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, 20162017

Commission File Number 1-8787

 

 

 

American International Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

13-2592361

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

175 Water Street, New York, New York

10038

(Address of principal executive offices)

(Zip Code)

 

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

________________

 

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

 

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

 

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

 

Large accelerated filer ☑ 

Accelerated filer ☐ 

Non-accelerated filer ☐ 

Smaller reporting company ☐ 

Emerging growth company ☐ 

 

 

(Do not check if a

smaller reporting company)

 

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

 

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

 

As of November 2, 2016,October 30, 2017, there were 1,027,135,119898,959,371 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, 20162017

Table of Contents

FORM 10-Q

 

Item Number
Description
Page
PARTPart I — FINANCIAL INFORMATIONFinancial Information
 

ItemITEM 1

Condensed Consolidated Financial Statements

2

 

Note 1.

Basis of Presentation

7

 

Note 2.

Summary of Significant Accounting Policies

98

 

Note 3.

Segment Information

1311

 

Note 4.

Held-for-Sale Classification

1513

 

Note 5.

Fair Value Measurements

1714

 

Note 6.

Investments

3732

 

Note 7.

Lending Activities

4641

 

Note 8.

Variable Interest Entities

4843

 

Note 9.

Derivatives and Hedge Accounting

5044

 

Note 10.

Contingencies, Commitments and GuaranteesInsurance Liabilities

5649

 

Note 11.

EquityContingencies, Commitments and Guarantees

6252

 

Note 12.

Earnings Per ShareEquity

6655

 

Note 13.

Employee Benefits

66Earnings Per Share

59

 

Note 14.

Employee Benefits

Income Taxes

6860

 

Note 15.

Income Taxes

61

Note 16.

Information Provided in Connection with Outstanding Debt

7164

 

Note 1617.

Subsequent Events

7769

ItemITEM 2

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

  

 

Operations

7870

 

·     Cautionary Statement Regarding Forward-Looking Information

7870

 

·     Use of Non-GAAP Measures

8173

 

·     Executive OverviewCritical Accounting Estimates

8475

 

·     Results of OperationsExecutive Summary

10276

 

·     InvestmentsConsolidated Results of Operations

14587

 

·     Insurance ReservesBusiness Segment Operations

16592

 

·     Liquidity and Capital ResourcesInvestments

181131

 

·     Enterprise Risk ManagementInsurance Reserves

195144

 

·     Critical Accounting EstimatesLiquidity and Capital Resources

200156

 

·     Regulatory EnvironmentEnterprise Risk Management

201168

 

·     GlossaryRegulatory Environment

202173

 

·     AcronymsGlossary

205180

 

Acronyms

183

ItemITEM 3

Quantitative and Qualitative Disclosures About Market Risk

206184

ItemITEM 4

Controls and Procedures

206184

PARTPart II — OTHER INFORMATIONOther Information
 

ItemITEM 1

Legal Proceedings

207185

ItemITEM 1A

Risk Factors

207185

ItemITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

207185

ItemITEM 4

Mine Safety Disclosures

207185

ItemITEM 6

Exhibits

207186

SIGNATURESSignatures
208187

1


TABLE OF CONTENTSAIG | Third Quarter 2017 Form 10-Q

PART I – FINANCIAL INFORMATION1

Item 1. Financial Statements

American International Group, Inc.

CONDENSED Consolidated Balance Sheets (unaudited)

 

September 30,

December 31,

(in millions, except for share data)

 

2016

 

2015

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value (amortized cost: 2016 - $241,415; 2015 - $240,968)

$

260,649

$

248,245

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

 

14,772

 

16,782

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2016 - $1,167; 2015 - $1,379)

 

1,544

 

2,915

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

 

498

 

921

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2016 - $11; 2015 - $11)

 

32,413

 

29,565

Other invested assets (portion measured at fair value: 2016 - $7,092; 2015 - $8,912)

 

25,747

 

29,794

Short-term investments (portion measured at fair value: 2016 - $2,724; 2015 - $2,591)

 

10,745

 

10,132

Total investments

 

346,368

 

338,354

 

 

 

 

 

Cash

 

2,498

 

1,629

Accrued investment income

 

2,608

 

2,623

Premiums and other receivables, net of allowance

 

11,606

 

11,451

Reinsurance assets, net of allowance

 

21,706

 

20,413

Deferred income taxes

 

18,412

 

20,394

Deferred policy acquisition costs

 

10,537

 

11,115

Other assets, including restricted cash of $196 in 2016 and $170 in 2015

 

 

 

 

(portion measured at fair value: 2016 - $2,133; 2015 - $1,309)

 

11,546

 

11,289

Separate account assets, at fair value

 

82,626

 

79,574

Assets held for sale

 

6,661

 

-

Total assets

$

514,568

$

496,842

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

72,487

$

74,942

Unearned premiums

 

21,047

 

21,318

Future policy benefits for life and accident and health insurance contracts

 

47,848

 

43,585

Policyholder contract deposits (portion measured at fair value: 2016 - $4,049; 2015 - $2,325)

 

132,808

 

127,588

Other policyholder funds (portion measured at fair value: 2016 - $6; 2015 - $6)

 

4,418

 

4,212

Other liabilities (portion measured at fair value: 2016 - $2,894; 2015 - $2,082)

 

27,983

 

26,164

Long-term debt (portion measured at fair value: 2016 - $3,664; 2015 - $3,670)

 

32,277

 

29,249

Separate account liabilities

 

82,626

 

79,574

Liabilities held for sale

 

3,909

 

-

Total liabilities

 

425,403

 

406,632

Contingencies, commitments and guarantees (see Note 10)

 

 

 

 

 

 

 

 

 

AIG shareholders’ equity:

 

 

 

 

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2016 - 1,906,671,492 and

 

 

 

 

2015 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2016 - 863,782,936 shares; 2015 - 712,754,875 shares of common stock

 

(38,518)

 

(30,098)

Additional paid-in capital

 

81,281

 

81,510

Retained earnings

 

32,077

 

30,943

Accumulated other comprehensive income

 

9,057

 

2,537

Total AIG shareholders’ equity

 

88,663

 

89,658

Non-redeemable noncontrolling interests

 

502

 

552

Total equity

 

89,165

 

90,210

Total liabilities and equity

$

514,568

$

496,842

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2


TABLE OF CONTENTS

 

 

Item 1 / Financial statements

 

Part I – Financial Information

Item 1. | Financial Statements

American International Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)Condensed Consolidated Balance Sheets (unaudited)

 

September 30,

December 31,

(in millions, except for share data)

 

2017

 

2016

Assets:

 

 

 

 

Investments:

 

 

 

 

Fixed maturity securities:

 

 

 

 

Bonds available for sale, at fair value (amortized cost: 2017 - $224,143; 2016 - $232,241)

$

237,771

$

241,537

Other bond securities, at fair value (See Note 6

 

12,653

 

13,998

Equity Securities:

 

 

 

 

Common and preferred stock available for sale, at fair value (cost: 2017 - $1,274; 2016 - $1,697)

 

1,707

 

2,078

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

 

538

 

482

Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2017 - $5; 2016 - $11)

 

36,089

 

33,240

Other invested assets (portion measured at fair value: 2017 - $6,503; 2016 - $6,946)

 

22,590

 

24,538

Short-term investments (portion measured at fair value: 2017 - $2,603; 2016 - $3,341)

 

9,775

 

12,302

Total investments

 

321,123

 

328,175

 

 

 

 

 

Cash

 

2,433

 

1,868

Accrued investment income

 

2,416

 

2,495

Premiums and other receivables, net of allowance

 

11,156

 

10,465

Reinsurance assets, net of allowance

 

34,429

 

21,901

Deferred income taxes

 

20,954

 

21,332

Deferred policy acquisition costs

 

10,938

 

11,042

Other assets, including restricted cash of $219 in 2017 and $193 in 2016

 

 

 

 

(portion measured at fair value: 2017 - $900; 2016 - $1,809)

 

10,324

 

10,815

Separate account assets, at fair value

 

89,300

 

82,972

Assets held for sale

 

-

 

7,199

Total assets

$

503,073

$

498,264

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

80,087

$

77,077

Unearned premiums

 

20,135

 

19,634

Future policy benefits for life and accident and health insurance contracts

 

44,055

 

42,204

Policyholder contract deposits (portion measured at fair value: 2017 - $3,988; 2016 - $3,058)

 

134,514

 

132,216

Other policyholder funds (portion measured at fair value: 2017 - $0; 2016 - $5)

 

3,678

 

3,989

Other liabilities (portion measured at fair value: 2017 - $1,220; 2016 - $2,016)

 

27,253

 

26,296

Long-term debt (portion measured at fair value: 2017 - $2,998; 2016 - $3,428)

 

31,039

 

30,912

Separate account liabilities

 

89,300

 

82,972

Liabilities held for sale

 

-

 

6,106

Total liabilities

 

430,061

 

421,406

Contingencies, commitments and guarantees (See Note 11

 

 

 

 

 

 

 

 

 

AIG shareholders’ equity:

 

 

 

 

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

 

 

 

 

2016 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2017 - 1,007,791,405 shares; 2016 - 911,335,651 shares of common stock

 

(47,602)

 

(41,471)

Additional paid-in capital

 

80,976

 

81,064

Retained earnings

 

28,389

 

28,711

Accumulated other comprehensive income

 

5,939

 

3,230

Total AIG shareholders’ equity

 

72,468

 

76,300

Non-redeemable noncontrolling interests

 

544

 

558

Total equity

 

73,012

 

76,858

Total liabilities and equity

$

503,073

$

498,264

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Third Quarter 2017 Form 10-Q2 (unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(dollars in millions, except per share data)

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,581

 

$

8,862

 

$

26,138

 

$

27,229

Policy fees

 

 

646

 

 

701

 

 

2,029

 

 

2,066

Net investment income

 

 

3,783

 

 

3,206

 

 

10,479

 

 

10,870

Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(58)

 

 

(225)

 

 

(332)

 

 

(460)

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

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income (loss)

 

 

(14)

 

 

(17)

 

 

(36)

 

 

(31)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income (loss)

 

 

(72)

 

 

(242)

 

 

(368)

 

 

(491)

Other realized capital gains (losses)

 

 

(693)

 

 

(100)

 

 

(461)

 

 

1,616

Total net realized capital gains (losses)

 

 

(765)

 

 

(342)

 

 

(829)

 

 

1,125

Other income

 

 

609

 

 

395

 

 

1,540

 

 

3,206

Total revenues

 

 

12,854

 

 

12,822

 

 

39,357

 

 

44,496

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

7,489

 

 

6,936

 

 

20,748

 

 

20,587

Interest credited to policyholder account balances

 

 

887

 

 

881

 

 

2,798

 

 

2,758

Amortization of deferred policy acquisition costs

 

 

1,018

 

 

1,275

 

 

3,625

 

 

3,981

General operating and other expenses

 

 

2,536

 

 

3,175

 

 

8,125

 

 

9,214

Interest expense

 

 

329

 

 

321

 

 

955

 

 

977

Loss (gain) on extinguishment of debt

 

 

(14)

 

 

346

 

 

76

 

 

756

Net (gain) loss on sale of divested businesses

 

 

(128)

 

 

3

 

 

(351)

 

 

10

Total benefits, losses and expenses

 

 

12,117

 

 

12,937

 

 

35,976

 

 

38,283

Income (loss) from continuing operations before income tax expense

 

 

737

 

 

(115)

 

 

3,381

 

 

6,213

Income tax expense

 

 

304

 

 

65

 

 

1,170

 

 

2,142

Income (loss) from continuing operations

 

 

433

 

 

(180)

 

 

2,211

 

 

4,071

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

 

 

3

 

 

(17)

 

 

(54)

 

 

-

Net income (loss)

 

 

436

 

 

(197)

 

 

2,157

 

 

4,071

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

(26)

 

 

34

 

 

(35)

 

 

34

Net income (loss) attributable to AIG

 

$

462

 

$

(231)

 

$

2,192

 

$

4,037

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.43

 

$

(0.17)

 

$

2.02

 

$

3.05

Income (loss) from discontinued operations

 

$

-

 

$

(0.01)

 

$

(0.05)

 

$

-

Net income (loss) attributable to AIG

 

$

0.43

 

$

(0.18)

 

$

1.97

 

$

3.05

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.42

 

$

(0.17)

 

$

1.97

 

$

2.97

Income (loss) from discontinued operations

 

$

-

 

$

(0.01)

 

$

(0.05)

 

$

-

Net income (loss) attributable to AIG

 

$

0.42

 

$

(0.18)

 

$

1.92

 

$

2.97

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

1,071,295,892

 

 

1,279,072,748

 

 

1,113,650,878

 

 

1,324,407,969

Diluted

 

 

1,102,400,770

 

 

1,279,072,748

 

 

1,142,700,207

 

 

1,357,108,784

Dividends declared per common share

 

$

0.320

 

$

0.280

 

$

0.960

 

$

0.530

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

3


TABLE OF CONTENTS

 

 

Item 1 / Financial statements

 

American International Group, Inc.

CONDENSED

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

(unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Net income (loss)

 

$

436

 

$

(197)

 

$

2,157

 

$

4,071

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

which other-than-temporary credit impairments were taken

 

 

217

 

 

(61)

 

 

(110)

 

 

(169)

Change in unrealized appreciation (depreciation) of all other investments

 

 

466

 

 

(857)

 

 

6,302

 

 

(3,309)

Change in foreign currency translation adjustments

 

 

111

 

 

(238)

 

 

332

 

 

(734)

Change in retirement plan liabilities adjustment

 

 

4

 

 

92

 

 

(4)

 

 

148

Other comprehensive income (loss)

 

 

798

 

 

(1,064)

 

 

6,520

 

 

(4,064)

Comprehensive income (loss)

 

 

1,234

 

 

(1,261)

 

 

8,677

 

 

7

Comprehensive income (loss) attributable to noncontrolling interests

 

 

(26)

 

 

33

 

 

(35)

 

 

30

Comprehensive income (loss) attributable to AIG

 

$

1,260

 

$

(1,294)

 

$

8,712

 

$

(23)

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(dollars in millions, except per share data)

 

 

2017

 

 

2016

 

 

2017

 

 

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,063

 

$

8,581

 

$

23,459

 

$

26,138

Policy fees

 

 

728

 

 

646

 

 

2,177

 

 

2,029

Net investment income

 

 

3,416

 

 

3,783

 

 

10,715

 

 

10,479

Net realized capital losses:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(66)

 

 

(58)

 

 

(138)

 

 

(332)

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

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income

 

 

(8)

 

 

(14)

 

 

(57)

 

 

(36)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income (loss)

 

 

(74)

 

 

(72)

 

 

(195)

 

 

(368)

Other realized capital losses

 

 

(848)

 

 

(693)

 

 

(911)

 

 

(461)

Total net realized capital losses

 

 

(922)

 

 

(765)

 

 

(1,106)

 

 

(829)

Other income

 

 

466

 

 

609

 

 

1,640

 

 

1,540

Total revenues

 

 

11,751

 

 

12,854

 

 

36,885

 

 

39,357

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

10,322

 

 

7,489

 

 

22,653

 

 

20,748

Interest credited to policyholder account balances

 

 

867

 

 

887

 

 

2,683

 

 

2,798

Amortization of deferred policy acquisition costs

 

 

912

 

 

1,018

 

 

3,135

 

 

3,625

General operating and other expenses

 

 

2,149

 

 

2,536

 

 

6,774

 

 

8,125

Interest expense

 

 

290

 

 

329

 

 

880

 

 

955

(Gain) loss on extinguishment of debt

 

 

1

 

 

(14)

 

 

(4)

 

 

76

Net (gain) loss on sale of divested businesses

 

 

13

 

 

(128)

 

 

173

 

 

(351)

Total benefits, losses and expenses

 

 

14,554

 

 

12,117

 

 

36,294

 

 

35,976

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense (benefit)

 

 

(2,803)

 

 

737

 

 

591

 

 

3,381

Income tax expense (benefit)

 

 

(1,091)

 

 

304

 

 

(18)

 

 

1,170

Income (loss) from continuing operations

 

 

(1,712)

 

 

433

 

 

609

 

 

2,211

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

 

 

(1)

 

 

3

 

 

7

 

 

(54)

Net income (loss)

 

 

(1,713)

 

 

436

 

 

616

 

 

2,157

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

 

26

 

 

(26)

 

 

40

 

 

(35)

Net income (loss) attributable to AIG

 

$

(1,739)

 

$

462

 

$

576

 

$

2,192

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(1.91)

 

$

0.43

 

$

0.60

 

$

2.02

Income (loss) from discontinued operations

 

$

-

 

$

-

 

$

0.01

 

$

(0.05)

Net income (loss) attributable to AIG

 

$

(1.91)

 

$

0.43

 

$

0.61

 

$

1.97

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(1.91)

 

$

0.42

 

$

0.59

 

$

1.97

Income (loss) from discontinued operations

 

$

-

 

$

-

 

$

0.01

 

$

(0.05)

Net income (loss) attributable to AIG

 

$

(1.91)

 

$

0.42

 

$

0.60

 

$

1.92

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

908,667,044

 

 

1,071,295,892

 

 

938,130,832

 

 

1,113,650,878

Diluted

 

 

908,667,044

 

 

1,102,400,770

 

 

961,295,946

 

 

1,142,700,207

Dividends declared per common share

 

$

0.32

 

$

0.32

 

$

0.96

 

$

0.96

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

4AIG | Third Quarter 2017 Form 10-Q3


TABLE OF CONTENTS

 

 

Item 1 / Financial statements

American International Group, Inc.

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

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

 

2017

 

 

2016

 

 

2017

 

 

2016

Net income (loss)

 

$

(1,713)

 

$

436

 

$

616

 

$

2,157

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

which other-than-temporary credit impairments were taken

 

 

97

 

 

217

 

 

330

 

 

(110)

Change in unrealized appreciation of all other investments

 

 

492

 

 

466

 

 

1,840

 

 

6,302

Change in foreign currency translation adjustments

 

 

325

 

 

111

 

 

447

 

 

332

Change in retirement plan liabilities adjustment

 

 

63

 

 

4

 

 

92

 

 

(4)

Other comprehensive income

 

 

977

 

 

798

 

 

2,709

 

 

6,520

Comprehensive income (loss)

 

 

(736)

 

 

1,234

 

 

3,325

 

 

8,677

Comprehensive income (loss) attributable to noncontrolling interests

 

 

26

 

 

(26)

 

 

40

 

 

(35)

Comprehensive income (loss) attributable to AIG

 

$

(762)

 

$

1,260

 

$

3,285

 

$

8,712

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Third Quarter 2017 Form 10-Q4 


TABLE OF CONTENTS

 

American International Group, Inc.

CONDENSED CONSOLIDATED

Condensed Consolidated Statements of Equity(unaudited)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

(in millions)

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Interests

 

Equity

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Interests

 

Equity

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(30,098)

$

81,510

$

30,943

$

2,537

$

89,658

$

552

$

90,210

$

4,766

$

(41,471)

$

81,064

$

28,711

$

3,230

$

76,300

$

558

$

76,858

Common stock issued under stock plans

 

-

 

86

 

(173)

 

-

 

-

 

(87)

 

-

 

(87)

 

-

 

140

 

(304)

 

-

 

-

 

(164)

 

-

 

(164)

Purchase of common stock

 

-

 

(8,506)

 

-

 

-

 

-

 

(8,506)

 

-

 

(8,506)

 

-

 

(6,275)

 

-

 

-

 

-

 

(6,275)

 

-

 

(6,275)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

2,192

 

-

 

2,192

 

(35)

 

2,157

 

-

 

-

 

-

 

576

 

-

 

576

 

40

 

616

Dividends

 

-

 

-

 

-

 

(1,051)

 

-

 

(1,051)

 

-

 

(1,051)

 

-

 

-

 

-

 

(884)

 

-

 

(884)

 

-

 

(884)

Other comprehensive income

 

-

 

-

 

-

 

-

 

6,520

 

6,520

 

-

 

6,520

 

-

 

-

 

-

 

-

 

2,709

 

2,709

 

-

 

2,709

Current and deferred income taxes

 

-

 

-

 

19

 

-

 

-

 

19

 

-

 

19

 

-

 

-

 

(4)

 

-

 

-

 

(4)

 

-

 

(4)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

9

 

9

 

-

 

-

 

-

 

-

 

-

 

-

 

78

 

78

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

4

 

4

 

-

 

-

 

-

 

-

 

-

 

-

 

13

 

13

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(31)

 

(31)

 

-

 

-

 

-

 

-

 

-

 

-

 

(131)

 

(131)

Other

 

-

 

-

 

(75)

 

(7)

 

-

 

(82)

 

3

 

(79)

 

-

 

4

 

220

 

(14)

 

-

 

210

 

(14)

 

196

Balance, end of period

$

4,766

$

(38,518)

$

81,281

$

32,077

$

9,057

$

88,663

$

502

$

89,165

$

4,766

$

(47,602)

$

80,976

$

28,389

$

5,939

$

72,468

$

544

$

73,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(19,218)

$

80,958

$

29,775

$

10,617

$

106,898

$

374

$

107,272

$

4,766

$

(30,098)

$

81,510

$

30,943

$

2,537

$

89,658

$

552

$

90,210

Common stock issued under stock plans

 

-

 

86

 

(173)

 

-

 

-

 

(87)

 

-

 

(87)

Purchase of common stock

 

-

 

(7,663)

 

-

 

-

 

-

 

(7,663)

 

-

 

(7,663)

 

-

 

(8,506)

 

-

 

-

 

-

 

(8,506)

 

-

 

(8,506)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

4,037

 

-

 

4,037

 

34

 

4,071

 

-

 

-

 

-

 

2,192

 

-

 

2,192

 

(35)

 

2,157

Dividends

 

-

 

-

 

-

 

(687)

 

-

 

(687)

 

-

 

(687)

 

-

 

-

 

-

 

(1,051)

 

-

 

(1,051)

 

-

 

(1,051)

Other comprehensive loss

 

-

 

-

 

-

 

-

 

(4,060)

 

(4,060)

 

(4)

 

(4,064)

Deferred income taxes

 

-

 

-

 

(7)

 

-

 

-

 

(7)

 

-

 

(7)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

6,520

 

6,520

 

-

 

6,520

Current and deferred income taxes

 

-

 

-

 

19

 

-

 

-

 

19

 

-

 

19

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

214

 

214

 

-

 

-

 

-

 

-

 

-

 

-

 

9

 

9

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(2)

 

(2)

 

-

 

-

 

-

 

-

 

-

 

-

 

4

 

4

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(5)

 

(5)

 

-

 

-

 

-

 

-

 

-

 

-

 

(31)

 

(31)

Other

 

-

 

-

 

484

 

(3)

 

-

 

481

 

9

 

490

 

-

 

-

 

(75)

 

(7)

 

-

 

(82)

 

3

 

(79)

Balance, end of period

$

4,766

$

(26,881)

$

81,435

$

33,122

$

6,557

$

98,999

$

620

$

99,619

$

4,766

$

(38,518)

$

81,281

$

32,077

$

9,057

$

88,663

$

502

$

89,165

See accompanying Notes to Condensed Consolidated Financial Statements.

AIG | Third Quarter 2017 Form 10-Q5


TABLE OF CONTENTS

 

 

Item 1 / Financial statements

 

American International Group, Inc.

CONDENSED

Condensed Consolidated Statements of Cash Flows (unaudited)

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

Cash flows from operating activities:

 

 

 

 

Net income

$

616

$

2,157

(Income) loss from discontinued operations

 

(7)

 

54

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

 

 

 

 

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

 

 

 

 

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

 

(404)

 

(1,125)

Net (gain) loss on sale of divested businesses

 

173

 

(351)

(Gains) losses on extinguishment of debt

 

(4)

 

76

Unrealized losses in earnings - net

 

251

 

1,396

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

 

(338)

 

50

Depreciation and other amortization

 

2,806

 

2,814

Impairments of assets

 

669

 

872

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

4,448

 

700

Premiums and other receivables and payables - net

 

300

 

347

Reinsurance assets and funds held under reinsurance treaties

 

(12,705)

 

(1,234)

Capitalization of deferred policy acquisition costs

 

(3,593)

 

(3,598)

Current and deferred income taxes - net

 

(508)

 

962

Other, net

 

(899)

 

(1,367)

Total adjustments

 

(9,804)

 

(458)

Net cash provided by (used in) operating activities

 

(9,195)

 

1,753

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

27,733

 

22,077

Other securities

 

2,647

 

3,367

Other invested assets

 

4,396

 

5,255

Divested businesses, net

 

605

 

-

Maturities of fixed maturity securities available for sale

 

22,126

 

18,210

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

 

3,932

 

4,435

Purchases of:

 

 

 

 

Available for sale securities

 

(38,717)

 

(42,572)

Other securities

 

(355)

 

(557)

Other invested assets

 

(2,359)

 

(2,472)

Mortgage and other loans receivable

 

(6,517)

 

(7,784)

Net change in restricted cash

 

(23)

 

(49)

Net change in short-term investments

 

2,815

 

(855)

Other, net

 

(1,509)

 

1,270

Net cash provided by investing activities

 

14,774

 

325

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

13,164

 

13,584

Policyholder contract withdrawals

 

(11,363)

 

(9,986)

Issuance of long-term debt

 

2,405

 

11,430

Repayments of long-term debt

 

(2,751)

 

(7,683)

Purchase of common stock

 

(6,275)

 

(8,506)

Dividends paid

 

(884)

 

(1,051)

Other, net

 

578

 

915

Net cash used in financing activities

 

(5,126)

 

(1,297)

Effect of exchange rate changes on cash

 

(21)

 

88

Net increase in cash

 

432

 

869

Cash at beginning of year

 

1,868

 

1,629

Change in cash of businesses held for sale

 

133

 

-

Cash at end of period

$

2,433

$

2,498

 

 

 

 

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,046

$

1,009

Taxes

$

490

$

208

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,494

$

2,691

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

AIG | Third Quarter 2017 Form 10-Q6(unaudited)

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

Net income

$

2,157

$

4,071

(Income) loss from discontinued operations

 

54

 

-

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

 

(1,125)

 

(660)

Net (gain) loss on sale of divested businesses

 

(351)

 

10

Losses on extinguishment of debt

 

76

 

756

Unrealized (gains) losses in earnings - net

 

1,396

 

(550)

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

 

50

 

(684)

Depreciation and other amortization

 

2,814

 

3,502

Impairments of assets

 

872

 

886

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

700

 

(1,618)

Premiums and other receivables and payables - net

 

347

 

(389)

Reinsurance assets and funds held under reinsurance treaties

 

(1,234)

 

1,396

Capitalization of deferred policy acquisition costs

 

(3,598)

 

(4,376)

Current and deferred income taxes - net

 

962

 

1,736

Other, net

 

(1,367)

 

(1,846)

Total adjustments

 

(458)

 

(1,837)

Net cash provided by operating activities

 

1,753

 

2,234

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale investments

 

22,077

 

20,846

Other securities

 

3,367

 

4,895

Other invested assets

 

5,255

 

7,015

Maturities of fixed maturity securities available for sale

 

18,210

 

18,427

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

 

4,435

 

3,298

Purchases of:

 

 

 

 

Available for sale investments

 

(42,572)

 

(36,333)

Other securities

 

(557)

 

(1,622)

Other invested assets

 

(2,472)

 

(2,675)

Mortgage and other loans receivable

 

(7,784)

 

(6,845)

Net change in restricted cash

 

(49)

 

1,476

Net change in short-term investments

 

(855)

 

(1,028)

Other, net

 

1,270

 

(774)

Net cash provided by investing activities

 

325

 

6,680

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

13,584

 

12,216

Policyholder contract withdrawals

 

(9,986)

 

(10,801)

Issuance of long-term debt

 

11,430

 

6,449

Repayments of long-term debt

 

(7,683)

 

(8,343)

Purchase of common stock

 

(8,506)

 

(7,473)

Dividends paid

 

(1,051)

 

(687)

Other, net

 

915

 

(425)

Net cash used in financing activities

 

(1,297)

 

(9,064)

Effect of exchange rate changes on cash

 

88

 

(39)

Net increase (decrease) in cash

 

869

 

(189)

Cash at beginning of year

 

1,629

 

1,758

Cash at end of period

$

2,498

$

1,569

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,009

$

1,112

Taxes

$

208

$

406

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,691

$

2,801

Non-cash consideration received from sale of AerCap

$

-

$

500

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

6


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /1. NOTE 1. BASIS OF PRESENTATIONBasis of Presentation

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. BASIS OF PRESENTATIONBasis of Presentation

American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 10080 countries and jurisdictions. AIG companies serve commercial institutional and individual customers through one of the most extensive worldwide property‑casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG) and the Tokyo Stock Exchange. Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.

