140

 

1,638

Notes and bonds payable, at fair value

 

 

58

 

-

 

-

 

-

 

-

 

-

 

-

 

58

Total AIG borrowings supported by assets

 

2,308

 

96

 

31

 

152

 

50

 

122

 

140

 

1,717

Total debt issued or guaranteed by AIG

 

 

25,545

 

96

 

1,498

 

1,882

 

1,560

 

1,659

 

1,138

 

17,712

Debt not guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other subsidiaries notes, bonds, loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and mortgages payable

 

 

51

 

-

 

1

 

42

 

1

 

1

 

6

 

-

Total debt not guaranteed by AIG

 

51

 

-

 

1

 

42

 

1

 

1

 

6

 

-

Total

 

$

25,596

$

96

$

1,499

$

1,924

$

1,561

$

1,660

$

1,144

$

17,712

Credit Ratings

Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of October 29, 2019. Figures in parentheses indicate the relative ranking of the ratings within the agency’s rating categories; that ranking refers only to the major rating category and not to the modifiers assigned by the rating agencies.

 

Short-Term Debt

 

Senior Long-Term Debt

 

Moody’s

S&P

 

Moody’s(a)

S&P(b)

Fitch(c)

American International Group, Inc.

P-2 (2nd of 3)

A-2 (2nd of 8)

 

Baa 1 (4th of 9)

BBB+ (4th of 9)

BBB+ (4th of 9)

 

Stable Outlook

 

 

Stable Outlook

Stable Outlook

Negative Outlook

AIG Financial Products Corp.(d)

P-2

A-2

 

Baa 1

BBB+

-

 

Stable Outlook

 

 

Stable Outlook

Stable Outlook

 

(a)Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.

(b)S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

(c)Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

(d)AIG guarantees all obligations of AIG Financial Products Corp.

These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.

We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.

In the event of a downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate such transactions early.

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The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade.

For a discussion of the effects of downgrades in our credit ratings see Note 9 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 2018 Annual Report.

FINANCIAL STRENGTH Ratings

Financial Strength ratings estimate an insurance company’s ability to pay its obligations under an insurance policy. The following table presents the ratings of our significant insurance subsidiaries as of October 29, 2019.

 

A.M. Best

S&P

Fitch

Moody’s

National Union Fire Insurance Company of Pittsburgh, Pa.

A

A+

A

A2

Lexington Insurance Company

A

A+

A

A2

American Home Assurance Company (U.S.)

A

A+

A

A2

American General Life Insurance Company

A

A+

A+

A2

The Variable Annuity Life Insurance Company

A

A+

A+

A2

United States Life Insurance Company in the City of New York

A

A+

A+

A2

AIG Europe S.A.

NR

A+

NR

A2

American International Group UK Ltd.

A

A+

NR

A2

AIG General Insurance Co. Ltd.

NR

A+

NR

NR

Validus Reinsurance, Ltd.

A

A

NR

A2

These financial strength ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances.

For a discussion of the effects of downgrades in our financial strength ratings see Note 9 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 2018 Annual Report.

Regulation and Supervision

For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources see Part I, Item 1. Business — Regulation and Part I, Item 1A. Risk Factors — Regulation in our 2018 Annual Report, and Regulatory Environment below in this Quarterly Report on Form 10-Q.

Dividends

On February 13, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 29, 2019 to shareholders of record on March 15, 2019. On May 6, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 2019 to shareholders of record on June 14, 2019. On August 7, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 30, 2019 to shareholders of record on September 17, 2019. On October 31, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 26, 2019 to shareholders of record on December 12, 2019.

On May 21, 2019, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $369.6875 per share, payable on June 17, 2019 to holders of record on May 31, 2019. On August 7, 2019, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on September 16, 2019 to holders of record on August 30, 2019. On October 31, 2019, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on December 16, 2019 to holders of record on November 29, 2019.

The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, as discussed further in Note 12 to the Condensed Consolidated Financial Statements.

Repurchases of AIG Common Stock

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of approximately $1.5 billion. As of October 31, 2019, $2.0 billion remained under the authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).

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ITEM 2 | Liquidity and Capital Resources

 

Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors, as discussed further in Note 12 to the Condensed Consolidated Financial Statements.

