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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, 2021

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 2

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.)

 

 

1271 Avenue of the Americas, New York, New York

10020

(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

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 November 1, 2021, there were 830,297,608 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, 2021

Table of Contents

FORM 10-Q

 

Item Number

Description

Page

Part I – Financial Information

 

ITEM 1

Financial Statements

2

 

Note 1.

Basis of Presentation

9

 

Note 2.

Summary of Significant Accounting Policies

12

 

Note 3.

Segment Information

14

 

Note 4.

Fair Value Measurements

17

 

Note 5.

Investments

34

 

Note 6.

Lending Activities

44

 

Note 7.

Reinsurance

48

 

Note 8.

Variable Interest Entities

51

 

Note 9.

Derivatives and Hedge Accounting

53

 

Note 10.

Insurance Liabilities

57

 

Note 11.

Contingencies, Commitments and Guarantees

61

 

Note 12.

Equity

63

 

Note 13.

Earnings Per Common Share (EPS)

69

 

Note 14.

Employee Benefits

70

 

Note 15.

Income Taxes

71

 

Note 16.

Subsequent Events

74

ITEM 2

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

75

 

Cautionary Statement Regarding Forward-Looking Information

75

 

Use of Non-GAAP Measures

78

 

Critical Accounting Estimates

80

 

Executive Summary

81

 

Consolidated Results of Operations

93

 

Business Segment Operations

99

 

Investments

134

 

Insurance Reserves

145

 

Liquidity and Capital Resources

160

 

Enterprise Risk Management

170

 

Regulatory Environment

171

 

Glossary

172

 

Acronyms

175

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

176

ITEM 4

Controls and Procedures

176

Part II – Other Information

 

ITEM 1

Legal Proceedings

177

ITEM 1A

Risk Factors

177

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

177

ITEM 4

Mine Safety Disclosures

177

ITEM 6

Exhibits

178

Signatures

179

AIG | Third Quarter 2021 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)

 

2021

 

2020

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value, net of allowance for credit losses of $66 in 2021 and $186 in 2020

 

 

 

 

(amortized cost: 2021 - $254,925; 2020 - $244,337)*

$

274,341

$

271,496

Other bond securities, at fair value (See Note 5)*

 

4,651

 

5,291

Equity securities, at fair value (See Note 5)*

 

1,035

 

1,056

Mortgage and other loans receivable, net of allowance for credit losses of $641 in 2021 and $814 in 2020*

 

45,821

 

45,562

Other invested assets (portion measured at fair value: 2021 - $10,037; 2020 - $8,422)*

 

15,977

 

19,060

Short-term investments, including restricted cash of $77 in 2021 and $180 in 2020

 

 

 

 

(portion measured at fair value: 2021 - $5,640; 2020 - $5,968)*

 

13,771

 

18,203

Total investments

 

355,596

 

360,668

 

 

 

 

 

Cash*

 

2,699

 

2,827

Accrued investment income*

 

2,312

 

2,271

Premiums and other receivables, net of allowance for credit losses and disputes of $194 in 2021 and $205 in 2020

 

13,593

 

11,333

Reinsurance assets - Fortitude Re, net of allowance for credit losses and disputes of $0 in 2021 and $0 in 2020

 

33,694

 

34,578

Reinsurance assets - other, net of allowance for credit losses and disputes of $339 in 2021 and $326 in 2020

 

41,062

 

38,963

Deferred income taxes

 

12,385

 

12,624

Deferred policy acquisition costs

 

10,607

 

9,805

Other assets, net of allowance for credit losses of $49 in 2021 and $49 in 2020, including restricted cash of $58 in 2021

 

 

 

 

and $223 in 2020 (portion measured at fair value: 2021 - $998; 2020 - $887)*

 

17,429

 

13,122

Separate account assets, at fair value

 

105,423

 

100,290

Total assets

$

594,800

$

586,481

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses, including allowance for credit losses of $14 in 2021 and $14 in 2020

$

79,274

$

77,720

Unearned premiums

 

21,245

 

18,660

Future policy benefits for life and accident and health insurance contracts

 

57,777

 

56,878

Policyholder contract deposits (portion measured at fair value: 2021 - $9,273; 2020 - $9,798)

 

156,623

 

154,470

Other policyholder funds

 

3,542

 

3,548

Fortitude Re funds withheld payable (portion measured at fair value: 2021 - $5,433; 2020 - $6,042)

 

40,888

 

43,060

Other liabilities (portion measured at fair value: 2021 - $703; 2020 - $570)*

 

32,819

 

27,122

Long-term debt (portion measured at fair value: 2021 - $1,964; 2020 - $2,097)

 

24,582

 

28,103

Debt of consolidated investment entities*

 

6,968

 

9,431

Separate account liabilities

 

105,423

 

100,290

Total liabilities

 

529,141

 

519,282

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: 2021 - 20,000 and 2020 - 20,000; liquidation preference $500

 

485

 

485

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2021 - 1,906,671,492 and

 

 

 

 

2020 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2021 - 1,070,875,441 shares; 2020 - 1,045,113,443 shares of common stock

 

(50,641)

 

(49,322)

Additional paid-in capital

 

81,327

 

81,418

Retained earnings

 

20,320

 

15,504

Accumulated other comprehensive income

 

8,606

 

13,511

Total AIG shareholders’ equity

 

64,863

 

66,362

Non-redeemable noncontrolling interests

 

796

 

837

Total equity

 

65,659

 

67,199

Total liabilities and equity

$

594,800

$

586,481

* See Note 8 for details of balances associated with variable interest entities.

See accompanying Notes to Condensed Consolidated Financial Statements.

2 AIG | Third Quarter 2021 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)

 

2021

 

 

2020

 

 

2021

 

 

2020

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

7,504

 

$

6,677

 

$

21,925

 

$

21,527

Policy fees

 

714

 

 

648

 

 

2,269

 

 

2,152

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

Net investment income - excluding Fortitude Re funds withheld assets

 

3,220

 

 

3,342

 

 

9,559

 

 

9,100

Net investment income - Fortitude Re funds withheld assets

 

495

 

 

458

 

 

1,488

 

 

574

Total net investment income

 

3,715

 

 

3,800

 

 

11,047

 

 

9,674

Net realized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) - excluding Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

assets and embedded derivative

 

679

 

 

(498)

 

 

1,331

 

 

1,430

Net realized gains (losses) on Fortitude Re funds withheld assets

 

190

 

 

32

 

 

536

 

 

128

Net realized gains (losses) on Fortitude Re funds withheld embedded

 

 

 

 

 

 

 

 

 

 

 

derivative

 

(209)

 

 

(656)

 

 

117

 

 

(1,493)

Total net realized gains (losses)

 

660

 

 

(1,122)

 

 

1,984

 

 

65

Other income

 

242

 

 

218

 

 

745

 

 

642

Total revenues

 

12,835

 

 

10,221

 

 

37,970

 

 

34,060

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

5,959

 

 

5,872

 

 

17,182

 

 

18,718

Interest credited to policyholder account balances

 

923

 

 

882

 

 

2,663

 

 

2,757

Amortization of deferred policy acquisition costs

 

1,260

 

 

707

 

 

3,479

 

 

3,323

General operating and other expenses

 

2,240

 

 

1,991

 

 

6,546

 

 

6,231

Interest expense

 

328

 

 

379

 

 

1,008

 

 

1,099

(Gain) loss on extinguishment of debt

 

51

 

 

(2)

 

 

149

 

 

15

Net (gain) loss on divestitures

 

(102)

 

 

24

 

 

(108)

 

 

8,652

Total benefits, losses and expenses

 

10,659

 

 

9,853

 

 

30,919

 

 

40,795

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

 

2,176

 

 

368

 

 

7,051

 

 

(6,735)

Income tax expense (benefit)

 

439

 

 

74

 

 

1,234

 

 

(918)

Income (loss) from continuing operations

 

1,737

 

 

294

 

 

5,817

 

 

(5,817)

Income from discontinued operations, net of income taxes

 

-

 

 

5

 

 

-

 

 

4

Net income (loss)

 

1,737

 

 

299

 

 

5,817

 

 

(5,813)

Less:

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

70

 

 

11

 

 

175

 

 

78

Net income (loss) attributable to AIG

 

1,667

 

 

288

 

 

5,642

 

 

(5,891)

Less: Dividends on preferred stock

 

7

 

 

7

 

 

22

 

 

22

Net income (loss) attributable to AIG common shareholders

$

1,660

 

$

281

 

$

5,620

 

$

(5,913)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

1.95

 

$

0.31

 

$

6.53

 

$

(6.80)

Income (loss) from discontinued operations

$

-

 

$

0.01

 

$

-

 

$

-

Net income (loss) attributable to AIG common shareholders

$

1.95

 

$

0.32

 

$

6.53

 

$

(6.80)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

1.92

 

$

0.31

 

$

6.45

 

$

(6.80)

Income (loss) from discontinued operations

$

-

 

$

0.01

 

$

-

 

$

-

Net income (loss) attributable to AIG common shareholders

$

1.92

 

$

0.32

 

$

6.45

 

$

(6.80)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

852,765,263

 

 

867,713,308

 

 

861,211,983

 

 

869,627,926

Diluted

 

864,019,494

 

 

873,130,950

 

 

871,002,018

 

 

869,627,926

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Third Quarter 2021 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)

 

 

2021

 

 

2020

 

 

2021

 

 

2020

Net income (loss)

 

$

1,737

 

$

299

 

$

5,817

 

$

(5,813)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

which allowance for credit losses was taken

 

 

12

 

 

79

 

 

49

 

 

(154)

Change in unrealized appreciation (depreciation) of all other investments

 

 

(1,510)

 

 

1,385

 

 

(4,999)

 

 

5,925

Change in foreign currency translation adjustments

 

 

(135)

 

 

352

 

 

4

 

 

206

Change in retirement plan liabilities adjustment

 

 

31

 

 

(1)

 

 

42

 

 

1

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

 

 

 

 

 

 

 

 

 

 

 

 

own credit risk

 

 

-

 

 

1

 

 

(1)

 

 

2

Other comprehensive income (loss)

 

 

(1,602)

 

 

1,816

 

 

(4,905)

 

 

5,980

Comprehensive income

 

 

135

 

 

2,115

 

 

912

 

 

167

Comprehensive income attributable to noncontrolling interests

 

 

71

 

 

18

 

 

175

 

 

62

Comprehensive income attributable to AIG

 

$

64

 

$

2,097

 

$

737

 

$

105

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4 AIG | Third Quarter 2021 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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

485

$

4,766

$

(49,634)

$

81,322

$

18,935

$

10,209

$

66,083

$

825

$

66,908

Common stock issued under stock plans

 

-

 

-

 

24

 

(19)

 

-

 

-

 

5

 

-

 

5

Purchase of common stock

 

-

 

-

 

(1,030)

 

(29)

 

-

 

-

 

(1,059)

 

-

 

(1,059)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

1,667

 

-

 

1,667

 

70

 

1,737

Dividends on preferred stock

 

-

 

-

 

-

 

-

 

(7)

 

-

 

(7)

 

-

 

(7)

Dividends on common stock

 

-

 

-

 

-

 

-

 

(269)

 

-

 

(269)

 

-

 

(269)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

-

 

(1,603)

 

(1,603)

 

1

 

(1,602)

Net decrease due to divestitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and acquisitions

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(8)

 

(8)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

1

 

1

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(98)

 

(98)

Other

 

-

 

-

 

(1)

 

53

 

(6)

 

-

 

46

 

5

 

51

Balance, end of period

$

485

$

4,766

$

(50,641)

$

81,327

$

20,320

$

8,606

$

64,863

$

796

$

65,659

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

485

$

4,766

$

(49,327)

$

81,294

$

15,847

$

9,169

$

62,234

$

584

$

62,818

Common stock issued under stock plans

 

-

 

-

 

-

 

(1)

 

-

 

-

 

(1)

 

-

 

(1)

Purchase of common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

288

 

-

 

288

 

11

 

299

Dividends on preferred stock

 

-

 

-

 

-

 

-

 

(7)

 

-

 

(7)

 

-

 

(7)

Dividends on common stock

 

-

 

-

 

-

 

-

 

(276)

 

-

 

(276)

 

-

 

(276)

Other comprehensive income

 

-

 

-

 

-

 

-

 

-

 

1,809

 

1,809

 

7

 

1,816

Net decrease due to divestitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and acquisitions

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(28)

 

(28)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(71)

 

(71)

Other

 

-

 

-

 

-

 

75

 

(14)

 

-

 

61

 

(4)

 

57

Balance, end of period

$

485

$

4,766

$

(49,327)

$

81,368

$

15,838

$

10,978

$

64,108

$

499

$

64,607

AIG | Third Quarter 2021 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

 

Equity

 

Interests

 

Equity

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

485

$

4,766

$

(49,322)

$

81,418

$

15,504

$

13,511

$

66,362

$

837

$

67,199

Common stock issued under stock plans

 

-

 

-

 

202

 

(279)

 

-

 

-

 

(77)

 

-

 

(77)

Purchase of common stock

 

-

 

-

 

(1,622)

 

(29)

 

-

 

-

 

(1,651)

 

-

 

(1,651)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

5,642

 

-

 

5,642

 

175

 

5,817

Dividends on preferred stock

 

-

 

-

 

-

 

-

 

(22)

 

-

 

(22)

 

-

 

(22)

Dividends on common stock

 

-

 

-

 

-

 

-

 

(819)

 

-

 

(819)

 

-

 

(819)

Other comprehensive loss

 

-

 

-

 

-

 

-

 

-

 

(4,905)

 

(4,905)

 

-

 

(4,905)

Net increase due to divestitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and acquisitions

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

50

 

50

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

8

 

8

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(279)

 

(279)

Other

 

-

 

-

 

101

 

217

 

15

 

-

 

333

 

5

 

338

Balance, end of period

$

485

$

4,766

$

(50,641)

$

81,327

$

20,320

$

8,606

$

64,863

$

796

$

65,659

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

485

$

4,766

$

(48,987)

$

81,345

$

23,084

$

4,982

$

65,675

$

1,752

$

67,427

Cumulative effect of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle, net of tax

 

-

 

-

 

-

 

-

 

(487)

 

-

 

(487)

 

-

 

(487)

Common stock issued under stock plans

 

-

 

-

 

167

 

(265)

 

-

 

-

 

(98)

 

-

 

(98)

Purchase of common stock

 

-

 

-

 

(500)

 

-

 

-

 

-

 

(500)

 

-

 

(500)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

(5,891)

 

-

 

(5,891)

 

78

 

(5,813)

Dividends on preferred stock

 

-

 

-

 

-

 

-

 

(22)

 

-

 

(22)

 

-

 

(22)

Dividends on common stock

 

-

 

-

 

-

 

-

 

(827)

 

-

 

(827)

 

-

 

(827)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

-

 

5,996

 

5,996

 

(16)

 

5,980

Net decrease due to divestitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and acquisitions

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1,199)

 

(1,199)

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

4

 

4

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(113)

 

(113)

Other

 

-

 

-

 

(7)

 

288

 

(19)

 

-

 

262

 

(7)

 

255

Balance, end of period

$

485

$

4,766

$

(49,327)

$

81,368

$

15,838

$

10,978

$

64,108

$

499

$

64,607

See accompanying Notes to Condensed Consolidated Financial Statements.

6 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

Nine Months Ended September 30,

(in millions)

 

2021

 

2020

Cash flows from operating activities:

 

 

 

 

Net income (loss)

$

5,817

$

(5,813)

Income from discontinued operations

 

-

 

(4)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

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

 

 

 

 

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

 

(1,141)

 

(675)

Net (gains) losses on divestitures

 

(108)

 

8,652

Losses on extinguishment of debt

 

149

 

15

Unrealized gains in earnings - net

 

(1,295)

 

(1,971)

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

 

14

 

210

Depreciation and other amortization

 

3,590

 

3,223

Impairments of assets

 

19

 

79

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

5,829

 

2,238

Premiums and other receivables and payables - net

 

(1,387)

 

2,152

Reinsurance assets and funds held under reinsurance contracts

 

(1,739)

 

(2,148)

Capitalization of deferred policy acquisition costs

 

(3,858)

 

(3,256)

Current and deferred income taxes - net

 

497

 

(1,793)

Other, net

 

(623)

 

(300)

Total adjustments

 

(53)

 

6,426

Net cash provided by operating activities

 

5,764

 

609

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

19,211

 

17,303

Other securities

 

703

 

2,256

Other invested assets

 

3,298

 

3,159

Divestitures, net

 

137

 

2,119

Maturities of fixed maturity securities available for sale

 

26,424

 

19,441

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

 

5,684

 

5,177

Purchases of:

 

 

 

 

Available for sale securities

 

(53,220)

 

(43,228)

Other securities

 

(128)

 

(562)

Other invested assets

 

(2,134)

 

(2,197)

Mortgage and other loans receivable

 

(6,156)

 

(4,072)

Net change in short-term investments

 

4,569

 

(7,368)

Other, net

 

(1,312)

 

2,751

Net cash used in investing activities

 

(2,924)

 

(5,221)

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

19,522

 

16,255

Policyholder contract withdrawals

 

(16,208)

 

(12,802)

Issuance of long-term debt

 

79

 

4,166

Issuance of debt of consolidated investment entities

 

3,458

 

1,459

Repayments of long-term debt

 

(3,451)

 

(1,207)

Repayments of debt of consolidated investment entities

 

(3,210)

 

(2,042)

Purchase of common stock

 

(1,651)

 

(500)

Dividends paid on preferred stock

 

(22)

 

(22)

Dividends paid on common stock

 

(819)

 

(827)

Other, net

 

(458)

 

425

Net cash provided by (used in) financing activities

 

(2,760)

 

4,905

Effect of exchange rate changes on cash and restricted cash

 

(40)

 

27

Net increase in cash and restricted cash

 

40

 

320

Cash and restricted cash at beginning of year

 

3,230

 

3,287

Change in cash of held for sale assets

 

(436)

 

-

Cash and restricted cash at end of period

$

2,834

$

3,607

AIG | Third Quarter 2021 Form 10-Q 7

 

TABLE OF CONTENTS

 

 

 

American International Group, Inc.

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

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

Nine Months Ended September 30,

(in millions)

 

2021

 

2020

Cash

$

2,699

$

3,191

Restricted cash included in Short-term investments*

 

77

 

214

Restricted cash included in Other assets*

 

58

 

202

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

$

2,834

$

3,607

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

781

$

829

Taxes

$

737

$

875

Non-cash investing activities:

 

 

 

 

Fixed maturity securities available for sale received in connection with pension risk transfer transactions

$

797

$

1,008

Fixed maturity securities received in connection with reinsurance transactions

$

58

$

336

Fixed maturity securities transferred in connection with reinsurance transactions

$

(734)

$

-

Non-cash financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,691

$

2,826

Fee income debited to policyholder contract deposits included in financing activities

$

(1,267)

$

(1,278)

 

 

 

 

 

* 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 2021 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 approximately 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, 2020 (the 2020 Annual Report). The condensed consolidated financial information as of December 31, 2020 included herein has been derived from the audited Consolidated Financial Statements in the 2020 Annual Report.

Certain of our foreign subsidiaries included in the Condensed Consolidated Financial Statements report on the basis of a fiscal year 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. Operating results for the nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, especially when considering the risks and uncertainties associated with COVID-19 and the impact it may have on our business, results of operations and financial condition.

We evaluated the need to recognize or disclose events that occurred subsequent to September 30, 2021 and prior to the issuance of these Condensed Consolidated Financial Statements.

Sales/disposals of ASSETS AND Businesses

Separation of Life and Retirement Business and Relationship with Blackstone Inc.

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG. On July 14, 2021, AIG and Blackstone Inc. (Blackstone) announced that they have reached a definitive agreement for Blackstone to acquire a 9.9 percent equity stake in SAFG Retirement Services, Inc. (SAFG), which is the holding company for AIG’s Life and Retirement business, for $2.2 billion in an all cash transaction, subject to adjustment if the final pro forma adjusted book value is greater or lesser than the target pro forma adjusted book value. The transaction contemplates that most of AIG’s investment operations would be transferred to SAFG or its subsidiaries as part of the separation. As part of this agreement, AIG also agreed to enter into a long-term asset management relationship with Blackstone to manage an initial $50 billion of Life and Retirement’s existing investment portfolio upon closing of the equity investment, with that amount increasing by increments of $8.5 billion per year for the next five years beginning in the fourth quarter of 2022, for an aggregate of $92.5 billion. Following the closing of the transaction, Blackstone will be entitled to designate one member of the board of directors of SAFG, which will consist of 11 directors. Pursuant to the definitive agreement, Blackstone will be required to hold its ownership interest in SAFG following the completion of the separation of the Life and Retirement business, subject to exceptions permitting Blackstone to sell 25%, 67% and 75% of its shares after the first, second and third anniversaries, respectively, of the initial public offering of SAFG (the IPO), with the transfer restrictions terminating in full on the fifth anniversary of the IPO. In the event that the IPO of SAFG is not completed prior to the second anniversary of the closing of the transaction, Blackstone will have the right to require AIG to undertake the IPO, and in the event that the IPO has not been completed prior to the third anniversary of the closing, Blackstone will have the right to exchange all or a portion of its ownership interest in SAFG for shares of AIG’s common stock on the terms set forth in the definitive agreement. These transactions closed on November 2, 2021. While we currently believe the IPO is the next step in the separation of the Life and Retirement business from AIG, no assurance can be given regarding the form that future separation transactions may take or the specific terms or timing thereof, or that a separation will in fact occur. Any separation transaction will be subject to the satisfaction of various conditions and approvals, including approval by the AIG Board of Directors, receipt of insurance and other required regulatory approvals, and satisfaction of any applicable requirements of the Securities and Exchange Commission (SEC).

AIG | Third Quarter 2021 Form 10-Q 9

 

TABLE OF CONTENTS

 

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

 

On July 14, 2021, AIG and Blackstone Real Estate Income Trust (BREIT), a long-term, perpetual capital vehicle affiliated with Blackstone, announced that they have reached a definitive agreement for BREIT to acquire AIG’s interests in a U.S. affordable housing portfolio for approximately $5.1 billion, subject to certain adjustments, in an all cash transaction. As of September 30, 2021, the assets, primarily Other invested assets (Investment real estate) and liabilities, primarily Debt of consolidated investment entities, related to the Affordable Housing portfolio, $4.3 billion and $2.7 billion, respectively, are classified as held for sale and are reported in Other assets and Other liabilities within our Condensed Consolidated Balance Sheets. This transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2021.

Sale of Certain AIG Life and Retirement Retail Mutual Funds Business

On February 8, 2021, AIG announced the execution of a definitive agreement with Touchstone Investments (Touchstone), an indirect wholly-owned subsidiary of Western & Southern Financial Group, to sell certain assets of AIG Life and Retirement’s Retail Mutual Funds business. The transaction closed on July 16, 2021 at which time we received initial proceeds, and twelve retail mutual funds managed by SunAmerica Asset Management, LLC (SAAMCo), a member of AIG Life and Retirement, with $6.8 billion in assets, were reorganized into Touchstone funds. Additional proceeds may be earned over a three-year period based on asset levels in certain reorganized funds. Six retail mutual funds managed by SAAMCo and not included in the transaction were liquidated. AIG Life and Retirement will retain its fund management platform and capabilities dedicated to its variable annuity insurance products.

Fortitude Holdings

On June 2, 2020, we completed the sale of a majority of the interests in Fortitude Group Holdings, LLC (Fortitude Holdings) to Carlyle FRL, L.P. (Carlyle FRL), an investment fund advised by an affiliate of The Carlyle Group Inc. (Carlyle), and T&D United Capital Co., Ltd. (T&D), a subsidiary of T&D Holdings, Inc., under the terms of a membership interest purchase agreement entered into on November 25, 2019 by and among AIG, Fortitude Holdings, Carlyle FRL, Carlyle, T&D and T&D Holdings, Inc. (the Majority Interest Fortitude Sale). AIG established Fortitude Reinsurance Company Ltd. (Fortitude Re), a wholly owned subsidiary of Fortitude Holdings, in 2018 in a series of reinsurance transactions related to AIG’s Run-Off operations. As of September 30, 2021, approximately $29.9 billion of reserves from AIG’s Life and Retirement Run-Off Lines and approximately $3.8 billion of reserves from AIG’s General Insurance Run-Off Lines, related to business written by multiple wholly-owned AIG subsidiaries, had been ceded to Fortitude Re under these reinsurance transactions. As of closing of the Majority Interest Fortitude Sale, these reinsurance transactions are no longer considered affiliated transactions and Fortitude Re is the reinsurer of the majority of AIG’s Run-Off operations. As these reinsurance transactions are structured as modified coinsurance and loss portfolio transfers with funds withheld, following the closing of the Majority Interest Fortitude Sale, AIG continues to reflect the invested assets, which consist mostly of available for sale securities, supporting Fortitude Re’s obligations, in AIG’s financial statements.

AIG sold a 19.9 percent ownership interest in Fortitude Holdings to TC Group Cayman Investments Holdings, L.P. (TCG), an affiliate of Carlyle, in November 2018 (the 2018 Fortitude Sale). As a result of completion of the Majority Interest Fortitude Sale, Carlyle FRL purchased from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D purchased from AIG a 25 percent ownership interest in Fortitude Holdings; AIG retained a 3.5 percent ownership interest in Fortitude Holdings and one seat on its Board of Managers. The $2.2 billion of proceeds received by AIG at closing included (i) the $1.8 billion under the Majority Interest Fortitude Sale, subject to a post-closing purchase price adjustment pursuant to which AIG would pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur through December 31, 2023, up to a maximum payment of $500 million; and (ii) a $383 million purchase price adjustment from Carlyle FRL and T&D, corresponding to their respective portions of a proposed $500 million non-pro rata distribution from Fortitude Holdings that was not received by AIG prior to the closing. Effective in the second quarter of 2021, AIG, Fortitude Holdings, Carlyle FRL, T&D and Carlyle amended the purchase agreement to finalize the post-closing purchase price adjustment for adverse reserve development. As a result of this amendment, during the nine months ended September 30, 2021, AIG recorded a $21 million benefit through Policyholder benefits and losses incurred and eliminated further net exposure to adverse development on the reserves ceded to Fortitude Re.

AIG recorded a total after-tax reduction to total AIG shareholders’ equity of $4.3 billion related to the sale of the majority interest in and deconsolidation of Fortitude Holdings in the second quarter of 2020. The impact to equity was primarily due to a $6.7 billion after-tax loss partially offset by a $2.4 billion increase in accumulated other comprehensive income (AOCI) due to the release of shadow adjustments primarily related to future policy benefits. The $6.7 billion after-tax loss was comprised of (i) a $2.7 billion loss related to the write-off of prepaid insurance assets and deferred policy acquisition costs (DAC) upon deconsolidation of Fortitude Holdings and (ii) $4.0 billion related to the loss on the sale primarily as a result of increases in Fortitude Holdings’ equity principally related to mark to market movements from the December 31, 2018 date as of which Fortitude Holdings’ equity was calculated for purposes of the purchase price determination, through the June 2, 2020 closing date.

10 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

In connection with the Majority Interest Fortitude Sale, AIG, Fortitude Holdings, and TCG agreed that, effective as of the closing, (i) AIG’s investment commitment targets under the 2018 Fortitude Sale (whereby AIG had agreed to invest certain amounts into various Carlyle strategies and to make certain minimum investment management fee payments by November 2021) were assumed by Fortitude Holdings and AIG was released therefrom, (ii) the purchase price adjustment that AIG had agreed to provide TCG in the 2018 Fortitude Sale (whereby AIG had agreed to reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that may occur through December 31, 2023, up to the value of TCG’s investment in Fortitude Holdings) has been terminated, and (iii) TCG remains obligated to pay AIG $115 million of deferred consideration upon settlement of the post-closing purchase price adjustment referred to above. This latter amount is composed of $95 million of deferred consideration contemplated as part of the 2018 Fortitude Sale, together with $19.9 million in respect of TCG’s 19.9 percent share of the unpaid portion of the $500 million non-pro rata dividend to be paid to AIG under the 2018 Fortitude Sale (TCG paid $79.6 million to AIG on May 26, 2020). In addition, the 2018 capital maintenance agreement between AIG and Fortitude Re and the letters of credit issued in support of Fortitude Re and subject to reimbursement by AIG in the event of a drawdown were terminated as of the closing of the Majority Interest Fortitude Sale. Upon closing of the Majority Interest Fortitude Sale, AIG entered into a transition services agreement with Fortitude Holdings for the provision of transition services for a period after closing, and letter of credit agreements with certain financial institutions, which issued letters of credit in support of certain General Insurance subsidiaries that have reinsurance agreements in place with Fortitude Re in the amount of $600 million. These letters of credit are subject to reimbursement by AIG in the event of a drawdown by these insurance subsidiaries.

Following closing, in the second quarter of 2020, AIG contributed $700 million of the proceeds of the Majority Interest Fortitude Sale to certain of its General Insurance subsidiaries and $135 million of the proceeds of the Majority Interest Fortitude Sale to certain of its Life and Retirement subsidiaries.

For further discussion on the sale of Fortitude Holdings see Note 7 to the Condensed Consolidated Financial Statements.

Blackboard

At the end of March 2020, Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s technology-driven subsidiary, was placed into run-off. As a result of this decision, during the three months ended March 31, 2020, AIG recognized a pre-tax loss of $210 million, primarily consisting of asset impairment charges.

Use of Estimates

The preparation of financial statements in accordance with U.S. 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);

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, for example universal life, variable and fixed annuities, and fixed indexed annuities;

reinsurance assets, including the allowance for credit losses;

goodwill impairment;

allowances for credit losses primarily on loans and available for sale fixed maturity securities;

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.

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 2021 Form 10-Q 11

 

TABLE OF CONTENTS

 

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

 

REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

During the fourth quarter of 2020, we identified certain cash flows that had been incorrectly classified in our Consolidated Statements of Cash Flows. Specifically, misclassifications were identified related to policyholder contract deposits that impacted several line items within the previously issued Consolidated Statements of Cash Flows. While these items affect the cash flows from operating and financing activities, they had no impact on the net increase (decrease) in cash and restricted cash for the previously reported periods. For the nine months ended September 30, 2020, the unrealized (gains) losses in earnings – net and Insurance reserves line items in the Condensed Consolidated Statements of Cash Flows were adjusted by $(2,043) million and $420 million, respectively. The total net cash provided by (used in) operating activities was adjusted by $(1,623) million. Additionally, the Policyholder contract deposits and Policyholder contract withdrawals line items in the Condensed Consolidated Statements of Cash Flows were adjusted by $2,241 million and $(618) million, respectively. The total net cash provided by financing activities was adjusted by $1,623 million.

In the third quarter of 2021, we identified misclassifications related to the balance sheet presentation of certain of our universal life and variable annuity products which resulted in an overstatement of Policyholder contract deposits and an understatement of Future policyholder benefits for life and accident and health insurance contracts. These balance sheet-only items had no impact to total liabilities reported, the Condensed Consolidated Statements of Income (Loss) or the Condensed Consolidated Statements of Cash Flows in any prior period. Accordingly, the Policyholder contract deposits, and Future policy benefits for life and accident and health insurance contracts included within the Condensed Consolidated Balance Sheets were decreased and increased, respectively, by $5.8 billion on December 31, 2020 to $154.5 billion and $56.9 billion, respectively.

We assessed the materiality of the misclassifications described above on prior period financial statements in accordance with SEC Staff Accounting Bulletin Number 99, Materiality, as codified in ASC 250-10, Accounting Changes and Error Corrections. We have determined that these misclassifications were not material to the financial statements of any prior annual or interim period. Accordingly, the nine-month period ended September 30, 2020 has been corrected in the comparative Condensed Consolidated Statements of Cash Flows to account for the misclassification of the policyholder contract deposits and the Condensed Consolidated Balance Sheets as of December 31, 2020 has been corrected to account for the misclassification of certain universal life and variable annuity products. Additionally, impacted prior periods will be revised within the Annual Report on Form 10-K to be filed for the period ending December 31, 2021.

DEBT CASH TENDER OFFERS

In the nine months ended September 30, 2021, we repurchased, through cash tender offers, and canceled approximately $262 million aggregate principal amount of certain notes and debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $369 million and wrote off $4 million of unamortized debt issuance costs, resulting in a total loss on extinguishment of debt of approximately $111 million.

 

2. Summary of Significant Accounting Policies

Accounting Standards Adopted During 2021

Income Tax

On December 18, 2019, the FASB issued an accounting standard that simplifies the accounting for income taxes by eliminating certain exceptions to the incremental approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendments also simplified other areas including the accounting for franchise taxes and enacted tax laws or rates and clarified the accounting for transactions that result in the step-up in the tax basis of goodwill. We adopted the standard on its effective date of January 1, 2021. The impact of adoption was not material to our consolidated financial condition, results of operations and cash flows.

Clarification of Accounting for Certain Equity Method Investments

On January 16, 2020, the FASB issued an accounting standard to clarify how a previously issued standard regarding a company’s ability to measure the fair value of certain equity securities without a readily determinable fair value should interact with equity method investments standards. The previously issued standard provides that such equity securities could be measured at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (measurement alternative). The new standard clarifies that a company should consider observable transactions that require the company to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with the equity method immediately before applying or upon discontinuing the equity method.

12 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

The standard further clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

We adopted the standard prospectively on its effective date of January 1, 2021. The adoption of the standard did not have a material impact on our consolidated financial condition, results of operations or cash flows.

 

Future Application of Accounting Standards

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 (loss).

Simplifies the amortization of 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 (loss).

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 November 2020, the FASB issued ASU 2020-11, which deferred the effective date of the standard for all entities. Our implementation efforts are underway for the standard’s revised effective date of January 1, 2023; we continue to evaluate 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.

Reference Rate Reform

On March 12, 2020, the FASB issued an accounting standard that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The standard allows us to account for certain contract modifications that result from the discontinuation of the London Inter-Bank Offered Rate (LIBOR) or another reference rate as a continuation of the existing contract without additional analysis.

Where permitted by the guidance, we would account for the modification due to the discontinuation of LIBOR or another reference rate as a continuation of the existing contract. As part of our implementation efforts, we will continue to assess our operational readiness and current and alternative reference rates’ merits, limitations, risks and suitability for our investment and insurance processes.

This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. The adoption of the standard is not expected to have a material impact on our reported consolidated financial condition, results of operations, cash flows and required disclosures.

AIG | Third Quarter 2021 Form 10-Q 13

 

TABLE OF CONTENTS

 

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

 

 

3. Segment Information

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

General Insurance

General Insurance business is presented as two operating segments:

North America – consists of insurance businesses in the United States, Canada and Bermuda, and our global reinsurance business, AIG Re. This also includes the results of Western World Insurance Group, Inc. and Glatfelter Insurance Group.

International – consists of regional insurance businesses in Japan, the United Kingdom, Europe, Middle East and Africa (EMEA region), Asia Pacific, Latin America and Caribbean, and China. International also includes the results of Talbot Holdings, Ltd. as well as AIG’s Global Specialty business.

North America and International operating segments consist of the following products:

–Commercial Lines – consists of Liability, Financial Lines, Property, Global Specialty and Crop Risk Services.

–Personal Insurance – consists of Personal Lines and Accident & 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, financial planning and advisory services, and plan administrative and compliance services.

Life Insurance – primary products in the U.S. include term life and universal life insurance. International operations primarily 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, high net worth products and guaranteed investment contracts (GICs).

For further discussion on the Life and Retirement business, see Note 1 to the Condensed Consolidated Financial Statements.

Other Operations

Other Operations primarily consists of income from assets held by AIG Parent and other corporate subsidiaries, deferred tax assets related to tax attributes, corporate expenses and intercompany eliminations, our institutional asset management business and results of our consolidated investment entities, General Insurance portfolios in run-off as well as the historical results of our legacy insurance lines ceded to Fortitude Re.

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. 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. Legal entities are attributed to each segment based upon the predominance of activity in that legal entity. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.

14 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

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

Three Months Ended September 30,

2021

 

2020

 

 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

 

Adjusted

 

Pre-tax

 

 

Adjusted

 

Pre-tax

 

(in millions)

 

Revenues

 

Income (Loss)

 

 

Revenues

 

Income (Loss)

 

General Insurance

 

 

 

 

 

 

 

 

 

 

North America

$

2,907

$

(166)

(a)

$

2,494

$

(370)

(a)

International

 

3,516

 

186

(a)

 

3,359

 

(53)

(a)

Net investment income

 

791

 

791

 

 

839

 

839

 

Total General Insurance

 

7,214

 

811

 

 

6,692

 

416

 

Life and Retirement

 

 

 

 

 

 

 

 

 

 

Individual Retirement

 

1,560

 

292

 

 

1,479

 

532

 

Group Retirement

 

832

 

316

 

 

758

 

338

 

Life Insurance

 

1,211

 

134

 

 

1,189

 

32

 

Institutional Markets

 

841

 

135

 

 

564

 

106

 

Total Life and Retirement

 

4,444

 

877

 

 

3,990

 

1,008

 

Other Operations

 

 

 

 

 

 

 

 

 

 

Other Operations before consolidation and eliminations

 

301

 

(370)

 

 

223

 

(368)

 

AIG consolidation and eliminations

 

(206)

 

(192)

 

 

(149)

 

(140)

 

Total Other Operations

 

95

 

(562)

 

 

74

 

(508)

 

Total

 

11,753

 

1,126

 

 

10,756

 

916

 

Reconciling items to pre-tax income:

 

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed living benefits

 

14

 

26

 

 

14

 

15

 

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

 

 

 

 

 

 

 

 

 

 

realized gains (losses)

 

-

 

9

 

 

-

 

78

 

Changes in the fair value of equity securities

 

(45)

 

(45)

 

 

119

 

119

 

Other income (expense) - net

 

(6)

 

-

 

 

22

 

-

 

Gain (loss) on extinguishment of debt

 

-

 

(51)

 

 

-

 

2

 

Net investment income on Fortitude Re funds withheld assets

 

495

 

495

 

 

458

 

458

 

Net realized gains on Fortitude Re funds withheld assets

 

190

 

190

 

 

32

 

32

 

Net realized losses on Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

embedded derivative

 

(209)

 

(209)

 

 

(656)

 

(656)

 

Net realized gains (losses)(b)

 

643

 

652

 

 

(524)

 

(512)

 

Income (loss) from divestitures

 

-

 

102

 

 

-

 

(24)

 

Non-operating litigation reserves and settlements

 

-

 

(3)

 

 

-

 

(1)

 

Favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

115

 

 

-

 

30

 

Net loss reserve discount benefit (charge)

 

-

 

(72)

 

 

-

 

31

 

Pension expense related to a one-time lump sum payment to former employees

 

-

 

(27)

 

 

-

 

-

 

Integration and transaction costs associated with acquiring or divesting

 

 

 

 

 

 

 

 

 

 

businesses

 

-

 

(11)

 

 

-

 

(1)

 

Restructuring and other costs

 

-

 

(104)

 

 

-

 

(100)

 

Non-recurring costs related to regulatory or accounting changes

 

-

 

(17)

 

 

-

 

(19)

 

Revenues and pre-tax income

$

12,835

$

2,176

 

$

10,221

$

368

 

AIG | Third Quarter 2021 Form 10-Q 15

 

TABLE OF CONTENTS

 

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

 

Nine Months Ended September 30,

2021

 

2020

 

 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

 

Adjusted

 

Pre-tax

 

 

Adjusted

 

Pre-tax

 

(in millions)

 

Revenues

 

Income (Loss)

 

 

Revenues

 

Income (Loss)

 

General Insurance

 

 

 

 

 

 

 

 

 

 

North America

$

7,980

$

(199)

(a)

$

7,699

$

(912)

(a)

International

 

10,524

 

755

(a)

 

9,970

 

59

(a)

Net investment income

 

2,294

 

2,294

 

 

1,945

 

1,945

 

Total General Insurance

 

20,798

 

2,850

 

 

19,614

 

1,092

 

Life and Retirement

 

 

 

 

 

 

 

 

 

 

Individual Retirement

 

4,556

 

1,441

 

 

4,178

 

1,386

 

Group Retirement

 

2,458

 

970

 

 

2,164

 

695

 

Life Insurance

 

3,839

 

114

 

 

3,608

 

112

 

Institutional Markets

 

2,617

 

417

 

 

2,987

 

311

 

Total Life and Retirement

 

13,470

 

2,942

 

 

12,937

 

2,504

 

Other Operations

 

 

 

 

 

 

 

 

 

 

Other Operations before consolidation and eliminations

 

884

 

(1,240)

 

 

1,145

 

(1,535)

 

AIG consolidation and eliminations

 

(511)

 

(462)

 

 

(255)

 

(174)

 

Total Other Operations

 

373

 

(1,702)

 

 

890

 

(1,709)

 

Total

 

34,641

 

4,090

 

 

33,441

 

1,887

 

Reconciling items to pre-tax income (loss):

 

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed living benefits

 

46

 

61

 

 

42

 

24

 

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

 

 

 

 

 

 

 

 

 

 

realized gains (losses)

 

-

 

(74)

 

 

-

 

(205)

 

Changes in the fair value of equity securities

 

(36)

 

(36)

 

 

(16)

 

(16)

 

Other income (expense) - net

 

(14)

 

-

 

 

46

 

-

 

Loss on extinguishment of debt

 

-

 

(149)

 

 

-

 

(15)

 

Net investment income on Fortitude Re funds withheld assets

 

1,488

 

1,488

 

 

574

 

574

 

Net realized gains on Fortitude Re funds withheld assets

 

536

 

536

 

 

128

 

128

 

Net realized gains (losses) on Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

embedded derivative

 

117

 

117

 

 

(1,493)

 

(1,493)

 

Net realized gains(b)

 

1,192

 

1,220

 

 

1,332

 

1,375

 

Income (loss) from divestitures

 

-

 

108

 

 

-

 

(8,652)

 

Non-operating litigation reserves and settlements

 

-

 

(3)

 

 

6

 

5

 

Favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

199

 

 

-

 

71

 

Net loss reserve discount charge

 

-

 

(62)

 

 

-

 

(41)

 

Pension expense related to a one-time lump sum payment to former employees

 

-

 

(27)

 

 

-

 

-

 

Integration and transaction costs associated with acquiring or divesting

 

 

 

 

 

 

 

 

 

 

businesses

 

-

 

(55)

 

 

-

 

(7)

 

Restructuring and other costs

 

-

 

(304)

 

 

-

 

(324)

 

Non-recurring costs related to regulatory or accounting changes

 

-

 

(58)

 

 

-

 

(46)

 

Revenues and pre-tax income (loss)

$

37,970

$

7,051

 

$

34,060

$

(6,735)

 

(a) General Insurance North America’s and General Insurance International’s Adjusted pre-tax income does not include Net investment income as the investment portfolio results are managed at the General Insurance level. Net investment income is shown separately as a component of General Insurance’s total Adjusted pre-tax income results.

(b) Includes all net realized 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 and net realized gains and losses on Fortitude Re funds withheld assets held by AIG in support of Fortitude Re’s reinsurance obligations to AIG (Fortitude Re funds withheld assets).

16 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

4. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

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

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

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

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

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

AIG | Third Quarter 2021 Form 10-Q 17

 

TABLE OF CONTENTS

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

September 30, 2021

 

 

 

 

 

 

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

$

4

$

4,452

$

-

$

-

$

-

$

4,456

Obligations of states, municipalities and political subdivisions

 

-

 

13,089

 

1,806

 

-

 

-

 

14,895

Non-U.S. governments

 

34

 

16,158

 

7

 

-

 

-

 

16,199

Corporate debt

 

-

 

174,291

 

2,646

 

-

 

-

 

176,937

RMBS

 

-

 

17,354

 

11,098

 

-

 

-

 

28,452

CMBS

 

-

 

14,287

 

1,025

 

-

 

-

 

15,312

CDO/ABS

 

-

 

8,903

 

9,187

 

-

 

-

 

18,090

Total bonds available for sale

 

38

 

248,534

 

25,769

 

-

 

-

 

274,341

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

1,761

 

-

 

-

 

-

 

1,761

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

12

 

-

 

-

 

-

 

12

RMBS

 

-

 

208

 

107

 

-

 

-

 

315

CMBS

 

-

 

238

 

36

 

-

 

-

 

274

CDO/ABS

 

-

 

104

 

2,185

 

-

 

-

 

2,289

Total other bond securities

 

-

 

2,323

 

2,328

 

-

 

-

 

4,651

Equity securities

 

1,002

 

28

 

5

 

-

 

-

 

1,035

Other invested assets(b)

 

-

 

145

 

1,906

 

-

 

-

 

2,051

Derivative assets(c):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

3,682

 

1

 

-

 

-

 

3,683

Foreign exchange contracts

 

-

 

1,347

 

1

 

-

 

-

 

1,348

Equity contracts

 

26

 

251

 

310

 

-

 

-

 

587

Commodity contracts

 

-

 

8

 

-

 

-

 

-

 

8

Credit contracts

 

-

 

-

 

2

 

-

 

-

 

2

Other contracts

 

-

 

-

 

12

 

-

 

-

 

12

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,698)

 

(2,058)

 

(4,756)

Total derivative assets

 

26

 

5,288

 

326

 

(2,698)

 

(2,058)

 

884

Short-term investments

 

3,635

 

2,005

 

-

 

-

 

-

 

5,640

Other assets

 

-

 

-

 

114

 

-

 

-

 

114

Separate account assets

 

101,533

 

3,890

 

-

 

-

 

-

 

105,423

Total

$

106,234

$

262,213

$

30,448

$

(2,698)

$

(2,058)

$

394,139

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

-

$

9,273

$

-

$

-

$

9,273

Derivative liabilities(c):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

1

 

3,889

 

-

 

-

 

-

 

3,890

Foreign exchange contracts

 

-

 

621

 

-

 

-

 

-

 

621

Equity contracts

 

4

 

52

 

3

 

-

 

-

 

59

Credit contracts

 

-

 

18

 

43

 

-

 

-

 

61

Other contracts

 

-

 

-

 

1

 

-

 

-

 

1

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,698)

 

(1,231)

 

(3,929)

Total derivative liabilities

 

5

 

4,580

 

47

 

(2,698)

 

(1,231)

 

703

Fortitude Re funds withheld payable

 

-

 

-

 

5,433

 

-

 

-

 

5,433

Other liabilities

 

-

 

-

 

-

 

-

 

-

 

-

Long-term debt

 

-

 

1,964

 

-

 

-

 

-

 

1,964

Total

$

5

$

6,544

$

14,753

$

(2,698)

$

(1,231)

$

17,373

18 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

December 31, 2020

 

 

 

 

 

 

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

$

73

$

4,053

$

-

$

-

$

-

$

4,126

Obligations of states, municipalities and political subdivisions

 

-

 

14,019

 

2,105

 

-

 

-

 

16,124

Non-U.S. governments

 

28

 

15,312

 

5

 

-

 

-

 

15,345

Corporate debt

 

-

 

166,949

 

2,349

 

-

 

-

 

169,298

RMBS

 

-

 

19,771

 

11,694

 

-

 

-

 

31,465

CMBS

 

-

 

15,211

 

922

 

-

 

-

 

16,133

CDO/ABS

 

-

 

9,191

 

9,814

 

-

 

-

 

19,005

Total bonds available for sale

 

101

 

244,506

 

26,889

 

-

 

-

 

271,496

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

1,845

 

-

 

-

 

-

 

1,845

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

12

 

-

 

-

 

-

 

12

RMBS

 

-

 

290

 

139

 

-

 

-

 

429

CMBS

 

-

 

273

 

47

 

-

 

-

 

320

CDO/ABS

 

-

 

173

 

2,512

 

-

 

-

 

2,685

Total other bond securities

 

-

 

2,593

 

2,698

 

-

 

-

 

5,291

Equity securities

 

929

 

76

 

51

 

-

 

-

 

1,056

Other invested assets(b)

 

-

 

102

 

1,827

 

-

 

-

 

1,929

Derivative assets(c):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

4,637

 

-

 

-

 

-

 

4,637

Foreign exchange contracts

 

-

 

1,020

 

2

 

-

 

-

 

1,022

Equity contracts

 

9

 

923

 

198

 

-

 

-

 

1,130

Credit contracts

 

-

 

-

 

2

 

-

 

-

 

2

Other contracts

 

-

 

-

 

14

 

-

 

-

 

14

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(3,812)

 

(2,219)

 

(6,031)

Total derivative assets

 

9

 

6,580

 

216

 

(3,812)

 

(2,219)

 

774

Short-term investments

 

2,379

 

3,589

 

-

 

-

 

-

 

5,968

Other assets

 

-

 

-

 

113

 

-

 

-

 

113

Separate account assets

 

96,560

 

3,730

 

-

 

-

 

-

 

100,290

Total

$

99,978

$

261,176

$

31,794

$

(3,812)

$

(2,219)

$

386,917

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

-

$

9,798

$

-

$

-

$

9,798

Derivative liabilities(c):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

1

 

4,435

 

-

 

-

 

-

 

4,436

Foreign exchange contracts

 

-

 

1,090

 

-

 

-

 

-

 

1,090

Equity contracts

 

14

 

162

 

47

 

-

 

-

 

223

Credit contracts

 

-

 

23

 

44

 

-

 

-

 

67

Other contracts

 

-

 

-

 

6

 

-

 

-

 

6

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(3,812)

 

(1,441)

 

(5,253)

Total derivative liabilities

 

15

 

5,710

 

97

 

(3,812)

 

(1,441)

 

569

Fortitude Re funds withheld payable

 

-

 

-

 

6,042

 

-

 

-

 

6,042

Other liabilities

 

-

 

1

 

-

 

-

 

-

 

1

Long-term debt

 

-

 

2,097

 

-

 

-

 

-

 

2,097

Total

$

15

$

7,808

$

15,937

$

(3,812)

$

(1,441)

$

18,507

(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 $8.0 billion and $6.5 billion as of September 30, 2021 and December 31, 2020, respectively.

(c) Presented as part of Other assets and Other liabilities on the Condensed Consolidated Balance Sheets.

 

AIG | Third Quarter 2021 Form 10-Q 19

 

TABLE OF CONTENTS

 

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

 

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the three- and nine-month periods ended September 30, 2021 and 2020 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, 2021 and 2020:

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

 

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

Other Comprehensive

 

 

 

 

Gains

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

 

(Losses)

 

Other

 

and

 

Gross

 

Gross

 

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

 

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

Other

of Period

 

at End of Period

 

at End of Period

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

1,939

$

6

$

(9)

$

(7)

$

-

$

(61)

$

(62)

$

1,806

$

-

$

-

Non-U.S. governments

 

10

 

-

 

-

 

-

 

-

 

(3)

 

-

 

7

 

-

 

-

Corporate debt

 

2,773

 

(1)

 

2

 

(173)

 

57

 

(12)

 

-

 

2,646

 

-

 

-

RMBS

 

11,085

 

118

 

(8)

 

(86)

 

8

 

(19)

 

-

 

11,098

 

-

 

-

CMBS

 

1,082

 

4

 

(6)

 

(13)

 

-

 

(42)

 

-

 

1,025

 

-

 

-

CDO/ABS

 

9,318

 

22

 

(41)

 

180

 

64

 

(356)

 

-

 

9,187

 

-

 

-

Total bonds available for sale

 

26,207

 

149

 

(62)

 

(99)

 

129

 

(493)

 

(62)

 

25,769

 

-

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

113

 

2

 

-

 

(8)

 

-

 

-

 

-

 

107

 

-

 

-

CMBS

 

46

 

(1)

 

-

 

(9)

 

-

 

-

 

-

 

36

 

-

 

-

CDO/ABS

 

2,279

 

40

 

-

 

(134)

 

-

 

-

 

-

 

2,185

 

-

 

-

Total other bond securities

 

2,438

 

41

 

-

 

(151)

 

-

 

-

 

-

 

2,328

 

-

 

-

Equity securities

 

4

 

-

 

1

 

(1)

 

1

 

-

 

-

 

5

 

-

 

-

Other invested assets

 

2,099

 

161

 

(3)

 

(351)

 

-

 

-

 

-

 

1,906

 

141

 

-

Other assets

 

113

 

-

 

-

 

1

 

-

 

-

 

-

 

114

 

-

 

-

Total

$

30,861

$

351

$

(64)

$

(601)

$

130

$

(493)

$

(62)

$

30,122

$

141

$

-

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

 

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

Other Comprehensive

 

 

 

 

(Gains)

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

Losses

 

Other

 

and

 

Gross

 

Gross

 

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

 

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

Other

of Period

 

at End of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

9,020

$

(26)

$

-

$

279

$

-

$

-

$

-

$

9,273

$

362

$

-

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

(1)

 

(2)

 

-

 

2

 

-

 

-

 

-

 

(1)

 

2

 

-

Foreign exchange contracts

 

(1)

 

(1)

 

-

 

1

 

-

 

-

 

-

 

(1)

 

1

 

-

Equity contracts

 

(357)

 

99

 

-

 

(50)

 

-

 

1

 

-

 

(307)

 

(90)

 

-

Credit contracts

 

43

 

-

 

-

 

(2)

 

-

 

-

 

-

 

41

 

1

 

-

Other contracts

 

(10)

 

(17)

 

-

 

16

 

-

 

-

 

-

 

(11)

 

16

 

-

Total derivative liabilities, net(a)

 

(326)

 

79

 

-

 

(33)

 

-

 

1

 

-

 

(279)

 

(70)

 

-

Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payable

 

5,317

 

209

 

-

 

(93)

 

-

 

-

 

-

 

5,433

 

414

 

-

Total

$

14,011

$

262

$

-

$

153

$

-

$

1

$

-

$

14,427

$

706

$

-

20 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

 

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

Other Comprehensive

 

 

 

 

Gains

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

 

(Losses)

 

Other

 

and

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

Divested

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

Businesses

 

of Period

 

at End of Period

 

at End of Period

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,279

$

3

$

(4)

$

(30)

$

-

$

(65)

$

-

$

2,183

$

-

$

-

Non-U.S. governments

 

5

 

-

 

1

 

-

 

1

 

-

 

-

 

7

 

-

 

-

Corporate debt

 

1,900

 

(33)

 

52

 

(25)

 

452

 

(231)

 

-

 

2,115

 

-

 

38

RMBS

 

12,678

 

192

 

301

 

(412)

 

3

 

(107)

 

-

 

12,655

 

-

 

335

CMBS

 

1,149

 

3

 

36

 

(11)

 

-

 

(196)

 

-

 

981

 

-

 

27

CDO/ABS

 

9,461

 

5

 

180

 

(174)

 

125

 

(244)

 

-

 

9,353

 

-

 

172

Total bonds available for sale

 

27,472

 

170

 

566

 

(652)

 

581

 

(843)

 

-

 

27,294

 

-

 

572

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

168

 

16

 

-

 

(16)

 

-

 

-

 

-

 

168

 

4

 

-

CMBS

 

47

 

1

 

-

 

-

 

-

 

-

 

-

 

48

 

1

 

-

CDO/ABS

 

2,531

 

124

 

-

 

(100)

 

-

 

-

 

-

 

2,555

 

34

 

-

Total other bond securities

 

2,746

 

141

 

-

 

(116)

 

-

 

-

 

-

 

2,771

 

39

 

-

Equity securities

 

43

 

-

 

2

 

1

 

7

 

(27)

 

-

 

26

 

1

 

-

Other invested assets

 

1,486

 

74

 

(2)

 

25

 

-

 

-

 

-

 

1,583

 

-

 

-

Other assets

 

111

 

-

 

-

 

2

 

-

 

-

 

(1)

 

112

 

-

 

-

Total

$

31,858

$

385

$

566

$

(740)

$

588

$

(870)

$

(1)

$

31,786

$

40

$

572

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

 

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

Other Comprehensive

 

 

 

 

(Gains)

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

 

Losses

 

Other

 

and

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

Divested

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

 

Businesses

 

of Period

 

at End of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

9,233

$

19

$

-

$

70

$

-

$

-

$

-

$

9,322

$

273

$

-

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Foreign exchange contracts

 

(1)

 

(2)

 

-

 

-

 

-

 

-

 

-

 

(3)

 

2

 

-

Equity contracts

 

(53)

 

9

 

-

 

(65)

 

(1)

 

5

 

-

 

(105)

 

-

 

-

Credit contracts

 

45

 

1

 

-

 

(2)

 

-

 

-

 

-

 

44

 

(7)

 

-

Other contracts

 

(3)

 

(19)

 

-

 

16

 

-

 

-

 

-

 

(6)

 

18

 

-

Total derivative liabilities, net(a)

 

(12)

 

(11)

 

-

 

(51)

 

(1)

 

5

 

-

 

(70)

 

13

 

-

Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payable

 

4,510

 

656

 

-

 

(30)

 

-

 

-

 

-

 

5,136

 

(256)

 

-

Total

$

13,731

$

664

$

-

$

(11)

$

(1)

$

5

$

-

$

14,388

$

30

$

-

AIG | Third Quarter 2021 Form 10-Q 21

 

TABLE OF CONTENTS

 

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

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

 

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

Other Comprehensive

 

 

 

 

Gains

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

 

(Losses)

 

Other

 

and

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

 

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

Other

of Period

 

at End of Period

 

at End of Period

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,105

$

14

$

(40)

$

(125)

$

-

$

(86)

$

(62)

$

1,806

$

-

$

225

Non-U.S. governments

 

5

 

-

 

(1)

 

1

 

5

 

(3)

 

-

 

7

 

-

 

-

Corporate debt

 

2,349

 

12

 

9

 

35

 

452

 

(211)

 

-

 

2,646

 

-

 

(106)

RMBS

 

11,694

 

435

 

17

 

(977)

 

8

 

(79)

 

-

 

11,098

 

-

 

934

CMBS

 

922

 

20

 

(39)

 

245

 

56

 

(179)

 

-

 

1,025

 

-

 

(45)

CDO/ABS

 

9,814

 

37

 

(11)

 

(358)

 

902

 

(1,197)

 

-

 

9,187

 

-

 

425

Total bonds available for sale

 

26,889

 

518

 

(65)

 

(1,179)

 

1,423

 

(1,755)

 

(62)

 

25,769

 

-

 

1,433

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

139

 

6

 

-

 

(38)

 

-

 

-

 

-

 

107

 

(86)

 

-

CMBS

 

47

 

(2)

 

-

 

(15)

 

6

 

-

 

-

 

36

 

2

 

-

CDO/ABS

 

2,512

 

74

 

-

 

(401)

 

-

 

-

 

-

 

2,185

 

235

 

-

Total other bond securities

 

2,698

 

78

 

-

 

(454)

 

6

 

-

 

-

 

2,328

 

151

 

-

Equity securities

 

51

 

11

 

1

 

(124)

 

77

 

(11)

 

-

 

5

 

3

 

-

Other invested assets

 

1,827

 

417

 

(10)

 

(328)

 

-

 

-

 

-

 

1,906

 

386

 

-

Other assets

 

113

 

-

 

-

 

1

 

-

 

-

 

-

 

114

 

-

 

-

Total

$

31,578

$

1,024

$

(74)

$

(2,084)

$

1,506

$

(1,766)

$

(62)

$

30,122

$

540

$

1,433

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

 

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

Other Comprehensive

 

 

 

 

(Gains)

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

 

Losses

 

Other

 

and

 

Gross

 

Gross

 

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

 

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

Other

 

of Period

 

at End of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

9,798

$

(923)

$

-

$

398

$

-

$

-

$

-

$

9,273

$

1,914

$

-

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

(4)

 

-

 

3

 

-

 

-

 

-

 

(1)

 

4

 

-

Foreign exchange contracts

 

(2)

 

-

 

-

 

1

 

-

 

-

 

-

 

(1)

 

-

 

-

Equity contracts

 

(151)

 

2

 

-

 

(204)

 

-

 

46

 

-

 

(307)

 

(58)

 

-

Credit contracts

 

42

 

7

 

-

 

(8)

 

-

 

-

 

-

 

41

 

2

 

-

Other contracts

 

(8)

 

(50)

 

-

 

47

 

-

 

-

 

-

 

(11)

 

50

 

-

Total derivative liabilities, net(a)

 

(119)

 

(45)

 

-

 

(161)

 

-

 

46

 

-

 

(279)

 

(2)

 

-

Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payable

 

6,042

 

(117)

 

-

 

(492)

 

-

 

-

 

-

 

5,433

 

1,917

 

-

Total

$

15,721

$

(1,085)

$

-

$

(255)

$

-

$

46

$

-

$

14,427

$

3,829

$

-

22 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

Other Comprehensive

 

 

 

 

Gains

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

 

(Losses)

 

Other

 

and

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

Divested

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

Businesses

 

of Period

 

at End of Period

 

at End of Period

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,121

$

8

$

195

$

127

$

27

$

(295)

$

-

$

2,183

$

-

$

193

Non-U.S. governments

 

-

 

-

 

1

 

5

 

7

 

(6)

 

-

 

7

 

-

 

-

Corporate debt

 

1,663

 

(101)

 

43

 

95

 

1,074

 

(659)

 

-

 

2,115

 

-

 

59

RMBS

 

13,408

 

532

 

(375)

 

(806)

 

29

 

(133)

 

-

 

12,655

 

-

 

(213)

CMBS

 

1,053

 

14

 

70

 

17

 

23

 

(196)

 

-

 

981

 

-

 

66

CDO/ABS

 

7,686

 

25

 

55

 

(19)

 

2,062

 

(456)

 

-

 

9,353

 

-

 

38

Total bonds available for sale

 

25,931

 

478

 

(11)

 

(581)

 

3,222

 

(1,745)

 

-

 

27,294

 

-

 

143

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

143

 

16

 

-

 

9

 

-

 

-

 

-

 

168

 

3

 

-

CMBS

 

50

 

-

 

-

 

(2)

 

-

 

-

 

-

 

48

 

(1)

 

-

CDO/ABS

 

3,545

 

225

 

-

 

(1,215)

 

-

 

-

 

-

 

2,555

 

25

 

-

Total other bond securities

 

3,738

 

241

 

-

 

(1,208)

 

-

 

-

 

-

 

2,771

 

27

 

-

Equity securities

 

8

 

(1)

 

3

 

11

 

33

 

(28)

 

-

 

26

 

1

 

-

Other invested assets

 

1,192

 

11

 

(2)

 

232

 

150

 

-

 

-

 

1,583

 

(13)

 

-

Other assets

 

89

 

-

 

-

 

61

 

-

 

-

 

(38)

 

112

 

-

 

-

Total

$

30,958

$

729

$

(10)

$

(1,485)

$

3,405

$

(1,773)

$

(38)

$

31,786

$

15

$

143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains

 

 

 

 

and

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Changes in

(Losses) Included in

 

 

 

 

Unrealized

 

 

 

Sales,

 

 

 

 

 

 

 

 

 

Unrealized Gains

Other Comprehensive

 

 

 

 

(Gains)

 

 

 

Issuances

 

 

 

 

 

 

 

 

 

(Losses) Included

 

Income (Loss) for

 

 

Fair Value

 

Losses

 

Other

 

and

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

Recurring Level 3

 

 

Beginning

 

Included

Comprehensive

Settlements,

Transfers

Transfers

 

Divested

 

End

 

Instruments Held

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Net

 

In

 

Out

Businesses

 

of Period

 

at End of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

6,910

$

2,250

$

-

$

162

$

-

$

-

$

-

$

9,322

$

(1,436)

$

-

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

(1)

 

-

 

1

 

-

 

-

 

-

 

-

 

1

 

-

Foreign exchange contracts

 

(6)

 

2

 

-

 

1

 

-

 

-

 

-

 

(3)

 

2

 

-

Equity contracts

 

(151)

 

19

 

-

 

23

 

(1)

 

5

 

-

 

(105)

 

(62)

 

-

Credit contracts

 

62

 

(59)

 

-

 

41

 

-

 

-

 

-

 

44

 

8

 

-

Other contracts

 

(7)

 

(46)

 

-

 

47

 

-

 

-

 

-

 

(6)

 

45

 

-

Total derivative liabilities, net(a)

 

(102)

 

(85)

 

-

 

113

 

(1)

 

5

 

-

 

(70)

 

(6)

 

-

Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payable

 

-

 

1,493

 

-

 

(30)

 

-

 

-

 

3,673

 

5,136

 

(919)

 

-

Total

$

6,808

$

3,658

$

-

$

245

$

(1)

$

5

$

3,673

$

14,388

$

(2,361)

$

-

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

 

AIG | Third Quarter 2021 Form 10-Q 23

 

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. 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 (Loss) as follows:

 

 

Net

 

 

 

 

 

 

 

 

Investment

 

Net Realized

 

Other

 

 

(in millions)

 

Income

Gains (Losses)

 

Income

 

Total

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

155

$

(6)

$

-

$

149

Other bond securities

 

41

 

-

 

-

 

41

Equity securities

 

-

 

-

 

-

 

-

Other invested assets

 

165

 

(4)

 

-

 

161

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

177

$

(7)

$

-

$

170

Other bond securities

 

143

 

(2)

 

-

 

141

Equity securities

 

-

 

-

 

-

 

-

Other invested assets

 

74

 

-

 

-

 

74

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

503

$

15

$

-

$

518

Other bond securities

 

78

 

-

 

-

 

78

Equity securities

 

11

 

-

 

-

 

11

Other invested assets

 

406

 

11

 

-

 

417

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale

$

557

$

(79)

$

-

$

478

Other bond securities

 

(25)

 

266

 

-

 

241

Equity securities

 

-

 

(1)

 

-

 

(1)

Other invested assets

 

11

 

-

 

-

 

11

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

Investment

 

Net Realized

 

Other

 

 

(in millions)

 

Income

(Gains) Losses

 

Income

 

Total

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits*

$

-

$

(26)

$

-

$

(26)

Derivative liabilities, net

 

-

 

93

 

(14)

 

79

Fortitude Re funds withheld payable

 

-

 

209

 

-

 

209

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits*

$

-

$

19

$

-

$

19

Derivative liabilities, net

 

-

 

5

 

(16)

 

(11)

Fortitude Re funds withheld payable

 

-

 

656

 

-

 

656

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits*

$

-

$

(923)

$

-

$

(923)

Derivative liabilities, net

 

-

 

(2)

 

(43)

 

(45)

Fortitude Re funds withheld payable

 

-

 

(117)

 

-

 

(117)

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits*

$

-

$

2,250

$

-

$

2,250

Derivative liabilities, net

 

-

 

(41)

 

(44)

 

(85)

Fortitude Re funds withheld payable

 

-

 

1,493

 

-

 

1,493

 

*Primarily embedded derivatives.