These unaudited Condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited Consolidated Financial Statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015 (20152016 (the 2016 Annual Report). The condensed consolidated financial information as of December 31, 20152016 included herein has been derived from the audited Consolidated Financial Statements in the 20152016 Annual Report.

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

Interim-period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to September 30, 20162017 and prior to the issuance of these Condensed Consolidated Financial Statements.

Sales of Businesses

NSM

On August 31, 2016, we sold our controlling interest in NSM Insurance Group (NSM), a managing general agent to ABRY Partners, a private equity firm, for consideration of $201 million resulting in a pre-tax gain of approximately $105 million in the third quarter of 2016. We retained an equity interest in a newly formed joint venture and will continue to provide underwriting capacity to NSM, and we retained exclusive renewal rights for certain business written through NSM.

In addition, see Note 4 to the Condensed Consolidated Financial Statements for information regarding recent sales of businesses that are classified as held-for-sale.

ILFC

On May 14, 2014, we completed the sale of 100 percent of the common stock of International Lease Finance Corporation (ILFC) to AerCap Ireland Limited, a wholly owned subsidiary of AerCap Holdings N.V. (AerCap), in exchange for total consideration of approximately $7.6 billion, including cash and 97.6 million newly issued AerCap common shares (the AerCap

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Item 1 / NOTE 1. BASIS OF PRESENTATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Transaction). The total value of the consideration was based in part on AerCap’s closing price per share of $47.01 on May 13, 2014.

In June 2015, we sold 86.9 million ordinary shares of AerCap by means of an underwritten public offering of 71.2 million ordinary shares and a private sale of 15.7 million ordinary shares to AerCap. We received cash proceeds of approximately $3.7 billion, reflecting proceeds of approximately $3.4 billion from the underwritten offering and cash proceeds of $250 million from the private sale of shares to AerCap. In connection with the closing of the private sale of shares to AerCap, we also received $500 million of 6.50% fixed-to-floating rate junior subordinated notes issued by AerCap Global Aviation Trust and guaranteed by AerCap and certain of its subsidiaries. These notes, included in Bonds available for sale, mature in 2045 and are callable beginning in 2025.  We accounted for our interest in AerCap using the equity method of accounting through the date of the June 2015 sale, and as available for sale thereafter.  In August 2015, we sold our remaining 10.7 million ordinary shares of AerCap by means of an underwritten public offering and received proceeds of approximately $500 million.

Use of Estimates

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

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

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

     reinsurance assets;

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

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

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

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

     liability for legal contingencies; and

     fair value measurements of certain financial assets and liabilities.

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

8AIG | Third Quarter 2017 Form 10-Q7


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ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |2. Item 1 /Summary of Significant Accounting Policies NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSummary of Significant Accounting Policies

Accounting Standards Adopted During 20162017

Derivative Contract Novations

Accounting for Share-Based Payments with Performance Targets

In June 2014,March 2016, the FASBFinancial Accounting Standards Board (FASB) issued an accounting standard that clarifies the accounting for share-based payments when the terms of an award provide that a performance target could be achieved afterchange in the requisite service period. The standard requirescounterparty (novation) to a derivative instrument that a performance target that affects vesting and that could be achieved after the requisite service period be treatedhas been designated as a performance condition.hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. 

We adopted the standard prospectively on its required effective date of January 1, 2016. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.  

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity

In August 2014, the FASB issued an accounting standard that allows a reporting entity to measure the financial assets and financial liabilities of a qualifying consolidated collateralized financing entity using the fair value of either its financial assets or financial liabilities, whichever is more observable.

We adopted the standard retrospectively on its required effective date of January 1, 2016. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows. 

Consolidation: Amendments to the Consolidation Analysis

In February 2015, the FASB issued an accounting standard that affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; eliminate the presumption that a general partner should consolidate a limited partnership; affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.

We adopted the standard prospectively on its required effective date of January 1, 2016.2017. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Customer’s Accounting for Fees PaidContingent Put and Call Options in a Cloud Computing ArrangementDebt Instruments

In April 2015,March 2016, the FASB issued an accounting standard that provides guidanceclarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to customers abouttheir debt hosts. The standard requires an evaluation of embedded call (put) options solely on a four-step decision sequence that requires an entity to consider whether (1) the amount paid upon settlement is adjusted based on changes in an index, (2) the amount paid upon settlement is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software licensesubstantial premium or discount and (4) the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change generally accepted accounting principles applicable to a customer's

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put or call option is contingently exercisable.

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

accounting for service contracts.  Consequently, all software licenses will be accounted for consistent with other licenses of intangible assets.

We adopted thisthe standard prospectively on its required effective date of January 1, 2016.2017. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flowsflows.

Simplifying the PresentationTransition to the Equity Method of Debt Issuance CostsAccounting

In April 2015,March 2016, the FASB issued an accounting standard that amendseliminates the guidancerequirement that when an investment qualifies for debt issuance costs by requiring such costs to be presenteduse of the equity method as a deduction toresult of an increase in the corresponding debt liability, rather thanlevel of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as an asset, and forif the amortization of such costs to be reported as interest expense.  The amendments are intended to simplifyequity method had been in effect during all previous periods during which the presentation of debt issuance costs and make it consistent with the presentation of debt discounts or premiums. The amendments, however, do not change the recognition and measurement guidance applicable to debt issuance costs.investment had been held.

We adopted thisthe standard on a retrospective basis on January 1, 2016, its required effective date.  Because the new standard did not affect accounting recognition or measurementdate of debt issuance costs, theJanuary 1, 2017. The adoption of thethis standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Disclosures for Investments in Certain EntitiesInterest Held through Related Parties that Calculate Net Asset Value per Share (or its Equivalent)are under Common Control

In May 2015,October 2016, the FASB amendedissued an accounting standard that amends the consolidation analysis for a reporting entity that is the single decision maker of a variable interest entity (VIE).  The new guidance on fair value disclosures for investments for which fair value is measured usingwill require the net asset value (NAV) per share (ordecision maker’s evaluation of its equivalent) as a practical expedient.  The amendmentin this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient.  In addition, the amendment removes the requirement to make certain disclosures for all investmentsinterests held through related parties that are eligible to be measured at fair value usingunder common control on a proportionate basis (rather than in their entirety) when determining whether it is the NAV per share asprimary beneficiary of that VIE.  The amendment does not change the characteristics of a practical expedient. primary beneficiary.

We adopted the standard on its required effective date of January 1, 2016 on a retrospective basis.2017. The adoption of this standard did not have a material effect on our consolidated financial condition, results of operations or cash flows.

Future Application of Accounting Standards

Revenue Recognition

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

The standard is effective for interim and annual reporting periods beginning after December 15, 2017 and may be applied retrospectively or through a cumulative effect adjustment to retained earnings at the date of adoption. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We have developed an implementation plan to adopt this standard using the standardmodified retrospective approach on its required effective date of January 1, 20182018.  Our analysis of revenues indicates that substantially all of our revenues are from sources excluded from the scope of the standard.  For those revenue sources within the scope of the standard, we do not expect material changes in the timing or measurement of revenues based upon our current interpretation of the guidance. We continue to refine our assessment of the impacts this standard is expected to have on our applicable revenue sources, financial statements and related disclosures.  However, as substantially all of our revenue sources are excluded from the scope of the standard, we do not expect the adoption of the standard to have a material effect on our reported consolidated financial condition, results of operations, or cash flows or required disclosures

10AIG | Third Quarter 2017 Form 10-Q8


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ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |2. Item 1 /Summary of Significant Accounting Policies NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Short Duration Insurance Contracts

In May 2015, the FASB issued an accounting standard that requires additional disclosures (including accident year information) for short-duration insurance contracts. New disclosures about the liability for unpaid losses and loss adjustment expenses will be required. The annual disclosures by accident year include: disaggregated net incurred and paid claims development tables segregated by business type (not required to exceed 10 years), reconciliation of total net reserves included in development tables to the reported liability for unpaid losses and loss adjustment expenses, incurred but not reported (IBNR) information, quantitative information and a qualitative description about claim frequency, and the average annual percentage payout of incurred claims. Further, the new standard requires, when applicable, disclosures about discounting liabilities for unpaid losses and loss adjustment expenses and significant changes and reasons for changes in methodologies and assumptions used to determine unpaid losses and loss adjustment expenses. 

The standard is effective for annual reporting periods beginning after December 15, 2015 including interim reporting periods thereafter and must be applied retrospectively.  While early adoption is permitted, we plan to adopt the standard on its required effective date.  The standard requires additional disclosures only and the adoption of the standard will have no effect on our consolidated financial condition, results of operations or cash flows. In addition, the roll forward of the liability for unpaid losses and loss adjustment expenses currently disclosed in annual financial statements will be required for interim periods beginning in the first quarter of 2017.  

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued an accounting standard that affects the recognition, measurement, presentation, and disclosure of financial instruments.  Specifically, under the new standard,will require equity investments (other than those accounted for usingthat do not follow the equity method of accounting or thoseare not subject to consolidation) willconsolidation to be measured at fair value with changes in fair value recognized in earnings.  Also, for thoseearnings, while financial liabilities for which fair value option accounting has been elected, the new standard requires changes in fair value due to instrument-specific credit risk towill be presented separately in other comprehensive income. The standard allows the election to record equity investments without readily determinable fair values at cost, less impairment, adjusted for subsequent observable price changes with changes in the carrying value of the equity investments recorded in earnings. The standard also updates certain fair value disclosure requirements for financial instruments carried at amortized cost.

TheWe will adopt this standard ison its effective for interimdate of January 1, 2018.  Based on our initial review, substantially all of our assets and annual reporting periods beginning after December 15, 2017. Earlyliabilities are not within the scope of the standard. We do not expect the adoption of certain provisions is permitted.  We are assessing the impact of the standard to have a material effect on our reported consolidated financial condition, results of operations, and cash flows.flows or required disclosures.

Leases

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

TheWe plan to adopt the standard ison its effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitteddate of January 1, 2019 using a modified retrospective approach.approach upon adoption. We are assessingcurrently quantifying the impact of the standardexpected recognition on our consolidated financial condition, results of operationsbalance sheet for a right to use asset and cash flows.

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Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Derivative Contract Novations

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

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.standard. We do not expect the adoptionimpact of the standard to have a material effect on our reported consolidated financial condition, results of operations, cash flows or cash flows.

Contingent Put and Call Options in Debt Instruments

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

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

Simplifying the Transition to the Equity Method of Accounting

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

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued a standard that simplifies several aspects of the accounting for share-based compensation, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows.

The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.  We do not expect the adoption of the standard to have a material effect on our consolidated financial condition, results of operations or cash flows.

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required disclosures.

TABLE OF CONTENTSFinancial Instruments - Credit Losses

Item 1 / NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Calculation of Credit Losses

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

The standard is effective for interim and annual reporting periods beginning after December 15, 2019,on January 1, 2020, with early adoption permitted on January 1, 2019.  We are continuing to develop our implementation plan to adopt the standard and are assessing the impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.  While we expect an increase in our allowances for annualcredit losses for the financial instruments within scope of the standard, given the objective of the new standard, the amount of any change will be dependent on our portfolios’ composition and interim periods after December 15,quality at the adoption date as well as economic conditions and forecasts at that time.

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued an accounting standard that addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide clarity on the treatment of eight specifically defined types of cash inflows and outflows. The standard is effective on January 1, 2018 using a retrospective transition method to each period presented or prospectively if adoption of an issue is impracticable.   

We continue to refine our analysis of certain cash flow types and intend to adopt this standard on its required effective date of January 1, 2018.  The standard addresses presentation in the statement of cash flows only and will have no effect on our reported consolidated financial condition, results of operations or required disclosures.  

Intra-Entity Transfers of Assets Other than Inventory

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

We plan to adopt the standard on its effective date of January 1, 2018 using a modified retrospective approach upon adoption.  We are assessing the impact of the standard on our reported consolidated financial condition, results of operations, cash flows and cash flows.   required disclosures.

AIG | Third Quarter 2017 Form 10-Q9


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Classification

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

Restricted Cash Receipts and Cash Payments in the Statement of Cash Flows

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

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

Clarifying the following eight specific cash flow issues:  (1) debt prepaymentDefinition of a Business

In January 2017, the FASB issued an accounting standard that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The new standard will require an entity to evaluate if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or debt extinguishment costs; (2) settlementa group of zero-coupon debt instruments or other debt instruments with coupon interest ratessimilar assets; if so, the set of transferred assets and activities is not a business.  At a minimum, a set must include an input and a substantive process that are insignificant in relationtogether significantly contribute to the effective interest rate of the borrowing;  (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.ability to create output. 

The standard is effective for interim and annual reporting periods beginning after December 15, 2017,on January 1, 2018, with early adoption permitted including interim periods with adjustments reflected aspermitted.  We are evaluating the timing of the beginning of the fiscal year that includes that interim period. Early adoption must include all amendments in the same period. Weand are assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.  Because the standard requires prospective adoption, the impact is dependent on future acquisitions, dispositions and those entities that we consolidate due to obtaining a controlling financial interest.

Simplifying the Test for Goodwill Impairment

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

The standard is effective on January 1, 2020, with early adoption permitted on testing dates after January 1, 2017.  We are evaluating the timing of our adoption. The impact of the standard will be dependent on the market conditions of the reporting units at the time of adoption.

Gains and Losses from the Derecognition of Nonfinancial Assets

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

The standard is effective on January 1, 2018 and may be applied retrospectively to each period presented or through a cumulative effect adjustment to retained earnings at the date of adoption (modified retrospective approach). We are evaluating the timing of adoption and are assessing the impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.

Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost

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

We will adopt this standard on its effective date of January 1, 2018 by retrospectively presenting the service cost and other components, and prospectively capitalizing the service cost component. The standard addresses presentation of net periodic benefit costs in the income statement and will have no effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

AIG | Third Quarter 2017 Form 10-Q10


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

Premium Amortization on Purchased Callable Debt Securities

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

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

Modification of Share-Based Payment Awards

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

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

Derivatives and Hedging

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

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

3. SEGMENT INFORMATIONSegment 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 through two reportable segments:  resources.

We report our results of operations as follows:

·Commercial Insurance business is presented as two operating segments:

-   Liability and Financial Lines

-    Property and Special Risks

·Consumer Insurance business is presented as well as a Corporate andfour operating segments:

-    Individual Retirement

-    Group Retirement

-    Life Insurance

-    Personal Insurance

·The Other category.  The Corporate and OtherOperations category consists of businessesof:

-    Institutional Markets

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

-    General operating expenses not allocatedattributable to our reportable segments. specific reporting segments

Prior to the third quarter of 2016, we presented United Guaranty and Institutional Markets as operating segments of Commercial Insurance. Beginning in the third quarter of 2016, in order to align our financial reporting with the manner in which our chief operating decision makers review the businesses to assess performance and make decisions about resources to be allocated, United Guaranty and Institutional Markets are presented in the Corporate and Other category for all periods presented. As a result, Commercial Insurance operations now consist of our commercial property and casualty business.-    Interest expense

As a result of the transaction agreement discussed in Note 4 to the Condensed Consolidated Financial Statements, the associated assets and liabilities of -    United Guaranty Corporation (UGC or United(United Guaranty) have been classified as held-for-sale at September — The sale of this business was completed on December 31, 2016 

-    AIG Fuji Life Insurance Company, Ltd. (Fuji Life) — The sale of this business was completed on April 30, 2016. 2017

·The Legacy Portfolio segment consists of:

-    Legacy Property and Casualty Run-Off Insurance Lines

-    Legacy Life Insurance Run-Off Lines

-    Legacy Investments

13AIG | Third Quarter 2017 Form 10-Q11


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ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /3. Segment Information NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

In the second quarter of 2015, a United Guaranty subsidiary and certain of our property casualty companies entered into a 50 percent quota share arrangement whereby the United Guaranty subsidiary (1) ceded 50 percent of the risk relating to policies written in 2014 that were current as of January 1, 2015 and (2) ceded 50 percent of the risk relating to all policies written in 2015 and 2016, each in exchange for a 30 percent ceding commission and reimbursements of 50 percent of the losses and loss adjustment expenses incurred on covered policies. Beginning in the third quarter of 2016, the effects of these intercompany reinsurance arrangements are included in the results of Commercial Insurance and Corporate and Other for all periods presented. Previously, these arrangements were eliminated for purposes of segment reporting.

Prior periods have been revised to conform to the current period presentation for the above segment changes.

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

The following tables present ourtable presents AIG’s continuing operations by reportableoperating segment:

 

2016

2015

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Three Months Ended September 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

Income (Loss)

Commercial Insurance

$

5,460

$

729

$

5,750

$

592

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

2,084

 

1,108

 

2,203

 

635

    Life

 

1,662

 

98

 

1,578

 

(40)

    Personal Insurance

 

2,982

 

178

 

2,871

 

62

      Total Consumer Insurance

 

6,728

 

1,384

 

6,652

 

657

Corporate and Other*

 

1,557

 

(522)

 

911

 

(396)

AIG consolidation and elimination

 

(149)

 

21

 

(134)

 

(5)

Total AIG consolidated operating revenues and pre-tax operating income

 

13,596

 

1,612

 

13,179

 

848

Reconciling items from Total revenues and Pre-tax operating income

 

 

 

 

 

 

 

 

    (loss) to revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

    Changes in fair values of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

       living benefits

 

17

 

17

 

4

 

4

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(67)

 

-

 

(2)

    Other income - net

 

-

 

3

 

-

 

-

    Loss on extinguishment of debt

 

-

 

14

 

-

 

(346)

    Net realized capital gains

 

(765)

 

(765)

 

(342)

 

(342)

    Income (loss) from divested businesses

 

-

 

128

 

-

 

(3)

    Non-operating litigation reserves and settlements

 

1

 

5

 

-

 

30

    Reserve development related to non-operating run-off insurance business

 

-

 

-

 

-

 

(30)

    Restructuring and other costs

 

-

 

(210)

 

-

 

(274)

    Other

 

5

 

-

 

(19)

 

-

Revenues and pre-tax income (loss)

$

12,854

$

737

$

12,822

$

(115)

Three Months Ended September 30,

2017

 

2016

 

 

 

 

Pre-Tax

 

 

 

 

Pre-Tax

 

 

Total

 

Operating

 

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

2,848

$

(257)

 

$

3,379

$

948

Property and Special Risks

 

1,744

 

(2,605)

 

 

2,037

 

(263)

      Total Commercial Insurance

 

4,592

 

(2,862)

 

 

5,416

 

685

Consumer Insurance

 

 

 

 

 

 

 

 

 

Individual Retirement

 

1,343

 

718

 

 

1,380

 

920

Group Retirement

 

702

 

249

 

 

717

 

214

Life Insurance

 

1,000

 

112

 

 

921

 

(54)

Personal Insurance

 

2,909

 

(71)

 

 

2,991

 

148

      Total Consumer Insurance

 

5,954

 

1,008

 

 

6,009

 

1,228

Other Operations

 

1,218

 

(287)

 

 

1,003

 

(164)

Legacy Portfolio

 

1,013

 

286

 

 

1,312

 

(99)

AIG Consolidation and elimination

 

(119)

 

(1)

 

 

(144)

 

(6)

Total AIG Consolidated revenues and pre-tax operating income

 

12,658

 

(1,856)

 

 

13,596

 

1,644

Reconciling Items from revenues and pre-tax operating income to

 

 

 

 

 

 

 

 

 

revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

26

 

26

 

 

17

 

17

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

 

 

 

 

 

 

 

 

 

net realized capital gains

 

-

 

84

 

 

-

 

(67)

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

7

 

 

-

 

3

Gain (Loss) on extinguishment of debt

 

-

 

(1)

 

 

-

 

14

Net realized capital losses

 

(922)

 

(922)

 

 

(765)

 

(765)

Gain (loss) from divested businesses

 

-

 

(13)

 

 

-

 

128

Non-operating litigation reserves and settlements

 

1

 

-

 

 

1

 

5

Net loss reserve discount (benefit) charge

 

-

 

(48)

 

 

-

 

(32)

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

 

-

 

(49)

 

 

-

 

-

Restructuring and other costs

 

-

 

(31)

 

 

-

 

(210)

Other

 

(12)

 

-

 

 

5

 

-

Revenues and Pre-tax income (loss)

$

11,751

$

(2,803)

 

$

12,854

$

737

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2017

 

2016

 

 

 

 

Pre-Tax

 

 

 

 

Pre-Tax

 

 

Total

 

Operating

 

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

8,443

$

903

 

$

10,118

$

2,332

Property and Special Risks

 

5,365

 

(2,200)

 

 

6,140

 

(44)

      Total Commercial Insurance

 

13,808

 

(1,297)

 

 

16,258

 

2,288

 

14AIG | Third Quarter 2017 Form 10-Q12


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /3. Segment Information NOTE 3. SEGMENT INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

2016

2015

 

 

 

 

Pre-Tax

 

 

 

Pre-Tax

Nine Months Ended September 30,

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

Income (Loss)

Commercial Insurance

$

16,376

$

2,306

$

17,993

$

2,990

Consumer Insurance

 

 

 

 

 

 

 

 

    Retirement

 

6,407

 

2,310

 

7,056

 

2,239

    Life

 

4,949

 

387

 

4,823

 

280

    Personal Insurance

 

8,718

 

579

 

8,602

 

106

      Total Consumer Insurance

 

20,074

 

3,276

 

20,481

 

2,625

Corporate and Other*

 

3,959

 

(1,411)

 

5,338

 

697

AIG consolidation and elimination

 

(507)

 

15

 

(408)

 

(69)

Total AIG consolidated operating revenues and pre-tax operating income

 

39,902

 

4,186

 

43,404

 

6,243

Reconciling items from Total revenues and Pre-tax operating income

 

 

 

 

 

 

 

 

    (loss) to revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

    Changes in fair values of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

       living benefits

 

270

 

270

 

(39)

 

(39)

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

 

 

 

 

 

 

 

 

       net realized capital gains

 

-

 

(91)

 

-

 

(84)

    Other income - net

 

-

 

15

 

-

 

-

    Loss on extinguishment of debt

 

-

 

(76)

 

-

 

(756)

    Net realized capital gains (losses)

 

(829)

 

(829)

 

1,125

 

1,125

    Income (loss) from divested businesses

 

-

 

351

 

(48)

 

(58)

    Non-operating litigation reserves and settlements

 

42

 

43

 

91

 

86

    Reserve development related to non-operating run-off insurance business

 

-

 

-

 

-

 

(30)

    Restructuring and other costs

 

-

 

(488)

 

-

 

(274)

    Other

 

(28)

 

-

 

(37)

 

-

Revenues and pre-tax income

$

39,357

$

3,381

$

44,496

$

6,213

Consumer Insurance

 

 

 

 

 

 

 

 

 

Individual Retirement

 

4,099

 

1,815

 

 

4,382

 

1,727

Group Retirement

 

2,116

 

758

 

 

2,053

 

670

Life Insurance

 

3,043

 

272

 

 

2,862

 

(27)

Personal Insurance

 

8,618

 

471

 

 

8,735

 

510

      Total Consumer Insurance

 

17,876

 

3,316

 

 

18,032

 

2,880

Other Operations

 

3,207

 

(835)

 

 

3,015

 

(565)

Legacy Portfolio

 

3,235

 

1,059

 

 

3,003

 

(94)

AIG Consolidation and elimination

 

(237)

 

75

 

 

(406)

 

-

Total AIG Consolidated revenues and pre-tax operating income

 

37,889

 

2,318

 

 

39,902

 

4,509

Reconciling Items from revenues and pre-tax operating income to

 

 

 

 

 

 

 

 

 

revenues and pre-tax income:

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

117

 

117

 

 

270

 

270

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

 

 

 

 

 

 

 

 

 

net realized capital gains

 

-

 

195

 

 

-

 

(91)

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

(258)

 

 

-

 

15

Gain (Loss) on extinguishment of debt

 

-

 

4

 

 

-

 

(76)

Net realized capital losses

 

(1,106)

 

(1,106)

 

 

(829)

 

(829)

Gain (loss) from divested businesses

 

-

 

(173)

 

 

-

 

351

Non-operating litigation reserves and settlements

 

17

 

86

 

 

42

 

43

Net loss reserve discount (benefit) charge

 

-

 

(283)

 

 

-

 

(323)

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

 

-

 

(50)

 

 

-

 

-

Restructuring and other costs

 

-

 

(259)

 

 

-

 

(488)

Other

 

(32)

 

-

 

 

(28)

 

-

Revenues and Pre-tax income

$

36,885

$

591

 

$

39,357

$

3,381

*    Corporate and Other includes income from assets held by AIG Parent and other corporate subsidiaries and results from United Guaranty and Institutional Markets.

4. HELD-FOR-SALE CLASSIFICATIONHeld-For-Sale Classification

Held-For-Sale Classification

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

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

Fuji Life and AIG United Guaranty Insurance (Asia) Limited, both previously classified as held-for-sale, were sold on April 30, 2017 and July 1, 2017, respectively. At September 30, 2017, we had no businesses classified as held-for-sale.

On October 18, 2016, we entered into agreements to sell certain insurance operations to Fairfax Financial Holdings Limited (Fairfax). The agreements include the sale of our subsidiary operations in Argentina, Chile, Colombia, Uruguay, Venezuela and Turkey. Fairfax will also acquire renewal rights for the portfolios of local business written by our operations in Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia, and assume certain of our operating assets and employees. Total cash consideration to us is expected to be approximately $234 million. The transaction is closing on a country-by-country basis as the regulatory approvals are obtained.  In the second quarter of 2017, the sale of operations in Turkey as well as the renewal rights in Bulgaria, the Czech Republic, Hungary, Poland and Slovakia were completed, which resulted in total cash proceeds of $48 million. In the third quarter of 2017, the sale of the operations in Colombia, Chile and Argentina were completed, which resulted in cash proceeds of $168 million. Substantially all of the operations and renewal rights that we agreed to sell Fairfax were sold at September 30, 2017.

15AIG | Third Quarter 2017 Form 10-Q13


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / NOTE 4. HELD-FOR-SALE CLASSIFICATIONHeld-For-Sale Classification

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

At September 30, 2016, held-for-sale assets and liabilities comprise the following:

United Guaranty

On August 15, 2016, we entered into a definitive agreement to sell our 100 percent interest in UGC and certain related affiliates to Arch Capital Group Ltd. (Arch) for total consideration of $3.4 billion, consisting of $2.2 billion of cash, up to $250 million of newly issued Arch perpetual preferred stock, with terms similar to Arch’s outstanding Series C preferred stock, and approximately $975 million of newly issued Arch convertible non-voting common-equivalent preferred stock.

The closing of the transaction is subject to certain conditions, including obtaining the requisite regulatory approvals or non-disapprovals and other customary closing conditions.

In lieu of receiving the perpetual preferred stock, we have elected to receive $250 million in pre-closing dividends from UGC. Total consideration for the transaction is expected to be $3.4 billion. In the second quarter of 2015, a United Guaranty subsidiary and certain of our property casualty companies entered into a 50 percent quota share arrangement whereby  the United Guaranty subsidiary (1) ceded 50 percent of the risk relating to policies written in 2014 that were current as of January 1, 2015 and (2) ceded 50 percent of the risk relating to all policies written in 2015 and 2016, each in exchange for a 30 percent ceding commission and reimbursements of 50 percent of the losses and loss adjustment expenses incurred on covered policies. Beginning in the third quarter of 2016, the effects of these intercompany reinsurance arrangements are included in the results of Commercial Insurance and Corporate and Other for all periods presented. Previously, these arrangements were eliminated for purposes of segment reporting.

Ascot

On September 16, 2016, we entered into an agreement to sell our interest in Ascot Underwriting Holdings Ltd. (AUHL) and related syndicate-funding subsidiary Ascot Corporate Name Ltd. (ACNL) (together Ascot) to Canada Pension Plan Investment Board (CPPIB).  Total consideration for the transaction is $1.1 billion inclusive of CPPIB’s recapitalization of Syndicate 1414 Funds at Lloyd’s (FAL) capital requirements. We expect to receive approximately $240 million in net cash proceeds from the transaction after the FAL recapitalization and release of the AIG-guaranteed letter of credit currently supporting the syndicate’s FAL. Such proceeds reflect AIG’s 20 percent stake in AUHL and ownership of ACNL.