We did not repurchase any shares of AIG Common Stock during the nine-month period ended September 30, 2019.

Restrictions on dividends from subsidiaries

Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities.

For a discussion of restrictions on payments of dividends by our subsidiaries see Note 19 to the Consolidated Financial Statements in the 2018 Annual Report.

Enterprise Risk Management

Risk management includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing returns. We consider risk management an integral part of managing our core businesses and a key element of our approach to corporate governance.

Overview

We have an integrated process for managing risks throughout our organization in accordance with our firm-wide risk appetite. Our Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department supervises and integrates the risk management functions in each of our business units, providing senior management with a consolidated view of AIG’s major risk positions. Within each business unit, senior leaders and executives approve risk-taking policies and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management by embedding risk management in our key day-to-day business processes and in identifying, assessing, quantifying, managing, monitoring, reporting, and mitigating the risks taken by our businesses and AIG overall. Nevertheless, our risk management efforts may not always be successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition may occur.

For a further discussion of AIG’s risk management program see Part II, Item 7. MD&A ─ Enterprise Risk Management in the 2018 Annual Report.

As of September 30, 2019, there have been no material changes in our economic exposure to market risk from December 31, 2018, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2018, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K on how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

Regulatory Environment

Overview

Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance, securities, derivatives, investment advisory and thrift regulators in the United States and abroad. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years.

Our insurance subsidiaries are subject to regulation and supervision by the states and jurisdictions in which they do business. We expect that the domestic and international regulations applicable to us and our regulated entities will continue to evolve for the foreseeable future.

In addition to the information set forth in this Quarterly Report on Form 10-Q, our regulatory status is also discussed in Part I, Item 1. Business – Regulation, Part I, Item 1A. Risk Factors – Regulation and Note 19 to the Consolidated Financial Statements in the 2018 Annual Report.

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Glossary

 

Glossary

Accident year The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Accident year combined ratio, as adjusted The combined ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.

Accident year loss ratio, as adjusted The loss ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.

Acquisition ratio Acquisition costs divided by net premiums earned. Acquisition costs are those costs incurred to acquire new and renewal insurance contracts and also include the amortization of VOBA and DAC. Acquisition costs vary with sales and include, but are not limited to, commissions, premium taxes, direct marketing costs and certain costs of personnel engaged in sales support activities such as underwriting.

Additional premium represents a premium on an insurance policy over and above the initial premium imposed at the beginning of the policy. An additional premium may be assessed if the insured’s risk is found to have increased significantly.

Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes).

Assets under administration include assets under management and Retail Mutual Funds and Group Retirement mutual fund assets that we sell or administer.

Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.

Base Spread Net investment income excluding income from alternative investments and other enhancements, less interest credited excluding amortization of sales inducement assets.

Base Yield Net investment income excluding income from alternative investments and other enhancements, as a percentage of average base invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for which the fair value option has been elected.

Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and are used to show the amount of our net worth on a per-common share basis. Book value per common share, excluding AOCI, is derived by dividing total AIG common shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI and DTA (Adjusted Common Shareholders’ Equity), by total common shares outstanding.

Casualty insurance Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured, and the legal liability imposed on the insured as a result.

Combined ratio Sum of the loss ratio and the acquisition and general operating expense ratios.

CSA Credit Support Annex A legal document generally associated with an ISDA Master Agreement that provides for collateral postings which could vary depending on ratings and threshold levels.

CVA Credit Valuation Adjustment The CVA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. Also, the CVA reflects the fair value movement in AIGFP's asset portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign exchange rates. Finally, the CVA also accounts for our own credit risk in the fair value measurement of all derivative net liability positions and liabilities where AIG has elected the fair value option, when appropriate.

DAC Deferred Policy Acquisition Costs Deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business.

AIG | Third Quarter 2019 Form 10-Q 165

 

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Glossary

 

DAC Related to Unrealized Appreciation (Depreciation) of Investments An adjustment to DAC and Reserves for investment-oriented products, equal to the change in DAC and Unearned Revenue amortization that would have been recorded if fixed maturity securities available for sale and also, prior to 2018, equity securities at fair value had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. An adjustment to benefit reserves for investment-oriented products is also recognized to reflect the application of the benefit ratio to the accumulated assessments that would have been recorded if fixed maturity securities available for sale and also, prior to 2018, equity securities at fair value had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (collectively referred to as “shadow Investment-Oriented Adjustments”).