24 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. 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, 2021 and 2020 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, 2021

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

40

$

(16)

$

(31)

$

(7)

Non-U.S. governments

 

-

 

-

 

-

 

-

Corporate debt

 

23

 

(61)

 

(135)

 

(173)

RMBS

 

704

 

(164)

 

(626)

 

(86)

CMBS

 

7

 

(3)

 

(17)

 

(13)

CDO/ABS

 

849

 

-

 

(669)

 

180

Total bonds available for sale

 

1,623

 

(244)

 

(1,478)

 

(99)

Other bond securities:

 

 

 

 

 

 

 

 

RMBS

 

-

 

(2)

 

(6)

 

(8)

CMBS

 

-

 

(9)

 

-

 

(9)

CDO/ABS

 

-

 

-

 

(134)

 

(134)

Total other bond securities

 

-

 

(11)

 

(140)

 

(151)

Equity securities

 

-

 

-

 

(1)

 

(1)

Other invested assets

 

32

 

-

 

(383)

 

(351)

Other assets

 

-

 

-

 

1

 

1

Total

$

1,655

$

(255)

$

(2,001)

$

(601)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

214

$

65

$

279

Derivative liabilities, net

 

(75)

 

2

 

40

 

(33)

Fortitude Re funds withheld payable

 

-

 

-

 

(93)

 

(93)

Total

$

(75)

$

216

$

12

$

153

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

34

$

(18)

$

(46)

$

(30)

Non-U.S. governments

 

-

 

-

 

-

 

-

Corporate debt

 

23

 

(2)

 

(46)

 

(25)

RMBS

 

182

 

-

 

(594)

 

(412)

CMBS

 

2

 

(10)

 

(3)

 

(11)

CDO/ABS

 

234

 

(78)

 

(330)

 

(174)

Total bonds available for sale

 

475

 

(108)

 

(1,019)

 

(652)

Other bond securities:

 

 

 

 

 

 

 

 

RMBS

 

-

 

-

 

(16)

 

(16)

CMBS

 

-

 

-

 

-

 

-

CDO/ABS

 

-

 

-

 

(100)

 

(100)

Total other bond securities

 

-

 

-

 

(116)

 

(116)

Equity securities

 

1

 

-

 

-

 

1

Other invested assets

 

25

 

-

 

-

 

25

Other assets

 

-

 

-

 

2

 

2

Total

$

501

$

(108)

$

(1,133)

$

(740)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

170

$

(100)

$

70

Derivative liabilities, net

 

(19)

 

-

 

(32)

 

(51)

Fortitude Re funds withheld payable

 

-

 

-

 

(30)

 

(30)

Total

$

(19)

$

170

$

(162)

$

(11)

AIG | Third Quarter 2021 Form 10-Q 25

 

TABLE OF CONTENTS

 

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

 

 

 

 

 

 

 

Issuances

 

Purchases, Sales,

 

 

 

 

 

 

and

 

Issuances and

(in millions)

 

Purchases

 

Sales

 

Settlements(a)

 

Settlements, Net(a)

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

51

$

(59)

$

(117)

$

(125)

Non-U.S. governments

 

1

 

-

 

-

 

1

Corporate debt

 

976

 

(94)

 

(847)

 

35

RMBS

 

1,186

 

(279)

 

(1,884)

 

(977)

CMBS

 

297

 

(3)

 

(49)

 

245

CDO/ABS

 

2,005

 

70

 

(2,433)

 

(358)

Total bonds available for sale

 

4,516

 

(365)

 

(5,330)

 

(1,179)

Other bond securities:

 

 

 

 

 

 

 

 

RMBS

 

1

 

(11)

 

(28)

 

(38)

CMBS

 

-

 

(15)

 

-

 

(15)

CDO/ABS

 

-

 

(39)

 

(362)

 

(401)

Total other bond securities

 

1

 

(65)

 

(390)

 

(454)

Equity securities

 

-

 

(3)

 

(121)

 

(124)

Other invested assets

 

424

 

-

 

(752)

 

(328)

Other assets

 

-

 

-

 

1

 

1

Total

$

4,941

$

(433)

$

(6,592)

$

(2,084)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

607

$

(209)

$

398

Derivative liabilities, net

 

(198)

 

4

 

33

 

(161)

Fortitude Re funds withheld payable

 

-

 

-

 

(492)

 

(492)

Total

$

(198)

$

611

$

(668)

$

(255)

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

201

$

(20)

$

(54)

$

127

Non-U.S. governments

 

5

 

-

 

-

 

5

Corporate debt

 

256

 

(7)

 

(154)

 

95

RMBS

 

883

 

-

 

(1,689)

 

(806)

CMBS

 

56

 

(17)

 

(22)

 

17

CDO/ABS

 

715

 

(103)

 

(631)

 

(19)

Total bonds available for sale

 

2,116

 

(147)

 

(2,550)

 

(581)

Other bond securities:

 

 

 

 

 

 

 

 

RMBS

 

37

 

-

 

(28)

 

9

CMBS

 

-

 

-

 

(2)

 

(2)

CDO/ABS

 

35

 

(579)

 

(671)

 

(1,215)

Total other bond securities

 

72

 

(579)

 

(701)

 

(1,208)

Equity securities

 

11

 

-

 

-

 

11

Other invested assets

 

277

 

-

 

(45)

 

232

Other assets

 

55

 

-

 

6

 

61

Total

$

2,531

$

(726)

$

(3,290)

$

(1,485)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

514

$

(352)

$

162

Derivative liabilities, net

 

(43)

 

8

 

148

 

113

Fortitude Re funds withheld payable

 

-

 

-

 

(30)

 

(30)

Total

$

(43)

$

522

$

(234)

$

245

 

(a)There were no issuances during the three- and nine-month periods ended September 30, 2021 and 2020.

 

26 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. 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, 2021 and 2020 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

The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table above excludes $1 million and $28 million of net gains (losses) related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2021, respectively, and includes $10 million and $7 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, 2021, respectively.

The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table above excludes $(79) million and $(207) million of net gains (losses) related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2020, respectively, and includes $18 million and $(13) 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, 2020, respectively.

Transfers of Level 3 Assets

During the three- and nine-month periods ended September 30, 2021 and 2020, 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, 2021 and 2020, 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 corporate debt, RMBS, CMBS, CDO/ABS and certain investments in municipal securities 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, 2021 and 2020.

AIG | Third Quarter 2021 Form 10-Q 27

 

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

2021

Technique

Unobservable Input(b)

(Weighted Average)(c)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

and political subdivisions

$

1,548

Discounted cash flow

Yield

2.83% - 3.46% (3.15%)

 

 

 

 

 

 

Corporate debt

 

1,607

Discounted cash flow

Yield

2.31% - 6.97% (4.64%)

 

 

 

 

 

 

RMBS(a)

 

10,058

Discounted cash flow

Constant prepayment rate

4.95% - 17.76% (11.36%)

 

 

 

 

Loss severity

28.09% - 73.42% (50.76%)

 

 

 

 

Constant default rate

1.31% - 6.11% (3.71%)

 

 

 

 

Yield

1.51% - 3.93% (2.72%)

 

 

 

 

 

 

CDO/ABS(a)

 

8,306

Discounted cash flow

Yield

1.51% - 4.50% (3.01%)

 

 

 

 

 

 

CMBS

 

550

Discounted cash flow

Yield

1.37% - 5.52% (3.33%)

Liabilities(d):

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

Variable annuity guaranteed minimum withdrawal benefits (GMWB)

 

2,551

Discounted cash flow

Equity volatility

6.45% - 51.15%

 

 

 

 

Base lapse rate

0.16% - 12.60%

 

 

 

 

Dynamic lapse multiplier

50.00% - 143.00%

 

 

 

 

Mortality multiplier(e)

38.00% - 147.00%

 

 

 

 

Utilization

90.00% - 100.00%

 

 

 

 

Equity / interest rate correlation

20.00% - 40.00%

 

 

 

 

NPA(f)

0.07% - 1.37%

 

 

 

 

 

 

Index annuities including certain GMWB

 

5,973

Discounted cash flow

Base lapse rate

0.38% - 50.00%

 

 

 

 

Dynamic lapse multiplier

19.00% - 178.00%

 

 

 

 

Mortality multiplier(e)

24.00% - 180.00%

 

 

 

 

Utilization(g)

80.00% - 95.00%

 

 

 

 

Option budget

0.00% - 4.00%

 

 

 

 

NPA(f)

0.07% - 1.37%

 

 

 

 

 

 

Indexed life

 

701

Discounted cash flow

Base lapse rate

0.00% - 37.97%

 

 

 

 

Mortality rate

0.00% - 100.00%

 

 

 

 

NPA(f)

0.07% - 1.37%

28 AIG | Third Quarter 2021 Form 10-Q

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

 

 

 

Fair Value at

 

 

 

 

 

December 31,

Valuation

 

Range

(in millions)

 

2020

Technique

Unobservable Input(b)

(Weighted Average)(c)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

and political subdivisions

$

1,670

Discounted cash flow

Yield

2.82% - 3.39% (3.11%)

 

 

 

 

 

 

Corporate debt

 

1,591

Discounted cash flow

Yield

2.13% - 7.82% (4.97%)

 

 

 

 

 

 

RMBS(a)

 

11,297

Discounted cash flow

Constant prepayment rate

3.90% - 11.99% (7.94%)

 

 

 

 

Loss severity

30.08% - 78.49% (54.29%)

 

 

 

 

Constant default rate

1.45% - 6.19% (3.82%)

 

 

 

 

Yield

1.69% - 4.25% (2.97%)

 

 

 

 

 

 

CDO/ABS(a)

 

8,324

Discounted cash flow

Yield

1.93% - 4.85% (3.39%)

 

 

 

 

 

 

CMBS

 

541

Discounted cash flow

Yield

0.92% - 5.89% (3.40%)

Liabilities(d):

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

GMWB

 

3,572

Discounted cash flow

Equity volatility

6.45% - 50.85%

 

 

 

 

Base lapse rate

0.16% - 12.60%

 

 

 

 

Dynamic lapse multiplier

50.00% - 143.00%

 

 

 

 

Mortality multiplier(e)

38.00% - 147.00%

 

 

 

 

Utilization

90.00% - 100.00%

 

 

 

 

Equity / interest rate correlation

20.00% - 40.00%

 

 

 

 

NPA(f)

0.06% - 1.48%

 

 

 

 

 

 

Index annuities including certain

 

 

 

 

 

GMWB

 

5,538

Discounted cash flow

Base lapse rate

0.38% - 50.00%

 

 

 

 

Dynamic lapse multiplier

19.00% - 178.00%

 

 

 

 

Mortality multiplier(e)

24.00% - 180.00%

 

 

 

 

Utilization(g)

80.00% - 100.00%

 

 

 

 

Option budget

0.00% - 4.00%

 

 

 

 

NPA(f)

0.06% - 1.48%

 

 

 

 

 

 

Indexed life

 

649

Discounted cash flow

Base lapse rate

0.00% - 37.97%

 

 

 

 

Mortality rate

0.00% - 100.00%

 

 

 

 

NPA(f)

0.06% - 1.48%

(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) The weighted averaging for fixed maturity securities is based on the estimated fair value of the securities. Because the valuation methodology for embedded derivatives within Policyholder contract deposits uses a range of inputs that vary at the contract level over the cash flow projection period, management believes that presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.

(d) The Fortitude Re funds withheld payable has been excluded from the above table. As discussed in Note 7, the Fortitude Re funds withheld payable is created through modified coinsurance (modco) and funds withheld reinsurance arrangements where the investments supporting the reinsurance agreements are withheld by, and continue to reside on AIG’s balance sheet. This embedded derivative is valued as a total return swap with reference to the fair value of the invested assets held by AIG. Accordingly, the unobservable inputs utilized in the valuation of the embedded derivative are a component of the invested assets supporting the reinsurance agreements that are held on AIG’s balance sheet.

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

(f) The non-performance risk adjustment (NPA) applied as a spread over risk-free curve for discounting.

(g) The partial withdrawal utilization unobservable input range shown applies only to policies with guaranteed minimum withdrawal benefit riders that are accounted for as an embedded derivative. The total embedded derivative liability at September 30, 2021 and December 31, 2020 was approximately $1.0 billion and $726 million, respectively. The remaining guaranteed minimum riders on the index annuities are valued under the accounting guidance for certain nontraditional long-duration contracts.

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

AIG | Third Quarter 2021 Form 10-Q 29

 

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

 

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.

Interrelationships between 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 significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. 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.

Fixed Maturity Securities

The significant unobservable input used in the fair value measurement of fixed maturity securities is yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. The yield may be affected by other factors including constant prepayment rates, loss severity, and constant default rates. In general, increases in the yield would decrease the fair value of investments, and conversely, decreases in the yield would increase the fair value of investments.

Embedded derivatives within Policyholder contract deposits

Embedded derivatives reported within Policyholder contract deposits include interest crediting rates based on market indices within index annuities, indexed life, and GICs as well as GMWB within variable annuity and certain index annuity products. 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.

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 and other factors, 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.

Non-performance or “own credit” risk adjustment used in the GAAP valuation of embedded derivatives, which reflects a market participant’s view of our claims-paying ability by incorporating a different spread (the NPA spread) to the curve used to discount projected benefit cash flows. 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 offered by variable and certain fixed index annuities.

30 AIG | Third Quarter 2021 Form 10-Q

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

 

Embedded derivatives within reinsurance contracts

The fair value of embedded derivatives associated with funds withheld reinsurance contracts is determined based upon a total return swap technique with reference to the fair value of the investments held by AIG related to AIG’s funds withheld payable. The fair value of the underlying assets is generally based on market observable inputs using industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy.

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, 2021

 

December 31, 2020

 

 

 

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

$

2,517

$

1,670

 

$

1,752

$

1,960

 

 

 

 

 

 

 

 

 

 

 

Real assets

Investments in real estate properties, agricultural and infrastructure assets, including power plants and other energy producing assets

 

1,020

 

528

 

 

908

 

445

 

 

 

 

 

 

 

 

 

 

 

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

 

257

 

200

 

 

167

 

171

 

 

 

 

 

 

 

 

 

 

 

Growth equity

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

 

913

 

128

 

 

703

 

55

 

 

 

 

 

 

 

 

 

 

 

Mezzanine

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

 

526

 

357

 

 

400

 

155

 

 

 

 

 

 

 

 

 

 

 

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

 

923

 

431

 

 

683

 

365

Total private equity funds

 

6,156

 

3,314

 

 

4,613

 

3,151

Hedge funds:

 

 

 

 

 

 

 

 

 

 

Event-driven

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

 

412

 

-

 

 

411

 

-

 

 

 

 

 

 

 

 

 

 

 

Long-short

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

 

383

 

-

 

 

361

 

-

 

 

 

 

 

 

 

 

 

 

 

Macro

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

 

680

 

-

 

 

807

 

-

 

 

 

 

 

 

 

 

 

 

 

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

 

355

 

-

 

 

301

 

1

Total hedge funds

 

 

1,830

 

-

 

 

1,880

 

1

Total

 

$

7,986

$

3,314

 

$

6,493

$

3,152

 

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

 

The hedge fund investments included above, which are carried at fair value, are generally redeemable subject to the redemption notices period. The majority of our hedge fund investments are redeemable monthly or quarterly.

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)

 

2021

 

2020

 

2021

 

2020

Assets:

 

 

 

 

 

 

 

 

Bond and equity securities

$

35

$

171

$

32

$

485

Alternative investments(a)

 

403

 

407

 

1,248

 

242

Liabilities:

 

 

 

 

 

 

 

 

Long-term debt(b)

 

6

 

18

 

39

 

(203)

Total gain

$

444

$

596

$

1,319

$

524

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

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

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 value and the aggregate contractual principal amount of long-term debt for which the fair value option was elected:

 

September 30, 2021

 

December 31, 2020

 

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

(in millions)

Fair Value

Principal Amount

Difference

 

Fair Value

Principal Amount

Difference

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt*

$

1,964

$

1,365

$

599

 

$

2,097

$

1,479

$

618

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

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

 

 

2021

 

2020

 

 

2021

 

2020

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

89

$

89

 

$

-

$

12

 

$

6

$

60

Other assets

 

-

 

-

 

-

 

-

 

 

13

 

2

 

 

13

 

14

Total

$

-

$

-

$

89

$

89

 

$

13

$

14

 

$

19

$

74

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

376

$

376

 

 

 

 

 

 

 

 

 

 

Other assets

 

-

 

-

 

28

 

28

 

 

 

 

 

 

 

 

 

 

Total

$

-

$

-

$

404

$

404

 

 

 

 

 

 

 

 

 

 

32 AIG | Third Quarter 2021 Form 10-Q

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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, 2021

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

87

$

47,880

$

47,967

$

45,821

Other invested assets

 

-

 

810

 

6

 

816

 

816

Short-term investments

 

-

 

8,131

 

-

 

8,131

 

8,131

Cash

 

2,699

 

-

 

-

 

2,699

 

2,699

Other assets

 

47

 

11

 

-

 

58

 

58

Liabilities:

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

181

 

146,110

 

146,291

 

133,395

Fortitude Re funds withheld payable

 

-

 

-

 

35,455

 

35,455

 

35,455

Other liabilities

 

-

 

3,702

 

-

 

3,702

 

3,702

Long-term debt

 

-

 

25,851

 

345

 

26,196

 

22,618

Debt of consolidated investment entities

 

-

 

2,655

 

4,476

 

7,131

 

6,968

Separate account liabilities - investment contracts

 

-

 

100,515

 

-

 

100,515

 

100,515

December 31, 2020

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

95

$

48,541

$

48,636

$

45,562

Other invested assets

 

-

 

837

 

6

 

843

 

843

Short-term investments

 

-

 

12,235

 

-

 

12,235

 

12,235

Cash

 

2,827

 

-

 

-

 

2,827

 

2,827

Other assets

 

209

 

14

 

-

 

223

 

223

Liabilities:

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

214

 

144,357

 

144,571

 

130,435

Fortitude Re funds withheld payable

 

-

 

-

 

37,018

 

37,018

 

37,018

Other liabilities

 

-

 

3,695

 

-

 

3,695

 

3,695

Long-term debt

 

-

 

30,310

 

365

 

30,675

 

26,006

Debt of consolidated investment entities

 

-

 

1,746

 

7,965

 

9,711

 

9,431

Separate account liabilities - investment contracts

 

-

 

95,610

 

-

 

95,610

 

95,610

 

AIG | Third Quarter 2021 Form 10-Q 33

 

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

 

 

5. Investments

 

Securities Available for Sale

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

 

 

 

 

Allowance

 

Gross

 

Gross

 

 

 

 

Amortized

 

for Credit

 

Unrealized

 

Unrealized

 

Fair

(in millions)

 

Cost

 

Losses(a)

 

Gains

 

Losses

 

Value

September 30, 2021

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

4,169

$

-

$

304

$

(17)

$

4,456

Obligations of states, municipalities and political subdivisions

 

13,084

 

-

 

1,826

 

(15)

 

14,895

Non-U.S. governments

 

15,677

 

(3)

 

753

 

(228)

 

16,199

Corporate debt

 

163,614

 

(55)

 

14,665

 

(1,287)

 

176,937

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

25,965

 

(8)

 

2,612

 

(117)

 

28,452

CMBS

 

14,630

 

-

 

727

 

(45)

 

15,312

CDO/ABS

 

17,786

 

-

 

360

 

(56)

 

18,090

Total mortgage-backed, asset-backed and collateralized

 

58,381

 

(8)

 

3,699

 

(218)

 

61,854

Total bonds available for sale(b)

$

254,925

$

(66)

$

21,247

$

(1,765)

$

274,341

December 31, 2020

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

3,640

$

-

$

503

$

(17)

$

4,126

Obligations of states, municipalities and political subdivisions

 

13,915

 

-

 

2,216

 

(7)

 

16,124

Non-U.S. governments

 

14,231

 

(4)

 

1,181

 

(63)

 

15,345

Corporate debt

 

150,111

 

(164)

 

19,905

 

(554)

 

169,298

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

28,551

 

(16)

 

3,000

 

(70)

 

31,465

CMBS

 

15,182

 

(1)

 

1,023

 

(71)

 

16,133

CDO/ABS

 

18,707

 

(1)

 

425

 

(126)

 

19,005

Total mortgage-backed, asset-backed and collateralized

 

62,440

 

(18)

 

4,448

 

(267)

 

66,603

Total bonds available for sale(b)

$

244,337

$

(186)

$

28,253

$

(908)

$

271,496

(a) Represents the allowance for credit losses that has been recognized. Changes in the allowance for credit losses are recorded through Net realized gains (losses) and are not recognized in Other comprehensive income (loss).

(b) At September 30, 2021 and December 31, 2020, bonds available for sale held by us that were below investment grade or not rated totaled $27.5 billion and $28.2 billion, respectively.

 

34 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

Securities Available for Sale in a Loss Position for Which No Allowance for Credit Loss Has Been Recorded

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 for which no allowance for credit loss has been recorded:

 

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1,340

$

10

 

$

287

$

7

 

$

1,627

$

17

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

702

 

11

 

 

84

 

4

 

 

786

 

15

Non-U.S. governments

 

4,250

 

123

 

 

604

 

100

 

 

4,854

 

223

Corporate debt

 

30,283

 

915

 

 

5,058

 

317

 

 

35,341

 

1,232

RMBS

 

5,605

 

74

 

 

1,041

 

37

 

 

6,646

 

111

CMBS

 

1,739

 

29

 

 

294

 

16

 

 

2,033

 

45

CDO/ABS

 

4,501

 

35

 

 

834

 

21

 

 

5,335

 

56

Total bonds available for sale

$

48,420

$

1,197

 

$

8,202

$

502

 

$

56,622

$

1,699

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

649

$

17

 

$

-

$

-

 

$

649

$

17

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

267

 

4

 

 

78

 

3

 

 

345

 

7

Non-U.S. governments

 

1,287

 

28

 

 

262

 

33

 

 

1,549

 

61

Corporate debt

 

11,715

 

348

 

 

1,283

 

81

 

 

12,998

 

429

RMBS

 

3,486

 

40

 

 

282

 

18

 

 

3,768

 

58

CMBS

 

1,644

 

58

 

 

346

 

12

 

 

1,990

 

70

CDO/ABS

 

5,456

 

81

 

 

3,063

 

45

 

 

8,519

 

126

Total bonds available for sale

$

24,504

$

576

 

$

5,314

$

192

 

$

29,818

$

768

 

At September 30, 2021 we held 11,524 individual fixed maturity securities that were in an unrealized loss position and for which no allowance for credit losses has been recorded (including 1,591 individual fixed maturity securities that were in a continuous unrealized loss position for 12 months or more). At December 31, 2020, we held 5,105 individual fixed maturity securities that were in an unrealized loss position and for which no allowance for credit losses has been recorded (including 949 individual fixed maturity securities that 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, 2021 because it was determined that such losses were due to non-credit factors. Additionally, 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, liquidity position, expected defaults, industry and sector analysis, forecasts and available market data.

AIG | Third Quarter 2021 Form 10-Q 35

 

TABLE OF CONTENTS

 

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

 

Available for Sale

 

 

Amortized Cost,

 

 

(in millions)

 

Net of Allowance

 

Fair Value

September 30, 2021

 

 

 

 

Due in one year or less

$

7,788

$

7,853

Due after one year through five years

 

44,190

 

45,730

Due after five years through ten years

 

46,916

 

49,930

Due after ten years

 

97,592

 

108,974

Mortgage-backed, asset-backed and collateralized

 

58,373

 

61,854

Total

$

254,859

$

274,341

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,

 

 

2021

 

2020

 

2021

 

2020

 

 

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

$

348

$

123

$

258

$

83

$

1,098

$

349

$

1,179

$

641

For the three- and nine-month periods ended September 30, 2021, the aggregate fair value of available for sale securities sold was $13.1 billion and $19.1 billion, respectively, which resulted in net realized gains of $225 million and $749 million, respectively. Included within the net realized gains are $159 million and $549 million of net realized gains for the three- and nine-month periods ended September 30, 2021, respectively, which relate to Fortitude Re funds withheld assets. These net realized gains are included in Net realized gains (losses) on Fortitude Re funds withheld assets.

For the three- and nine-month periods ended September 30, 2020, the aggregate fair value of available for sale securities sold was $3.1 billion and $17.0 billion, respectively, which resulted in net realized gains of $175 million and $538 million, respectively. Included within the net realized gains (losses) are $147 million and $269 million of net realized gains for the three- and nine-month periods ended September 30, 2020, respectively, which relate to the Fortitude Re funds withheld assets for the period after deconsolidation of Fortitude Re. These net realized gains are included in Net realized gains (losses) on Fortitude Re funds withheld assets.

36 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

 

Other Securities Measured at Fair Value

The following table presents the fair value of fixed maturity securities measured at fair value based on our election of the fair value option, which are reported in the other bond securities caption in the financial statements, and equity securities measured at fair value:

 

 

September 30, 2021

 

 

 

December 31, 2020

 

 

 

Fair

Percent

 

 

 

Fair

Percent

 

(in millions)

 

Value

of Total

 

 

 

Value

of Total

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1,761

31

%

 

$

1,845

29

%

Corporate debt

 

12

-

 

 

 

12

-

 

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

RMBS

 

315

6

 

 

 

429

7

 

CMBS

 

274

5

 

 

 

320

5

 

CDO/ABS and other collateralized

 

2,289

40

 

 

 

2,685

42

 

Total mortgage-backed, asset-backed and collateralized

 

2,878

51

 

 

 

3,434

54

 

Total fixed maturity securities

 

4,651

82

 

 

 

5,291

83

 

Equity securities

 

1,035

18

 

 

 

1,056

17

 

Total

$

5,686

100

%

 

$

6,347

100

%

Other Invested Assets

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

 

 

September 30,

 

December 31,

(in millions)

 

2021

 

2020

Alternative investments(a) (b)

$

10,708

$

9,572

Investment real estate(c)

 

3,492

 

7,930

All other investments(d)

 

1,777

 

1,558

Total

$

15,977

$

19,060

 

(a) At September 30, 2021, included hedge funds of $2.0 billion and private equity funds of $8.7 billion. At December 31, 2020, included hedge funds of $2.3 billion, private equity funds of $7.0 billion and unconsolidated affordable housing partnerships of $257 million.

 

(b) At September 30, 2021, approximately 58 percent of our hedge fund portfolio is available for redemption in 2021. The remaining 42 percent will be available for redemption between 2022 and 2027.

 

(c) Represents values net of accumulated depreciation. At September 30, 2021 and December 31, 2020, the accumulated depreciation was $701 million and $756 million, respectively, excluding depreciation related to our affordable housing portfolio.

(d) Includes AIG’s 3.5 percent ownership interest in Fortitude Holdings which is recorded using the measurement alternative for equity securities and is carried at cost, which was $100 million as of September 30, 2021 and December 31, 2020.

Net Investment Income

The following table presents the components of Net investment income:

Three Months Ended September 30,

2021

 

2020

 

Excluding Fortitude

Fortitude Re

 

 

 

Excluding Fortitude

Fortitude Re

 

 

 

Re Funds

Funds Withheld

 

 

 

Re Funds

Funds Withheld

 

(in millions)

Withheld Assets

Assets

Total

 

Withheld Assets

Assets

Total

Available for sale fixed maturity securities,

 

 

 

 

 

 

 

 

 

 

 

 

 

including short-term investments

$

2,173

$

374

$

2,547

 

$

2,209

$

373

$

2,582

Other fixed maturity securities(a)

 

32

 

3

 

35

 

 

164

 

7

 

171

Equity securities

 

(45)

 

-

 

(45)

 

 

119

 

-

 

119

Interest on mortgage and other loans

 

435

 

50

 

485

 

 

443

 

46

 

489

Alternative investments(b)

 

616

 

77

 

693

 

 

455

 

40

 

495

Real estate

 

99

 

-

 

99

 

 

22

 

-

 

22

Other investments(c)

 

41

 

1

 

42

 

 

55

 

-

 

55

Total investment income

 

3,351

 

505

 

3,856

 

 

3,467

 

466

 

3,933

Investment expenses

 

131

 

10

 

141

 

 

125

 

8

 

133

Net investment income

$

3,220

$

495

$

3,715

 

$

3,342

$

458

$

3,800

AIG | Third Quarter 2021 Form 10-Q 37

 

TABLE OF CONTENTS

 

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

 

Nine Months Ended September 30,

2021

 

2020

 

Excluding Fortitude

Fortitude Re

 

 

 

Excluding Fortitude

Fortitude Re

 

 

 

Re Funds

Funds Withheld

 

 

 

Re Funds

Funds Withheld

 

(in millions)

Withheld Assets

Assets

Total

 

Withheld Assets

Assets

Total

Available for sale fixed maturity securities,

 

 

 

 

 

 

 

 

 

 

 

 

 

including short-term investments

$

6,481

$

1,112

$

7,593

 

$

7,320

$

459

$

7,779

Other fixed maturity securities(a)

 

23

 

9

 

32

 

 

475

 

10

 

485

Equity securities

 

(36)

 

-

 

(36)

 

 

(16)

 

-

 

(16)

Interest on mortgage and other loans

 

1,295

 

154

 

1,449

 

 

1,441

 

59

 

1,500

Alternative investments(b)

 

1,767

 

238

 

2,005

 

 

309

 

54

 

363

Real estate

 

215

 

-

 

215

 

 

142

 

-

 

142

Other investments(c)

 

162

 

3

 

165

 

 

(159)

 

-

 

(159)

Total investment income

 

9,907

 

1,516

 

11,423

 

 

9,512

 

582

 

10,094

Investment expenses

 

348

 

28

 

376

 

 

412

 

8

 

420

Net investment income

$

9,559

$

1,488

$

11,047

 

$

9,100

$

574

$

9,674

 

(a) Included in the three- and nine-month periods ended September 30, 2021 were losses of $3 million and $49 million, respectively, related to fixed maturity securities measured at fair value that economically hedge liabilities described in (c) below. Included in the three- and nine-month periods ended September 30, 2020 were income of $8 million and $206 million, respectively, related to fixed maturity securities measured at fair value that economically hedge liabilities described in (c) below.

(b) Included 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.

(c) Included in the three- and nine-month periods ended September 30, 2021 were income of $9 million and $52 million, respectively, related to liabilities measured at fair value that are economically hedged with fixed maturity securities as described in (a) above. Included in the three- and nine-month periods ended September 30, 2020 were income of $21 million and losses of $195 million, respectively, related to liabilities measured at fair value that are economically hedged with fixed maturity securities as described in (a) above.

Net Realized Gains and Losses

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

Three Months Ended September 30,

2021

 

2020

 

Excluding

Fortitude Re

 

 

 

Excluding

Fortitude Re

 

 

 

Fortitude Re

 

Funds

 

 

 

Fortitude Re

 

Funds

 

 

 

Funds

Withheld

 

 

 

Funds

Withheld

 

 

(in millions)

Withheld Assets

Assets

 

Total

 

Withheld Assets

 

Assets

 

Total

Sales of fixed maturity securities

$

66

$

159

$

225

 

$

28

$

147

$

175

Intent to sell

 

-

 

-

 

-

 

 

-

 

-

 

-

Change in allowance for credit losses on fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

3

 

1

 

4

 

 

(77)

 

(4)

 

(81)

Change in allowance for credit losses on loans

 

22

 

3

 

25

 

 

(13)

 

2

 

(11)

Foreign exchange transactions

 

(127)

 

(9)

 

(136)

 

 

250

 

7

 

257

Variable annuity embedded derivatives, net of related

 

 

 

 

 

 

 

 

 

 

 

 

 

hedges

 

(39)

 

-

 

(39)

 

 

(148)

 

-

 

(148)

All other derivatives and hedge accounting

 

317

 

(15)

 

302

 

 

(626)

 

(120)

 

(746)

Other*

 

437

 

51

 

488

 

 

88

 

-

 

88

Net realized gains (losses) – excluding Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

679

 

190

 

869

 

 

(498)

 

32

 

(466)

Net realized losses on Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

-

 

(209)

 

(209)

 

 

-

 

(656)

 

(656)

Net realized gains (losses)

$

679

$

(19)

$

660

 

$

(498)

$

(624)

$

(1,122)

38 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

Nine Months Ended September 30,

2021

 

2020

 

Excluding

Fortitude Re

 

 

 

Excluding

Fortitude Re

 

 

 

Fortitude Re

 

Funds

 

 

 

Fortitude Re

 

Funds

 

 

 

Funds

Withheld

 

 

 

Funds

Withheld

 

 

(in millions)

Withheld Assets

Assets

 

Total

 

Withheld Assets

 

Assets

 

Total

Sales of fixed maturity securities

$

200

$

549

$

749

 

$

269

$

269

$

538

Intent to sell

 

-

 

-

 

-

 

 

(3)

 

-

 

(3)

Change in allowance for credit losses on fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

64

 

7

 

71

 

 

(299)

 

(11)

 

(310)

Change in allowance for credit losses on loans

 

130

 

6

 

136

 

 

(73)

 

6

 

(67)

Foreign exchange transactions

 

(37)

 

(6)

 

(43)

 

 

40

 

10

 

50

Variable annuity embedded derivatives, net of related

 

 

 

 

 

 

 

 

 

 

 

 

 

hedges

 

(3)

 

-

 

(3)

 

 

1,034

 

-

 

1,034

All other derivatives and hedge accounting

 

332

 

(72)

 

260

 

 

365

 

(146)

 

219

Other*

 

645

 

52

 

697

 

 

97

 

-

 

97

Net realized gains – excluding Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

1,331

 

536

 

1,867

 

 

1,430

 

128

 

1,558

Net realized gains (losses) on Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

-

 

117

 

117

 

 

-

 

(1,493)

 

(1,493)

Net realized gains (losses)

$

1,331

$

653

$

1,984

 

$

1,430

$

(1,365)

$

65

*In the three- and nine-month periods ended September 30, 2021, primarily includes gains from sale of global real estate investments of $292 million and $341 million, respectively, and gains from affordable housing partnerships of $80 million and $210 million, respectively.

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)

 

2021

 

2020

 

 

2021

 

2020

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

 

 

 

 

 

 

 

 

 

Fixed maturity securities

$

(2,065)

$

2,373

 

$

(7,863)

$

5,875

Other investments

 

-

 

1

 

 

(5)

 

1

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

$

(2,065)

$

2,374

 

$

(7,868)

$

5,876

The following table summarizes the unrealized gains and losses recognized in Net investment income during the reporting period on equity securities and other investments still held at the reporting date:

Three Months Ended September 30,

2021

 

2020

 

 

 

 

Other

 

 

 

 

 

 

Other

 

 

 

 

 

Invested

 

 

 

 

 

Invested

 

 

(in millions)

 

Equities

 

Assets

 

Total

 

 

Equities

 

Assets

 

Total

Net gains (losses) recognized during the period on equity securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

other investments

$

(45)

$

471

$

426

 

$

119

$

464

$

583

Less: Net gains (losses) recognized during the period on equity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities and other investment sold during the period

 

8

 

23

 

31

 

 

(3)

 

(5)

 

(8)

Unrealized gains (losses) recognized during the reporting period

 

 

 

 

 

 

 

 

 

 

 

 

 

on equity securities and other investments still held at the reporting date

$

(53)

$

448

$

395

 

$

122

$

469

$

591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2021

 

2020

 

 

 

 

Other

 

 

 

 

 

 

Other

 

 

 

 

 

Invested

 

 

 

 

 

Invested

 

 

(in millions)

 

Equities

 

Assets

 

Total

 

 

Equities

 

Assets

 

Total

Net gains (losses) recognized during the period on equity securities and

 

 

 

 

 

 

 

 

 

 

 

 

 

other investments

$

(36)

$

1,484

$

1,448

 

$

(16)

$

264

$

248

Less: Net gains (losses) recognized during the period on equity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities and other investment sold during the period

 

(192)

 

38

 

(154)

 

 

14

 

10

 

24

Unrealized gains (losses) recognized during the reporting period

 

 

 

 

 

 

 

 

 

 

 

 

 

on equity securities and other investments still held at the reporting date

$

156

$

1,446

$

1,602

 

$

(30)

$

254

$

224

AIG | Third Quarter 2021 Form 10-Q 39

 

TABLE OF CONTENTS

 

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

 

 

Evaluating Investments for AN ALLOWANCE FOR CREDIT LOSSES

Fixed Maturity Securities

If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and if the fair value of the security is below amortized cost, an impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to Net realized gains (losses). No allowance is established in these situations and any previously recorded allowance is reversed. The new cost basis is not adjusted for subsequent increases in estimated fair value. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing.

For fixed maturity securities for which a decline in the fair value below the amortized cost is due to credit related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to Net realized gains (losses). The allowance for credit losses is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit related factors is presented in unrealized appreciation (depreciation) of fixed maturity securities on which an allowance for credit losses was previously recognized (a separate component of AOCI). Accrued interest is excluded from the measurement of the allowance for credit losses.

When estimating future cash flows for structured fixed maturity securities (e.g., RMBS, CMBS, CDO, ABS) management considers the historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and the priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by asset class:

Current delinquency rates;

Expected default rates and the timing of such defaults;

Loss severity and the timing of any recovery; and

Expected prepayment speeds.

When estimating future cash flows for corporate, municipal and sovereign fixed maturity securities determined to be credit impaired, management considers:

Expected default rates and the timing of such defaults;

Loss severity and the timing of any recovery; and

Scenarios specific to the issuer and the security, which may also include estimates of outcomes of corporate restructurings, political and macroeconomic factors, stability and financial strength of the issuer, the value of any secondary sources of repayment and the disposition of assets.

We consider severe price declines in our assessment of potential credit impairments. We may also modify our model inputs when we determine that price movements in certain sectors are indicative of factors not captured by the cash flow models.

Under the current expected credit loss (CECL) model, credit losses are reassessed each period. The allowance for credit losses and the corresponding charge to Net realized gains (losses) can be reversed if conditions change, however, the allowance for credit losses will never be reduced below zero. When we determine that all or a portion of a fixed maturity security is uncollectable, the uncollectable amortized cost amount is written off with a corresponding reduction to the allowance for credit losses. If we collect cash flows that were previously written off, the recovery is recognized by recording a gain in Net realized gains (losses).

40 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

Credit Impairments

The following table presents a rollforward of the changes in allowance for credit losses on available for sale fixed maturity securities by major investment category:

Three Months Ended September 30,

2021

 

2020

 

 

 

 

Non-

 

 

 

 

 

 

Non-

 

 

(in millions)

Structured

Structured

 

Total

 

Structured

Structured

 

Total

Balance, beginning of period

$

10

$

87

$

97

 

$

37

$

161

$

198

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities for which allowance for credit losses were not

 

 

 

 

 

 

 

 

 

 

 

 

 

previously recorded

 

-

 

20

 

20

 

 

1

 

30

 

31

Purchases of available for sale debt securities accounted for

 

 

 

 

 

 

 

 

 

 

 

 

 

as purchased credit deteriorated assets

 

-

 

-

 

-

 

 

-

 

-

 

-

Accretion of available for sale debt securities accounted for

 

 

 

 

 

 

 

 

 

 

 

 

 

as purchased credit deteriorated assets

 

-

 

-

 

-

 

 

-

 

-

 

-

Reductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold during the period

 

-

 

(21)

 

(21)

 

 

(2)

 

(5)

 

(7)

Addition to (release of) the allowance for credit losses on

 

 

 

 

 

 

 

 

 

 

 

 

 

securities that had an allowance recorded in a previous

 

 

 

 

 

 

 

 

 

 

 

 

 

period, for which there was no intent to sell before

 

 

 

 

 

 

 

 

 

 

 

 

 

recovery of amortized cost basis

 

(3)

 

(21)

 

(24)

 

 

(10)

 

67

 

57

Write-offs charged against the allowance

 

-

 

(6)

 

(6)

 

 

-

 

(43)

 

(43)

Balance, end of period

$

7

$

59

$

66

 

$

26

$

210

$

236

Nine Months Ended September 30,

2021

 

2020

 

 

 

 

Non-

 

 

 

 

 

 

Non-

 

 

(in millions)

Structured

Structured

 

Total

 

Structured

Structured

 

Total

Balance, beginning of period*

$

17

$

169

$

186

 

$

7

$

-

$

7

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities for which allowance for credit losses were not

 

 

 

 

 

 

 

 

 

 

 

 

 

previously recorded

 

8

 

48

 

56

 

 

36

 

294

 

330

Purchases of available for sale debt securities accounted for

 

 

 

 

 

 

 

 

 

 

 

 

 

as purchased credit deteriorated assets

 

-

 

-

 

-

 

 

26

 

-

 

26

Accretion of available for sale debt securities accounted for

 

 

 

 

 

 

 

 

 

 

 

 

 

as purchased credit deteriorated assets

 

-

 

-

 

-

 

 

1

 

-

 

1

Reductions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities sold during the period

 

(3)

 

(28)

 

(31)

 

 

(3)

 

(10)

 

(13)

Addition to (release of) the allowance for credit losses on

 

 

 

 

 

 

 

 

 

 

 

 

 

securities that had an allowance recorded in a previous

 

 

 

 

 

 

 

 

 

 

 

 

 

period, for which there was no intent to sell before

 

 

 

 

 

 

 

 

 

 

 

 

 

recovery of amortized cost basis

 

(15)

 

(112)

 

(127)

 

 

(41)

 

34

 

(7)

Write-offs charged against the allowance

 

-

 

(18)

 

(18)

 

 

-

 

(108)

 

(108)

Balance, end of period

$

7

$

59

$

66

 

$

26

$

210

$

236

* The beginning balance incorporates the Day 1 gross up on purchased credit deteriorated (PCD) assets held as of January 1, 2020. 

AIG | Third Quarter 2021 Form 10-Q 41

 

TABLE OF CONTENTS

 

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

 

Purchased Credit Deteriorated Securities

We purchase certain RMBS securities that have experienced more-than-insignificant deterioration in credit quality since origination. These are referred to as PCD assets. At the time of purchase an allowance is recognized for these PCD assets by adding it to the purchase price to arrive at the initial amortized cost. There is no credit loss expense recognized upon acquisition of a PCD asset. When determining the initial allowance for credit losses, management considers the historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and the priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs:

• Current delinquency rates;

• Expected default rates and the timing of such defaults;

• Loss severity and the timing of any recovery; and

• Expected prepayment speeds.

 

Subsequent to the acquisition date, the PCD assets follow the same accounting as other structured securities that are not high credit quality.

We did not purchase securities with more than insignificant credit deterioration since their origination during the nine-month period ended September 30, 2021.

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, 2021

 

December 31, 2020

Fixed maturity securities available for sale

$

3,546

$

3,636

 

At both September 30, 2021 and December 31, 2020, amounts borrowed under repurchase and securities lending agreements totaled $3.7 billion.

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

39

$

-

$

-

$

-

$

-

$

39

Corporate debt

 

147

 

78

 

8

 

-

 

3

 

236

Total

$

186

$

78

$

8

$

-

$

3

$

275

 

 

 

 

 

 

 

 

 

 

 

 

 

42 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

63

$

-

$

-

$

-

$

-

$

63

Corporate debt

 

96

 

97

 

-

 

-

 

-

 

193

Total

$

159

$

97

$

-

$

-

$

-

$

256

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

-

$

93

$

-

$

-

$

93

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

495

 

2,492

 

191

 

-

 

3,178

Total

$

-

$

495

$

2,585

$

191

$

-

$

3,271

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

-

$

103

$

-

$

-

$

103

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

982

 

2,295

 

-

 

-

 

3,277

Total

$

-

$

982

$

2,398

$

-

$

-

$

3,380

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, 2021

 

December 31, 2020

Securities collateral pledged to us

$

977

$

5,359

 

At September 30, 2021 and December 31, 2020, the carrying value of reverse repurchase agreements totaled $1.0 billion and $5.4 billion, respectively.

We do not currently offset any secured financing transactions. All such transactions are collateralized and margined on a daily basis 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 contracts, was $11.6 billion and $11.2 billion at September 30, 2021 and December 31, 2020, 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 $210 million and $191 million of stock in FHLBs at September 30, 2021 and December 31, 2020, 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 $5.3 billion and $0.9 billion, respectively, at September 30, 2021 and $5.7 billion and $1.2 billion, respectively, at December 31, 2020.

AIG | Third Quarter 2021 Form 10-Q 43

 

TABLE OF CONTENTS

 

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

 

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 $1.4 billion and $1.5 billion, at September 30, 2021 and December 31, 2020, respectively. 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 $582 million and $494 million, comprised of bonds available for sale and short-term investments at September 30, 2021 and December 31, 2020, respectively.

Reinsurance transactions between AIG and Fortitude Re were structured as modco and loss portfolio transfer arrangements with funds withheld. Following closing of the Majority Interest Fortitude Sale, a portion of the proceeds were contributed to AIG subsidiaries.

For further discussion on the sale of Fortitude Holdings see Note 1 and Note 7 to the Condensed Consolidated Financial Statements.

 

6. Lending Activities

 

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

 

September 30,

 

December 31,

(in millions)

 

2021

 

2020

Commercial mortgages(a)

$

35,980

$

36,424

Residential mortgages

 

4,808

 

4,645

Life insurance policy loans

 

1,876

 

1,986

Commercial loans, other loans and notes receivable

 

3,798

 

3,321

Total mortgage and other loans receivable

 

46,462

 

46,376

Allowance for credit losses(b)

 

(641)

 

(814)

Mortgage and other loans receivable, net

$

45,821

$

45,562

(a)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 10 percent, respectively, at September 30, 2021 and 24 percent and 10 percent, respectively, at December 31, 2020).

 

(b)Does not include allowance for credit losses of $83 million and $79 million, respectively, at September 30, 2021 and December 31, 2020, in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.

 

Interest income is not accrued when payment of contractual principal and interest is not expected. Any cash received on impaired loans is generally recorded as a reduction of the current carrying amount of the loan. Accrual of interest income is generally resumed when delinquent contractual principal and interest is repaid or when a portion of the delinquent contractual payments are made and the ongoing required contractual payments have been made for an appropriate period. As of September 30, 2021, $8 million and $251 million of residential mortgage loans and commercial mortgage loans, respectively, were placed on nonaccrual status. As of December 31, 2020, $14 million and $238 million of residential mortgage loans and commercial mortgage loans, respectively, were placed on nonaccrual status.

Accrued interest is presented separately and is included in Other assets on the Condensed Consolidated Balance Sheets. As of September 30, 2021, accrued interest receivable was $11 million and $131 million associated with residential mortgage loans and commercial mortgage loans, respectively. As of December 31, 2020, accrued interest receivable was $14 million and $129 million associated with residential mortgage loans and commercial mortgage loans, respectively.

A significant majority of commercial mortgages in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.

Nonperforming loans are generally those loans where payment of contractual principal or interest is more than 90 days past due. Nonperforming loans were not significant for any of the periods presented.

44 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

Credit Quality of Commercial Mortgages

The following table presents debt service coverage ratios(a) for commercial mortgages by year of vintage:

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2021

 

2020

 

2019

 

2018

 

2017

 

Prior

 

Total

>1.2X

$

1,466

$

1,827

$

5,082

$

4,592

$

3,709

$

12,977

$

29,653

1.00 - 1.20X

 

526

 

868

 

752

 

667

 

181

 

1,219

 

4,213

<1.00X

 

1

 

27

 

-

 

957

 

88

 

1,041

 

2,114

Total commercial mortgages

$

1,993

$

2,722

$

5,834

$

6,216

$

3,978

$

15,237

$

35,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Total

>1.2X

$

1,914

$

5,596

$

5,649

$

3,941

$

4,592

$

10,730

$

32,422

1.00 - 1.20X

 

770

 

467

 

456

 

144

 

161

 

1,106

 

3,104

<1.00X

 

4

 

86

 

343

 

87

 

96

 

282

 

898

Total commercial mortgages

$

2,688

$

6,149

$

6,448

$

4,172

$

4,849

$

12,118

$

36,424

The following table presents loan-to-value ratios(b) for commercial mortgages by year of vintage:

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2021

 

2020

 

2019

 

2018

 

2017

 

Prior

 

Total

Less than 65%

$

1,304

$

2,365

$

3,484

$

4,232

$

2,641

$

10,780

$

24,806

65% to 75%

 

355

 

331

 

2,331

 

1,984

 

1,010

 

3,346

 

9,357

76% to 80%

 

-

 

-

 

19

 

-

 

153

 

531

 

703

Greater than 80%

 

334

 

26

 

-

 

-

 

174

 

580

 

1,114

Total commercial mortgages

$

1,993

$

2,722

$

5,834

$

6,216

$

3,978

$

15,237

$

35,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Total

Less than 65%

$

2,382

$

3,755

$

3,855

$

2,565

$

2,852

$

8,145

$

23,554

65% to 75%

 

274

 

2,330

 

2,363

 

1,306

 

1,200

 

2,551

 

10,024

76% to 80%

 

28

 

45

 

30

 

-

 

70

 

515

 

688

Greater than 80%

 

4

 

19

 

200

 

301

 

727

 

907

 

2,158

Total commercial mortgages

$

2,688

$

6,149

$

6,448

$

4,172

$

4,849

$

12,118

$

36,424

(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 2.0X at September 30, 2021 and 2.2X at December 31, 2020. The debt service coverage ratios have been updated within the last 12 months. The debt service coverage ratios are updated when additional relevant information becomes available.

 

 

(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 58 percent at September 30, 2021 and was 60 percent at December 31, 2020. The loan-to-value ratios have been updated within the last three to nine months.

 

AIG | Third Quarter 2021 Form 10-Q 45

 

TABLE OF CONTENTS

 

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

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

646

 

$

14,084

$

10,405

$

4,872

$

3,774

$

1,932

$

451

$

35,518

99

%

Restructured(a)

9

 

 

-

 

141

 

49

 

-

 

136

 

-

 

326

1

 

90 days or less delinquent

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

5

 

 

-

 

81

 

55

 

-

 

-

 

-

 

136

-

 

Total(b)

660

 

$

14,084

$

10,627

$

4,976

$

3,774

$

2,068

$

451

$

35,980

100

%

Allowance for credit losses

 

 

$

104

$

262

$

114

$

42

$

29

$

6

$

557

2

%

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

688

 

$

13,969

$

10,506

$

5,144

$

3,766

$

2,064

$

460

$

35,909

99

%

Restructured(a)

5

 

 

-

 

52

 

50

 

-

 

4

 

-

 

106

-

 

90 days or less delinquent

3

 

 

-

 

87

 

-

 

-

 

114

 

-

 

201

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

4

 

 

-

 

67

 

55

 

-

 

86

 

-

 

208

1

 

Total(b)

700

 

$

13,969

$

10,712

$

5,249

$

3,766

$

2,268

$

460

$

36,424

100

%

Allowance for credit losses

 

 

$

145

$

267

$

145

$

53

$

65

$

10

$

685

2

%

(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 2020 Annual Report.