Consummation of the transaction is subject to customary closing conditions, including regulatory and other approvals.

Real Estate Investments

Certain real estate investments, including consolidated investment vehicles, met the criteria to be reported as held for sale and are included in the table below. 

16


TABLE OF CONTENTS

Item 1 / NOTE 4. HELD-FOR-SALE CLASSIFICATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table summarizes the components of assets and liabilities held-for-sale on the Condensed Consolidated Balance Sheets at September 30, 2016:December 31, 2016*:

 

September 30,

December 31,

(in millions)

 

2016

 

2016

Assets:

 

 

 

 

Fixed maturity securities

$

4,233

$

6,045

Equity securities

 

149

Mortgage and other loans receivable, net

 

1

 

137

Other invested assets

 

1,006

 

2

Short-term investments

 

212

 

130

Cash

 

80

 

133

Accrued investment income

 

21

Premiums and other receivables, net of allowance

 

357

 

351

Reinsurance assets, net of allowance

 

8

Deferred policy acquisition costs

 

179

 

471

Other assets

 

593

 

273

Assets of businesses held for sale

 

7,720

Less: Loss Accrual

 

(521)

Total assets held for sale

$

6,661

$

7,199

Liabilities:

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

1,074

$

402

Unearned premiums

 

1,164

 

297

Long-term debt

 

1,160

Future policy benefits for life and accident and health insurance contracts

 

4,579

Other policyholder funds

 

378

Other liabilities

 

511

 

450

Total liabilities held for sale

$

3,909

$

6,106

*    Excludes net intercompany assets of $384 million at December 31, 2016, that are eliminated in consolidation.

5. FAIR VALUE MEASUREMENTSFair 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.

17AIG | Third Quarter 2017 Form 10-Q14


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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, 2016

 

  

 

  

 

  

Counterparty

Cash

 

September 30, 2017

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1

$

2,222

$

-

$

-

$

-

$

2,223

$

1

$

2,383

$

-

$

-

$

-

$

2,384

Obligations of states, municipalities and political subdivisions

 

-

 

24,287

 

2,291

 

-

 

-

 

26,578

 

-

 

16,460

 

2,371

 

-

 

-

 

18,831

Non-U.S. governments

 

179

 

20,508

 

19

 

-

 

-

 

20,706

 

56

 

15,526

 

11

 

-

 

-

 

15,593

Corporate debt

 

-

 

140,187

 

1,017

 

-

 

-

 

141,204

 

-

 

132,475

 

1,210

 

-

 

-

 

133,685

RMBS

 

-

 

20,606

 

17,209

 

-

 

-

 

37,815

 

-

 

21,095

 

16,414

 

-

 

-

 

37,509

CMBS

 

-

 

12,808

 

2,265

 

-

 

-

 

15,073

 

-

 

12,853

 

665

 

-

 

-

 

13,518

CDO/ABS

 

-

 

9,305

 

7,745

 

-

 

-

 

17,050

 

-

 

7,837

 

8,414

 

-

 

-

 

16,251

Total bonds available for sale

 

180

 

229,923

 

30,546

 

-

 

-

 

260,649

 

57

 

208,629

 

29,085

 

-

 

-

 

237,771

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

140

 

3,207

 

-

 

-

 

-

 

3,347

 

33

 

2,796

 

-

 

-

 

-

 

2,829

Obligations of states, municipalities and political subdivisions

 

-

 

-

 

-

 

-

 

-

 

-

Non-U.S. governments

 

-

 

54

 

-

 

-

 

-

 

54

 

-

 

55

 

-

 

-

 

-

 

55

Corporate debt

 

-

 

1,955

 

19

 

-

 

-

 

1,974

 

-

 

1,844

 

18

 

-

 

-

 

1,862

RMBS

 

-

 

451

 

1,396

 

-

 

-

 

1,847

 

-

 

426

 

1,443

 

-

 

-

 

1,869

CMBS

 

-

 

451

 

159

 

-

 

-

 

610

 

-

 

491

 

65

 

-

 

-

 

556

CDO/ABS

 

-

 

959

 

5,981

 

-

 

-

 

6,940

 

-

 

648

 

4,834

 

-

 

-

 

5,482

Total other bond securities

 

140

 

7,077

 

7,555

 

-

 

-

 

14,772

 

33

 

6,260

 

6,360

 

-

 

-

 

12,653

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

1,230

 

2

 

-

 

-

 

-

 

1,232

 

1,051

 

-

 

5

 

-

 

-

 

1,056

Preferred stock

 

18

 

-

 

-

 

-

 

-

 

18

 

18

 

559

 

-

 

-

 

-

 

577

Mutual funds

 

291

 

3

 

-

 

-

 

-

 

294

 

74

 

-

 

-

 

-

 

-

 

74

Total equity securities available for sale

 

1,539

 

5

 

-

 

-

 

-

 

1,544

 

1,143

 

559

 

5

 

-

 

-

 

1,707

Other equity securities

 

498

 

-

 

-

 

-

 

-

 

498

 

538

 

-

 

-

 

-

 

-

 

538

Mortgage and other loans receivable

 

-

 

-

 

11

 

-

 

-

 

11

 

-

 

-

 

5

 

-

 

-

 

5

Other invested assets(a)

 

-

 

1

 

256

 

-

 

-

 

257

 

-

 

1

 

259

 

-

 

-

 

260

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

4,289

 

-

 

-

 

-

 

4,289

 

2

 

2,252

 

-

 

-

 

-

 

2,254

Foreign exchange contracts

 

-

 

1,144

 

1

 

-

 

-

 

1,145

 

-

 

867

 

-

 

-

 

-

 

867

Equity contracts

 

118

 

150

 

54

 

-

 

-

 

322

 

191

 

209

 

69

 

-

 

-

 

469

Credit contracts

 

-

 

-

 

2

 

-

 

-

 

2

 

-

 

-

 

1

 

-

 

-

 

1

Other contracts

 

-

 

-

 

22

 

-

 

-

 

22

 

-

 

2

 

21

 

-

 

-

 

23

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,289)

 

(1,358)

 

(3,647)

 

-

 

-

 

-

 

(1,390)

 

(1,324)

 

(2,714)

Total derivative assets

 

118

 

5,583

 

79

 

(2,289)

 

(1,358)

 

2,133

 

193

 

3,330

 

91

 

(1,390)

 

(1,324)

 

900

Short-term investments

 

1,936

 

788

 

-

 

-

 

-

 

2,724

 

2,247

 

356

 

-

 

-

 

-

 

2,603

Separate account assets

 

77,016

 

5,610

 

-

 

-

 

-

 

82,626

 

84,239

 

5,061

 

-

 

-

 

-

 

89,300

Total

$

81,427

$

248,987

$

38,447

$

(2,289)

$

(1,358)

$

365,214

$

88,450

$

224,196

$

35,805

$

(1,390)

$

(1,324)

$

345,737

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

14

$

3,974

$

-

$

-

$

3,988

Other policyholder funds

 

-

 

-

 

-

 

-

 

-

 

-

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

2,228

 

26

 

-

 

-

 

2,254

Foreign exchange contracts

 

-

 

1,298

 

3

 

-

 

-

 

1,301

Equity contracts

 

56

 

3

 

-

 

-

 

-

 

59

Credit contracts

 

-

 

4

 

274

 

-

 

-

 

278

Other contracts

 

-

 

-

 

5

 

-

 

-

 

5

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,390)

 

(1,395)

 

(2,785)

Total derivative liabilities

 

56

 

3,533

 

308

 

(1,390)

 

(1,395)

 

1,112

Long-term debt

 

-

 

2,995

 

3

 

-

 

-

 

2,998

Other liabilities

 

75

 

33

 

-

 

-

 

-

 

108

Total

$

131

$

6,575

$

4,285

$

(1,390)

$

(1,395)

$

8,206

18AIG | Third Quarter 2017 Form 10-Q15


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

27

$

4,022

$

-

$

-

$

4,049

Other policyholder funds

 

6

 

-

 

-

 

-

 

-

 

6

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

3,667

 

52

 

-

 

-

 

3,719

Foreign exchange contracts

 

-

 

1,400

 

10

 

-

 

-

 

1,410

Equity contracts

 

-

 

2

 

-

 

-

 

-

 

2

Credit contracts

 

-

 

-

 

347

 

-

 

-

 

347

Other contracts

 

-

 

-

 

112

 

-

 

-

 

112

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(2,289)

 

(482)

 

(2,771)

Total derivative liabilities

 

-

 

5,069

 

521

 

(2,289)

 

(482)

 

2,819

Long-term debt

 

-

 

3,594

 

70

 

-

 

-

 

3,664

Other liabilities

 

75

 

-

 

-

 

-

 

-

 

75

Total

$

81

$

8,690

$

4,613

$

(2,289)

$

(482)

$

10,613

December 31, 2015

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

-

$

1,844

$

-

$

-

$

-

$

1,844

Obligations of states, municipalities and political subdivisions

 

-

 

25,199

 

2,124

 

-

 

-

 

27,323

Non-U.S. governments

 

683

 

17,480

 

32

 

-

 

-

 

18,195

Corporate debt

 

-

 

134,618

 

1,370

 

-

 

-

 

135,988

RMBS

 

-

 

19,690

 

16,537

 

-

 

-

 

36,227

CMBS

 

-

 

10,986

 

2,585

 

-

 

-

 

13,571

CDO/ABS

 

-

 

8,928

 

6,169

 

-

 

-

 

15,097

Total bonds available for sale

 

683

 

218,745

 

28,817

 

-

 

-

 

248,245

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

3,369

 

-

 

-

 

-

 

3,369

Obligations of states, municipalities and political subdivisions

 

-

 

75

 

-

 

-

 

-

 

75

Non-U.S. governments

 

-

 

50

 

-

 

-

 

-

 

50

Corporate debt

 

-

 

2,018

 

17

 

-

 

-

 

2,035

RMBS

 

-

 

649

 

1,581

 

-

 

-

 

2,230

CMBS

 

-

 

557

 

193

 

-

 

-

 

750

CDO/ABS

 

-

 

1,218

 

7,055

 

-

 

-

 

8,273

Total other bond securities

 

-

 

7,936

 

8,846

 

-

 

-

 

16,782

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

2,401

 

-

 

-

 

-

 

-

 

2,401

Preferred stock

 

22

 

-

 

-

 

-

 

-

 

22

Mutual funds

 

491

 

1

 

-

 

-

 

-

 

492

Total equity securities available for sale

 

2,914

 

1

 

-

 

-

 

-

 

2,915

Other equity securities

 

906

 

1

 

14

 

-

 

-

 

921

Mortgage and other loans receivable

 

-

 

-

 

11

 

-

 

-

 

11

Other invested assets(a)

 

2

 

1

 

332

 

-

 

-

 

335

19


TABLE OF CONTENTS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

December 31, 2016

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

63

$

1,929

$

-

$

-

$

-

$

1,992

Obligations of states, municipalities and political subdivisions

 

-

 

22,732

 

2,040

 

-

 

-

 

24,772

Non-U.S. governments

 

52

 

14,466

 

17

 

-

 

-

 

14,535

Corporate debt

 

-

 

131,047

 

1,133

 

-

 

-

 

132,180

RMBS

 

-

 

20,468

 

16,906

 

-

 

-

 

37,374

CMBS

 

-

 

12,231

 

2,040

 

-

 

-

 

14,271

CDO/ABS

 

-

 

8,578

 

7,835

 

-

 

-

 

16,413

Total bonds available for sale

 

115

 

211,451

 

29,971

 

-

 

-

 

241,537

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

2,939

 

-

 

-

 

-

 

2,939

Non-U.S. governments

 

-

 

51

 

-

 

-

 

-

 

51

Corporate debt

 

-

 

1,755

 

17

 

-

 

-

 

1,772

RMBS

 

-

 

420

 

1,605

 

-

 

-

 

2,025

CMBS

 

-

 

448

 

155

 

-

 

-

 

603

CDO/ABS

 

-

 

905

 

5,703

 

-

 

-

 

6,608

Total other bond securities

 

-

 

6,518

 

7,480

 

-

 

-

 

13,998

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

1,056

 

9

 

-

 

-

 

-

 

1,065

Preferred stock

 

752

 

-

 

-

 

-

 

-

 

752

Mutual funds

 

260

 

1

 

-

 

-

 

-

 

261

Total equity securities available for sale

 

2,068

 

10

 

-

 

-

 

-

 

2,078

Other equity securities

 

482

 

-

 

-

 

-

 

-

 

482

Mortgage and other loans receivable

 

-

 

-

 

11

 

-

 

-

 

11

Other invested assets(a)

 

-

 

1

 

204

 

-

 

-

 

205

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

3,150

 

12

 

-

 

-

 

3,162

 

-

 

2,328

 

-

 

-

 

-

 

2,328

Foreign exchange contracts

 

-

 

766

 

-

 

-

 

-

 

766

 

-

 

1,320

 

-

 

-

 

-

 

1,320

Equity contracts

 

91

 

32

 

54

 

-

 

-

 

177

 

188

 

59

 

58

 

-

 

-

 

305

Credit contracts

 

-

 

-

 

3

 

-

 

-

 

3

 

-

 

-

 

2

 

-

 

-

 

2

Other contracts

 

-

 

2

 

21

 

-

 

-

 

23

 

-

 

6

 

16

 

-

 

-

 

22

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,268)

 

(1,554)

 

(2,822)

 

-

 

-

 

-

 

(1,265)

 

(903)

 

(2,168)

Total derivative assets

 

91

 

3,950

 

90

 

(1,268)

 

(1,554)

 

1,309

 

188

 

3,713

 

76

 

(1,265)

 

(903)

 

1,809

Short-term investments

 

1,416

 

1,175

 

-

 

-

 

-

 

2,591

 

2,660

 

681

 

-

 

-

 

-

 

3,341

Separate account assets

 

73,699

 

5,875

 

-

 

-

 

-

 

79,574

 

77,318

 

5,654

 

-

 

-

 

-

 

82,972

Total

$

79,711

$

237,684

$

38,110

$

(1,268)

$

(1,554)

$

352,683

$

82,831

$

228,028

$

37,742

$

(1,265)

$

(903)

$

346,433

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

36

$

2,289

$

-

$

-

$

2,325

$

-

$

25

$

3,033

$

-

$

-

$

3,058

Other policyholder funds

 

6

 

-

 

-

 

-

 

-

 

6

 

5

 

-

 

-

 

-

 

-

 

5

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

2,137

 

62

 

-

 

-

 

2,199

 

-

 

3,039

 

38

 

-

 

-

 

3,077

Foreign exchange contracts

 

-

 

1,197

 

7

 

-

 

-

 

1,204

 

-

 

1,358

 

11

 

-

 

-

 

1,369

Equity contracts

 

-

 

68

 

-

 

-

��

-

 

68

 

12

 

7

 

-

 

-

 

-

 

19

Credit contracts

 

-

 

-

 

508

 

-

 

-

 

508

 

-

 

-

 

331

 

-

 

-

 

331

Other contracts

 

-

 

-

 

69

 

-

 

-

 

69

 

-

 

1

 

5

 

-

 

-

 

6

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,268)

 

(760)

 

(2,028)

 

-

 

-

 

-

 

(1,265)

 

(1,521)

 

(2,786)

Total derivative liabilities

 

-

 

3,402

 

646

 

(1,268)

 

(760)

 

2,020

 

12

 

4,405

 

385

 

(1,265)

 

(1,521)

 

2,016

Long-term debt

 

-

 

3,487

 

183

 

-

 

-

 

3,670

 

-

 

3,357

 

71

 

-

 

-

 

3,428

Other liabilities

 

-

 

62

 

-

 

-

 

-

 

62

Total

$

6

$

6,987

$

3,118

$

(1,268)

$

(760)

$

8,083

$

17

$

7,787

$

3,489

$

(1,265)

$

(1,521)

$

8,507

(a)            Excludes investments that are measured at fair value using the NAVnet asset value (NAV) per share (or its equivalent), which totaled $6.8$6.2 billion and $8.6$6.7 billion as of September 30, 2016 2017 and December 31,2015, 2016, respectively.

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

AIG | Third Quarter 2017 Form 10-Q16


TABLE OF CONTENTS

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

Transfers of Level 1 and Level 2 Assets and Liabilities

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

We had no material transfers of preferred stock or securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2 during the three-month period ended September 30, 2017. During the three- and nine-month periods ended September 30, 2017, we transferred $300 million and $352 million, respectively, of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. For similar reasons, during the nine-month period ended September 30, 2017, we transferred $113 million of securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2. Additionally, we transferred $126 million of preferred stock from Level 1 to Level 2 during the nine-month period ended September 30, 2017. We had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2017.

During the three- and nine-month periods ended September 30, 2016, we transferred $635 million and $946 million, respectively, of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. For similar reasons, during the three- and nine-month periods ended September 30, 2016, we transferred $18 million and $34 million, respectively, of securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2. We had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2016.

During the three- and nine-month periods ended September 30, 2015, we transferred $188 million and $450 million, respectively, of securities issued by Non-U.S. government entities from Level 1 to Level 2, as they are no longer considered actively traded. For similar reasons, during the nine-month period ended September 30, 2015, we transferred $180 million of securities issued by the U.S. government and government sponsored entities from Level 1 to Level 2, while we had no material transfers of these securities from Level 1 to Level 2 during the three-month period ended September 30, 2015. We had no material transfers from Level 2 to Level 1 during the three- and nine-month periods ended September 30, 2015.

20AIG | Third Quarter 2017 Form 10-Q17


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Changes in Level 3 Recurring Fair Value Measurements  

The following tables present changes during the three- and nine-month periods ended September 30, 20162017 and 20152016 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, 20162017 and 2015:2016:

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair Value

 

in Income on

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,313

$

1

$

(5)

$

58

$

2

$

(78)

$

-

$

2,291

$

-

$

2,285

$

2

$

38

$

52

$

-

$

(6)

$

-

$

2,371

$

-

Non-U.S. governments

 

28

 

(3)

 

(9)

 

3

 

-

 

-

 

-

 

19

 

-

 

12

 

(5)

 

4

 

-

 

-

 

-

 

-

 

11

 

-

Corporate debt

 

836

 

(4)

 

7

 

(6)

 

267

 

(82)

 

(1)

 

1,017

 

-

 

932

 

5

 

(2)

 

(53)

 

449

 

(121)

 

-

 

1,210

 

-

RMBS

 

16,779

 

255

 

304

 

(165)

 

36

 

-

 

-

 

17,209

 

-

 

16,393

 

253

 

495

 

(731)

 

11

 

(7)

 

-

 

16,414

 

-

CMBS

 

2,295

 

12

 

(5)

 

(1)

 

2

 

(32)

 

(6)

 

2,265

 

-

 

735

 

2

 

5

 

(77)

 

-

 

-

 

-

 

665

 

-

CDO/ABS

 

7,075

 

7

 

16

 

728

 

-

 

-

 

(81)

 

7,745

 

-

 

8,605

 

8

 

(12)

 

(166)

 

-

 

(21)

 

-

 

8,414

 

-

Total bonds available for sale

 

29,326

 

268

 

308

 

617

 

307

 

(192)

 

(88)

 

30,546

 

-

 

28,962

 

265

 

528

 

(975)

 

460

 

(155)

 

-

 

29,085

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

18

 

1

 

-

 

-

 

-

 

-

 

-

 

19

 

-

 

28

 

1

 

-

 

-

 

-

 

(11)

 

-

 

18

 

-

RMBS

 

1,486

 

30

 

-

 

(120)

 

-

 

-

 

-

 

1,396

 

12

 

1,510

 

63

 

-

 

(130)

 

-

 

-

 

-

 

1,443

 

49

CMBS

 

168

 

6

 

-

 

(15)

 

-

 

-

 

-

 

159

 

4

 

66

 

2

 

-

 

42

 

-

 

(45)

 

-

 

65

 

3

CDO/ABS

 

6,312

 

175

 

-

 

(506)

 

-

 

-

 

-

 

5,981

 

-

 

5,234

 

111

 

-

 

(505)

 

-

 

(6)

 

-

 

4,834

 

(34)

Total other bond securities

 

7,984

 

212

 

-

 

(641)

 

-

 

-

 

-

 

7,555

 

16

 

6,838

 

177

 

-

 

(593)

 

-

 

(62)

 

-

 

6,360

 

18

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

7

 

-

 

-

 

(2)

 

-

 

-

 

-

 

5

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

7

 

-

 

-

 

(2)

 

-

 

-

 

-

 

5

 

-

Other equity securities

 

14

 

-

 

-

 

(14)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Mortgage and other loans receivable

 

11

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

 

5

 

-

 

-

 

-

 

-

 

-

 

-

 

5

 

-

Other invested assets

 

241

 

(4)

 

1

 

18

 

-

 

-

 

-

 

256

 

-

 

225

 

-

 

(2)

 

36

 

-

 

-

 

-

 

259

 

(3)

Total

$

37,576

$

476

$

309

$

(20)

$

307

$

(192)

$

(88)

$

38,368

$

16

$

36,037

$

442

$

526

$

(1,534)

$

460

$

(217)

$

-

$

35,714

$

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

3,518

$

299

$

-

$

157

$

-

$

-

$

-

$

3,974

$

1

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

30

 

(2)

 

-

 

(2)

 

-

 

-

 

-

 

26

 

1

Foreign exchange contracts

 

7

 

-

 

-

 

(4)

 

-

 

-

 

-

 

3

 

-

Equity contracts

 

(63)

 

(11)

 

-

 

5

 

-

 

-

 

-

 

(69)

 

8

Credit contracts

 

293

 

(19)

 

-

 

(1)

 

-

 

-

 

-

 

273

 

19

Other contracts

 

(16)

 

(19)

 

-

 

19

 

-

 

-

 

-

 

(16)

 

12

Total derivative liabilities, net(a)

 

251

 

(51)

 

-

 

17

 

-

 

-

 

-

 

217

 

40

Long-term debt(b)

 

61

 

2

 

-

 

(60)

 

-

 

-

 

-

 

3

 

4

Total

$

3,830

$

250

$

-

$

114

$

-

$

-

$

-

$

4,194

$

45

 

21AIG | Third Quarter 2017 Form 10-Q18


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair Value

 

in Income on

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

3,990

$

65

$

-

$

(33)

$

-

$

-

$

-

$

4,022

$

1

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

46

 

(3)

 

-

 

9

 

-

 

-

 

-

 

52

 

4

Foreign exchange contracts

 

9

 

1

 

-

 

(1)

 

-

 

-

 

-

 

9

 

(1)

Equity contracts

 

(52)

 

(5)

 

-

 

3

 

-

 

-

 

-

 

(54)

 

5

Commodity contracts

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Credit contracts

 

373

 

(36)

 

-

 

7

 

-

 

1

 

-

 

345

 

28

Other contracts

 

102

 

(16)

 

-

 

4

 

-

 

-

 

-

 

90

 

33

Total derivative liabilities, net(a)

 

478

 

(59)

 

-

 

22

 

-

 

1

 

-

 

442

 

69

Long-term debt(b)

 

67

 

3

 

-

 

-

 

-

 

-

 

-

 

70

 

(3)

Total

$

4,535

$

9

$

-

$

(11)

$

-

$

1

$

-

$

4,534

$

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period(a)

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,124

$

3

$

189

$

51

$

2

$

(78)

$

-

$

2,291

$

-

$

2,040

$

3

$

123

$

221

$

8

$

(24)

$

-

$

2,371

$

-

Non-U.S. governments

 

32

 

(3)

 

(11)

 

5

 

-

 

(4)

 

-

 

19

 

-

 

17

 

(5)

 

5

 

(6)

 

-

 

-

 

-

 

11

 

-

Corporate debt

 

1,370

 

(1)

 

(10)

 

(42)

 

581

 

(880)

 

(1)

 

1,017

 

-

 

1,133

 

6

 

(2)

 

(219)

 

655

 

(363)

 

-

 

1,210

 

-

RMBS

 

16,537

 

734

 

(55)

 

(337)

 

330

 

-

 

-

 

17,209

 

-

 

16,906

 

806

 

992

 

(2,270)

 

19

 

(39)

 

-

 

16,414

 

-

CMBS

 

2,585

 

70

 

(83)

 

(169)

 

2

 

(134)

 

(6)

 

2,265

 

-

 

2,040

 

25

 

12

 

(699)

 

-

 

(713)

 

-

 

665

 

-

CDO/ABS

 

6,169

 

27

 

59

 

1,548

 

23

 

-

 

(81)

 

7,745

 

-

 

7,835

 

(14)

 

168

 

478

 

-

 

(53)

 

-

 

8,414

 

-

Total bonds available for sale

 

28,817

 

830

 

89

 

1,056

 

938

 

(1,096)

 

(88)

 

30,546

 

-

 

29,971

 

821

 

1,298

 

(2,495)

 

682

 

(1,192)

 

-

 

29,085

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

17

 

3

 

-

 

(1)

 

-

 

-

 

-

 

19

 

3

 

17

 

2

 

-

 

10

 

-

 

(11)

 

-

 

18

 

1

RMBS

 

1,581

 

7

 

-

 

(174)

 

-

 

(18)

 

-

 

1,396

 

(48)

 

1,605

 

184

 

-

 

(313)

 

-

 

(33)

 

-

 

1,443

 

116

CMBS

 

193

 

4

 

-

 

(38)

 

-

 

-

 

-

 

159

 

14

 

155

 

4

 

-

 

24

 

-

 

(118)

 

-

 

65

 

6

CDO/ABS

 

7,055

 

151

 

-

 

(1,225)

 

65

 

(65)

 

-

 

5,981

 

(378)

 

5,703

 

459

 

-

 

(1,322)

 

-

 

(6)

 

-

 

4,834

 

91

Total other bond securities

 

8,846

 

165

 

-

 

(1,438)

 

65

 

(83)

 

-

 

7,555

 

(409)

 

7,480

 

649

 

-

 

(1,601)

 

-

 

(168)

 

-

 

6,360

 

214

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

6

 

-

 

(1)

 

-

 

5

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

6

 

-

 

(1)

 

-

 

5

 

-

Other equity securities

 

14

 

-

 

-

 

(14)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Mortgage and other loans receivable

 

11

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

 

11

 

-

 

-

 

(6)

 

-

 

-

 

-

 

5

 

-

Other invested assets

 

332

 

(5)

 

2

 

(19)

 

-

 

(54)

 

-

 

256

 

(2)

 

204

 

3

 

(5)

 

58

 

-

 

(1)

 

-

 

259

 

1

Total

$

38,020

$

990

$

91

$

(415)

$

1,003

$

(1,233)

$

(88)

$

38,368

$

(411)

$

37,666

$

1,473

$

1,293

$

(4,038)

$

682

$

(1,362)

$

-

$

35,714

$

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

3,033

$

594

$

-

$

347

$

-

$

-

$

-

$

3,974

$

3

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

38

 

(3)

 

-

 

(9)

 

-

 

-

 

-

 

26

 

3

Foreign exchange contracts

 

11

 

1

 

-

 

(9)

 

-

 

-

 

-

 

3

 

(1)

Equity contracts

 

(58)

 

(26)

 

-

 

15

 

-

 

-

 

-

 

(69)

 

22

Credit contracts

 

329

 

(55)

 

-

 

(1)

 

-

 

-

 

-

 

273

 

53

Other contracts

 

(11)

 

(58)

 

-

 

56

 

(3)

 

-

 

-

 

(16)

 

57

Total derivative liabilities, net(a)

 

309

 

(141)

 

-

 

52

 

(3)

 

-

 

-

 

217

 

134

Long-term debt(b)

 

71

 

16

 

-

 

(84)

 

-

 

-

 

-

 

3

 

-

Total

$

3,413

$

469

$

-

$

315

$

(3)

$

-

$

-

$

4,194

$

137

 

22AIG | Third Quarter 2017 Form 10-Q19


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair Value

 

in Income on

 

Fair value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period(a)

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,313

$

1

$

(5)

$

58

$

2

$

(78)

$

-

$

2,291

$

-

Non-U.S. governments

 

28

 

(3)

 

(9)

 

3

 

-

 

-

 

-

 

19

 

-

Corporate debt

 

836

 

(4)

 

7

 

(6)

 

267

 

(82)

 

(1)

 

1,017

 

-

RMBS

 

16,779

 

255

 

304

 

(165)

 

36

 

-

 

-

 

17,209

 