For long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves).

Deferred Gain on Retroactive Reinsurance Retroactive reinsurance is a reinsurance contract in which an assuming entity agrees to reimburse a ceding entity for liabilities incurred as a result of past insurable events. If the amount of premium paid by the ceding reinsurer is less than the related ceded loss reserves, the resulting gain is deferred and amortized over the settlement period of the reserves. Any related development on the ceded loss reserves recoverable under the contract would increase the deferred gain if unfavorable, or decrease the deferred gain if favorable.

Expense ratio Sum of acquisition expenses and general operating expenses, divided by net premiums earned.

General operating expense ratio General operating expenses divided by net premiums earned. General operating expenses are those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel costs, projects and bad debt expenses. General operating expenses exclude losses and loss adjustment expenses incurred, acquisition expenses, and investment expenses.

GIC/GIA Guaranteed Investment Contract/Guaranteed Investment Agreement A contract whereby the seller provides a guaranteed repayment of principal and a fixed or floating interest rate for a predetermined period of time.

IBNR Incurred But Not Reported Estimates of claims that have been incurred but not reported to us.

ISDA Master Agreement An agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, that generally provides for the net settlement of all or a specified group of these derivative transactions, as well as pledged collateral, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.

LAE Loss Adjustment Expenses The expenses directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster’s fees and the portion of general expenses allocated to claim settlement costs.

Loan-to-Value Ratio Principal amount of loan amount divided by appraised value of collateral securing the loan.

Loss Ratio Losses and loss adjustment expenses incurred divided by net premiums earned.

Loss reserve development The increase or decrease in incurred losses and loss adjustment expenses related to prior years as a result of the re-estimation of loss reserves at successive valuation dates for a given group of claims.

Loss reserves Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.

Master netting agreement An agreement between two counterparties who have multiple derivative contracts with each other that provides for the net settlement of all contracts covered by such agreement, as well as pledged collateral, through a single payment, in a single currency, in the event of default on or upon termination of any one such contract.

Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that exceed the $10 million threshold.

Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period.

166 AIG | Third Quarter 2019 Form 10-Q

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Glossary

 

Noncontrolling interests The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.

Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost of issuing a policy, establishing the required records, sending premium notices and other related expenses.

Pool A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each member in accordance with its pool participation percentage.

Premiums and deposits – Life and Retirement include direct and assumed amounts received on traditional life insurance policies and group benefit policies, and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, FHLB funding agreements and mutual funds.

Prior year development See Loss reserve development.

RBC Risk-Based Capital A formula designed to measure the adequacy of an insurer’s statutory surplus compared to the risks inherent in its business.

Reinstatement premiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.

Reinsurance The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.

Retroactive Reinsurance See Deferred Gain on Retroactive Reinsurance.

Return on common equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted Return on common equity) is a non-GAAP measure and is used to show the rate of return on common shareholders’ equity. Adjusted Return on common equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted Common Shareholders’ Equity.

Return premium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or an overpayment of an advance premium.

SIA Sales Inducement Asset Represents enhanced crediting rates or bonus payments to contract holders on certain annuity and investment contract products that meet the criteria to be deferred and amortized over the life of the contract.

Solvency II Legislation in the European Union which reforms the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. The Solvency II Directive (2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.

Subrogation The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party’s insurer.

Surrender charge A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or for the cancellation of the agreement.

Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement mutual fund assets under administration.

Unearned premium reserve Liabilities established by insurers and reinsurers to reflect unearned premiums, which are usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.

VOBA Value of Business Acquired Present value of projected future gross profits from in-force policies of acquired businesses.

AIG | Third Quarter 2019 Form 10-Q 167

 

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Acronyms

 

Acronyms

A&H Accident and Health Insurance

GMWB Guaranteed Minimum Withdrawal Benefits

ABS Asset-Backed Securities

ISDA International Swaps and Derivatives Association, Inc.

AUM Assets Under Management

Moody's Moody's Investors’ Service Inc.