(b) Does not reflect allowance for credit losses.

The following table presents credit quality performance indicators for residential mortgages by year of vintage:

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2021

 

2020

 

2019

 

2018

 

2017

 

Prior

 

Total

FICO*:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

780 and greater

$

1,066

$

752

$

355

$

133

$

227

$

570

$

3,103

720 - 779

 

830

 

255

 

102

 

51

 

69

 

177

 

1,484

660 - 719

 

29

 

44

 

25

 

13

 

21

 

55

 

187

600 - 659

 

-

 

1

 

2

 

3

 

2

 

13

 

21

Less than 600

 

-

 

-

 

1

 

1

 

2

 

9

 

13

Total residential mortgages

$

1,925

$

1,052

$

485

$

201

$

321

$

824

$

4,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Total

FICO*:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

780 and greater

$

522

$

619

$

283

$

469

$

539

$

484

$

2,916

720 - 779

 

478

 

349

 

103

 

155

 

180

 

156

 

1,421

660 - 719

 

19

 

61

 

28

 

42

 

51

 

58

 

259

600 - 659

 

1

 

5

 

6

 

7

 

4

 

12

 

35

Less than 600

 

-

 

-

 

1

 

2

 

2

 

9

 

14

Total residential mortgages

$

1,020

$

1,034

$

421

$

675

$

776

$

719

$

4,645

*Fair Isaac Corporation (FICO) is the credit quality indicator used to evaluate consumer credit risk for residential mortgage loan borrowers and have been updated within the last twelve months.

46 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

Methodology Used to Estimate the Allowance for Credit Losses

At the time of origination or purchase, an allowance for credit losses is established for mortgage and other loan receivables and is updated each reporting period. Changes in the allowance for credit losses are recorded in realized losses. This allowance reflects the risk of loss, even when that risk is remote, and reflects losses expected over the remaining contractual life of the loan. The allowance for credit losses considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions. We revert to historical information when we determine that we can no longer reliably forecast future economic assumptions.

The allowances for the commercial mortgage loans and residential mortgage loans are estimated utilizing a probability of default and loss given default model. Loss rate factors are determined based on historical data and adjusted for current and forecasted information. The loss rates are applied based on individual loan attributes and considering such data points as loan-to-value ratios, FICO scores, and debt service coverage.

The estimate of credit losses also reflects management’s assumptions on certain macroeconomic factors that include, but are not limited to, gross domestic product growth, employment, inflation, housing price index, interest rates and credit spreads.

Accrued interest is excluded from the measurement of the allowance for credit losses and accrued interest is reversed through interest income once a loan is placed on nonaccrual.

When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount of the loan is charged off against the allowance.

We also have off-balance sheet commitments related to our commercial mortgage loans. The liability for expected credit losses related to these commercial mortgage loan commitments is reported in Other liabilities in the Condensed Consolidated Balance Sheets. When a commitment is funded, we record a loan receivable and reclassify the liability for expected credit losses related to the commitment into loan allowance for expected credit losses. Other changes in the liability for expected credit losses on loan commitments are recorded in Net realized gains (losses) in the Condensed Consolidated Statements of Income (Loss).

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

 

Three Months Ended September 30,

2021

 

2020

 

 

Commercial

 

Other

 

 

 

 

Commercial

 

Other

 

 

(in millions)

 

Mortgages

 

Loans

 

Total

 

 

Mortgages

 

Loans

 

Total

Allowance, beginning of period

$

587

$

114

$

701

 

$

667

$

127

$

794

Loans charged off

 

(2)

 

-

 

(2)

 

 

-

 

-

 

-

Recoveries of loans previously charged off

 

-

 

-

 

-

 

 

-

 

-

 

-

Net charge-offs

 

(2)

 

-

 

(2)

 

 

-

 

-

 

-

Addition to (release of) allowance for loan losses

 

(28)

 

1

 

(27)

 

 

(8)

 

11

 

3

Reclassified to held for sale(b)

 

-

 

(31)

 

(31)

 

 

-

 

-

 

-

Allowance, end of period

$

557

$

84

$

641

 

$

659

$

138

$

797

Nine Months Ended September 30,

2021

 

2020

 

 

Commercial

 

Other

 

 

 

 

Commercial

 

Other

 

 

(in millions)

 

Mortgages

 

Loans

 

Total

 

 

Mortgages

 

Loans

 

Total

Allowance, beginning of year

$

685

$

129

$

814

 

$

336

$

102

$

438

Initial allowance upon CECL adoption

 

-

 

-

 

-

 

 

311

 

7

 

318

Loans charged off

 

(2)

 

-

 

(2)

 

 

(12)

 

-

 

(12)

Recoveries of loans previously charged off

 

-

 

-

 

-

 

 

-

 

-

 

-

Net charge-offs

 

(2)

 

-

 

(2)

 

 

(12)

 

-

 

(12)

Addition to (release of) allowance for loan losses

 

(126)

 

(14)

 

(140)

 

 

24

 

29

 

53

Reclassified to held for sale(b)

 

-

 

(31)

 

(31)

 

 

-

 

-

 

-

Allowance, end of period

$

557

$

84

$

641

 

$

659

$

138

$

797

(a)Does not include allowance for credit losses of $83 million and $66 million, respectively, at September 30, 2021 and 2020 in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.

(b)Reported in Other assets in the Condensed Consolidated Balance Sheets.

 

AIG | Third Quarter 2021 Form 10-Q 47

 

TABLE OF CONTENTS

 

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

 

As a result of the COVID-19 crisis, including the significant global economic slowdown, our expectations and models used to estimate the allowance for losses on commercial and residential mortgage loans have been updated to reflect the current economic environment. The full impact of COVID-19 on real estate valuations remains uncertain and we will continue to review our valuations as further information becomes available.

TROUBLED DEBT RESTRUCTURINGS

We modify loans to optimize their returns and improve their collectability, among other things. When we undertake such a modification with a borrower that is experiencing financial difficulty and the modification involves us granting a concession to the troubled debtor, the modification is a troubled debt restructuring (TDR). We assess whether a borrower is experiencing financial difficulty based on a variety of factors, including the borrower’s current default on any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the modification, the insufficiency of the borrower’s forecasted cash flows to service any of its outstanding debt (including both principal and interest), and the borrower’s inability to access alternative third-party financing at an interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal or interest forgiveness, payment deferrals and easing of loan covenants.

In response to the COVID-19 pandemic, there was an increase in the volume of loan modifications in our commercial mortgage, residential mortgage and leveraged loan portfolios in 2020. The COVID-19 related modifications were primarily in the form of short term payment deferrals (one to six months). Short-term payment deferrals are not considered a concession and therefore these modifications are not considered a TDR. As of September 30, 2021, the number of loans in deferral or in the process of being modified have returned to pre-COVID-19 levels.

During the nine-month periods ended September 30, 2021 and 2020, loans with a carrying value of $45 million and $50 million, respectively, were modified in TDRs.

7. Reinsurance

Sale of Fortitude Holdings

On June 2, 2020, we completed the Majority Interest Fortitude Sale. AIG established Fortitude Re, a wholly owned subsidiary of Fortitude Holdings, in 2018 in a series of reinsurance transactions related to AIG’s Run-Off operations. As of September 30, 2021, approximately $29.9 billion of reserves from AIG’s Life and Retirement Run-Off Lines and approximately $3.8 billion of reserves from AIG’s General Insurance Run-Off Lines, related to business written by multiple wholly-owned AIG subsidiaries, had been ceded to Fortitude Re under these reinsurance transactions. As of closing of the Majority Interest Fortitude Sale, these reinsurance transactions are no longer considered affiliated transactions and Fortitude Re is the reinsurer of the majority of AIG’s Run-Off operations. Additionally, the Majority Interest Fortitude Sale was subject to a post-closing purchase price adjustment pursuant to which AIG would pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur through December 31, 2023, up to a maximum payment of $500 million. Effective in the second quarter of 2021, AIG, Fortitude Holdings, Carlyle FRL, T&D and Carlyle amended the purchase agreement to finalize the post-closing purchase price adjustment for adverse reserve development. As a result of this amendment, during the nine months ended September 30, 2021, AIG recorded a $21 million benefit through Policyholder benefits and losses incurred and eliminated further net exposure to adverse development on the reserves ceded to Fortitude Re.

These reinsurance transactions between AIG and Fortitude Re were structured as modco and loss portfolio transfer arrangements with funds withheld (funds withheld). In modco and funds withheld arrangements, the investments supporting the reinsurance agreements, and which reflect the majority of the consideration that would be paid to the reinsurer for entering into the transaction, are withheld by, and therefore continue to reside on the balance sheet of, the ceding company (i.e., AIG) thereby creating an obligation for the ceding company to pay the reinsurer (i.e., Fortitude Re) at a later date. Additionally, as AIG maintains ownership of these investments, AIG will maintain its existing accounting for these assets (e.g., the changes in fair value of available for sale securities will be recognized within Other comprehensive income (loss)). As a result of the deconsolidation resulting from the Majority Interest Fortitude Sale, AIG has established a funds withheld payable to Fortitude Re while simultaneously establishing a reinsurance asset representing reserves for the insurance coverage that Fortitude Re has assumed. The funds withheld payable contains an embedded derivative and changes in fair value of the embedded derivative related to the funds withheld payable are recognized in earnings through Net realized gains (losses). This embedded derivative is considered a total return swap with contractual returns that are attributable to various assets and liabilities associated with these reinsurance agreements.

48 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

There is a diverse pool of assets supporting the funds withheld arrangements with Fortitude Re. The following summarizes the composition of the pool of assets:

 

September 30, 2021

 

December 31, 2020

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

(in millions)

 

Value

 

Value

 

 

Value

 

Value

 

Corresponding Accounting Policy

Fixed maturity securities - available for sale(a)

$

33,457

$

33,457

 

$

36,047

$

36,047

 

Fair value through other comprehensive income (loss)

Fixed maturity securities - fair value option

 

158

 

158

 

 

200

 

200

 

Fair value through net investment income

Commercial mortgage loans

 

3,732

 

3,968

 

 

3,679

 

4,010

 

Amortized cost

Real estate investments

 

245

 

508

 

 

358

 

585

 

Amortized cost

Private equity funds / hedge funds

 

1,465

 

1,465

 

 

1,168

 

1,168

 

Fair value through net investment income

Policy loans

 

384

 

384

 

 

413

 

413

 

Amortized cost

Short-term investments

 

55

 

55

 

 

34

 

34

 

Fair value through net investment income

Funds withheld investment assets

 

39,496

 

39,995

 

 

41,899

 

42,457

 

 

Derivative assets, net(b)

 

47

 

47

 

 

(1)

 

(1)

 

Fair value through net realized gains (losses)

Other(c)

 

846

 

846

 

 

604

 

604

 

Amortized cost

Total

$

40,389

$

40,888

 

$

42,502

$

43,060

 

 

 

(a)The change in the net unrealized gains (losses) on available for sale securities related to the Fortitude Re funds withheld assets was $(2.1) billion ($(1.6) billion after-tax) for the nine months ended September 30, 2021 and $1.0 billion ($812 million after-tax) during the post deconsolidation period (June 2, 2020 - December 31, 2020).

 

(b) The derivative assets and liabilities have been presented net of cash collateral. The derivative assets and liabilities supporting the Fortitude Re funds withheld arrangements had a fair market value of $304 million and $12 million, respectively, as of September 30, 2021. The derivative assets supporting the Fortitude Re funds withheld arrangements had a fair market value of $357 million as of December 31, 2020. These derivative assets and liabilities are fully collateralized either by cash or securities.

(c) Primarily comprised of Cash and Accrued investment income.

 

The impact of the funds withheld arrangements with Fortitude Re was as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

2021

2020

 

2021

2020

Net underwriting income(a)

$

-

$

-

 

$

-

$

-

Net investment income - Fortitude Re funds withheld assets

 

495

 

458

 

 

1,488

 

574

Net realized gains (losses) on Fortitude Re funds withheld assets:

 

 

 

 

 

 

 

 

 

Net realized gains - Fortitude Re funds withheld assets

 

190

 

32

 

 

536

 

128

Net realized gains (losses) - Fortitude Re embedded derivatives

 

(209)

 

(656)

 

 

117

 

(1,493)

Net realized gains (losses) on Fortitude Re funds withheld assets

 

(19)

 

(624)

 

 

653

 

(1,365)

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

 

476

 

(166)

 

 

2,141

 

(791)

Income tax expense (benefit)(b)

 

99

 

(35)

 

 

449

 

(166)

Net income (loss)

 

377

 

(131)

 

 

1,692

 

(625)

Change in unrealized appreciation (depreciation) of all other investments(b)

 

(360)

 

132

 

 

(1,645)

 

570

Comprehensive income (loss)

$

17

$

1

 

$

47

$

(55)

 

(a) Effective in the second quarter of 2021, an amendment was made to the purchase agreement to finalize the post-closing purchase price adjustment for adverse reserve development and as a result, during the nine months ended September 30, 2021, AIG recognized a $21 million benefit through Policyholder benefits and losses incurred.

(b) The income tax expense (benefit) and the tax impact in AOCI was computed using AIG’s U.S. statutory tax rate of 21 percent.

 

Various assets supporting the Fortitude Re funds withheld arrangements are reported at amortized cost, and as such, changes in the fair value of these assets are not reflected in the financial statements. However, changes in the fair value of these assets are included in the embedded derivative in the Fortitude Re funds withheld arrangements and the appreciation of these assets is the primary driver of the comprehensive income (loss) reflected above.

Reinsurance – Credit Losses

The estimation of reinsurance recoverables involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverables on unpaid losses and loss adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves. Similarly, Other assets include reinsurance recoverables for contracts which are accounted for as deposits.

AIG | Third Quarter 2021 Form 10-Q 49

 

TABLE OF CONTENTS

 

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

 

We assess the collectability of reinsurance recoverable balances in each reporting period, through either historical trends of disputes and credit events or financial analysis of the credit quality of the reinsurer. We record adjustments to reflect the results of these assessments through an allowance for credit losses and disputes on uncollectable reinsurance that reduces the carrying amount of reinsurance and other assets on the consolidated balance sheets (collectively, reinsurance recoverables). This estimate requires significant judgment for which key considerations include:

•paid and unpaid amounts recoverable;

•whether the balance is in dispute or subject to legal collection;

•the relative financial health of the reinsurer as determined by the Obligor Risk Ratings (ORRs) we assign to each reinsurer based upon our financial reviews; insurers that are financially troubled (i.e., in run-off, have voluntarily or involuntarily been placed in receivership, are insolvent, are in the process of liquidation or otherwise subject to formal or informal regulatory restriction) are assigned ORRs that will generate a significant allowance; and

•whether collateral and collateral arrangements exist.

An estimate of the reinsurance recoverable’s lifetime expected credit losses is established utilizing a probability of default and loss given default method, which reflects the reinsurer’s ORR rating. The allowance for credit losses excludes disputed amounts. An allowance for disputes is established for a reinsurance recoverable using the losses incurred model for contingencies.

The total reinsurance recoverables as of September 30, 2021 were $76.8 billion. As of that date, utilizing AIG’s ORRs, (i) approximately 92 percent of the reinsurance recoverables were investment grade, of which 52 percent related to General Insurance and 40 percent related to Life and Retirement; (ii) approximately 6 percent of the reinsurance recoverables were non-investment grade, the majority of which related to General Insurance; (iii) less than one percent of the non-investment grade reinsurance recoverables related to Life and Retirement and (iv) approximately one percent of the reinsurance recoverables related to entities that were not rated by AIG.

As of September 30, 2021, approximately 74 percent of our non-investment grade reinsurance exposure related to captive insurers. These arrangements are typically collateralized by letters of credit, funds withheld or trust agreements.

 

Reinsurance Recoverable Allowance

The following table presents a rollforward of the reinsurance recoverable allowance:

Three Months Ended September 30,

2021

 

2020

 

 

General

 

Life and

 

 

 

 

General

 

Life and

 

 

(in millions)

Insurance

Retirement

 

Total

 

Insurance

Retirement

 

Total

Balance, beginning of period

$

287

$

87

$

374

 

$

305

$

59

$

364

Addition to (release of) allowance for expected credit losses and disputes, net

 

5

 

15

 

20

 

 

(2)

 

2

 

-

Write-offs charged against the allowance for credit losses and disputes

 

(8)

 

-

 

(8)

 

 

-

 

-

 

-

Other changes

 

2

 

-

 

2

 

 

5

 

1

 

6

Balance, end of period

$

286

$

102

$

388

 

$

308

$

62

$

370

Nine Months Ended September 30,

2021

 

2020

 

 

General

 

Life and

 

 

 

 

General

 

Life and

 

 

(in millions)

Insurance

Retirement

 

Total

 

Insurance

Retirement

 

Total

Balance, beginning of year

$

292

$

83

$

375

 

$

111

$

40

$

151

Initial allowance upon CECL adoption

 

-

 

-

 

-

 

 

202

 

22

 

224

Addition to (release of) allowance for expected credit losses and disputes, net

 

5

 

19

 

24

 

 

-

 

5

 

5

Write-offs charged against the allowance for credit losses and disputes

 

(15)

 

-

 

(15)

 

 

(5)

 

(5)

 

(10)

Other changes

 

4

 

-

 

4

 

 

-

 

-

 

-

Balance, end of period

$

286

$

102

$

388

 

$

308

$

62

$

370

 

There were no material recoveries of credit losses previously written off for either of the three- or nine-month periods ended September 30, 2021. There were no recoveries of credit losses previously written off for either of the three- or nine-month periods ended September 30, 2020.

Past-Due Status

We consider a reinsurance asset to be past due when it is 90 days past due. The allowance for credit losses is estimated excluding disputed amounts. An allowance for disputes is established using the losses incurred method for contingencies. Past due balances on claims that are not in dispute were not material for any of the periods presented.

50 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

 

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 to which the entity was designed to expose the variable interest holders.

The primary beneficiary is the entity that has both (i) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (ii) 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

Creditors or beneficial interest holders of VIEs for which AIG is the primary beneficiary generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to AIG, except in limited circumstances when AIG has provided a guarantee to the VIE’s interest holders. 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

 

Partnerships(e)

 

Other

 

Total

September 30, 2021

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

-

$

5,104

$

-

$

-

$

5,104

Other bond securities

 

-

 

1,985

 

-

 

-

 

1,985

Equity securities

 

449

 

-

 

-

 

-

 

449

Mortgage and other loans receivable

 

-

 

2,875

 

-

 

-

 

2,875

Other invested assets

 

 

 

 

 

 

 

 

 

 

Alternative investments(a)

 

3,167

 

-

 

-

 

-

 

3,167

Investment real estate

 

3,026

 

-

 

-

 

-

 

3,026

Short-term investments

 

388

 

176

 

-

 

20

 

584

Cash

 

137

 

-

 

-

 

-

 

137

Accrued investment income

 

-

 

20

 

-

 

-

 

20

Other assets(e)

 

152

 

70

 

3,898

 

-

 

4,120

Other

 

28

 

-

 

-

 

2

 

30

Total(b)

$

7,347

$

10,230

$

3,898

$

22

$

21,497

Liabilities:

 

 

 

 

 

 

 

 

 

 

Debt of consolidated investment entities

$

2,285

$

4,519

$

-

$

-

$

6,804

Other(c)(e)

 

166

 

317

 

2,570

 

9

 

3,062

Total

$

2,451

$

4,836

$

2,570

$

9

$

9,866

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

-

$

6,089

$

-

$

-

$

6,089

Other bond securities

 

-

 

2,367

 

-

 

-

 

2,367

Equity securities

 

507

 

-

 

-

 

-

 

507

Mortgage and other loans receivable

 

-

 

3,135

 

-

 

-

 

3,135

Other invested assets

 

 

 

 

 

 

 

 

 

 

Alternative investments(a)

 

2,689

 

-

 

-

 

-

 

2,689

Investment real estate

 

3,378

 

-

 

3,558

 

-

 

6,936

Short-term investments

 

365

 

1,534

 

-

 

27

 

1,926

Cash

 

129

 

-

 

203

 

-

 

332

Accrued investment income

 

-

 

38

 

-

 

-

 

38

Other assets

 

166

 

120

 

243

 

-

 

529

Other

 

3

 

-

 

-

 

2

 

5

Total(b)

$

7,237

$

13,283

$

4,004

$

29

$

24,553

AIG | Third Quarter 2021 Form 10-Q 51

 

TABLE OF CONTENTS

 

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

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Debt of consolidated investment entities

$

2,559

$

3,961

$

2,287

$

2

$

8,809

Other(c)

 

180

 

187

 

187

 

10

 

564

Total

$

2,739

$

4,148

$

2,474

$

12

$

9,373

(a)Comprised primarily of investments in real estate joint ventures at September 30, 2021 and December 31, 2020.

(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, 2021 and December 31, 2020.

(d) At September 30, 2021 and December 31, 2020, off-balance sheet exposure primarily consisting of our insurance companies’ commitments to real estate and investment entities were $2.7 billion and $2.4 billion, respectively, of which commitments to external parties were $0.8 billion and $0.7 billion, respectively.

(e) Includes Affordable Housing portfolio classified as held for sale and reported in Other assets and Other liabilities.

 

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.

Under the terms of six transactions entered into between 2012 and 2014, securitized portfolios of certain debt securities previously owned by AIG and its affiliates, an indirectly wholly-owned subsidiary of AIG was obligated to make certain capital contributions to such a securitization VIE in the event that the VIE was unable to redeem any rated notes it had in issue on the relevant redemption date. AIG had provided a guarantee to the six securitization VIEs of the obligations of its indirectly wholly-owned subsidiary to make such capital contributions when due. At or prior to September 30, 2021, all six transactions had been terminated. In aggregate, the termination of these six transactions resulted in a reduction of debt of consolidated investment entities of $175 million. There were no amounts paid related to the guarantees provided.

SunAmerica Affordable Housing Partners, Inc. (SAAHP) provides a Base Internal Rate of Return (Base IRR) guarantee to its third party investors, so that on a specified date if the investor has not received distributions of cash and allocations of certain tax benefits required to achieve their Base IRR as provided for in the partnership agreement, SAAHP shall distribute cash to effectively generate the Base IRR to the investor. In addition, SAAHP has from time to time guaranteed certain debt issued by third parties related to its business activities. As of September 30, 2021, the off-balance sheet amount of that guarantee was approximately $1 million.

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, 2021

 

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

421,901

$

7,557

 

$

3,545

(d)

$

11,102

Affordable housing partnerships

 

2,445

 

292

(c)

 

1

 

 

293

Other

 

1,717

 

203

 

 

479

(e)

 

682

Total

$

426,063

$

8,052

 

$

4,025

 

$

12,077

December 31, 2020

 

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

321,716

$

6,420

 

$

3,273

(d)

$

9,693

Affordable housing partnerships

 

2,801

 

368

(c)

 

4

 

 

372

Other

 

1,733

 

195

 

 

546

(e)

 

741

Total

$

326,250

$

6,983

 

$

3,823

 

$

10,806

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

 

 

(b) At September 30, 2021 and December 31, 2020, $7.7 billion and $6.8 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.

(c) At September 30, 2021, primarily included alternative equity investments of $6 million, other loans receivables of $33 million, and other assets of $246 million. At December 31, 2020, primarily included alternative equity investments of $257 million and other loans receivables of $97 million.

(d) These amounts represent our unfunded commitments to invest in private equity funds and hedge funds.

(e) 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 2020 Annual Report.

52 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

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.

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, foreign currency transactions, and foreign denominated investments. 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. Commodity derivatives are used to hedge exposures within reinsurance contracts. 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 contracts with respect to investment operations, which may include, among other things, credit default swaps (CDSs), total return swaps and purchases of investments with embedded derivatives, such as equity-linked notes and convertible bonds.

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, 2021

 

December 31, 2020

 

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

$

807

$

11

 

$

895

$

4

 

$

815

$

16

 

$

356

$

11

Foreign exchange contracts

 

8,504

 

499

 

 

2,842

 

164

 

 

3,468

 

256

 

 

7,424

 

379

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

as hedging instruments:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

45,446

 

3,672

 

 

41,617

 

3,886

 

 

62,259

 

4,621

 

 

48,732

 

4,425

Foreign exchange contracts

 

13,834

 

849

 

 

4,789

 

457

 

 

9,518

 

766

 

 

12,860

 

711

Equity contracts

 

25,448

 

587

 

 

3,767

 

59

 

 

22,924

 

1,130

 

 

7,076

 

223

Commodity contracts

 

340

 

8

 

 

216

 

-

 

 

-

 

-

 

 

-

 

-

Credit contracts(b)

 

3,790

 

2

 

 

950

 

61

 

 

5,797

 

2

 

 

969

 

67

Other contracts(c)

 

43,377

 

12

 

 

54

 

1

 

 

43,441

 

14

 

 

54

 

6

Total derivatives, gross

$

141,546

$

5,640

 

$

55,130

$

4,632

 

$

148,222

$

6,805

 

$

77,471

$

5,822

Counterparty netting(d)

 

 

 

(2,698)

 

 

 

 

(2,698)

 

 

 

 

(3,812)

 

 

 

 

(3,812)

Cash collateral(e)

 

 

 

(2,058)

 

 

 

 

(1,231)

 

 

 

 

(2,219)

 

 

 

 

(1,441)

Total derivatives on Condensed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets(f)

 

 

$

884

 

 

 

$

703

 

 

 

$

774

 

 

 

$

569

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

(b) As of September 30, 2021 and December 31, 2020, included CDSs on super senior multi-sector CDOs with a net notional amount of $111 million and $137 million (fair value liability of $43 million and $44 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 Other liabilities, respectively. Fair value of assets related to bifurcated embedded derivatives was zero at both September 30, 2021 and December 31, 2020. Fair value of liabilities related to bifurcated embedded derivatives was $14.7 billion and $15.8 billion, respectively, at September 30, 2021 and December 31, 2020. 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, and the funds withheld arrangement with Fortitude Re. For additional information see Note 7 to the Condensed Consolidated Financial Statements.

 

AIG | Third Quarter 2021 Form 10-Q 53

 

TABLE OF CONTENTS

 

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

 

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 by us 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 $2.9 billion at September 30, 2021 and $3.0 billion at December 31, 2020. 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 $2.3 billion and $2.3 billion at September 30, 2021 and December 31, 2020, 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.

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, 2021, we recognized gains of $57 million and $163 million, respectively, and for the three- and nine-month periods ended September 30, 2020, we recognized losses of $107 million and $5 million, respectively, included in Change in foreign currency translation adjustments in Other comprehensive income (loss) 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.

54 AIG | Third Quarter 2021 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 income on our derivative instruments in fair value hedging relationships in the Condensed Consolidated Statements of Income (Loss):

 

Gains/(Losses) Recognized in Income for:

 

 

 

 

Hedging

Excluded

Hedged

 

 

 

(in millions)

Derivatives(a)

Components(b)

Items

 

Net Impact

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Interest credited to policyholder account balances

$

(3)

$

-

$

6

 

$

3

Net investment income

 

1

 

-

 

(2)

 

 

(1)

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Net realized gains/(losses)

 

205

 

30

 

(205)

 

 

30

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Interest credited to policyholder account balances

$

(2)

$

-

$

5

 

$

3

Net investment income

 

1

 

-

 

-

 

 

1

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Net realized gains/(losses)

 

(250)

 

(50)

 

250

 

 

(50)

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Interest credited to policyholder account balances

$

(10)

$

-

$

13

 

$

3

Net investment income

 

8

 

-

 

(9)

 

 

(1)

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Net realized gains/(losses)

 

201

 

108

 

(201)

 

 

108

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

Interest credited to policyholder account balances

$

16

$

-

$

(15)

 

$

1

Net investment income

 

(6)

 

-

 

6

 

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

Net realized gains/(losses)

 

(77)

 

155

 

77

 

 

155

(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 2021 Form 10-Q 55

 

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 (Loss):

 

Gains (Losses) Recognized in Income

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2021

 

2020

 

 

2021

 

2020

By Derivative Type:

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

(172)

$

(462)

 

$

(861)

$

2,104

Foreign exchange contracts

 

310

 

(535)

 

 

271

 

366

Equity contracts

 

(55)

 

(46)

 

 

(606)

 

586

Commodity contracts

 

(5)

 

-

 

 

(4)

 

-

Credit contracts

 

-

 

(1)

 

 

(9)

 

55

Other contracts

 

17

 

18

 

 

49

 

44

Embedded derivatives

 

(28)

 

(507)

 

 

1,569

 

(3,333)

Total

$

67

$

(1,533)

 

$

409

$

(178)

By Classification:

 

 

 

 

 

 

 

 

 

Policy fees

$

16

$

16

 

$

46

$

46

Net investment income

 

(1)

 

4

 

 

(6)

 

1

Net realized gains (losses) - excluding Fortitude Re funds withheld assets

 

277

 

(775)

 

 

329

 

1,398

Net realized gains (losses) on Fortitude Re funds withheld assets(a)

 

(224)

 

(776)

 

 

45

 

(1,639)

Policyholder benefits and claims incurred

 

(1)

 

(2)

 

 

(5)

 

16

Total

$

67

$

(1,533)

 

$

409

$

(178)

(a)Includes over-the-counter derivatives supporting the funds withheld arrangements with Fortitude Re and the embedded derivative contained within the funds withheld payable with Fortitude Re.

CREDIT RISK-RELATED CONTINGENT FEATURES

 

We estimate that at September 30, 2021, 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 $39 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 $213 million and $257 million at September 30, 2021 and December 31, 2020, respectively. The aggregate fair value of assets posted as collateral under these contracts at September 30, 2021 and December 31, 2020, was approximately $243 million and $306 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 $2.1 billion and $2.4 billion at September 30, 2021 and December 31, 2020, respectively. These securities have par amounts of $4.7 billion and $5.0 billion at September 30, 2021 and December 31, 2020, respectively, and have remaining stated maturity dates that extend to 2052.

56 AIG | Third Quarter 2021 Form 10-Q

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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 and loss adjustment expenses, 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. Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown, the full impact of COVID-19 and how it may ultimately impact the results of our insurance operations remains uncertain. In addition, in response to the crisis, new governmental, legislative and regulatory initiatives have been put in place and continue to be developed that could result in additional restrictions and requirements relating to our policies that may have a negative impact on our business operations. We have recorded our estimate of the ultimate liability for losses that have occurred as of the balance sheet date associated with COVID-19 which reflects our expectations given the current facts and circumstances. We will continue to monitor and review the impact. 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 $12.3 billion and $12.6 billion at September 30, 2021 and December 31, 2020, 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 both September 30, 2021 and December 31, 2020, we held collateral of approximately $8.6 billion and $9.2 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements. Allowance for credit losses for the unsecured portion of these recoverable amounts was $14 million at both September 30, 2021 and December 31, 2020.

 

AIG | Third Quarter 2021 Form 10-Q 57

 

TABLE OF CONTENTS

 

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

 

The following table presents the rollforward of activity in Loss Reserves:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2021

 

2020

 

 

2021

 

2020

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

$

78,981

$

77,853

 

$

77,720

$

78,328

Reinsurance recoverable

 

(34,866)

 

(35,458)

 

 

(34,431)

 

(31,069)

Initial allowance upon CECL adoption

 

-

 

-

 

 

-

 

164

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

 

44,115

 

42,395

 

 

43,289

 

47,423

Losses and loss adjustment expenses incurred:

 

 

 

 

 

 

 

 

 

Current year

 

4,467

 

4,324

 

 

12,262

 

12,683

Prior years, excluding discount and amortization of deferred gain

 

(153)

 

20

 

 

(166)

 

(6)

Prior years, discount charge (benefit)

 

83

 

25

 

 

99

 

135

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

 

(13)

 

(36)

 

 

(107)

 

(187)

Total losses and loss adjustment expenses incurred

 

4,384

 

4,333

 

 

12,088

 

12,625

Losses and loss adjustment expenses paid:

 

 

 

 

 

 

 

 

 

Current year

 

(1,147)

 

(1,316)

 

 

(2,370)

 

(2,568)

Prior years

 

(2,449)

 

(3,115)

 

 

(8,653)

 

(11,256)

Total losses and loss adjustment expenses paid

 

(3,596)

 

(4,431)

 

 

(11,023)

 

(13,824)

Other changes:

 

 

 

 

 

 

 

 

 

Foreign exchange effect

 

(414)

 

925

 

 

(57)

 

656

Allowance for credit losses

 

-

 

-

 

 

-

 

-

Retroactive reinsurance adjustment (net of discount)(b)

 

159

 

80

 

 

351

 

240

Fortitude sale(c)

 

-

 

-

 

 

-

 

(3,818)

Total other changes

 

(255)

 

1,005

 

 

294

 

(2,922)

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

 

 

 

 

 

 

 

 

 

Net liability for unpaid losses and loss adjustment expenses

 

44,648

 

43,302

 

 

44,648

 

43,302

Reinsurance recoverable

 

34,626

 

35,282

 

 

34,626

 

35,282

Total

$

79,274

$

78,584

 

$

79,274

$

78,584

(a)Includes $5 million and $6 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, 2021 and 2020, respectively, and $23 million and $26 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

 

 

(b) Includes benefit (charge) from change in discount on retroactive reinsurance in the amount of $22 million and $20 million for the three-month periods ended September 30, 2021 and 2020, respectively, and $78 million and $78 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

(c) On June 2, 2020, AIG completed the Majority Interest Fortitude Sale. Concurrent with the Majority Interest Fortitude Sale, AIG established a reinsurance recoverable. For additional information see Note 1 to the Condensed Consolidated Financial Statements.

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.

58 AIG | Third Quarter 2021 Form 10-Q

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

 

Prior Year Development

During the three-month period ended September 30, 2021, we recognized favorable prior year loss reserve development of $153 million excluding discount and amortization of deferred gain. During the nine-month period ended September 30, 2021, we recognized favorable prior year loss reserve development of $166 million excluding discount and amortization of deferred gain. The development in these periods was largely driven by favorable development on U.S. Workers Compensation, global short-tailed Commercial Lines and Personal Insurance, including catastrophes, partially offset by unfavorable development in Financial Lines (U.S. and International).

During the three-month period ended September 30, 2020, we recognized unfavorable prior year loss reserve development of $20 million excluding discount and amortization of deferred gain. During the nine-month period ended September 30, 2020, we recognized favorable prior year loss reserve development of $6 million excluding discount and amortization of deferred gain. The development in these periods was primarily driven by favorable development on U.S. Workers Compensation, short-tailed Commercial Lines, and International Personal Property, offset by unfavorable development in global Financial Lines and Europe Casualty Lines.

Discounting of Loss Reserves

At September 30, 2021 and December 31, 2020, the loss reserves reflect a net loss reserve discount of $741 million and $725 million, respectively, including tabular and non-tabular calculations based upon the following assumptions:

The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York, Pennsylvania and Delaware, 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.

– The Pennsylvania and Delaware regulators 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 and Delaware domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios. In 2020, the regulators also approved that the discount rate will be updated on an annual basis.

The tabular workers’ compensation discount is calculated based on the mortality rate used in the 2007 U.S. Life table and interest rates prescribed or permitted by each state (i.e. New York is based on 5 percent interest rate and Pennsylvania and Delaware are based on U.S. Treasury plus liquidity rate).

The discount for asbestos reserves has been fully accreted.

At September 30, 2021 and December 31, 2020, the discount consists of $261 million and $285 million of tabular discount, respectively, and $480 million and $440 million of non-tabular discount for workers’ compensation, respectively. During the nine-month periods ended September 30, 2021 and 2020, the benefit / (charge) from changes in discount of $(62) million and $(41) million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Condensed Consolidated Statements of Income (Loss).

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

 

 

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

 

September 30, 2021

 

December 31, 2020

 

North

 

 

 

 

 

North

 

 

 

 

 

America

 

Other

 

 

 

America

 

Other

 

 

 

Commercial

 

Operations

 

 

 

Commercial

 

Operations

 

 

(in millions)

Insurance

 

Run-Off(b)

 

Total

 

Insurance

 

Run-Off(b)

 

Total

U.S. workers' compensation

$

1,574

$

-

$

1,574

 

$

1,636

$

-

$

1,636

Retroactive reinsurance

 

(833)

 

-

 

(833)

 

 

(911)

 

-

 

(911)

Total reserve discount(a)

$

741

$

-

$

741

 

$

725

$

-

$

725

(a)Excludes $121 million and $151 million of discount related to certain long-tail liabilities in the UK at September 30, 2021 and December 31, 2020, respectively.

 

(b)Excludes $502 million and $493 million, respectively, of discount which was 100 percent ceded to Fortitude Re at September 30, 2021 and December 31, 2020. On June 2, 2020, we completed the Majority Interest Fortitude Sale. For additional information see Note 1 to the Condensed Consolidated Financial Statements.

The following table presents the net loss reserve discount benefit (charge):

Three Months Ended September 30,

2021

 

2020

 

North

 

 

 

 

 

North

 

 

 

 

 

America

 

Other

 

 

 

America

 

Other

 

 

 

Commercial

Operations

 

 

 

Commercial

Operations

 

 

(in millions)

Insurance

Run-Off

 

Total

 

Insurance

Run-Off(d)

 

Total

Current accident year

$

11

$

-

$

11

 

$

56

$

-

$

56

Accretion and other adjustments to prior year discount

 

(83)

 

-

 

(83)

 

 

(25)

 

-

 

(25)

Effect of interest rate changes

 

-

 

-

 

-

 

 

-

 

-

 

-

Net reserve discount benefit (charge)(a)

 

(72)

 

-

 

(72)

 

 

31

 

-

 

31

Change in discount on loss reserves ceded under

 

 

 

 

 

 

 

 

 

 

 

 

 

retroactive reinsurance

 

22

 

-

 

22

 

 

20

 

-

 

20

Net change in total reserve discount(b)

$

(50)

$

-

$

(50)

 

$

51

$

-

$

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2021

 

2020

 

North

 

 

 

 

 

North

 

 

 

 

 

America

 

Other

 

 

 

America

 

Other

 

 

 

Commercial

Operations

 

 

 

Commercial

Operations

 

 

(in millions)

Insurance

Run-Off

 

Total

 

Insurance

Run-Off(d)

 

Total

Current accident year

$

37

$

-

$

37

 

$

94

$

-

$

94

Accretion and other adjustments to prior year discount

 

(99)

 

-

 

(99)

 

 

(117)

 

(18)

 

(135)

Effect of interest rate changes

 

-

 

-

 

-

 

 

-

 

-

 

-

Net reserve discount benefit (charge)(a)

 

(62)

 

-

 

(62)

 

 

(23)

 

(18)

 

(41)

Change in discount on loss reserves ceded under

 

 

 

 

 

 

 

 

 

 

 

 

 

retroactive reinsurance

 

78

 

-

 

78

 

 

78

 

-

 

78

Net change in total reserve discount(c)

$

16

$

-

$

16

 

$

55

$

(18)

$

37

(a) For the three- and nine-month periods ended September 30, 2021 and September 30, 2020, the changes in net reserve discount benefit (charge) were primarily driven by accretion and changes to nominal reserves.

(b) Excludes $(39) million and $(12) million discount related to certain long-tail liabilities in the UK for the three-month periods ended September 30, 2021 and 2020, respectively.

(c) Excludes $(30) million and $(20) million discount related to certain long-tail liabilities in the UK for the nine-month periods ended September 30, 2021 and 2020, respectively.

(d) On June 2, 2020, we completed the Majority Interest Fortitude Sale. For additional information see Note 1 to the Condensed Consolidated Financial Statements. Change in discount prior to the sale is included in the above for the three- and nine-month periods ended September 30, 2020. Following the sale, 100 percent of the discount is ceded to Fortitude Re.

Amortization of Deferred Gain on Retroactive Reinsurance

Amortization of deferred gain on retroactive reinsurance includes $8 million and $29 million related to the adverse development reinsurance cover with NICO for the three-month periods ended September 30, 2021 and 2020, respectively, and $84 million and $161 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

Amounts recognized reflect the amortization of deferred gain at inception, as amended for subsequent changes in the deferred gain due to changes in subject reserves.

60 AIG | Third Quarter 2021 Form 10-Q

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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 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 may 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, indemnification 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 or examinations 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.

Moriarty Litigation

Effective January 1, 2013, the California legislature enacted AB 1747 (the Act), which amended the Insurance Code to mandate that life insurance policies issued and delivered in California contain a 60-day grace period during which time the policies must remain in force after a premium payment is missed, and that life insurers provide both a 30-day minimum notification of lapse and the right of policy owners to designate a secondary recipient for lapse and termination notices. Following guidance from the California Department of Insurance and certain industry trade groups, American General Life Insurance Company (AGL) interpreted the Act to be prospective in nature, applying only to policies issued and delivered on or after the Act’s January 1, 2013, effective date. On July 18, 2017, AGL was sued in a putative class action captioned Moriarty v. American General Life Insurance Company, No. 17-cv-1709 (S.D. Cal.), challenging AGL’s prospective application of the Act. Plaintiff’s complaint, which is similar to complaints filed against other insurers, argues that policies issued and delivered prior to January 1, 2013, like the $1 million policy issued to Plaintiff’s husband do not lapse—despite nonpayment of premiums—if the insurer has not complied with the Act’s terms. On August 30, 2021, the California Supreme Court issued an opinion in McHugh v. Protective Life Insurance, 12 Cal. 5th 213 (2021), ruling that the Act applies to all policies in force on January 1, 2013, regardless of when the policies were issued. The District Court in Moriarty reached effectively the same result on October 2, 2020, when it held that the Act applied to Plaintiff’s husband’s 25-year term life insurance policy under the theory that the payment of premiums “renewed” Plaintiff’s policy after the effective date of the Act. However, the District Court in Moriarty also ruled on October 2, 2020 that various fact issues precluded a final determination as to AGL’s liability and what (if any) corresponding damages may have resulted. In addition, the District Court denied Plaintiff’s motion for class certification without

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

 

prejudice on November 25, 2020. Proceedings are ongoing in the District Court in the Moriarty case and in other California cases that raise similar industry-wide issues. We have accrued our current estimate of probable loss with respect to this litigation.

Tax Litigation

We were party to tax litigation before the Southern District of New York (Southern District), which was dismissed by the Southern District in October 2020 based upon the settlement reached between AIG and the government. 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, 2021.

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. arising from transactions entered into by AIG Markets, Inc.

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, 2021 was $74 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. 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. The Majority Interest Fortitude Sale was subject to a post-closing purchase price adjustment pursuant to which AIG would pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur through December 31, 2023, up to a maximum of $500 million. Effective in the second quarter of 2021, AIG, Fortitude Holdings, Carlyle FRL, T&D and Carlyle amended the purchase agreement to finalize the post-closing purchase price adjustment for adverse reserve development. As a result of this amendment, during the nine months ended September 30, 2021, AIG recorded a $21 million benefit through Policyholder benefits and losses incurred and eliminated further net exposure to adverse development on the reserves ceded to Fortitude Re.

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

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

 

For additional discussion on the Fortitude Re transaction, see Note 1 to the Condensed Consolidated Financial Statements.

Other

For additional discussion on commitments and guarantees associated with VIEs, see Note 8 to the Condensed Consolidated Financial Statements.

For additional disclosures about derivatives, see Note 9 to the Condensed Consolidated Financial Statements.

 

12. Equity

Shares Outstanding

Preferred Stock

On March 14, 2019, we issued 20,000 shares of Series A 5.85% Non-Cumulative Perpetual 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.

The following table presents declaration date, record date, payment date and dividends paid per preferred share and per depository share on the Series A Preferred Stock in the nine months ended September 30, 2021 and 2020:

 

 

 

Dividends Paid

Declaration Date

Record Date

Payment Date

 

Per Preferred Share

 

Per Depositary Share

August 5, 2021

August 31, 2021

September 15, 2021

$

365.625

$

0.365625

May 6, 2021

May 31, 2021

June 15, 2021

 

365.625

 

0.365625

February 16, 2021

February 26, 2021

March 15, 2021

 

365.625

 

0.365625

August 3, 2020

August 31, 2020

September 15, 2020

$

365.625

$

0.365625

May 4, 2020

May 29, 2020

June 15, 2020

 

365.625

 

0.365625

February 12, 2020

February 28, 2020

March 16, 2020

 

365.625

 

0.365625

Common Stock

The following table presents a rollforward of outstanding shares:

Nine Months Ended September 30, 2021

Common

Treasury

Common Stock

 

Stock Issued

Stock

Outstanding

Shares, beginning of year

1,906,671,492

(1,045,113,443)

861,558,049

Shares issued

-

6,532,595

6,532,595

Shares repurchased

-

(32,294,593)

(32,294,593)

Shares, end of period

1,906,671,492

(1,070,875,441)

835,796,051

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.

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

 

 

The following table presents declaration date, record date, payment date and dividends paid per common share on AIG Common Stock in the nine months ended September 30, 2021 and 2020:

 

 

 

 

 

Dividends Paid

Declaration Date

Record Date

Payment Date

 

 

Per Common Share

August 5, 2021

September 16, 2021

September 30, 2021

 

$

0.32

May 6, 2021

June 15, 2021

June 29, 2021

 

 

0.32

February 16, 2021

March 16, 2021

March 30, 2021

 

 

0.32

August 3, 2020

September 17, 2020

September 30, 2020

 

$

0.32

May 4, 2020

June 15, 2020

June 29, 2020

 

 

0.32

February 12, 2020

March 16, 2020

March 30, 2020

 

 

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 2020 Annual Report.

Repurchase of AIG Common Stock

The following table presents repurchases of AIG Common Stock:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2021

 

2020

Aggregate repurchases of common stock

$

1,651

$

500

Total number of common shares repurchased

 

32

 

12

Aggregate repurchases of warrants

$

-

$

-

Total number of warrants repurchased

 

-

 

-

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. Certain of our share repurchases have been and may from time to time be effected through Securities Exchange Act of 1934 (Exchange Act) Rule 10b5-1 repurchase plans.

Our warrants to purchase shares of AIG Common Stock expired on January 19, 2021. In August 2021, we executed an accelerated stock repurchase (ASR) agreement with a third-party financial institution. The total number of shares of AIG Common Stock repurchased in the nine months ended September 30, 2021, and the aggregate purchase price of those shares, reflect our payment of $1.0 billion in the aggregate under the ASR agreement and the receipt of approximately 18 million shares of AIG Common Stock in the aggregate. In February 2020, we executed an ASR agreement with a third-party financial institution. The total number of shares of AIG Common Stock repurchased in the nine months ended September 30, 2020, and the aggregate purchase price of those shares, reflect our payment of $500 million in the aggregate under the ASR agreement and the receipt of approximately 12 million shares of AIG Common Stock in the aggregate.

Additionally, in the nine months ended September 30, 2021, we repurchased approximately 14 million shares of AIG Common Stock for an aggregate purchase price of approximately $651 million pursuant to Exchange Act Rule 10b5-1 repurchase plans. Approximately $92 million of these share repurchases were funded with proceeds received from warrant exercises that occurred prior to the expiration of warrants to purchase shares of AIG Common Stock on January 19, 2021.

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.

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

 

Accumulated Other Comprehensive INCOME

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

 

 

 

 

 

 

 

 

 

 

Fair Value of

 

 

 

 

Unrealized Appreciation

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

 

(Depreciation) of Fixed

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

 

Maturity Securities on

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

 

Which Allowance for

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Credit Losses Was Taken

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Balance, June 30, 2021, net of tax

$

(58)

$

13,605

$

(2,128)

$

(1,217)

$

7

$

10,209

Change in unrealized appreciation (depreciation)

 

 

 

 

 

 

 

 

 

 

 

 

of investments

 

21

 

(2,086)

 

-

 

-

 

-

 

(2,065)

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(6)

 

138

 

-

 

-

 

-

 

132

Change in future policy benefits

 

-

 

72

 

-

 

-

 

-

 

72

Change in foreign currency translation adjustments

 

-

 

-

 

(132)

 

-

 

-

 

(132)

Change in net actuarial loss

 

-

 

-

 

-

 

40

 

-

 

40

Change in prior service cost

 

-

 

-

 

-

 

1

 

-

 

1

Change in deferred tax asset (liability)

 

(3)

 

366

 

(3)

 

(10)

 

-

 

350

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

-

 

-

Total other comprehensive income (loss)

 

12

 

(1,510)

 

(135)

 

31

 

-

 

(1,602)

Noncontrolling interests

 

-

 

1

 

-

 

-

 

-

 

1

Balance, September 30, 2021, net of tax

$

(46)

$

12,094

$

(2,263)

$

(1,186)

$

7

$

8,606

Balance, June 30, 2020, net of tax

$

(233)

$

13,281

$

(2,767)

$

(1,120)

$

8

$

9,169

Change in unrealized appreciation

 

 

 

 

 

 

 

 

 

 

 

 

of investments

 

101

 

2,273

 

-

 

-

 

-

 

2,374

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(5)

 

(296)

 

-

 

-

 

-

 

(301)

Change in future policy benefits

 

-

 

(147)

 

-

 

-

 

-

 

(147)

Change in foreign currency translation adjustments

 

-

 

-

 

297

 

-

 

-

 

297

Change in net actuarial loss

 

-

 

-

 

-

 

2

 

-

 

2

Change in prior service cost

 

-

 

-

 

-

 

-

 

-

 

-

Change in deferred tax asset (liability)

 

(17)

 

(445)

 

55

 

(3)

 

-

 

(410)

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

1

 

1

Total other comprehensive income (loss)

 

79

 

1,385

 

352

 

(1)

 

1

 

1,816

Noncontrolling interests

 

-

 

2

 

5

 

-

 

-

 

7

Balance, September 30, 2020, net of tax

$

(154)

$

14,664

$

(2,420)

$

(1,121)

$

9

$

10,978

AIG | Third Quarter 2021 Form 10-Q 65

 

TABLE OF CONTENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

Fair Value of

 

 

 

 

Unrealized Appreciation

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

 

(Depreciation) of Fixed

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

 

Maturity Securities on

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

 

Which Allowance for

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Credit Losses Was Taken

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Balance, December 31, 2020, net of tax

$

(95)

$

17,093

$

(2,267)

$

(1,228)

$

8

$

13,511

Change in unrealized appreciation (depreciation)

 

 

 

 

 

 

 

 

 

 

 

 

of investments

 

72

 

(7,940)

 

-

 

-

 

-

 

(7,868)

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(10)

 

840

 

-

 

-

 

-

 

830

Change in future policy benefits

 

-

 

839

 

-

 

-

 

-

 

839

Change in foreign currency translation adjustments

 

-

 

-

 

63

 

-

 

-

 

63

Change in net actuarial loss

 

-

 

-

 

-

 

51

 

-

 

51

Change in prior service cost

 

-

 

-

 

-

 

5

 

-

 

5

Change in deferred tax asset (liability)

 

(13)

 

1,262

 

(59)

 

(14)

 

-

 

1,176

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

(1)

 

(1)

Total other comprehensive income (loss)

 

49

 

(4,999)

 

4

 

42

 

(1)

 

(4,905)

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2021, net of tax

$

(46)

$

12,094

$

(2,263)

$

(1,186)

$

7

$

8,606

Balance, December 31, 2019, net of tax

$

-

$

8,722

$

(2,625)

$

(1,122)

$

7

$

4,982

Change in unrealized appreciation (depreciation)

 

 

 

 

 

 

 

 

 

 

 

 

of investments

 

(212)

 

6,088

 

-

 

-

 

-

 

5,876

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

14

 

(655)

 

-

 

-

 

-

 

(641)

Change in future policy benefits

 

-

 

2,187

 

-

 

-

 

-

 

2,187

Change in foreign currency translation adjustments

 

-

 

-

 

169

 

-

 

-

 

169

Change in net actuarial loss

 

-

 

-

 

-

 

18

 

-

 

18

Change in prior service credit

 

-

 

-

 

-

 

(1)

 

-

 

(1)

Change in deferred tax asset (liability)

 

44

 

(1,695)

 

37

 

(16)

 

-

 

(1,630)

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

2

 

2

Total other comprehensive income (loss)

 

(154)

 

5,925

 

206

 

1

 

2

 

5,980

Noncontrolling interests

 

-

 

(17)

 

1

 

-

 

-

 

(16)

Balance, September 30, 2020, net of tax

$

(154)

$

14,664

$

(2,420)

$

(1,121)

$

9

$

10,978

66 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

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

 

The following table presents the other comprehensive income (loss) reclassification adjustments for the three- and nine-month periods ended September 30, 2021 and 2020, respectively:

 

 

 

 

 

 

 

 

 

 

Fair Value of

 

 

 

 

Unrealized Appreciation

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

 

(Depreciation) of Fixed

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

 

Maturity Securities on

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

 

Which Allowance for

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Credit Losses Was Taken

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

21

$

(1,657)

$

(132)

$

30

$

-

$

(1,738)

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

6

 

219

 

-

 

(11)

 

-

 

214

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

15

 

(1,876)

 

(132)

 

41

 

-

 

(1,952)

Less: Income tax expense (benefit)

 

3

 

(366)

 

3

 

10

 

-

 

(350)

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

12

$

(1,510)

$

(135)

$

31

$

-

$

(1,602)

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

99

$

2,002

$

297

$

(9)

$

1

$

2,390

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

3

 

172

 

-

 

(11)

 

-

 

164

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

96

 

1,830

 

297

 

2

 

1

 

2,226

Less: Income tax expense (benefit)

 

17

 

445

 

(55)

 

3

 

-

 

410

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

79

$

1,385

$

352

$

(1)

$

1

$

1,816

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

62

$

(5,512)

$

63

$

22

$

(1)

$

(5,366)

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

-

 

749

 

-

 

(34)

 

-

 

715

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

62

 

(6,261)

 

63

 

56

 

(1)

 

(6,081)

Less: Income tax expense (benefit)

 

13

 

(1,262)

 

59

 

14

 

-

 

(1,176)

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

49

$

(4,999)

$

4

$

42

$

(1)

$

(4,905)

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

(198)

$

8,158

$

169

$

(15)

$

2

$

8,116

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

-

 

538

 

-

 

(32)

 

-

 

506

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

(198)

 

7,620

 

169

 

17

 

2

 

7,610

Less: Income tax expense (benefit)

 

(44)

 

1,695

 

(37)

 

16

 

-

 

1,630

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

(154)

$

5,925

$

206

$

1

$

2

$

5,980

AIG | Third Quarter 2021 Form 10-Q 67

 

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 AOCI on the respective line items in the Condensed Consolidated Statements of Income (Loss):

 

Amount Reclassified from AOCI

 

Affected Line Item in the

 

Three Months Ended September 30,

 

Condensed Consolidated

(in millions)

 

2021

2020

 

Statements of Income (Loss)

Unrealized appreciation (depreciation) of fixed maturity

 

 

 

 

 

 

 

 

securities on which allowance for credit losses was taken

 

 

 

 

 

 

 

 

Investments

 

$

6

$

3

 

 

Net realized gains

Total

 

 

6

 

3

 

 

 

Unrealized appreciation (depreciation) of all other

 

 

 

 

 

 

 

 

investments

 

 

 

 

 

 

 

 

Investments

 

 

219

 

172

 

 

Net realized gains

Total

 

 

219

 

172

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

Prior-service credit

 

 

(1)

 

-

 

 

*

Actuarial losses

 

 

(10)

 

(11)

 

 

*

Total

 

 

(11)

 

(11)

 

 

 

Total reclassifications for the period

 

$

214

$

164

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from AOCI

 

Affected Line Item in the

 

Nine Months Ended September 30,

 

Condensed Consolidated

(in millions)

 

2021

2020

 

Statements of Income (Loss)

Unrealized appreciation (depreciation) of fixed maturity

 

 

 

 

 

 

 

 

securities on which allowance for credit losses was taken

 

 

 

 

 

 

 

 

Investments

 

$

-

$

-

 

 

Net realized gains

Total

 

 

-

 

-

 

 

 

Unrealized appreciation (depreciation) of all other

 

 

 

 

 

 

 

 

investments

 

 

 

 

 

 

 

 

Investments

 

 

749

 

538

 

 

Net realized gains

Total

 

 

749

 

538

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

Prior-service credit

 

 

(3)

 

(1)

 

 

*

Actuarial losses

 

 

(31)

 

(31)

 

 

*

Total

 

 

(34)

 

(32)

 

 

 

Total reclassifications for the period

 

$

715

$

506

 

 

 

*These AOCI components are included in the computation of net periodic pension cost. For additional information see Note 14 to the Condensed Consolidated Financial Statements.

68 AIG | Third Quarter 2021 Form 10-Q

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)

 

2021

 

2020

 

 

2021

 

2020

Numerator for EPS:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

1,737

$

294

 

$

5,817

$

(5,817)

Less: Net income from continuing operations

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

70

 

11

 

 

175

 

78

Less: Preferred stock dividends

 

7

 

7

 

 

22

 

22

Income (loss) attributable to AIG common shareholders

 

 

 

 

 

 

 

 

 

from continuing operations

 

1,660

 

276

 

 

5,620

 

(5,917)

Income from discontinued operations, net of income tax expense

 

-

 

5

 

 

-

 

4

Net income (loss) attributable to AIG common shareholders

$

1,660

$

281

 

$

5,620

$

(5,913)

Denominator for EPS:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

852,765,263

 

867,713,308

 

 

861,211,983

 

869,627,926

Dilutive common shares

 

11,254,231

 

5,417,642

 

 

9,790,035

 

-

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

 

864,019,494

 

873,130,950

 

 

871,002,018

 

869,627,926

Income (loss) per common share attributable to AIG common

 

 

 

 

 

 

 

 

 

shareholders:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

1.95

$

0.31

 

$

6.53

$

(6.80)

Income from discontinued operations

$

-

$

0.01

 

$

-

$

-

Income (loss) attributable to AIG common shareholders

$

1.95

$

0.32

 

$

6.53

$

(6.80)

Diluted:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

1.92

$

0.31

 

$

6.45

$

(6.80)

Income from discontinued operations

$

-

$

0.01

 

$

-

$

-

Income (loss) attributable to AIG common shareholders

$

1.92

$

0.32

 

$

6.45

$

(6.80)

(a) For the nine-month period ended September 30, 2020, because we reported a net loss attributable to AIG common shareholders, all common stock equivalents are anti-dilutive and are therefore excluded from the calculation of diluted shares and diluted per share amounts. The number of common shares excluded from the calculation was 4,432,369 shares for the nine-month period ended September 30, 2020.