-

CMBS

 

2,295

 

12

 

(5)

 

(1)

 

2

 

(32)

 

(6)

 

2,265

 

-

CDO/ABS

 

7,075

 

7

 

16

 

728

 

-

 

-

 

(81)

 

7,745

 

-

Total bonds available for sale

 

29,326

 

268

 

308

 

617

 

307

 

(192)

 

(88)

 

30,546

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

18

 

1

 

-

 

-

 

-

 

-

 

-

 

19

 

-

RMBS

 

1,486

 

30

 

-

 

(120)

 

-

 

-

 

-

 

1,396

 

12

CMBS

 

168

 

6

 

-

 

(15)

 

-

 

-

 

-

 

159

 

4

CDO/ABS

 

6,312

 

175

 

-

 

(506)

 

-

 

-

 

-

 

5,981

 

-

Total other bond securities

 

7,984

 

212

 

-

 

(641)

 

-

 

-

 

-

 

7,555

 

16

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other equity securities

 

14

 

-

 

-

 

(14)

 

-

 

-

 

-

 

-

 

-

Mortgage and other loans receivable

 

11

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

Other invested assets

 

241

 

(4)

 

1

 

18

 

-

 

-

 

-

 

256

 

-

Total

$

37,576

$

476

$

309

$

(20)

$

307

$

(192)

$

(88)

$

38,368

$

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

 

Fair value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

2,289

$

1,508

$

-

$

225

$

-

$

-

$

-

$

4,022

$

38

$

3,990

$

65

$

-

$

(33)

$

-

$

-

$

-

$

4,022

$

1

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

50

 

4

 

-

 

(2)

 

-

 

-

 

-

 

52

 

(5)

 

46

 

(3)

 

-

 

9

 

-

 

-

 

-

 

52

 

4

Foreign exchange contracts

 

7

 

3

 

-

 

(1)

 

-

 

-

 

-

 

9

 

(2)

 

9

 

1

 

-

 

(1)

 

-

 

-

 

-

 

9

 

(1)

Equity contracts

 

(54)

 

(5)

 

-

 

5

 

-

 

-

 

-

 

(54)

 

5

 

(52)

 

(5)

 

-

 

3

 

-

 

-

 

-

 

(54)

 

5

Commodity contracts

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Credit contracts

 

505

 

(70)

 

-

 

(91)

 

-

 

1

 

-

 

345

 

56

 

373

 

(36)

 

-

 

7

 

-

 

1

 

-

 

345

 

28

Other contracts

 

48

 

14

 

-

 

28

 

-

 

-

 

-

 

90

 

3

 

102

 

(16)

 

-

 

4

 

-

 

-

 

-

 

90

 

33

Total derivative liabilities, net(a)

 

556

 

(54)

 

-

 

(61)

 

-

 

1

 

-

 

442

 

57

Total derivatives liabilities, net(a)

 

478

 

(59)

 

-

 

22

 

-

 

1

 

-

 

442

 

69

Long-term debt(b)

 

183

 

3

 

-

 

(3)

 

-

 

(113)

 

-

 

70

 

-

 

67

 

3

 

-

 

-

 

-

 

-

 

-

 

70

 

-

Other liabilities

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(3)

Total

$

3,028

$

1,457

$

-

$

161

$

-

$

(112)

$

-

$

4,534

$

95

$

4,535

$

9

$

-

$

(11)

$

-

$

1

$

-

$

4,534

$

67

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

  

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

  

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

  

 

Fair value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair value

 

in Income on

  

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,180

$

(1)

$

(15)

$

16

$

-

$

(40)

$

2,140

$

-

Non-U.S. governments

 

33

 

-

 

(1)

 

(1)

 

-

 

-

 

31

 

-

Corporate debt

 

2,118

 

5

 

2

 

(63)

 

987

 

(573)

 

2,476

 

-

RMBS

 

17,097

 

265

 

(151)

 

(352)

 

-

 

-

 

16,859

 

-

CMBS

 

2,677

 

17

 

(15)

 

50

 

-

 

-

 

2,729

 

-

CDO/ABS

 

6,071

 

8

 

57

 

(21)

 

6

 

(13)

 

6,108

 

-

Total bonds available for sale

 

30,176

 

294

 

(123)

 

(371)

 

993

 

(626)

 

30,343

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

16

 

-

 

-

 

-

 

-

 

-

 

16

 

-

RMBS

 

1,337

 

(4)

 

-

 

169

 

-

 

(1)

 

1,501

 

(3)

CMBS

 

223

 

(1)

 

-

 

(8)

 

5

 

-

 

219

 

(1)

CDO/ABS

 

7,426

 

85

 

-

 

(415)

 

51

 

-

 

7,147

 

23

Total other bond securities

 

9,002

 

80

 

-

 

(254)

 

56

 

(1)

 

8,883

 

19

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other equity securities

 

22

 

-

 

-

 

-

 

-

 

-

 

22

 

-

Mortgage and other loans receivable

 

6

 

-

 

-

 

5

 

-

 

-

 

11

 

-

Other invested assets

 

437

 

(15)

 

(21)

 

(18)

 

-

 

-

 

383

 

-

Total

$

39,643

$

359

$

(144)

$

(638)

$

1,049

$

(627)

$

39,642

$

19

23AIG | Third Quarter 2017 Form 10-Q20


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

  

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

  

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

  

 

Fair value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair value

 

in Income on

  

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,124

$

3

$

189

$

51

$

2

$

(78)

$

-

$

2,291

$

-

Non-U.S. governments

 

32

 

(3)

 

(11)

 

5

 

-

 

(4)

 

-

 

19

 

-

Corporate debt

 

1,370

 

(1)

 

(10)

 

(42)

 

581

 

(880)

 

(1)

 

1,017

 

-

RMBS

 

16,537

 

734

 

(55)

 

(337)

 

330

 

-

 

-

 

17,209

 

-

CMBS

 

2,585

 

70

 

(83)

 

(169)

 

2

 

(134)

 

(6)

 

2,265

 

-

CDO/ABS

 

6,169

 

27

 

59

 

1,548

 

23

 

-

 

(81)

 

7,745

 

-

Total bonds available for sale

 

28,817

 

830

 

89

 

1,056

 

938

 

(1,096)

 

(88)

 

30,546

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

17

 

3

 

-

 

(1)

 

-

 

-

 

-

 

19

 

3

RMBS

 

1,581

 

7

 

-

 

(174)

 

-

 

(18)

 

-

 

1,396

 

(48)

CMBS

 

193

 

4

 

-

 

(38)

 

-

 

-

 

-

 

159

 

14

CDO/ABS

 

7,055

 

151

 

-

 

(1,225)

 

65

 

(65)

 

-

 

5,981

 

(378)

Total other bond securities

 

8,846

 

165

 

-

 

(1,438)

 

65

 

(83)

 

-

 

7,555

 

(409)

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other equity securities

 

14

 

-

 

-

 

(14)

 

-

 

-

 

-

 

-

 

-

Mortgage and other loans receivable

 

11

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

Other invested assets

 

332

 

(5)

 

2

 

(19)

 

-

 

(54)

 

-

 

256

 

(2)

Total

$

38,020

$

990

$

91

$

(415)

$

1,003

$

(1,233)

$

(88)

$

38,368

$

(411)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

  

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

  

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

  

 

Fair value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair value

 

in Income on

  

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

2,289

$

1,508

$

-

$

225

$

-

$

-

$

-

$

4,022

$

38

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

50

 

4

 

-

 

(2)

 

-

 

-

 

-

 

52

 

(5)

Foreign exchange contracts

 

7

 

3

 

-

 

(1)

 

-

 

-

 

-

 

9

 

(2)

Equity contracts

 

(54)

 

(5)

 

-

 

5

 

-

 

-

 

-

 

(54)

 

5

Credit contracts

 

505

 

(70)

 

-

 

(91)

 

-

 

1

 

-

 

345

 

56

Other contracts

 

48

 

14

 

-

 

28

 

-

 

-

 

-

 

90

 

3

Total derivatives liabilities, net(a)

 

556

 

(54)

 

-

 

(61)

 

-

 

1

 

-

 

442

 

57

Long-term debt(b)

 

183

 

3

 

-

 

(3)

 

-

 

(113)

 

-

 

70

 

-

Total

$

3,028

$

1,457

$

-

$

161

$

-

$

(112)

$

-

$

4,534

$

95

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

 

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

 

 

Fair value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair value

 

in Income on

 

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

End

 

Instruments Held

 

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

1,232

$

871

$

-

$

146

$

-

$

-

$

2,249

$

32

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

62

 

3

 

-

 

(7)

 

-

 

-

 

58

 

(4)

Foreign exchange contracts

 

7

 

1

 

-

 

(1)

 

-

 

-

 

7

 

(2)

Equity contracts

 

(63)

 

21

 

-

 

3

 

-

 

-

 

(39)

 

(21)

Credit contracts

 

551

 

(11)

 

-

 

(12)

 

-

 

-

 

528

 

23

Other contracts

 

16

 

12

 

-

 

23

 

-

 

-

 

51

 

(13)

Total derivatives liabilities, net(a)

 

573

 

26

 

-

 

6

 

-

 

-

 

605

 

(17)

Long-term debt(b)

 

193

 

(3)

 

-

 

-

 

-

 

-

 

190

 

-

Total

$

1,998

$

894

$

-

$

152

$

-

$

-

$

3,044

$

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

  

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

  

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

  

 

Fair value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair value

 

in Income on

  

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions(c)

$

2,159

$

-

$

(94)

$

174

$

-

$

(99)

$

2,140

$

-

Non-U.S. governments

 

30

 

-

 

(2)

 

3

 

-

 

-

 

31

 

-

Corporate debt

 

1,883

 

19

 

(31)

 

(209)

 

1,443

 

(629)

 

2,476

 

-

RMBS

 

16,805

 

804

 

(322)

 

(428)

 

-

 

-

 

16,859

 

-

CMBS

 

2,696

 

63

 

(45)

 

97

 

-

 

(82)

 

2,729

 

-

CDO/ABS

 

6,110

 

138

 

(110)

 

98

 

6

 

(134)

 

6,108

 

-

Total bonds available for sale

 

29,683

 

1,024

 

(604)

 

(265)

 

1,449

 

(944)

 

30,343

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

16

 

-

 

16

 

-

RMBS

 

1,105

 

22

 

-

 

389

 

44

 

(59)

 

1,501

 

(21)

CMBS

 

369

 

7

 

-

 

(162)

 

5

 

-

 

219

 

(3)

CDO/ABS

 

7,449

 

482

 

-

 

(1,341)

 

632

 

(75)

 

7,147

 

(55)

Total other bond securities

 

8,923

 

511

 

-

 

(1,114)

 

697

 

(134)

 

8,883

 

(79)

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

1

 

2

 

-

 

(3)

 

-

 

-

 

-

 

-

Total equity securities available for sale

 

1

 

2

 

-

 

(3)

 

-

 

-

 

-

 

-

Other equity securities

 

-

 

-

 

-

 

-

 

22

 

-

 

22

 

(2)

Mortgage and other loans receivable

 

6

 

-

 

-

 

5

 

-

 

-

 

11

 

-

Other invested assets

 

1,042

 

457

 

(509)

 

(607)

 

-

 

-

 

383

 

-

Total

$

39,655

$

1,994

$

(1,113)

$

(1,984)

$

2,168

$

(1,078)

$

39,642

$

(81)

24


TABLE OF CONTENTS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

  

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

  

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

  

 

Fair value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair value

 

in Income on

  

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

1,509

$

410

$

-

$

330

$

-

$

-

$

2,249

$

72

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

74

 

3

 

-

 

(19)

 

-

 

-

 

58

 

(4)

Foreign exchange contracts

 

8

 

(2)

 

-

 

1

 

-

 

-

 

7

 

1

Equity contracts

 

(47)

 

15

 

-

 

(7)

 

-

 

-

 

(39)

 

(19)

Credit contracts

 

978

 

(171)

 

-

 

(279)

 

-

 

-

 

528

 

73

Other contracts

 

59

 

(61)

 

-

 

53

 

-

 

-

 

51

 

53

Total derivatives liabilities, net(a)

 

1,072

 

(216)

 

-

 

(251)

 

-

 

-

 

605

 

104

Long-term debt(b)

 

213

 

(5)

 

-

 

(18)

 

-

 

-

 

190

 

13

Total

$

2,794

$

189

$

-

$

61

$

-

$

-

$

3,044

$

189

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

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

AIG | Third Quarter 2017 Form 10-Q21


TABLE OF CONTENTS

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

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

 

Net

 

Net Realized

 

 

 

 

 

Net

 

Net Realized

 

 

 

 

 

Investment

 

Capital

 

Other

 

 

 

Investment

 

Capital

 

Other

 

 

(in millions)

 

Income

Gains (Losses)

 

Income

 

Total

 

Income

Gains (Losses)

 

Income

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

Bonds available for sale

$

257

$

8

$

-

$

265

Other bond securities

 

87

 

(2)

 

92

 

177

Other invested assets

 

2

 

1

 

(3)

 

-

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

Bonds available for sale

$

849

$

(28)

$

-

$

821

Other bond securities

 

259

 

-

 

390

 

649

Other invested assets

 

5

 

(1)

 

(1)

 

3

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

294

$

(27)

$

1

$

268

$

294

$

(27)

$

1

$

268

Other bond securities

 

37

 

13

 

162

 

212

 

37

 

13

 

162

 

212

Other invested assets

 

5

 

(3)

 

(6)

 

(4)

 

5

 

(3)

 

(6)

 

(4)

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

883

$

(56)

$

3

$

830

$

883

$

(56)

$

3

$

830

Other bond securities

 

29

 

45

 

91

 

165

 

29

 

45

 

91

 

165

Other invested assets

 

2

 

29

 

(36)

 

(5)

 

2

 

29

 

(36)

 

(5)

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

Bonds available for sale

$

304

$

(15)

$

5

$

294

Other bond securities

 

7

 

-

 

73

 

80

Equity securities available for sale

 

-

 

-

 

-

 

-

Other invested assets

 

(8)

 

(11)

 

4

 

(15)

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

Bonds available for sale

$

926

$

(14)

$

112

$

1,024

Other bond securities

 

48

 

3

 

460

 

511

Equity securities available for sale

 

-

 

2

 

-

 

2

Other invested assets

 

(10)

 

408

 

59

 

457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

Net Realized

 

 

 

 

 

Investment

 

Capital

 

Other

 

 

(in millions)

 

Income

Gains (Losses)

 

Income

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

299

$

-

$

299

Derivative liabilities, net

 

-

 

(5)

 

(46)

 

(51)

Long-term debt

 

-

 

-

 

2

 

2

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

594

$

-

$

594

Derivative liabilities, net

 

-

 

(13)

 

(128)

 

(141)

Long-term debt

 

-

 

-

 

16

 

16

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

65

$

-

$

65

Derivative liabilities, net

 

-

 

(5)

 

(54)

 

(59)

Long-term debt

 

-

 

-

 

3

 

3

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

1,508

$

-

$

1,508

Derivative liabilities, net

 

-

 

(1)

 

(53)

 

(54)

Long-term debt

 

-

 

-

 

3

 

3

25AIG | Third Quarter 2017 Form 10-Q22


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

Net

 

Net Realized

 

 

 

 

 

 

Investment

 

Capital

 

Other

 

 

(in millions)

 

Income

Gains (Losses)

 

Income

 

Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

65

$

-

$

65

Derivative liabilities, net

 

-

 

(5)

 

(54)

 

(59)

Long-term debt

 

-

 

-

 

3

 

3

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

1,508

$

-

$

1,508

Derivative liabilities, net

 

-

 

(1)

 

(53)

 

(54)

Long-term debt

 

-

 

-

 

3

 

3

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

871

$

-

$

871

Derivative liabilities, net

 

-

 

17

 

9

 

26

Long-term debt

 

-

 

-

 

(3)

 

(3)

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

410

$

-

$

410

Derivative liabilities, net

 

-

 

12

 

(228)

 

(216)

Long-term debt

 

-

 

-

 

(5)

 

(5)

The following table presents the gross components of purchases, sales, issues and settlements, net, shown above, for the three- and nine-month periods ended September 30, 2017 and 2016 and 2015 related to Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Sales, Issues and

 

(in millions)

 

Purchases

 

Sales

 

Settlements

 

Settlements, Net(a)

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

98

$

-

$

(40)

$

58

 

Non-U.S. governments

 

7

 

-

 

(4)

 

3

 

Corporate debt

 

-

 

-

 

(6)

 

(6)

 

RMBS

 

754

 

(23)

 

(896)

 

(165)

 

CMBS

 

50

 

(24)

 

(27)

 

(1)

 

CDO/ABS

 

902

 

(22)

 

(152)

 

728

 

Total bonds available for sale

 

1,811

 

(69)

 

(1,125)

 

617

 

Other bond securities:

 

 

 

 

 

 

 

 

 

RMBS

 

12

 

(74)

 

(58)

 

(120)

 

CMBS

 

-

 

(14)

 

(1)

 

(15)

 

CDO/ABS

 

-

 

(340)

 

(166)

 

(506)

 

Total other bond securities

 

12

 

(428)

 

(225)

 

(641)

 

Other equity securities

 

-

 

-

 

(14)

 

(14)

 

Other invested assets

 

21

 

-

 

(3)

 

18

 

Total assets

$

1,844

$

(497)

$

(1,367)

$

(20)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

95

$

(128)

$

(33)

 

Derivative liabilities, net

 

(2)

 

-

 

24

 

22

 

Long-term debt(b)

 

-

 

-

 

-

 

-

 

Total liabilities

$

(2)

$

95

$

(104)

$

(11)

 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Sales, Issues and

 

(in millions)

 

Purchases

 

Sales

 

Settlements

 

Settlements, Net(a)

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

56

$

-

$

(4)

$

52

 

Non-U.S. governments

 

7

 

-

 

(7)

 

-

 

Corporate debt

 

6

 

(5)

 

(54)

 

(53)

 

RMBS

 

194

 

(16)

 

(909)

 

(731)

 

CMBS

 

-

 

(17)

 

(60)

 

(77)

 

CDO/ABS

 

402

 

(136)

 

(432)

 

(166)

 

Total bonds available for sale

 

665

 

(174)

 

(1,466)

 

(975)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

RMBS

 

-

 

(51)

 

(79)

 

(130)

 

CMBS

 

42

 

-

 

-

 

42

 

CDO/ABS

 

-

 

(57)

 

(448)

 

(505)

 

Total other bond securities

 

42

 

(108)

 

(527)

 

(593)

 

Equity securities available for sale

 

4

 

-

 

(6)

 

(2)

 

Other equity securities

 

-

 

-

 

-

 

-

 

Other invested assets

 

46

 

(9)

 

(1)

 

36

 

Total assets

$

757

$

(291)

$

(2,000)

$

(1,534)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

79

$

78

$

157

 

Derivative liabilities, net

 

-

 

-

 

17

 

17

 

Long-term debt(b)

 

-

 

-

 

(60)

 

(60)

 

Total liabilities

$

-

$

79

$

35

$

114

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

98

$

-

$

(40)

$

58

 

Non-U.S. governments

 

7

 

-

 

(4)

 

3

 

Corporate debt

 

-

 

-

 

(6)

 

(6)

 

RMBS

 

754

 

(23)

 

(896)

 

(165)

 

CMBS

 

50

 

(24)

 

(27)

 

(1)

 

CDO/ABS

 

902

 

(22)

 

(152)

 

728

 

Total bonds available for sale

 

1,811

 

(69)

 

(1,125)

 

617

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

RMBS

 

12

 

(74)

 

(58)

 

(120)

 

CMBS

 

-

 

(14)

 

(1)

 

(15)

 

CDO/ABS

 

-

 

(340)

 

(166)

 

(506)

 

Total other bond securities

 

12

 

(428)

 

(225)

 

(641)

 

Equity securities available for sale

 

-

 

-

 

-

 

-

 

Other equity securities

 

-

 

-

 

(14)

 

(14)

 

Other invested assets

 

21

 

-

 

(3)

 

18

 

Total assets

$

1,844

$

(497)

$

(1,367)

$

(20)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

95

$

(128)

$

(33)

 

Derivative liabilities, net

 

(2)

 

-

 

24

 

22

 

Long-term debt(b)

 

-

 

-

 

-

 

-

 

Total liabilities

$

(2)

$

95

$

(104)

$

(11)

 

26AIG | Third Quarter 2017 Form 10-Q23


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

35

$

-

$

(19)

$

16

 

Non-U.S. governments

 

3

 

(1)

 

(3)

 

(1)

 

Corporate debt

 

32

 

-

 

(95)

 

(63)

 

RMBS

 

449

 

(29)

 

(772)

 

(352)

 

CMBS

 

50

 

-

 

-

 

50

 

CDO/ABS

 

160

 

(9)

 

(172)

 

(21)

 

Total bonds available for sale

 

729

 

(39)

 

(1,061)

 

(371)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

RMBS

 

218

 

(6)

 

(43)

 

169

 

CMBS

 

-

 

-

 

(8)

 

(8)

 

CDO/ABS

 

10

 

(5)

 

(420)

 

(415)

 

Total other bond securities

 

228

 

(11)

 

(471)

 

(254)

 

Equity securities available for sale

 

-

 

-

 

-

 

-

 

Mortgage and other loans receivable

 

5

 

-

 

-

 

5

 

Other invested assets

 

(8)

 

-

 

(10)

 

(18)

 

Total assets

$

954

$

(50)

$

(1,542)

$

(638)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

122

$

24

$

146

 

Derivative liabilities, net

 

(1)

 

-

 

7

 

6

 

Long-term debt(b)

 

-

 

-

 

-

 

-

 

Total liabilities

$

(1)

$

122

$

31

$

152

 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Sales, Issues and

 

(in millions)

 

Purchases

 

Sales

 

Settlements

 

Settlements, Net(a)

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

144

$

(7)

$

(86)

$

51

 

Non-U.S. governments

 

10

 

-

 

(5)

 

5

 

Corporate debt

 

29

 

(25)

 

(46)

 

(42)

 

RMBS

 

2,297

 

(81)

 

(2,553)

 

(337)

 

CMBS

 

156

 

(82)

 

(243)

 

(169)

 

CDO/ABS

 

2,053

 

(33)

 

(472)

 

1,548

 

Total bonds available for sale

 

4,689

 

(228)

 

(3,405)

 

1,056

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

(1)

 

(1)

 

RMBS

 

101

 

(100)

 

(175)

 

(174)

 

CMBS

 

53

 

(85)

 

(6)

 

(38)

 

CDO/ABS

 

69

 

(376)

 

(918)

 

(1,225)

 

Total other bond securities

 

223

 

(561)

 

(1,100)

 

(1,438)

27


TABLE OF CONTENTS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Equity securities available for sale

 

-

 

-

 

-

 

-

 

Other equity securities

 

14

 

-

 

(28)

 

(14)

 

Other invested assets

 

39

 

(2)

 

(56)

 

(19)

 

Total assets

$

4,965

$

(791)

$

(4,589)

$

(415)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

365

$

(140)

$

225

 

Derivative liabilities, net

 

(5)

 

-

 

(56)

 

(61)

 

Long-term debt(b)

 

-

 

-

 

(3)

 

(3)

 

Total liabilities

$

(5)

$

365

$

(199)

$

161

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions(c)

$

258

$

(22)

$

(62)

$

174

 

Non-U.S. governments

 

11

 

(1)

 

(7)

 

3

 

Corporate debt

 

220

 

(60)

 

(369)

 

(209)

 

RMBS

 

1,856

 

(194)

 

(2,090)

 

(428)

 

CMBS

 

192

 

(27)

 

(68)

 

97

 

CDO/ABS

 

1,021

 

(210)

 

(713)

 

98

 

Total bonds available for sale

 

3,558

 

(514)

 

(3,309)

 

(265)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

RMBS

 

527

 

(16)

 

(122)

 

389

 

CMBS

 

-

 

(79)

 

(83)

 

(162)

 

CDO/ABS

 

236

 

(376)

 

(1,201)

 

(1,341)

 

Total other bond securities

 

763

 

(471)

 

(1,406)

 

(1,114)

 

Equity securities available for sale

 

-

 

(2)

 

(1)

 

(3)

 

Mortgage and other loans receivable

 

5

 

-

 

-

 

5

 

Other invested assets

 

19

 

(587)

 

(39)

 

(607)

 

Total assets

$

4,345

$

(1,574)

$

(4,755)

$

(1,984)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

307

$

23

$

330

 

Derivative liabilities, net

 

(18)

 

-

 

(233)

 

(251)

 

Long-term debt(b)

 

-

 

-

 

(18)

 

(18)

 

Total liabilities

$

(18)

$

307

$

(228)

$

61

 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Sales, Issues and

 

(in millions)

 

Purchases

 

Sales

 

Settlements

 

Settlements, Net(a)

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

279

$

(16)

$

(42)

$

221

 

Non-U.S. governments

 

7

 

(1)

 

(12)

 

(6)

 

Corporate debt

 

36

 

(59)

 

(196)

 

(219)

 

RMBS

 

834

 

(260)

 

(2,844)

 

(2,270)

 

CMBS

 

39

 

(128)

 

(610)

 

(699)

 

CDO/ABS

 

1,609

 

(136)

 

(995)

 

478

 

Total bonds available for sale

 

2,804

 

(600)

 

(4,699)

 

(2,495)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

11

 

-

 

(1)

 

10

 

RMBS

 

112

 

(218)

 

(207)

 

(313)

 

CMBS

 

42

 

(11)

 

(7)

 

24

 

CDO/ABS

 

-

 

(65)

 

(1,257)

 

(1,322)

 

Total other bond securities

 

165

 

(294)

 

(1,472)

 

(1,601)

 

Equity securities available for sale

 

12

 

-

 

(6)

 

6

 

Other equity securities

 

-

 

-

 

-

 

-

 

Mortgage and other loans receivable

 

-

 

(6)

 

-

 

(6)

 

Other invested assets

 

89

 

(11)

 

(20)

 

58

 

Total assets

$

3,070

$

(911)

$

(6,197)

$

(4,038)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

231

$

116

$

347

 

Derivative liabilities, net

 

-

 

-

 

52

 

52

 

Long-term debt(b)

 

-

 

-

 

(84)

 

(84)

 

Total liabilities

$

-

$

231

$

84

$

315

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

144

$

(7)

$

(86)

$

51

 

Non-U.S. governments

 

10

 

-

 

(5)

 

5

 

Corporate debt

 

29

 

(25)

 

(46)

 

(42)

 

RMBS

 

2,297

 

(81)

 

(2,553)

 

(337)

 

CMBS

 

156

 

(82)

 

(243)

 

(169)

 

CDO/ABS

 

2,053

 

(33)

 

(472)

 

1,548

 

Total bonds available for sale

 

4,689

 

(228)

 

(3,405)

 

1,056

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

(1)

 

(1)

 

RMBS

 

101

 

(100)

 

(175)

 

(174)

 

CMBS

 

53

 

(85)

 

(6)

 

(38)

 

CDO/ABS

 

69

 

(376)

 

(918)

 

(1,225)

 

Total other bond securities

 

223

 

(561)

 

(1,100)

 

(1,438)

 

Equity securities available for sale

 

-

 

-

 

-

 

-

 

Other equity securities

 

14

 

-

 

(28)

 

(14)

 

Other invested assets

 

39

 

(2)

 

(56)

 

(19)

 

Total assets

$

4,965

$

(791)

$

(4,589)

$

(415)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

365

$

(140)

$

225

 

Derivative liabilities, net

 

(5)

 

-

 

(56)

 

(61)

 

Long-term debt(b)

 

-

 

-

 

(3)

 

(3)

 

Total liabilities

$

(5)

$

365

$

(199)

$

161

(a)  There were no issuances during the three- and nine-month periods ended September 30, 20162017 and 2015,2016, respectively.

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

AIG | Third Quarter 2017 Form 10-Q24


TABLE OF CONTENTS

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

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at September 30, 20162017 and 20152016 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).

28


TABLE OF CONTENTS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Transfers of Level 3 Assets and Liabilities

We record transfers of assets and liabilities into or out of Level 3 classification at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excluded $49 million and $57 million of net losses related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2017, respectively, and included $32 million and $38 million of net losses related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2017, respectively.

The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table above excluded $11 million of net losses related to assets and liabilities transferred into Level 3 during the nine-month period ended September 30, 2016, and included $3 million and $54 million of net losses related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2016, respectively.