CDO Collateralized Debt Obligations

NAIC National Association of Insurance Commissioners

CDS Credit Default Swap

NM Not Meaningful

CMA Capital Maintenance Agreement

OTC Over-the-Counter

CMBS Commercial Mortgage-Backed Securities

OTTI Other-Than-Temporary Impairment

EGPs Estimated gross profits

RMBS Residential Mortgage-Backed Securities

FASB Financial Accounting Standards Board

S&P Standard & Poor’s Financial Services LLC

FRBNY Federal Reserve Bank of New York

SEC Securities and Exchange Commission

GAAP Accounting principles generally accepted in the United States of America

URR Unearned revenue reserve

GMDB Guaranteed Minimum Death Benefits

VIE Variable Interest Entity

 

 

 

 

 

168 AIG | Third Quarter 2019 Form 10-Q

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ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk

 

ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk

Included in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – Enterprise Risk Management.

 

ITEM 4 | Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation, which excluded the impact of the acquisition of Glatfelter Insurance Group (Glatfelter), was carried out by AIG management, with the participation of AIG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2019. Based on this evaluation, AIG’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.

Changes in Internal Control Over Financial Reporting

We continue to integrate the internal controls of Glatfelter. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f)) that have occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

AIG | Third Quarter 2019 Form 10-Q 169

 

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Part II – Other Information

ITEM 1 | Legal Proceedings

For a discussion of legal proceedings see Note 11 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.

 

ITEM 1A | Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our 2018 Annual Report.

 

 

ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds

On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of $1.5 billion.

During the three-month period ended September 30, 2019, we did not repurchase any shares of AIG Common Stock or any warrants to purchase shares of AIG Common Stock under this authorization.

As of September 30, 2019, approximately $2.0 billion remained under the authorization. We did not repurchase any shares of AIG Common Stock from October 1, 2019 to October 31, 2019. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors. The repurchase of AIG Common Stock is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which AIG may not (other than in limited circumstances) purchase, redeem or otherwise acquire AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.

 

ITEM 4 | Mine Safety Disclosures

Not applicable.

 

170 AIG | Third Quarter 2019 Form 10-Q

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ITEM 6 | Exhibits

Exhibit Index

Exhibit
Number

Description

Location

31

Rule 13a-14(a)/15d-14(a) Certifications

Filed herewith.

32

Section 1350 Certifications*

Filed herewith.

101

Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018, (iii) the Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2019 and 2018, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, (v) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 and (vi) the Notes to the Condensed Consolidated Financial Statements

Filed herewith.

104

Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

Filed herewith.

*This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

AIG | Third Quarter 2019 Form 10-Q 171

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

AMERICAN INTERNATIONAL GROUP, INC.

 

(Registrant)

 

/S/ MARK D. LYONS

 

Mark D. Lyons

 

Executive Vice President and

 

Chief Financial Officer

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

/S/ JONATHAN WISMER

 

Jonathan Wismer

 

Senior Vice President

 

Deputy Chief Financial Officer and

 

Chief Accounting Officer

 

(Principal Accounting Officer)

 

 

 

Dated: November 1, 2019

172 AIG | Third Quarter 2019 Form 10-Q
American International Group, Inc

 

Exhibit 31

CERTIFICATIONS

I, Brian Duperreault, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of American International Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 1, 2019

 

 

/S/ BRIAN DUPERREAULT

 

Brian Duperreault

 

President and Chief Executive Officer

 

  

 

 

CERTIFICATIONS

I, Mark D. Lyons, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of American International Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 1, 2019

 

 

/S/ MARK D. LYONS

 

Mark D. Lyons

 

Executive Vice President and

 

Chief Financial Officer

 

 

American International Group, Inc

 

Exhibit 32

CERTIFICATION

In connection with this Quarterly Report on Form 10-Q of American International Group, Inc. (the “Company”) for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian Duperreault, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 1, 2019

 

 

/S/ BRIAN DUPERREAULT

 

Brian Duperreault

 

President and Chief Executive Officer

 

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.

 

 

CERTIFICATION

In connection with this Quarterly Report on Form 10-Q of American International Group, Inc. (the “Company”) for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark D. Lyons, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 1, 2019

 

 

 

/S/ MARK D. LYONS

 

Mark D. Lyons

 

Executive Vice President and

 

Chief Financial Officer

 

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.