(b) Dilutive common shares include our share-based employee compensation plans and a weighted average portion of the 10-year warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011, which expired in January 2021. The number of common shares excluded from diluted shares outstanding was 5.2 million and 6.6 million for the three- and nine-month periods ended September 30, 2021, respectively, and 70.9 million and 68.9 million for the three- and nine-month periods ended September 30, 2020, respectively, because the effect of including those common shares in the calculation would have been anti-dilutive.

For information about our repurchases of AIG Common Stock see Note 12 to the Condensed Consolidated Financial Statements.

AIG | Third Quarter 2021 Form 10-Q 69

 

TABLE OF CONTENTS

 

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

 

 

14. Employee Benefits

We sponsor various defined benefit 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 pension benefits:

 

Pension

(in millions)

 

U.S. Plans

 

Non-U.S. Plans

 

Total

Three Months Ended September 30, 2021

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

Service cost

$

2

$

4

$

6

Interest cost

 

22

 

2

 

24

Expected return on assets

 

(62)

 

(5)

 

(67)

Amortization of prior service cost

 

-

 

1

 

1

Amortization of net loss

 

8

 

2

 

10

Net periodic benefit cost (credit)

$

(30)

$

4

$

(26)

Settlement charges

 

27

 

-

 

27

Net benefit cost (credit)

$

(3)

$

4

$

1

Three Months Ended September 30, 2020

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

Service cost

$

1

$

5

$

6

Interest cost

 

33

 

3

 

36

Expected return on assets

 

(60)

 

(5)

 

(65)

Amortization of prior service cost

 

-

 

1

 

1

Amortization of net loss

 

9

 

1

 

10

Net periodic benefit cost (credit)

$

(17)

$

5

$

(12)

Nine Months Ended September 30, 2021

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

Service cost

$

4

$

15

$

19

Interest cost

 

67

 

7

 

74

Expected return on assets

 

(184)

 

(16)

 

(200)

Amortization of prior service cost

 

-

 

3

 

3

Amortization of net loss

 

25

 

5

 

30

Net periodic benefit cost (credit)

$

(88)

$

14

$

(74)

Settlement charges

 

27

 

-

 

27

Net benefit cost (credit)

$

(61)

$

14

$

(47)

Nine Months Ended September 30, 2020

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

Service cost

$

4

$

15

$

19

Interest cost

 

100

 

8

 

108

Expected return on assets

 

(179)

 

(15)

 

(194)

Amortization of prior service cost

 

-

 

2

 

2

Amortization of net loss

 

25

 

5

 

30

Net periodic benefit cost (credit)

$

(50)

$

15

$

(35)

The service cost for our U.S. defined benefit plans only reflects administrative fees as the plans are frozen and no longer accrue benefits. We recognized net expense of $2 million and $6 million for our U.S. and non-U.S. postretirement benefit plans for both the three- and nine-month periods ended September 30, 2021 and 2020, respectively.

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15. Income Taxes

U.S. Tax law changes

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the Tax Act). The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes 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. While the U.S. tax authorities issued formal guidance, including recently issued regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and subject to substantial uncertainties. Additional guidance is expected in future periods. 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.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 crisis. The tax provisions of the CARES Act have not had and are currently not expected to have a material impact on AIG’s U.S. federal tax liabilities.

RECLASSIFICATION OF CERTAIN TAX EFFECTS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

We use an item-by-item approach to release the stranded or disproportionate income tax effects in AOCI related to our available-for-sale securities. Under this approach, a portion of the disproportionate tax effects is assigned to each individual security lot at the date the amount becomes lodged. When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.

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 uncertain tax positions and realizability of deferred tax assets, 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. As of September 30, 2021, the annual effective tax rate includes the tax effects of actual and projected COVID-19 related losses and market developments.

Interim Tax Expense (Benefit)

For the three-month period ended September 30, 2021, the effective tax rate on income from continuing operations was 20.2 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax benefits associated with tax adjustments related to prior year returns, tax exempt income, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. These tax benefits were partially offset by tax charges associated with the effect of foreign operations, valuation allowance activity related to certain foreign subsidiaries, state and local income taxes, and non-deductible transfer pricing charges. The effect of foreign operations is primarily related to income of 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, 2021, the effective tax rate on income from continuing operations was 17.5 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax benefits associated with the release of reserves for uncertain tax positions, penalties and interest related to the recent completion of audit activity by the IRS, release of reserves for uncertain tax positions and interest related to a New York State tax settlement based on the completion of recent audit activity, tax adjustments related to prior year returns, tax exempt income, remeasurement of deferred taxes as a result of an increase in the UK corporate income tax rate enacted during the second quarter, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. These tax benefits were partially offset by tax charges associated with the establishment of U.S. federal valuation allowance related to certain tax attribute carryforwards, the effect of foreign operations, excess tax charges related to share based compensation payments recorded through the income statement, state and local income taxes, and non-deductible transfer pricing charges. We also recognized a tax charge

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associated with reduction of net operating loss deferred tax assets in certain foreign jurisdictions, with a corresponding decrease in the related deferred tax asset valuation allowance. The effect of foreign operations is primarily related to income of 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, 2020, 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 the effect of foreign operations, accrual of interest associated with IRS and other tax authority matters, state and local income taxes, and nondeductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. 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, 2020, the effective tax rate on loss from continuing operations was 13.6 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax effects of the Majority Interest Fortitude Sale, tax charges associated with the establishment of U.S. federal valuation allowance related to certain tax attribute carryforwards, accrual of interest associated with IRS and other tax authority matters, the effect of foreign operations, excess tax charges related to share based compensation payments recorded through the income statement, state and local income taxes, and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. 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, 2021, 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. Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown, we continue to monitor and review its impact on our reinvestment considerations, including regulatory oversight in the relevant jurisdictions.

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, including forecasts of future income for each of our businesses and actual and planned business and operational changes;

the carryforward periods 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 the foreign tax credit carryforwards. Accordingly, we are able to utilize both the net operating loss and foreign tax credit carryforwards concurrently.

Recent events, including the impact of the recent completion of audit activity by the IRS, the COVID-19 crisis, changes in target interest rates by the Board of Governors of the Federal Reserve System, and significant market volatility, continue to impact actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax

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planning strategies. In order to demonstrate the predictability and sufficiency of future taxable income necessary to support the realizability of the net operating losses and foreign tax credit carryforwards, we have considered forecasts of future income for each of our businesses, including assumptions about future macro-economic and AIG-specific conditions and events, and any impact these conditions and events may have on our prudent and feasible tax planning strategies. We also subjected the forecasts to a variety of stresses of key assumptions and evaluated the effect on tax attribute utilization.

The carryforward periods of our foreign tax credit carryforwards range from tax years 2021 through 2023. Carryforward periods for our net operating losses extend from 2028 forward. However, utilization of a portion of our net operating losses is limited under separate return limitation year rules. During the first quarter of 2021, the recent completion of audit activity by the IRS and subsequent release of certain reserves for uncertain tax positions resulted in an initial recognition of additional net operating loss and foreign tax credit carryforwards arising in prior years. Taking into account this initial recognition of additional carryforwards as well as other events and our analysis of their potential impact on utilization of our tax attributes, for the three months ended March 31, 2021, we recorded an increase of $700 million in valuation allowance related to a portion of our net operating loss carryforwards that are no longer more-likely-than-not to be realized. No additional activity was recorded for the three-month periods ended June 30, and September 30, 2021. Accordingly, during the nine months ended September 30, 2021, we have recorded a $700 million valuation allowance through continuing operations.

To the extent that the valuation allowance is attributed to changes in forecast of current year taxable income, the impact is included in our estimated annualized effective tax rate. The valuation allowance related to changes in forecasts of income in future periods as well as other items not related to the current year was recorded discretely.

As of September 30, 2021, the balance sheet reflects a valuation allowance of $850 million related to a portion of our tax attribute carryforwards that are no longer more-likely-than-not to be realized.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies, impact of settlements with taxing authorities, and any changes to 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. Additionally, estimates of future taxable income, including prudent and feasible tax planning strategies, may be further impacted by market developments arising from the COVID-19 crisis and uncertainty regarding its outcome. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

For the nine-month period ended September 30, 2021, recent changes in market conditions, including the COVID-19 crisis and interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance companies’ available for sale securities portfolio, resulting in a deferred tax liability related to net unrealized tax capital gains. As of September 30, 2021, based on all available evidence, we concluded that no valuation allowance is necessary in the U.S. Life Insurance companies’ available for sale securities portfolio.

For the nine-month period ended September 30, 2021, 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 a deferred tax liability related to net unrealized tax capital gains. As of September 30, 2021, based on all available evidence, we concluded that 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, 2021, we recognized net increases of $45 million and $6 million, respectively, in deferred tax asset valuation allowance associated with certain foreign and state jurisdictions, primarily attributable to current year activity. The third quarter increase in valuation allowance is primarily attributable to a corresponding increase in foreign net operating loss deferred tax assets as a result of tax benefits expected to be realized in certain tax jurisdictions. The nine-month period also includes a $16 million decrease in deferred tax asset valuation allowance associated with certain foreign jurisdictions, primarily attributable to a corresponding reduction in foreign net operating loss deferred tax assets as a result of the expiration of a portion of net operating losses prior to utilization in Japan.

Tax Examinations and Litigation

We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign laws.

We are currently under examination by the IRS for the tax years 2011 through 2013.

In September 2020, we received the IRS Revenue Agent Report containing agreed and disagreed issues for the audit of tax years 2007-2010. In October 2020, we filed a protest of the disagreed issues with the IRS Independent Office of Appeals (IRS Appeals). In March 2021, the IRS audit team issued their rebuttal to the protest of disagreed issues to IRS Appeals. We have also received notification that the disagreed issues were accepted for review by IRS Appeals.

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In 2009, after paying amounts due on a statutory notice of deficiency related to the disallowance of foreign tax credits associated with cross border financing transactions, we filed a refund lawsuit in the Southern District of New York (Southern District) with respect to tax year 1997. In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute with respect to other relevant tax years. In 2019, we agreed with the IRS to execute an agreement for the tax years at issue in which AIG would waive restrictions on the assessment of additional tax related to the settlement of the underlying issues in those tax years. The litigation was stayed pending the outcome of the review process. During the fourth quarter of 2020, the parties concluded the review process and executed a binding settlement agreement with respect to the underlying issues. On October 22, 2020, the Southern District dismissed the case based upon the settlement reached between AIG and the government. The parties continue to review the related interest calculations based on the settlement agreement, which will become due upon the IRS’ issuance of a Notice and Demand for Payment. During June 2021, AIG made an additional payment of $354 million to the U.S. Treasury with respect to this matter. While we continue to finalize the interest calculations with the IRS, AIG expects to make the remaining payment as early as the fourth quarter of 2021.

Accounting for Uncertainty in Income Taxes

At September 30, 2021 and December 31, 2020, our unrecognized tax benefits, excluding interest and penalties, were $1.1 billion and $2.3 billion, respectively. At September 30, 2021 and December 31, 2020, 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 $10 million and $44 million, respectively. Accordingly, at September 30, 2021 and December 31, 2020, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $1.1 billion and $2.3 billion, respectively. The decrease in the nine-month period ended September 30, 2021 is primarily attributable to the recent completion of audit activity by the IRS and New York State.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At September 30, 2021 and December 31, 2020, we had accrued liabilities of $73 million and $286 million, respectively, for the payment of interest (net of the federal benefit) and penalties. For the nine-month periods ended September 30, 2021 and 2020, we accrued expense (benefit) of $(203) million and $126 million, respectively, for the payment of interest and penalties. The activity in the nine-month period ended September 30, 2021 is primarily related to the recent completion of audit activity by the IRS and New York State.

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $15 million, 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.

16. Subsequent Events

Dividends Declared

On November 4, 2021, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 30, 2021 to shareholders of record on December 16, 2021. On November 4, 2021, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on December 15, 2021 to holders of record on November 30, 2021.

CLOSING OF BLACKSTONE TRANSACTION

On July 14, 2021, AIG and Blackstone announced that they have reached a definitive agreement for Blackstone to acquire a 9.9 percent equity stake in SAFG, which is the holding company for AIG’s Life and Retirement business, for $2.2 billion in an all cash transaction, subject to adjustment if the final pro forma adjusted book value is greater or lesser than the target pro forma adjusted book value. The transaction closed on November 2, 2021. On November 1, 2021, SAFG declared a dividend payable to AIG in the amount of $8.3 billion. In connection with such dividend, SAFG issued a promissory note to AIG in the amount of $8.3 billion, which will be required to be paid to AIG prior to the initial public offering of SAFG.

For more information on the separation of Life and Retirement business and relationship with Blackstone see Note 1 to the Condensed Consolidated Financial Statements.

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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, 2020 (the 2020 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,” “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 AIG’s control. These projections, goals, assumptions and statements are often preceded by, followed by or include 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, expense reduction efforts, the outcome of contingencies such as legal proceedings, anticipated organizational, business or regulatory changes, the effect of catastrophes, such as the COVID-19 crisis, and macroeconomic events, anticipated dispositions, 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.

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It is possible that AIG’s 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 AIG’s actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:

AIG’s ability to successfully separate the Life and Retirement business and the impact any separation may have on AIG, its businesses, employees, contracts and customers;

AIG’s ability to close the sale of its Affordable Housing portfolio to an affiliate of Blackstone;

the occurrence of catastrophic events, both natural and man-made, including COVID-19, other pandemics, civil unrest and the effects of climate change;

changes in market and industry conditions, including a prolonged global economic recovery, volatility in financial and capital markets, fluctuations in interest rates, inflationary pressures and disruptions to AIG’s operations driven by COVID-19 and responses thereto, including new or changed governmental policy and regulatory actions;

AIG’s ability to effectively execute on the AIG 200 operational programs designed to modernize AIG’s operating infrastructure and enhance user and customer experiences, and AIG’s ability to achieve anticipated cost savings from AIG 200;

the impact of potential information technology, cybersecurity or data security breaches, including as a result of cyber-attacks or security vulnerabilities, the likelihood of which may increase due to extended remote business operations as a result of COVID-19;

availability and affordability of reinsurance;

disruptions in the availability of AIG’s electronic data systems or those of third parties;

the impact of COVID-19 generally, including with respect to AIG’s business, financial condition and results of operations;

changes to the valuation of AIG’s investments;

actions by rating agencies with respect to AIG’s credit and financial strength ratings as well as those of its businesses and subsidiaries;

the effectiveness of AIG’s enterprise risk management policies and procedures, including with respect to business continuity and disaster recovery plans;

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

AIG’s ability to successfully dispose of, monetize and/or acquire businesses or assets or successfully integrate acquired businesses;

nonperformance or defaults by counterparties, including Fortitude Reinsurance Company Ltd. (Fortitude Re);

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

changes in judgments concerning potential cost-saving opportunities;

concentrations in AIG’s investment portfolios;

changes to our sources of or access to liquidity;

changes in judgments or assumptions concerning insurance underwriting and insurance liabilities;

the requirements, which may change from time to time, of the global regulatory framework to which AIG is subject;

significant legal, regulatory or governmental proceedings; 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 June 30, 2021;

–Part I, Item 2. MD&A of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021; and

–Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the 2020 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.

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INDEX TO ITEM 2

 

 

 

 

Page

Use of Non-GAAP Measures

 

78

Critical Accounting Estimates

 

80

Executive Summary

 

81

Overview

 

81

AIG's Operating Structure

 

83

Financial Performance Summary

 

84

AIG's Outlook – Industry and Economic Factors

 

89

Consolidated Results of Operations

 

93

Business Segment Operations

 

99

General Insurance

 

100

Life and Retirement

 

112

Other Operations

 

132

Investments

 

134

Overview

 

134

Investment Highlights in the Nine Months Ended September 30, 2021

 

134

Investment Strategies

 

135

Credit Ratings

 

137

Insurance Reserves

 

145

Loss Reserves

 

145

Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC

 

151

Liquidity and Capital Resources

 

160

Overview

 

160

Analysis of Sources and Uses of Cash

 

162

Liquidity and Capital Resources of AIG Parent and Subsidiaries

 

163

Credit Facilities

 

165

Contractual Obligations

 

165

Off-Balance Sheet Arrangements and Commercial Commitments

 

165

Debt

 

166

Credit Ratings

 

168

Financial Strength Ratings

 

168

Rating Agency Actions Related to the Announced Separation of Life and Retirement

 

169

Regulation and Supervision

 

169

Dividends

 

169

Repurchases of AIG Common Stock

 

170

Dividend Restrictions

 

170

Enterprise Risk Management

 

170

Overview

 

170

Regulatory Environment

 

171

Overview

 

171

Glossary

 

172

Acronyms

 

175

 

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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 (SEC) 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 (loss) (AOCI) adjusted for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets and deferred tax assets (DTA) (Adjusted book value per common share) is used to show the amount of our net worth on a per-common share basis after eliminating items that can fluctuate significantly from period to period including changes in fair value of AIG’s 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. In addition, we adjust for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets held by AIG in support of Fortitude Re’s reinsurance obligations to AIG post deconsolidation of Fortitude Re (Fortitude Re funds withheld assets) since these fair value movements are economically transferred to Fortitude Re. 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. Adjusted book value per common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI adjusted for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets, 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 adjusted for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets 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. In addition, we adjust for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets since these fair value movements are economically transferred to Fortitude Re. 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 (the Tax Act);

and by excluding the net realized gains (losses) and other charges 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.

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ITEM 2 | Use of Non-GAAP Measures

 

Adjusted revenues exclude Net realized 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 segments.

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 gains and losses;

changes in the fair value of equity securities;

net investment income on Fortitude Re funds withheld assets;

following deconsolidation of Fortitude Re, net realized gains and losses on Fortitude Re funds withheld assets;

loss (gain) on extinguishment of debt;

all net realized 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 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 divestitures;

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 acquiring or divesting businesses;

losses from the impairment of goodwill; and

non-recurring 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 accident year combined ratios, as adjusted: both the accident year loss and accident year 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 catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and man-made catastrophe losses, 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.

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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;

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, for example universal life, variable and fixed annuities, and fixed indexed annuities;

reinsurance assets, including the allowance for credit losses;

goodwill impairment;

allowances for credit losses primarily on loans and available for sale fixed maturity securities;

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.

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 2020 Annual Report.

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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 2020 Annual Report, in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

Separation of Life and Retirement Business and Relationship with Blackstone Inc.

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG. On July 14, 2021, AIG and Blackstone Inc. (Blackstone) announced that they have reached a definitive agreement for Blackstone to acquire a 9.9 percent equity stake in SAFG Retirement Services, Inc. (SAFG), which is the holding company for AIG’s Life and Retirement business, for $2.2 billion in an all cash transaction, subject to adjustment if the final pro forma adjusted book value is greater or lesser than the target pro forma adjusted book value. The transaction contemplates that most of AIG’s investment operations would be transferred to SAFG or its subsidiaries as part of the separation. As part of this agreement, AIG also agreed to enter into a long-term asset management relationship with Blackstone to manage an initial $50 billion of Life and Retirement’s existing investment portfolio upon closing of the equity investment, with that amount increasing by increments of $8.5 billion per year for the next five years beginning in the fourth quarter of 2022, for an aggregate of $92.5 billion. Following the closing of the transaction, Blackstone will be entitled to designate one member of the board of directors of SAFG, which will consist of 11 directors. Pursuant to the definitive agreement, Blackstone will be required to hold its ownership interest in SAFG following the completion of the separation of the Life and Retirement business, subject to exceptions permitting Blackstone to sell 25%, 67% and 75% of its shares after the first, second and third anniversaries, respectively, of the initial public offering of SAFG (the IPO), with the transfer restrictions terminating in full on the fifth anniversary of the IPO. In the event that the IPO of SAFG is not completed prior to the second anniversary of the closing of the transaction, Blackstone will have the right to require AIG to undertake the IPO, and in the event that the IPO has not been completed prior to the third anniversary of the closing, Blackstone will have the right to exchange all or a portion of its ownership interest in SAFG for shares of AIG’s common stock on the terms set forth in the definitive agreement. These transactions closed on November 2, 2021. While we currently believe the IPO is the next step in the separation of the Life and Retirement business from AIG, no assurance can be given regarding the form that future separation transactions may take or the specific terms or timing thereof, or that a separation will in fact occur. Any separation transaction will be subject to the satisfaction of various conditions and approvals, including approval by the AIG Board of Directors, receipt of insurance and other required regulatory approvals, and satisfaction of any applicable requirements of the SEC.

On July 14, 2021, AIG and Blackstone Real Estate Income Trust (BREIT), a long-term, perpetual capital vehicle affiliated with Blackstone, announced that they have reached a definitive agreement for BREIT to acquire AIG’s interests in a U.S. affordable housing portfolio for approximately $5.1 billion, subject to certain adjustments, in an all cash transaction. As of September 30, 2021, the assets, primarily Other invested assets (Investment real estate) and liabilities, primarily Debt of consolidated investment entities, related to the Affordable Housing portfolio, $4.3 billion and $2.7 billion, respectively, are classified as held for sale and are reported in Other assets and Other liabilities within our Condensed Consolidated Balance Sheets. This transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2021.

Debt Cash Tender Offers

In the nine months ended September 30, 2021, we repurchased, through cash tender offers, and canceled approximately $262 million aggregate principal amount of certain notes and debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $369 million and wrote off $4 million of unamortized debt issuance costs, resulting in a total loss on extinguishment of debt of approximately $111 million.

Sale of Certain AIG Life and Retirement Retail Mutual Funds Business

On February 8, 2021, AIG announced the execution of a definitive agreement with Touchstone Investments (Touchstone), an indirect wholly-owned subsidiary of Western & Southern Financial Group, to sell certain assets of AIG Life and Retirement’s Retail Mutual Funds business. The transaction closed on July 16, 2021 at which time we received initial proceeds, and twelve retail mutual funds managed by SunAmerica Asset Management, LLC (SAAMCo), a member of AIG Life and Retirement, with $6.8 billion in assets, were reorganized into Touchstone funds. Additional proceeds may be earned over a three-year period based on asset levels in certain reorganized funds. Six retail mutual funds managed by SAAMCo and not included in the transaction were liquidated. AIG Life and Retirement will retain its fund management platform and capabilities dedicated to its variable annuity insurance products.

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ITEM 2 | Executive Summary

 

Sale of Fortitude Holdings

On June 2, 2020, we completed the sale of a majority of the interests in Fortitude Group Holdings, LLC (Fortitude Holdings) to Carlyle FRL, L.P. (Carlyle FRL), an investment fund advised by an affiliate of The Carlyle Group Inc. (Carlyle), and T&D United Capital Co., Ltd. (T&D), a subsidiary of T&D Holdings, Inc., under the terms of a membership interest purchase agreement entered into on November 25, 2019 by and among AIG, Fortitude Holdings, Carlyle FRL, Carlyle, T&D and T&D Holdings, Inc. (the Majority Interest Fortitude Sale). AIG established Fortitude Re, a wholly owned subsidiary of Fortitude Holdings, in 2018 in a series of reinsurance transactions related to AIG’s Run-Off portfolio. As of September 30, 2021, approximately $29.9 billion of reserves from AIG’s Life and Retirement Run-Off Lines and approximately $3.8 billion of reserves from AIG’s General Insurance Run-Off Lines, related to business written by multiple wholly-owned AIG subsidiaries, had been ceded to Fortitude Re under these reinsurance transactions. As of closing of the Majority Interest Fortitude Sale, these reinsurance transactions are no longer considered affiliated transactions and Fortitude Re is the reinsurer of the majority of AIG’s Run-Off operations. As these reinsurance transactions are structured as modified coinsurance and loss portfolio transfers with funds withheld, following the closing of the Majority Interest Fortitude Sale, AIG continues to reflect the invested assets, which consist mostly of available for sale securities, supporting Fortitude Re’s obligations, in AIG’s financial statements.

AIG sold a 19.9 percent ownership interest in Fortitude Holdings to TC Group Cayman Investments Holdings, L.P., an affiliate of Carlyle, in November 2018. As a result of completion of the Majority Interest Fortitude Sale, Carlyle FRL purchased from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D purchased from AIG a 25 percent ownership interest in Fortitude Holdings; AIG retained a 3.5 percent ownership interest in Fortitude Holdings and one seat on its Board of Managers. The $2.2 billion of proceeds received by AIG at closing included (i) the $1.8 billion under the Majority Interest Fortitude Sale, subject to a post-closing purchase price adjustment pursuant to which AIG would pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur through December 31, 2023, up to a maximum payment of $500 million; and (ii) a $383 million purchase price adjustment from Carlyle FRL and T&D, corresponding to their respective portions of a proposed $500 million non-pro rata distribution from Fortitude Holdings that was not received by AIG prior to the closing. Effective in the second quarter of 2021, AIG, Fortitude Holdings, Carlyle FRL, T&D and Carlyle amended the purchase agreement to finalize the post-closing purchase price adjustment for adverse reserve development. As a result of this amendment, during the nine months ended September 30, 2021, AIG recorded a $21 million benefit through Policyholder benefits and losses incurred and eliminated further net exposure to adverse development on the reserves ceded to Fortitude Re.

For further discussion on the sale of Fortitude Holdings see Note 7 to the Condensed Consolidated Financial Statements.

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AIG’S OPERATING STRUCTURE

AIG reports the results of its businesses through three segments – 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. Other Operations is primarily comprised of corporate, our institutional asset management business and consolidation and eliminations. On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG.

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, and our global reinsurance business, AIG Re. Our General Insurance International operating segment includes regional insurance businesses in Japan, the United Kingdom, Europe, Middle East and Africa (EMEA region), Asia Pacific, Latin America and Caribbean, and China. International also includes the results of Talbot Holdings, Ltd. as well as AIG’s global specialty business.

For further discussion on our business segments see Note 3 to the Condensed Consolidated Financial Statements, and for further discussion on the separation of Life and Retirement see Note 1 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.

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 1Picture 2

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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 Re); Talbot Holdings Ltd. (Talbot); Western World Insurance Group, Inc. and Glatfelter Insurance Group (Glatfelter).

Life and Retirement includes the following major operating companies: American General Life Insurance Company (AGL); 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 primarily consists of income from assets held by AIG Parent and other corporate subsidiaries, deferred tax assets related to tax attributes, corporate expenses and intercompany eliminations, our institutional asset management business and results of our consolidated investment entities, General Insurance portfolios in run-off as well as the historical results of our legacy insurance lines ceded to Fortitude Re.

 

 

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Financial Performance Summary

 

Net Income (Loss) Attributable to AIG Common Shareholders

Three Months Ended September 30,

(in millions)

 

Chart 3

 

2021 and 2020 Quarterly Comparison

Net income attributable to AIG common shareholders increased $1.4 billion due to the following, on a pre-tax basis:

higher net realized gains excluding Fortitude Re funds withheld assets and embedded derivative of $1.2 billion, driven primarily by $943 million of gains on other derivative and hedge activity, gains on sales of real estate and other assets ($349 million) and lower derivative losses on variable annuity embedded derivatives, net of related hedges ($109 million), offset by adverse impact of foreign exchange ($377 million);

lower net realized loss on Fortitude Re funds withheld embedded derivative ($447 million) and higher net realized gains on Fortitude Re funds withheld assets ($158 million); and

higher underwriting income in General Insurance ($443 million) from higher net premium marked by strong rate improvement, higher renewal retentions and strong new business growth, with continued attritional loss ratio improvement as well as lower catastrophe losses, net of reinstatement premiums ($170 million) and favorable prior year development as compared to unfavorable development ($63 million).

These pre-tax increases were partially offset by:

Life and Retirement, which had higher DAC amortization ($495 million) principally due to the impact of the annual assumption review which was partially offset by the gain from the sale of our retail mutual fund business; and

$365 million higher income tax expense attributable primarily to higher income from continuing operations.

For further discussion see Consolidated Results of Operations.

 

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Net Income (Loss) Attributable to AIG Common Shareholders

Nine Months Ended September 30,

(in millions)

 

Chart 4

 

2021 and 2020 Year-to-Date Comparison

Net income attributable to AIG common shareholders increased $11.5 billion due to the following, on a pre-tax basis:

the recognition of an $8.4 billion loss on the closing of the Majority Interest Fortitude Sale in 2020;

net realized gain on Fortitude Re funds withheld embedded derivative as compared to a loss ($1.6 billion) and higher net realized gains on Fortitude Re funds withheld assets ($408 million);

$1.4 billion higher net investment income, of which $459 million is excluding Fortitude Re funds withheld assets, with higher returns in our investment portfolio primarily due to alternative investments, an increase which was driven by positive returns achieved in equity markets, partially offset by declines in fair value option bonds;

lower policyholder benefits ($1.6 billion) due in part to the cession to Fortitude Re and higher policy fees ($117 million) in Life and Retirement, partially offset by lower premiums ($490 million) and higher DAC amortization ($212 million) principally due to the impact of the annual assumption review; and

higher underwriting income in General Insurance ($1.4 billion) from higher net premium marked by strong rate improvement, higher renewal retentions and strong new business growth, with continued attritional loss ratio improvement as well as lower catastrophe losses, net of reinstatement premiums ($712 million) and higher favorable prior year development ($36 million).

These pre-tax increases were partially offset by:

higher Corporate general operating expenses, driven largely by increases in performance-based employee costs ($93 million) and transaction costs ($48 million);

prior period having included the results of Fortitude Re, a loss of $241 million, up through the Majority Interest Fortitude Sale on June 2, 2020;

$2.2 billion higher income tax expense with $1.7 billion attributable to the tax benefit on the deconsolidation of Fortitude Holdings in 2020; and

lower net realized gains excluding Fortitude Re funds withheld assets and embedded derivative of $99 million, where a $1.0 billion decrease in gains on variable annuity embedded derivatives, net of hedging was largely offset by an increase in other realized gains primarily driven by higher gains on sales of real estate and other assets ($548 million) as well as favorable movement in the allowance for credit losses on fixed maturity securities ($363 million).

For further discussion see Consolidated Results of Operations.

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Adjusted Pre-Tax Income*

Three Months Ended September 30,

(in millions)

 

Chart 4

2021 and 2020 Quarterly Comparison

Adjusted pre-tax income increased $210 million primarily due to:

higher underwriting income in General Insurance ($443 million) from higher net premium marked by strong rate improvement, higher renewal retentions and strong new business growth, with continued attritional loss ratio improvement as well as lower catastrophe losses, net of reinstatement premiums ($170 million) and favorable prior year development as compared to unfavorable development ($63 million).

These adjusted pre-tax increases were partially offset by:

lower adjusted pre-tax income for Life and Retirement ($131 million) driven by unfavorable mortality as well as an unfavorable impact from the annual assumption review ($59 million).

 

Adjusted Pre-Tax Income*

Nine Months Ended September 30,

(in millions)

 

Chart 4

2021 and 2020 Year-to-Date Comparison

Adjusted pre-tax income increased $2.2 billion primarily due to:

returns in our investment portfolio were $554 million higher due primarily to alternative investments, an increase which was driven by positive returns achieved in equity markets, partially offset by declines in available for sale securities and fair value option bonds;

higher underwriting income in General Insurance ($1.4 billion) from higher net premium marked by strong rate improvement, higher renewal retentions and strong new business growth, with continued attritional loss ratio improvement as well as lower catastrophe losses, net of reinstatement premiums ($712 million) and higher favorable prior year development ($36 million); and

investment portfolio returns at Life and Retirement that more than offset the impact of unfavorable mortality and unfavorable annual assumption review ($59 million).

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

 

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General Operating and Other Expenses

Three Months Ended September 30,

(in millions)

 

Chart 1

 

2021 and 2020 Quarterly Comparison

General operating and other expenses increased $249 million primarily due to increases in expenses related to business growth and professional fees.

General operating and other expenses in the three-month periods ended September 30, 2021 and 2020 included approximately $104 million and $100 million of pre-tax restructuring and other costs, respectively, which were primarily comprised of employee severance charges and other costs related to organizational simplification, operational efficiency, and business rationalization.

 

 

General Operating and Other Expenses

Nine Months Ended September 30,

(in millions)

 

Chart 1

 

2021 and 2020 Year-to-Date Comparison

General operating and other expenses increased $315 million primarily due to increases in professional fees and transaction costs partially offset by decreases in restructuring and other costs.

General operating and other expenses in the nine-month periods ended September 30, 2021 and 2020 included approximately $304 million and $324 million of pre-tax restructuring and other costs, respectively, which were primarily comprised of employee severance charges and other costs related to organizational simplification, operational efficiency, and business rationalization.

 

 

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Return on Common Equity

 

Return on Common Equity

Chart 1

 

Chart 3

 

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.

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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 challenging market conditions in the first nine months of 2021, characterized by factors such as the impact of COVID-19 and the related governmental and societal responses, interest rate volatility, inflationary pressures, an uneven global economic recovery, global trade tensions and 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.

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG. On July 14, 2021, AIG and Blackstone announced that they have reached a definitive agreement for Blackstone to acquire a 9.9 percent equity stake in SAFG, which is the holding company for AIG’s Life and Retirement business, for $2.2 billion in an all cash transaction, subject to adjustment if the final pro forma adjusted book value is greater or lesser than the target pro forma adjusted book value. The transaction contemplates that most of AIG’s investment operations would be transferred to SAFG or its subsidiaries as part of the separation. As part of this agreement, AIG also agreed to enter into a long-term asset management relationship with Blackstone to manage an initial $50 billion of Life and Retirement’s existing investment portfolio upon closing of the equity investment, with that amount increasing by increments of $8.5 billion per year for the next five years beginning in the fourth quarter of 2022, for an aggregate of $92.5 billion. These transactions closed on November 2, 2021. While we currently believe an initial public offering is the next step in the separation of the Life and Retirement business from AIG, no assurance can be given regarding the form that a separation transaction may take or the specific terms or timing thereof, or that a separation will in fact occur. Any separation transaction will be subject to the satisfaction of various conditions and approvals, including approval by the AIG Board of Directors, receipt of insurance and other required regulatory approvals, and satisfaction of any applicable requirements of the SEC.

On July 14, 2021, AIG and BREIT, a long-term, perpetual capital vehicle affiliated with Blackstone, announced that they have reached a definitive agreement for BREIT to acquire AIG’s interests in a U.S. affordable housing portfolio for approximately $5.1 billion, subject to certain adjustments, in an all cash transaction. As of September 30, 2021, the assets, primarily Other invested assets (Investment real estate) and liabilities, primarily Debt of consolidated investment entities, related to the Affordable Housing portfolio, $4.3 billion and $2.7 billion, respectively, are classified as held for sale and are reported in Other assets and Other liabilities within our Condensed Consolidated Balance Sheets. This transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2021.

For additional information on the separation of AIG’s Life and Retirement business, please see the 2020 Annual Report, Part I, Item 1A. Risk Factors – Business and Operations – No assurances can be given that the separation of our Life and Retirement business will occur or as to the specific terms or timing thereof. In addition, the separation could cause the emergence or exacerbate the effects of other risks to which AIG is exposed and – Overview above.

Impact of COVID-19

We are continually assessing the impact on our business, operations and investments of COVID-19 and the resulting ongoing economic and societal disruption. These impacts initially included a global economic contraction, disruptions in financial markets, increased market volatility and declines in certain equity and other asset prices that had negative effects on our investments, our access to liquidity, our ability to generate new sales and the costs associated with claims. While many of the major global economies continue to recover and global financial markets appear to have largely stabilized, there remains a risk that the disruptions previously experienced could return and new ones emerge as COVID-19 persists or new variants arise. In addition, in response to the crisis, new governmental, legislative and regulatory actions have been taken and continue to be developed that have resulted and could continue to result in additional restrictions and requirements, or court decisions rendered, relating to or otherwise affecting our policies that may have a negative impact on our business, operations and capital.

General Insurance offers numerous products for which we are monitoring claims activity and assessing adverse impact on future new and renewal business in relation to the COVID-19 crisis. We are continually reassessing our exposures in light of unfolding developments in the U.S. and globally and evaluating coverage by our reinsurance arrangements.

In our Life and Retirement business, the most significant impacts relating to COVID-19 have been the impact of interest rate and equity market levels on spread and fee income, deferred acquisition cost amortization and adverse mortality. We are actively monitoring the mortality rates and the potential direct and indirect impacts that COVID-19 may have across our portfolio of Life and Retirement businesses.

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We have a diverse investment portfolio with material exposures to various forms of credit risk. The far-reaching economic impacts of COVID-19 have been largely offset, to date, by intervention taken by governments and monetary authorities and equity market rebound resulting in a minimal impact on the value of the portfolio. At this point in time, uncertainty surrounding the duration and severity of the COVID-19 crisis makes the long-term financial impact difficult to quantify.

For additional information please see the 2020 Annual Report, Part I, Item 1A. Risk Factors – Market Conditions – COVID-19 is adversely affecting, and is expected to continue to adversely affect, our global business, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope, severity and duration of the crisis, and the governmental, legislative and regulatory actions taken and court decisions rendered in response thereto.

Impact of Changes in the Interest Rate Environment

Key U.S. benchmark rates have been volatile in 2021 as investors form opinions over recent elevated inflation measures and whether they will be transitory or not. While key rates have recently increased, they are still historically low. The low interest rate environment negatively affects sales of interest rate sensitive products in our industry and negatively impacts 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. 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. We may not be able to fully mitigate our interest rate risk by matching exposure of our assets relative to our liabilities. A low interest rate environment could also impair our ability to earn the returns assumed in the pricing and the reserving of our products at the time they were sold and issued.

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 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. Fixed annuities have surrender charge periods, generally in the three-to-five year range, 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 closely monitor surrenders of fixed annuities as contracts with lower minimum interest rates come out of the surrender charge period. 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.

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For investment-oriented products, for example universal life, and variable, fixed and fixed indexed annuities, 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 begin to rise again, we may need to raise crediting rates on in-force business for competitive and other reasons, potentially offsetting a portion of the additional investment income resulting from investing in a higher interest rate environment.

Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 68 percent were crediting at the contractual minimum guaranteed interest rate as of September 30, 2021. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent were 58 percent and 59 percent as of September 30, 2021 and December 31, 2020, 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 universal life products in our Life Insurance business, 67 percent of the account values were crediting at the contractual minimum guaranteed interest rate as of September 30, 2021.

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, excluding balances ceded to Fortitude Re:

 

Current Crediting Rates

September 30, 2021

 

 

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%

$

9,970

$

1,940

$

17,877

$

29,787

 

> 1% - 2%

 

4,661

 

29

 

1,683

 

6,373

 

> 2% - 3%

 

10,551

 

-

 

18

 

10,569

 

> 3% - 4%

 

8,282

 

41

 

6

 

8,329

 

> 4% - 5%

 

485

 

-

 

5

 

490

 

> 5% - 5.5%

 

34

 

-

 

5

 

39

 

Total Individual Retirement

$

33,983

$

2,010

$

19,594

$

55,587

 

Group Retirement*

 

 

 

 

 

 

 

 

 

<=1%

$

2,120

$

3,242

$

4,673

$

10,035

 

> 1% - 2%

 

6,094

 

658

 

101

 

6,853

 

> 2% - 3%

 

14,842

 

-

 

-

 

14,842

 

> 3% - 4%

 

733

 

-

 

-

 

733

 

> 4% - 5%

 

7,053

 

-

 

-

 

7,053

 

> 5% - 5.5%

 

165

 

-

 

-

 

165

 

Total Group Retirement

$

31,007

$

3,900

$

4,774

$

39,681

 

Universal life insurance

 

 

 

 

 

 

 

 

 

<=1%

$

-

$

-

$

-

$

-

 

> 1% - 2%

 

102

 

25

 

356

 

483

 

> 2% - 3%

 

258

 

539

 

1,206

 

2,003

 

> 3% - 4%

 

1,424

 

179

 

209

 

1,812

 

> 4% - 5%

 

3,108

 

2

 

-

 

3,110

 

> 5% - 5.5%

 

239

 

-

 

-

 

239

 

Total universal life insurance

$

5,131

$

745

$

1,771

$

7,647

 

Total

$

70,121

$

6,655

$

26,139

$

102,915

 

Percentage of total

 

68

%

7

%

25

%

100

%

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

AIG | Third Quarter 2021 Form 10-Q 91

 

TABLE OF CONTENTS

 

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 currently 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 be disciplined in pricing and risk selection.

In addition, for our General Insurance segment, 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

In our Life and Retirement business, we and our distributors are subject to laws and regulations regarding the standard of care applicable to sales of our products and the provision of advice to our customers. In recent years, many of these laws and regulations have been revised or reexamined while others have been newly adopted. We continue to closely follow these legislative and regulatory activities. For additional information regarding these legislative and regulatory activities, see Item 1. Business – Regulation – U.S. Regulation – Standard of Care Developments in the 2020 Annual Report. Changes in standard of care requirements or new standards issued by governmental authorities, such as the Department of Labor, the SEC, the National Association of Insurance Commissioners (NAIC) or state regulators and/or legislators, may affect our businesses, results of operations and financial condition. While we cannot predict the long-term impact of these legislative and regulatory 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.

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 exit from the European Union (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

2021

2020

 

Change

 

 

2021

2020

 

Change

 

Currency:

 

 

 

 

 

 

 

 

 

 

 

GBP

0.72

0.78

 

(8)

%

 

0.72

0.79

 

(9)

%

EUR

0.84

0.87

 

(3)

%

 

0.83

0.90

 

(8)

%

JPY

110.06

106.80

 

3

%

 

107.77

107.94

 

-

%

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.

92 AIG | Third Quarter 2021 Form 10-Q

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, 2021 and 2020. 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 Critical Accounting Estimates in this MD&A and Part II, Item 7. MD&A – Critical Accounting Estimates in the 2020 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)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

7,504

$

6,677

 

12

%

 

$

21,925

$

21,527

 

2

%

Policy fees

 

714

 

648

 

10

 

 

 

2,269

 

2,152

 

5

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income - excluding Fortitude Re funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

withheld assets

 

3,220

 

3,342

 

(4)

 

 

 

9,559

 

9,100

 

5

 

Net investment income - Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

assets

 

495

 

458

 

8

 

 

 

1,488

 

574

 

159

 

Total net investment income

 

3,715

 

3,800

 

(2)

 

 

 

11,047

 

9,674

 

14

 

Net realized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) - excluding Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld assets and embedded derivative

 

679

 

(498)

 

NM

 

 

 

1,331

 

1,430

 

(7)

 

Net realized gains on Fortitude Re funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

withheld assets

 

190

 

32

 

494

 

 

 

536

 

128

 

319

 

Net realized gains (losses) on Fortitude Re funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

withheld embedded derivative

 

(209)

 

(656)

 

68

 

 

 

117

 

(1,493)

 

NM

 

Total net realized gains (losses)

 

660

 

(1,122)

 

NM

 

 

 

1,984

 

65

 

NM

 

Other income

 

242

 

218

 

11

 

 

 

745

 

642

 

16

 

Total revenues

 

12,835

 

10,221

 

26

 

 

 

37,970

 

34,060

 

11

 

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

5,959

 

5,872

 

1

 

 

 

17,182

 

18,718

 

(8)

 

Interest credited to policyholder account balances

 

923

 

882

 

5

 

 

 

2,663

 

2,757

 

(3)

 

Amortization of deferred policy acquisition costs

 

1,260

 

707

 

78

 

 

 

3,479

 

3,323

 

5

 

General operating and other expenses

 

2,240

 

1,991

 

13

 

 

 

6,546

 

6,231

 

5

 

Interest expense

 

328

 

379

 

(13)

 

 

 

1,008

 

1,099

 

(8)

 

(Gain) loss on extinguishment of debt

 

51

 

(2)

 

NM

 

 

 

149

 

15

 

NM

 

Net (gain) loss on divestitures

 

(102)

 

24

 

NM

 

 

 

(108)

 

8,652

 

NM

 

Total benefits, losses and expenses

 

10,659

 

9,853

 

8

 

 

 

30,919

 

40,795

 

(24)

 

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense (benefit)

 

2,176

 

368

 

491

 

 

 

7,051

 

(6,735)

 

NM

 

Income tax expense (benefit)

 

439

 

74

 

493

 

 

 

1,234

 

(918)

 

NM

 

Income (loss) from continuing operations

 

1,737

 

294

 

491

 

 

 

5,817

 

(5,817)

 

NM

 

Income from discontinued operations, net of income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

taxes

 

-

 

5

 

NM

 

 

 

-

 

4

 

NM

 

Net income (loss)

 

1,737

 

299

 

481

 

 

 

5,817

 

(5,813)

 

NM

 

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

70

 

11

 

NM

 

 

 

175

 

78

 

124

 

Net income (loss) attributable to AIG

 

1,667

 

288

 

479

 

 

 

5,642

 

(5,891)

 

NM

 

Less: Dividends on preferred stock

 

7

 

7

 

-

 

 

 

22

 

22

 

-

 

Net income (loss) attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

$

1,660

$

281

 

491

%

 

$

5,620

$

(5,913)

 

NM

%

 

AIG | Third Quarter 2021 Form 10-Q 93

 

TABLE OF CONTENTS

 

ITEM 2 | Consolidated Results of Operations

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in millions, except per common share data)

 

 

 

 

 

 

 

 

2021

 

 

2020

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

$

594,800

 

$

586,481

 

Long-term debt

 

 

 

 

 

 

24,582

 

 

28,103

 

Debt of consolidated investment entities

 

 

 

 

 

 

6,968

 

 

9,431

 

Total AIG shareholders’ equity

 

 

 

 

 

 

 

 

64,863

 

 

66,362

 

Book value per common share

 

 

 

 

 

 

 

 

77.03

 

 

76.46

 

Adjusted book value per common share

 

 

 

 

 

 

 

 

61.80

 

 

57.01

 

The following table presents a reconciliation of Book value per common share to Adjusted book value per common share, which is a non-GAAP measure. For additional information see Use of Non-GAAP Measures.

 

September 30,

 

December 31,

(dollars in millions, except per common share data)

 

2021

 

2020

Total AIG shareholders' equity

$

64,863

$

66,362

Preferred equity

 

485

 

485

Total AIG common shareholders' equity

 

64,378

 

65,877

Less: Accumulated other comprehensive income (loss)

 

8,606

 

13,511

Add: Cumulative unrealized gains and losses related to

 

 

 

 

Fortitude Re funds withheld assets

 

2,966

 

4,657

Less: Deferred tax assets

 

7,083

 

7,907

Adjusted common shareholders' equity

$

51,655

$

49,116

 

 

 

 

 

Total common shares outstanding

 

835,796,051

 

861,558,049

Book value per common share

$

77.03

$

76.46

Adjusted book value per common share

 

61.80

 

57.01

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)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2020

 

Actual or annualized net income (loss) attributable to AIG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders

$

6,640

 

$

1,124

 

$

7,493

 

$

(7,884)

 

$

(5,973)

 

Actual or annualized adjusted after-tax income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to AIG common shareholders

 

3,348

 

 

2,832

 

 

4,121

 

 

1,832

 

 

2,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average AIG common shareholders' equity

$

64,988

 

$

62,686

 

$

64,512

 

$

62,563

 

$

63,225

 

Less: Average AOCI

 

9,408

 

 

10,074

 

 

9,698

 

 

6,034

 

 

7,529

 

Add: Average cumulative unrealized gains and losses related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fortitude Re funds withheld assets

 

3,154

 

 

4,304

 

 

3,303

 

 

2,152

 

 

2,653

 

Less: Average DTA

 

7,229

 

 

8,383

 

 

7,476

 

 

8,570

 

 

8,437

 

Average adjusted AIG common shareholders' equity

$

51,505

 

$

48,533

 

$

50,641

 

$

50,111

 

$

49,912

 

Return on common equity

 

10.2

%

 

1.8

%

 

11.6

%

 

NM

 

 

(9.4)

%

Adjusted return on common equity

 

6.5

%

 

5.8

%

 

8.1

%

 

3.7

%

 

4.4

%

94 AIG | Third Quarter 2021 Form 10-Q

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,

2021

 

2020

 

 

 

 

Total Tax

Non-

 

 

 

 

 

 

Total Tax

Non-

 

 

 

 

 

 

(Benefit)

controlling

 

After

 

 

 

 

(Benefit)

controlling

 

After

(in millions, except per common share data)

 

Pre-tax

 

Charge

Interests(d)

 

Tax

 

 

Pre-tax

 

Charge

Interests(d)

 

Tax

Pre-tax income/net income, including

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

$

2,176

$

439

$

-

$

1,737

 

$

368

$

74

$

-

$

299

Noncontrolling interests

 

 

 

 

 

(70)

 

(70)

 

 

 

 

 

 

(11)

 

(11)

Pre-tax income/net income attributable to AIG

$

2,176

$

439

$

(70)

$

1,667

 

$

368

$

74

$

(11)

$

288

Dividends on preferred stock

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

7

Net income attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

 

 

 

 

 

 

$

1,660

 

 

 

 

 

 

 

$

281

Changes in uncertain tax positions and other tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments(a)

 

 

 

35

 

-

 

(35)

 

 

 

 

7

 

-

 

(7)

Deferred income tax valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(releases) charges(b)

 

 

 

(45)

 

-

 

45

 

 

 

 

8

 

-

 

(8)

Changes in fair value of securities used to hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

guaranteed living benefits

 

(26)

 

(5)

 

-

 

(21)

 

 

(15)

 

(3)

 

-

 

(12)

Changes in benefit reserves and DAC, VOBA and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIA related to net realized gains (losses)

 

(9)

 

(3)

 

-

 

(6)

 

 

(78)

 

(17)

 

-

 

(61)

Changes in the fair value of equity securities

 

45

 

7

 

-

 

38

 

 

(119)

 

(25)

 

-

 

(94)

(Gain) loss on extinguishment of debt

 

51

 

10

 

-

 

41

 

 

(2)

 

(1)

 

-

 

(1)

Net investment income on Fortitude Re funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

\withheld assets

 

(495)

 

(103)

 

-

 

(392)

 

 

(458)

 

(96)

 

-

 

(362)

Net realized gains on Fortitude Re funds withheld assets

 

(190)

 

(40)

 

-

 

(150)

 

 

(32)

 

(7)

 

-

 

(25)

Net realized losses on Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

embedded derivative

 

209

 

44

 

-

 

165

 

 

656

 

137

 

-

 

519

Net realized (gains) losses(c)

 

(652)

 

(132)

 

-

 

(520)

 

 

512

 

89

 

-

 

423

Income from discontinued operations

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

(5)

(Income) loss from divestitures

 

(102)

 

(22)

 

-

 

(80)

 

 

24

 

14

 

-

 

10

Non-operating litigation reserves and settlements

 

3

 

-

 

-

 

3

 

 

1

 

-

 

-

 

1

Favorable prior year development and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

related amortization changes ceded under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

retroactive reinsurance agreements

 

(115)

 

(23)

 

-

 

(92)

 

 

(30)

 

(6)

 

-

 

(24)

Net loss reserve discount (benefit) charge

 

72

 

15

 

-

 

57

 

 

(31)

 

(6)

 

-

 

(25)

Pension expense related to a one-time lump sum payment to former

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

employees

 

27

 

6

 

-

 

21

 

 

-

 

-

 

-

 

-

Integration and transaction costs associated with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

acquiring or divesting businesses

 

11

 

3

 

-

 

8

 

 

1

 

1

 

-

 

-

Restructuring and other costs

 

104

 

22

 

-

 

82

 

 

100

 

21

 

-

 

79

Non-recurring costs related to regulatory or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

accounting changes

 

17

 

4

 

-

 

13

 

 

19

 

4

 

-

 

15

Noncontrolling interests primarily related to net realized gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Fortitude Holdings' standalone results(d)

 

 

 

 

 

-

 

-

 

 

 

 

 

 

4

 

4

Adjusted pre-tax income/Adjusted after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

$

1,126

$

212

$

(70)

$

837

 

$

916

$

194

$

(7)

$

708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding(e)

 

 

 

 

 

 

 

864.0

 

 

 

 

 

 

 

 

873.1

Income per common share attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG common shareholders (diluted)(e)

 

 

 

 

 

 

$

1.92

 

 

 

 

 

 

 

$

0.32

Adjusted after-tax income per common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders (diluted)(e)

 

 

 

 

 

 

$

0.97

 

 

 

 

 

 

 

$

0.81

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ITEM 2 | Consolidated Results of Operations

 

Nine Months Ended September 30,

2021

 

2020

 

 

 

Total Tax

Non-

 

 

 

 

 

Total Tax

Non-

 

 

 

 

 

(Benefit)

controlling

 

After

 

 

 

(Benefit)

controlling

 

After

(in millions, except per common share data)

Pre-tax

Charge

Interests(d)

 

Tax

 

Pre-tax

Charge

Interests(d)

 

Tax

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

$

7,051

$

1,234

$

-

$

5,817

 

$

(6,735)

$

(918)

$

-

 

(5,813)

Noncontrolling interests

 

 

 

 

 

(175)

 

(175)

 

 

 

 

 

 

(78)

 

(78)

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

$

7,051

$

1,234

$

(175)

$

5,642

 

$

(6,735)

$

(918)

$

(78)

$

(5,891)

Dividends on preferred stock

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

22

Net income (loss) attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

 

 

 

 

 

 

$

5,620

 

 

 

 

 

 

 

$

(5,913)

Changes in uncertain tax positions and other tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments(a)

 

 

 

901

 

-

 

(901)

 

 

 

 

(204)

 

-

 

204

Deferred income tax valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

charges(b)

 

 

 

(706)

 

-

 

706

 

 

 

 

(92)

 

-

 

92

Changes in fair value of securities used to hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

guaranteed living benefits

 

(61)

 

(12)

 

-

 

(49)

 

 

(24)

 

(5)

 

-

 

(19)

Changes in benefit reserves and DAC, VOBA and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIA related to net realized gains (losses)

 

74

 

15

 

-

 

59

 

 

205

 

43

 

-

 

162

Changes in the fair value of equity securities

 

36

 

5

 

-

 

31

 

 

16

 

3

 

-

 

13

(Gain) loss on extinguishment of debt

 

149

 

31

 

-

 

118

 

 

15

 

3

 

-

 

12

Net investment income on Fortitude Re funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

\withheld assets

 

(1,488)

 

(312)

 

-

 

(1,176)

 

 

(574)

 

(120)

 

-

 

(454)

Net realized gains on Fortitude Re funds withheld assets

 

(536)

 

(113)

 

-

 

(423)

 

 

(128)

 

(27)

 

-

 

(101)

Net realized (gains) losses on Fortitude Re funds withheld

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

embedded derivative

 

(117)

 

(24)

 

-

 

(93)

 

 

1,493

 

313

 

-

 

1,180

Net realized gains(c)

 

(1,220)

 

(260)

 

-

 

(960)

 

 

(1,375)

 

(309)

 

-

 

(1,066)

Income from discontinued operations

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

(4)

(Income) loss from divestitures

 

(108)

 

(23)

 

-

 

(85)

 

 

8,652

 

1,716

 

-

 

6,936

Non-operating litigation reserves and settlements

 

3

 

-

 

-

 

3

 

 

(5)

 

(1)

 

-

 

(4)

Favorable prior year development and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

related amortization changes ceded under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

retroactive reinsurance agreements

 

(199)

 

(41)

 

-

 

(158)

 

 

(71)

 

(15)

 

-

 

(56)

Net loss reserve discount charge

 

62

 

13

 

-

 

49

 

 

41

 

9

 

-

 

32

Pension expense related to a one-time lump sum payment to former

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

employees

 

27

 

6

 

-

 

21

 

 

-

 

-

 

-

 

-

Integration and transaction costs associated with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

acquiring or divesting businesses

 

55

 

12

 

-

 

43

 

 

7

 

2

 

-

 

5

Restructuring and other costs

 

304

 

64

 

-

 

240

 

 

324

 

68

 

-

 

256

Non-recurring costs related to regulatory or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

accounting changes

 

58

 

12

 

-

 

46

 

 

46

 

10

 

-

 

36

Noncontrolling interests primarily related to net realized gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Fortitude Holdings' standalone results(d)

 

 

 

 

 

-

 

-

 

 

 

 

 

 

63

 

63

Adjusted pre-tax income/Adjusted after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders

$

4,090

$

802

$

(175)

$

3,091

 

$

1,887

$

476

$

(15)

$

1,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding(e)

 

 

 

 

 

 

 

871.0

 

 

 

 

 

 

 

 

869.6

Income (loss) per common share attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG common shareholders (diluted)(e)

 

 

 

 

 

 

$

6.45

 

 

 

 

 

 

 

$

(6.80)

Adjusted after-tax income per common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share attributable to AIG common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shareholders (diluted)(e)

 

 

 

 

 

 

$

3.55

 

 

 

 

 

 

 

$

1.57

(a) Nine months ended September 30, 2021 includes the completion of audit activity by the Internal Revenue Service (IRS). Nine months ended September 30, 2020 includes the write-down of net operating loss deferred tax assets in certain foreign jurisdictions, which is offset by valuation allowance release.

(b) Nine months ended September 30, 2021 as well as three and nine months ended September 30, 2020 include valuation allowance established against a portion of certain tax attribute carryforwards of AIG's U.S. federal consolidated income tax group, as well as valuation allowance changes in certain foreign jurisdictions.

(c) Includes all net realized 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 and net realized gains and losses on Fortitude Re funds withheld assets.

(d) Prior to June 2, 2020, noncontrolling interests was primarily due to the 19.9 percent investment in Fortitude Holdings by an affiliate of Carlyle, which occurred in the fourth quarter of 2018. Carlyle was allocated 19.9 percent of Fortitude Holdings’ standalone financial results through the June 2, 2020 closing date of the Majority Interest Fortitude Sale. Fortitude Holdings’ results were mostly eliminated in AIG’s consolidated income from continuing operations given that its results arose from intercompany transactions. Noncontrolling interests was calculated based on the standalone financial results of Fortitude Holdings. The most significant component of Fortitude Holdings’ standalone results was the change in fair value of the embedded derivatives which changes with movements in interest rates and credit spreads, and which was recorded in net realized gains and losses of Fortitude Holdings. In accordance with AIG's adjusted after-tax income definition, realized gains and losses are excluded from noncontrolling interests. Subsequent to the Majority Interest Fortitude Sale, AIG owns 3.5 percent of Fortitude Holdings and no longer consolidates Fortitude Holdings in its financial statements as of such date. The minority interest in Fortitude Holdings is carried at cost within AIG’s Other invested assets, which was $100 million as of September 30, 2021.