The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excluded $17 million and $35 million of net gains related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2015, respectively, and included $3 million and $6 million of net gains related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2015, respectively.

Transfers of Level 3 Assets

During the three- and nine-month periods ended September 30, 2017 and 2016, and 2015, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS and RMBS. Also, in the nine-month periods ended September 30, 2016 and 2015, transfers into Level 3 assets included certain investments in CDO/ABS. 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.liquidity.  The transfers of investments in RMBS and CDO and certain ABS into Level 3 assets were due to decreases in market transparency and liquidity for individual security types.

During the three- and nine-monthnine-month periods ended September 30, 20162017 and 2015, 2016, transfers out of Level 3 assets primarily included private placement and other corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. Also, in the nine-month periods ended September 30, 2016 and 2015, transfers out of Level 3 assets included certain investments in CDO/ABS and RMBS. securities. Transfers of certain investments municipal securities, corporate debt, RMBS, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments.  Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three- and nine-month periods ended September 30, 20162017 and 2015.2016

.

29AIG | Third Quarter 2017 Form 10-Q25


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Quantitative Information Aboutabout 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‑partythird-party valuation service providers and from internal valuation models. Because input information from third‑partiesthird-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 liabilitiesliabilities:

 

Fair Value at

 

 

 

 

September 30,

Valuation

 

Range

(in millions)

2017

Technique

Unobservable Input(b)

(Weighted Average)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

and political subdivisions

$

1,578

Discounted cash flow

Yield

3.71% - 4.49% (4.10%)

 

 

 

 

 

 

Corporate debt

 

430

Discounted cash flow

Yield

4.18% - 4.52% (4.35%)

 

 

 

 

 

 

RMBS(a)

 

16,472

Discounted cash flow

Constant prepayment rate

2.54% - 11.06% (6.80%)

 

 

 

 

Loss severity

47.05% - 79.54% (62.97%)

 

 

 

 

Constant default rate

3.21% - 7.87% (5.54%)

 

 

 

 

Yield

2.27% - 4.88% (3.58%)

 

 

 

 

 

 

CDO/ABS(a)

 

5,086

Discounted cash flow

Yield

3.26% - 4.99% (4.12%)

 

 

 

 

 

 

CMBS

 

488

Discounted cash flow

Yield

1.86% - 9.12% (5.49%)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

Guaranteed minimum withdrawal benefits (GMWB)

 

2,104

Discounted cash flow

Equity volatility

5.00% - 40.00%

 

 

 

 

Base lapse rate

0.35% - 14.00%

 

 

 

 

Dynamic lapse multiplier

30.00% - 170.00%

 

 

 

 

Mortality multiplier(c)

40.00% - 153.00%

 

 

 

 

Utilization

100.00%

 

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

 

 

 

Index Annuities

 

1,375

Discounted cash flow

Lapse rate

0.50% - 40.00%

 

 

 

 

Mortality multiplier(c)

42.00% - 162.00%

 

 

 

 

 

 

Indexed Life

 

477

Discounted cash flow

Base lapse rate

2.00% to 19.00%

 

 

 

 

Mortality rate

0.00% to 40.00%

AIG | Third Quarter 2017 Form 10-Q26:

 

Fair Value at

 

 

 

 

September 30,

Valuation

 

Range

(in millions)

2016

Technique

Unobservable Input(b)

(Weighted Average)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

and political subdivisions

 

 

 

 

 

 

$

1,460

Discounted cash flow

Yield

3.46% - 4.29% (3.87%)

 

 

 

 

 

 

Corporate debt

 

625

Discounted cash flow

Yield

2.90% - 8.34% (5.62%)

 

 

 

 

 

 

RMBS(a)

 

17,369

Discounted cash flow

Constant prepayment rate

1.37% - 8.78% (5.07%)

 

 

 

 

Loss severity

49.30% - 80.09% (64.69%)

 

 

 

 

Constant default rate

3.51% - 8.83% (6.17%)

 

 

 

 

Yield

2.79% - 5.53% (4.16%)

 

 

 

 

 

 

CDO/ABS(a)

 

4,049

Discounted cash flow

Yield

3.00% - 5.34% (4.17%)

 

 

 

 

 

 

CMBS

 

1,939

Discounted cash flow

Yield

0.00% - 13.78% (6.20%)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

2,793

Discounted cash flow

Equity volatility

12.00% - 12.00%

 

 

 

 

Base lapse rate

0.50% - 20.00%

 

 

 

 

Dynamic lapse rate

30.00% - 170.00%

 

 

 

 

Mortality multiplier(c)

42.00% - 161.00%

 

 

 

 

Utilization rate

100.00%

 

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

 

 

 

Index Annuities

 

907

Discounted cash flow

Lapse rate

1.00% - 66.00%

 

 

 

 

Mortality multiplier(c)

101.00% - 103.00%

 

 

 

 

 

 

Indexed Life

 

352

Discounted cash flow

Base lapse rate

2.00% to 19.00%

 

 

 

 

Mortality rate

0.00% to 40.00%

30


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

 

 

 

Fair Value at

 

 

 

 

December 31,

Valuation

 

Range

 

December 31,

Valuation

 

Range

(in millions)

 

2015

Technique

Unobservable Input(b)

(Weighted Average)

 

2016

Technique

Unobservable Input(b)

(Weighted Average)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

1,217

Discounted cash flow

Yield

4.32% - 5.10% (4.71%)

$

1,248

Discounted cash flow

Yield

4.12% - 4.91% (4.52%)

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

642

Discounted cash flow

Yield

5.63% - 12.45% (9.04%)

 

498

Discounted cash flow

Yield

3.41% - 6.38% (4.90%)

 

 

 

 

 

 

 

 

 

 

RMBS(a)

 

17,280

Discounted cash flow

Constant prepayment rate

0.99% - 8.95% (4.97%)

 

17,412

Discounted cash flow

Constant prepayment rate

3.95% - 6.54% (5.25%)

 

 

 

Loss severity

47.21% - 79.50% (63.35%)

 

 

 

Loss severity

47.51% - 80.98% (64.24%)

 

 

 

Constant default rate

3.49% - 9.04% (6.26%)

 

 

 

Constant default rate

3.28% - 8.64% (5.96%)

 

 

 

Yield

3.13% - 6.14% (4.63%)

 

 

 

Yield

3.28% - 5.87% (4.57%)

 

 

 

 

 

 

 

 

 

 

CDO/ABS(a)

 

3,338

Discounted cash flow

Yield

3.41% - 4.98% (4.19%)

 

4,368

Discounted cash flow

Yield

3.67% - 5.85% (4.76%)

 

 

 

 

 

 

 

 

 

 

CMBS

 

2,388

Discounted cash flow

Yield

0.00% - 17.65% (6.62%)

 

1,511

Discounted cash flow

Yield

0.48% - 10.21% (5.34%)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB and GMAB

 

1,234

Discounted cash flow

Equity volatility

15.00% - 50.00%

GMWB

 

1,777

Discounted cash flow

Equity volatility

13.00% - 50.00%

 

 

 

Base lapse rate

1.00% - 17.00%

 

 

 

Base lapse rate

0.50% - 20.00%

 

 

 

Dynamic lapse rate

0.20% - 25.50%

 

 

 

Dynamic lapse multiplier

30.00% - 170.00%

 

 

 

Mortality multiplier(d)

80.00% - 104.27%

 

 

 

Mortality multiplier(c)

42.00% - 161.00%

 

 

 

Utilization rate

0.00% - 70.00%

 

 

 

Utilization

100.00%

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

 

 

 

 

 

 

 

Index Annuities

 

715

Discounted cash flow

Lapse rate

0.75% - 66.00%

 

859

Discounted cash flow

Lapse rate

1.00% - 66.00%

 

 

 

Mortality multiplier(d)

50.00% - 75.00%

 

 

 

Mortality multiplier(c)

101.00% - 103.00%

 

 

 

 

 

 

 

 

 

 

Indexed Life

 

332

Discounted cash flow

Base lapse rate

2.00% to 19.00%

 

381

Discounted cash flow

Base lapse rate

2.00% - 19.00%

 

 

 

Mortality rate

0.00% to 40.00%

 

 

 

Mortality rate

0.00% - 40.00%

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

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

(c)  Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table for Guaranteed Minimum Withdrawal Benefits (GMWB) and Guaranteed Minimum Accumulation Benefits (GMAB).

(d)  Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table for GMWB and GMAB, and the 1975-1980 Modified Basic Table for index annuities.table.

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

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TABLE OF CONTENTS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Sensitivity to Changes in Unobservable Inputs

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

AIG | Third Quarter 2017 Form 10-Q27


TABLE OF CONTENTS

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

Obligations of States, Municipalities and Political Subdivisions

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

Corporate Debt

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

RMBS and CDO/ABS

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

32


TABLE OF CONTENTSCMBS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

CMBS

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

Embedded derivatives within Policyholder contract deposits

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

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

     Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB and GMAB 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, but in certain scenarios, increases in assumed lapse rates may increase the fair value of the liability.

     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.

AIG | Third Quarter 2017 Form 10-Q28


TABLE OF CONTENTS

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

     Utilization rate 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 rate assumptions are based on company experience, which includes partial withdrawal behavior. Increases in assumed utilization rates will generally increase the fair value of the liability.

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TABLE OF CONTENTS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 NAVnet asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the NAVnet asset value per share to measure fair valuevalue.

 

 

September 30, 2017

 

December 31, 2016

 

 

 

Fair Value

 

 

 

Fair Value

 

 

 

 

 

Using NAV

 

 

 

Using NAV

 

 

 

 

 

Per Share (or

 

Unfunded

 

Per Share (or

 

Unfunded

(in millions)

Investment Category Includes

 

its equivalent)

 

Commitments

 

its equivalent)

 

Commitments

Investment Category

 

 

 

 

 

 

 

 

 

 

Private equity funds:

 

 

 

 

 

 

 

 

 

 

Leveraged buyout

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

$

1,310

$

761

 

$

1,424

$

750

 

 

 

 

 

 

 

 

 

 

 

Real Estate /

Infrastructure

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

 

226

 

185

 

 

258

 

208

 

 

 

 

 

 

 

 

 

 

 

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

 

127

 

44

 

 

137

 

31

 

 

 

 

 

 

 

 

 

 

 

Distressed

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

 

119

 

43

 

 

123

 

44

 

 

 

 

 

 

 

 

 

 

 

Other

Includes multi-strategy, mezzanine and other strategies

 

400

 

237

 

 

312

 

215

Total private equity funds

 

2,182

 

1,270

 

 

2,254

 

1,248

Hedge funds:

 

 

 

 

 

 

 

 

 

 

Event-driven

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

 

1,228

 

-

 

 

1,453

 

9

 

 

 

 

 

 

 

 

 

 

 

Long-short

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

 

1,317

 

-

 

 

1,429

 

-

 

 

 

 

 

 

 

 

 

 

 

Macro

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

 

1,016

 

-

 

 

992

 

-

 

 

 

 

 

 

 

 

 

 

 

Distressed

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

 

278

 

7

 

 

416

 

8

 

 

 

 

 

 

 

 

 

 

 

Other

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

 

222

 

4

 

 

197

 

14

Total hedge funds

 

 

4,061

 

11

 

 

4,487

 

31

Total

 

$

6,243

$

1,281

 

$

6,741

$

1,279

AIG | Third Quarter 2017 Form 10-Q29


TABLE OF CONTENTS

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

 

 

September 30, 2016

 

December 31, 2015

 

 

 

Fair Value

 

 

 

Fair Value

 

 

 

 

 

Using NAV

 

 

 

Using NAV

 

 

 

 

 

Per Share (or

 

Unfunded

 

Per Share (or

 

Unfunded

(in millions)

Investment Category Includes

 

its equivalent)

 

Commitments

 

its equivalent)

 

Commitments

Investment Category

 

 

 

 

 

 

 

 

 

 

Private equity funds:

 

 

 

 

 

 

 

 

 

 

Leveraged buyout

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

$

1,486

$

595

 

$

1,774

$

436

 

 

 

 

 

 

 

 

 

 

 

Real Estate /

Infrastructure

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

 

267

 

190

 

 

306

 

213

 

 

 

 

 

 

 

 

 

 

 

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

 

92

 

32

 

 

107

 

41

 

 

 

 

 

 

 

 

 

 

 

Distressed

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

 

124

 

44

 

 

146

 

41

 

 

 

 

 

 

 

 

 

 

 

Other

Includes multi-strategy, mezzanine and other strategies

 

310

 

235

 

 

298

 

239

Total private equity funds

 

2,279

 

1,096

 

 

2,631

 

970

Hedge funds:

 

 

 

 

 

 

 

 

 

 

Event-driven

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

 

652

 

-

 

 

1,194

 

-

 

 

 

 

 

 

 

 

 

 

 

Long-short

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

 

2,264

 

24

 

 

2,978

 

25

 

 

 

 

 

 

 

 

 

 

 

Macro

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

 

579

 

-

 

 

555

 

-

 

 

 

 

 

 

 

 

 

 

 

Distressed

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

 

620

 

7

 

 

699

 

8

 

 

 

 

 

 

 

 

 

 

 

Emerging markets

Investments in the financial markets of developing countries

 

307

 

-

 

 

353

 

-

 

 

 

 

 

 

 

 

 

 

 

Other

Includes multi-strategy, relative value and other strategies

 

134

 

-

 

 

167

 

-

Total hedge funds

 

 

4,556

 

31

 

 

5,946

 

33

Total

 

$

6,835

$

1,127

 

$

8,577

$

1,003

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‑year10-year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one-one or two‑yeartwo-year increments. At September 30, 2016,2017, assuming average original expected lives of 10 years for the funds, 7562 percent of the total fair value using NAVnet asset value per share (or its equivalent) presented above would have expected remaining lives of three years or less, 1117 percent between four and six years and 1421 percent between seven and 10 years.years.

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TABLE OF CONTENTS

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (14(21 percent), quarterly (40(45 percent), semi‑annually (12semi-annually (11 percent) and annually (34(23 percent), with redemption notices ranging from one day to 180 days. At September 30, 2016,2017, investments representing approximately 7349 percent of the total fair value of these hedge fund investments had partial contractual redemption restrictions. These partial redemption restrictions are generally related to one or more investments held in the hedge funds that the fund manager deemed to be illiquid. The majority of these contractual restrictions, which may have been put in place at the fund’s inception or thereafter, have pre‑definedpre-defined end dates. The majority of these restrictions are generally expected to be lifted by the end of 2017.2018.

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,

Gain (Loss) Three Months Ended September 30,

Gain (Loss) Nine Months Ended September 30,

(in millions)

 

2016

 

2015

 

2016

 

2015

 

2017

 

2016

 

2017

 

2016

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond and equity securities

$

331

$

(106)

$

629

$

495

$

289

$

331

$

1,088

$

629

Alternative Investments(a)

 

154

 

(115)

 

(60)

 

148

 

129

 

154

 

406

 

(60)

Other, including Short-term investments

 

-

 

-

 

-

 

2

 

1

 

-

 

1

 

-

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt(b)

 

8

 

(144)

 

(239)

 

(89)

 

(18)

 

8

 

(66)

 

(239)

Other liabilities

 

-

 

-

 

-

 

(3)

 

(1)

 

-

 

(2)

 

-

Total gain (loss)

$

493

$

(365)

$

330

$

553

Total gain

$

400

$

493

$

1,427

$

330

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

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

We recognized gains of $2 million during both three- and nine-month periods ended September 30, 2017 and gains of $6 million and $14 million during the three- and nine-month periods ended September 30, 2016, respectively, and losses of $18 million and $7 million during the three- and nine-month periods ended September 30, 2015, respectively, attributable to the observable effect of changes in credit spreads on our own liabilities for which the fair value option was elected. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.

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

September 30, 2016

 

December 31, 2015

September 30, 2017

 

December 31, 2016

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

(in millions)

Fair Value

Principal Amount

Difference

 

Fair Value

Principal Amount

Difference

Fair Value

Principal Amount

Difference

 

Fair Value

Principal Amount

Difference

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

11

$

8

$

3

 

$

11

$

9

$

2

$

5

$

5

$

-

 

$

11

$

8

$

3

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt*

$

3,664

$

2,595

$

1,069

 

$

3,670

$

2,675

$

995

$

2,998

$

2,353

$

645

 

$

3,428

$

2,628

$

800

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

35AIG | Third Quarter 2017 Form 10-Q30


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 5. FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

Assets at Fair Value

 

Impairment Charges

Non-Recurring Basis

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Non-Recurring Basis

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 Level 1

  Level 2

  Level 3

 

  Total

 

 

2016

 

2015

 

 

2016

 

2015

 Level 1

  Level 2

  Level 3

 

  Total

 

 

2017

 

2016

 

 

2017

 

2016

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

62

$

62

 

$

26

$

27

 

$

76

$

58

Investments in life settlements

 

-

 

-

 

1,759

 

1,759

 

273

 

80

 

 

360

 

329

Other assets*

 

-

 

-

 

-

 

-

 

 

-

 

2

 

 

35

 

11

Total

$

-

$

-

$

1,821

$

1,821

 

$

299

$

109

 

$

471

$

398

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

194

$

194

 

$

27

$

22

 

$

58

$

74

$

-

$

-

$

364

$

364

 

 

 

 

 

 

 

 

 

 

Investments in life settlements

 

-

 

-

 

665

 

665

 

 

80

 

58

 

 

329

 

200

 

-

 

-

 

736

 

736

 

 

 

 

 

 

 

 

 

 

Other assets

 

-

 

-

 

2

 

2

 

 

2

 

5

 

 

11

 

12

 

-

 

-

 

2

 

2

 

 

 

 

 

 

 

 

 

 

Total

$

-

$

-

$

861

$

861

 

$

109

$

85

 

$

398

$

286

$

-

$

-

$

1,102

$

1,102

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

1,117

$

1,117

 

 

 

 

 

 

 

 

 

 

Investments in life settlements

 

-

 

-

 

828

 

828

 

 

 

 

 

 

 

 

 

 

Other assets

 

-

 

-

 

129

 

129

 

 

 

 

 

 

 

 

 

 

Total

$

-

$

-

$

2,074

$

2,074

 

 

 

 

 

 

 

 

 

 

*    Impairments include $35 million related to other assets that were sold during the three-month period ended June 30, 2017.

Fair Value Information About Financial Instruments Not Measured at Fair ValueFAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

The following table presents the carrying valueamounts and estimated fair valuevalues 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

Estimated Fair Value

 

Carrying

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Value

September 30, 2016

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

172

$

33,950

$

34,122

$

32,402

$

-

$

155

$

36,750

$

36,905

$

36,084

Other invested assets

 

-

 

629

 

2,875

 

3,504

 

4,211

 

-

 

665

 

6

 

671

 

661

Short-term investments

 

-

 

8,021

 

-

 

8,021

 

8,021

 

-

 

7,172

 

-

 

7,172

 

7,172

Cash

 

2,498

 

-

 

-

 

2,498

 

2,498

 

2,433

 

-

 

-

 

2,433

 

2,433

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

394

 

129,460

 

129,854

 

112,380

 

-

 

353

 

123,656

 

124,009

 

114,070

Other liabilities

 

-

 

4,214

 

-

 

4,214

 

4,214

 

-

 

4,896

 

-

 

4,896

 

4,896

Long-term debt

 

-

 

26,133

 

3,868

 

30,001

 

28,613

 

-

 

23,687

 

3,486

 

27,173

 

28,041

December 31, 2015

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

198

$

30,147

$

30,345

$

29,554

$

-

$

161

$

33,575

$

33,736

$

33,229

Other invested assets

 

-

 

563

 

2,880

 

3,443

 

4,169

 

-

 

955

 

2,053

 

3,008

 

3,474

Short-term investments

 

-

 

7,541

 

-

 

7,541

 

7,541

 

-

 

8,961

 

-

 

8,961

 

8,961

Cash

 

1,629

 

-

 

-

 

1,629

 

1,629

 

1,868

 

-

 

-

 

1,868

 

1,868

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

309

 

117,537

 

117,846

 

108,788

 

-

 

382

 

121,742

 

122,124

 

112,705

Other liabilities

 

-

 

2,852

 

-

 

2,852

 

2,852

 

-

 

4,196

 

-

 

4,196

 

4,196

Long-term debt

 

-

 

21,686

 

4,528

 

26,214

 

25,579

 

-

 

23,117

 

3,333

 

26,450

 

27,484

36AIG | Third Quarter 2017 Form 10-Q31


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / 6. Investments NOTE 6. INVESTMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

6. INVESTMENTSInvestments

Securities Available for Sale

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

 

 

 

 

 

 

 

 

 

Other-Than-

 

 

 

 

 

 

 

 

 

Other-Than-

 

Amortized

 

Gross

 

Gross

 

 

 

Temporary

 

Amortized

 

Gross

 

Gross

 

 

 

Temporary

 

Cost or

 

Unrealized

 

Unrealized

 

Fair

 

Impairments

 

Cost or

 

Unrealized

 

Unrealized

 

Fair

 

Impairments

(in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

in AOCI(a)

 

Cost

 

Gains

 

Losses

 

Value

 

in AOCI(a)

September 30, 2016

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1,974

$

249

$

-

$

2,223

$

-

$

2,252

$

152

$

(20)

$

2,384

$

-

Obligations of states, municipalities and political subdivisions

 

24,468

 

2,139

 

(29)

 

26,578

 

-

 

17,637

 

1,235

 

(41)

 

18,831

 

-

Non-U.S. governments

 

18,515

 

2,297

 

(106)

 

20,706

 

-

 

14,885

 

808

 

(100)

 

15,593

 

-

Corporate debt

 

130,290

 

11,709

 

(795)

 

141,204

 

(23)

 

126,014

 

8,519

 

(848)

 

133,685

 

10

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

35,178

 

2,963

 

(326)

 

37,815

 

1,204

 

34,270

 

3,421

 

(182)

 

37,509

 

1,737

CMBS

 

14,244

 

869

 

(40)

 

15,073

 

54

 

13,154

 

456

 

(92)

 

13,518

 

52

CDO/ABS

 

16,746

 

411

 

(107)

 

17,050

 

39

 

15,931

 

374

 

(54)

 

16,251

 

29

Total mortgage-backed, asset-backed and collateralized

 

66,168

 

4,243

 

(473)

 

69,938

 

1,297

 

63,355

 

4,251

 

(328)

 

67,278

 

1,818

Total bonds available for sale(b)

 

241,415

 

20,637

 

(1,403)

 

260,649

 

1,274

 

224,143

 

14,965

 

(1,337)

 

237,771

 

1,828

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

894

 

356

 

(18)

 

1,232

 

-

 

708

 

357

 

(9)

 

1,056

 

-

Preferred stock

 

14

 

4

 

-

 

18

 

-

 

504

 

73

 

-

 

577

 

-

Mutual funds

 

259

 

36

 

(1)

 

294

 

-

 

62

 

12

 

-

 

74

 

-

Total equity securities available for sale

 

1,167

 

396

 

(19)

 

1,544

 

-

 

1,274

 

442

 

(9)

 

1,707

 

-

Total

$

242,582

$

21,033

$

(1,422)

$

262,193

$

1,274

$

225,417

$

15,407

$

(1,346)

$

239,478

$

1,828

December 31, 2015

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1,698

$

155

$

(9)

$

1,844

$

-

$

1,870

$

148

$

(26)

$

1,992

$

-

Obligations of states, municipalities and political subdivisions

 

26,003

 

1,424

 

(104)

 

27,323

 

19

 

24,025

 

1,001

 

(254)

 

24,772

 

-

Non-U.S. governments

 

17,752

 

805

 

(362)

 

18,195

 

-

 

14,018

 

773

 

(256)

 

14,535

 

-

Corporate debt

 

133,513

 

6,462

 

(3,987)

 

135,988

 

(87)

 

126,648

 

7,271

 

(1,739)

 

132,180

 

(31)

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

33,878

 

2,760

 

(411)

 

36,227

 

1,326

 

35,311

 

2,541

 

(478)

 

37,374

 

1,212

CMBS

 

13,139

 

561

 

(129)

 

13,571

 

185

 

14,054

 

409

 

(192)

 

14,271

 

45

CDO/ABS

 

14,985

 

360

 

(248)

 

15,097

 

39

 

16,315

 

278

 

(180)

 

16,413

 

39

Total mortgage-backed, asset-backed and collateralized

 

62,002

 

3,681

 

(788)

 

64,895

 

1,550

 

65,680

 

3,228

 

(850)

 

68,058

 

1,296

Total bonds available for sale(b)

 

240,968

 

12,527

 

(5,250)

 

248,245

 

1,482

 

232,241

 

12,421

 

(3,125)

 

241,537

 

1,265

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

913

 

1,504

 

(16)

 

2,401

 

-

 

708

 

369

 

(12)

 

1,065

 

-

Preferred stock

 

19

 

3

 

-

 

22

 

-

 

748

 

4

 

-

 

752

 

-

Mutual funds

 

447

 

53

 

(8)

 

492

 

-

 

241

 

23

 

(3)

 

261

 

-

Total equity securities available for sale

 

1,379

 

1,560

 

(24)

 

2,915

 

-

 

1,697

 

396

 

(15)

 

2,078

 

-

Total

$

242,347

$

14,087

$

(5,274)

$

251,160

$

1,482

$

233,938

$

12,817

$

(3,140)

$

243,615

$

1,265

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

(b)  At September 30, 2017 and December 31, 2016, bonds available for sale held by us that were below investment grade or not rated totaled $31.2 billion and $33.6 billion, respectively.

37AIG | Third Quarter 2017 Form 10-Q32


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / 6. Investments NOTE 6. INVESTMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(b) At September 30, 2016 and December 31, 2015, bonds available for sale held by us that were below investment grade or not rated totaled $35.6 billion and $34.9 billion, respectively.