 

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ITEM 2 | Consolidated Results of Operations

 

Fortitude Holdings’ summarized financial information (standalone results), prior to the Majority Interest Fortitude Sale on June 2, 2020 is presented below:

 

Three Months Ended

 

Nine Months Ended

 

September 30,2020

 

September 30,2020

 

Fortitude

AIG Noncontrolling

 

Fortitude

AIG Noncontrolling

(in millions)

Holdings

 

Interest

 

Holdings

 

Interest

Revenues

$

-

$

-

 

$

653

$

130

Expenses

 

-

 

-

 

 

702

 

140

Adjusted pre-tax income (loss)

 

-

 

-

 

 

(49)

 

(10)

Taxes (benefit) expense

 

-

 

-

 

 

(10)

 

(2)

Adjusted after-tax income (loss)

 

-

 

-

 

 

(39)

 

(8)

 

 

 

 

 

 

 

 

 

 

Net realized gains and other charges

 

-

 

-

 

 

383

 

77

Taxes on net realized gains and other charges

 

-

 

-

 

 

81

 

16

Net realized gains and other charges - after-tax

 

-

 

-

 

 

302

 

61

Net income

$

-

$

-

 

$

263

$

53

(e) For the nine-month period ended September 30, 2020, because we reported a net loss attributable to AIG common shareholders, all common stock equivalents are anti-dilutive and are therefore excluded from the calculation of diluted shares and diluted per share amounts. However, because we reported adjusted after-tax income attributable to AIG common shareholders, the calculation of adjusted after-tax income per diluted share attributable to AIG common shareholders includes 4,432,369 dilutive shares for the nine-month period ended September 30, 2020.

QUARTERLY pre-tax income (LOSS) Comparison for 2021 and 2020

Pre-tax income of $2.2 billion in the three-month period ended September 30, 2021 compared to $368 million in the same period in 2020 primarily due to:

higher net realized gains excluding Fortitude Re funds withheld assets and embedded derivative of $1.2 billion, driven primarily by $943 million of gains on other derivative and hedge activity, gains on sales of real estate and other assets ($349 million) and lower derivative losses on variable annuity embedded derivatives, net of related hedges ($109 million), offset by adverse impact of foreign exchange ($377 million);

lower net realized loss on Fortitude Re funds withheld embedded derivative ($447 million) and higher net realized gains on Fortitude Re funds withheld assets ($158 million); and

higher underwriting income in General Insurance ($443 million) from higher net premium marked by strong rate improvement, higher renewal retentions and strong new business growth, with continued attritional loss ratio improvement as well as lower catastrophe losses, net of reinstatement premiums ($170 million) and favorable prior year development as compared to unfavorable development ($63 million).

These pre-tax increases were partially offset by:

Life and Retirement, which had higher DAC amortization ($495 million) principally due to the impact of the annual assumption review which was partially offset by the gain from the sale of our retail mutual fund business.

YEAR-TO-DATE pre-tax income (LOSS) Comparison for 2021 and 2020

Pre-tax income of $7.1 billion in the nine-month period ended September 30, 2021 compared to pre-tax loss of $6.7 billion in the same period in 2020 primarily due to:

the recognition of an $8.4 billion loss on the closing of the Majority Interest Fortitude Sale in 2020;

net realized gain on Fortitude Re funds withheld embedded derivative as compared to a loss ($1.6 billion) and higher net realized gains on Fortitude Re funds withheld assets ($408 million);

$1.4 billion higher net investment income, of which $459 million is excluding Fortitude Re funds withheld assets, with higher returns in our investment portfolio primarily due to alternative investments, an increase which was driven by positive returns achieved in equity markets, partially offset by declines in fair value option bonds;

lower policyholder benefits ($1.6 billion) due in part to the cession to Fortitude Re and higher policy fees ($117 million) in Life and Retirement, partially offset by lower premiums ($490 million) and higher DAC amortization ($212 million) principally due to the impact of the annual assumption review; and

higher underwriting income in General Insurance ($1.4 billion) from higher net premium marked by strong rate improvement, higher renewal retentions and strong new business growth, with continued attritional loss ratio improvement as well as lower catastrophe losses, net of reinstatement premiums ($712 million) and higher favorable prior year development ($36 million).

These pre-tax increases were partially offset by:

higher Corporate general operating expenses, driven largely by increases in performance-based employee costs ($93 million) and transaction costs ($48 million);

prior period having included the results of Fortitude Re, a loss of $241 million, up through the Majority Interest Fortitude Sale on June 2, 2020; and

AIG | Third Quarter 2021 Form 10-Q 97

 

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ITEM 2 | Consolidated Results of Operations

 

lower net realized gains excluding Fortitude Re funds withheld assets and embedded derivative of $99 million, where a $1.0 billion decrease in gains on variable annuity embedded derivatives, net of hedging was largely offset by an increase in other realized gains primarily driven by higher gains on sales of real estate and other assets ($548 million) as well as favorable movement in the allowance for credit losses on fixed maturity securities ($363 million).

U.S. Tax law changes

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the Tax Act). The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes 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. While the U.S. tax authorities issued formal guidance, including recently issued regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and subject to substantial uncertainties. Additional guidance is expected in future periods. 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.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 crisis. The tax provisions of the CARES Act have not had and are currently not expected to have a material impact on AIG’s U.S. federal tax liabilities.

Repatriation Assumptions

For 2021, 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 uncertain tax positions and realizability of deferred tax assets, 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. As of September 30, 2021, the annual effective tax rate includes the tax effects of actual and projected COVID-19 related losses and market developments.

Income Tax expense analysis

For the three-month period ended September 30, 2021, the effective tax rate on income from continuing operations was 20.2 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax benefits associated with tax adjustments related to prior year returns, tax exempt income, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. These tax benefits were partially offset by tax charges associated with the effect of foreign operations, valuation allowance activity related to certain foreign subsidiaries, state and local income taxes, and non-deductible transfer pricing charges. The effect of foreign operations is primarily related to income of 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, 2021, the effective tax rate on income from continuing operations was 17.5 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax benefits associated with the release of reserves for uncertain tax positions, penalties and interest related to the recent completion of audit activity by the IRS, release of reserves for uncertain tax positions and interest related to a New York State tax settlement based on the completion of recent audit activity, tax adjustments related to prior year returns, tax exempt income, remeasurement of deferred taxes as a result of an increase in the UK corporate income tax rate enacted during the second quarter, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. These tax benefits were partially offset by tax charges associated with the establishment of U.S. federal valuation allowance related to certain tax attribute carryforwards, the effect of foreign operations, excess tax charges related to share based compensation payments recorded through the income statement, state and local income taxes, and non-deductible transfer pricing charges. We also recognized a tax charge associated with reduction of net operating loss deferred tax assets in certain foreign jurisdictions, with a corresponding decrease in

98 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Consolidated Results of Operations

 

the related deferred tax asset valuation allowance. The effect of foreign operations is primarily related to income of 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, 2020, 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 the effect of foreign operations, accrual of interest associated with IRS and other tax authority matters, state and local income taxes, and nondeductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. 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, 2020, the effective tax rate on loss from continuing operations was 13.6 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax effects of the Majority Interest Fortitude Sale, tax charges associated with the establishment of U.S. federal valuation allowance related to certain tax attribute carryforwards, accrual of interest associated with IRS and other tax authority matters, the effect of foreign operations, excess tax charges related to share based compensation payments recorded through the income statement, state and local income taxes, and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from AOCI to income from continuing operations related to the disposal of available for sale securities. 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.

Business Segment Operations

Our business operations consist of 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. Other Operations is primarily comprised of corporate, our institutional asset management business and consolidation and eliminations.

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG. For further discussion on the separation of Life and Retirement see Note 1 to the Condensed Consolidated Financial Statements.

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)

 

 

2021

 

2020

 

 

2021

 

2020

General Insurance

 

 

 

 

 

 

 

 

 

 

North America - Underwriting loss

 

$

(166)

$

(370)

 

$

(199)

$

(912)

International - Underwriting income (loss)

 

 

186

 

(53)

 

 

755

 

59

Net investment income

 

 

791

 

839

 

 

2,294

 

1,945

General Insurance

 

 

811

 

416

 

 

2,850

 

1,092

Life and Retirement

 

 

 

 

 

 

 

 

 

 

Individual Retirement

 

 

292

 

532

 

 

1,441

 

1,386

Group Retirement

 

 

316

 

338

 

 

970

 

695

Life Insurance

 

 

134

 

32

 

 

114

 

112

Institutional Markets

 

 

135

 

106

 

 

417

 

311

Life and Retirement

 

 

877

 

1,008

 

 

2,942

 

2,504

Other Operations

 

 

 

 

 

 

 

 

 

 

Other Operations before consolidation and eliminations

 

 

(370)

 

(368)

 

 

(1,240)

 

(1,535)

Consolidation and eliminations

 

 

(192)

 

(140)

 

 

(462)

 

(174)

Other Operations

 

 

(562)

 

(508)

 

 

(1,702)

 

(1,709)

Adjusted pre-tax income

 

$

1,126

$

916

 

$

4,090

$

1,887

 

AIG | Third Quarter 2021 Form 10-Q 99

 

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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 2

Picture 1

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, mergers and acquisitions, fidelity, employment practices, fiduciary liability, cyber risk, kidnap and ransom, and errors and omissions insurance.

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

Global Specialty: Products include aerospace, political risk, trade credit, portfolio solutions, energy-related property insurance products and marine.

Crop Risk Services: Products include hailstorm and multi-peril insurance.

Personal Lines: Products include personal auto and property in selected markets and insurance for high net-worth individuals offered through AIG’s 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 global platform enables writing multi-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, while taking a disciplined approach in managing exposures to those where terms and conditions meet our risk/return appetite. Look to inorganic growth opportunities in profitable markets and segments to expand our capabilities and footprint.

Reinsurance Optimization: Strategically partner with reinsurers to effectively manage exposure to losses arising from frequency of large catastrophic events and 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. 

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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 and other underwriting organizations in the U.S. In international markets, we compete against 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 handling expertise, 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, including public health events, such as the COVID-19 crisis.

OUTLOOK–INDUSTRY AND ECONOMIC FACTORS

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

The worldwide health and economic impact of COVID-19 continues to evolve, influenced by the scope, severity and duration of the crisis as well as the actions of governments, judiciaries, legislative bodies, regulators and other third parties in response, all of which are subject to continuing uncertainty. While production in certain lines of business continues to remain near or below pre-COVID-19 levels, although uneven, the global economic recovery is having a positive impact on consumer and business demand across our Commercial Lines and Personal Insurance businesses. The overall results of General Insurance for the nine months ended September 30, 2021 reflect continued strong performance from our Commercial Lines portfolio and positive momentum within Personal Insurance. Across our North America and International Commercial Lines of business we have seen increased demand for our insurance products with improvement in rates as well as terms and conditions. We continue to monitor inflationary impacts resulting from central bank stimulus, sharp increases in demand and supply chain disruptions on rate adequacy and loss cost trends. While the global economic outlook continues to improve, the ultimate impact of COVID-19 on our business will depend upon the speed at which government-mandated safety precautions can be fully lifted, the distribution and effectiveness of vaccinations, and the manner and speed with which economic activity sustainably rebounds.

General Insurance – North America

The North America business remains in a firm market with common drivers being higher industry-wide claims severity trends driven by social and economic inflation, higher natural catastrophe losses over recent years and the uncertain impact of COVID-19 and market interest rates. While market discipline continues to support price increases across most lines (outside of Workers’ Compensation), we are seeing capacity move back into the market in certain segments given the improved pricing level. Despite the higher rates, we have focused on retaining our best accounts which has led to improving retention across the portfolio. These retention rates are often coupled with an exposure limit management strategy to reduce volatility within the portfolio. We continue to proactively identify and prioritize targeted businesses to grow as market conditions warrant through effective portfolio management.

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.

During the first quarter of 2021, AIG amended a distribution agreement with one of its largest travel insurance distributors. Following the effectiveness of the amendments, the revised agreement no longer represents a risk transfer transaction and as such is accounted for under deposit accounting.

General Insurance – International

We believe our global presence provides Commercial Lines and Personal Insurance a 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.

AIG | Third Quarter 2021 Form 10-Q 101

 

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ITEM 2 | Business Segment Operations | General Insurance

 

We are continuing to pursue growth in our most profitable lines of business and diversify our portfolio across all regions by expanding key business lines (i.e. Financial Lines and Accident & Health) while remaining a market leader in key developed and developing markets. Overall, Commercial Lines continue to show positive rate increases, particularly in our Global Specialty, Financial Lines and Property portfolio and across international markets where market events or withdrawal of capability and capacity have favorably impacted pricing. We are maintaining our underwriting discipline, reducing gross and net limits, increasing use of reinsurance to reduce volatility, as well as 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.

General INSURANCE RESULTS

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

6,590

$

5,924

 

11

%

 

$

19,929

$

17,394

 

15

%

(Increase) decrease in unearned premiums

 

(167)

 

(71)

 

(135)

 

 

 

(1,425)

 

275

 

NM

 

Net premiums earned

 

6,423

 

5,853

 

10

 

 

 

18,504

 

17,669

 

5

 

Losses and loss adjustment expenses incurred(a)

 

4,392

 

4,367

 

1

 

 

 

12,050

 

12,593

 

(4)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

892

 

835

 

7

 

 

 

2,619

 

2,687

 

(3)

 

Other acquisition expenses

 

380

 

322

 

18

 

 

 

1,026

 

948

 

8

 

Total acquisition expenses

 

1,272

 

1,157

 

10

 

 

 

3,645

 

3,635

 

-

 

General operating expenses

 

739

 

752

 

(2)

 

 

 

2,253

 

2,294

 

(2)

 

Underwriting income (loss)

 

20

 

(423)

 

NM

 

 

 

556

 

(853)

 

NM

 

Net investment income

 

791

 

839

 

(6)

 

 

 

2,294

 

1,945

 

18

 

Adjusted pre-tax income

$

811

$

416

 

95

%

 

$

2,850

$

1,092

 

161

%

Loss ratio(a)

 

68.4

 

74.6

 

(6.2)

 

 

 

65.1

 

71.3

 

(6.2)

 

Acquisition ratio

 

19.8

 

19.8

 

-

 

 

 

19.7

 

20.6

 

(0.9)

 

General operating expense ratio

 

11.5

 

12.8

 

(1.3)

 

 

 

12.2

 

13.0

 

(0.8)

 

Expense ratio

 

31.3

 

32.6

 

(1.3)

 

 

 

31.9

 

33.6

 

(1.7)

 

Combined ratio(a)

 

99.7

 

107.2

 

(7.5)

 

 

 

97.0

 

104.9

 

(7.9)

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(9.7)

 

(13.5)

 

3.8

 

 

 

(6.4)

 

(10.8)

 

4.4

 

Prior year development, net of (additional) return

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

premium on loss sensitive business

 

0.5

 

(0.4)

 

0.9

 

 

 

0.7

 

0.5

 

0.2

 

Accident year loss ratio, as adjusted

 

59.2

 

60.7

 

(1.5)

 

 

 

59.4

 

61.0

 

(1.6)

 

Accident year combined ratio, as adjusted

 

90.5

 

93.3

 

(2.8)

 

 

 

91.3

 

94.6

 

(3.3)

 

(a) 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)

 

2021

 

2020

 

U.S. dollars

 

Original

Currency

 

 

 

2021

 

2020

 

U.S. dollars

 

Original Currency

 

North America

$

3,005

$

2,571

 

17

%

17

%

 

$

9,091

$

7,423

 

22

%

22

%

International

 

3,585

 

3,353

 

7

 

5

 

 

 

10,838

 

9,971

 

9

 

5

 

Total net premiums written

$

6,590

$

5,924

 

11

%

10

%

 

$

19,929

$

17,394

 

15

%

12

%

102 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Business Segment Operations | General Insurance

 

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

 

# of

 

 

North

 

 

 

 

(in millions)

Events

 

 

America

 

International

 

Total

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Flooding and rainstorms

5

 

$

95

$

122

$

217

Windstorms and hailstorms

7

 

 

376

 

46

 

422

Winter storms

3

 

 

(61)

 

(15)

 

(76)

Wildfires

2

 

 

35

 

-

 

35

Earthquakes

-

 

 

-

 

-

 

-

Civil unrest

1

 

 

5

 

25

 

30

Reinstatement premiums

 

 

 

(11)

 

1

 

(10)

Total catastrophe-related charges

18

 

$

439

$

179

$

618

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Flooding and rainstorms

1

 

$

(3)

$

61

$

58

Windstorms and hailstorms

6

 

 

364

 

108

 

472

Wildfire

3

 

 

96

 

1

 

97

Earthquakes

-

 

 

(1)

 

3

 

2

COVID-19

N/A

(c)

 

130

 

55

 

185

Civil unrest

-

 

 

(8)

 

(16)

 

(24)

Reinstatement premiums

 

 

 

(2)

 

-

 

(2)

Total catastrophe-related charges

10

 

$

576

$

212

$

788

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Flooding and rainstorms

5

 

$

95

$

132

$

227

Windstorms and hailstorms

7

 

 

458

 

46

 

504

Winter storms

3

 

 

288

 

65

 

353

Wildfires

2

 

 

35

 

-

 

35

Earthquakes

1

 

 

-

 

19

 

19

Civil unrest

1

 

 

5

 

25

 

30

Reinstatement premiums

 

 

 

7

 

15

 

22

Total catastrophe-related charges

19

 

$

888

$

302

$

1,190

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Flooding and rainstorms

4

 

$

27

$

77

$

104

Windstorms and hailstorms

11

 

 

443

 

184

 

627

Wildfire

3

 

 

96

 

1

 

97

Earthquakes

2

 

 

23

 

15

 

38

COVID-19

N/A

(c)

 

598

 

317

 

915

Civil unrest

1

 

 

73

 

29

 

102

Reinstatement premiums

 

 

 

-

 

19

 

19

Total catastrophe-related charges

21

 

$

1,260

$

642

$

1,902

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

(b) Geography: North America primarily includes insurance businesses in the United States, Canada and Bermuda, and our global reinsurance business, AIG Re. International includes regional insurance businesses in Japan, the United Kingdom, EMEA region, Asia Pacific, Latin America and Caribbean, and China. International also includes the results of Talbot as well as AIG’s global specialty business.

(c) As COVID-19 continues to evolve, impacting many lines of business, the number of events is yet to be determined.

AIG | Third Quarter 2021 Form 10-Q 103

 

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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)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

3,005

$

2,571

 

17

%

 

$

9,091

$

7,423

 

22

%

(Increase) decrease in unearned premiums

 

(98)

 

(77)

 

(27)

 

 

 

(1,111)

 

276

 

NM

 

Net premiums earned

 

2,907

 

2,494

 

17

 

 

 

7,980

 

7,699

 

4

 

Losses and loss adjustment expenses incurred(a)

 

2,308

 

2,202

 

5

 

 

 

6,020

 

6,405

 

(6)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

347

 

293

 

18

 

 

 

963

 

1,061

 

(9)

 

Other acquisition expenses

 

136

 

79

 

72

 

 

 

343

 

257

 

33

 

Total acquisition expenses

 

483

 

372

 

30

 

 

 

1,306

 

1,318

 

(1)

 

General operating expenses

 

282

 

290

 

(3)

 

 

 

853

 

888

 

(4)

 

Underwriting loss

$

(166)

$

(370)

 

55

%

 

$

(199)

$

(912)

 

78

%

Loss ratio(a)

 

79.4

 

88.3

 

(8.9)

 

 

 

75.4

 

83.2

 

(7.8)

 

Acquisition ratio

 

16.6

 

14.9

 

1.7

 

 

 

16.4

 

17.1

 

(0.7)

 

General operating expense ratio

 

9.7

 

11.6

 

(1.9)

 

 

 

10.7

 

11.5

 

(0.8)

 

Expense ratio

 

26.3

 

26.5

 

(0.2)

 

 

 

27.1

 

28.6

 

(1.5)

 

Combined ratio(a)

 

105.7

 

114.8

 

(9.1)

 

 

 

102.5

 

111.8

 

(9.3)

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(15.2)

 

(23.1)

 

7.9

 

 

 

(11.1)

 

(16.4)

 

5.3

 

Prior year development, net of (additional) return

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

premium on loss sensitive business

 

1.0

 

5.5

 

(4.5)

 

 

 

1.7

 

2.4

 

(0.7)

 

Accident year loss ratio, as adjusted

 

65.2

 

70.7

 

(5.5)

 

 

 

66.0

 

69.2

 

(3.2)

 

Accident year combined ratio, as adjusted

 

91.5

 

97.2

 

(5.7)

 

 

 

93.1

 

97.8

 

(4.7)

 

(a)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 continues to make progress in strengthening our underwriting, actively managing our portfolio to improve business mix and articulating our revised risk appetite to the marketplace. We are at the forefront of the industry across multiple lines in terms of driving rate momentum while simultaneously increasing the level of business retained in targeted lines. As we see disruption in the marketplace, we are well placed to capitalize on opportunities.

During the second quarter of 2020, AIG entered into a series of quota share reinsurance agreements, including with Lloyd’s Syndicate 2019, a Lloyd’s syndicate managed by Talbot Underwriting Ltd., and with PCG 2019 Corporate Member Ltd., both of which are wholly-owned subsidiaries of AIG, to cede PCG business written by our General Insurance operations to third parties. Overall, these ceded reinsurance transactions, accounted for under ASC 944 Financial Services – Insurance, further AIG’s continued optimization of its General Insurance portfolio, create additional products for clients and diversify AIG’s capital base. We consolidate our interest in Lloyd’s Syndicate 2019 and account for the reinsurance transactions in a manner consistent with other third-party reinsurance arrangements.

Underwriting loss decreased in the three- and nine-month periods ended September 30, 2021 compared to the same periods in the prior year by $204 million and $713 million, respectively, primarily due to lower catastrophe losses, improvement in the accident year loss ratio, as adjusted and lower expense ratio, partially offset by lower net favorable prior year reserve development.

Net premiums written increased in the three- and nine-month periods ended September 30, 2021 compared to the same periods in the prior year by $434 million and $1.7 billion, respectively, primarily due to growth in Commercial Lines driven by strong rate improvement, higher renewal retentions and strong new business production. While net premiums written increased across most Commercial Lines, it was particularly strong within our AIG Re and Financial Lines businesses. In the three months ended September 30, 2021, growth in Travel and Warranty businesses driven by recovery in consumer spending contributed to the increase in Personal Lines net premiums written.

104 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Business Segment Operations | General Insurance

 

The increase in net premiums written in the nine-month period ended September 30, 2021 was also due to lower ceded premiums driven by 2020 quota share reinsurance agreements partially offset by lower Travel due to changes in business mix.

For a discussion of 2021 reinsurance programs see Part II, Item 7. MD&A – Enterprise Risk Management in the 2020 Annual Report.

 

North America Underwriting Income (Loss)

Three Months Ended September 30,

(in millions)

Chart 5

 

 

Quarterly 2021 and 2020 Comparison

Underwriting loss decreased by $204 million primarily due to:

• lower catastrophe losses ($137 million), notably due to the impact of COVID-19 in 2020;

• higher premium with improvement in the accident year loss ratio, as adjusted (5.5 points) primarily driven by changes in business mix along with strong rate improvement, focused risk selection and improved terms and conditions; and

• lower general operating expense ratio (1.9 points) reflecting continued general expense discipline as we grow the portfolio.

These increases were partially offset by:

• lower net favorable prior year reserve development (4.5 points or $101 million), primarily driven by unfavorable development in Financial Lines and Property, partially offset by favorable development in PCG business, AIGRM and Casualty business; and

• higher acquisition ratio (1.7 points) primarily driven by changes in business mix and changes in the 2021 Commercial Lines reinsurance program.

 

North America Underwriting Income (Loss)

Nine Months Ended September 30,

(in millions)

Chart 3

 

 

Year-to-Date 2021 and 2020 Comparison

Underwriting loss decreased by $713 million primarily due to:

• significantly lower catastrophe losses ($372 million), notably due to the impact of COVID-19 in 2020 partially offset by higher natural catastrophe losses;

• higher premium with improvement in the accident year loss ratio, as adjusted (3.2 points) primarily driven by changes in business mix along with strong rate improvement, focused risk selection and improved terms and conditions;

• lower acquisition ratio (0.7 points) primarily driven by changes in business mix including the impact of COVID-19 most notably in Travel and changes in 2021 Commercial Lines reinsurance program; and

• lower general operating expense ratio (0.8 points) reflects continued general expense discipline as we grow the portfolio.

These increases were partially offset by:

• lower net favorable prior year reserve development (0.7 points or $43 million), primarily driven by unfavorable development in Financial Lines and Property, partially offset by favorable development in PCG and Casualty business.

 

AIG | Third Quarter 2021 Form 10-Q 105

 

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ITEM 2 | Business Segment Operations | General Insurance

 

North America Net Premiums Written

Three Months Ended September 30,

(in millions)

Chart 3

Quarterly 2021 and 2020 Comparison

Net premiums written increased by $434 million primarily due to:

• growth in Commercial Lines ($390 million), particularly within our Casualty, Property and Financial Lines businesses driven by strong rate improvement, higher renewal retentions and strong new business production; and

• growth in Personal Lines ($44 million) particularly from our Travel and Warranty businesses driven by increased consumer spending, partially offset by lower PCG business driven by underwriting actions taken to improve our portfolio mix and rate adequacy.

 

North America Net Premiums Written

Nine Months Ended September 30,

(in millions)

Chart 6

Year-to-Date 2021 and 2020 Comparison

Net premiums written increased by $1.7 billion primarily due to:

• growth in Commercial Lines ($1.4 billion), particularly within our AIG Re business, Casualty, Property, and Financial Lines businesses, driven by strong rate improvement, and higher renewal retentions and strong new business production;

• increased PCG net premiums written resulting from changes in our reinsurance program ($215 million); and

• growth in Personal Lines in our Warranty business driven by increased consumer spending was partially offset by lower production in Travel due to changes in business mix.

 

106 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Business Segment Operations | General Insurance

 

North America Combined Ratios

Three Months Ended September 30,

Chart 10

Quarterly 2021 and 2020 Comparison

The decrease in the calendar year combined ratio of 9.1 points reflected a decrease in both the loss ratio (8.9 points) and the expense ratio (0.2 points).

The decrease in the loss ratio by 8.9 points reflected:

• lower catastrophe losses (7.9 points); and

• higher premium with improvement in the accident year loss ratio, as adjusted (5.5 points) primarily driven by changes in business mix along with strong rate improvement, focused risk selection and improved terms and conditions; partially offset by

• lower net favorable prior year reserve development (4.5 points), primarily driven by unfavorable development in Financial Lines and Property, partially offset by favorable development in PCG business, AIGRM and Casualty business.

The decrease in the expense ratio by 0.2 points reflected a lower general operating expense ratio (1.9 points) resulting from continued general expense discipline as we grow the portfolio, partially offset by a higher acquisition ratio (1.7 points) primarily driven by changes in business mix and changes in 2021 Commercial Lines reinsurance program.

North America Combined Ratios

Nine Months Ended September 30,

Chart 4

Year-to-Date 2021 and 2020 Comparison

The decrease in the calendar year combined ratio of 9.3 points reflected a decrease in both the loss ratio (7.8 points) and the expense ratio (1.5 points).

The decrease in the loss ratio of 7.8 points reflected:

• significantly lower catastrophe losses (5.3 points), notably due to the impact of COVID-19 in 2020 partially offset by higher natural catastrophe losses;

• higher premium with improvement in the accident year loss ratio, as adjusted (3.2 points) primarily driven by changes in business mix along with strong rate improvement, focused risk selection and improved terms and conditions; partially offset by

• lower net favorable prior year reserve development (0.7 points), primarily driven by unfavorable development in Financial Lines and Property partially offset by favorable development in PCG business and Casualty business.

The decrease in the expense ratio of 1.5 points reflected a lower acquisition ratio (0.7 points) primarily driven by changes in business mix including the impact of COVID-19 most notably in Travel, changes in 2021 Commercial Lines reinsurance program and lower general operating expense ratio (0.8 points) resulting from continued general expense discipline as we grow the portfolio.

AIG | Third Quarter 2021 Form 10-Q 107

 

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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)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

3,585

$

3,353

 

7

%

 

$

10,838

$

9,971

 

9

%

(Increase) decrease in unearned premiums

 

(69)

 

6

 

NM

 

 

 

(314)

 

(1)

 

NM

 

Net premiums earned

 

3,516

 

3,359

 

5

 

 

 

10,524

 

9,970

 

6

 

Losses and loss adjustment expenses incurred

 

2,084

 

2,165

 

(4)

 

 

 

6,030

 

6,188

 

(3)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

545

 

542

 

1

 

 

 

1,656

 

1,626

 

2

 

Other acquisition expenses

 

244

 

243

 

-

 

 

 

683

 

691

 

(1)

 

Total acquisition expenses

 

789

 

785

 

1

 

 

 

2,339

 

2,317

 

1

 

General operating expenses

 

457

 

462

 

(1)

 

 

 

1,400

 

1,406

 

-

 

Underwriting income (loss)

$

186

$

(53)

 

NM

%

 

$

755

$

59

 

NM

%

Loss ratio

 

59.3

 

64.5

 

(5.2)

 

 

 

57.3

 

62.1

 

(4.8)

 

Acquisition ratio

 

22.4

 

23.4

 

(1.0)

 

 

 

22.2

 

23.2

 

(1.0)

 

General operating expense ratio

 

13.0

 

13.8

 

(0.8)

 

 

 

13.3

 

14.1

 

(0.8)

 

Expense ratio

 

35.4

 

37.2

 

(1.8)

 

 

 

35.5

 

37.3

 

(1.8)

 

Combined ratio

 

94.7

 

101.7

 

(7.0)

 

 

 

92.8

 

99.4

 

(6.6)

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(5.1)

 

(6.4)

 

1.3

 

 

 

(2.8)

 

(6.4)

 

3.6

 

Prior year development, net of (additional) return

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

premium on loss sensitive business

 

-

 

(4.8)

 

4.8

 

 

 

(0.1)

 

(1.0)

 

0.9

 

Accident year loss ratio, as adjusted

 

54.2

 

53.3

 

0.9

 

 

 

54.4

 

54.7

 

(0.3)

 

Accident year combined ratio, as adjusted

 

89.6

 

90.5

 

(0.9)

 

 

 

89.9

 

92.0

 

(2.1)

 

Business and Financial Highlights

The International General Insurance business is focused on underwriting profits, driving operational efficiency and growing profitably in businesses and geographies that support our growth strategy.

Underwriting income increased in the three- and nine-month periods ended September 30, 2021 compared to the same periods in the prior year by $239 million and $696 million respectively, primarily due to significantly lower catastrophe losses, lower expense ratio and net favorable prior year reserve development partially offset in the three-month period by higher accident year loss ratio, as adjusted.

Net premiums written, excluding the impact of foreign exchange, increased in the three- and nine-month periods ended September 30, 2021 compared to the same periods in the prior year by $180 million and $466 million, respectively, primarily due to growth across most Commercial Lines, in particular Financial Lines, Global Specialty, Property and Casualty driven by strong rate improvement, higher renewal retentions and strong new business production, partially offset by lower production across most lines within Personal Insurance due to the impact of COVID-19, as well as underwriting actions taken to strengthen our portfolio and to maintain pricing discipline.

For a discussion of 2021 reinsurance programs see Part II, Item 7 MD&A – Enterprise Risk Management in the 2020 Annual Report.

 

108 AIG | Third Quarter 2021 Form 10-Q

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International Underwriting Income (Loss)

Three Months Ended September 30,

(in millions)

Chart 4

Quarterly 2021 and 2020 Comparison

Underwriting income increased by $239 million primarily due to:

• near-flat net prior year reserve development compared to unfavorable development in 2020 (4.8 points or $164 million), primarily due to favorable development in Global Specialty, Personal Auto and Accident & Health offset by unfavorable development in Financial Lines;

• lower catastrophe losses ($33 million), notably due to the impact of COVID-19 in 2020; and

• lower expense ratio 1.8 points reflected a lower acquisition ratio (1.0 points) primarily driven by changes in 2021 Commercial Lines reinsurance program and a lower general operating expense ratio (0.8 points), which reflects continued general expense discipline as we grow the portfolio.

These increases were partially offset by higher accident year loss ratio, as adjusted (0.9 points) due to higher loss experience most notably in Personal Insurance.

International Underwriting Income (Loss)

Nine Months Ended September 30,

(in millions)

Chart 5

Year-to-Date 2021 and 2020 Comparison

Underwriting income increased by $696 million primarily due to:

• significantly lower catastrophe losses ($340 million); notably due to the impact of COVID-19 in 2020;

• lower expense ratio 1.8 points reflected a lower acquisition ratio (1.0 points) primarily driven by lower acquisition expenses, changes in 2021 Commercial Lines reinsurance program and changes in business mix, as well as a lower general operating expense ratio (0.8 points), which reflects continued general expense discipline as we grow the portfolio; and

• lower net unfavorable prior year reserve development (0.9 points or $79 million), primarily due to unfavorable development in Financial Lines mostly offset by favorable development in Global Specialty, Personal Auto and Accident & Health.

 

AIG | Third Quarter 2021 Form 10-Q 109

 

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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 2021 and 2020 Comparison

Net premiums written, excluding the impact of foreign exchange, increased by $180 million due to:

• growth across most Commercial Lines ($226 million), notably in Financial Lines, Casualty and Global Specialty driven by strong rate improvement, higher renewal retentions and strong new business production.

This increase was partially offset by lower production in Personal Insurance ($46 million) driven by underwriting actions taken to improve our portfolio mix and rate adequacy, partially offset by growth in Travel due to a rebound in travel activity.

 

 

International Net Premiums Written

Nine Months Ended September 30,

(in millions)

Chart 8

Year-to-Date 2021 and 2020 Comparison

Net premiums written, excluding the impact of foreign exchange, increased by $466 million due to:

• growth across most Commercial Lines ($638 million), notably in Financial Lines, Global Specialty and Property driven by strong rate improvement, higher renewal retentions and strong new business production.

These increases were partially offset by lower production in Personal Insurance ($173 million) driven by underwriting actions taken to improve our portfolio mix and rate adequacy as well as due to the impact of COVID-19, partially offset by growth in Warranty.

 

 

110 AIG | Third Quarter 2021 Form 10-Q

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International Combined Ratios

Three Months Ended September 30,

Chart 10

Quarterly 2021 and 2020 Comparison

The decrease in the calendar year combined ratio of 7.0 points reflected a decrease in both the loss ratio (5.2 points) and the expense ratio (1.8 points).

The decrease in the loss ratio by 5.2 points reflected:

• near-flat net prior year reserve development in 2021 compared to unfavorable development in 2020 (4.8 points), primarily due to favorable development in Global Specialty, Personal Auto and Personal Accident & Health offset by unfavorable development in Financial Lines; and

• lower catastrophe losses (1.3 points); partially offset by

• higher accident year loss ratio, as adjusted (0.9 points) due to higher loss experience most notably in Personal Insurance.

The decrease in the expense ratio by 1.8 points reflected:

• lower acquisition ratio (1.0 points) primarily driven by changes in 2021 Commercial Lines reinsurance program as well as changes in business mix; and

• lower general operating expense ratio (0.8 points) resulting from continued general expense discipline as we grow the portfolio.

International Combined Ratios

Nine Months Ended September 30,

Chart 4

Year-to-Date 2021 and 2020 Comparison

The decrease in the calendar year combined ratio of 6.6 points reflected a decrease in both the loss ratio (4.8 points) and the expense ratio (1.8 points).

The decrease in the loss ratio by 4.8 points reflected:

• significantly lower catastrophe losses (3.6 points), notably due to the impact of COVID-19 in 2020; and

• lower net unfavorable prior year reserve development (0.9 points), primarily due to unfavorable development in Financial Lines mostly offset by favorable development in Global Specialty, Personal Auto and Accident & Health.

The decrease in the expense ratio by 1.8 points reflected:

• lower acquisition ratio (1.0 points) primarily driven by lower acquisition expenses, changes in 2021 Commercial Lines reinsurance program and changes in business mix; and

• lower general operating expense ratio (0.8 points) resulting from continued general expense discipline as we grow the portfolio.

 

AIG | Third Quarter 2021 Form 10-Q 111

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

 

Life and Retirement

Life and Retirement consists of four operating segments: Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. We offer a broad portfolio of products in the U.S. through a multichannel distribution network and life and health products in the UK and Ireland.

PRODUCTS AND DISTRIBUTION

Picture 4

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 as well as optional living guaranteed features that provide lifetime income protection. 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. For further details on the Sale of Certain Assets of the Retail Mutual Funds Business, see Executive Summary – Overview.

Picture 3

Group Retirement: Products and services include options for employer sponsored defined contribution plans including investments, plan administrative and compliance services, financial planning and advisory solutions, as well as retail annuity, advisory and brokerage products.

AIG Retirement Services offers its products and services through The Variable Annuity Life Insurance Company and its subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.

AIG Retirement Services career financial advisors serve individual clients, including in-plan enrollment support and education, and comprehensive financial planning services.

Picture 2

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 primarily include the distribution of life and health products in the UK and Ireland.

Picture 1

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

112 AIG | Third Quarter 2021 Form 10-Q

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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 fixed or 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’ 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. In this advisory role, Group Retirement’s clients may invest in assets in which AIG or a third-party is custodian.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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 support our cash and liquidity needs under various operating scenarios.

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

AIG | Third Quarter 2021 Form 10-Q 113

 

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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 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 competitors, 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 as well as other product lines;

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

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:

The worldwide health and economic impact of COVID-19 continues to evolve, influenced by the scope, severity and duration of the crisis as well as the actions of governments, judiciaries, legislative bodies, regulators and other third parties in response, as well as the distribution and effectiveness of vaccinations, all of which are subject to continuing uncertainty. The impact on the results for the first nine months of 2021 with respect to COVID-19 is primarily related to mortality.

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG. On July 14, 2021, AIG and Blackstone announced that they have reached a definitive agreement for Blackstone to acquire a 9.9 percent equity stake in SAFG, which is the holding company for AIG’s Life and Retirement business, for $2.2 billion in an all cash transaction, subject to adjustment if the final pro forma adjusted book value is greater or lesser than the target pro forma adjusted book value. The transaction contemplates that most of AIG’s investment operations would be transferred to SAFG or its subsidiaries as part of the separation. As part of this agreement, AIG also agreed to enter into a long-term asset management relationship with Blackstone to manage an initial $50 billion of Life and Retirement’s existing investment portfolio upon closing of the equity investment, with that amount increasing by increments of $8.5 billion per year for the next five years beginning in the fourth quarter of 2022, for an aggregate of $92.5 billion. These transactions closed on November 2, 2021. While we currently believe an initial public offering is the next step in the separation of the Life and Retirement business from AIG, no assurance can be given regarding the form that a separation transaction may take or the specific terms or timing thereof, or that a separation will in fact occur. Any separation transaction will be subject to the satisfaction of various conditions and approvals, including approval by the AIG Board of Directors, receipt of insurance and other required regulatory approvals, and satisfaction of any applicable requirements of the SEC.

On July 14, 2021, AIG and BREIT, a long-term, perpetual capital vehicle affiliated with Blackstone, announced that they have reached a definitive agreement for BREIT to acquire AIG’s interests in a U.S. affordable housing portfolio for approximately $5.1 billion, subject to certain adjustments, in an all cash transaction. As of September 30, 2021, the assets, primarily Other invested assets (Investment real estate) and liabilities, primarily Debt of consolidated investment entities, related to the Affordable Housing portfolio, $4.3 billion and $2.7 billion, respectively, are classified as held for sale and are reported in Other assets and Other liabilities within our Condensed Consolidated Balance Sheets. This transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2021.

On February 8, 2021, AIG announced the execution of a definitive agreement with Touchstone, an indirect wholly-owned subsidiary of Western & Southern Financial Group, to sell certain assets of AIG Life and Retirement’s Retail Mutual Funds business. The transaction closed on July 16, 2021 at which time we received initial proceeds, and twelve retail mutual funds managed by SAAMCo, a member of AIG Life and Retirement, with $6.8 billion in assets, were reorganized into Touchstone funds. Additional proceeds may be earned over a three-year period based on asset levels in certain reorganized funds. Six retail mutual funds managed by SAAMCo and not included in the transaction were liquidated. AIG Life and Retirement will retain its fund management platform and capabilities dedicated to its variable annuity insurance products.

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ITEM 2 | Business Segment Operations | Life and Retirement

 

For additional information regarding the separation of Life and Retirement please see Note 1 to the Condensed Consolidated Financial Statements and the 2020 Annual Report, Part I, Item 1A. Risk Factors – Business and Operations – No assurances can be given that the separation of our Life and Retirement business will occur or as to the specific terms or timing thereof. In addition, the separation could cause the emergence or exacerbate the effects of other risks to which AIG is exposed.

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 index and fixed deferred annuities with guaranteed income features has attracted increased competition in this product space. In response to the low interest rate environment, which has added pressure to profit margins, we have developed guaranteed income benefits for variable, fixed index, and fixed deferred annuities with margins that are less sensitive to the level of interest rates.

Changes in the capital markets (interest rate environment, equity markets, volatility) can have a significant impact on sales, surrender rates, investment returns, guaranteed income features, and net investment 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 and equity market environment can have a significant impact on investment returns, fee income, advisory and other income, guaranteed income features, and net investment spreads, and a moderate impact on sales and surrender rates.

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 low interest rate environment, our Life Insurance product portfolio will continue to promote products with less 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 (direct and assumed reinsurance) 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 the tax efficiency associated with institutional life insurance products, impacting 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.

AIG | Third Quarter 2021 Form 10-Q 115

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

life and retirement RESULTS

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Adjusted revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

1,041

$

785

 

33

%

 

$

3,286

$

3,674

 

(11)

%

Policy fees

 

715

 

649

 

10

 

 

 

2,270

 

2,110

 

8

 

Net investment income

 

2,435

 

2,332

 

4

 

 

 

7,164

 

6,497

 

10

 

Advisory fee and other income

 

253

 

224

 

13

 

 

 

750

 

656

 

14

 

Total adjusted revenues

 

4,444

 

3,990

 

11

 

 

 

13,470

 

12,937

 

4

 

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

1,544

 

1,506

 

3

 

 

 

5,024

 

5,377

 

(7)

 

Interest credited to policyholder account balances

 

935

 

893

 

5

 

 

 

2,687

 

2,670

 

1

 

Amortization of deferred policy acquisition costs

 

382

 

(46)

 

NM

 

 

 

775

 

399

 

94

 

General operating and other expenses*

 

673

 

592

 

14

 

 

 

1,940

 

1,868

 

4

 

Interest expense

 

33

 

37

 

(11)

 

 

 

102

 

119

 

(14)

 

Total benefits, losses and expenses

 

3,567

 

2,982

 

20

 

 

 

10,528

 

10,433

 

1

 

Adjusted pre-tax income

$

877

$

1,008

 

(13)

%

 

$

2,942

$

2,504

 

17

%

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

Our insurance companies generate significant revenues from investment activities. As a result, the operating segments in Life and Retirement are significantly impacted by 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.

116 AIG | Third Quarter 2021 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)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Adjusted revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

66

$

35

 

89

%

 

$

123

$

114

 

8

%

Policy fees

 

245

 

221

 

11

 

 

 

718

 

633

 

13

 

Net investment income

 

1,103

 

1,080

 

2

 

 

 

3,260

 

3,008

 

8

 

Advisory fee and other income

 

146

 

143

 

2

 

 

 

455

 

423

 

8

 

Total adjusted revenues

 

1,560

 

1,479

 

5

 

 

 

4,556

 

4,178

 

9

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

163

 

96

 

70

 

 

 

374

 

284

 

32

 

Interest credited to policyholder account balances

 

483

 

453

 

7

 

 

 

1,342

 

1,323

 

1

 

Amortization of deferred policy acquisition costs

 

371

 

143

 

159

 

 

 

612

 

418

 

46

 

Non deferrable insurance commissions

 

94

 

83

 

13

 

 

 

271

 

245

 

11

 

Advisory fee expenses

 

43

 

52

 

(17)

 

 

 

149

 

153

 

(3)

 

General operating expenses

 

98

 

103

 

(5)

 

 

 

319

 

313

 

2

 

Interest expense

 

16

 

17

 

(6)

 

 

 

48

 

56

 

(14)

 

Total benefits, losses and expenses

 

1,268

 

947

 

34

 

 

 

3,115

 

2,792

 

12

 

Adjusted pre-tax income

$

292

$

532

 

(45)

%

 

$

1,441

$

1,386

 

4

%

Fixed annuities base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield*

 

3.92

%

4.06

%

(14)

bps

 

 

3.98

%

4.21

%

(23)

bps

Cost of funds

 

2.56

 

2.63

 

(7)

 

 

 

2.59

 

2.63

 

(4)

 

Fixed annuities base net investment spread

 

1.36

%

1.43

%

(7)

bps

 

 

1.39

%

1.58

%

(19)

bps

Variable and index annuities base net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield*

 

3.82

%

3.83

%

(1)

bps

 

 

3.87

%

3.94

%

(7)

bps

Cost of funds

 

1.31

 

1.28

 

3

 

 

 

1.31

 

1.31

 

-

 

Variable and index annuities base net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investment spread:

 

2.51

%

2.55

%

(4)

bps

 

 

2.56

%

2.63

%

(7)

bps

* Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.

Business and Financial Highlights

The market environment is beginning to improve as disruptions due to the COVID-19 crisis are less impactful and benchmark interest rates have increased. Premiums and deposits increased $555 million and $3.0 billion in the three- and nine-month periods ended September 30, 2021, respectively, compared to the same periods in the prior year. Net flows improved $864 million and $3.3 billion in the three- and nine-month periods ended September 30, 2021, respectively, compared to the same periods in the prior year.

Adjusted pre-tax income decreased $240 million in the three-month period ended September 30, 2021 compared to the same period in the prior year, primarily due to a net unfavorable impact from the review and update of actuarial assumptions ($195 million) and higher DAC amortization and policyholder benefits net of premiums excluding the actuarial assumptions update ($101 million) compared to the same period in the prior year. Partially offsetting these decreases were higher policy and advisory fee income, net of advisory fee expenses ($36 million) and higher net investment income ($23 million).

Adjusted pre-tax income increased $55 million in the nine-month period ended September 30, 2021 compared to the same period in the prior year primarily due to higher net investment income ($252 million) and higher policy and advisory fee income, net of advisory fee expenses ($121 million). Partially offsetting these increases was a net unfavorable impact from the review and update of actuarial assumptions update ($195 million), higher DAC amortization and policyholder benefits net of premiums excluding the actuarial assumptions update ($113 million) compared to the same period in the prior year and an increase in non-deferrable insurance commissions ($26 million).

AIG | Third Quarter 2021 Form 10-Q 117

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Individual Retirement Adjusted Pre-Tax Income (Loss)

Three Months Ended September 30,

(in millions)

Chart 3

Quarterly 2021 and 2020 Comparison

Adjusted pre-tax income decreased $240 million primarily due to:

higher net unfavorable impacts from the review and update of actuarial assumptions ($195 million); and

increase in DAC amortization and policyholder benefits net of premiums, excluding the review and update of actuarial assumptions ($101 million) primarily due to lower Variable annuity separate account returns, impact of lower portfolio yields on policyholder benefits, and Index Annuities growth.

Partially offsetting these decreases were:

higher policy and advisory fee income, net of advisory fee expenses ($36 million), primarily due to an increase in variable annuity separate account assets driven by strong equity market performance; and

increase in net investment income ($23 million) driven by higher private equity income ($42 million) and higher commercial mortgage loan prepayment income ($15 million), partially offset by lower gains on securities on which the fair value option was elected ($27 million).

Individual Retirement Adjusted Pre-Tax Income (Loss)

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2021 and 2020 Comparison

Adjusted pre-tax income increased $55 million primarily due to:

increase in net investment income ($252 million) driven by higher private equity income ($246 million), higher call and tender income ($43 million), and higher commercial mortgage loan prepayment income ($22 million), partially offset by lower base portfolio income ($71 million) resulting from decreased reinvestment rates on the base portfolio; and

higher policy and advisory fee income, net of advisory fee expenses ($121 million), primarily due to an increase in variable annuity separate account assets driven by robust equity market performance.

Partially offsetting these increases were:

a net unfavorable impact from the review and update of actuarial assumptions ($195 million);

increase in DAC amortization and policyholder benefits net of premiums, excluding the actuarial assumption updates ($113 million), primarily due to higher growth in Index Annuities, coupled with the impact of lower portfolio yields on policyholder benefits; and

higher non-deferrable insurance commissions ($26 million) primarily due to growth in variable annuity separate account assets.

118 AIG | Third Quarter 2021 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 $31 million and $9 million in the three- and nine-month periods ended September 30, 2021, respectively, compared to the same periods in the prior year. Premiums are generally not a significant driver of Individual Retirement results.

Premiums and deposits are 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.

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)

 

2021

 

2020

 

 

2021

 

2020

Premiums

$

66

$

35

 

$

123

$

114

Deposits

 

3,190

 

2,670

 

 

10,488

 

7,508

Other

 

1

 

(3)

 

 

(3)

 

(10)

Premiums and deposits

$

3,257

$

2,702

 

$

10,608

$

7,612

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2021

 

2020

 

 

2021

 

2020

 

Surrenders as a percentage of average reserves

 

 

 

 

 

 

 

 

 

Fixed annuities

6.6

%

5.8

%

 

7.2

%

5.7

%

Variable and index annuities

6.3

 

5.5

 

 

6.4

 

5.4

 

Variable annuities

7.1

 

5.9

 

 

7.1

 

5.9

 

Index annuities

4.4

 

4.4

 

 

4.6

 

4.0

 

The following table presents reserves for fixed annuities and variable and index annuities by surrender charge category:

 

September 30, 2021

 

December 31, 2020*

 

 

 

 

Variable

 

 

 

 

Variable

 

 

Fixed

 

and Index

 

 

Fixed

 

and Index

(in millions)

 

Annuities

 

Annuities

 

 

Annuities

 

Annuities

No surrender charge

$

26,741

$

34,452

 

$

27,110

$

30,954

Greater than 0% - 2%

 

1,979

 

12,054

 

 

2,298

 

11,647

Greater than 2% - 4%

 

2,608

 

13,848

 

 

2,758

 

15,361

Greater than 4%

 

16,221

 

35,045

 

 

16,163

 

32,261

Non-surrenderable

 

2,309

 

-

 

 

2,214

 

-

Total reserves

$

49,858

$

95,399

 

$

50,543

$

90,223

* Certain reclassifications have been made to the prior year amounts for consistency with the current year presentation.

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, 2021 decreased compared to December 31, 2020. The increase in reserves with no surrender charge for variable and index annuities as of September 30, 2021 compared to December 31, 2020 was principally due to normal aging of business.

AIG | Third Quarter 2021 Form 10-Q 119

 

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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

* Retail Mutual Fund net flows reflects customer activity and in 2021, it excludes $7.0 billion of funds (i) transferred as part of the Touchstone sale or (ii) liquidated.

 

Quarterly 2021 and 2020 Comparison

Fixed Annuities Net flows remained negative and decreased ($264 million) over the prior year, primarily due to lower premiums and deposits ($309 million) due to higher competitive rates in the bank channel and higher surrenders and withdrawals ($82 million) partially offset by lower death benefits ($127 million).

Variable Annuities Net flows improved ($215 million) primarily due to higher premium and deposits ($527 million) driven by growth in independent and regional broker dealers in part due to prior year impact from distribution channel disruptions related to COVID-19, partially offset by higher surrenders and withdrawals ($295 million) and death benefits ($17 million).

Index Annuities Net flows increased ($399 million) primarily due to higher premiums and deposits ($474 million) driven by growth in wirehouse and bank channels partially due to prior year impact from distribution channel disruptions related to COVID-19, partially offset by higher surrenders and withdrawals ($56 million) and death benefits ($19 million).

Retail Mutual Funds Net flows remained negative but improved ($514 million) due to lower surrenders and withdrawals ($651 million) partially offset by lower premiums and deposits ($137 million) due to investors’ continued preference for passive, low-fee investment vehicles. Retail Mutual Funds net flows reflects customer activity and in 2021, it excludes $7.0 billion of funds (i) transferred as part of the Touchstone sale or (ii) liquidated. See discussion regarding sale of certain AIG Life and Retirement Retail Mutual Funds business in Note 1 to the Condensed Consolidated Financial Statements.

120 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

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

Nine Months Ended September 30,

(in millions)

 

Chart 5

* Retail Mutual Funds net flows reflects customer activity and in 2021, it excludes $7.0 billion of funds (i) transferred as part of the Touchstone sale or (ii) liquidated.

 

Year-to-Date 2021 and 2020 Comparison

Fixed Annuities Net flows remained negative and decreased ($62 million) over the prior year, primarily due to higher surrenders and withdrawals ($519 million) partially offset by higher premiums and deposits ($233 million) due to the improved interest rate environment and prior year impact from distribution channel disruptions related to COVID-19, and lower death benefits ($224 million).

Variable Annuities Variable annuity net flows improved ($753 million) primarily due to higher premium and deposits ($1.8 billion) driven by growth in independent and regional broker dealers in part due to prior year impact from distribution channel disruptions related to COVID-19, partially offset by higher surrenders and withdrawal ($839 million) and death benefits ($159 million).

Index Annuities Net flows increased ($1.0 billion) primarily due to higher premiums and deposits ($1.4 billion) driven by growth in wirehouse and bank channels partially due to prior year impact from distribution channel disruptions related to COVID-19, partially offset by higher surrenders and withdrawal ($257 million) and death benefits ($60 million).

Retail Mutual Funds Net flows remained negative but improved ($1.6 billion) due to lower surrenders and withdrawals ($1.9 billion) partially offset by lower premiums and deposits ($338 million) due to investors’ continued preference for passive, low-fee investment vehicles, and the distribution channel disruptions related to COVID-19. Retail Mutual Funds net flows reflects customer activity and in 2021, it excludes $7.0 billion of funds (i) transferred as part of the Touchstone sale or (ii) liquidated. See discussion regarding sale of certain AIG Life and Retirement Retail Mutual Funds business in Note 1 to the Condensed Consolidated Financial Statements.

AIG | Third Quarter 2021 Form 10-Q 121

 

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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)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Adjusted revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

7

$

5

 

40

%

 

$

15

$

14

 

7

%

Policy fees

 

135

 

115

 

17

 

 

 

389

 

324

 

20

 

Net investment income

 

601

 

571

 

5

 

 

 

1,806

 

1,629

 

11

 

Advisory fee and other income

 

89

 

67

 

33

 

 

 

248

 

197

 

26

 

Total adjusted revenues

 

832

 

758

 

10

 

 

 

2,458

 

2,164

 

14

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

30

 

17

 

76

 

 

 

56

 

64

 

(13)

 

Interest credited to policyholder account balances

 

289

 

276

 

5

 

 

 

859

 

836

 

3

 

Amortization of deferred policy acquisition costs

 

16

 

(44)

 

NM

 

 

 

45

 

(5)

 

NM

 

Non deferrable insurance commissions

 

31

 

28

 

11

 

 

 

78

 

84

 

(7)

 

Advisory fee expenses

 

34

 

27

 

26

 

 

 

96

 

81

 

19

 

General operating expenses

 

107

 

106

 

1

 

 

 

326

 

377

 

(14)

 

Interest expense

 

9

 

10

 

(10)

 

 

 

28

 

32

 

(13)

 

Total benefits, losses and expenses

 

516

 

420

 

23

 

 

 

1,488

 

1,469

 

1

 

Adjusted pre-tax income

$

316

$

338

 

(7)

%

 

$

970

$

695

 

40

%

Base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield*

 

4.12

%

4.20

%

(8)

bps

 

 

4.13

%

4.29

%

(16)

bps

Cost of funds

 

2.60

 

2.65

 

(5)

 

 

 

2.61

 

2.66

 

(5)

 

Base net investment spread

 

1.52

%

1.55

%

(3)

bps

 

 

1.52

%

1.63

%

(11)

bps

* Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.

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. Premiums and deposits increased $59 million and $607 million in the three- and nine-month periods ended September 30, 2021, respectively, compared to the same periods in the prior year. Net flows remained negative and deteriorated $57 million and $349 million in the three- and nine-month periods ended September 30, 2021 respectively, compared to the same periods in the prior year.

Adjusted pre-tax income decreased $22 million in the three-month period ended September 30, 2021 compared to the same period in the prior year primarily due to a net unfavorable impact from the review and update of actuarial assumptions ($70 million) and increases in variable annuity DAC amortization and policyholder benefits excluding the actuarial assumptions update ($14 million) partially offset by higher policy and advisory fee income, net of advisory fee expenses ($35 million) and higher net investment income ($30 million).

Adjusted pre-tax income increased $275 million in the nine-month period ended September 30, 2021 compared to the same period in the prior year primarily from higher net investment income ($177 million), higher policy and advisory fee income, net of advisory fee expenses ($101 million), lower general operating expenses ($51 million) and decreases in variable annuity DAC amortization and policyholder benefits ($16 million). Partially offsetting these increases was a net unfavorable impact from the review and update of actuarial assumptions ($70 million).

122 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Group Retirement Adjusted Pre-Tax Income (Loss)

Three Months Ended September 30,

(in millions)

Chart 3

Quarterly 2021 and 2020 Comparison

Adjusted pre-tax income decreased $22 million primarily due to:

a net unfavorable impact from the review and update of actuarial assumptions ($70 million); and

increases in variable annuity DAC amortization and policyholder benefits excluding actuarial assumptions update ($14 million), due to lower variable annuity market returns.

Partially offsetting these decreases were:

higher policy and advisory fee income, net of advisory fee expenses ($35 million), due to an increase in separate account, mutual fund, and advisory average assets; and

higher net investment income excluding base portfolio income ($26 million), primarily driven by higher private equity returns ($23 million) and higher call and tender income ($11 million) partially offset by lower gains on securities for which the fair value option was elected ($12 million).

 

Group Retirement Adjusted Pre-Tax Income (Loss)

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2021 and 2020 Comparison

Adjusted pre-tax income increased $275 million primarily due to:

higher net investment income excluding base portfolio income ($188 million), primarily driven by higher private equity returns ($150 million) and higher call and tender income ($36 million);

higher policy and advisory fee income, net of advisory fee expenses, ($101 million) due to an increase in separate account, mutual fund, and advisory average assets;

lower general operating expenses ($51 million) primarily due to decreased regulatory expenses and savings from COVID-19 travel restrictions; and

decreases in variable annuity DAC amortization and policyholder benefits excluding actuarial assumptions update ($16 million), due to stronger equity market performance.

Partially offsetting these increases were:

a net unfavorable impact from the review and update of actuarial assumptions ($70 million); and

lower base portfolio income net of interest credited ($23 million) primarily driven by decreased reinvestment yields.

AIG | Third Quarter 2021 Form 10-Q 123

 

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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, 2021, which primarily represents immediate annuities, increased $2 million and $1 million, respectively, compared to the same periods in the prior year. Premiums are not a significant driver of Group Retirement results.

Premiums and deposits are 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 included in Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals.

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)

 

2021

 

2020

 

 

2021

 

2020

Premiums

$

7

$

5

 

$

15

$

14

Deposits

 

1,824

 

1,767

 

 

5,889

 

5,283

Premiums and deposits

$

1,831

$

1,772

 

$

5,904

$

5,297

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,

 

2021

 

2020

 

 

2021

 

2020

 

Surrenders as a percentage of average reserves and mutual funds

9.1

%

10.1

%

 

8.6

%

8.8

%

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

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2021

(a)

 

2020

(a)

No surrender charge(b)

$

79,755

 

$

77,507

 

Greater than 0% - 2%

 

645

 

 

565

 

Greater than 2% - 4%

 

818

 

 

829

 

Greater than 4%

 

6,197

 

 

6,119

 

Non-surrenderable

 

788

 

 

616

 

Total reserves

$

88,203

 

$

85,636

 

(a) Excludes mutual fund assets under administration of $27.3 billion and $25.0 billion at September 30, 2021 and December 31, 2020, respectively.

(b) Group Retirement amounts in this category include general account reserves of approximately $6.4 billion and $6.3 billion at September 30, 2021 and December 31, 2020 respectively, which are subject to 20 percent annual withdrawal limitations at the participant level and general account reserves of $6.2 billion at September 30, 2021 and $5.8 billion at December 31, 2020, respectively, which are subject to 20 percent annual withdrawal limitations at the plan level.

Group Retirement annuity deposits are typically subject to a five- to seven-year surrender charge period, depending on the product. At September 30, 2021, Group Retirement annuity reserves with no surrender charge increased compared to December 31, 2020 primarily due to growth in assets under management.

124 AIG | Third Quarter 2021 Form 10-Q

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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 follows:

Group Retirement Premiums and Deposits and Net Flows

Three Months Ended September 30,

(in millions)

Chart 5

Quarterly 2021 and 2020 Comparison

Net flows remained negative and deteriorated ($57 million) due to higher surrenders and withdrawals ($94 million) and death benefits ($22 million) partially offset by higher deposits ($59 million).

Group Retirement Premiums and Deposits and Net Flows

Nine Months Ended September 30,

(in millions)

Chart 5

Year-to-Date 2021 and 2020 Comparison

Net flows remained negative and deteriorated ($349 million) due to higher surrenders and withdrawals ($847 million) and death benefits ($109 million) partially offset by higher deposits ($607 million). Large plan acquisitions and surrenders also contributed to the period over period volatility. In the nine-month period ended September 30, 2021, large plan activity contributed net positive flows of $0.9 billion compared to the same period in the prior year. External factors including consolidation of healthcare providers and other employers in target markets continue to impact Group Retirement customer retention.

 

AIG | Third Quarter 2021 Form 10-Q 125

 

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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)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Adjusted revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

469

$

470

 

-

%

 

$

1,533

$

1,424

 

8

%

Policy fees

 

288

 

266

 

8

 

 

 

1,023

 

1,014

 

1

 

Net investment income

 

437

 

439

 

-

 

 

 

1,238

 

1,134

 

9

 

Other income

 

17

 

14

 

21

 

 

 

45

 

36

 

25

 

Total adjusted revenues

 

1,211

 

1,189

 

2

 

 

 

3,839

 

3,608

 

6

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

753

 

1,033

 

(27)

 

 

 

2,707

 

2,674

 

1

 

Interest credited to policyholder account balances

 

88

 

94

 

(6)

 

 

 

265

 

280

 

(5)

 

Amortization of deferred policy acquisition costs

 

(6)

 

(147)

 

96

 

 

 

114

 

(18)

 

NM

 

Non deferrable insurance commissions

 

37

 

10

 

270

 

 

 

103

 

68

 

51

 

General operating expenses

 

199

 

159

 

25

 

 

 

517

 

469

 

10

 

Interest expense

 

6

 

8

 

(25)

 

 

 

19

 

23

 

(17)

 

Total benefits, losses and expenses

 

1,077

 

1,157

 

(7)

 

 

 

3,725

 

3,496

 

7

 

Adjusted pre-tax income

$

134

$

32

 

319

%

 

$

114

$

112

 

2

%

Business and Financial Highlights

Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. Adjusted pre-tax income increased $102 million in the three-month period ended September 30, 2021 compared to the same period in the prior year primarily due to a higher net favorable impact from the review and update of actuarial assumptions ($207 million) partially offset by unfavorable premiums and policy fees, net of policyholder benefits, excluding actuarial assumptions update ($64 million), due to higher mortality, and higher general operating expenses ($40 million). Adjusted pre-tax income increased $2 million in the nine-month period ended September 30, 2021 compared to the same period in the prior year primarily due to higher net favorable impact from the review and update of actuarial assumptions ($207 million) and higher net investment income ($104 million) partially offset by unfavorable premiums and policy fees, net of policyholder benefits, excluding actuarial assumptions update ($281 million), due to higher mortality, and higher general operating expenses ($48 million).

Life Insurance Adjusted Pre-Tax Income (Loss)

Three Months Ended September 30,

(in millions)

Chart 1

Quarterly 2021 and 2020 Comparison

Adjusted pre-tax income increased $102 million primarily due to higher net favorable impact from the review and update of actuarial assumptions update ($207 million).

Partially offsetting this increase were unfavorable premiums and policy fees, net of policyholder benefits, excluding actuarial assumptions update ($64 million), due to higher mortality.

126 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Life Insurance Adjusted Pre-Tax Income (Loss)

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2021 and 2020 Comparison

Adjusted pre-tax income increased $2 million primarily due to:

higher net favorable impact from the review and update of actuarial assumptions update ($207 million); and

higher net investment income ($104 million), primarily driven by higher private equity returns ($99 million) due to stronger equity market performance higher gains on calls ($29 million) partially offset by lower base portfolio income ($26 million) driven by reduced fixed asset income.

Partially offsetting these increases were unfavorable premiums and policy fees, net of policyholder benefits, excluding actuarial assumptions update ($281 million), due to higher mortality.

Life Insurance GAAP Premiums and Premiums and Deposits

Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life and international life and health. Premiums, excluding the effect of foreign exchange, decreased $8 million and increased $67 million in the three- and nine-month periods ended September 30, 2021, respectively, 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)

 

2021

 

2020

 

 

2021

 

2020

Premiums

$

469

$

470

 

$

1,533

$

1,424

Deposits

 

403

 

394

 

 

1,209

 

1,218

Other*

 

280

 

212

 

 

702

 

615

Premiums and deposits

$

1,152

$

1,076

 

$

3,444

$

3,257

* Other principally consists of adding back ceded premiums to reflect the gross premiums and deposits.

AIG | Third Quarter 2021 Form 10-Q 127

 

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 2021 and 2020 Comparison

Premiums and deposits, excluding the effect of foreign exchange, increased $64 million primarily due to growth in international life premiums.

Life Insurance Premiums and Deposits

Nine Months Ended September 30,

(in millions)

Chart 2

Year-to-Date 2021 and 2020 Comparison

Premiums and deposits, excluding the effect of foreign exchange, increased $128 million primarily due to growth in international life premiums.

 

128 AIG | Third Quarter 2021 Form 10-Q

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)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Adjusted revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

499

$

275

 

81

%

 

$

1,615

$

2,122

 

(24)

%

Policy fees

 

47

 

47

 

-

 

 

 

140

 

139

 

1

 

Net investment income

 

294

 

242

 

21

 

 

 

860

 

726

 

18

 

Other income

 

1

 

-

 

NM

 

 

 

2

 

-

 

NM

 

Total adjusted revenues

 

841

 

564

 

49

 

 

 

2,617

 

2,987

 

(12)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

598

 

360

 

66

 

 

 

1,887

 

2,355

 

(20)

 

Interest credited to policyholder account balances

 

75

 

70

 

7

 

 

 

221

 

231

 

(4)

 

Amortization of deferred policy acquisition costs

 

1

 

2

 

(50)

 

 

 

4

 

4

 

-

 

Non deferrable insurance commissions

 

6

 

7

 

(14)

 

 

 

19

 

23

 

(17)

 

General operating expenses

 

24

 

17

 

41

 

 

 

62

 

55

 

13

 

Interest expense

 

2

 

2

 

-

 

 

 

7

 

8

 

(13)

 

Total benefits, losses and expenses

 

706

 

458

 

54

 

 

 

2,200

 

2,676

 

(18)

 

Adjusted pre-tax income

$

135

$

106

 

27

%

 

$

417

$

311

 

34

%

Business and Financial Highlights

Institutional Markets is focused on opportunities to grow its portfolio while maintaining pricing discipline. Product distribution continues to be strong. Growth in assets under management in recent years has partially driven higher net investment income and adjusted pre-tax income. Adjusted pre-tax income increased $29 million and $106 million in the three- and nine-month periods ended September 30, 2021, respectively, compared to the same periods in the prior year.

Institutional Markets Adjusted Pre-Tax Income (Loss)

Three Months Ended September 30,

(in millions)

Chart 1

Quarterly 2021 and 2020 Comparison

Adjusted pre-tax income increased $29 million primarily due to:

an increase in premiums on new pension risk transfer business ($265 million), partially offset by lower structured settlement annuities ($41 million); and

higher net investment income ($52 million) primarily due to private equity returns ($22 million) and higher yield enhancement income ($27 million).

Partially offsetting these increases were:

an increase in policyholder benefits and losses incurred (including interest accretion) on pension risk transfer products ($278 million), primarily driven by new business, partially offset by lower policyholder benefits and losses incurred (including interest accretion) on structured settlement annuities ($40 million);

higher general operating expenses ($7 million) associated with growth of the pension risk transfer business; and

higher interest credited to policyholder account balances ($5 million) primarily due to fair value changes of certain GICs and hedging instruments.

 

AIG | Third Quarter 2021 Form 10-Q 129

 

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ITEM 2 | Business Segment Operations | Life and Retirement

 

Institutional Markets Adjusted Pre-Tax Income (Loss)

Nine Months Ended September 30,

(in millions)

Chart 3

Year-to-Date 2021 and 2020 Comparison

Adjusted pre-tax income increased $106 million primarily due to:

a decrease in policyholder benefits and losses incurred (including interest accretion) on pension risk transfer and structured settlement products driven by higher sales in the prior year ($468 million);

higher net investment income ($134 million) primarily due to private equity returns ($101 million) and higher base portfolio income ($33 million) driven by growth in average invested assets; and

lower interest credited to policyholder account balances ($10 million) due to interest rate impacts on certain GICs and hedging instruments, partially offset by fair value changes.

Partially offsetting these increases were:

a decrease in premiums on pension risk transfer and structured settlement business ($507 million) driven by higher sales in the prior year; and

higher general operating expenses ($7 million) associated with growth of the pension risk transfer business.

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 $224 million in the three-month period ended September 30, 2021 compared to the same period in the prior year primarily driven by pension risk transfer business (direct and assumed reinsurance). Premiums decreased $507 million in the nine-month period ended September 30, 2021 compared to the same period in the prior year primarily driven by pension risk transfer business (direct and assumed reinsurance) written in 2020, as well as structured settlement annuities with life contingencies business.

Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on investment-type annuity contracts. Deposits include GICs and 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)

 

2021

 

2020

 

 

2021

 

2020

Premiums

$

499

$

275

 

$

1,615

$

2,122

Deposits

 

488

 

1,167

 

 

1,081

 

1,417

Other*

 

7

 

6

 

 

19

 

20

Premiums and deposits

$

994

$

1,448

 

$

2,715

$

3,559

* Other principally consists of adding back ceded premiums to reflect the gross premiums and deposits.

130 AIG | Third Quarter 2021 Form 10-Q

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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 2021 and 2020 Comparison

Premiums and deposits decreased ($454 million) primarily due to lower deposits on GICs ($700 million) and lower structured settlement annuities ($37 million), partially offset by higher premium on pension risk transfer business ($265 million) and higher deposits on high net worth products ($21 million).

Institutional Markets Premiums and Deposits

Nine Months Ended September 30,

(in millions)

Chart 2

Year-to-Date 2021 and 2020 Comparison

Premiums and deposits decreased ($844 million) due to lower premiums on pension risk transfer ($404 million), lower deposits on GICs ($274 million), lower structured settlement annuities ($148 million), and lower deposits on high net worth products ($16 million).

 

AIG | Third Quarter 2021 Form 10-Q 131

 

TABLE OF CONTENTS

 

ITEM 2 | Business Segment Operations | Other Operations

 

Other Operations

 

Other Operations primarily consists of income from assets held by AIG Parent and other corporate subsidiaries, deferred tax assets related to tax attributes, corporate expenses and intercompany eliminations, our institutional asset management business and results of our consolidated investment entities, General Insurance portfolios in run-off as well as the historical results of our legacy insurance lines ceded to Fortitude Re.

Other Operations Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

Percentage

 

 

September 30,

Percentage

 

(in millions)

 

2021

 

2020

 

Change

 

 

 

2021

 

2020

 

Change

 

Adjusted revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

42

$

40

 

5

%

 

$

148

$

180

 

(18)

%

Policy fees

 

-

 

1

 

NM

%

 

 

-

 

43

 

NM

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividends

 

35

 

44

 

(20)

 

 

 

130

 

858

 

(85)

 

Alternative investments

 

216

 

48

 

350

 

 

 

541

 

(30)

 

NM

 

Other investment income

 

23

 

88

 

(74)

 

 

 

66

 

127

 

(48)

 

Investment expenses

 

(17)

 

(2)

 

NM

 

 

 

(31)

 

(37)

 

16

 

Total net investment income

 

257

 

178

 

44

 

 

 

706

 

918

 

(23)

 

Other income

 

2

 

4

 

(50)

 

 

 

30

 

4

 

NM

 

Total adjusted revenues

 

301

 

223

 

35

 

 

 

884

 

1,145

 

(23)

 

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

50

 

42

 

19

 

 

 

212

 

775

 

(73)

 

Interest credited to policyholder account balances

 

-

 

(4)

 

NM

 

 

 

-

 

89

 

NM

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

9

 

9

 

-

 

 

 

30

 

40

 

(25)

 

Other acquisition expenses

 

2

 

(1)

 

NM

 

 

 

1

 

-

 

NM

 

Total acquisition expenses

 

11

 

8

 

38

 

 

 

31

 

40

 

(23)

 

General operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and Other

 

295

 

205

 

44

 

 

 

855

 

734

 

16

 

Asset Management

 

7

 

2

 

250

 

 

 

55

 

31

 

77

 

Amortization of intangible assets

 

10

 

10

 

-

 

 

 

30

 

30

 

-

 

Total General operating expenses

 

312

 

217

 

44

 

 

 

940

 

795

 

18

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest - Corporate and Other

 

257

 

296

 

(13)

 

 

 

794

 

859

 

(8)

 

Interest - Asset Management*

 

41

 

32

 

28

 

 

 

147

 

122

 

20

 

Total interest expense

 

298

 

328

 

(9)

 

 

 

941

 

981

 

(4)

 

Total benefits, losses and expenses

 

671

 

591

 

14

 

 

 

2,124

 

2,680

 

(21)

 

Adjusted pre-tax loss before consolidation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

eliminations

 

(370)

 

(368)

 

(1)

 

 

 

(1,240)

 

(1,535)

 

19

 

Consolidation and eliminations

 

(192)

 

(140)

 

(37)

 

 

 

(462)

 

(174)

 

(166)

 

Adjusted pre-tax loss

$

(562)

$

(508)

 

(11)

%

 

$

(1,702)

$

(1,709)

 

-

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted pre-tax income (loss) by activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and Other

 

(583)

 

(395)

 

(48)

 

 

$

(1,752)

$

(1,522)

 

(15)

%

Asset Management

 

213

 

27

 

NM

 

 

 

512

 

(13)

 

NM

 

Consolidation and eliminations

 

(192)

 

(140)

 

(37)

 

 

 

(462)

 

(174)

 

(166)

 

Adjusted pre-tax loss

$

(562)

$

(508)

 

(11)

%

 

$

(1,702)

$

(1,709)

 

-

%

* Interest – Asset Management primarily represents interest expense on consolidated investment entities of $39 million and $29 million in the three-month periods ended September 30, 2021 and 2020, respectively, and $141 million and $116 million in the nine-month periods ended September 30, 2021 and 2020, respectively.

132 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Business Segment Operations | Other Operations

 

QUARTERLY 2021 AND 2020 COMPARISON

Adjusted pre-tax loss before consolidation and eliminations of $370 million in 2021 compared to $368 million in 2020, a slight increase of $2 million, was primarily due to:

higher corporate general operating expenses of $90 million, including increases in performance-based employee compensation.

The increase in adjusted pre-tax loss was partially offset by:

higher net investment income associated with consolidated investment entities of $181 million, partially offset by decline in net mark to market gains on CDO securities of $59 million and losses on fair value option assets of $29 million; and

lower corporate interest expense of $39 million primarily due to debt redemptions of $3.0 billion debt in 2021 ($18 million) and debt expiration of $1.3 billion debt in 2020 ($14 million).

Adjusted pre-tax loss on consolidation and eliminations of $192 million in 2021 compared to $140 million in 2020, was primarily due to the elimination of the insurance companies’ net investment income on their investment in the consolidated investment entities of $80 million.

YEAR-TO-DATE 2021 and 2020 Comparison

Adjusted pre-tax loss before consolidation and eliminations of $1.2 billion in 2021 compared to $1.5 billion in 2020, a decrease of $295 million, was primarily due to the sale of a majority of the interest in Fortitude Holdings on June 2, 2020, as prior period results included adjusted pre-tax loss of $241 million. Excluding the results of Fortitude Re, adjusted pre-tax loss decreased $54 million primarily due to:

higher net investment income associated with consolidated investment entities of $525 million was partially offset by decline in net mark to market gains on CDO securities of $181 million; and

lower corporate interest expense of $65 million primarily due to debt expiration of $1.3 billion debt in 2020 ($48 million) and debt redemptions of $3.0 billion debt in 2021 ($39 million), partially offset by interest expense of $50 million due to corporate debt issuances of $4.1 billion in 2020.

The decrease in adjusted pre-tax loss was partially offset by:

higher underwriting loss attributable to net prior year development in 2021 of $84 million and higher catastrophe activity of $39 million within Other Operations Run-off, primarily attributable to Blackboard; and

higher corporate general operating expenses of $121 million, including increases in performance-based employee compensation.

Adjusted pre-tax loss on consolidation and eliminations of $462 million in 2021 compared to $174 million in 2020, an increase of $288 million, was primarily due to the elimination of the insurance companies’ net investment income on their investment in the consolidated investment entities of $296 million.

AIG | Third Quarter 2021 Form 10-Q 133

 

TABLE OF CONTENTS

 

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 supports estimated cash flows of our outstanding liabilities and 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.

The worldwide health and economic impact of COVID-19 continues to evolve, influenced by the scope, severity and duration of the crisis as well as the actions of governments, judiciaries, legislative bodies, regulators and other third parties in response, including the distribution and effectiveness of vaccinations, all of which are subject to continuing uncertainty. Weak initial economic conditions resulting from COVID-19 have been met with intervention taken by governments and monetary authorities aimed at stimulating growth, resulting in a sharp recovery on our overall investment portfolio to pre-COVID-19 conditions. In certain segments of our diversified investment portfolio, there have been exposures to sectors of the economy significantly affected by the crisis, which has, in certain periods, resulted in the recognition of credit losses and increases in our allowance for credit losses. Further recognition of credit losses and increases in our allowances for credit losses could result if new business closures are imposed or economic conditions worsen in response to a future resurgence of the virus.

INVESTMENT HIGHLIGHTS IN THE NINE MONTHS ENDED SEPTEMBER 30, 2021

A rise in interest rates resulted in a net unrealized loss movement in our investment portfolio. Net unrealized gains in our available for sale portfolio decreased to approximately $19.5 billion as of September 30, 2021 from approximately $27.4 billion as of December 31, 2020.

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

We experienced an increase in net investment income in the nine-month period ended September 30, 2021 compared to the same period in the prior year due primarily to the higher income on our alternative investments and fair value option equity security holdings that directionally followed the positive returns achieved in equity markets. The same period in the prior year experienced significant volatility and declines in equity markets due to the onset of the COVID-19 crisis.

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

 

 

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, 2021 was primarily attributable to movements in interest rates and spreads. There was a rise in rates and widening spreads in the three-month period ended September 30, 2021 that resulted in unrealized losses of approximately $2.1 billion on fixed maturity securities. For the nine-month period ended September 30, 2021, net unrealized losses related to fixed maturity securities were $7.9 billion due primarily to an increase in interest rates.

The change in net unrealized gains and losses on investments in the three- and nine-month periods ended September 30, 2020 was primarily attributable to increases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2020, net unrealized gains related to fixed maturity securities increased by $5.9 billion due primarily to lower rates partially offset by a widening of credit spreads.

For further discussion of our investment portfolio see Note 5 to the Condensed Consolidated Financial Statements.

134 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Investments

 

Net Realized Gains and Losses

Net realized gains excluding Fortitude Re funds withheld assets in the three-month period ended September 30, 2021 were driven primarily by gains on other derivative and hedge activity and gains on real estate and other assets compared to net realized losses excluding Fortitude Re funds withheld assets in the same period in the prior year which were primarily the result of derivative losses. Lower net realized gains excluding Fortitude Re funds withheld assets in the nine-month period ended September 30, 2021 compared to the same period in the prior year were primarily due to lower derivatives gains, which more than offset higher gains on sales of real estate and other assets.

Variable annuity embedded derivatives, net of related hedges, reflected lower losses in the three-month period ended September 30, 2021 and lower gains in the nine-month period ended September 30, 2021 compared to the same periods in the prior year. Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities due to 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, and other risk margins used for valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio.

Net realized gains (losses) on Fortitude Re funds withheld assets primarily reflect changes in the valuation of the modified coinsurance and funds withheld assets. Increases in the valuation of these assets result in losses to AIG as the appreciation on the assets must under those reinsurance arrangements be transferred to Fortitude Re. Decreases in valuation of the assets result in gains to AIG as the depreciation on the assets under those reinsurance arrangements must be transferred to Fortitude Re. For further details on the impact of the funds withheld arrangements with Fortitude Re see Note 7 to the Condensed Consolidated Financial Statements.

For further details on net realized gains and losses, see – Credit Ratings – Net Realized Gains and Losses below.

For additional discussion of market risk management related to these product features see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Life and Retirement Companies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs in the 2020 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 Future Policy Benefits, Policyholder Contract Deposits and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.

For further discussion of our investment portfolio see Note 5 to the Condensed Consolidated Financial Statements.

Investment Strategies

Investment strategies are assessed at the 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, and tax and legal investment limitations.

Some of our key investment strategies are as follows:

Our fundamental strategy across the portfolios is to seek investments with similar characteristics to the associated insurance liabilities to the extent practicable. AIG embeds Environmental, Social and Governance (ESG) considerations in its fundamental investment analysis of the companies or projects we invest in to ensure that they have sustainable earnings over the full term of our investment. AIG considers internal and external factors and evaluates changes in consumer behavior, industry trends related to ESG factors as well as the ability of the management of companies to respond appropriately to these changes in order to maintain their competitive advantage.

We seek to originate investments that offer enhanced yield through illiquidity 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 any currency risk using derivatives, which could provide opportunities to earn higher risk adjusted returns compared to assets in the functional currency.

AIG Parent, included in Other Operations, actively manages its assets and liabilities, 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 that can be readily monetized through sales or repurchase agreements. This strategy allows us to both diversify our sources of liquidity and reduce the cost of maintaining sufficient liquidity.

AIG | Third Quarter 2021 Form 10-Q 135

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Within the U.S., 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 duration, risk-return, tax, liquidity, credit quality and diversification objectives. We assess asset classes based on their fundamental underlying risk factors, including credit (public and private), commercial real estate and residential real estate regardless of whether such investments are bonds, loans, or structured products.

– Surplus investments seek to enhance portfolio returns and are generally comprised of a mix of fixed maturity investment grade and below investment grade securities 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 below investment grade credit.

Outside of the U.S., fixed maturity securities held by insurance companies consist primarily of investment-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. 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’ North America operations have an average duration of 3.9 years. Fixed maturity securities of the General Insurance companies’ International operations have an average duration of 4.2 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 illiquidity premiums, particularly in our North America 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 that seek to balance liquidity, volatility and growth of surplus. There is a higher allocation to equity-oriented investments in General Insurance surplus 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, subject to asset liability management, capital, liquidity 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. We seek to diversify the portfolio across asset classes, sectors, and issuers to mitigate idiosyncratic portfolio risks. 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 duration markets.

Fixed maturity securities of the Life and Retirement companies’ domestic operations have an average duration of 9 years.

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 returns in excess of the fixed maturity portfolio returns.

136 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Investments

 

NAIC Designations of Fixed Maturity Securities

The Securities Valuation Office (SVO) of the 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. NAIC Designations for non-agency RMBS and CMBS are calculated using third party modeling results provided through the NAIC. 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 below.

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

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

NAIC Designation

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

Other fixed maturity securities

$

105,630

$

89,215

$

194,845

 

$

9,688

$

8,294

$

1,296

$

122

$

19,400

$

214,245

Mortgage-backed, asset-backed and collateralized

 

57,680

 

5,205

 

62,885

 

 

206

 

88

 

41

 

1,512

 

1,847

 

64,732

Total*

$

163,310

$

94,420

$

257,730

 

$

9,894

$

8,382

$

1,337

$

1,634

$

21,247

$

278,977

* Excludes $14 million 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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

$

110,064

$

84,554

$

194,618

 

$

9,521

$

7,339

$

2,767

$

19,627

$

214,245

Mortgage-backed, asset-backed and collateralized

 

49,464

 

5,626

 

55,090

 

 

480

 

365

 

8,797

 

9,642

 

64,732

Total*

$

159,528

$

90,180

$

249,708

 

$

10,001

$

7,704

$

11,564

$

29,269

$

278,977

* Excludes $14 million of fixed maturity securities for which no NAIC Designation is available.

Credit Ratings

At September 30, 2021, approximately 88 percent of our fixed maturity securities were held by our domestic entities. Approximately 89 percent of these securities were rated investment grade by one or more of the principal rating agencies. 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, 2021, approximately 94 percent of such investments were either rated investment grade or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated investment grade. Approximately 27 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

Composite AIG Credit Ratings

With respect to our fixed maturity securities, the credit ratings in the table below and in subsequent tables reflect: (i) 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 (ii) 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.

AIG | Third Quarter 2021 Form 10-Q 137

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

For a discussion of credit risks associated with Investments see Part II, Item 7. MD&A – Enterprise Risk Management – Credit Risk Management in the 2020 Annual Report.

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)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

11,955

 

$

11,758

 

$

1,719

 

$

1,803

 

$

13,674

 

$

13,561

 

AA

 

37,864

 

 

36,146

 

 

42

 

 

42

 

 

37,906

 

 

36,188

 

A

 

58,472

 

 

57,255

 

 

12

 

 

12

 

 

58,484

 

 

57,267

 

BBB

 

84,555

 

 

80,878

 

 

-

 

 

-

 

 

84,555

 

 

80,878

 

Below investment grade

 

18,280

 

 

18,087

 

 

-

 

 

-

 

 

18,280

 

 

18,087

 

Non-rated

 

1,361

 

 

769

 

 

-

 

 

-

 

 

1,361

 

 

769

 

Total

$

212,487

 

$

204,893

 

$

1,773

 

$

1,857

 

$

214,260

 

$

206,750

 

Mortgage-backed, asset-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed and collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

28,297

 

$

31,133

 

$

203

 

$

347

 

$

28,500

 

$

31,480

 

AA

 

14,374

 

 

15,287

 

 

149

 

 

195

 

 

14,523

 

 

15,482

 

A

 

6,304

 

 

6,711

 

 

137

 

 

145

 

 

6,441

 

 

6,856

 

BBB

 

4,982

 

 

4,137

 

 

644

 

 

343

 

 

5,626

 

 

4,480

 

Below investment grade

 

7,870

 

 

9,281

 

 

1,515

 

 

2,165

 

 

9,385

 

 

11,446

 

Non-rated

 

27

 

 

54

 

 

230

 

 

239

 

 

257

 

 

293

 

Total

$

61,854

 

$

66,603

 

$

2,878

 

$

3,434

 

$

64,732

 

$

70,037

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

40,252

 

$

42,891

 

$

1,922

 

$

2,150

 

$

42,174

 

$

45,041

 

AA

 

52,238

 

 

51,433

 

 

191

 

 

237

 

 

52,429

 

 

51,670

 

A

 

64,776

 

 

63,966

 

 

149

 

 

157

 

 

64,925

 

 

64,123

 

BBB

 

89,537

 

 

85,015

 

 

644

 

 

343

 

 

90,181

 

 

85,358

 

Below investment grade

 

26,150

 

 

27,368

 

 

1,515

 

 

2,165

 

 

27,665

 

 

29,533

 

Non-rated

 

1,388

 

 

823

 

 

230

 

 

239

 

 

1,618

 

 

1,062

 

Total

$

274,341

 

$

271,496

 

$

4,651

 

$

5,291

 

$

278,992

 

$

276,787

 

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)

 

 

 

 

 

 

 

2021

 

2020

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

 

 

 

 

 

$

4,456

$

4,126

Obligations of states, municipalities and political subdivisions

 

 

 

 

 

 

 

14,895

 

16,124

Non-U.S. governments

 

 

 

 

 

 

 

16,199

 

15,345

Corporate debt

 

 

 

 

 

 

 

176,937

 

169,298

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

 

28,452

 

31,465

CMBS

 

 

 

 

 

 

 

15,312

 

16,133

CDO/ABS

 

 

 

 

 

 

 

18,090

 

19,005

Total mortgage-backed, asset-backed and collateralized

 

 

 

 

 

 

 

61,854

 

66,603

Total bonds available for sale*

 

 

 

 

 

 

$

274,341

$

271,496

* At September 30, 2021 and December 31, 2020, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $27.5 billion and $28.2 billion, respectively.

138 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

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)

 

2021

 

 

2020

Japan

$

1,314

 

$

1,510

Canada

 

1,175

 

 

986

United Kingdom

 

763

 

 

820

France

 

738

 

 

790

Germany

 

698

 

 

642

Indonesia

 

642

 

 

554

Chile

 

547

 

 

398

Israel

 

514

 

 

535

Mexico

 

475

 

 

358

United Arab Emirates

 

465

 

 

519

Other

 

8,868

 

 

8,233

Total

$

16,199

 

$

15,345

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

 

September 30, 2021

 

 

 

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2020

(in millions)

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

Euro-Zone countries:

 

 

 

 

 

 

 

 

 

 

 

 

France

$

738

$

1,759

$

1,465

$

-

$

3,962

$

4,206

Germany

 

698

 

234

 

2,786

 

-

 

3,718

 

3,691

Netherlands

 

246

 

1,101

 

1,318

 

51

 

2,716

 

2,804

Ireland

 

11

 

82

 

499

 

1,407

 

1,999

 

2,162

Belgium

 

132

 

254

 

1,187

 

-

 

1,573

 

1,538

Spain

 

25

 

367

 

503

 

-

 

895

 

989

Luxembourg

 

84

 

391

 

379

 

-

 

854

 

712

Italy

 

22

 

100

 

502

 

-

 

624

 

580

Finland

 

76

 

34

 

43

 

-

 

153

 

123

Austria

 

62

 

-

 

-

 

-

 

62

 

93

Other Euro-Zone

 

560

 

95

 

228

 

-

 

883

 

928

Total Euro-Zone

$

2,654

$

4,417

$

8,910

$

1,458

$

17,439

$

17,826

Remainder of Europe:

 

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

$

763

$

4,561

$

9,348

$

1,632

$

16,304

$

17,066

Switzerland

 

18

 

988

 

946

 

-

 

1,952

 

1,778

Norway

 

382

 

65

 

288

 

-

 

735

 

556

Sweden

 

193

 

222

 

129

 

-

 

544

 

646

Russian Federation

 

206

 

30

 

145

 

-

 

381

 

407

Other - Remainder of Europe

 

93

 

283

 

155

 

-

 

531

 

227

Total - Remainder of Europe

$

1,655

$

6,149

$

11,011

$

1,632

$

20,447

$

20,680

Total

$

4,309

$

10,566

$

19,921

$

3,090

$

37,886

$

38,506

AIG | Third Quarter 2021 Form 10-Q 139

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Investments in Municipal Bonds

At September 30, 2021, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-exempt bonds with 93 percent of the portfolio rated A or higher.

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, 2021

 

 

 

 

State

 

Local

 

 

 

Total

December 31,

 

 

General

 

General

 

 

 

Fair

 

2020

(in millions)

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

State:

 

 

 

 

 

 

 

 

 

 

California

$

724

$

401

$

1,969

$

3,094

$

3,301

New York

 

7

 

237

 

2,570

 

2,814

 

3,135

Texas

 

84

 

510

 

932

 

1,526

 

1,553

Illinois

 

89

 

97

 

861

 

1,047

 

1,106

Massachusetts

 

354

 

1

 

340

 

695

 

800

Ohio

 

9

 

-

 

508

 

517

 

542

Georgia

 

104

 

71

 

297

 

472

 

494

Florida

 

6

 

-

 

400

 

406

 

436

Pennsylvania

 

17

 

2

 

383

 

402

 

399

Virginia

 

10

 

-

 

367

 

377

 

456

Washington

 

143

 

7

 

211

 

361

 

413

Washington, D.C.

 

11

 

-

 

286

 

297

 

328

New Jersey

 

12

 

1

 

271

 

284

 

269

All other states(a)

 

323

 

176

 

2,104

 

2,603

 

2,892

Total(b)(c)

$

1,893

$

1,503

$

11,499

$

14,895

$

16,124

(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 $542 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)

 

2021

 

2020

Financial institutions:

 

 

 

 

Money center/Global bank groups

$

10,121

$

10,512

Regional banks – other

 

472

 

627

Life insurance

 

3,133

 

3,175

Securities firms and other finance companies

 

386

 

312

Insurance non-life

 

6,754

 

5,805

Regional banks – North America

 

7,311

 

7,505

Other financial institutions

 

17,115

 

15,581

Utilities

 

24,317

 

23,470

Communications

 

11,655

 

11,137

Consumer noncyclical

 

25,035

 

24,826

Capital goods

 

9,470

 

8,773

Energy

 

13,684

 

13,293

Consumer cyclical

 

13,722

 

13,213

Basic

 

6,354

 

5,894

Other

 

27,408

 

25,175

Total*

$

176,937

$

169,298

* At September 30, 2021 and December 31, 2020, approximately 90 percent of these investments were rated investment grade.

140 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.0 percent and 4.9 percent, at September 30, 2021 and December 31, 2020, 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.

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)

 

 

 

 

 

 

 

 

 

 

2021

 

2020

Agency RMBS

 

 

 

 

 

 

 

 

 

$

14,488

$

15,816

Alt-A RMBS

 

 

 

 

 

 

 

 

 

 

6,300

 

7,278

Subprime RMBS

 

 

 

 

 

 

 

 

 

 

2,373

 

2,575

Prime non-agency

 

 

 

 

 

 

 

 

 

 

3,234

 

3,847

Other housing related

 

 

 

 

 

 

 

 

 

 

2,057

 

1,949

Total RMBS(a)(b)

 

 

 

 

 

 

 

 

 

$

28,452

$

31,465

(a) Includes approximately $6.5 billion and $7.6 billion at September 30, 2021 and December 31, 2020, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. For additional discussion on Purchased Credit Impaired Securities see Note 5 to the Condensed Consolidated Financial Statements.

(b) The weighted average expected life was five years at September 30, 2021 and December 31, 2020.

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

2020

CMBS (traditional)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,492

$

12,917

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,743

 

2,078

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,077

 

1,138

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

15,312

$

16,133

The fair value of CMBS holdings remained stable during the third quarter of 2021. 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 ABS/CDOs

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

 

 

 

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

2021

 

2020

Collateral Type:

 

 

 

 

 

 

 

 

 

 

 

 

ABS

 

 

 

 

 

 

 

 

$

9,404

$

9,178

Bank loans (collateralized loan obligation)

 

 

 

 

 

 

 

 

 

8,666

 

9,793

Other

 

 

 

 

 

 

 

 

 

20

 

34

Total

 

 

 

 

 

 

 

 

$

18,090

$

19,005

AIG | Third Quarter 2021 Form 10-Q 141

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Unrealized Losses of Fixed Maturity Securities

The following table shows the aging of the 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, 2021

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

$

31,503

$

502

5,432

 

$

10

$

3

3

 

$

-

$

-

-

 

$

31,513

$

505

5,435

7-11 months

 

13,442

 

561

2,299

 

 

5

 

1

2

 

 

-

 

-

1

 

 

13,447

 

562

2,302

12 months or more

 

5,575

 

280

752

 

 

197

 

47

23

 

 

1

 

1

2

 

 

5,773

 

328

777

Total

$

50,520

$

1,343

8,483

 

$

212

$

51

28

 

$

1

$

1

3

 

$

50,733

$

1,395

8,514

Below investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

grade bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

3,552

$

59

1,812

 

$

10

$

3

8

 

$

31

$

31

12

 

$

3,593

$

93

1,832

7-11 months

 

1,129

 

36

479

 

 

3

 

1

4

 

 

1

 

1

-

 

 

1,133

 

38

483

12 months or more

 

3,100

 

122

755

 

 

374

 

100

51

 

 

21

 

17

17

 

 

3,495

 

239

823

Total

$

7,781

$

217

3,046

 

$

387

$

104

63

 

$

53

$

49

29

 

$

8,221

$

370

3,138

Total bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

35,055

$

561

7,244

 

$

20

$

6

11

 

$

31

$

31

12

 

$

35,106

$

598

7,267

7-11 months

 

14,571

 

597

2,778

 

 

8

 

2

6

 

 

1

 

1

1

 

 

14,580

 

600

2,785

12 months or more

 

8,675

 

402

1,507

 

 

571

 

147

74

 

 

22

 

18

19

 

 

9,268

 

567

1,600

Total(e)

$

58,301

$

1,560

11,529

 

$

599

$

155

91

 

$

54

$

50

32

 

$

58,954

$

1,765

11,652

(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, 2021.

(c) For bonds, represents amortized cost net of allowance.

(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.

The allowance for credit losses was $2 million for investment grade bonds and $64 million for below investment grade bonds as of September 30, 2021.

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, 2021 was primarily attributable to movements in interest rates and spreads. There was a rise in rates and widening spreads in the three-month period ended September 30, 2021 that resulted in unrealized losses of approximately $2.1 billion on fixed maturity securities. For the nine-month period ended September 30, 2021, net unrealized losses related to fixed maturity securities were $7.9 billion due primarily to an increase in interest rates.

The change in net unrealized gains and losses on investments in the three- and nine-month periods ended September 30, 2020 was primarily attributable to increases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2020, net unrealized gains related to fixed maturity securities increased by $5.9 billion due primarily to lower rates partially offset by a widening of credit spreads.

For further discussion of our investment portfolio see Note 5 to the Condensed Consolidated Financial Statements.

142 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Commercial Mortgage Loans

At September 30, 2021, we had direct commercial mortgage loan exposure of $35.9 billion.

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

99

 

$

2,188

$

4,865

$

441

$

441

$

103

$

-

$

8,038

22

%

California

63

 

 

820

 

1,324

 

241

 

557

 

768

 

32

 

3,742

10

 

New Jersey

47

 

 

1,933

 

30

 

425

 

108

 

11

 

33

 

2,540

7

 

Texas

50

 

 

568

 

1,139

 

167

 

174

 

143

 

-

 

2,191

6

 

Florida

59

 

 

409

 

152

 

388

 

214

 

217

 

-

 

1,380

4

 

Massachusetts

11

 

 

532

 

196

 

541

 

24

 

-

 

-

 

1,293

5

 

Illinois

22

 

 

556

 

602

 

10

 

17

 

-

 

21

 

1,206

3

 

Pennsylvania

22

 

 

78

 

144

 

480

 

76

 

25

 

-

 

803

2

 

Washington D.C.

13

 

 

510

 

212

 

-

 

-

 

18

 

-

 

740

2

 

Ohio

23

 

 

168

 

10

 

177

 

257

 

-

 

-

 

612

2

 

Other states

162

 

 

1,996

 

604

 

1,104

 

665

 

331

 

-

 

4,700

13

 

Foreign

89

 

 

4,326

 

1,349

 

1,002

 

1,241

 

452

 

365

 

8,735

24

 

Total*

660

 

$

14,084

$

10,627

$

4,976

$

3,774

$

2,068

$

451

$

35,980

100

%

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

107

 

$

2,624

$

5,237

$

465

$

393

$

102

$

-

$

8,821

24

%

California

66

 

 

842

 

1,343

 

247

 

532

 

775

 

32

 

3,771

10

 

New Jersey

47

 

 

1,756

 

31

 

420

 

92

 

12

 

33

 

2,344

6

 

Texas

51

 

 

605

 

1,165

 

170

 

100

 

144

 

-

 

2,184

6

 

Florida

69

 

 

421

 

153

 

497

 

216

 

217

 

-

 

1,504

4

 

Massachusetts

12

 

 

536

 

227

 

551

 

25

 

-

 

-

 

1,339

4

 

Illinois

20

 

 

504

 

574

 

10

 

18

 

-

 

22

 

1,128

3

 

Washington, D.C.

13

 

 

465

 

213

 

-

 

-

 

19

 

-

 

697

2

 

Pennsylvania

21

 

 

79

 

17

 

489

 

76

 

25

 

-

 

686

2

 

Ohio

23

 

 

170

 

10

 

183

 

261

 

-

 

-

 

624

2

 

Other states

187

 

 

1,992

 

722

 

1,192

 

731

 

399

 

-

 

5,036

14

 

Foreign

84

 

 

3,975

 

1,020

 

1,025

 

1,322

 

575

 

373

 

8,290

23

 

Total*

700

 

$

13,969

$

10,712

$

5,249

$

3,766

$

2,268

$

460

$

36,424

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 2020 Annual Report.

AIG | Third Quarter 2021 Form 10-Q 143

 

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Net Realized Gains and Losses

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

Three Months Ended September 30,

2021

 

2020

 

Excluding

Fortitude Re

 

 

 

Excluding

Fortitude Re

 

 

 

Fortitude Re

 

Funds

 

 

 

Fortitude Re

 

Funds

 

 

 

Funds

Withheld

 

 

 

Funds

Withheld

 

 

(in millions)

Withheld Assets

Assets

 

Total

 

Withheld Assets

 

Assets

 

Total

Sales of fixed maturity securities

$

66

$

159

$

225

 

$

28

$

147

$

175

Intent to sell

 

-

 

-

 

-

 

 

-

 

-

 

-

Change in allowance for credit losses on fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

3

 

1

 

4

 

 

(77)

 

(4)

 

(81)

Change in allowance for credit losses on loans

 

22

 

3

 

25

 

 

(13)

 

2

 

(11)

Foreign exchange transactions

 

(127)

 

(9)

 

(136)

 

 

250

 

7

 

257

Variable annuity embedded derivatives, net of related

 

 

 

 

 

 

 

 

 

 

 

 

 

hedges

 

(39)

 

-

 

(39)

 

 

(148)

 

-

 

(148)

All other derivatives and hedge accounting

 

317

 

(15)

 

302

 

 

(626)

 

(120)

 

(746)

Other*

 

437

 

51

 

488

 

 

88

 

-

 

88

Net realized gains (losses) – excluding Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

679

 

190

 

869

 

 

(498)

 

32

 

(466)

Net realized losses on Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

-

 

(209)

 

(209)

 

 

-

 

(656)

 

(656)

Net realized gains (losses)

$

679

$

(19)

$

660

 

$

(498)

$

(624)

$

(1,122)

Nine Months Ended September 30,

2021

 

2020

 

Excluding

Fortitude Re

 

 

 

Excluding

Fortitude Re

 

 

 

Fortitude Re

 

Funds

 

 

 

Fortitude Re

 

Funds

 

 

 

Funds

Withheld

 

 

 

Funds

Withheld

 

 

(in millions)

Withheld Assets

Assets

 

Total

 

Withheld Assets

 

Assets

 

Total

Sales of fixed maturity securities

$

200

$

549

$

749

 

$

269

$

269

$

538

Intent to sell

 

-

 

-

 

-

 

 

(3)

 

-

 

(3)

Change in allowance for credit losses on fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

64

 

7

 

71

 

 

(299)

 

(11)

 

(310)

Change in allowance for credit losses on loans

 

130

 

6

 

136

 

 

(73)

 

6

 

(67)

Foreign exchange transactions

 

(37)

 

(6)

 

(43)

 

 

40

 

10

 

50

Variable annuity embedded derivatives, net of related

 

 

 

 

 

 

 

 

 

 

 

 

 

hedges

 

(3)

 

-

 

(3)

 

 

1,034

 

-

 

1,034

All other derivatives and hedge accounting

 

332

 

(72)

 

260

 

 

365

 

(146)

 

219

Other*

 

645

 

52

 

697

 

 

97

 

-

 

97

Net realized gains – excluding Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

1,331

 

536

 

1,867

 

 

1,430

 

128

 

1,558

Net realized gains (losses) on Fortitude Re

 

 

 

 

 

 

 

 

 

 

 

 

 

funds withheld embedded derivative

 

-

 

117

 

117

 

 

-

 

(1,493)

 

(1,493)

Net realized gains (losses)

$

1,331

$

653

$

1,984

 

$

1,430

$

(1,365)

$

65

* In the three- and nine-month periods ended September 30, 2021, primarily includes gains from sale of global real estate investments of $292 million and $341 million, respectively, and gains from affordable housing partnerships of $80 million and $210 million, respectively.

Net realized gains excluding Fortitude Re funds withheld assets in the three-month period ended September 30, 2021 were driven primarily by gains on other derivative and hedge activity and gains on real estate and other assets compared to net realized losses excluding Fortitude Re funds withheld assets in the same period in the prior year which were primarily the result of derivative losses. Lower net realized gains excluding Fortitude Re funds withheld assets in the nine-month period ended September 30, 2021 compared to the same period in the prior year were primarily due to lower derivatives gains, which more than offset higher gains on sales of real estate and other assets.

Variable annuity embedded derivatives, net of related hedges, reflected lower losses in the three-month period ended September 30, 2021 and lower gains in the nine-month period ended September 30, 2021 compared to the same periods in the prior year. Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities due to the non-performance or “own credit” risk adjustment used in the valuation of the variable annuities with GMWB embedded derivative, which are not hedged as part of our economic hedging program, and other risk margins used for valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio.

144 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Investments

 

Net realized gains (losses) on Fortitude Re funds withheld assets primarily reflect changes in the valuation of the modified coinsurance and funds withheld assets. Increases in the valuation of these assets result in losses to AIG as the appreciation on the assets must under those reinsurance arrangements be transferred to Fortitude Re. Decreases in valuation of the assets result in gains to AIG as the depreciation on the assets under those reinsurance arrangements must be transferred to Fortitude Re. For further details on the impact of the funds withheld arrangements with Fortitude Re see Note 7 to the Condensed Consolidated Financial Statements.

For additional discussion of market risk management related to these product features see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Life and Retirement Companies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs in the 2020 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 Future Policy Benefits, Policyholder Contract Deposits and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.

For further discussion of our investment portfolio see Note 5 to the Condensed Consolidated Financial Statements.

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(a):

 

September 30, 2021

 

December 31, 2020

 

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)

$

3,731

$

5,188

$

8,919

 

$

3,905

$

5,653

$

9,558

U.S. Excess Casualty

 

3,705

 

4,380

 

8,085

 

 

3,746

 

4,584

 

8,330

U.S. Other Casualty

 

3,741

 

4,277

 

8,018

 

 

3,520

 

4,568

 

8,088

U.S. Financial Lines

 

5,295

 

1,975

 

7,270

 

 

4,838

 

2,193

 

7,031

U.S. Property and Special Risks

 

7,016

 

2,809

 

9,825

 

 

6,181

 

2,571

 

8,752

U.S. Personal Insurance

 

950

 

2,050

 

3,000

 

 

1,116

 

1,626

 

2,742

UK/Europe Casualty and Financial Lines

 

7,220

 

1,609

 

8,829

 

 

6,826

 

1,225

 

8,051

UK/Europe Property and Special Risks

 

2,764

 

1,483

 

4,247

 

 

2,679

 

1,215

 

3,894

UK/Europe and Japan Personal Insurance

 

2,082

 

616

 

2,698

 

 

2,219

 

505

 

2,724

Other product lines(b)

 

5,965

 

5,492

 

11,457

 

 

6,202

 

5,410

 

11,612

Unallocated loss adjustment expenses(b)

 

1,468

 

1,028

 

2,496

 

 

1,526

 

1,106

 

2,632

Total General Insurance

 

43,937

 

30,907

 

74,844

 

 

42,758

 

30,656

 

73,414

Other Operations Run-Off:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Run-Off Long Tail Insurance Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

 

200

 

3,418

 

3,618

 

 

205

 

3,500

 

3,705

Other run-off product lines

 

265

 

59

 

324

 

 

210

 

60

 

270

Blackboard

 

219

 

128

 

347

 

 

88

 

101

 

189

Unallocated loss adjustment expenses

 

27

 

114

 

141

 

 

28

 

114

 

142

Total Other Operations Run-Off

 

711

 

3,719

 

4,430

 

 

531

 

3,775

 

4,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

44,648

$

34,626

$

79,274

 

$

43,289

$

34,431

$

77,720

(a) Includes net loss reserve discount of $741 million and $725 million as of September 30, 2021 and December 31, 2020, respectively. For discussion of loss reserve discount see Note 10 to the Condensed Consolidated Financial Statements.

(b) Other product lines and Unallocated loss adjustment expenses includes $3.5 billion and $3.8 billion within Gross liability for unpaid losses and loss adjustment expense and Reinsurance recoverable on unpaid losses and loss adjustment expense as of September 30, 2021 and December 31, 2020, respectively, for the Fortitude Re reinsurance.

AIG | Third Quarter 2021 Form 10-Q 145

 

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)

 

2021

 

2020

 

 

2021

 

2020

General Insurance:

 

 

 

 

 

 

 

 

 

North America*

$

(49)

$

(150)

 

$

(165)

$

(208)

International

 

(1)

 

163

 

 

8

 

87

Total General Insurance

$

(50)

$

13

 

$

(157)

$

(121)

Other Operations Run-Off

 

-

 

-

 

 

84

 

(2)

Total prior year (favorable) unfavorable development

$

(50)

$

13

 

$

(73)

$

(123)

* Includes the amortization attributed to the deferred gain at inception from the National Indemnity Company (NICO) adverse development reinsurance agreement of $47 million and $53 million for the three-month periods ended September 30, 2021 and 2020, respectively, and $148 million and $159 million for the nine-month periods ended September 30, 2021 and 2020, 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 $(150) million and $(46) million for the three-month periods ended September 30, 2021 and 2020, respectively, and $(241) million and $(42) million for the nine-month periods ended September 30, 2021 and 2020, respectively. Also excludes the related changes in amortization of the deferred gain, which were $(34) million and $(17) million for the three-month periods ended September 30, 2021 and 2020, respectively, and $(41) million and $28 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

Net Loss Development

In the three-month period ended September 30, 2021, we recognized favorable prior year loss reserve development of $50 million. The key components of this development were:

North America

Strong favorable development in Personal Insurance, primarily attributable to subrogation recovery related to the 2017 and 2018 California wildfires partially offset by the impact of dropping below the attachment point of our 2018 catastrophe aggregate treaty, which also adversely impacted our U.S. Property and Special Risk Commercial Lines.

Favorable development on U.S. Workers Compensation and Other short-tailed commercial lines reflecting lower frequency and severity in recent calendar years.

Amortization benefit of $47 million related to the deferred gain on the adverse development cover.

Reserve strengthening within U.S. Financial Lines, reflecting higher severity of claims in Directors & Officers, principally from accident years 2018 and prior.

International

Favorable development on short-tailed International Commercial Lines and Personal Insurance, reflecting lower frequency and severity of claims.

Reserve strengthening on International Financial Lines, reflecting higher severity of claims, the majority of which is from accident years 2018 and prior.

In the nine-month period ended September 30, 2021, we recognized favorable prior year loss reserve development of $73 million. The key components of this development were:

North America

Strong favorable development in Personal Insurance, primarily attributable to subrogation recovery related to the 2017 and 2018 California wildfires partially offset by the impact of dropping below the attachment point of our 2018 catastrophe aggregate treaty, which also adversely impacted our U.S. Property and Special Risk Commercial Lines.

Favorable development on U.S. Workers Compensation and Other short-tailed commercial lines reflecting lower frequency and severity in recent calendar years.

Amortization benefit of $148 million related to the deferred gain on the adverse development cover.

Reserve strengthening within U.S. Financial Lines, reflecting higher severity of claims in Directors & Officers, principally from accident years 2018 and prior.

146 AIG | Third Quarter 2021 Form 10-Q

TABLE OF CONTENTS

 

ITEM 2 | Insurance Reserves

 

International

Favorable development on short-tailed International Commercial Lines and Personal Insurance, reflecting lower frequency and severity of claims.

Reserve strengthening on International Financial Lines, reflecting higher severity of claims, the majority of which is from accident years 2018 and prior.

Other Operations

Unfavorable development primarily attributed to the Blackboard insurance portfolio due to increased severity on reported claims.

In the three-month period ended September 30, 2020, we recognized unfavorable prior year loss reserve development of $13 million. The key components of this development were:

North America

Favorable development on U.S. Workers Compensation and U.S. Property and Special Risks due to lower emergence on Workers Compensation and lower severity in Property and Special Risks.

Amortization benefit of $53 million related to the deferred gain on the adverse development cover.

Reserve strengthening in U.S. Financial Lines driven by increased frequency of class actions and overall severity.

International

Favorable development in International Property and Special Risks and International Personal Insurance due to lower severity and frequency in personal lines.

Reserve strengthening in Financial Lines and Casualty, largely in UK/Europe, due to increased severity of claims.

In the nine-month period ended September 30, 2020, we recognized favorable prior year loss reserve development of $123 million. The key components of this development were:

North America

Favorable development on U.S. Workers Compensation and U.S. Other Casualty, driven by lower emergence across the recent diagonals on Workers Compensation and lower frequency in primary casualty.

Amortization benefit of $159 million related to the deferred gain on the adverse development cover.

Reserve strengthening in U.S. Financial Lines and in U.S. Personal Insurance, due to increased frequency of class actions and overall severity.

International

Favorable development in International Property and Special Risks and International Personal Insurance due to lower severity and lower frequency for personal lines.

Reserve strengthening in Financial Lines and Casualty, largely in UK/Europe, due to increased severity of clams.

AIG | Third Quarter 2021 Form 10-Q 147

 

TABLE OF CONTENTS

 

ITEM 2 | Insurance Reserves

 

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, 2021

 

 

 

 

 

 

(in millions)

 

Total

 

2020

 

2019 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(211)

$

(27)

$

(184)

U.S. Excess Casualty

 

19

 

6

 

13

U.S. Other Casualty

 

31

 

65

 

(34)

U.S. Financial Lines

 

466

 

(4)

 

470

U.S. Property and Special Risks

 

136

 

(25)

 

161

U.S. Personal Insurance

 

(380)

 

(33)

 

(347)

Other Product Lines

 

(110)

 

(40)

 

(70)

Total General Insurance North America

$

(49)

$

(58)

$

9

General Insurance International:

 

 

 

 

 

 

UK/Europe Casualty and Financial Lines

$

175

$

62

$

113

UK/Europe Property and Special Risks

 

(69)

 

(47)

 

(22)

UK/Europe and Japan Personal Insurance

 

(158)

 

(141)

 

(17)

Other product lines

 

51

 

(5)

 

56

Total General Insurance International

$

(1)

$

(131)

$

130

Other Operations Run-Off

 

-

 

-

 

-

Total Prior Year (Favorable) Unfavorable Development

$

(50)

$

(189)

$

139

 

 

 

 

 

 

 

Three Months Ended September 30, 2020

 

 

 

 

 

 

(in millions)

 

Total

 

2019

 

2018 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(186)

$

(12)

$

(174)

U.S. Excess Casualty

 

17

 

-

 

17

U.S. Other Casualty

 

(10)

 

-

 

(10)

U.S. Financial Lines

 

69

 

43

 

26

U.S. Property and Special Risks

 

(64)

 

(20)

 

(44)

U.S. Personal Insurance

 

11

 

27

 

(16)

Other Product Lines

 

13

 

4

 

9

Total General Insurance North America

$

(150)

$

42

$

(192)

General Insurance International:

 

 

 

 

 

 

UK/Europe Casualty and Financial Lines

$

244

$

30

$

214

UK/Europe Property and Special Risks

 

(114)

 

(64)

 

(50)

UK/Europe and Japan Personal Insurance

 

(44)

 

(23)

 

(21)

Other product lines

 

77

 

22

 

55

Total General Insurance International

$

163

$

(35)

$

198

Other Operations Run-Off

 

-

 

-

 

-

Total Prior Year (Favorable) Unfavorable Development

$

13

$

7

$

6

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ITEM 2 | Insurance Reserves

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

(in millions)

 

Total

 

2020

 

2019 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(316)

$

(14)

$

(302)

U.S. Excess Casualty

 

(5)

 

6

 

(11)

U.S. Other Casualty

 

32

 

63

 

(31)

U.S. Financial Lines

 

487

 

(4)

 

491

U.S. Property and Special Risks

 

156

 

(34)

 

190

U.S. Personal Insurance

 

(402)

 

(42)

 

(360)

Other Product Lines

 

(117)

 

(46)

 

(71)

Total General Insurance North America

$

(165)

$

(71)

$

(94)

General Insurance International:

 

 

 

 

 

 

UK/Europe Casualty and Financial Lines

$

183

$

61

$

122

UK/Europe Property and Special Risks

 

(79)

 

(48)

 

(31)

UK/Europe and Japan Personal Insurance

 

(162)

 

(145)

 

(17)

Other product lines

 

66

 

13

 

53

Total General Insurance International

$

8

$

(119)

$

127

Other Operations Run-Off

 

84

 

33

 

51

Total Prior Year (Favorable) Unfavorable Development

$

(73)

$

(157)

$

84

 

 

 

 

 

 

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

(in millions)

 

Total

 

2019

 

2018 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(242)

$

10

$

(252)

U.S. Excess Casualty

 

(9)

 

-

 

(9)

U.S. Other Casualty

 

(56)

 

(20)

 

(36)

U.S. Financial Lines

 

54

 

43

 

11

U.S. Property and Special Risks

 

(6)

 

(19)

 

13

U.S. Personal Insurance

 

57

 

75

 

(18)

Other Product Lines

 

(6)

 

(20)

 

14

Total General Insurance North America

$

(208)

$

69

$

(277)

General Insurance International:

 

 

 

 

 

 

UK/Europe Casualty and Financial Lines

$

244

$

30

$

214

UK/Europe Property and Special Risks

 

(145)

 

(85)

 

(60)

UK/Europe and Japan Personal Insurance

 

(44)

 

(20)

 

(24)

Other product lines

 

32

 

32

 

-

Total General Insurance International

$

87

$

(43)

$

130

Other Operations Run-Off

 

(2)

 

(2)

 

-

Total Prior Year (Favorable) Unfavorable Development

$

(123)

$

24

$

(147)

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.