Securities Available for Sale in a Loss Position

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

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

Fair

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Fair

 

Unrealized

(in millions)

 

Value

 

Losses

 

 

Value

 

Losses

 

 

Value

 

Losses

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

18

$

-

 

$

-

$

-

 

$

18

$

-

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

967

 

9

 

 

245

 

20

 

 

1,212

 

29

Non-U.S. governments

 

984

 

34

 

 

581

 

72

 

 

1,565

 

106

Corporate debt

 

6,730

 

214

 

 

6,346

 

581

 

 

13,076

 

795

RMBS

 

3,962

 

70

 

 

4,341

 

256

 

 

8,303

 

326

CMBS

 

1,044

 

25

 

 

368

 

15

 

 

1,412

 

40

CDO/ABS

 

2,906

 

44

 

 

2,571

 

63

 

 

5,477

 

107

Total bonds available for sale

 

16,611

 

396

 

 

14,452

 

1,007

 

 

31,063

 

1,403

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

235

 

18

 

 

-

 

-

 

 

235

 

18

Mutual funds

 

5

 

1

 

 

-

 

-

 

 

5

 

1

Total equity securities available for sale

 

240

 

19

 

 

-

 

-

 

 

240

 

19

Total

$

16,851

$

415

 

$

14,452

$

1,007

 

$

31,303

$

1,422

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

483

$

9

 

$

1

$

-

 

$

484

$

9

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

2,382

 

87

 

 

268

 

17

 

 

2,650

 

104

Non-U.S. governments

 

4,327

 

203

 

 

832

 

159

 

 

5,159

 

362

Corporate debt

 

41,317

 

2,514

 

 

5,428

 

1,473

 

 

46,745

 

3,987

RMBS

 

7,215

 

133

 

 

4,318

 

278

 

 

11,533

 

411

CMBS

 

4,138

 

108

 

 

573

 

21

 

 

4,711

 

129

CDO/ABS

 

7,064

 

104

 

 

2,175

 

144

 

 

9,239

 

248

Total bonds available for sale

 

66,926

 

3,158

 

 

13,595

 

2,092

 

 

80,521

 

5,250

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

91

 

16

 

 

-

 

-

 

 

91

 

16

Mutual funds

 

200

 

8

 

 

-

 

-

 

 

200

 

8

Total equity securities available for sale

 

291

 

24

 

 

-

 

-

 

 

291

 

24

Total

$

67,217

$

3,182

 

$

13,595

$

2,092

 

$

80,812

$

5,274

 

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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

766

$

10

 

$

237

$

10

 

$

1,003

$

20

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

871

 

9

 

 

638

 

32

 

 

1,509

 

41

Non-U.S. governments

 

2,354

 

17

 

 

793

 

83

 

 

3,147

 

100

Corporate debt

 

13,155

 

272

 

 

7,984

 

576

 

 

21,139

 

848

RMBS

 

5,861

 

99

 

 

2,287

 

83

 

 

8,148

 

182

CMBS

 

2,663

 

37

 

 

1,173

 

55

 

 

3,836

 

92

CDO/ABS

 

1,864

 

24

 

 

755

 

30

 

 

2,619

 

54

Total bonds available for sale

 

27,534

 

468

 

 

13,867

 

869

 

 

41,401

 

1,337

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

149

 

9

 

 

1

 

-

 

 

150

 

9

Mutual funds

 

6

 

-

 

 

-

 

-

 

 

6

 

-

Total equity securities available for sale

 

155

 

9

 

 

1

 

-

 

 

156

 

9

Total

$

27,689

$

477

 

$

13,868

$

869

 

$

41,557

$

1,346

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

720

$

26

 

$

-

$

-

 

$

720

$

26

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

5,814

 

221

 

 

231

 

33

 

 

6,045

 

254

Non-U.S. governments

 

3,865

 

162

 

 

489

 

94

 

 

4,354

 

256

Corporate debt

 

28,184

 

1,013

 

 

6,080

 

726

 

 

34,264

 

1,739

RMBS

 

8,794

 

252

 

 

4,045

 

226

 

 

12,839

 

478

CMBS

 

4,469

 

152

 

 

479

 

40

 

 

4,948

 

192

CDO/ABS

 

5,362

 

102

 

 

1,961

 

78

 

 

7,323

 

180

Total bonds available for sale

 

57,208

 

1,928

 

 

13,285

 

1,197

 

 

70,493

 

3,125

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

125

 

12

 

 

-

 

-

 

 

125

 

12

Mutual funds

 

64

 

3

 

 

-

 

-

 

 

64

 

3

Total equity securities available for sale

 

189

 

15

 

 

-

 

-

 

 

189

 

15

Total

$

57,397

$

1,943

 

$

13,285

$

1,197

 

$

70,682

$

3,140

38AIG | Third Quarter 2017 Form 10-Q33


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / 6. Investments NOTE 6. INVESTMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

At September 30, 2016,2017, we held 5,2646,115 and 15175 individual fixed maturity and equity securities, respectively, that were in an unrealized loss position, of which 2,1591,721 and three individual fixed maturity and equity securities, respectively, 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, 20162017 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

Contractual Maturities of Fixed Maturity Securities Available for Sale

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

Total Fixed Maturity Securities

 

Fixed Maturity Securities in a Loss

Total Fixed Maturity Securities

 

Fixed Maturity Securities in a Loss

September 30, 2016

Available for Sale

 

Position Available for Sale

Available for Sale

 

Position Available for Sale

(in millions)

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

September 30, 2017

 

 

 

 

 

 

 

 

Due in one year or less

$

8,321

$

8,504

 

$

695

$

680

$

8,929

$

9,129

 

$

1,400

$

1,386

Due after one year through five years

 

51,382

 

54,984

 

3,364

 

3,197

 

47,237

 

49,651

 

5,260

 

5,134

Due after five years through ten years

 

46,208

 

49,119

 

4,839

 

4,528

 

41,576

 

43,101

 

8,841

 

8,474

Due after ten years

 

69,336

 

78,104

 

7,903

 

7,466

 

63,046

 

68,612

 

12,306

 

11,804

Mortgage-backed, asset-backed and collateralized

 

66,168

 

69,938

 

15,665

 

15,192

 

63,355

 

67,278

 

14,931

 

14,603

Total

$

241,415

$

260,649

 

$

32,466

$

31,063

$

224,143

$

237,771

 

$

42,738

$

41,401

December 31, 2015

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

Due in one year or less

$

9,176

$

9,277

 

$

1,122

$

1,103

$

7,796

$

7,994

 

$

604

$

581

Due after one year through five years

 

47,230

 

49,196

 

9,847

 

9,494

 

49,200

 

51,958

 

6,002

 

5,841

Due after five years through ten years

 

54,120

 

54,459

 

22,296

 

20,686

 

43,308

 

44,226

 

16,045

 

15,332

Due after ten years

 

68,440

 

70,418

 

26,235

 

23,755

 

66,257

 

69,301

 

25,007

 

23,629

Mortgage-backed, asset-backed and collateralized

 

62,002

 

64,895

 

26,271

 

25,483

 

65,680

 

68,058

 

25,960

 

25,110

Total

$

240,968

$

248,245

 

$

85,771

$

80,521

$

232,241

$

241,537

 

$

73,618

$

70,493

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,

Three Months Ended September 30,

Nine Months Ended September 30,

 

2016

 

2015

2016

 

2015

 

2017

 

2016

2017

 

2016

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

Gross

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

(in millions)

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

Losses

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

Losses

Fixed maturity securities

$

189

$

54

$

96

$

112

$

593

$

696

 

$

439

$

289

$

93

$

39

$

189

$

54

$

637

$

263

 

$

593

$

696

Equity securities

 

54

 

1

 

24

 

8

 

1,066

 

15

 

 

544

 

16

 

6

 

2

 

54

 

1

 

106

 

20

 

 

1,066

 

15

Total

$

243

$

55

$

120

$

120

$

1,659

$

711

 

$

983

$

305

$

99

$

41

$

243

$

55

$

743

$

283

 

$

1,659

$

711

39AIG | Third Quarter 2017 Form 10-Q34


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / 6. Investments NOTE 6. INVESTMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

For the threethree- and nine-month periods ended September 30, 2017, the aggregate fair value of available for sale securities sold was $4.4 billion and $27.8 billion, respectively, which resulted in net realized capital gains of $58 million and $460 million, respectively.

For the three- and nine-month periods ended September 30, 2016, the aggregate fair value of available for sale securities sold was $7.9 billion and $22.3 billion, respectively, which resulted in net realized capital gains of $188 million and $948 million, respectively.

For the three and nine-month periods ended September 30, 2015, the aggregate fair value of available for sale securities sold was $6.9 billion and $20.9 billion, respectively, which resulted in net realized capital gains of zero and $678 million, respectively.

Other Securities Measured at Fair Value

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

 

September 30, 2016

 

 

 

December 31, 2015

 

 

September 30, 2017

 

 

 

December 31, 2016

 

 

Fair

Percent

 

 

 

Fair

Percent

 

 

Fair

Percent

 

 

Fair

Percent

 

(in millions)

 

Value

 of Total

 

 

 

Value

 of Total

 

 

Value

 of Total

 

 

Value

 of Total

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

3,347

22

%

 

$

3,369

19

%

$

2,829

22

%

 

$

2,939

20

%

Obligations of states, municipalities and political subdivisions

 

-

-

 

 

 

75

-

 

 

-

-

 

 

 

-

-

 

Non-U.S. governments

 

54

-

 

 

 

50

-

 

 

55

-

 

 

 

51

-

 

Corporate debt

 

1,974

13

 

 

 

2,035

12

 

 

1,862

14

 

 

 

1,772

12

 

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

1,847

12

 

 

 

2,230

13

 

 

1,869

14

 

 

 

2,025

14

 

CMBS

 

610

4

 

 

 

750

4

 

 

556

4

 

 

 

603

4

 

CDO/ABS and other collateralized*

 

6,940

46

 

 

 

8,273

47

 

 

5,482

42

 

 

 

6,608

47

 

Total mortgage-backed, asset-backed and collateralized

 

9,397

62

 

 

 

11,253

64

 

 

7,907

60

 

 

 

9,236

65

 

Total fixed maturity securities

 

14,772

97

 

 

 

16,782

95

 

 

12,653

96

 

 

 

13,998

97

 

Equity securities

 

498

3

 

 

 

921

5

 

 

538

4

 

 

 

482

3

 

Total

$

15,270

100

%

 

$

17,703

100

%

$

13,191

100

%

 

$

14,480

100

%

*    Includes $463$270 million and $712$421 million of U.S. Governmentgovernment agency-backed ABS at September 30, 20162017 and December 31, 2015,2016, respectively.

Other Invested Assets

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

 

September 30,

 

December 31,

 

September 30,

 

December 31,

(in millions)

 

2016

 

2015

 

2017

 

2016

Alternative investments(a) (b)

$

14,227

$

18,150

$

12,042

$

13,379

Investment real estate(c)

 

6,494

 

6,579

 

7,465

 

6,900

Aircraft asset investments(d)

 

356

 

477

 

218

 

321

Investments in life settlements

 

3,577

 

3,606

 

1,759

 

2,516

All other investments

 

1,093

 

982

 

1,106

 

1,422

Total

$

25,747

$

29,794

$

22,590

$

24,538

(a)  At September 30, 2016,2017, includes hedge funds of $7.8$6.3 billion, private equity funds of $5.8$5.2 billion, and affordable housing partnerships of $618$558 million. At December 31, 2015,2016, includes hedge funds of $10.9$7.2 billion, private equity funds of $6.5$5.5 billion, and affordable housing partnerships of $701$625 million.

(b)  Approximately 5645 percent and 32 percent of our hedge fund portfolio is available for redemption in 2016,2017 and 2018, respectively, an additional 27 percent and 1017 percent will be available in 2017between 2019 and 2018, respectively.2024.

(c)  Net of accumulated depreciation of $554$510 million and $668$451 million in September 30, 20162017 and December 31, 2015,2016, respectively.

(d)  Consists of investments in aircraft equipment held in a consolidated trusts.trust.

40AIG | Third Quarter 2017 Form 10-Q35


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / 6. Investments NOTE 6. INVESTMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Net Investment Income

The following table presents the components of Net investment income:

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

 

2017

 

2016

 

 

2017

 

2016

Fixed maturity securities, including short-term investments

$

2,935

$

2,794

 

$

8,863

$

8,477

$

2,697

$

2,935

 

$

8,326

$

8,863

Equity securities

 

25

 

(5)

 

 

(19)

 

76

 

5

 

25

 

 

22

 

(19)

Interest on mortgage and other loans

 

379

 

360

 

 

1,144

 

1,046

 

414

 

379

 

 

1,206

 

1,144

Alternative investments*

 

365

 

(18)

 

 

309

 

1,226

 

355

 

365

 

 

1,174

 

309

Real estate

 

37

 

66

 

 

125

 

116

 

51

 

37

 

 

131

 

125

Other investments

 

157

 

142

 

 

395

 

331

 

30

 

157

 

 

246

 

395

Total investment income

 

3,898

 

3,339

 

 

10,817

 

11,272

 

3,552

 

3,898

 

 

11,105

 

10,817

Investment expenses

 

115

 

133

 

 

338

 

402

 

136

 

115

 

 

390

 

338

Net investment income

$

3,783

$

3,206

 

$

10,479

$

10,870

$

3,416

$

3,783

 

$

10,715

$

10,479

*    Beginning in the first quarter of 2016, the presentation of income on alternative investments has been refined to include onlyIncludes income from hedge funds, private equity funds and affordable housing partnerships. Prior period disclosures have been reclassified to conform to this presentation. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag.

Net Realized Capital Gains and Losses

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

 

2015

 

2017

 

2016

 

 

2017

 

 

2016

Sales of fixed maturity securities

$

135

$

(16)

 

$

(103)

 

$

150

$

54

$

135

 

$

374

 

$

(103)

Sales of equity securities

 

53

 

16

 

 

1,051

 

 

528

 

4

 

53

 

 

86

 

 

1,051

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severity

 

(10)

 

(10)

 

 

(15)

 

 

(12)

 

-

 

(10)

 

 

(2)

 

 

(15)

Change in intent

 

(2)

 

(81)

 

 

(35)

 

 

(193)

 

(1)

 

(2)

 

 

(9)

 

 

(35)

Foreign currency declines

 

(7)

 

(5)

 

 

(14)

 

 

(37)

 

(1)

 

(7)

 

 

(11)

 

 

(14)

Issuer-specific credit events

 

(77)

 

(176)

 

 

(303)

 

 

(314)

 

(85)

 

(77)

 

 

(197)

 

 

(303)

Adverse projected cash flows

 

(6)

 

(1)

 

 

(47)

 

 

(9)

 

(1)

 

(6)

 

 

(4)

 

 

(47)

Provision for loan losses

 

8

 

32

 

 

8

 

 

43

 

(38)

 

8

 

 

(56)

 

 

8

Foreign exchange transactions

 

(639)

 

(16)

 

 

(1,197)

 

 

304

 

66

 

(639)

 

 

299

 

 

(1,197)

Derivatives and hedge accounting

 

(226)

 

13

 

 

(129)

 

 

509

Variable annuity embedded derivatives, net of related hedges

 

(430)

 

(309)

 

 

(1,023)

 

 

(482)

All other derivatives and hedge accounting

 

(136)

 

83

 

 

(217)

 

 

353

Impairments on investments in life settlements

 

(80)

 

(58)

 

 

(329)

 

 

(200)

 

(273)

 

(80)

 

 

(360)

 

 

(329)

Other*

 

86

 

(40)

 

 

284

 

 

356

 

(81)

 

86

 

 

14

 

 

284

Net realized capital gains (losses)

$

(765)

$

(342)

 

$

(829)

 

$

1,125

Net realized capital losses

$

(922)

$

(765)

 

$

(1,106)

 

$

(829)

*    Includes $107 million of realized gains due to a purchase price adjustment on the sale of Class B shares of Prudential Financial, Inc. for the nine months ended September 30, 2016 and $357 million of realized gains due to the sale of common shares of SpringLeaf Holdings, $428 million of realized gains due to the sale of Class B shares of Prudential Financial, Inc. and $463 million of realized losses due to the sale of ordinary shares of AerCap for the nine months ended September 30, 2015.2016.

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)

 

2017

 

2016

 

 

2017

 

2016

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

 

 

 

 

 

 

 

 

 

Fixed maturity securities

$

1,059

$

1,595

 

$

4,332

$

11,957

Equity securities

 

9

 

(19)

 

 

52

 

(1,159)

Other investments

 

10

 

(29)

 

 

(127)

 

(243)

Total Increase (decrease) in unrealized appreciation (depreciation) of investments*

$

1,078

$

1,547

 

$

4,257

$

10,555

*    Excludes net unrealized losses attributable to businesses held for sale.

41AIG | Third Quarter 2017 Form 10-Q36


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / 6. Investments NOTE 6. INVESTMENTS

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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)

 

2016

 

2015

 

 

2016

 

2015

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

 

 

 

 

 

 

 

 

 

Fixed maturity securities

$

1,595

$

(1,180)

 

$

11,957

$

(5,583)

Equity securities

 

(19)

 

(384)

 

 

(1,159)

 

(479)

Other investments

 

(29)

 

(85)

 

 

(243)

 

(625)

Total Increase (decrease) in unrealized appreciation (depreciation) of investments*

$

1,547

$

(1,649)

 

$

10,555

$

(6,687)

*    Excludes net unrealized gains attributable to businesses held for sale.

Evaluating Investments for Other-Than-Temporary Impairments

For a discussion of our policy for evaluating investments for other-than-temporary impairments see Note 56 to the Consolidated Financial Statements in the 20152016 Annual Report.

Credit Impairments

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

 

2017

 

2016

 

 

2017

 

2016

Balance, beginning of period

$

1,298

$

2,238

 

$

1,747

$

2,659

$

762

$

1,298

 

$

1,098

$

1,747

Increases due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit impairments on new securities subject to impairment losses

 

23

 

51

 

 

146

 

101

 

58

 

23

 

 

116

 

146

Additional credit impairments on previously impaired securities

 

37

 

37

 

 

166

 

84

 

12

 

37

 

 

49

 

166

Reductions due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit impaired securities fully disposed of for which there was no

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

prior intent or requirement to sell

 

(39)

 

(63)

 

 

(282)

 

(213)

 

(44)

 

(39)

 

 

(99)

 

(282)

Credit impaired securities for which there is a current intent or

 

 

 

 

 

 

 

 

 

anticipated requirement to sell

 

-

 

(1)

 

 

-

 

(1)

Accretion on securities previously impaired due to credit*

 

(187)

 

(197)

 

 

(645)

 

(565)

 

(147)

 

(187)

 

 

(523)

 

(645)

Impairments on securities reclassified to Assets held for sale

 

(2)

 

-

 

 

(2)

 

-

 

-

 

(2)

 

 

-

 

(2)

Balance, end of period

$

1,130

$

2,065

 

$

1,130

$

2,065

$

641

$

1,130

 

$

641

$

1,130

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

42


TABLE OF CONTENTS

Item 1 / NOTE 6. INVESTMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Purchased Credit Impaired (PCI) Securities

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

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

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

(in millions)

At Date of Acquisition

At Date of Acquisition

Contractually required payments (principal and interest)

$

35,665

$

36,228

Cash flows expected to be collected*

 

29,091

 

29,649

Recorded investment in acquired securities

 

19,536

 

19,944

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

 

(in millions)

September 30, 2016

December 31, 2015

Outstanding principal balance

$

17,163

$

16,871

Amortized cost

 

12,364

 

12,303

Fair value

 

13,203

 

13,164

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

 

Three Months Ended

Nine Months Ended

 

September 30,

September 30,

(in millions)

 

2016

 

2015

 

2016

 

2015

Balance, beginning of period

$

7,043

$

6,833

$

6,846

$

6,865

Newly purchased PCI securities

 

177

 

136

 

628

 

551

Disposals

 

-

 

-

 

-

 

(13)

Accretion

 

(214)

 

(220)

 

(637)

 

(661)

Effect of changes in interest rate indices

 

(196)

 

4

 

(435)

 

(140)

Net reclassification from (to) non-accretable difference,

 

 

 

 

 

 

 

 

including effects of prepayments

 

158

 

180

 

566

 

331

Balance, end of period

$

6,968

$

6,933

$

6,968

$

6,933

43AIG | Third Quarter 2017 Form 10-Q37


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / 6. Investments NOTE 6. INVESTMENTS

 

(in millions)

September 30, 2017

December 31, 2016

Outstanding principal balance

$

14,977

$

16,728

Amortized cost

 

10,636

 

11,987

Fair value

 

12,470

 

12,922

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)The following table presents activity for the accretable yield on PCI securities:

 

Three Months Ended

Nine Months Ended

 

September 30,

September 30,

(in millions)

 

2017

 

2016

 

2017

 

2016

Balance, beginning of period

$

7,465

$

7,043

$

7,498

$

6,846

Newly purchased PCI securities

 

16

 

177

 

117

 

628

Disposals

 

-

 

-

 

(18)

 

-

Accretion

 

(193)

 

(214)

 

(609)

 

(637)

Effect of changes in interest rate indices

 

(74)

 

(196)

 

(188)

 

(435)

Net reclassification from (to) non-accretable difference,

 

 

 

 

 

 

 

 

including effects of prepayments

 

172

 

158

 

586

 

566

Balance, end of period

$

7,386

$

6,968

$

7,386

$

6,968

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, 2016

 

December 31, 2015

 

September 30, 2017

 

December 31, 2016

Fixed maturity securities available for sale

$

2,177

$

1,145

$

2,988

$

2,389

Other bond securities, at fair value

$

1,967

$

1,740

$

1,869

$

1,799

At September 30, 20162017 and December 31, 2015,2016, amounts borrowed under repurchase and securities lending agreements totaled $4.1 4.9billion and $2.9 4.2billion, respectively.

AIG | Third Quarter 2017 Form 10-Q38


TABLE OF CONTENTS

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

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

Remaining Contractual Maturity of the Agreements

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

Overnight and Continuous

 

up to 30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

-

$

40

$

-

$

-

$

-

$

40

Corporate debt

 

-

 

17

 

44

 

11

 

-

 

72

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

33

 

-

 

-

 

-

 

-

 

33

Non-U.S. governments

 

-

 

-

 

-

 

55

 

-

 

55

Corporate debt

 

-

 

422

 

1,089

 

270

 

-

 

1,781

Total

$

33

$

479

$

1,133

$

336

$

-

$

1,981

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

-

$

-

$

54

$

-

$

-

$

54

$

-

$

-

$

-

$

51

$

-

$

51

Corporate debt

 

-

 

365

 

1,111

 

437

 

-

 

1,913

 

-

 

163

 

860

 

725

 

-

 

1,748

Total

$

-

$

365

$

1,165

$

437

$

-

$

1,967

$

-

$

163

$

860

$

776

$

-

$

1,799

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

-

$

50

$

-

$

-

$

-

$

50

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

 

-

 

-

 

-

 

49

 

-

 

49

Corporate debt

 

-

 

33

 

332

 

1,326

 

-

 

1,691

Total

$

-

$

83

$

332

$

1,375

$

-

$

1,790

44


TABLE OF CONTENTS

Item 1 / NOTE 6. INVESTMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

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

 

Overnight and Continuous

 

up to 30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

-

$

-

$

-

$

-

$

-

Non-U.S. governments

$

-

$

-

$

113

$

-

$

-

$

113

 

-

 

68

 

-

 

-

 

-

 

68

Corporate debt

 

-

 

711

 

1,190

 

102

 

-

 

2,003

 

-

 

704

 

1,608

 

496

 

-

 

2,808

CMBS

 

-

 

-

 

-

 

61

 

-

 

61

 

-

 

-

 

-

 

-

 

-

 

-

Total

$

-

$

711

$

1,303

$

163

$

-

$

2,177

$

-

$

772

$

1,608

$

496

$

-

$

2,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

21

$

-

$

-

$

-

$

21

Non-U.S. governments

$

-

$

-

$

57

$

-

$

-

$

57

 

-

 

-

 

50

 

-

 

-

 

50

Corporate debt

 

-

 

-

 

914

 

-

 

-

 

914

 

-

 

791

 

1,466

 

-

 

-

 

2,257

RMBS

 

-

 

-

 

-

 

124

 

-

 

124

CMBS

 

-

 

-

 

61

 

-

 

-

 

61

Total

$

-

$

-

$

971

$

124

$

-

$

1,095

$

-

$

812

$

1,577

$

-

$

-

$

2,389

AIG | Third Quarter 2017 Form 10-Q39


TABLE OF CONTENTS

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

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

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

(in millions)

 

September 30, 2016

 

December 31, 2015

 

September 30, 2017

 

December 31, 2016

Securities collateral pledged to us

$

1,590

$

1,742

$

2,054

$

1,434

Amount sold or repledged by us

$

80

$

11

Insurance – Statutory and Other Deposits

TotalThe total carrying valuesvalue of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, were $5.2 billion andwas $4.9 billion at both September 30, 20162017 and December 31, 2015, respectively.2016.

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 $127$103 million and $47$114 million of stock in FHLBs at September 30, 20162017 and December 31, 2015,2016, respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with advances from FHLB, with a fair value of $3.9$2.9 billion and $1.2 billion$223 million, respectively, at September 30, 20162017 and $3.4 billion and $17 million, respectively, at December 31, 2015, respectively,2016, associated with advances from the FHLBs.

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,

45


TABLE OF CONTENTS

Item 1 / NOTE 6. INVESTMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 $2.3$2.1 billion and $2.4$2.2 billion at September 30, 20162017 and December 31, 2015,2016, 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.

Short-term investmentsInvestments held in escrow accounts or otherwise subject to restriction as to their use were $470$411 million and $439$523 million, comprised of bonds available for sale and short term investments at September 30, 20162017 and December 31, 2015,2016, respectively.

AIG | Third Quarter 2017 Form 10-Q40


TABLE OF CONTENTS

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

7. Lending Activities 

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

September 30,

 

December 31,

September 30,

 

December 31,

(in millions)

 

2016

 

2015

 

2017

 

2016

Commercial mortgages*

$

24,010

$

22,067

$

27,930

$

25,042

Residential mortgages

 

3,557

 

2,758

 

4,991

 

3,828

Life insurance policy loans

 

2,301

 

2,367

Commercial loans, other loans and notes receivable

 

2,635

 

2,451

 

1,212

 

2,300

Life insurance policy loans

 

2,510

 

2,597

Total mortgage and other loans receivable

 

32,712

 

29,873

 

36,434

 

33,537

Allowance for credit losses

 

(299)

 

(308)

 

(345)

 

(297)

Mortgage and other loans receivable, net

$

32,413

$

29,565

$

36,089

$

33,240

*    Commercial mortgages primarily represent loans for offices, apartments and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 2322 percent and 1312 percent, respectively, at September 30, 2016,2017, and 2224 percent and 12 percent, respectively, at December 31, 2015)2016).

Credit Quality of Commercial Mortgages

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

Debt Service Coverage Ratios(a)

Debt Service Coverage Ratios(a)

(in millions)

 

>1.20X

 

1.00X - 1.20X

 

<1.00X

 

Total

 

>1.20X

 

1.00X - 1.20X

 

<1.00X

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

Loan-to-Value Ratios(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 65%

$

13,111

$

1,949

$

228

$

15,288

$

17,040

$

1,960

$

355

$

19,355

65% to 75%

 

5,391

 

589

 

87

 

6,067

 

5,466

 

418

 

205

 

6,089

76% to 80%

 

1,445

 

184

 

47

 

1,676

 

672

 

54

 

53

 

779

Greater than 80%

 

362

 

412

 

205

 

979

 

1,189

 

437

 

81

 

1,707

Total commercial mortgages

$

20,309

$

3,134

$

567

$

24,010

$

24,367

$

2,869

$

694

$

27,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

Loan-to-Value Ratios(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 65%

$

10,283

$

1,704

$

150

$

12,137

$

13,998

$

1,694

$

232

$

15,924

65% to 75%

 

6,361

 

611

 

45

 

7,017

 

5,946

 

575

 

62

 

6,583

76% to 80%

 

1,370

 

169

 

81

 

1,620

 

1,246

 

174

 

47

 

1,467

Greater than 80%

 

646

 

226

 

421

 

1,293

 

471

 

392

 

205

 

1,068

Total commercial mortgages

$

18,660

$

2,710

$

697

$

22,067

$

21,661

$

2,835

$

546

$

25,042

(a)  The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio was 1.8X and 1.9X at September 30, 2017 and December 31, 2016, respectively.

(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 both September 30, 2017, and December 31, 2016.

46AIG | Third Quarter 2017 Form 10-Q41


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 / NOTE 7. LENDING ACTIVITIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Lending Activities
 

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

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

of

 

Class

 

 

of

 

of

 

Class

 

 

of

 

(dollars in millions)

Loans

 

Apartments

 

Offices

 

Retail

Industrial

 

Hotel

 

Others

 

Total(c)

Total $

 

Loans

 

Apartments

 

Offices

 

Retail

Industrial

 

Hotel

 

Others

 

Total(c)

Total $

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

801

 

$

5,197

$

7,884

$

5,127

$

1,824

$

2,430

$

1,381

$

23,843

99

%

770

 

$

7,274

$

8,642

$

5,367

$

2,147

$

2,391

$

2,002

$

27,823

100

%

Restructured(a)

4

 

-

 

133

 

18

 

-

 

16

 

-

 

167

1

 

3

 

 

-

 

15

 

4

 

-

 

16

 

-

 

35

-

 

90 days or less delinquent

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

1

 

 

-

 

14

 

-

 

-

 

-

 

-

 

14

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

2

 

 

-

 

40

 

18

 

-

 

-

 

-

 

58

-

 

Total(b)

805

 

$

5,197

$

8,017

$

5,145

$

1,824

$

2,446

$

1,381

$

24,010

100

%

776

 

$

7,274

$

8,711

$

5,389

$

2,147

$

2,407

$

2,002

$

27,930

100

%

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

 

$

-

$

3

$

1

$

6

$

1

$

-

$

11

-

%

 

 

$

-

$

3

$

31

$

-

$

1

$

-

$

35

-

%

General

 

 

31

 

73

 

41

 

7

 

13

 

13

 

178

1

 

 

 

 

61

 

93

 

36

 

8

 

14

 

17

 

229

1

 

Total allowance for credit losses

 

 

$

31

$

76

$

42

$

13

$

14

$

13

$

189

1

%

 

 

$

61

$

96

$

67

$

8

$

15

$

17

$

264

1

%

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

830

 

$

3,916

$

7,484

$

4,809

$

1,902

$

2,082

$

1,435

$

21,628

98

%

784

 

$

6,005

$

7,830

$

5,179

$

1,898

$

2,373

$

1,589

$

24,874

99

%

Restructured(a)

9

 

-

 

156

 

25

 

6

 

16

 

6

 

209

1

 

4

 

 

-

 

134

 

18

 

-

 

16

 

-

 

168

1

 

90 days or less delinquent

1

 

-

 

-

 

4

 

-

 

-

 

-

 

4

-

 

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

9

 

3

 

205

 

-

 

6

 

-

 

12

 

226

1

 

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

Total(b)

849

 

$

3,919

$

7,845

$

4,838

$

1,914

$

2,098

$

1,453

$

22,067

100

%

788

 

$

6,005

$

7,964

$

5,197

$

1,898

$

2,389

$

1,589

$

25,042

100

%

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

 

$

-

$

16

$

1

$

6

$

1

$

-

$

24

-

%

 

 

$

-

$

3

$

1

$

6

$

1

$

-

$

11

-

%

General

 

 

35

 

47

 

29

 

8

 

15

 

13

 

147

1

 

 

 

 

35

 

72

 

41

 

7

 

13

 

15

 

183

1

 

Total allowance for credit losses

 

 

$

35

$

63

$

30

$

14

$

16

$

13

$

171

1

%

 

 

$

35

$

75

$

42

$

13

$

14

$

15

$

194

1

%

(a)  Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt restructurings see Note 67 to the Consolidated Financial Statements in the 20152016 Annual Report.