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 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 2021, see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – General Insurance Companies’ Key Risks – Natural Catastrophe Risk in the 2020 Annual Report.

AIG | Third Quarter 2021 Form 10-Q 149

 

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ITEM 2 | Insurance Reserves

 

The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of September 30, 2021 and as of December 31, 2020, showing the effect of discounting of loss reserves and amortization of the deferred gain.

 

 

September 30,

 

December 31,

(in millions)

 

2021

 

2020

Gross Covered Losses

 

 

 

 

Covered reserves before discount

$

14,919

$

16,534

Inception to date losses paid

 

26,512

 

25,198

Attachment point

 

(25,000)

 

(25,000)

Covered losses above attachment point

$

16,431

$

16,732

 

 

 

 

 

Deferred Gain Development

 

 

 

 

Covered losses above attachment ceded to NICO (80%)

$

13,145

$

13,386

Consideration paid including interest

 

(10,188)

 

(10,188)

Pre-tax deferred gain before discount and amortization

 

2,957

 

3,198

Discount on ceded losses(a)

 

(833)

 

(911)

Pre-tax deferred gain before amortization

 

2,124

 

2,287

Inception to date amortization of deferred gain at inception

 

(1,052)

 

(904)

Inception to date amortization attributed to changes in deferred gain(b)

 

(22)

 

(86)

Deferred gain liability reflected in AIG's balance sheet

$

1,050

$

1,297

(a) For the period from inception to September 30, 2021, 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)

 

2021

 

2020

 

 

2021

 

2020

Balance at beginning of year, net of discount

$

1,186

$

1,311

 

$

1,297

$

1,381

(Favorable) unfavorable prior year reserve development ceded to NICO(a)

 

(150)

 

(46)

 

 

(241)

 

(42)

Amortization attributed to deferred gain at inception(b)

 

(47)

 

(53)

 

 

(148)

 

(159)

Amortization attributed to changes in deferred gain(c)

 

39

 

24

 

 

64

 

(2)

Changes in discount on ceded loss reserves

 

22

 

20

 

 

78

 

78

Balance at end of period, net of discount

$

1,050

$

1,256

 

$

1,050

$

1,256

(a)Prior year reserve development ceded to NICO under the retroactive reinsurance agreement is deferred under GAAP.

(b)Represents amortization of the deferred gain recognized in APTI.

(c)Excluded from APTI and included in 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 has resulted in lower capital charges for reserve risks at our U.S. insurance subsidiaries. In addition, net investment income declined as a result of lower invested assets.

Fortitude Re was established during the first quarter of 2018 in a series of reinsurance transactions related to our Run-Off operations. Those reinsurance transactions were designed to consolidate most of our Insurance Run-Off Lines into a single legal entity. As of September 30, 2021, approximately $29.9 billion of reserves from our Life and Retirement Run-Off Lines and approximately $3.8 billion of reserves from our General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries, had been ceded to Fortitude Re under these reinsurance transactions.

Of the Fortitude Re reinsurance agreements, the largest is the Amended and Restated Combination Coinsurance and Modified Coinsurance Agreement by and between our subsidiary AGL and Fortitude Re. Under this treaty, approximately $22.7 billion of AGL reserves as of September 30, 2021 were ceded to Fortitude Re representing a mix of life and annuity risks. Fortitude Re provides 100 percent reinsurance of the ceded risks. AGL continues to administer the policies, including handling claims, although it is anticipated that much of the administration will move to a Fortitude Re administrative subsidiary over time, subject to regulatory approvals being obtained and the satisfaction of other conditions. Until such time, Fortitude Re has certain rights to consult on and participate in such administration, and AGL retains the risk of collection of any third party reinsurance covering the ceded business. At effectiveness of the treaty, an amount equal to the aggregate ceded reserves was deposited by AGL into a modified coinsurance account of AGL to

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ITEM 2 | Insurance Reserves

 

secure the obligations of Fortitude Re. Fortitude Re receives or makes quarterly payments that represent the net gain or loss under the treaty for the relevant quarter, including any net investment gain or loss on the assets in the modified coinsurance account. An AIG affiliate will serve as portfolio manager of assets in the modified coinsurance account for a minimum of three years after the June 2, 2020 closing of the Majority Interest Fortitude Sale.

For a summary of significant reinsurers see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Reinsurance Activities – Reinsurance Recoverable in the 2020 Annual Report.

LIFE AND ANNUITY FUTURE POLICY BENEFITS, POLICYHOLDER CONTRACT DEPOSITS and dac

The following section provides discussion of life and annuity future policy benefits, policyholder contract deposits 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 assumptions used to amortize DAC and related items (which may include VOBA, SIA and unearned revenue reserves) as well as assessments used to accrue guaranteed benefit reserves at least annually. Estimated gross profit projections include assumptions for investment-related returns and spreads (including investment expenses), 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, 2021:

• The reversion to the mean rates of return (gross of fees) were decreased to 1.04 percent from 3.12 percent for the variable annuity product line in Individual Retirement and to (0.62) percent from 2.87 percent for the variable annuity product line in Group Retirement primarily due to recent equity market movements. Since the Group Retirement reversion to the mean rate of return had become and had remained less than zero percent, the rate was unlocked and reset to 3.59%, which increased the DAC and Sales Inducement balances by a total of $77.9 million and decreased reserve balances by $6.1 million, increasing pre-tax income by a total of $84.0 million. The separate account long-term asset growth rate assumption related to equity market performance remained unchanged at 7.0 percent; and

• Ultimate projected yields on the vast majority of our invested assets were lowered on life and annuity deposits. Life deposit projected yields decreased up to 42 basis points while annuity insurance deposits saw decreases of up to 52 basis points. 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 generally having a shorter duration than life products.

Traditional long-duration products

For long-duration traditional products, 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. A loss recognition event occurs when current liabilities together with expected future premiums are not sufficient to provide for all future benefits, expenses, and DAC amortization, net of reinsurance. A loss recognition event is driven by observed changes in actual experience or estimates differing significantly from “locked-in” assumptions. Underlying assumptions, including interest rates, are reviewed periodically and updated as appropriate for loss recognition testing purposes. As it relates to business ceded to Fortitude Re, as our accounting policy is to include reinsurance balances when performing loss recognition testing and as there will be no future profits recognized on this business, we will not incur any future loss recognition events related to business ceded to Fortitude Re, absent any decisions by us to recapture the business.

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ITEM 2 | Insurance Reserves

 

The net increases (decreases) to pre-tax income and adjusted pre-tax income as a result of the update of actuarial assumptions for the three- and nine-month periods ended September 30, 2021 and 2020 are shown in the following tables.

The following table presents the decrease in pre-tax income resulting from the update of actuarial assumptions in the life insurance companies, by line item as reported in Results of Operations:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2021

 

2020

Premiums

$

(41)

$

-

Policy fees

 

(74)

 

(106)

Interest credited to policyholder account balances

 

(50)

 

(6)

Amortization of deferred policy acquisition costs

 

(139)

 

225

Non deferrable insurance commissions

 

-

 

15

Policyholder benefits and losses incurred

 

138

 

(235)

Decrease in adjusted pre-tax income

 

(166)

 

(107)

Change in DAC related to net realized gains and losses

 

57

 

(44)

Net realized gains (losses)

 

(100)

 

142

Decrease in pre-tax income

$

(209)

$

(9)

The following table presents the increase (decrease) in adjusted pre-tax income resulting from the update of actuarial assumptions for the life insurance companies, by segment and product line:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2021

 

2020

Life and Retirement:

 

 

 

 

Individual Retirement

 

 

 

 

Fixed annuities

$

(274)

$

(77)

Variable and indexed annuities

 

4

 

2

Total Individual Retirement

 

(270)

 

(75)

Group Retirement

 

(2)

 

68

Life Insurance

 

106

 

(101)

Institutional Markets

 

-

 

1

Total decrease in adjusted pre-tax income from update of assumptions

$

(166)

$

(107)

For the period ended September 30, 2021, adjusted pre-tax income included a net unfavorable update of $166 million, primarily in fixed annuities driven by changes to earned rates causing spread compression partially offset by favorable updates to full surrender assumptions, and updates to the Life Insurance reserves for universal life with secondary guarantees and similar features (excluding base policy liabilities and embedded derivatives) model.

For the period ended September 30, 2020, adjusted pre-tax income included a net unfavorable impact of $107 million, primarily in fixed annuities driven by changes to earned rates causing spread compression partially offset by favorable updates to full surrender assumptions, and in Life Insurance primarily due to mortality modeling enhancements.

The updates related to the update of actuarial assumptions in each period are discussed by business segment below.

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ITEM 2 | Insurance Reserves

 

Update of Actuarial Assumptions by Business Segment

Individual Retirement

The update of actuarial assumptions resulted in a net unfavorable impact to adjusted pre-tax income of Individual Retirement of $270 million for the period ended September 30, 2021 compared to net unfavorable updates to adjusted pre-tax income of Individual Retirement of $75 million for the period ended September 30, 2020.

For the period ended September 30, 2021 for fixed annuities, the update of estimated gross profit assumptions resulted in a net unfavorable impact of $274 million which reflected lower projected investment earnings.

For the period ended September 30, 2020 for fixed annuities, the update of estimated gross profit assumptions resulted in a net unfavorable impact of $77 million which reflected lower projected investment earnings, partially offset by lower assumed lapses.

For the period ended September 30, 2021 for variable and index annuities, the update of estimated gross profit assumptions resulted in a net favorable impact of $4 million, driven by lower assumed lapses. These updates were largely offset by lower projected investment earnings.

For the period ended September 30, 2020 for variable and index annuities, the update of estimated gross profit assumptions resulted in a net favorable impact of $2 million, driven by updated withdrawal benefit utilization assumptions. These updates were partially offset by lower projected investment earnings.

Group Retirement

For the period ended September 30, 2021 for Group Retirement, the update of estimated gross profit assumptions resulted in a net unfavorable impact of $2 million, driven primarily in the variable annuities line by lower projected investment earnings, largely offset by updates to the reversion to the mean rates of return on separate account growth rates related to equity market performance.

For the period ended September 30, 2020 for Group Retirement, the update of estimated gross profit assumptions resulted in a favorable impact of $68 million, primarily in the variable annuities line from extending the DAC amortization projection period, partially offset by updates to expense and lapse assumptions. The DAC amortization projection period was extended to reflect business still in-force at the end of the previous projection period, resulting in an increase in modeled future profits and an increase in the current DAC balance.

Life Insurance

For the period ended September 30, 2021 for Life Insurance, the update of actuarial assumptions resulted in a net favorable impact of $106 million, primarily driven by updates to the reserves for universal life with secondary guarantees and similar features (excluding base policy liabilities and embedded derivatives), which was partially offset by lower projected investment earnings and model updates involving reinsurance.

For the period ended September 30, 2020 for the update of actuarial assumptions resulted in a net unfavorable impact of $101 million, primarily driven by updates to universal life mortality assumptions. The mortality updates better align the assumptions with experience and reduce future profits which increases the reserves for affected products. The unfavorable updates were partially offset by refinements to reserve modeling.

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 Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Life and Retirement Companies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs in the 2020 Annual Report.

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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 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 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 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 GAAP valuation, which reflects a market participant’s view of our claims-paying ability by incorporating a different spread (the NPA spread) to the curve used to discount projected benefit cash flows. Because the discount rate includes the NPA spread and other explicit risk margins, the 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 4 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 GAAP embedded derivatives and the value of our economic hedge target:

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

2021

 

2020

Reconciliation of embedded derivatives and economic hedge target:

 

 

 

 

 

 

 

 

 

Embedded derivative liability

 

 

 

 

 

$

2,551

$

3,572

Exclude non-performance risk adjustment

 

 

 

 

 

 

(2,431)

 

(2,958)

Embedded derivative liability, excluding NPA

 

 

 

 

 

 

4,982

 

6,530

Adjustments for risk margins and differences in valuation

 

 

 

 

 

 

(2,122)

 

(2,502)

Economic hedge target liability

 

 

 

 

 

$

2,860

$

4,028

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 Net realized gains (losses). Realized 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 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.

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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)

 

2021

 

2020

 

 

2021

 

2020

Change in fair value of embedded derivatives, excluding update of actuarial

 

 

 

 

 

 

 

 

 

assumptions and NPA

$

219

$

1,207

 

$

2,136

$

(3,096)

Change in fair value of variable annuity hedging portfolio:

 

 

 

 

 

 

 

 

 

Fixed maturity securities*

 

12

 

13

 

 

43

 

31

Interest rate derivative contracts

 

(140)

 

(356)

 

 

(784)

 

1,873

Equity derivative contracts

 

12

 

(384)

 

 

(768)

 

109

Change in fair value of variable annuity hedging portfolio

 

(116)

 

(727)

 

 

(1,509)

 

2,013

Change in fair value of embedded derivatives excluding update of actuarial assumptions and

 

 

 

 

 

 

 

 

 

NPA, net of hedging portfolio

 

103

 

480

 

 

627

 

(1,083)

Change in fair value of embedded derivatives due to NPA spread

 

(43)

 

(519)

 

 

(136)

 

1,033

Change in fair value of embedded derivatives due to change in NPA volume

 

(27)

 

(290)

 

 

(391)

 

921

Change in fair value of embedded derivatives due to update of actuarial assumptions

 

(60)

 

194

 

 

(60)

 

194

Total change due to updated of actuarial assumptions and NPA

 

(130)

 

(615)

 

 

(587)

 

2,148

Net impact on pre-tax income (loss)

$

(27)

$

(135)

 

$

40

$

1,065

 

 

 

 

 

 

 

 

 

 

Impact to Consolidated Income Statement

 

 

 

 

 

 

 

 

 

Net investment income, net of related interest credited to policyholder account balances

$

12

$

13

 

$

43

$

31

Net realized gains (losses)

 

(39)

 

(148)

 

 

(3)

 

1,034

Net impact on pre-tax income (loss)

$

(27)

$

(135)

 

$

40

$

1,065

 

 

 

 

 

 

 

 

 

 

Net change in value of economic hedge target and related hedges

 

 

 

 

 

 

 

 

 

Net impact on economic gains (losses)

$

58

$

(270)

 

$

135

$

897

* The change in fair value of available-for-sale fixed maturity securities recognized as a component of other comprehensive income (loss) were losses of $23 million and $134 million for the three- and nine-month periods ended September 30, 2021, respectively, due to higher interest rates. The change in fair value of available-for-sale fixed maturity securities recognized as a component of other comprehensive income (loss) were gains of $10 million and $139 million for the three- and nine-month periods ended September 30, 2020, respectively, due to lower interest rates.

The net impact on pre-tax loss of $27 million from the GMWB embedded derivatives and related hedges in the three-month period ended September 30, 2021 was driven by losses from the review and update of actuarial assumptions, tightening of the NPA spreads, and impact of higher interest rates that resulted in NPA volume losses from lower expected GMWB payments, offset by impact of higher 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 income of $40 million from the GMWB embedded derivatives and related hedges in the nine-month period ended September 30, 2021 was driven by gains from higher equity markets, impact of higher interest rates on the change in the fair value of embedded derivatives excluding NPA, net of the hedging portfolio, offset by the tightening of NPA credit spreads, impact of higher interest rates that resulted in NPA volume losses from lower expected GMWB payments, and losses from the review and update of actuarial assumptions. The net impact on pre-tax loss of $135 million from the GMWB embedded derivatives and related hedges in the three-month period ended September 30, 2020 was driven by tightening of credit spreads on the economic hedge target and NPA spread, and NPA volume losses from lower expected GMWB payments, partially offset by gains from the review and update of actuarial assumptions, net of the hedging portfolio. The net impact on pre-tax income of $1.1 billion from the GMWB embedded derivatives and related hedges in the nine-month period ended September 30, 2020 was driven by the widening of credits spreads on the economic hedge target and the NPA, and impact of lower interest rates that resulted in NPA volume gains from higher expected GMWB payments, partially 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 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, 2021 reflected gains from increases in interest rates and equity markets. The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in the three-month period ended September 30, 2020 reflected gains from higher equity markets and interest rates. The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in the nine-month period ended September 30, 2020 reflected losses from decreases in interest rates.

AIG | Third Quarter 2021 Form 10-Q 155

 

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ITEM 2 | Insurance Reserves

 

Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a GAAP basis, due to the NPA and other risk margins used for 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 changes in the economic hedge target, as discussed below. In the three- and nine-month periods ended September 30, 2021, we had a net mark to market gain of approximately $58 million and $135 million, respectively, from our hedging activities related to our economic hedge target primarily driven by higher equity markets, partially offset by losses from the review and update of actuarial assumptions. In the three-month period ended September 30, 2020, we estimated a net mark to market loss of approximately $270 million from our hedging activities related to our economic hedge target primarily driven by tightening credit spreads, partially offset by gains from the review and update of actuarial assumptions. In the nine-month period ended September 30, 2020, we estimated a net mark to market gain of approximately $897 million, from our hedging activities related to our economic hedge target primarily driven by widening credit spreads and gains from the review and update of actuarial assumptions.

Change in Economic Hedge Target

The decrease in the economic hedge target liability in the three- and nine-month periods ended September 30, 2021 was primarily driven by higher interest rates, partially offset by losses from the review and update of actuarial assumptions. The decrease in the economic hedge target liability in the three-month period ended September 30, 2020 was primarily due to higher interest rates, equity markets, and benefits from the review and update of assumptions, offset by tightening credit spreads. The increase in the economic hedge target liability in the nine-month period ended September 30, 2020 was primarily due to lower interest rates, offset by widening credit spreads and benefits from the review and update of 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 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 interest rate derivative contracts, which included swaps, swaptions and futures, resulted in losses driven by higher interest rates in the three- and nine-month periods ended September 30, 2021 compared to losses driven by higher interest rates in the three-month period ended September 30, 2020 and gains due to lower interest rates in the nine-month period ended September 30, 2020.

Changes in the fair value of equity derivative contracts, which included futures and options, resulted in gains in the three-month period ended September 30, 2021 and losses in the nine-month period ended September 30, 2021 compared to losses in the three-month period ended September 30, 2020 and gains in the nine-month period ended September 30, 2020, which varied based on the relative change in equity market returns in the respective periods.

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, 2021 reflected losses due to higher interest rates. The change in the fair value of the corporate bond hedging program in the three-month period ended September 30, 2020 reflected gains due to tightening credit spreads, offset by higher interest rates. The change in the fair value of the corporate bond hedging program in the nine-month period ended September 30, 2020 reflected gains due to decreases in interest rates, offset by widening credit spreads.

156 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Insurance Reserves

 

DAC

The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and Retirement companies:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2021

 

2020

Balance, beginning of year

$

7,316

$

8,119

Initial allowance upon the adoption of the current expected credit loss accounting standard

 

-

 

15

Acquisition costs deferred

 

788

 

676

Amortization expense:

 

 

 

 

Update of assumptions included in adjusted pre-tax income

 

(139)

 

225

Related to realized gains and losses

 

(56)

 

(197)

All other operating amortization

 

(636)

 

(624)

Increase (decrease) in DAC due to foreign exchange

 

(10)

 

(15)

Change related to unrealized depreciation (appreciation) of investments

 

706

 

(548)

Balance, end of period(a)

$

7,969

$

7,651

(a) DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $10.4 billion and $10.2 billion at September 30, 2021 and 2020, respectively.

DAC and Reserves Related to Unrealized Appreciation of Investments

DAC and Reserves for universal life and 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 (loss) (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 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 conditions in the nine-month period ended September 30, 2021 drove a $6.6 billion decrease in the unrealized appreciation of fixed maturity securities held to support the Life and Retirement businesses at September 30, 2021 compared to December 31, 2020. At September 30, 2021, the shadow Investment-Oriented Adjustments reflected increases in amortized balances including DAC and unearned revenue reserves, while policyholder benefit liabilities including shadow loss recognition reserves decreased $861 million from December 31, 2020.

AIG | Third Quarter 2021 Form 10-Q 157

 

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ITEM 2 | Insurance Reserves

 

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 policyholder 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)

 

2021

 

2020

 

 

2021

 

2020

Individual Retirement

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

152,459

$

142,056

 

$

148,837

$

144,753

Premiums and deposits

 

3,257

 

2,702

 

 

10,608

 

7,612

Surrenders and withdrawals

 

(2,473)

 

(2,691)

 

 

(8,822)

 

(9,115)

Death and other contract benefits

 

(689)

 

(780)

 

 

(2,342)

 

(2,347)

Subtotal

 

152,554

 

141,287

 

 

148,281

 

140,903

Change in fair value of underlying assets and reserve accretion, net of policy fees

 

(564)

 

2,352

 

 

2,970

 

1,934

Cost of funds(a)

 

421

 

422

 

 

1,250

 

1,254

Other reserve changes

 

167

 

(106)

 

 

77

 

(136)

Less the sale of retail mutual fund assets

 

(7,009)

 

-

 

 

(7,009)

 

-

Balance at end of period

 

145,569

 

143,955

 

 

145,569

 

143,955

Reinsurance ceded

 

(311)

 

(316)

 

 

(311)

 

(316)

Total Individual Retirement insurance reserves and mutual fund assets

$

145,258

$

143,639

 

$

145,258

$

143,639

Group Retirement

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

116,942

$

99,523

 

$

110,651

$

102,049

Premiums and deposits

 

1,831

 

1,772

 

 

5,904

 

5,297

Surrenders and withdrawals

 

(2,638)

 

(2,544)

 

 

(7,385)

 

(6,538)

Death and other contract benefits

 

(207)

 

(185)

 

 

(655)

 

(546)

Subtotal

 

115,928

 

98,566

 

 

108,515

 

100,262

Change in fair value of underlying assets and reserve accretion, net of policy fees

 

(619)

 

3,758

 

 

6,430

 

1,605

Cost of funds(a)

 

287

 

285

 

 

851

 

840

Other reserve changes

 

(57)

 

(49)

 

 

(257)

 

(147)

Balance at end of period

 

115,539

 

102,560

 

 

115,539

 

102,560

Total Group Retirement insurance reserves and mutual fund assets

$

115,539

$

102,560

 

$

115,539

$

102,560

Life Insurance

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

28,307

$

27,686

 

$

27,998

$

27,397

Premiums and deposits

 

1,045

 

986

 

 

3,130

 

2,985

Surrenders and withdrawals

 

(113)

 

(88)

 

 

(373)

 

(355)

Death and other contract benefits

 

(136)

 

(114)

 

 

(447)

 

(415)

Subtotal

 

29,103

 

28,470

 

 

30,308

 

29,612

Change in fair value of underlying assets and reserve accretion, net of policy fees

 

(228)

 

(290)

 

 

(634)

 

(948)

Cost of funds(a)

 

88

 

94

 

 

265

 

280

Other reserve changes

 

(793)

 

(17)

 

 

(1,769)

 

(687)

Balance at end of period

 

28,170

 

28,257

 

 

28,170

 

28,257

Reinsurance ceded

 

(1,504)

 

(1,370)

 

 

(1,504)

 

(1,370)

Total Life Insurance reserves

$

26,666

$

26,887

 

$

26,666

$

26,887

158 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Insurance Reserves

 

Institutional Markets

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

27,999

$

25,572

 

$

27,342

$

23,673

Premiums and deposits

 

994

 

1,448

 

 

2,715

 

3,559

Surrenders and withdrawals

 

(15)

 

(805)

 

 

(934)

 

(1,021)

Death and other contract benefits

 

(254)

 

(162)

 

 

(656)

 

(691)

Subtotal

 

28,724

 

26,053

 

 

28,467

 

25,520

Change in fair value of underlying assets and reserve accretion, net of policy fees

 

155

 

267

 

 

600

 

535

Cost of funds(a)

 

75

 

70

 

 

221

 

231

Other reserve changes

 

(8)

 

(42)

 

 

(342)

 

62

Balance at end of period

 

28,946

 

26,348

 

 

28,946

 

26,348

Reinsurance ceded

 

(45)

 

(46)

 

 

(45)

 

(46)

Total Institutional Markets reserves

$

28,901

$

26,302

 

$

28,901

$

26,302

Total insurance reserves and mutual fund assets

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

325,707

$

294,837

 

$

314,828

$

297,872

Premiums and deposits

 

7,127

 

6,908

 

 

22,357

 

19,453

Surrenders and withdrawals

 

(5,239)

 

(6,128)

 

 

(17,514)

 

(17,029)

Death and other contract benefits

 

(1,286)

 

(1,241)

 

 

(4,100)

 

(3,999)

Subtotal

 

326,309

 

294,376

 

 

315,571

 

296,297

Change in fair value of underlying assets and reserve accretion, net of policy fees

 

(1,256)

 

6,087

 

 

9,366

 

3,126

Cost of funds(a)

 

871

 

871

 

 

2,587

 

2,605

Other reserve changes

 

(691)

 

(214)

 

 

(2,291)

 

(908)

Less the sale of retail mutual fund assets

 

(7,009)

 

-

 

 

(7,009)

 

-

Balance at end of period, excluding Fortitude Re reserves

 

318,224

 

301,120

 

 

318,224

 

301,120

Fortitude Re reserves(b)

 

27,833

 

28,703

 

 

27,833

 

28,703

Balance at end of period, including Fortitude Re reserves

 

346,057

 

329,823

 

 

346,057

 

329,823

Fortitude Re reinsurance ceded(b)

 

(27,833)

 

(28,703)

 

 

(27,833)

 

(28,703)

Reinsurance ceded

 

(1,860)

 

(1,732)

 

 

(1,860)

 

(1,732)

Total insurance reserves and mutual fund assets

$

316,364

$

299,388

 

$

316,364

$

299,388

(a) Excludes amortization of deferred sales inducements.

(b) Includes amounts related to policies where AIG has partially ceded to other reinsurers and Fortitude Re.

Insurance reserves, 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)

 

 

 

2021

 

2020(b)

Future policy benefits

 

 

$

55,573

$

54,645

Policyholder contract deposits

 

 

 

156,842

 

154,669

Other policyholder funds(a)

 

 

 

883

 

957

Separate account liabilities

 

 

 

105,423

 

100,290

Total insurance reserves

 

 

 

318,721

 

310,561

Mutual fund assets

 

 

 

27,336

 

32,772

Total insurance reserves and mutual fund assets

 

 

$

346,057

$

343,333

(a) Excludes unearned revenue liability.

(b) Beginning in the quarter ended September 30, 2021, liabilities for certain universal life products were reclassified from Policyholder contract deposits to Future policy benefits for life and accident and health insurance contracts. Prior periods have been revised to conform to the current period presentation.

AIG | Third Quarter 2021 Form 10-Q 159

 

TABLE OF CONTENTS

 

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 2020 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, catastrophic losses or fluctuations in the capital markets generally may result in significant additional cash or capital needs and loss of sources of liquidity and 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. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.

For a discussion regarding risks associated with COVID-19, see the 2020 Annual Report, Part I, Item 1A. Risk Factors – Market Conditions – COVID-19 is adversely affecting, and is expected to continue to adversely affect, our global business, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope, severity and duration of the crisis, and the governmental, legislative and regulatory actions taken and court decisions rendered in response thereto.

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 on the AIG Common Stock, par value $2.50 per share (AIG Common Stock), paying dividends to the holders of our Series A 5.85% Non-Cumulative Perpetual Preferred Stock (Series A Preferred Stock), and repurchases of AIG Common Stock.

160 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

 

LIQUIDITY AND CAPITAL RESOURCES HIGHLIGHTS

Sources

Liquidity to AIG Parent from Subsidiaries

During the nine-month period ended September 30, 2021, our General Insurance companies distributed cash and fixed maturity securities of $1.2 billion, and our Life and Retirement companies distributed $2.3 billion of cash and $38 million of AIG Common Stock held by certain Life and Retirement companies to AIG Parent or applicable intermediate holding companies.

Warrant Exercises

In January 2021, we received aggregate proceeds of approximately $92 million in connection with warrant exercises to purchase approximately 2 million shares of AIG Common Stock that occurred prior to the January 19, 2021 expiration of warrants to purchase shares of AIG Common Stock.

Tax Sharing Payment from Fortitude Re

In January 2021, we received $109 million in tax sharing payments in the form of cash from Fortitude Re related to periods prior to the Majority Interest Fortitude Sale. The tax sharing payments from Fortitude Re may be subject to further adjustment in future periods.

 

Uses

General Borrowings

During the nine-month period ended September 30, 2021, $3.3 billion of debt categorized as general borrowings matured, was repaid or redeemed as follows:

Redeemed $1.5 billion aggregate principal amount of our 3.300% Notes Due 2021 for a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest.

Repurchased, through cash tender offers, $262 million aggregate principal amount of certain notes and debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $369 million.

Redeemed $1.5 billion aggregate principal amount of our 4.875% Notes Due 2022 for a redemption price of 103.156 percent of the principal amount, plus accrued and unpaid interest.

We made interest payments on our general borrowings totaling $764 million during the nine-month period ended September 30, 2021. Of this amount, AIG Parent made interest payments on AIG Parent-issued debt instruments totaling $726 million during the nine-month period ended September 30, 2021.

Dividends

We paid a cash dividend of $365.625 per share on AIG’s Series A Preferred Stock during each of the first, second and third quarters of 2021 totaling $22 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 2021 totaling $819 million.

Repurchases of Common Stock*

During the nine-month period ended September 30, 2021, AIG Parent repurchased approximately 32 million shares of AIG Common Stock, for an aggregate purchase price of approximately $1.7 billion. Approximately $92 million of these share repurchases were funded with proceeds received from warrant exercises that occurred prior to the expiration of warrants to purchase shares of AIG Common Stock on January 19, 2021.

IRS Tax Prepayment

In June 2021, AIG Parent made a prepayment of approximately $354 million to the U.S. Treasury in connection with certain settlement agreements described in Tax Matters below.

 

* Pursuant to an Exchange Act Rule 10b5-1 repurchase plan, from October 1, 2021 to November 4, 2021, we repurchased approximately $368 million of additional shares of AIG Common Stock. As of November 4, 2021, approximately $4.6 billion remained under our share repurchase authorization.

AIG | Third Quarter 2021 Form 10-Q 161

 

TABLE OF CONTENTS

 

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)

 

 

 

2021

 

2020

Sources:

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

5,764

$

609

Changes in policyholder contract balances

 

 

 

3,314

 

3,453

Issuance of long-term debt

 

 

 

79

 

4,166

Issuance of debt of consolidated investment entities

 

 

 

3,458

 

1,459

Net cash provided by other financing activities

 

 

 

-

 

425

Total sources

 

 

 

12,615

 

10,112

Uses:

 

 

 

 

 

 

Net cash used in investing activities

 

 

 

(2,924)

 

(5,221)

Repayments of long-term debt

 

 

 

(3,451)

 

(1,207)

Repayments of debt of consolidated investment entities

 

 

 

(3,210)

 

(2,042)

Purchase of common stock

 

 

 

(1,651)

 

(500)

Dividends paid on preferred stock

 

 

 

(22)

 

(22)

Dividends paid on common stock

 

 

 

(819)

 

(827)

Net cash used in other financing activities

 

 

 

(458)

 

-

Total uses

 

 

 

(12,535)

 

(9,819)

Effect of exchange rate changes on cash and restricted cash

 

 

 

(40)

 

27

Increase in cash and restricted cash

 

 

$

40

$

320

The following table presents a summary of AIG’s Condensed Consolidated Statements of Cash Flows:

 

 

 

 

 

(in millions)

 

2021

 

2020

Summary:

 

 

 

 

Net cash provided by operating activities

$

5,764

$

609

Net cash used in investing activities

 

(2,924)

 

(5,221)

Net cash provided by (used in) financing activities

 

(2,760)

 

4,905

Effect of exchange rate changes on cash and restricted cash

 

(40)

 

27

Net Increase in cash and restricted cash

 

40

 

320

Cash and restricted cash at beginning of year

 

3,230

 

3,287

Change in cash of held for sale assets

 

(436)

 

-

Cash and restricted cash at end of period

$

2,834

$

3,607

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 $781 million in the nine-month period ended September 30, 2021 compared to $829 million in the same period in the prior year. Excluding interest payments, AIG had operating cash inflows of $6.5 billion in the nine-month period ended September 30, 2021 compared to operating cash inflows of $1.4 billion in the same period in the prior year.

162 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

Investing Cash Flow Activities

Net cash used in investing activities in the nine-month period ended September 30, 2021 was $2.9 billion compared to net cash used in investing activities of $5.2 billion in the same period in the prior year. Net cash used in investing activities in 2020 included $2.2 billion of net cash proceeds from the sale of Fortitude Holdings.

Financing Cash Flow Activities

Net cash used in financing activities in the nine-month period ended September 30, 2021 reflected:

• approximately $819 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 2021;

• approximately $22 million in the aggregate to pay a dividend of $365.625 per share on AIG’s Series A Preferred Stock in each of the first, second and third quarters of 2021;

• approximately $1,651 million in the aggregate to repurchase approximately 32 million shares of AIG Common Stock;

• approximately $3.4 billion in net outflows from the issuance and repayment of long-term debt; and

• approximately $248 million in net inflows from the issuance and repayment of debt of consolidated investment entities.

Net cash provided by financing activities in the nine-month period ended September 30, 2020 reflected:

• approximately $827 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 2020;

• approximately $22 million in the aggregate to pay a dividend of $365.625 per share on AIG’s Series A Preferred Stock in each of the first, second and third quarters of 2020;

• $500 million to repurchase approximately 12 million shares of AIG Common Stock;

• approximately $3.0 billion in net inflows from the issuance and repayment of long-term debt; and

• approximately $583 million in net outflows from the issuance and repayment of debt of consolidated investment entities.

Liquidity and Capital Resources of AIG Parent and Subsidiaries

AIG Parent

As of September 30, 2021, AIG Parent had approximately $9.8 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 include 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 requirements, bank creditor covenants and internal stress tests for capital.

AIG | Third Quarter 2021 Form 10-Q 163

 

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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, 2021

December 31, 2020

Cash and short-term investments(a)

$

1,813

$

6,762

Unencumbered fixed maturity securities(b)

 

3,503

 

3,711

Total AIG Parent liquidity

 

5,316

 

10,473

Available capacity under committed, syndicated credit facility(c)

 

4,500

 

4,500

Total AIG Parent liquidity sources

$

9,816

$

14,973

(a) Cash and short-term investments include agreements in which securities are purchased by us under agreements to resell totaling $984 million and $5.4 billion as of September 30, 2021 and December 31, 2020, 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.

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 or as a result of fluctuations in the capital markets generally, 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 both September 30, 2021 and December 31, 2020. Our U.S. Life and Retirement companies had $3.6 billion which were due to FHLBs in their respective districts at both September 30, 2021 and December 31, 2020, under funding agreements issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments, which were reported in Policyholder contract deposits. Proceeds from funding agreements are generally invested in fixed income securities and other investments intended to generate spread income. These investment contracts do not have mortality or morbidity risk and are similar to GICs. In addition, our U.S. Life and Retirement companies had no outstanding borrowings in the form of cash advances from FHLBs at both September 30, 2021 and December 31, 2020.

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 $3.3 billion and $3.4 billion of securities subject to these agreements at September 30, 2021 and December 31, 2020, respectively, and $3.4 billion and $3.5 billion of liabilities to borrowers for collateral received at September 30, 2021 and December 31, 2020, respectively.

164 AIG | Third Quarter 2021 Form 10-Q

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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 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.

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. These letters of credit are subject to reimbursement by AIG Parent and/or certain subsidiaries in the event of a drawdown by our insurance companies. Letters of credit issued in support of the General Insurance companies totaled approximately $4.0 billion at September 30, 2021. Letters of credit issued in support of the Life and Retirement companies totaled approximately $360 million at September 30, 2021.

In the nine-month period ended September 30, 2021, our General Insurance companies collectively paid to AIG Parent or applicable intermediate holding companies a total of approximately $1.1 billion in dividends in the form of cash and fixed maturity securities and $63 million in tax sharing payments in the form of cash. The fixed maturity securities primarily included U.S. treasuries and securities issued by other U.S. agencies.

In the nine-month period ended September 30, 2021, our Life and Retirement companies collectively paid to AIG Parent or applicable intermediate holding companies a total of approximately $987 million in dividends in the form of cash and AIG Common Stock and $1.3 billion in tax sharing payments in the form of cash.

Tax Matters

In October 2020, the Southern District of New York dismissed the case for the 1997 tax year related to the disallowance of foreign tax credits associated with cross border financing transactions based upon the settlement reached between AIG and the government. The settlement concluded our ongoing dispute related to the disallowance of foreign tax credits associated with cross border financing transactions for all years and as a result of the settlement, we will be required to make a payment to the U.S. Treasury. The amount we currently expect to pay based on settlement terms is approximately $0.3 billion, including obligations of AIG Parent and subsidiaries. This amount is net of payments previously made with respect to cross border financing transactions from tax years 1997 through 2006 and other matters related to 2006 and prior, including prepayments of approximately $548 million and $354 million that AIG made to the U.S. Treasury in June 2020 and June 2021, respectively. The amount also includes interest that will become due after review of the interest calculations and will reflect benefits from the application of interest netting which AIG has requested. While we continue to finalize the interest calculations with the IRS, AIG expects to make the remaining payment as early as the fourth quarter of 2021.

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, 2021, 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.

Contractual Obligations

As of September 30, 2021, there have been no material changes in our contractual obligations from December 31, 2020, a description of which may be found in Part II, Item 7. MD&A – Liquidity and Capital Resources – Contractual Obligations in the 2020 Annual Report.

Off-Balance Sheet Arrangements and Commercial Commitments

As of September 30, 2021, there have been no material changes in our off-balance sheet arrangements and commercial commitments from December 31, 2020, a description of which may be found in Part II, Item 7. MD&A – Liquidity and Capital Resources – Off-Balance Sheet Arrangements and Commercial Commitments in the 2020 Annual Report.

AIG | Third Quarter 2021 Form 10-Q 165

 

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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.

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, 2021

 

December 31,

 

 

 

and

 

Foreign

 

Other

 

September 30,

(in millions)

 

2020

Issuances

Repayments

 

Exchange

 

Changes

 

 

2021

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

$

23,068

$

-

$

(3,045)

$

(124)

$

32

 

$

19,931

Junior subordinated debt

 

1,561

 

-

 

-

 

(11)

 

-

 

 

1,550

AIG Japan Holdings Kabushiki Kaisha

 

361

 

-

 

-

 

(19)

 

-

 

 

342

AIGLH notes and bonds payable

 

282

 

-

 

(82)

 

-

 

-

 

 

200

AIGLH junior subordinated debt

 

361

 

-

 

(134)

 

-

 

-

 

 

227

Validus notes and bonds payable

 

348

 

-

 

-

 

-

 

(4)

 

 

344

Total AIG general borrowings

 

25,981

 

-

 

(3,261)

 

(154)

 

28

 

 

22,594

AIG borrowings supported by assets:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

Series AIGFP matched notes and bonds payable

 

21

 

-

 

-

 

-

 

-

 

 

21

GIAs, at fair value

 

2,033

 

79

 

(199)

 

-

 

(17)

(b)

 

1,896

Notes and bonds payable, at fair value

 

64

 

-

 

(6)

 

-

 

10

(b)

 

68

Total AIG borrowings supported by assets

 

2,118

 

79

 

(205)

 

-

 

(7)

 

 

1,985

Total debt issued or guaranteed by AIG

 

28,099

 

79

 

(3,466)

 

(154)

 

21

 

 

24,579

Other subsidiaries' notes, bonds, loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgages payable - not guaranteed by AIG

 

4

 

-

 

(1)

 

-

 

-

 

 

3

Total long-term debt

 

28,103

 

79

 

(3,467)

 

(154)

 

21

 

 

24,582

Debt of consolidated investment entities - not

 

 

 

 

 

 

 

 

 

 

 

 

 

guaranteed by AIG(c)

 

9,431

 

3,458

 

(3,210)

 

(13)

 

(2,698)

(d)

 

6,968

Total debt

$

37,534

$

3,537

$

(6,677)

$

(167)

$

(2,677)

 

$

31,550

(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 were $1.4 billion at both September 30, 2021 and December 31, 2020. 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) At September 30, 2021, includes debt of consolidated investment entities primarily related to real estate investments of $2.4 billion and other securitization vehicles of $4.5 billion. At December 31, 2020, includes debt of consolidated investment entities related to real estate investments of $3.1 billion, affordable housing partnership investments of $2.3 billion and other securitization vehicles of $4.0 billion.

(d) Includes the effect of consolidating previously unconsolidated partnership and reclassification of held for sale Affordable Housing debt to other liabilities.

TOTAL DEBT OUTSTANDING

(in millions)

Chart 1

166 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Liquidity and Capital Resources

 

Debt Maturities

The following table summarizes maturing long-term debt at September 30, 2021 of AIG for the next four quarters:

 

 

Fourth

 

First

 

Second

 

Third

 

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

(in millions)

 

2021

 

2022

 

2022

 

2022

 

Total

AIG general borrowings

$

-

$

-

$

-

$

-

$

-

AIG borrowings supported by assets

 

34

 

1

 

19

 

19

 

73

Other subsidiaries' notes, bonds, loans and mortgages payable

 

-

 

-

 

-

 

1

 

1

Total

$

34

$

1

$

19

$

20

$

74

The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting valuation adjustments and fair value adjustments, when applicable):

September 30, 2021

 

 

 

Remainder

Year Ending

(in millions)

 

 

Total

 

of 2021

 

2022

 

2023

 

2024

 

2025

 

2026

Thereafter

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

 

$

19,931

$

-

$

17

$

1,626

$

999

$

2,751

$

1,545

$

12,993

Junior subordinated debt

 

 

1,550

 

-

 

-

 

-

 

-

 

-

 

-

 

1,550

AIG Japan Holdings Kabushiki Kaisha

 

 

342

 

-

 

-

 

224

 

-

 

118

 

-

 

-

AIGLH notes and bonds payable

 

 

200

 

-

 

-

 

-

 

-

 

101

 

-

 

99

AIGLH junior subordinated debt

 

 

227

 

-

 

-

 

-

 

-

 

-

 

-

 

227

Validus notes and bonds payable

 

 

344

 

-

 

-

 

-

 

-

 

-

 

-

 

344

Total AIG general borrowings

 

 

22,594

 

-

 

17

 

1,850

 

999

 

2,970

 

1,545

 

15,213

AIG borrowings supported by assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series AIGFP matched notes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds payable

 

 

21

 

-

 

-

 

-

 

-

 

-

 

-

 

21

GIAs, at fair value

 

 

1,896

 

34

 

51

 

125

 

147

 

581

 

103

 

855

Notes and bonds payable, at fair value

 

 

68

 

-

 

-

 

-

 

-

 

-

 

-

 

68

Total AIG borrowings supported by assets

 

1,985

 

34

 

51

 

125

 

147

 

581

 

103

 

944

Total debt issued or guaranteed by AIG

 

 

24,579

 

34

 

68

 

1,975

 

1,146

 

3,551

 

1,648

 

16,157

Debt not guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other subsidiaries notes, bonds, loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and mortgages payable

 

 

3

 

-

 

2

 

1

 

-

 

-

 

-

 

-

Total debt not guaranteed by AIG

 

3

 

-

 

2

 

1

 

-

 

-

 

-

 

-

Total*

 

$

24,582

$

34

$

70

$

1,976

$

1,146

$

3,551

$

1,648

$

16,157

* Does not reflect $7.0 billion of notes issued by consolidated investment entities, for which recourse is limited to the assets of the respective investment entities and for which there is no recourse to the general credit of AIG.

AIG | Third Quarter 2021 Form 10-Q 167

 

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ITEM 2 | Liquidity and Capital Resources

 

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 the date of this filing. 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 2 (4th of 9)

BBB+ (4th of 9)

BBB+ (4th of 9)

 

 

 

 

/ Stable outlook

CreditWatch

Rating Watch

 

 

 

 

 

Negative

Negative

AIG Financial Products Corp.(d)

P-2

A-2

 

Baa 2 (4th of 9)

BBB+

 

 

 

 

 

/ Stable outlook

CreditWatch

 

 

 

 

 

 

Negative

 

(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 Inc. (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. For a discussion of rating agency actions in response to AIG’s announced intention to separate its Life and Retirement business from AIG, see –Rating Agency Actions Related to the Announced Separation of Life and Retirement below.

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, AIG Financial Products Corp. and related subsidiaries (collectively 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.

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 and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit – “A downgrade in the Insurer Financial Strength ratings of our insurance or reinsurance companies could limit their retention of customers and in-force business and retaining customers and business, and a downgrade in our credit ratings could adversely affect our business, our results of operations or our liquidity” in the 2020 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 the date of this filing.

 

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

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

168 AIG | Third Quarter 2021 Form 10-Q

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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 and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit – “A downgrade in the Insurer Financial Strength ratings of our insurance or reinsurance companies could limit their retention of customers and in-force business and retaining customers and business, and a downgrade in our credit ratings could adversely affect our business, our results of operations or our liquidity” in the 2020 Annual Report.

Rating Agency Actions RELATED TO the ANNOUNCED SEPARATION OF LIFE AND RETIREMENT

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG, and on July 14, 2021, AIG and Blackstone announced that they have reached a definitive agreement for Blackstone to acquire a 9.9 percent equity stake in AIG’s Life and Retirement business. In response to such announcements, the rating agencies in the tables above took the following actions:

On October 27, 2020, A.M. Best issued a comment stating that its financial strength and issuer credit ratings on AIG and subsidiaries are unchanged as a result of the announcement. On October 7, 2021, A.M. Best affirmed all of the financial strength and issuer credit ratings of AIG and subsidiaries with stable outlooks.

On October 28, 2020, Fitch placed the credit ratings of AIG on “Rating Watch Negative.” Fitch also affirmed the financial strength ratings and outlooks on AIG’s insurance subsidiaries.

On October 28, 2020, Moody’s placed the debt ratings of AIG on review for downgrade. Moody’s also affirmed the financial strength ratings and outlooks on AIG’s insurance subsidiaries. On July 15, 2021, Moody’s lowered its debt ratings of AIG to Baa2 from Baa1 and assigned a stable outlook. Moody’s also revised the outlook on the A2 financial strength ratings of the Life and Retirement subsidiaries to negative from stable. The ratings of the General Insurance subsidiaries were unaffected by these announcements.

On October 27, 2020, S&P placed the credit ratings of AIG and the financial strength ratings of most of the General Insurance subsidiaries on CreditWatch with negative implications. S&P also placed the financial strength ratings of the Life and Retirement subsidiaries on CreditWatch with developing implications.

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 the 2020 Annual Report, and Regulatory Environment below in this MD&A.

Dividends

On February 16, 2021, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 30, 2021 to shareholders of record on March 16, 2021. On May 6, 2021, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 29, 2021 to shareholders of record on June 15, 2021. On August 5, 2021, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 30, 2021 to shareholders of record on September 16, 2021. On November 4, 2021, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 30, 2021 to shareholders of record on December 16, 2021.

On February 16, 2021, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on March 15, 2021 to holders of record on February 26, 2021. On May 6, 2021, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on June 15, 2021 to holders of record on May 31, 2021. On August 5, 2021, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on September 15, 2021 to holders of record on August 31, 2021. On November 4, 2021, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on December 15, 2021 to holders of record on November 30, 2021.

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.

AIG | Third Quarter 2021 Form 10-Q 169

 

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ITEM 2 | Liquidity and Capital Resources

 

Repurchases of AIG Common Stock

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock through a series of actions. On August 3, 2021, our Board of Directors authorized a share repurchase authorization of AIG Common Stock of $6.0 billion (inclusive of the approximately $908 million remaining under the Board’s prior share repurchase authorization).

During the nine-month period ended September 30, 2021, AIG Parent repurchased approximately 32 million shares of AIG Common Stock for an aggregate purchase price of $1.7 billion, including approximately $6 million of shares purchased from certain Life and Retirement companies. Pursuant to an Exchange Act Rule 10b5-1 repurchase plan, from October 1, 2021 to November 4, 2021, we repurchased approximately $368 million of additional shares of AIG Common Stock. As of November 4, 2021, approximately $4.6 billion remained under the 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. Certain of our share repurchases have been and may from time to time be effected through the 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.

Dividend Restrictions

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 2020 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 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 targeted risk tolerances 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, 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.

AIG employs a Three Lines of Defense model. AIG’s business leaders assume full accountability for the risks and controls in their operating units, and ERM performs a review, challenge and oversight function. The third line consists of our Internal Audit Group that provides independent assurance for AIG’s Board.

For a further discussion of AIG’s risk management program see Part II, Item 7. MD&A ─ Enterprise Risk Management in the 2020 Annual Report.

As of September 30, 2021, there have been no material changes in our economic exposure to market risk from December 31, 2020, a description of which may be found in Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the 2020 Annual Report. See Part I, Item 1A. Risk Factors in the 2020 Annual Report on how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

170 AIG | Third Quarter 2021 Form 10-Q

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ITEM 2 | Regulatory Environment

 

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 are generally subject to close regulatory scrutiny and supervision.

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 particular, significant legislative and regulatory activity has occurred at both the U.S. federal and state levels, as well as globally, in response to COVID-19 and its impact on insurance consumers. For example, many jurisdictions have issued regulations and guidance advising or requiring insurers to offer accommodations to policyholders adversely impacted by COVID-19, including requirements to defer payment of, or refund, premiums, postpone policy lapses, and have sought information and data from insurers on a number of topics, including operational preparedness, policyholder data, claims data, and other matters. While some of these legislative and regulatory initiatives have expired, resurgence of the COVID-19 virus may lead to a renewal of these initiatives. We cannot predict what form any further legal and regulatory responses to concerns about COVID-19 and related public health issues will take, how long they will last or how such responses will impact our business. We continue to actively monitor these developments and to cooperate fully with all government and regulatory authorities as they develop their responses. 

In addition to the information set forth in this Quarterly Report on Form 10-Q, our regulatory status is also discussed in the 2020 Annual Report, Part I, Item 1A. Risk Factors – Market Conditions – COVID-19 is adversely affecting, and is expected to continue to adversely affect, our global business, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope, severity and duration of the crisis, and the governmental, legislative and regulatory actions taken and court decisions rendered in response thereto.

AIG | Third Quarter 2021 Form 10-Q 171

 

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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 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 segments.

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.

Attritional losses are losses recorded in the current accident year, which are not catastrophe losses.

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 (loss) (AOCI) adjusted for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets and deferred tax assets (DTA) (Adjusted book value per common share) is a non-GAAP measure and is used to show the amount of our net worth on a per-common share basis. Adjusted book value per common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI adjusted for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets 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.

Credit Valuation Adjustment (CVA)/Non-Performance Risk Adjustment (NPA) The CVA/NPA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. Also, the CVA/NPA 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/NPA 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.

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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 catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and man-made catastrophe losses, 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.

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.

AIG | Third Quarter 2021 Form 10-Q 173

 

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Glossary

 

Premiums and deposits – Life and Retirement 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, 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 contracts.

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 adjusted for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets 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.

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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.

APTI Adjusted pre-tax income

Moody's Moody's Investors’ Service Inc.

AUM Assets Under Management

NAIC National Association of Insurance Commissioners

CDO Collateralized Debt Obligations

NM Not Meaningful

CDS Credit Default Swap

ORR Obligor Risk Ratings

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

URR Unearned Revenue Reserve

States of America

VIE Variable Interest Entity

GMDB Guaranteed Minimum Death Benefits

 

 

AIG | Third Quarter 2021 Form 10-Q 175

 

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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 (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 was carried out by American International Group, Inc. (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, 2021. 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, 2021.

Changes in Internal Control Over Financial Reporting

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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

176 AIG | Third Quarter 2021 Form 10-Q

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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 the 2020 Annual Report.

 

ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds

 

Total Number

 

Average

Total Number of Shares

Approximate Dollar Value of Shares

 

 

of Shares

 

Price Paid

Purchased as Part of Publicly

that May Yet Be Purchased Under the

 

Period

Repurchased

 

per Share

Announced Plans or Programs

Plans or Programs (in millions)

 

July 1 – 31

-

$

-

-

 

$

6,000

 

August 1 – 31

13,608,433

 

53.78

13,608,433

 

 

5,268

 

September 1 – 30

6,148,184 *

 

54.12

6,148,184

 

 

4,935

 

Total

19,756,617

$

53.89

19,756,617

 

$

4,935

 

* Includes 107,951 shares of AIG Common Stock purchased from certain Life and Retirement companies.

On August 3, 2021, our Board of Directors authorized a share repurchase authorization of AIG Common Stock of $6.0 billion (inclusive of the approximately $908 million remaining under the Board’s prior share repurchase authorization).

During the three-month period ended September 30, 2021, AIG Parent repurchased approximately 20 million shares of AIG Common Stock, par value $2.50 per share (AIG Common Stock) for an aggregate purchase price of $1.1 billion, including approximately $6 million of shares purchased from certain Life and Retirement companies.

As of September 30, 2021, approximately $4.9 billion remained under the authorization. From October 1, 2021 to November 4, 2021, we repurchased approximately 6 million shares of AIG Common Stock for an aggregate purchase price of approximately $368 million pursuant to an Exchange Act Rule 10b5-1 plan. 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. 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 Series A 5.85% Non-Cumulative Preferred Stock (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.

AIG | Third Quarter 2021 Form 10-Q 177

 

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ITEM 6 | Exhibits

Exhibit Index

Exhibit
Number

Description

Location

10

(1) Stock Purchase Agreement, dated as of July 14, 2021, between American International Group, Inc. and Argon Holdco LLC (an affiliate of The Blackstone Group, Inc.)

Incorporated by reference to Exhibit 10.3 to AIG’s Quarterly Report on Form 10-Q, filed with the SEC on August 6, 2021 (File No. 1-8787).

 

(2) Purchase Agreement, dated as of July 14, 2021, between American International Group, Inc. and Aztec Holdco LLC (an affiliate of The Blackstone Group, Inc.)

Incorporated by reference to Exhibit 10.4 to AIG’s Quarterly Report on Form 10-Q, filed with the SEC on August 6, 2021 (File No. 1-8787).

 

(3) AIG Long Term Incentive Plan (as amended and restated September 2021*

Filed herewith.

 

(4) AIG Long Term Incentive Plan Form of Award Agreement*

Filed herewith.

22

Guaranteed Securities

None.

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, 2021 and December 31, 2020, (ii) the Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2021 and 2020, (iii) the Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2021 and 2020, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020 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 exhibit is a management contract or compensatory arrangement.

**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.

178 AIG | Third Quarter 2021 Form 10-Q

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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/ ELIAS F. HABAYEB

 

Elias F. Habayeb

 

Senior Vice President,

 

Chief Financial Officer, Life and Retirement and

 

Chief Accounting Officer, AIG

 

(Principal Accounting Officer)

 

 

 

Dated: November 5, 2021

AIG | Third Quarter 2021 Form 10-Q 179

 
 

 

Exhibit 10.3

  

 

American International Group, Inc.

Long Term Incentive Plan

(as amended and restated effective September 27, 2021)

 

1.         Purpose; Definitions

This American International Group, Inc. Long Term Incentive Plan (this “Plan”) is designed to provide selected officers and key employees of American International Group, Inc. (“AIG” and together with its consolidated subsidiaries, determined in accordance with U.S. generally accepted accounting principles, the “Company”) with incentives to contribute to the long-term performance of AIG in a manner that appropriately balances risk and rewards.

As specified in the applicable award agreement, Awards under this Plan are issued either under the American International Group, Inc. 2013 Omnibus Incentive Plan (the “2013 Omnibus Plan”) or the American International Group, Inc. 2021 Omnibus Incentive Plan (“the 2021 Omnibus Plan”), as each are amended from time to time or any successor stock incentive plan, (collectively or as applicable the “Omnibus Plan”), the terms of which are incorporated in this Plan.  Capitalized terms used in this Plan but not otherwise defined in this Plan or in the attached Glossary of Terms in Annex A have the meaning ascribed to them in the applicable Omnibus Plan.

2.         Performance Period

Awards (as defined below) will be earned over a three-year performance period (a “Performance Period”), unless the Compensation and Management Resources Committee of the Board of Directors of AIG (including any successor, the “Committee”) determines a different period is appropriate for some or all Participants as set forth in the applicable award agreement.

3.         Awards and Participants

A.         Awards.  Awards issued under this Plan (“Awards”) may consist of performance share units (“PSUs”), restricted stock units (“RSUs”), stock options (“Options”), or a combination of PSUs, RSUs and Options, as the Committee may determine from time to time.  PSUs provide holders with the opportunity to earn shares of AIG Common Stock (“Shares”) based on achievement of performance criteria during the Performance Period.  RSUs provide holders with the opportunity to earn Shares based on continued Employment throughout the Performance Period.  Options provide holders with the right to purchase Shares based on achievement of performance criteria during, or continued Employment throughout, the Performance Period, or a combination thereof.  PSUs, RSUs and Options will be subject to the terms and conditions of the applicable Omnibus Plan, this Plan and the applicable award agreement, and will be issued only to the extent permissible under relevant laws, regulatory restrictions and agreements applicable to the Company.  In addition to the preceding, the Committee may establish another form of Award to the extent it determines appropriate for some or all Participants (as defined below). 

B.         Participants.  The Committee will from time to time determine (1) the officers and key employees of the Company who will receive Awards (the “Participants”) and (2) the number and type of Awards issued to each Participant.  No Award to a Participant shall in any way obligate the Committee to (or imply that the Committee will) provide a similar Award (or any Award) to the Participant in the future.

C.         Status of Awards.  Each PSU and RSU constitutes an unfunded and unsecured promise of AIG to deliver (or cause to be delivered) one (1) Share (or, at the election of AIG, cash equal to the Fair Market Value thereof) as provided in Section 5.B.  Until such delivery, a holder of PSUs or RSUs will have only the rights of a general unsecured creditor and no rights as a shareholder of AIG.  Each Option represents a right to purchase one (1) Share, subject to the terms and conditions set forth in the applicable award agreement.

 

 

 

 

D.         Award Agreements.  Each Award granted under the Plan shall be evidenced by an award agreement that shall contain such provisions and conditions as the Committee deems appropriate; provided that, except as otherwise expressly provided in an award agreement, if there is any conflict between any provision of this Plan and an award agreement, the provisions of this Plan shall govern.  By accepting an Award pursuant to this Plan, a Participant thereby agrees that the Award shall be subject to all of the terms and provisions of this Plan, the applicable Omnibus Plan and the applicable award agreement.  Awards shall be accepted by a Participant signing the applicable award agreement, and returning it to the Company.  Failure by a Participant to do so within ninety (90) days from the date of the award agreement shall give the Company the right to rescind the Award.

4.         Performance Measures for PSUs; Earned PSUs

A.       Target PSUs.  For an Award of PSUs, a  Participant’s award agreement will set forth a target number of PSUs as determined by the Committee (the “Target PSUs”).   

B.         Performance Measures.  The number of PSUs earned for any Performance Period will be based on one or more performance measures established by the Committee in its sole discretion with respect to such Performance Period (collectively, the “Performance Measures”).  For each Performance Measure with respect to a Performance Period, the Committee will establish a Threshold, Target and Maximum achievement level and the weighting afforded to each such Performance Measure.  The Committee may also establish gating metrics that must be satisfied before Performance Measures are applied to assess the number of PSUs that are earned.

C.      Performance Results.  At the end of the Performance Period, the Committee will assess performance against each Performance Measure and determine the Earned Percentage (as detailed below) for each such Performance Measure as follows, subject to the terms and conditions of this Plan and unless determined otherwise by the Committee:

Performance

Earned Percentage

Performance less than Threshold

0%

Performance at Threshold

50%

Performance at Target

100%

Performance at or above Maximum

200%

The Earned Percentage for performance between Threshold and Target and between Target and Maximum will be determined on a straight-line basis, unless determined otherwise by the Committee.  

D.         Earned PSUs.  The number of PSUs earned for the Performance Period (the “Earned PSUs”) will equal the sum of the PSUs earned for each Performance Measure, calculated as follows, unless determined otherwise by the Committee: 

PSUs earned
for a
Performance
Measure

=

Target
PSUs

X

Earned
Percentage

X

Weighting of
Performance
Measure

 

For the avoidance of doubt, the Committee retains discretion to reduce any Earned PSU Award to zero.

 

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5.         Vesting and Delivery

A.         Vesting of Earned Awards.  Except as provided in Section 6, and subject to the other terms and conditions of this Plan and the applicable award agreement, Earned PSUs, RSUs and Options will vest on the date(s) and/or event(s) specified in the applicable award agreement (each, a “Scheduled Vesting Date”).  Unless otherwise set forth in the applicable award agreement, RSUs and Options will be earned based solely on the Participant’s continued Employment through the end of the Performance Period.

B.      Delivery of Earned PSUs and RSUs.  Except as provided in Section 6, AIG will deliver (or cause to be delivered) to the Participant Shares (or, at the election of AIG, cash equal to the Fair Market Value thereof) in respect of any Earned PSUs, RSUs, or portion thereof, as promptly as administratively practicable following the applicable Scheduled Vesting Date.  Subject to Section 6, a Participant must be Employed on the applicable Scheduled Vesting Date in order to be entitled to receive a delivery of any portion of the Earned PSUs and RSUs.

C.        Dividend Equivalents and Dividend Equivalent Units (as both are defined below) for RSUs and PSUs.  In respect of Awards of RSUs or PSUs, unless otherwise set forth in the applicable award agreement, if any cash dividend is declared on Shares with a record date that occurs during the Dividend Equivalent Period (as defined below):

 

(1)        With respect to dividends declared with a record date that occurs after the second quarter of 2021, the Participant will accrue, with respect to each RSU and Earned PSU awarded to the Participant, in accordance with the Plan, a Dividend Equivalent.  

 

The value of the Dividend Equivalents that the Participant will accrue will be equal to (1) the declared cash dividend amount per Share times  (2) the number of RSUs and Earned PSUs (including, unless otherwise determined by AIG, the number of RSUs and PSUs accrued through the issuance of Dividend Equivalent Units previously credited pursuant to Section 5.C(2) below), in accordance with the plan, covered by the Participant's Award at such time.

 

The accrued Dividend Equivalents will vest and be paid in cash at the same time, and subject to the same terms and conditions (including, for PSUs, increase or decrease based on achievement of performance criteria in accordance with Section 4 above) as the RSUs or Earned PSUs on which such Dividend Equivalent accrued.

 

(2)        With respect to dividends declared with a record date that occurs on or after the date an Award is granted through the second quarter of 2021, the Participant will accrue, with respect to each RSU and Earned PSU awarded to the Participant, in accordance with the Plan, a Dividend Equivalent Unit in the form of additional RSUs and PSUs.

 

The number of Dividend Equivalent Units that the Participant will accrue will be equal to (1) the cash dividend amount per Share times  (2) the number of RSUs and Earned PSUs, in accordance with the Plan, outstanding with respect to a Participant's Award (including both RSUs and PSUs awarded at the grant date of the Award, and RSUs and PSUs accrued through the issuance of prior Dividend Equivalent Units) divided  by the Fair Market Value of one Share on the applicable dividend record date. 

 

Dividend Equivalent Units will vest and be settled in Shares or the cash value of such Shares (at the discretion of the Company), at the same time, and subject to the same terms and conditions (including, for PSUs, increase or decrease based on achievement of performance criteria in accordance with Section 4 above) as the RSUs or PSUs on which such Dividend Equivalent Units accrued.

 

(3)        Definitions

 

“Dividend Equivalent” is the unfunded and unsecured promise of AIG to pay cash at the time set forth in paragraph 5.C(1) above with respect to amounts that accrued with respect to the Dividend Equivalent Period from cash dividends that were declared for AIG shareholders with respect to each RSU and Earned PSU awarded to the Participant in accordance with the Plan.

 

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“Dividend Equivalent Unit” is the unfunded and unsecured promise of AIG to settle, at the time set forth in paragraph 5.C(2) above, in Shares or the cash value of such Shares (rounded down to the nearest whole number of Shares) the additional RSUs and PSUs that accrued with respect to the Dividend Equivalent Period from cash dividends that were declared for AIG shareholders with respect to each RSU and Earned PSU awarded to the Participant, in accordance with the Plan.

 

“Dividend Equivalent Period” means the period commencing on the date on which PSUs or RSUs were awarded to the Participant and ending on the last day on which Shares (or cash) are delivered to the Participant with respect to the RSUs or Earned PSUs.   

 

D.         Exercise and Expiration of Options.  Vested Options may be exercised in accordance with procedures set forth in Section 2.3.5 of the applicable Omnibus Plan, including procedures established by the Company.  Stock Options that are not vested may not be exercised.  Pursuant to Section 2.3.4 of the applicable Omnibus Plan, in no event will any Option be exercisable after the expiration of ten (10) years from the date on which the Option is granted (but the applicable award agreement may provide for an earlier expiration date).

6.         Vesting and Payout Upon Termination of Employment and Corporate Events

Except as otherwise provided in the applicable award agreement:

A.         Termination Generally.  Except as otherwise provided in this Section 6, if a Participant’s Employment is Terminated for any reason, then (i) any unvested Awards, or parts thereof, shall immediately terminate and be forfeited, and (ii) any vested Options will remain exercisable as set forth in the applicable award agreement (but in no case later than the expiration date for such Options specified in the applicable award agreement), provided  that  in the case of a Participant’s Termination for Cause, all Options (whether vested or unvested) will immediately terminate and be forfeited.

B.         Involuntary Termination, Retirement or Disability.  Subject to Section 6.F, in the case of a Participant’s involuntary Termination without Cause, Retirement or Disability:

(1)        the Participant’s outstanding PSUs and RSUs will immediately vest and the Shares (or cash) corresponding to the Earned PSUs (based on the performance for the whole Performance Period) or RSUs, as applicable, will be delivered to the Participant on the dates that the applicable Award would otherwise have been delivered if the Participant had continued to remain Employed; and

(2)        (i) any vested Options will remain exercisable, (ii) any unvested time-vesting Options will be deemed to have attained their respective time-vesting requirements, and (iii) any unvested performance-vesting Options will (a) be deemed to have attained their respective time-vesting requirements, if any, and (b) to the extent any performance-vesting requirements have not been achieved, continue to be eligible to vest in accordance with their respective performance-vesting terms.  In the event of an Involuntary Termination or Disability, the Options that are or become vested pursuant to this paragraph (2) shall remain exercisable as set forth in the applicable award agreement, provided, however, in the event of a Retirement, with respect to Retirements on and after January 1, 2021, all Options that are or become vested pursuant to this paragraph (2) (including, but not limited to, Options granted in calendar years 2017 - 2020, notwithstanding any language to the contrary in the award agreements and Schedule A of such Options) will remain exercisable for the remainder of the term of such Options set forth in the applicable award agreement for such Options.  No Options will remain exercisable beyond the expiration date for such Options as specified in the applicable award agreement.

For the avoidance of doubt, an involuntary Termination without Cause as provided in this Section 6.B shall not include a resignation that a Participant may assert was a constructive discharge.

 

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C.         Death. 

(1)        PSUs.  For outstanding Awards of PSUs, (i) in the case of a Participant’s death during a Performance Period or following a Performance Period but prior to the Committee’s adjudication of performance under Section 4.C, the Participant’s PSU Award will immediately vest and the Shares (or cash) corresponding to the Target PSUs will be delivered to the Participant’s estate as soon as practicable but in no event later than the end of the calendar year or, if later, within two (2) and one-half (1/2) months following the date of death and (ii) in the case of a Participant’s death following the Committee’s adjudication of performance for a Performance Period under Section 4.C, the Participant’s PSU Award will immediately vest and the Shares (or cash) corresponding to the Earned PSUs (based on performance for the whole Performance Period) will be delivered to the Participant’s estate as soon as practicable but in no event later than the end of the calendar year or, if later, within two (2) and one-half (1/2) months following the date of death.

(2)        RSUs.  For outstanding Awards of RSUs, in the case of a Participant’s death, the Participant’s outstanding unvested RSUs will immediately vest and the Shares (or cash) corresponding to the RSUs will be delivered to the Participant’s estate as soon as practicable but in no event later than the end of the calendar year or, if later, within two (2) and one-half (1/2) months following the date of death.

(3)        Options.  For outstanding Awards of Options, in the case of a Participant’s death, (i) any vested Options will remain exercisable as set forth in the applicable award agreement, (ii) any unvested time-vesting Options will be deemed to have attained their respective time-vesting requirements and remain exercisable as set forth in the applicable award agreement and (iii) any unvested performance-vesting Options will (a) be deemed to have attained their respective time-vesting requirements, if any, (b) to the extent any performance-vesting requirements have not been achieved, continue to be eligible to vest in accordance with their respective performance-vesting terms and (c) be exercisable as set forth in the applicable award agreement; provided that no Options will remain exercisable beyond the expiration date for such Options as specified in the applicable award agreement.

D.         Change in Control. 

(1)       PSUs.  For outstanding Awards of PSUs, in the case of a Change in Control during a Performance Period and the Participant’s involuntary Termination without Cause or resignation for Good Reason within twenty-four (24) months following such Change in Control, the Participant shall receive Shares (or cash) corresponding to the Target PSUs, unless the Committee determines to use actual performance through the date of the Change in Control, and such Shares (or cash) will immediately vest.  In the case of a Change in Control following a Performance Period and the Participant’s involuntary Termination without Cause or resignation for Good Reason within twenty-four (24) months following such Change in Control, the Participant shall receive Shares (or cash) corresponding to the Earned PSUs (based on performance for the whole Performance Period), and such Shares (or cash) will immediately vest.  Any such amounts representing vested PSUs will be delivered by the end of the calendar year or, if later, within two (2) and one-half (1/2) months following the Participant’s separation from service, provided that no delivery will be delayed as a result of the Change in Control. 

(2)       RSUs.  For outstanding Awards of RSUs, in the case of a Change in Control and the Participant’s involuntary Termination without Cause or resignation for Good Reason within twenty-four (24) months following such Change in Control, a Participant’s outstanding unvested RSUs will immediately vest.  Any such amounts representing vested RSUs will be delivered by the end of the calendar year or, if later, within two and one-half months following the Participant’s separation from service, provided that no delivery will be delayed as a result of the Change in Control.

 

5 

 

(3)     Options.  For outstanding Awards of performance-vesting Options, (a) in the case of a Change in Control during the applicable Performance Period and the Participant’s involuntary Termination without Cause or resignation for Good Reason within twenty-four (24) months following such Change in Control, any unvested performance-vesting Options will immediately vest based on target performance, unless the Committee determines to use actual performance through the date of the Change in Control, and (b) in the case of a Change in Control following an applicable Performance Period and the Participant’s involuntary Termination without Cause or resignation for Good Reason within twenty-four (24) months following such Change in Control, any performance-vesting Stock Options will immediately vest based on actual performance for such period.  For outstanding time-vesting Options, in the case of a Change in Control and the Participant’s involuntary Termination without Cause or resignation for Good Reason within twenty-four (24) months following such Change in Control, any unvested time-vesting Options will immediately vest.  All Options that vest pursuant to this paragraph will remain exercisable for the remainder of the term of such Options as set forth in the applicable award agreement for such Options.  No Options will remain exercisable beyond the expiration date for such Options as specified in the applicable award agreement.

E.     Election to Accelerate or Delay Delivery.   The Committee may, in its sole discretion, determine to accelerate or defer delivery of any Shares (or cash) underlying the Awards granted under the Plan or permit a Participant to elect to accelerate or defer delivery of any such Shares (or cash), in each case in a manner that conforms to the requirements of Section 409A and is consistent with the provisions of Section 8.E. 

F.       Release of Claims.  In the case of a Participant’s involuntary Termination without Cause, resignation for Good Reason or Retirement, as a condition to (i) with respect to Options, the vesting of any Options pursuant to this Plan or the applicable award agreement, and (ii) with respect to all other Awards, receiving delivery of any Shares (or cash) under such Awards, following such event, the Company will require the Participant to execute a release substantially in the form attached as Annex B (the “Release”), subject to any provisions that the Senior HR Attorney and the Senior Compensation Executive or their designee(s) may amend or add to the release in order to impose restrictive covenants requiring (x) confidentiality of information, non-disparagement and non-solicitation of Company employees for twelve (12) months following the Termination, and (y) in the case of an involuntary Termination without Cause or resignation for Good Reason of any Participant who is eligible to participate in the American International Group, Inc. 2012 Executive Severance Plan (as may be amended from time to time, and together with any successor plan, the “ESP”), or Retirement, non-competition for such periods as are generally specified herein.  The Release for any Participant who is eligible to participate in the ESP shall be in the form of the release required by the ESP at the time of the Termination (including any non-competition covenants), modified to cover the vesting of any Options and payment of any Shares (or cash) under any other Awards under this Plan as a result of the Participant’s involuntary Termination without Cause or resignation for Good Reason.  Effective for Retirements on or after December 1, 2015, the Release will require non-competition for no less than six (6) months following the Retirement in order for the Participant to (i) with respect to Options, vest in any Options, and (ii), with respect to all other Awards, receive any Shares (or cash) under such Awards.  The Release or the ESP form of release must be executed by the Participant and become irrevocable, in the case of a Participant’s involuntary Termination without Cause, resignation for Good Reason or Retirement, prior to or during the calendar year of the date on which (i) with respect to Options, such Options vest, and (ii) with respect to all other Awards, a delivery of Shares (or cash) with respect to the Award is scheduled to be delivered pursuant to Section 5.B; provided that if the Release is executed after such time, (i) with respect to Options, any Options that would have vested during such period will be forfeited, and (ii) with respect to all other Awards, the delivery of Shares (or cash) with respect to such calendar year will be forfeited; provided, further, that if the local laws of a country or non-U.S. jurisdiction in which Participant performs services render invalid or unenforceable all or a portion of the Release (subject to additional provisions as described above), the Senior HR Attorney and the Senior Compensation Executive or their designee(s) shall have the discretion to create a release that incorporates as much of the Release as possible while also complying with such local laws.

 

6 

 

7.         Administration of this Plan

A.         General.  This Plan shall be administered by the Committee and the person or persons designated by the Committee to administer the Plan from time to time.  Actions of the Committee may be taken by the vote of a majority of its members.  The Committee may allocate among its members and delegate to any person who is not a member of the Committee any of its administrative responsibilities.  The Committee will have the power to interpret this Plan, to make regulations for carrying out its purposes and to make all other determinations in connection with its administration (including, without limitation, whether a Participant has become subject to Disability), all of which will, unless otherwise determined by the Committee, be final, binding and conclusive.  The Committee may, in its sole discretion, reinstate any Awards made under this Plan that have been terminated and forfeited because of a Participant’s Termination, if the Participant complies with any covenants, agreements or conditions that the Committee may impose; provided,  however, that any delivery of Shares (or cash) under such reinstated Awards will not be made until the scheduled times set forth in this Plan.

B.         Non-Uniform Determinations.  The Committee’s determinations under this Plan need not be uniform and may be made by it selectively with respect to persons who receive, or are eligible to receive, Awards (whether or not such persons are similarly situated).  Without limiting the generality of the foregoing, the Committee will be entitled, among other things, to make non-uniform and selective determinations as to the persons to become Participants.

C.         Determination of Employment.  The Committee, with respect to any Participant under the purview of the Committee, and the Senior Compensation Executive, with respect to any other Participant, will have the right to determine the commencement or Termination date of a Participant’s Employment with the Company solely for purposes of this Plan, separate and apart from any determination as may be made by the Company with respect to the Participants’ employment.

D.         Amendments.  The Committee will have the power to amend this Plan and any Performance Measures established pursuant to Section 4.B in any manner and at any time, including in a manner adverse to the rights of the Participants; provided, however, that in the event that a Plan amendment is adopted or effective on or within twenty-four (24) months following a Change in Control, then such amendment shall be invalid and ineffective with respect to each Participant, in the absence of his or her written consent, if the amendment is adverse to the Participant.  The Committee shall also have the power, in its sole discretion, to reduce the amount of any RSUs, Target PSUs, Earned PSUs or Options at any time including, for the avoidance of doubt, after the relevant Performance Period has ended.  Notwithstanding the foregoing, the Committee’s rights and powers to amend the Plan shall be delegated to the Senior Compensation Executive who shall have the right to amend the Plan with respect to (1) amendments required by relevant law, regulation or ruling, (2) amendments that are not expected to have a material financial impact on the Company, (3) amendments that can reasonably be characterized as technical or ministerial in nature, or (4) amendments that have previously been approved in concept by the Committee.  Notwithstanding the foregoing delegation, the Senior Compensation Executive shall not have the power to make an amendment to the Plan that could reasonably be expected to result in a termination of the Plan or a change in the structure or the powers, duties or responsibilities of the Committee, unless such amendment is approved or ratified by the Committee.

 

7 

 

E.         No Liability.  No member of the Board of Directors of AIG (the “Board”) or any employee of the Company performing services with respect to the Plan (each, a “Covered Person”) will have any liability to any person (including any Participant) for any action taken or omitted to be taken or any determination made, in each case, in good faith with respect to this Plan or any Participant’s participation in it.  Each Covered Person will be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense (including attorneys’ fees) that may be imposed upon or incurred by such Covered Person in connection with or resulting from any action, suit or proceeding to which such Covered Person may be a party or in which such Covered Person may be involved by reason of any action taken or omitted to be taken under this Plan and against and from any and all amounts paid or Shares delivered by such Covered Person, with the Company’s approval, in settlement thereof, or paid or delivered by such Covered Person in satisfaction of any judgment in any such action, suit or proceeding against such Covered Person, provided  that  the Company will have the right, at its own expense, to assume and defend any such action, suit or proceeding and, once the Company gives notice of its intent to assume the defense, the Company will have sole control over such defense with counsel of the Company’s choice.  To the extent any taxable expense reimbursement under this paragraph is subject to Section 409A, (1) the amount thereof eligible in one taxable year shall not affect the amount eligible in any other taxable year; (2) in no event shall any expenses be reimbursed after the last day of the taxable year following the taxable year in which the Covered Person incurred such expenses; and (3) in no event shall any right to reimbursement be subject to liquidation or exchange for another benefit.  The foregoing right of indemnification will not be available to a Covered Person to the extent that a court of competent jurisdiction in a final judgment or other final adjudication, in either case, not subject to further appeal, determines that the acts or omissions of such Covered Person giving rise to the indemnification claim resulted from such Covered Person’s bad faith, fraud or willful misconduct.  The foregoing right of indemnification will not be exclusive of any other rights of indemnification to which Covered Persons may be entitled under AIG’s Amended and Restated Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any other power that the Company may have to indemnify such persons or hold them harmless.

F.     Clawback/Repayment.  Notwithstanding anything to the contrary herein, Awards and any payments or deliveries under this Plan will be subject to forfeiture and/or repayment to the extent provided in (1) the AIG Clawback Policy, as in effect from time to time and (2) other agreements executed by a Participant.

8.         General Rules

A.        No Funding.   The Company will be under no obligation to fund or set aside amounts to pay obligations under this Plan.  A Participant will have no rights to any Awards or other amounts under this Plan other than as a general unsecured creditor of the Company.

B.         Tax Withholding.  The delivery of Shares (or cash) or exercise of any Awards under this Plan is conditioned on a Participant’s satisfaction of any applicable withholding taxes in accordance with, as applicable, Section 4.2 of the 2013 Omnibus Plan and Section 3.2 of the 2021 Omnibus Plan, as amended from time to time, or such similar provision of any successor stock incentive plan.

C.         No Rights to Other Payments.  The provisions of this Plan provide no right or eligibility to a Participant to any other payouts from AIG or its subsidiaries under any other alternative plans, schemes, arrangements or contracts AIG may have with any employee or group of employees of AIG or its subsidiaries.

D.          No Effect on Benefits.  Grants or the exercise of any Awards and the delivery of Shares (or cash) under this Plan will constitute a special discretionary incentive payment to the Participants and will not be required to be taken into account in computing the amount of salary or compensation of the Participants for the purpose of determining any contributions to or any benefits under any pension, retirement, profit-sharing, bonus, life insurance, severance or other benefit plan of AIG or any of its subsidiaries or under any agreement with the Participant, unless AIG or the subsidiary with which the Participant is Employed specifically provides otherwise.

E.         Section 409A. 

(1)        Awards made under the Plan are intended to be “deferred compensation” subject to Section 409A, and this Plan is intended to, and shall be interpreted, administered and construed to, comply with Section 409A.  The Committee will have full authority to give effect to the intent of this Section 8.E. 

 

8 

 

(2)        If any payment or delivery to be made under any Award (or any other payment or delivery under this Plan) would be subject to the limitations in Section 409A(a)(2)(b) of the Code, the payment or delivery will be delayed until six (6) months after the Participant’s separation from service (or earlier death) in accordance with the requirements of Section 409A. 

(3)     Each payment or delivery in respect of any Award will be treated as a separate payment or delivery for purposes of Section 409A.

F.   Severability.  If any of the provisions of this Plan is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision will be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability) and the remaining provisions will not be affected thereby; provided  that  if any of such provisions is finally held to be invalid, illegal or unenforceable because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision will be deemed to be modified to the minimum extent necessary to modify such scope in order to make such provision enforceable hereunder.

G.  Entire Agreement.  This Plan contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, promises, covenants, arrangements, communications, representations and warranties between them, whether written or oral with respect to the subject matter hereof. 

H.   Waiver of Claims.  Each Participant recognizes and agrees that prior to being selected by the Committee to receive an Award he or she has no right to any benefits under this Plan.  Accordingly, in consideration of the Participant’s receipt of any Award hereunder, he or she expressly waives any right to contest the amount of any Award, the terms of this Plan, any determination, action or omission hereunder by the Committee or the Company or any amendment to this Plan.

I.    No Third Party Beneficiaries.  Except as expressly provided herein, this Plan will not confer on any person other than the Company and the Participant any rights or remedies hereunder.  The exculpation and indemnification provisions of Section 7.E will inure to the benefit of a Covered Person’s estate and beneficiaries and legatees.

J.   Successor Entity; AIG’s Assigns.  Unless otherwise provided in the applicable award agreement and except as otherwise determined by the Committee, in the event of a merger, consolidation, mandatory share exchange or other similar business combination of AIG with or into any other entity (“Successor Entity”) or any transaction in which another person or entity acquires all of the issued and outstanding Common Stock of AIG, or all or substantially all of the assets of AIG, outstanding Awards may be assumed or a substantially equivalent award may be substituted by such Successor Entity or a parent or subsidiary of such Successor Entity.  The terms of this Plan will be binding and inure to the benefit of AIG and its successors and assigns.

K.  Nonassignability.  No Award (or any rights and obligations thereunder) granted to any person under the Plan may be sold, exchanged, transferred, assigned, pledged, hypothecated or otherwise disposed of or hedged, in any manner (including through the use of any cash-settled instrument), whether voluntarily or involuntarily and whether by operation of law or otherwise, other than by will or by the laws of descent and distribution, except as may be otherwise provided in the award agreement.  Any sale, exchange, transfer, assignment, pledge, hypothecation, or other disposition in violation of the provisions of this Section 8.K will be null and void and any Award which is hedged in any manner will immediately be forfeited.  All of the terms and conditions of this Plan and the award agreements will be binding upon any permitted successors and assigns.

L.   Right to Discharge.  Nothing contained in this Plan or in any Award will confer on any Participant any right to be continued in the employ of AIG or any of its subsidiaries or to participate in any future plans.

M.  Consent.  If the Committee at any time determines that any consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any Award or the delivery of any Shares under this Plan, or the taking of any other action thereunder (each such action, a “plan action”), then such plan action will not be taken, in whole or in part, unless and until such consent will have been effected or obtained to the full satisfaction of the Committee; provided  that  if such consent has not been so effected or obtained as of the latest date provided by this Plan for payment of such amount or delivery and further delay is not permitted in accordance with the requirements of Section 409A, such amount will be forfeited and terminate notwithstanding any prior earning or vesting. 

 

9 

 

The term “consent” as used in this paragraph with respect to any plan action includes (1) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or under any federal, state, or local law, or law, rule or regulation of a jurisdiction outside the United States, (2) any other matter, which the Committee may deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made, (3) any and all other consents, clearances and approvals in respect of a plan action by any governmental or other regulatory body or any stock exchange or self-regulatory agency and (4) any and all consents required by the Committee.

N.  Awards Subject to an AIG Section 162(m) Plan.  With respect to any awards hereunder that were granted pursuant to written binding agreements in effect on November 2, 2017 and that were granted during a period when this Plan functioned as a subplan of a Section 162(m) compliant performance incentive award plan adopted by AIG (the “AIG Section 162(m) Plan”) that was proposed and approved by AIG stockholders in accordance with Section 162(m)(4)(C) of the Code and related Treasury Regulations as they existed prior to the adoption of the Tax Cuts and Jobs Act of 2017 (Public Law 115-97) (the “Prior Rules”),  this Plan will operate whereby the designated performance-based compensation amounts  (as defined under the Prior Rules)  payable under such awards can be paid and deducted in full or in part in accordance with the Prior Rules.

  

O.  No Liability With Respect to Tax Qualification or Adverse Tax Treatment.  Notwithstanding anything to the contrary contained herein, in no event shall the Company be liable to a Participant on account of the failure of any Award or amount payable under this Plan to (1) qualify for favorable United States or foreign tax treatment or (2) avoid adverse tax treatment under United States or foreign law, including, without limitation, Section 409A.

9.         Disputes

A.   Governing Law.  This Plan will be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflict of laws.  The Plan shall also be subject to all applicable non-U.S. laws as to Participants located outside of the United States.  In the event that any provision of this Plan is not permitted by the local laws of a country or jurisdiction in which a Participant performs services, such local law shall supersede that provision of this Plan with respect to that Participant.  The benefits to which a Participant would otherwise be entitled under this Plan may be adjusted or limited to the extent that the Senior HR Attorney and the Senior Compensation Executive or their designee(s) determine is necessary or appropriate in light of applicable law or local practice.

B.  Arbitration.  Subject to the provisions of this Section 9, any dispute, controversy or claim between the Company and a Participant, arising out of or relating to or concerning this Plan or any Award, will be finally settled by arbitration.  Participants who are subject to an Employment Dispute Resolution Program (“EDR Program”) maintained by AIG or any affiliated company of AIG, will resolve such dispute, controversy or claim in accordance with the operative terms and conditions of such EDR Program, and to the extent applicable, the employment arbitration rules of the American Arbitration Association (“AAA”).  Participants who are not subject to an EDR Program shall arbitrate their dispute, controversy or claim in New York City before, and in accordance with the employment arbitration rules of the AAA, without reference to the operative terms and conditions of any EDR Program.  Prior to arbitration, all claims maintained by a Participant must first be submitted to the Committee in accordance with claims procedures determined by the Committee.  Either the Company or a Participant may seek injunctive relief from the arbitrator.  Notwithstanding any other provision in this Plan, the Company or a Participant may apply to a court with jurisdiction over them for temporary, preliminary or emergency injunctive relief that, under the legal and equitable standards applicable to the granting of such relief, is necessary to preserve the rights of that party pending the arbitrator’s modification of any such injunction or determination of the merits of the dispute, controversy or claim.

C.  Jurisdiction.  The Company and each Participant hereby irrevocably submit to the exclusive jurisdiction of a state or federal court of appropriate jurisdiction located in the Borough of Manhattan, the City of New York over any suit, action or proceeding arising out of or relating to or concerning this Plan or any Award that is not otherwise arbitrated or resolved according to Section 9.B.  The Company and each Participant acknowledge that the forum designated by this section has a reasonable relation to this Plan and to such Participant’s relationship with the Company, that the agreement as to forum is independent of the law that may be applied in the action, suit or proceeding and that such forum shall apply even if the forum may under applicable law choose to apply non-forum law.

10 

 

D.  Change in Control.  On or following a Change in Control, any arbitration referred to in Section 9.B or any court action referred to in Section 9.C by a Participant to enforce the Participant’s rights under the Plan shall be subject to a de novo standard of review, and the Participant shall be reimbursed for reasonable attorneys’ fees and costs incurred in seeking to enforce his or her rights under the Plan to the extent he or she prevails as to the material issues in such dispute.  The reimbursement of attorneys’ fees shall be made promptly following delivery of an invoice therefor.

E.   Waiver.  The Company and each Participant waive, to the fullest extent permitted by applicable law, any objection which the Company and such Participant now or hereafter may have to personal jurisdiction or to the laying of venue of any such suit, action or proceeding in any court referred to in Section 9.C.  The Company and each Participant undertake not to commence any action, suit or proceeding arising out of or relating to or concerning this Plan or any Award in any forum other than a forum described in Section 9.C.  Notwithstanding the foregoing, nothing herein shall preclude the Company from bringing any action, suit or proceeding in any other court for the purpose of enforcing the provisions of this Section 9.  The Company and each Participant agree that, to the fullest extent permitted by applicable law, a final and non-appealable judgment in any such suit, action or proceeding in any such court shall be conclusive and binding upon the Participant and the Company.

F.  Service of Process.  Each Participant irrevocably appoints the Secretary of AIG at 80 Pine Street, New York, New York 10005, U.S.A., or effective as of May 1, 2021, 1271 Avenue of the Americas, 11th Floor, New York, NY 10020, as his or her agent for service of process in connection with any action, suit or proceeding arising out of or relating to or concerning this Plan or any Award that is not otherwise arbitrated or resolved according to Section 9.B.  The Secretary will promptly advise the Participant of any such service of process.

G.  Confidentiality.  Each Participant must keep confidential any information concerning any grant or Award made under this Plan and any dispute, controversy or claim relating to this Plan, except that (i) a Participant may disclose information concerning a dispute or claim to the court that is considering such dispute or to such Participant’s legal counsel (provided  that  such counsel agrees not to disclose any such information other than as necessary to the prosecution or defense of the dispute) or (ii) a Participant may disclose information regarding an Award to the Participant’s personal lawyer or tax accountant, provided  that  such individuals agree to keep the information confidential.  Nothing herein shall prevent the Participant from making or publishing any truthful statement (1) when required by law, subpoena,  court order, or at the request of an administrative or regulatory agency or legislature, (2) in the course of any legal, arbitral, administrative, legislative or or regulatory proceeding, (3) to any governmental authority, administrative or regulatory agency, legislative body, or self-regulatory organization, (4) in connection with any investigation by the Company, or (5) where a prohibition or limitation on such communication is unlawful; provided, however, that with respect to the subject matter of this Section 9(G), the terms of a Participant’s award agreement shall govern.    

10.       Term of Plan

The Plan was first effective as of January 1, 2017 and will continue until suspended or terminated by the Committee in its sole discretion; provided, however, that the existence of the Plan at any time or from time to time does not guarantee or imply the payment of any Awards hereunder, or the establishment of any future plans or the continuation of this Plan.  Any termination of this Plan will be done in a manner that the Committee determines complies with Section 409A. 

 

11 

 

Annex A

Glossary of Terms

            “Cause” means (1) a Participant’s conviction, whether following trial or by plea of guilty or nolo  contendere  (or similar plea), in a criminal proceeding (A) on a misdemeanor charge involving fraud, false statements or misleading omissions, wrongful taking, embezzlement, bribery, forgery, counterfeiting or extortion, or (B) on a felony charge or (C) on an equivalent charge to those in clauses (A) and (B) in jurisdictions which do not use those designations; (2) a Participant’s engagement in any conduct which constitutes an employment disqualification under applicable law (including statutory disqualification as defined under the Securities Exchange Act of 1934); (3) a Participant’s violation of any securities or commodities laws, any rules or regulations issued pursuant to such laws, or the rules and regulations of any securities or commodities exchange or association of which the Company or any of its subsidiaries or affiliates is a member; or (4) a Participant’s material violation of the Company’s codes or conduct or any other AIG policy as in effect from time to time.  The determination as to whether “Cause” has occurred shall be made by the Committee, with respect to any Participant under the purview of the Committee, or the Senior Compensation Executive, with respect to any other Participant, in each case, in its or his or her sole discretion.  The Committee or Senior Compensation Executive, as applicable, shall also have the authority in its sole discretion to waive the consequences of the existence or occurrence of any of the events, acts or omissions constituting “Cause.” 

            “Change in Control” means the occurrence of any of the following events:

(1)  individuals who, on February 16, 2021, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to February 16, 2021, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of AIG’s proxy statement in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of AIG as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(2)  Any “person” (as such term is defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), is or becomes a “beneficial owner” (as defined in Rule 13d‑3 under the Exchange Act), directly or indirectly, of securities of AIG representing fifty percent (50%) or more of the combined voting power of AIG’s then outstanding securities eligible to vote for the election of the Board (“AIG Voting Securities”); provided, however, that the event described in this paragraph (2) shall not be deemed to be a Change in Control by virtue of an acquisition of AIG Voting Securities:  (A) by AIG or any subsidiary of AIG (B) by any employee benefit plan (or related trust) sponsored or maintained by AIG or any subsidiary of AIG or (C) by any underwriter temporarily holding securities pursuant to an offering of such securities;

(3)  The consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving AIG (a “Business Combination”) that results in any person (other than the United States Department of Treasury) becoming the beneficial owner, directly or indirectly, of fifty percent (50%) or more of the total voting power of the outstanding voting securities eligible to elect directors of the entity resulting from such Business Combination;

(4)  The consummation of a sale or all or substantially all of AIG’s assets (other than to an affiliate of AIG); or

(5)  AIG’s stockholders approve a plan of complete liquidation or dissolution of AIG.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because (A) any person holds or acquires beneficial ownership of more than fifty percent (50%) of the AIG Voting Securities as a result of an “AIG share repurchase program” or other acquisition of AIG Voting Securities by AIG which reduces the total number of AIG Voting Securities outstanding; provided that if after such acquisition by AIG such person becomes the beneficial owner of additional AIG Voting Securities that increases the percentage of outstanding AIG Voting Securities beneficially owned by such person, a Change in Control shall then occur or (B) the consummation of a sale of all or substantially all (or a subset) of the assets and/or operations of the Life and Retirement business (or any similar transaction).

A-1 

 

             “Disability” means that a Participant, who after receiving short term disability income replacement payments for six (6) months, (i) is determined to be disabled in accordance with the Company’s long term disability plan in which employees of the Company are generally able to participate, if one is in effect at such time, to the extent such disability complies with 26 C.F.R. § 1.409A-3(i)4(i)(B), or (ii) to the extent such Participant is not participating in the Company’s long term disability plan, or no such long term disability plan exists, is determined to have medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months as determined by, as applicable, the Company’s long term disability insurer or the department or vendor directed by the Company to determine eligibility for unpaid medical leave.

            “Employed” and “Employment” mean (a) actively performing services for the Company, (b) being on a Company-approved leave of absence, whether paid or unpaid, or (c) receiving long term disability benefits, in each case while in good standing with the Company.

            “Retirement” for a Participant means voluntary Termination initiated by the Participant (while such Participant is in good standing with the Company) (i) on or after age sixty (60) with five (5) years of service or (ii) on or after age fifty-five (55) with ten (10) years of service.

“Good Reason” means, following a Change in Control, without a Participant’s written consent, (i) a reduction of more than twenty percent (20%) in a Participant’s annual target direct compensation (including annual base salary, short-term incentive opportunity and long-term incentive opportunity); provided that  such reduction will not constitute Good Reason if it results from a Board-approved program generally applicable to similarly-situated employees; (ii) a material diminution in the Participant’s authority, duties or responsibilities; provided that  a change in the Participant’s reporting relationship will not constitute Good Reason unless it affects a Participant who the Company has classified as an executive vice president or above; or (ii) a relocation of the office at which the Participant performs his or her services to a location that increases his or her one-way commute by more than fifty (50) miles.  Notwithstanding the foregoing, a termination for Good Reason shall not have occurred unless (a) the Participant gives written notice to the Company of termination of employment within thirty (30) days after the Participant first becomes aware of the occurrence of the circumstances constituting Good Reason, specifying in detail the circumstances constituting Good Reason, (b) the Company has failed within thirty (30) days after receipt of such notice to cure the circumstances constituting Good Reason, and (c) (A) in the case of any Participant who not is eligible to participate in the ESP, the Participant’s “separation from service” (within the meaning of Code section 409A) occurs no later than thirty (30) days after the end of the Company’s cure period, and (B) in the case of any Participant who is eligible to participate in the ESP, the Participant’s “separation from service” (within the meaning of Code section 409A) occurs no later than two (2) years following the initial existence of the circumstances giving rise to Good Reason or such other period specified in the ESP for this purpose.

“Senior Compensation Executive” means the Company’s most senior executive whose responsibility it is to oversee the Corporate Compensation Department.  In the event that no individual holds such position, “Senior Compensation Executive” will instead refer to the Company’s most senior executive whose responsibility it is to oversee the global Human Resources Department.

“Senior HR Attorney” means the Company’s most senior attorney whose responsibility it is to oversee Human Resource/employment matters.

“Termination” or “Terminate,” with respect to a Participant, means the termination of the Participant’s Employment.

 

A-2 

 

Attachment I

Annex B

Form of Release Referred to in Section 6.F of the Plan.

NOT personalized to each Participant.

(1)        [Employee Name] (“Employee”), for good and sufficient consideration, the receipt of which is hereby acknowledged, hereby waives and forever releases and discharges any and all claims of any kind Employee may have against American International Group, Inc., its affiliate or subsidiary companies (“AIG”), or any officer, director or employee of, or any benefit plan sponsored by, any such company (collectively, the “Released Parties”) which arise from Employee’s employment with any of the Released Parties or the termination of Employee’s employment with any of the Released Parties. [Specifically, but without limiting that release, Employee hereby waives any rights or claims Employee might have pursuant to the Age Discrimination in Employment Act of 1967, as amended (the “Act”) and under the laws of any and all jurisdictions, including, without limitation, the United States. Employee recognizes that Employee is not waiving any rights or claims under the Act that may arise after the date that Employee executes this Release.] Nothing herein modifies or affects any vested rights that Employee may have under the [American International Group, Inc. Retirement Plan, or the American International Group, Inc. Incentive Savings Plan] [and other plans applicable to Employee]; nor does this Release confer any such rights, which are governed by the terms of the respective plans (and any agreements under such plans).

(2)        Employee acknowledges and agrees that Employee has complied with and will continue to comply with the non-disparagement, non-solicitation and confidentiality provisions set forth in the Employee’s award agreement pursuant to Section 3.D of the Plan, [a copy of which is attached hereto as Exhibit A], [for Retirements; and further agrees that during the period commencing on the date of the Employee’s [Retirement] and ending on the [for Retirements, 6-month] anniversary of such date, the Employee shall not, directly or indirectly:

(a)        Engage in any “Competitive Business” (defined below) for the Employee’s own account;

(b)        Enter the employ of, or render any services to, any person engaged in any Competitive Business;

(c)     Acquire a financial interest in, or otherwise become actively involved with, any person engaged in any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or

(d)        Interfere with business relationships between AIG and customers or suppliers of, or consultants to AIG.

(e)    For purposes of this Section 2, a “Competitive Business” means, as of any date, including during the  Restricted Period, any person or entity (including any joint venture, partnership, firm, corporation or limited liability company) that engages in or proposes to engage in the following activities in any geographical area in which AIG does such business:

(i)     The property and casualty insurance business,  including commercial insurance,  business   insurance, personal insurance and specialty insurance;

(ii)        The life and accident and health insurance business;

(iii)       The underwriting, reinsurance, marketing or sale of (y) any form of insurance of any kind that AIG as of such date does, or proposes to, underwrite, reinsure, market or sell (any such form of insurance, an “AIG Insurance Product”), or (z) any other form of insurance that is marketed or sold in competition with any AIG Insurance Product;

(iv)       The investment and financial services business, including retirement services and mutual fund or brokerage services; or

B-1 

 

(v)     Any other business that as of such date is a direct and material competitor of one of AIG’s businesses.

(3)     Employee further agrees that AIG’s remedies at law for a breach or threatened breach of any of the non-disparagement, non-solicitation and confidentiality provisions in the Employee’s award agreement [and for the non-competition covenant set forth above] would be inadequate. In recognition of this fact, the Employee agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, AIG, without posting any bond, shall be entitled to obtain equitable relief from a court of competent jurisdiction in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available;

(4)        [Employee acknowledges and understands that Employee is hereby being advised to consult with an attorney prior to executing this Release. Employee also acknowledges and understands that Employee has [twenty-one (21)] days to consider the terms of this Release before signing it. However, in no event may Employee sign this Release before Employee’s termination date.]

(5)        [Upon the signing of this Release by Employee, Employee understands that Employee shall have a period of seven (7) days following Employee’s signing of this Release in which Employee may revoke this Release. Employee understands that this Release shall not become effective or enforceable until this seven (7) day revocation period has expired, and that neither the Released Parties nor any other person has any obligation [pursuant to the American International Group, Inc. 2013 Long Term Incentive Plan] until eight (8) days have passed since Employee’s signing of this Release without Employee having revoked this Release. If Employee revokes this Release, Employee will be deemed not to have accepted the terms of this Release.]

(6)        Any dispute arising under this Release shall be governed by the law of the State of New York, without reference to the choice of law rules that would cause the application of the law of any other jurisdiction.

 

 

 

 

DATE

 

[Employee]

 

 

B-2 

 

 

Exhibit 10.4

 

AMERICAN INTERNATIONAL GROUP, INC.

LONG TERM INCENTIVE PLAN

LTI AWARD AGREEMENT

1.    Status of Award; Defined Terms.    American International Group, Inc. (“AIG”)   has awarded you  [performance share units] [restricted stock units] [and]  [stock options]   (the “Award”) pursuant to the AIG Long Term Incentive Plan (the “Plan”)  and the [American International Group, Inc. 2013 Omnibus Incentive Plan] [American International Group, Inc. 2021 Omnibus Incentive Plan].  This award agreement  (“Award  Agreement”), which sets forth the terms and conditions of your Award, is made pursuant to the Plan and this Award and Award Agreement are subject to the terms of the Plan.  Capitalized terms not defined in this Award Agreement have the meanings ascribed to them in the Plan.

2.         Award.

[(a) Award of PSUs. 

(i) AIG hereby awards you the number of performance share units (“PSUs”) specified in Schedule A (the “Target PSUs”).  [For PSU AWARDS in 2021 and thereafter: You are also entitled to receive Dividend Equivalents in the form of cash in accordance with the Plan.  [Only with respect to PSU AWARDS in 2019 and 2020: You are also entitled to receive Dividend Equivalents or Dividend Equivalent Units on each PSU as follows, in each case in accordance with the Plan:

 

(x) With respect to dividends declared with a record date that occurs after the second quarter of 2021, for each Earned PSU you are entitled to accrue Dividend Equivalents and such Dividend Equivalents will be paid in cash in accordance with the Plan.

 

(y) With respect to dividends declared with a record date that occurs on or after the Date of Award (as specified in Schedule A of the Award Agreement) through the second quarter of 2021, for each Earned PSU you are entitled to accrue Dividend Equivalents Units (as defined in the Plan) in the form of additional PSUs and such Dividend Equivalent Units will be settled in cash equal to the fair market value of a Share on the settlement date in accordance with the Plan.]

Each PSU constitutes an unfunded and unsecured promise of AIG to deliver (or cause to be delivered) one Share (or, at the election of AIG, cash equal to the Fair Market Value thereof) in accordance with the Plan.   

(ii) The actual number of PSUs that will be earned is subject to the Committee’s assessment of achievement based on the Performance Measures established for the Performance Period.

(iii) After the end of the Performance Period, the Committee will determine the percentage of your Target PSUs that will be earned (such earned PSUs, the “Earned PSUs”).  The number of Shares covered by your Earned PSUs may range from 0% to 200% of your Target PSUs.  Your Earned PSUs, if any, will vest and be paid in accordance with the schedule specified in Schedule A,  subject to earlier vesting, forfeiture or termination as provided in accordance with the Plan. On any payment date, the number of Shares to be issued under this Award Agreement shall be rounded down to the nearest whole Share.] 

 

 

 

[(a)][(b)] [Award of RSUs.   AIG hereby awards you the number of restricted stock units (“RSUs”) specified in Schedule A.  [For RSU aWARDS in 2021 and thereafter: You are also entitled to receive Dividend Equivalents in the form of cash in accordance with the Plan.  [Only with respect to RSU AWARDS in 2019 and 2020:   You are also entitled to receive Dividend Equivalents or Dividend Equivalent Units on each RSU as follows, in each case in accordance with the Plan:

 

(x) With respect to dividends declared with a record date that occurs after the second quarter of 2021, for each RSU you are entitled to accrue Dividend Equivalents and such Dividend Equivalents will be paid in cash in accordance with the Plan.

 

(y) With respect to dividends declared with a record date that occurs on or after the Date of Award (as specified in Schedule A of the Award Agreement) through the second quarter of 2021, for each RSU you are entitled to accrue Dividend Equivalents Units (as defined in the Plan) in the form of additional RSUs and such Dividend Equivalent Units will be settled in Shares in accordance with the Plan.]

Each RSU constitutes an unfunded and unsecured promise of AIG to deliver (or cause to be delivered) one Share (or, at the election of AIG, cash equal to the Fair Market Value thereof) in accordance with the Plan.  Until such delivery, you have only the rights of a general unsecured creditor, and no rights as a shareholder, of AIG.  You will earn the RSUs subject to your continued Employment throughout the Performance Period.  Your RSUs will vest and be paid in accordance with the schedule specified in Schedule A,  subject to earlier vesting, forfeiture or termination as provided in accordance with the Plan.  On any payment date, the number of Shares to be issued under this Award Agreement shall be rounded down to the nearest whole Share.] 

[(a)][(b)(c)] [Award of Stock Options.   AIG hereby awards you the number of [time-vesting] [and]  [performance-vesting]  stock options (“Options”)  specified in Schedule A.    Each Option represents a right to purchase one share of Common Stock of AIG, subject to the terms and conditions set forth in the Award Agreement and the Plan. The Options are subject to the [time-]  [and]  [performance-]  vesting and expiration terms specified in Schedule A, subject to earlier vesting, forfeiture or termination as provided in accordance with the Plan.

3.         Non-Disclosure.  During the term of your Employment, the Company has permitted and will continue to permit you to have access to and become acquainted with information of a confidential, proprietary and/or trade secret nature.  Subject to and in addition to any confidentiality or non-disclosure requirements to which you were subject prior to the date you electronically consent to or execute this Award Agreement, during your Employment and any time thereafter, you agree that (i) all confidential, proprietary and/or trade secret information received, obtained or possessed at any time by you concerning or relating to the business, financial, operational, marketing, economic, accounting, tax or other affairs at the Company or any client, customer, agent or supplier or prospective client, customer, agent or supplier of the Company will be treated by you in the strictest confidence and will not be disclosed or used by you in any manner other than in connection with the discharge of your job responsibilities without the prior written consent of the Company or unless required by law, and (ii) you will not remove or destroy any confidential, proprietary and/or trade secret information and will return any such information in your possession, custody or control at the end of your Employment (or earlier if so requested by the Company).   Nothing herein shall prevent you from making or publishing any truthful statement (a) when required by law, subpoena or court order, or at the request of an administrative agency or legislature, (b) in the course of any legal, arbitral, administrative, legislative or regulatory proceeding, (c) to any governmental authority, regulatory agency or self-regulatory organization, (d) in connection with any investigation by the Company, or (e) where a prohibition or limitation on such communication is unlawful.

             Nothing in this Award Agreement or any AIG policy prohibits or restricts you from communicating with or responding to any inquiry by the Securities and Exchange Commission, law enforcement, the Equal Employment Opportunity Commission [IF EMPLOYEE IS IN NEW YORK:, the New York State Division of Human Rights, the New York City Commission on Civil Rights or any other local commission on human rights, an attorney retained by you], or any other local, state, or federal governmental or regulatory authority, or any self-regulatory organization, provided that AIG does not waive any attorney-client privilege over any information provided by you that is appropriately covered by such privilege.

 

 

 

 

 

 

4.         Non-Solicitation.  Your Employment with the Company requires exposure to and use of confidential, proprietary and/or trade secret information (as set forth in the above Paragraph).  Subject to and in addition to any non-solicitation requirements to which you were subject prior to the date you electronically consent to or execute this Award Agreement, you agree that (i) during your Employment with the Company and any time thereafter, you will not, directly or indirectly, on your own behalf or on behalf of any other person or entity, solicit, contact, call upon, communicate with or attempt to communicate with any customer or client or prospective customer or client of the Company where to do so would require the use or disclosure of confidential, proprietary and/or trade secret information, and (ii) during your Employment with the Company and for a period of one (1) year after Employment Terminates for any reason, you will not, directly or indirectly, regardless of who initiates the communication, solicit, participate in the solicitation or recruitment of, or in any manner encourage or provide assistance to any employee, consultant, registered representative, or agent of the Company to terminate his or her Employment or other relationship with the Company or to leave its employ or other relationship with the Company for any engagement in any capacity or any other person or entity.

[ALL OR A PORTION OF SECTION 5 TO BE INSERTED AT THE DISCRETION OF THE COMMITTEE OR ITS DELEGATE]

 

5.         Non-Disparagement.  You agree that during and after your Employment with the Company, you will not make disparaging comments about AIG or any of its subsidiaries or affiliates or any of their officers, directors or employees to any person or entity not affiliated with the Company.   Nothing in this Agreement  shall prevent you from making or publishing any truthful statement (a) when required by law, subpoena or court order, or at the request of an administrative agency or legislature (b) in the course of any legal, arbitral. administrative, legislative or regulatory proceeding, (c) to any governmental authority, regulatory agency or self-regulatory organization, (d) in connection with any investigation by the Company, or (e) where a prohibition or limitation on such communication is unlawful.  Moreover, nothing in this Agreement will deny you the right to disclose information about unlawful acts in the workplace, including, but not limited to, sexual harrassment.

 

[SECTION 6 TO BE INSERTED AT DISCRETION OF THE COMMITTEE OR ITS DELEGATE]

 

6.         Notice of Termination of Employment.  Except where local law prohibits enforcement or you resign for Good Reason under the terms of the Plan, you agree that if you voluntarily resign you will give at least six months’ written notice to the Company of your voluntary Termination, which may be working notice or non-working notice at the Company’s sole discretion and which notice period is waivable by the Company at the Company’s sole discretion.  This notice period provision supersedes any conflicting notice period provision contained in the award agreements governing your prior long-term incentive awards awarded under the Plan.

 

 

 [SECTION 6 TO BE INSERTED AT DISCRETION OF THE COMMITTEE OR ITS DELEGATE]

 

6.           Notice of Termination of Employment.  Except where local law prohibits enforcement or you resign for Good Reason under the terms of the Plan, you agree that if you voluntarily resign you will give at least three months’ written notice to the Company of your voluntary Termination, which may be working notice or non-working notice at the Company’s sole discretion and which notice period is waivable by the Company at the Company’s sole discretion.  This notice period provision supersedes any conflicting notice period provision contained in the award agreements governing your prior long-term incentive awards awarded under the Plan.

 

 

  [SECTION 6 TO BE INSERTED AT DISCRETION OF THE COMMITTEE  OR ITS DELEGATE]

6.           Notice of Termination of Employment.  You agree that:

1.         if you voluntarily resign (other than if you resign for Good Reason under the terms of the Plan), you will give at least three months’ written notice to the Company of your voluntary Termination, which may be working notice or non-working notice at the Company’s sole discretion and which notice period is waivable by the Company at the Company’s sole discretion, except to the extent prohibited by local law; and

 

 

 

 

 

2.         if your employment is not at-will and you or the Company is obligated to give other advance notice of a Termination by virtue of local law, any applicable collective bargaining agreement or your employment agreement, such notice obligation will not be affected by this provision.  As set forth in the Executive Severance Plan (“ESP”), any severance payment paid in accordance with the ESP will be reduced by any payment in lieu of notice paid by the Company to you, and you will cease to have any further entitlement to notice. 

This notice period provision supersedes any conflicting notice period provision contained in any of the award agreements governing your prior long-term incentive awards awarded under the Plan.

7.         Clawback/Repayment.  Notwithstanding anything to the contrary contained herein, in consideration of the grant of this Award, you agree that you are a Covered Employee under the AIG Clawback Policy with respect to this Award and any payments hereunder and, accordingly, this Award and any payments hereunder will be subject to forfeiture and/or repayment to the extent provided for in the AIG Clawback Policy, as in effect from time to time if it is determined that a Covered Event (as defined in such Policy) has occurred.  With respect to this Award and any payments hereunder, each of the following events is a “Covered Event” for purposes of the Policy:

1.     a material restatement of all or a portion of AIG’s financial statements occurs and the Board or Committee determines that recovery of payments under this Award is appropriate after reviewing all relevant facts and circumstances that contributed to the restatement, including whether you engaged in misconduct, and considering issues of accountability;

2.    payments  under this Award were based on materially inaccurate financial statements or on performance metrics that are materially inaccurately determined, regardless of whether you were responsible for the inaccuracy;

3.    your failure to properly identify, assess or sufficiently raise concerns about risk, including in a supervisory role, resulted in a material adverse impact on AIG, any of AIG’s business units or the broader financial system;

4.       any action or omission by you constituted a material violation of AIG’s risk policies as in effect from time to time; or  

5.         any action or omission by you resulted in material financial or reputational harm to AIG.

8.         Entire Agreement.     The Plan is incorporated herein by reference.    This Award Agreement, the Plan, the personalized information in Schedule A, and such other documents as may be provided to you pursuant to this Award Agreement regarding any  applicable service, performance or other vesting conditions and the size of your Award, constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersede all prior understandings and agreements with respect to such subject matter. 

9.         Notices.  Any notice or communication required to be given or delivered to the Company under the terms of this Award Agreement shall be in writing (which may include an electronic writing) and addressed to the Corporate Secretary of AIG at its principal corporate offices as specified in Section  9.E of the Plan or, with respect to the acceptance of an Award, as specified in Schedule A or the Compensation Plan Grant Acceptance website.  Any notice required to be given or delivered to you shall be in writing (including an electronic writing) and addressed to you at your Company email address or your home address on file in the Company’s payroll or personnel records.  All notices shall be deemed to have been given or delivered upon:  personal delivery; electronic delivery or three (3) business days after deposit in the United States mail by certified or registered mail (return receipt requested) or one (1) business day after deposit with any return receipt express courier (prepaid).

10.       Governing Law.  This Award Agreement will be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflict of laws.

11.       Signatures.   Execution  of this Award Agreement by AIG and/or you may be in the form of an electronic, manual or similar signature, and such signature shall be treated as an original signature for all purposes.   

 

 

 

 

IN WITNESS WHEREOF, AMERICAN INTERNATIONAL GROUP, INC. has caused this Award Agreement to be duly executed and delivered as of the Date of Award specified in Schedule A. 

 

AMERICAN INTERNATIONAL GROUP, INC.

_______________________________________

By: 

                                                 

 

 

 

 

 

 

Schedule A

Long-Term Incentive Award

 

Recipient:

●

Employee ID:

●

Date of Award Agreement:

●

 

[[PSUs] [and] [RSUs] Award]

Target Number

Performance Period

Vesting Terms

Payment

[PSUs] 

[●] 

[●] 

[●] 

[●] 

[RSUs] 

[●] 

[●] 

[●] 

[●] 

 

[Options Award]

Number of Options

Exercise Price

Performance Period

Vesting Terms

Expiration Date

[Time-Vesting Options] 

[●] 

[$●] 

[●] 

[●] 

[●] 

[Performance-Vesting Options] 

[●] 

[$●] 

[●] 

[●] 

[●] 

 

[The following termination treatment will [apply to your Award] [supersede that provided in Section 6 of the Plan: ●]   

 

 

 

Receipt

 

Acknowledged:

 

 

 

 

 

 

Signature

 

Date

 

 
 

Address:

 

 

 

 

 

 

Street

 

 

 

 
 

 

 

 

 

 

 

 

City,                 State               Zip Code

 

 

 

 

 

 

In order to be eligible to receive your Award, you must agree to and either electronically consent or sign the Award Agreement within 90 days of the receipt of this communication.  If you do not electronically consent to or sign the Award Agreement within 90 days, you may forfeit your Award.   

 

[Insert instructions]

 

 

 

 

American International Group, Inc

 

Exhibit 31

CERTIFICATIONS

I, Peter S. Zaffino, 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 5, 2021

 

 

/S/ PETER S. ZAFFINO

 

Peter S. Zaffino

 

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 5, 2021

 

 

/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, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter S. Zaffino, 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 5, 2021

 

 

/S/ PETER S. ZAFFINO

 

Peter S. Zaffino

 

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, 2021, 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 5, 2021

 

 

 

/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.