(b)  Does not reflect allowance for credit losses.

(c)  Approximately all99.7 percent of the commercial mortgages held at such respective dates were current as to payments of principal and interest.  There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.     

47


TABLE OF CONTENTS

Item 1 / NOTE 7. LENDING ACTIVITIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Allowance for Credit Losses

See Note 6 to the Consolidated Financial Statements in the 2015 Annual Report forFor a discussion of our accounting policy for evaluating Mortgage and other loans receivable for impairment.impairment seeNote 7 to the Consolidated Financial Statements in the 2016 Annual Report

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

 

 

 

2016

 

2015

 

 

 

2017

 

2016

Nine Months Ended September 30,

 

 

 

 

 

 

 

Commercial

 

Other

 

 

 

 

Commercial

 

Other

 

 

 

 

 

 

 

 

 

Commercial

 

Other

 

 

 

 

Commercial

 

Other

 

 

(in millions)

 

 

 

 

 

 

 

Mortgages

 

Loans

 

Total

 

 

Mortgages

 

Loans

 

Total

 

 

 

 

 

 

 

Mortgages

 

Loans

 

Total

 

 

Mortgages

 

Loans

 

Total

Allowance, beginning of year

 

 

 

 

 

 

$

171

$

137

$

308

 

$

159

$

112

$

271

 

 

 

 

 

 

$

194

$

103

$

297

 

$

171

$

137

$

308

Loans charged off

 

 

 

 

 

 

 

(13)

 

(2)

 

(15)

 

 

(23)

 

(6)

 

(29)

 

 

 

 

 

 

 

(5)

 

(2)

 

(7)

 

 

(13)

 

(2)

 

(15)

Recoveries of loans previously charged off

Recoveries of loans previously charged off

 

 

 

 

 

 

11

 

-

 

11

 

 

4

 

1

 

5

Recoveries of loans previously charged off

 

 

 

 

 

 

-

 

-

 

-

 

 

11

 

-

 

11

Net charge-offs

 

 

 

 

 

 

 

(2)

 

(2)

 

(4)

 

 

(19)

 

(5)

 

(24)

 

 

 

 

 

 

 

(5)

 

(2)

 

(7)

 

 

(2)

 

(2)

 

(4)

Provision for loan losses

 

 

 

 

 

 

 

20

 

(25)

 

(5)

 

 

22

 

(66)

 

(44)

 

 

 

 

 

 

 

75

 

(20)

 

55

 

 

20

 

(25)

 

(5)

Other

 

 

 

 

 

 

 

-

 

-

 

-

 

 

-

 

3

 

3

 

 

 

 

 

 

 

-

 

-

 

-

 

 

-

 

-

 

-

Allowance, end of period

 

 

 

 

 

 

$

 189 *

$

110

$

299

 

$

 162 *

$

44

$

206

 

 

 

 

 

 

$

 264 *

$

81

$

345

 

$

 189 *

$

110

$

299

*    Of the total allowance, $11$35 million and $24$11 million relate to individually assessed credit losses on $292$342 million and $512$292 million of commercial mortgages at September 30, 20162017 and 2015,2016, respectively.

AIG | Third Quarter 2017 Form 10-Q42


TABLE OF CONTENTS

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

During the nine-month period ended September 30, 2017, loans with a carrying value of $25 million were modified in troubled debt restructurings.  Loans that had been modified in troubled debt restructurings during the nine monthnine-month period ended September 30, 2016 have been fully paid off.    For the nine-month period ended September 30, 2015, loans with a carrying value of $42 million, were modified in troubled debt restructurings.

 

8. 8. VARIABLE INTEREST ENTITIESVariable Interest Entities

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

The primary beneficiary of a VIE is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE.

48


  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.

TABLE OF CONTENTS

Item 1 / NOTE 8. VARIABLE INTEREST ENTITIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Balance Sheet Classification and Exposure to Loss

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

(in millions)

 

Real Estate and Investment Entities(d)

 

Securitization Vehicles

 

Structured Investment

Vehicle

 

Affordable Housing Partnerships

 

Other

 

Total

 

Real Estate and Investment Entities(d)

 

Securitization Vehicles(e)

 

Structured Investment

Vehicle

 

Affordable Housing Partnerships

 

Other

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

-

$

10,546

$

-

$

-

$

-

$

10,546

$

-

$

10,144

$

-

$

-

$

-

$

10,144

Other bond securities

 

-

 

5,074

 

324

 

-

 

6

 

5,404

 

-

 

4,427

 

-

 

-

 

4

 

4,431

Mortgage and other loans receivable

 

1

 

1,553

 

-

 

-

 

109

 

1,663

 

-

 

1,641

 

-

 

-

 

-

 

1,641

Other invested assets

 

1,008

 

356

 

-

 

2,810

 

27

 

4,201

 

1,047

 

218

 

-

 

3,050

 

25

 

4,340

Other (a)

 

1,619

 

885

 

122

 

401

 

170

 

3,197

 

358

 

1,196

 

4

 

463

 

83

 

2,104

Total assets(b)

$

2,628

$

18,414

$

446

$

3,211

$

312

$

25,011

$

1,405

$

17,626

$

4

$

3,513

$

112

$

22,660

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

431

$

781

$

55

$

1,698

$

6

$

2,971

$

465

$

1,099

$

3

$

1,861

$

5

$

3,433

Other (c)

 

1,440

 

225

 

-

 

230

 

138

 

2,033

 

112

 

137

 

-

 

209

 

27

 

485

Total liabilities

$

1,871

$

1,006

$

55

$

1,928

$

144

$

5,004

$

577

$

1,236

$

3

$

2,070

$

32

$

3,918

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

-

$

10,309

$

-

$

-

$

15

$

10,324

$

-

$

10,233

$

-

$

-

$

-

$

10,233

Other bond securities

 

-

 

5,756

 

387

 

-

 

24

 

6,167

 

-

 

4,858

 

266

 

-

 

5

 

5,129

Mortgage and other loans receivable

 

1

 

1,960

 

-

 

-

 

132

 

2,093

 

1

 

1,442

 

-

 

-

 

104

 

1,547

Other invested assets

 

489

 

477

 

-

 

2,608

 

24

 

3,598

 

1,052

 

321

 

-

 

2,821

 

28

 

4,222

Other (a)

 

29

 

1,349

 

94

 

293

 

159

 

1,924

 

365

 

1,104

 

50

 

384

 

92

 

1,995

Total assets(b)

$

519

$

19,851

$

481

$

2,901

$

354

$

24,106

$

1,418

$

17,958

$

316

$

3,205

$

229

$

23,126

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

-

$

1,025

$

53

$

1,513

$

6

$

2,597

$

444

$

771

$

56

$

1,696

$

6

$

2,973

Other(c)

 

34

 

236

 

1

 

214

 

71

 

556

 

224

 

203

 

1

 

211

 

38

 

677

Total liabilities

$

34

$

1,261

$

54

$

1,727

$

77

$

3,153

$

668

$

974

$

57

$

1,907

$

44

$

3,650

(a)  At September 30, 2016, includes approximately $1.0 billion of assets from real estate investment entities that are classified as held for sale. The remaining balance was comprisedComprised primarily of Short-term investments and Other assets at September 30, 20162017 and December 31, 2015.2016.

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

(c)  At September 30, 2016, includes approximately $1.2 billion of liabilities from real estate investment entities that are classified as held for sale. The remaining balance was comprisedComprised primarily of Other liabilities and Derivative liabilities, at fair value, at September 30, 20162017 and December 31, 2015.2016.

(d)  At September 30, 20162017 and December 31, 2015,2016, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $126$98.6 million and $131$106 million, respectively.

AIG | Third Quarter 2017 Form 10-Q43


TABLE OF CONTENTS

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

(e)  At September 30, 2017 and December 31, 2016, $17.0 billion and $17.3 billion, respectively, of the total assets of consolidated securitization vehicles were owed to AIG Parent or its subsidiaries.

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

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TABLE OF CONTENTS

Item 1 / NOTE 8. VARIABLE INTEREST ENTITIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

 

Maximum Exposure to Loss

 

Total VIE

 

On-Balance

 

Off-Balance

 

 

 

 

Total VIE

 

On-Balance

 

Off-Balance

 

 

 

(in millions)

 

Assets

 

Sheet(a)

 

Sheet

 

 

Total

 

Assets

 

Sheet(b)

 

Sheet

 

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

 

Real estate and investment entities(d)

$

410,119

$

11,722

$

2,108

 

$

13,830

Affordable housing partnerships

 

4,755

 

789

 

-

 

 

789

Other

 

4,371

 

332

 

1,031

(b)

 

1,363

Total(c) (e)

$

419,245

$

12,843

$

3,139

 

$

15,982

December 31, 2015

 

 

 

 

 

 

 

 

 

Real estate and investment entities(d)

$

21,951

$

3,072

$

398

 

$

3,470

September 30, 2017

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

378,378

$

9,876

$

2,019

 

$

11,895

Affordable housing partnerships

 

5,255

 

774

 

-

 

 

774

 

4,549

 

736

 

-

 

 

736

Other

 

1,110

 

215

 

1,000

(b)

 

1,215

 

2,882

 

277

 

1,189

(c)

 

1,466

Total

$

28,316

$

4,061

$

1,398

 

$

5,459

$

385,809

$

10,889

$

3,208

 

$

14,097

December 31, 2016

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

409,087

$

11,015

$

2,115

 

$

13,130

Affordable housing partnerships

 

4,709

 

785

 

-

 

 

785

Other

 

2,869

 

314

 

1,045

(c)

 

1,359

Total

$

416,665

$

12,114

$

3,160

 

$

15,274

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

(b)  At September 30, 20162017 and December 31, 2015,2016, $ 12.410.5 billion and $3.8$11.7 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.

(b)(c)  These amounts primarily 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.

(c) As discussed in Note 2, on January 1, 2016, we adopted accounting guidance that resulted in an increase in the number of our investment entities classified as VIEs.

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

(e) At September 30, 2016, includes approximately $492 million total assets, $4 million of on-balance sheet exposure, and $2 million of off-balance sheet exposure from unconsolidated VIE entities that are classified as held for sale.

See For additional information on VIEs seeNote 910 to the Consolidated Financial Statements in the 20152016 Annual Report for additional information on VIEs. Report.                         

 

9. DERIVATIVES AND HEDGE ACCOUNTINGDerivatives 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. See Note 10 to the Consolidated Financial Statements in the 2015 Annual Report for

For a discussion of our accounting policies and procedures regarding derivatives and hedge accounting.accounting see Note 11 to the Consolidated Financial Statements in the 2016 Annual Report.  

Our businesses use derivatives and other instruments as part of their financial risk management. 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 options) are used to economically mitigate risk associated with non‑U.S. dollar denominated debt, net capital exposures, and foreign currency transactions. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities. We use credit derivatives to manage our credit exposures. The derivatives are effective economic hedges of the exposures that they are meant to offset.

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

50AIG | Third Quarter 2017 Form 10-Q44


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /9. Derivatives and Hedge Accounting NOTE 9. DERIVATIVES AND HEDGE ACCOUNTING

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

September 30, 2016

 

December 31, 2015

September 30, 2017

 

December 31, 2016

Gross Derivative Assets

 

Gross Derivative Liabilities

 

Gross Derivative Assets

 

Gross Derivative Liabilities

Gross Derivative Assets

 

Gross Derivative Liabilities

 

Gross Derivative Assets

 

Gross Derivative Liabilities

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

(in millions)

 

Amount

 

Value

 

Amount

 

Value

 

 

Amount

 

Value

 

 

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

 

 

Amount

 

Value

 

 

Amount

 

Value

Derivatives designated as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging instruments:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

355

$

2

 

$

476

$

3

 

$

301

$

1

 

$

725

$

2

$

290

$

1

 

$

615

$

9

 

$

175

$

-

 

$

782

$

11

Foreign exchange contracts

 

4,686

 

392

 

1,795

 

67

 

2,903

 

207

 

 

914

 

56

 

2,634

 

198

 

4,546

 

289

 

3,527

 

385

 

 

2,602

 

184

Equity contracts

 

113

 

9

 

-

 

-

 

-

 

-

 

 

121

 

23

 

-

 

-

 

143

 

3

 

-

 

-

 

 

113

 

7

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

as hedging instruments:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

56,872

 

4,287

 

42,001

 

3,716

 

45,846

 

3,161

 

 

65,733

 

2,197

 

49,801

 

2,253

 

33,303

 

2,245

 

51,030

 

2,328

 

 

44,211

 

3,066

Foreign exchange contracts

 

10,574

 

753

 

8,149

 

1,343

 

9,472

 

559

 

 

8,900

 

1,148

 

6,143

 

669

 

10,763

 

1,012

 

9,468

 

935

 

 

7,674

 

1,185

Equity contracts

 

12,994

 

313

 

8,369

 

2

 

6,656

 

177

 

 

5,028

 

45

 

14,340

 

469

 

8,224

 

56

 

14,060

 

305

 

 

8,633

 

12

Credit contracts(b)

 

4

 

2

 

911

 

347

 

4

 

3

 

 

1,289

 

508

 

3

 

1

 

975

 

278

 

4

 

2

 

 

861

 

331

Other contracts(c)

 

37,937

 

22

 

192

 

112

 

37,586

 

23

 

 

203

 

69

 

38,031

 

23

 

61

 

5

 

37,633

 

22

 

 

62

 

6

Total derivatives, gross

$

123,535

$

5,780

 

$

61,893

$

5,590

 

$

102,768

$

4,131

 

$

82,913

$

4,048

$

111,242

$

3,614

 

$

58,630

$

3,897

 

$

115,897

$

3,977

 

$

64,938

$

4,802

Counterparty netting(d)

 

 

 

(2,289)

 

 

 

(2,289)

 

 

 

(1,268)

 

 

 

 

(1,268)

 

 

 

(1,390)

 

 

 

(1,390)

 

 

 

(1,265)

 

 

 

 

(1,265)

Cash collateral(e)

 

 

 

(1,358)

 

 

 

(482)

 

 

 

(1,554)

 

 

 

 

(760)

 

 

 

(1,324)

 

 

 

(1,395)

 

 

 

(903)

 

 

 

 

(1,521)

Total derivatives on condensed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

consolidated balance sheets(f)

 

 

$

2,133

 

 

$

2,819

 

 

$

1,309

 

 

 

$

2,020

 

 

$

900

 

 

$

1,112

 

 

$

1,809

 

 

 

$

2,016

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

(b)  As of September 30, 20162017 and December 31, 20152016, included CDSs on super senior multi-sector CDOs with a net notional amount of $0.8 billion$716 million and $1.1 billion$801 million (fair value liability of $329$263 million and $483$308 million), respectively. The expected weighted average maturity as of September 30, 20162017 is six years. Because of long-term maturities of the CDSs in the portfolio, we are unable to make reasonable estimates of the periods during which any payments would be made. However, the net notional amount represents the maximum exposure to loss on the portfolio. As of September 30, 20162017 and December 31, 2015,2016, there were no super senior corporate debt/CLOs remaining.

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

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

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

(f)  Freestanding derivatives only, excludes Embedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities, respectively.  Fair value of assets related to bifurcated Embedded derivatives was $0zero at both September 30, 20162017 and December 31, 2015.2016. Fair value of liabilities related to bifurcated Embedded derivatives was $4.1$4.0 billion and $2.3$3.1 billion, respectively, at September 30, 20162017 and December 31, 2015.2016. A bifurcated Embedded derivative is generally presented with the host contract in the Condensed Consolidated Balance Sheets. Embedded derivatives are primarily related to guarantee features in variable annuity products, which include equity and interest rate components.   

Collateral

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

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Item 1 / NOTE 9. DERIVATIVES AND HEDGE ACCOUNTING

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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.

AIG | Third Quarter 2017 Form 10-Q45


TABLE OF CONTENTS

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

Collateral posted by us to third parties for derivative transactions was $3.5$3.1 billion and $3.0$4.5 billion at September 30, 20162017 and December 31, 2015,2016, respectively. 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 $2.1$1.3 billion and $1.6$1.5 billion at September 30, 20162017 and December 31, 2015,2016, 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.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, 2017, we recognized losses of $39 million and $87 million, respectively, and for the three- and nine-month periods ended September 30, 2016, we recognized a gain of $1 million and a loss of $8 million, respectively, and for the three- and nine-month periods ended September 30, 2015, we recognized gains of $14 million and $87 million, respectively, included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge relationships.

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

52AIG | Third Quarter 2017 Form 10-Q46


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /9. Derivatives and Hedge Accounting NOTE 9. DERIVATIVES AND HEDGE ACCOUNTING

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Gains/(Losses) Recognized in Earnings for:

 

Including Gains/(Losses) Attributable to:

 

Hedging

Hedged

 

Hedge

Excluded

 

 

(in millions)

Derivatives(a)

Items

 

Ineffectiveness

Components

Other(b)

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(1)

$

1

 

$

-

$

-

$

-

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

-

 

 

-

 

-

 

-

Other income

 

-

 

3

 

 

-

 

-

 

3

Gain/(Loss) on extinguishment of debt

 

-

 

-

 

 

-

 

-

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(10)

 

(34)

 

 

-

 

(44)

 

-

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

-

 

 

-

 

-

 

-

Other income

 

-

 

3

 

 

-

 

-

 

3

Gain/(Loss) on extinguishment of debt

 

-

 

-

 

 

-

 

-

 

-

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

8

 

(9)

 

 

-

 

(1)

 

-

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

1

$

(1)

 

$

-

$

-

$

-

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

-

 

 

-

 

-

 

-

Other income

 

-

 

2

 

 

-

 

-

 

2

Gain/(Loss) on extinguishment of debt

 

-

 

1

 

 

-

 

-

 

1

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

81

 

(67)

 

 

-

 

14

 

-

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

-

 

 

-

 

-

 

-

Other income

 

-

 

4

 

 

-

 

-

 

4

Gain/(Loss) on extinguishment of debt

 

-

 

-

 

 

-

 

-

 

-

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(4)

 

3

 

 

-

 

(1)

 

-

53


TABLE OF CONTENTS

Item 1 / NOTE 9. DERIVATIVES AND HEDGE ACCOUNTING

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Gains/(Losses) Recognized in Earnings for:

 

Including Gains/(Losses) Attributable to:

Hedging

Hedged

 

Hedge

Excluded

 

 

(in millions)

Derivatives(a)

Items

 

Ineffectiveness

Components

Other(b)

Three Months Ended September 30, 2017

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(1)

$

1

 

$

-

$

-

$

-

Other income

 

-

 

-

 

 

-

 

-

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(157)

 

142

 

 

-

 

(15)

 

-

Other income

 

-

 

-

 

 

-

 

-

 

-

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(3)

 

2

 

 

-

 

(1)

 

-

Three Months Ended September 30, 2016

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(1)

$

1

 

$

-

$

-

$

-

Other income

 

-

 

3

 

 

-

 

-

 

3

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(10)

 

(34)

 

 

-

 

(44)

 

-

Other income

 

-

 

3

 

 

-

 

-

 

3

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

8

 

(9)

 

 

-

 

(1)

 

-

Nine Months Ended September 30, 2017

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

1

$

(1)

 

$

-

$

-

$

-

Other income

 

-

 

-

 

 

-

 

-

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(318)

 

332

 

 

-

 

14

 

-

Other income

 

-

 

4

 

 

-

 

-

 

4

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(29)

 

26

 

 

-

 

(3)

 

-

Nine Months Ended September 30, 2016

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

-

$

(6)

 

$

-

$

-

$

(6)

$

-

$

(6)

 

$

-

$

-

$

(6)

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

-

 

 

-

 

-

 

-

Other income

 

-

 

10

 

 

-

 

-

 

10

 

-

 

10

 

 

-

 

-

 

10

Gain/(Loss) on extinguishment of debt

 

-

 

-

 

 

-

 

-

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

413

 

(443)

 

 

-

 

(30)

 

-

 

413

 

(443)

 

 

-

 

(30)

 

-

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

-

 

 

-

 

-

 

-

Other income

 

-

 

15

 

 

-

 

-

 

15

 

-

 

15

 

 

-

 

-

 

15

Gain/(Loss) on extinguishment of debt

 

-

 

-

 

 

-

 

-

 

-

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

28

 

(28)

 

 

-

 

-

 

-

 

28

 

(28)

 

 

-

 

-

 

-

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

1

$

(1)

 

$

-

$

-

$

-

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

-

 

 

-

 

-

 

-

Other income

 

-

 

7

 

 

-

 

-

 

7

Gain/(Loss) on extinguishment of debt

 

-

 

14

 

 

-

 

-

 

14

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

152

 

(123)

 

 

-

 

27

 

2

Interest credited to policyholder

 

 

 

 

 

 

 

 

 

 

 

account balances

 

-

 

(1)

 

 

-

 

-

 

(1)

Other income

 

-

 

14

 

 

-

 

-

 

14

Gain/(Loss) on extinguishment of debt

 

-

 

17

 

 

-

 

-

 

17

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(23)

 

21

 

 

-

 

(2)

 

-

(a)  The amounts presented do not include the periodic net coupon settlements of the derivative contract or the coupon income (expense) related to the hedged item.

(b)  Represents accretion/amortization of opening fair value of the hedged item at inception of hedge relationship, amortization of basis adjustment on hedged item following the discontinuation of hedge accounting, and the release of debt basis adjustment following the repurchase of issued debt that was part of previously-discontinued fair value hedge relationship.

54AIG | Third Quarter 2017 Form 10-Q47


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /9. Derivatives and Hedge Accounting NOTE 9. DERIVATIVES AND HEDGE ACCOUNTING

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Derivatives Not Designated as Hedging Instruments

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

Gains (Losses) Recognized in Earnings

Gains (Losses) Recognized in Earnings

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

 

2017

 

2016

 

 

2017

 

2016

By Derivative Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

91

$

470

 

$

1,464

$

398

$

(18)

$

91

 

$

81

$

1,464

Foreign exchange contracts

 

49

 

51

 

 

203

 

321

 

(98)

 

49

 

 

(220)

 

203

Equity contracts

 

(317)

 

229

 

 

(589)

 

108

 

(233)

 

(317)

 

 

(723)

 

(589)

Commodity contracts

 

-

 

-

 

 

-

 

(1)

 

-

 

-

 

 

-

 

-

Credit contracts

 

36

 

11

 

 

70

 

171

 

19

 

36

 

 

55

 

70

Other contracts

 

22

 

71

 

 

58

 

60

 

19

 

22

 

 

55

 

58

Embedded derivatives

 

30

 

(816)

 

 

(1,255)

 

(143)

 

(213)

 

30

 

 

(326)

 

(1,255)

Total

$

(89)

$

16

 

$

(49)

$

914

$

(524)

$

(89)

 

$

(1,078)

$

(49)

By Classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policy fees

$

20

$

20

 

$

60

$

59

$

20

$

20

 

$

59

$

60

Net investment income

 

2

 

6

 

 

14

 

20

 

(3)

 

2

 

 

(10)

 

14

Net realized capital gains (losses)

 

(181)

 

20

 

 

(93)

 

496

Net realized capital losses

 

(550)

 

(181)

 

 

(1,250)

 

(93)

Other income (losses)

 

69

 

(36)

 

 

(43)

 

334

 

8

 

69

 

 

121

 

(43)

Policyholder benefits and claims incurred

 

1

 

6

 

 

13

 

5

 

1

 

1

 

 

2

 

13

Total

$

(89)

$

16

 

$

(49)

$

914

$

(524)

$

(89)

 

$

(1,078)

$

(49)

Credit Risk-Related Contingent Features

The aggregate fair value of our derivative instruments that containcontained credit risk-related contingent features and that were in a net liability position at September 30, 20162017 and December 31, 2015,2016, was approximately $2.3$2.0 billion and $2.0$3.0 billion, respectively. The aggregate fair value of assets posted as collateral under these contracts at September 30, 20162017 and December 31, 2015,2016, was approximately $2.7$2.8 billion and $2.1$4.0 billion, respectively.

We estimate that at September 30, 2016,2017, based on our outstanding financial derivative transactions, a downgrade of our long-term senior debt ratings to BBB+, 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 $145$95 million.

Additional collateral postings upon downgrade are estimated based on the factors in the individual collateral posting provisions of the CSA with each counterparty and current exposure as of September 30, 2016.2017. Factors considered in estimating the termination payments upon downgrade include current market conditions and the terms of the respective CSA provisions. Our estimates are also based on the assumption that counterparties will terminate based on their net exposure to us. The actual termination payments could differ from our estimates given market conditions at the time of downgrade and the level of uncertainty in estimating both the number of counterparties who may elect to exercise their right to terminate and the payment that may be triggered in connection with any such exercise.

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TABLE OF CONTENTS

Item 1 / NOTE 9. DERIVATIVES AND HEDGE ACCOUNTING

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 $4.9$4.2 billion and $5.7$4.8 billion at September 30, 20162017 and December 31, 2015,2016, respectively. These securities have par amounts of $10.4$9.3 billion and $11.2$10.1 billion at September 30, 20162017 and December 31, 2015,2016, respectively, and have remaining stated maturity dates that extend to 2052.

AIG | Third Quarter 2017 Form 10-Q48


TABLE OF CONTENTS

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

10. Insurance Liabilities

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

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

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.4 billion and $12.8 billion at September 30, 2017 and December 31, 2016, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim.  Thus, these recoverable amounts represent a credit exposure to us.  At September 30, 2017 and December 31, 2016, we held collateral of approximately $9.5 billion and $9.7 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements.

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

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

$

76,422

$

74,143

 

$

77,077

$

74,942

Reinsurance recoverable

 

(27,660)

 

(14,520)

 

 

(15,532)

 

(14,339)

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

 

48,762

 

59,623

 

 

61,545

 

60,603

Foreign exchange effect

 

330

 

(147)

 

 

688

 

53

Dispositions(a)

 

-

 

-

 

 

-

 

-

Retroactive reinsurance adjustment (net of discount)(b)

 

22

 

-

 

 

(11,438)

 

-

Total

 

49,114

 

59,476

 

 

50,795

 

60,656

Losses and loss adjustment expenses incurred

 

 

 

 

 

 

 

 

 

   Current year

 

7,511

 

4,960

 

 

16,021

 

14,896

   Prior years, excluding discount and amortization of deferred gain

 

901

 

274

 

 

1,354

 

214

   Prior years, discount charge (benefit)

 

48

 

32

 

 

283

 

323

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

 

(75)

 

-

 

 

(195)

 

-

Total losses and loss adjustment expenses incurred

 

8,385

 

5,266

 

 

17,463

 

15,433

Losses and loss adjustment expenses paid

 

 

 

 

 

 

 

 

 

   Current year

 

(1,634)

 

(1,948)

 

 

(3,342)

 

(3,945)

   Prior years

 

(3,395)

 

(3,779)

 

 

(12,438)

 

(13,129)

Total losses and loss adjustment expenses paid

 

(5,029)

 

(5,727)

 

 

(15,780)

 

(17,074)

Reclassified to liabilities held for sale(d)

 

8

 

(1,060)

 

 

-

 

(1,060)

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

 

 

 

 

 

 

 

 

 

Net liability for unpaid losses and loss adjustment expenses

 

52,478

 

57,955

 

 

52,478

 

57,955

Reinsurance recoverable

 

27,609

 

14,501

 

 

27,609

 

14,501

Total

$

80,087

$

72,456

 

$

80,087

$

72,456

(a)  Includes amounts related to dispositions through the date of disposition.  Includes sale of United Guaranty and Ascot Underwriting Holdings Limited, Ascot Corporate Name Limited and Ascot Employees Corporate Member Limited (Ascot).

(b)  Includes discount on retroactive reinsurance in the amount of $53 million and $1.5 billion for the three- and nine-month periods ended September 30, 2017, respectively.

(c)  Includes $6 million and $11  million for the 2011 retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the three- and nine-month periods ended September 30, 2017, respectively.    

AIG | Third Quarter 2017 Form 10-Q49


TABLE OF CONTENTS

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

(d)  Represents change in loss reserves included in our pending sale of certain of our insurance operations to Fairfax for the three- and nine-month periods ended September 30, 2017.  Upon consummation of the sale, we may retain a portion of these reserves through reinsurance arrangements.        

On January 20, 2017, we entered into an adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire), 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.

On June 14, 2017, a catastrophic fire occurred at Grenfell Tower, a 24-story residential housing block in London, UK, resulting in damage to the property and loss of lives. As of September 30, 2017, our net exposure to loss on this event was not estimable as the forensic investigation was incomplete and the list of potential insureds (and any potential liability) was unclear. There may also be other policyholders involved as the matter evolves.

Discounting of Loss Reserves

At September 30, 2017, the loss reserves reflect a net loss reserve discount of $1.8 billion, including tabular and non-tabular calculations based upon the following assumptions:

Certain asbestos claims are discounted when allowed by the regulator and when payments are fixed and determinable, based on the investment yields of the companies and the payout pattern for the claims. At December 31, 2016, the discount for asbestos reserves was fully amortized.

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

The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state.  For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns. In 2012, for Pennsylvania companies, the statute has specified discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern.  For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.

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

In the fourth quarter of 2016, our Pennsylvania and Delaware regulators approved an updated discount rate that we applied to our workers’ compensation loss reserves for the legal entities domiciled in those states.

The discount consists of $491 million of tabular discount and $1.3 billion of non-tabular discount for workers’ compensation.  During the nine-month periods ended September 30, 2017 and 2016, the charge from changes in discount of $283 million and $321 million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Condensed Consolidated Statement of Income.  For the nine-month period ended September 30, 2017, the discount on workers’ compensation reserves decreased by $1.5 billion due to the impact of the adverse development reinsurance agreement with NICO.

During the nine-month period ended September 30, 2017, the forward yield curve component of the discount rates decreased reflecting a decline in the U.S. Treasury rates which resulted in a $138 million decrease in the loss reserve discount.

During the nine-month period ended September 30, 2016, the forward yield curve component of the discount rates decreased reflecting a decline in U.S. Treasury rates which resulted in a $295 million decrease in the loss reserve discount.

AIG | Third Quarter 2017 Form 10-Q50


TABLE OF CONTENTS

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. CONTINGENCIES, COMMITMENTS AND GUARANTEESInsurance Liabilities

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

 

September 30, 2017

 

December 31, 2016

 

 

Legacy Portfolio

 

 

 

 

Legacy Portfolio

 

 

 

U.S. Liability

- Property and

 

 

 

U.S. Liability

- Property and

 

 

 

and

Casualty run-off

 

 

 

and

Casualty run-off

 

 

(in millions)

Financial Lines

Insurance Lines

 

Total

 

Financial Lines

Insurance Lines

 

Total

U.S. workers' compensation

$

2,376

$

911

$

3,287

 

$

2,583

$

987

$

3,570

Retroactive reinsurance

 

(1,494)

 

-

 

(1,494)

 

 

-

 

-

 

-

Total reserve discount*

$

882

$

911

$

1,793

 

$

2,583

$

987

$

3,570

* Excludes $167 million and $181 million of discount related to certain long tail liabilities in the United Kingdom at September 30, 2017 and December 31, 2016, respectively.

The following tables present increase (decrease) in the net loss reserve discount:

Three Months Ended September 30,

2017

 

2016

 

 

 

Legacy Portfolio

 

 

 

 

 

Legacy Portfolio

 

 

 

U.S. Liability

- Property and

 

 

 

U.S. Liability

- Property and

 

 

 

and

Casualty run-off

 

 

 

and

Casualty run-off

 

 

(in millions)

Financial Lines

Insurance Lines

 

Total

 

Financial Lines

Insurance Lines

 

Total

Current accident year

$

33

$

-

$

33

 

$

37

$

-

$

37

Accretion and other adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

to prior year discount

 

(100)

 

25

 

(75)

 

 

(43)

 

(12)

 

(55)

Effect of interest rate changes

 

(7)

 

1

 

(6)

 

 

(11)

 

(3)

 

(14)

Net reserve discount

 

 

 

 

 

 

 

 

 

 

 

 

 

benefit (charge)

 

(74)

 

26

 

(48)

 

 

(17)

 

(15)

 

(32)

Change in discount on loss reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

ceded under retroactive reinsurance(a)

 

53

 

-

 

53

 

 

-

 

-

 

-

Net change in total reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

discount(b)

$

(21)

$

26

$

5

 

$

(17)

$

(15)

$

(32)

Comprised of:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' compensation

$

(21)

$

26

$

5

 

$

(17)

$

(15)

$

(32)

Asbestos

$

-

$

-

$

-

 

$

-

$

-

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2017

 

2016

 

 

 

Legacy Portfolio

 

 

 

 

 

Legacy Portfolio

 

 

 

U.S. Liability

- Property and

 

 

 

U.S. Liability

- Property and

 

 

 

and

Casualty run-off

 

 

 

and

Casualty run-off

 

 

(in millions)

Financial Lines

Insurance Lines

 

Total

 

Financial Lines

Insurance Lines

 

Total

Current accident year

$

94

$

-

$

94

 

$

118

$

-

$

118

Accretion and other adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

to prior year discount

 

(205)

 

(34)

 

(239)

 

 

(104)

 

(42)

 

(146)

Effect of interest rate changes

 

(96)

 

(42)

 

(138)

 

 

(196)

 

(99)

 

(295)

Net reserve discount

 

 

 

 

 

 

 

 

 

 

 

 

 

benefit (charge)

 

(207)

 

(76)

 

(283)

 

 

(182)

 

(141)

 

(323)

Change in discount on loss reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

ceded under retroactive reinsurance

 

(1,494)

 

-

 

(1,494)

 

 

-

 

-

 

-

Net change in total reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

discount(c)

$

(1,701)

$

(76)

$

(1,777)

 

$

(182)

$

(141)

$

(323)

Comprised of:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' compensation

$

(1,701)

$

(76)

$

(1,777)

 

$

(182)

$

(139)

$

(321)

Asbestos

$

-

$

-

$

-

 

$

-

$

(2)

$

(2)

(a)  Included in the deferred gain from retroactive reinsurance reported in other liabilities.

(b)  Excludes $(18) million and $4 million of discount related to certain long tail liabilities in the United Kingdom for the three-month period ended September 30, 2017 and 2016, respectively.

(c)  Excludes $20 million and $(16) million of discount related to certain long tail liabilities in the United Kingdom for the nine-month period ended September 30, 2017 and 2016, respectively.

AIG | Third Quarter 2017 Form 10-Q51


TABLE OF CONTENTS

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

11. Contingencies, Commitments and Guarantees

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

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

Legal Contingencies

Overview.In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services industries in general, subject to litigation, including claims for punitive damages. In our insurance and United Guaranty operations, litigation arising from claims settlement activities is generally considered in the establishment of our liability for unpaid losses and loss adjustment expenses.reserves. However, the potential for increasing jury awards and settlements makes it difficult to assess the ultimate outcome of such litigation. AIG is also subject to derivative, class action and other claims asserted by its shareholders and others alleging, among other things, breach of fiduciary duties by its directors and officers and violations of insurance laws and regulations, as well as federal and state securities laws. In the case of any derivative action brought on behalf of AIG, any recovery would accrue to the benefit of AIG.

Various regulatory and governmental agencies have been reviewing certain transactions and practices of AIG and our subsidiaries in connection with industry-wide and other inquiries into, among other matters, certain business practices of current and former operating insurance subsidiaries. We have cooperated, and will continue to cooperate, in producing documents and other information in response to subpoenas and other requests.

AIG’s Subprime Exposure, AIGFP Credit Default Swap Portfolio and Related Matters

AIG, AIG Financial Products Corp. and related subsidiaries (collectively AIGFP), and certain directors and officers of AIG, AIGFP and other AIG subsidiaries have been named in various actions relating to our exposure to the U.S. residential subprime mortgage market, unrealized market valuation losses on AIGFP’s super senior credit default swap portfolio, losses

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and liquidity constraints relating to our securities lending program and related disclosure and other matters (Subprime Exposure Issues).

Consolidated 2008 Securities Litigation.   On May 19, 2009, a consolidated class action complaint, resulting from the consolidation of eight purported securities class actions filed between May 2008 and January 2009, was filed against AIG and certain directors and officers of AIG and AIGFP, AIG’s outside auditors, and the underwriters of various securities offerings in the United States District Court for the Southern District of New York (the Southern District of New York)(SDNY) in In re American International Group, Inc. 2008 Securities Litigation (the Consolidated 2008 Securities Litigation), asserting claims under the Securities Exchange Act of 1934, as amended (the Exchange Act), and claims under the Securities Act of 1933, as amended (the Securities Act), for allegedly materially false and misleading statements in AIG’s public disclosures from March 16, 2006 to September 16, 2008 relating to, among other things, the Subprime Exposure Issues.

On July 15, 2014 and August 1,In 2014, lead plaintiff, AIG and AIG’s outside auditor accepted mediators’ proposals to settle the Consolidated 2008 Securities Litigation against all defendants. On October 22, 2014, AIG made a cash paymentpaid the settlement amount of $960 million, which is being held in escrow until all funds are distributed.million. On March 20, 2015, the Court issued an Order and Final Judgment approving the class settlement and dismissing the action with prejudice, and the AIG settlement became final on June 29, 2015.

Individual Securities Litigations.Between November 18, 2011 and February 9, 2015, eleven separate, though similar, securities actions (Individual Securities Litigations) were filed in or transferred to the Southern District of New York (SDNY),SDNY, asserting claims substantially similar to those in the Consolidated 2008 Securities Litigation against AIG and certain directors and officers of AIG and AIGFP. Two of the actions were voluntarily dismissed. On September 10, 2015, the SDNY granted AIG’s motion to dismiss some of the claims in the Individual Securities Litigations in whole or in part. AIG has settled eight of the nine remaining actions. The remaining Individual Securities Litigation pending in the SDNY was brought by a series of institutional investor funds. After the court’s decision granting AIG’s motion to dismiss plaintiff’s claims in part, the claims in the remaining action are limited to a claim under Section 10(b) of the Exchange Act for allegedly materially false and misleading statements in AIG’s public disclosures from February 8, 2008 to September 16, 2008 relating to, among other things, the Subprime Exposure Issues. On January 17, 2017, AIG filed a motion for summary judgment to dismiss the vast majority of the institutional investor funds’ remaining claims

On March 27, 2015, an additional securities action was filed in state court in Orange County, California asserting a claim against AIG pursuant to Section 11 of the Securities Act (the California Action) that is substantially similar to those in the Consolidated 2008

AIG | Third Quarter 2017 Form 10-Q52


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

Securities Litigation and the Individual Securities Litigations. After denying AIG’s motion to remove the California Action to federal court and stay the action, theThe trial court overruled AIG’s demurrer to dismiss all of the claims asserted in the California Action, which is currently on appealAIG appealed to the California Court of Appeals for the Fourth Appellate District.  In light of a Supreme Court decision addressing the timeliness of claims like those asserted in the California Action, plaintiffs filed a voluntary request for dismissal on June 30, 2017, which has the same effect as a judgment of dismissal. On July 18, 2017, the California Court of Appeals for the Fourth Appellate District dismissed AIG’s appeal as moot.

We have accrued our current estimate of probable loss with respect to these litigations.

Starr International Litigation

On November 21, 2011, Starr International Company, Inc. (SICO) filed a complaint against the United States in the United States Court of Federal Claims (the Court of Federal Claims), bringing claims, both individually and on behalf of the classes defined below and derivatively on behalf of AIG (the SICO Treasury Action). The complaint challenges the government’s assistance of AIG, pursuant to which AIG entered into a credit facility with the Federal Reserve Bank of New York (the FRBNY, and such credit facility, the FRBNY Credit Facility) and the United States received an approximately 80 percent ownership in AIG. The complaint alleges that the interest rate imposed on AIG and the appropriation of approximately 80 percent of AIG’s equity was discriminatory, unprecedented, and inconsistent with liquidity assistance offered by the government to other comparable firms at the time and violated the Equal Protection, Due Process, and Takings Clauses of the U.S. Constitution.

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In the SICO Treasury Action, the only claims naming AIG as a party (as a nominal defendant) are derivative claims on behalf of AIG. On September 21, 2012, SICO made a pre‑litigation demand on our Board demanding that we pursue the derivative claims or allow SICO to pursue the claims on our behalf. On January 9, 2013, our Board unanimously refused SICO’s demand in its entirety and on January 23, 2013, counsel for the Board sent a letter to counsel for SICO describing the process by which our Board considered and refused SICO’s demand and stating the reasons for our Board’s determination.

On March 11, 2013, SICO filed a second amended complaint in the SICO Treasury Action alleging that its demand was wrongfully refused. On June 26, 2013, the Court of Federal Claims granted AIG’s and the United States’ motions to dismiss SICO’s derivative claims in the SICO Treasury Action due to our Board’s refusal of SICO’s demand and denied the United States’ motion to dismiss SICO’s direct, non-derivative claims.

On March 11, 2013, the Court of Federal Claims in the SICO Treasury Action granted SICO’s motion for class certification of two classes with respect to SICO’s non‑derivative claims: (1) persons and entities who held shares of AIG Common Stock on or before September 16, 2008 and who owned those shares on September 22, 2008 (the Credit Agreement Shareholder Class); and (2) persons and entities who owned shares of AIG Common Stock on June 30, 2009 and were eligible to vote those shares at AIG’s June 30, 2009 annual meeting of shareholders (the Reverse Stock Split Shareholder Class). SICO has provided notice of class certification to potential members of the classes, who, pursuant to a court order issued on April 25, 2013, had to return opt‑in consent forms by September 16, 2013 to participate in either class. 286,908 holders of AIG Common Stock during the two class periods have opted into the classes.

On June 15, 2015, the Court of Federal Claims issued its opinion and order in the SICO Treasury Action.  The Court found that the United States exceeded its statutory authority by exacting approximately 80 percent of AIG’s equity in exchange for the FRBNY Credit Facility, but that AIG shareholders suffered no damages as a result.  SICO argued during trial that the two classes are entitled to a total of approximately $40 billion in damages, plus interest. The Court also found that the United States was not liable to the Reverse Stock Split Class in connection with the reverse stock split vote at the June 30, 2009 annual meeting of shareholders.

On June 17, 2015, the Court of Federal Claims entered judgment stating that “the Credit Agreement Shareholder Class shall prevail on liability due to the Government's illegal exaction, but shall recover zero damages, and that the Reverse Stock Split Shareholder Class shall not prevail on liability or damages.”  SICO filed a notice of appeal of the July 2, 2012 dismissal of SICO’s unconstitutional conditions claim, the June 26, 2013 dismissal of SICO’s derivative claims, the Court’s June 15, 2015 opinion and order, and the Court’s June 17, 2015 judgment to the United States Court of Appeals for the Federal Circuit. The United States filed a notice of cross appeal of the Court’s July 2, 2012 opinion and order denying in part its motion to dismiss, the Court’s June 26, 2013 opinion and order denying its motion to dismiss SICO’s direct claims, the Court’s June 15, 2015 opinion and order, and the Court’s June 17, 2015 judgment to the United States Court of Appeals for the Federal Circuit.On May 9, 2017, the Court of Appeals for the Federal Circuit: (i) vacated the Court of Federal Claims judgment on the Credit Agreement Shareholder Class and remanded with instructions for dismissal of that class, and (ii) affirmed the finding of no liability with respect to the Reverse Stock Split Class.

On August 25, 2015,October 6, 2017, SICO filed its appellate brief, in which it stated SICO does not appeala petition for writ of certiorari with the dismissal of the derivative claims it asserted on behalf of AIG. United States Supreme Court.

In the Court of Federal Claims, the United States has alleged, as an affirmative defense in its answer, that AIG is obligated to indemnify the FRBNY and its representatives, including the Federal Reserve Board of Governors and the United States (as the FRBNY’s principal), for any recovery in the SICO Treasury Action.

AIG | Third Quarter 2017 Form 10-Q53


TABLE OF CONTENTS

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

AIG believes that any indemnification obligation would arise only if: (a) SICO prevails on its appeal and ultimately receives an award of damages; (b) the United States then commences an action against AIG seeking indemnification; and (c) the United States is successful in such an action through any appellate process. If SICO prevails on its claims and the United States seeks indemnification from AIG, AIG intends to assert defenses thereto. A reversal of the Court of Federal Claim’s June 17, 2015 decision and judgment and a final determination that the United States is liable for damages, together with a final determination that AIG is obligated to indemnify the United States for any such damages, could have a material adverse effect on our business, consolidated financial condition and results of operations.

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False Claims Act Complaint

On February 25, 2010, a complaint was filed in the United States District Court for the Southern District of California by two individuals (Relators) seeking to assert claims on behalf of the United States against AIG and certain other defendants, including Goldman Sachs and Deutsche Bank, under the False Claims Act. Relators filed a first amended complaint on September 30, 2010, adding certain additional defendants, including Bank of America and Société Générale. The first amended complaint alleged that defendants engaged in fraudulent business practices in respect of their activities in the over-the-counter market for collateralized debt obligations, and submitted false claims to the United States in connection with the FRBNY Credit Facility and Maiden Lane II LLC and Maiden Lane III LLC entities (the Maiden Lane Interests) through, among other things, misrepresenting AIG’s ability and intent to repay amounts drawn on the FRBNY Credit Facility, and misrepresenting the value of the securities that the Maiden Lane Interests acquired from AIG and certain of its counterparties. The first amended complaint sought unspecified damages pursuant to the False Claims Act in the amount of three times the damages allegedly sustained by the United States as well as interest, attorneys’ fees, costs and expenses. The complaint and the first amended complaint were initially filed and maintained under seal while the United States considered whether to intervene in the action. On or about April 28, 2011, after the United States declined to intervene, the District Court lifted the seal, and Relators served the first amended complaint on AIG on July 11, 2011. On April 19, 2013, the Court granted AIG’s motion to dismiss, dismissing the first amended complaint in its entirety, without prejudice, giving the Relators the opportunity to file a second amended complaint. On May 24, 2013, the Relators filed a second amended complaint, which attempted to plead the same claims as the prior complaints and did not specify an amount of alleged damages. AIG and its co-defendants filed motions to dismiss the second amended complaint on August 9, 2013. On March 29, 2014, the Court dismissed the second amended complaint with prejudice. On April 30, 2014, the Relators filed a Notice of Appeal to the Ninth Circuit. On May 5, 2016, the Ninth Circuit affirmed the decision of the trial court and the Relators failed to file a petition for a writ of certiorari to the United States Supreme Court within the mandated period. Therefore, the District Court judgment dismissing the case is now final and no longer subject to appeal.

Litigation Matters Relating to AIG’s Insurance Operations

Caremark. AIG and certain of its subsidiaries have been named defendants in two putative class actions in state court in Alabama that arise out of the 1999 settlement of class and derivative litigation involving Caremark Rx, Inc. (Caremark). The plaintiffs in the second‑filed action intervened in the first‑filed action, and the second‑filed action was dismissed. An excess policy issued by a subsidiary of AIG with respect to the 1999 litigation was expressly stated to be without limit of liability. In the current actions, plaintiffs allege that the judge approving the 1999 settlement was misled as to the extent of available insurance coverage and would not have approved the settlement had he known of the existence and/or unlimited nature of the excess policy. They further allege that AIG, its subsidiaries, and Caremark are liable for fraud and suppression for misrepresenting and/or concealing the nature and extent of coverage.

The complaints filed by the plaintiffs and the intervenors request compensatory damages for the 1999 class in the amount of $3.2 billion, plus punitive damages. AIG and its subsidiaries deny the allegations of fraud and suppression, assert that information concerning the excess policy was publicly disclosed months prior to the approval of the settlement, that the claims are barred by the statute of limitations, and that the statute cannot be tolled in light of the public disclosure of the excess coverage. The plaintiffs and intervenors, in turn, have asserted that the disclosure was insufficient to inform them of the nature of the coverage and did not start the running of the statute of limitations.

On August 15, 2012, the trial court entered an order granting plaintiffs’ motion for class certification, and on September 12, 2014, the Alabama Supreme Court affirmed that order. AIG and the other defendants’ petition for rehearing of that decision was denied on February 27, 2015. The matter was remanded to the trial court for general discovery and adjudication of the merits. On November 24, 2015, the trial court ruled that the defendants had a duty to disclose the amount of insurance available at the settlement approval hearings and that the defendants breached that duty. Thereafter, the parties settled this

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matter and the court granted final approval of the settlement on August 15, 2016. Payment of the settlement amount was made on September 12, 2016. We had previously accrued our estimate of loss with respect to this litigation.

Regulatory and Related Matters

In April 2007, the National Association of Insurance Commissioners (NAIC) formed a Settlement Review Working Group, directed by the State of Indiana, to review the Workers’ Compensation Residual Market Assessment portion of the settlement between AIG, the Office of the New York Attorney General, and the New York State Department of Insurance.  In late 2007, the Settlement Review Working Group, under the direction of Indiana, Minnesota and Rhode Island, recommended that a multi-state targeted market conduct examination focusing on workers’ compensation insurance be commenced under the direction of the NAIC’s Market Analysis Working Group.  AIG was informed of the multi-state targeted market conduct examination in January 2008.  The lead states in the multi-state examination were Delaware, Florida, Indiana, Massachusetts, Minnesota, New York, Pennsylvania and Rhode Island.  All other states (and the District of Columbia) agreed to participate in the multi-state examination. The examination focused on legacy issues related to certain AIG entities’ writing and reporting of workers compensation insurance between 1985 and 1996. 

On December 17, 2010, AIG and the lead states reached an agreement to settle all regulatory liabilities arising out of the subjects of the multistate examination.  This regulatory settlement agreement, which was agreed to by all 50 states and the District of Columbia, included, among other terms, (i) AIG’s payment of $100 million in regulatory fines and penalties; (ii) AIG’s payment of $46.5 million in outstanding premium taxes and assessments; (iii) AIG’s agreement to enter into a compliance plan describing agreed-upon specific steps and standards for evaluating AIG’s ongoing compliance with state regulations governing the setting of workers’ compensation insurance premium rates and the reporting of workers’ compensation premiums; and (iv) AIG’s agreement to pay up to $150 million in contingent fines in the event that AIG fails to comply substantially with the compliance plan requirements. In furtherance of the compliance plan, the agreement provided for a monitoring period from May 29, 2012 to May 29, 2014 leading up to a compliance plan examination.  After the close of the monitoring period, as part of preparation for the actual conduct of the compliance plan examination, on or about October 1, 2014, AIG and the lead states agreed upon corrective action plans to address particular issues identified during the monitoring period.  The compliance plan examination is ongoing. There can be no assurance that the result of the compliance plan examination will not result in a fine, have a material adverse effect on AIG’s ongoing operations or lead to civil litigation.

In connection with a multi‑state examination of certain accident and health products, including travel products, issued by National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), AIG Property Casualty Inc. (formerly Chartis Inc.), on behalf of itself, National Union, and certain of AIG Property Casualty Inc.’s insurance and non‑insurance companies (collectively, the AIG PC parties) entered into a Regulatory Settlement Agreement with regulators from 50 U.S. jurisdictions effective November 29, 2012. Under the agreement, and without admitting any liability for the issues raised in the examination, the AIG PC parties (i) paid a civil penalty of $50 million, (ii) entered into a corrective action plan describing agreed‑upon specific steps and standards for evaluating the AIG PC parties’ ongoing compliance with laws and regulations governing the issues identified in the examination, and (iii) agreed to pay a contingent fine in the event that the AIG PC parties fail to satisfy certain terms of the corrective action plan. On April 29, 2016, National Union and other AIG companies achieved a settlement in principle of civil litigation relating to the conduct of their accident and health business, subject to formal documentation and court approval.  Preliminary approval of the settlement was granted on October 14, 2016, and the settlement funds have been placed into escrow, pending final court approval of the settlement. We had previously accrued our estimate of loss with respect to this settlement. On May 23, 2016, the managing lead state in the multi-state examination ordered that the companies subject to the Regulatory Settlement Agreement have “complied with the terms” of the Regulatory Settlement Agreement and that no contingent fine or civil penalty would be due. 

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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 $3.2$3.1 billion at September 30, 2016.2017.

Guarantees

Subsidiaries

Subsidiaries

We have issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIGFP and of AIG Markets arising from transactions entered into by AIG Markets.

In connection with AIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at September 30, 20162017 was $138$139 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

General

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

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

Other

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

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

For additional disclosures about guarantees of outstanding debt see Note 16 to the Condensed Consolidated Financial Statements

61

AIG | Third Quarter 2017 Form 10-Q54


TABLE OF CONTENTS

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

 

Item 1 / NOTE 10. CONTINGENCIES, COMMITMENTS AND GUARANTEES

12. Equity

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Other

·See Note 8 to the Condensed Consolidated Financial Statements for additional discussion of commitments and guarantees associated with VIEs.

·See Note 9 to the Condensed Consolidated Financial Statements for additional disclosures about derivatives.

·See Note 15 to the Condensed Consolidated Financial Statements for additional disclosures about guarantees of outstanding debt.

11. EQUITY

Shares Outstanding

The following table presents a rollforward of outstanding shares:

Nine Months Ended September 30, 2017

Common

Treasury

Common Stock

Common

Treasury

Common Stock

Stock Issued

Stock

Outstanding

Stock Issued

Stock

Outstanding

Nine Months Ended September 30, 2016

 

Shares, beginning of year

1,906,671,492

(712,754,875)

1,193,916,617

1,906,671,492

(911,335,651)

995,335,841

Shares issued

-

2,054,043

-

3,221,892

3,221,892

Shares repurchased

-

(153,082,104)

-

(99,677,646)

(99,677,646)

Shares, end of period

1,906,671,492

(863,782,936)

1,042,888,556

1,906,671,492

(1,007,791,405)

898,880,087

Dividends

Payment of future dividends to our shareholders and repurchases of AIG Common Stock depends in part on the regulatory framework that we are currently subject to and that will ultimately be applicable to us, including as a nonbank systemically important financial institution under the Dodd‑Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank) and a global systemically important insurer. In addition, dividendsDividends 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 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.

On March 28, 2016, weThe following table presents record date, payment date and dividends paid a dividend of $0.32 per share on AIG Common Stock to shareholders of record on March 14, 2016.Stock:          

 

 

 

 

Dividends Paid

Record Date

Payment Date

 

 

Per Share

September 15, 2017

September 29, 2017

 

$

0.32

June 14, 2017

June 28, 2017

 

 

0.32

March 15, 2017

March 29, 2017

 

 

0.32

 

 

 

 

 

September 15, 2016

September 29, 2016

 

 

0.32

June 13, 2016

June 27, 2016

 

 

0.32

March 14, 2016

March 28, 2016

 

 

0.32

On June 27, 2016, we paid a dividend of $0.32 per share on AIG Common Stock to shareholders of record on June 13, 2016. On September 29, 2016, we paid a dividend of $0.32 per share on AIG Common Stock to shareholders of record on September 15, 2016.

See Note 18 to the Consolidated Financial Statements in the 2015 Annual Report forFor a discussion of restrictions on payments of dividends to AIG Parent by its subsidiaries seeNote 19 to the Consolidated Financial Statements in the 2016 Annual Report.

62


TABLE OF CONTENTS

Item 1 / NOTE 11. EQUITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Repurchase of AIG Common Stock

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

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2017

 

2016

Aggregate repurchases of common stock

$

6,275

$

8,506

Total number of common shares repurchased

 

100

 

153

Aggregate repurchases of warrants

$

3

$

263

Total number of warrants repurchased*

 

-

 

15

*    For the nine-month period ended September 30, 2017, we repurchased 185,000 warrants to purchase shares 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 2, 2016,May 3, 2017, our Board of Directors authorized an additional increase of $3.0 $2.5 billion to its previous share repurchase authorization. AsAs of September 30, 2016,2017, approximately $2.4$2.2 billion remained under our share repurchase authorization. Sharesmay be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including(including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.

We repurchased approximately 153 million shares of AIG Common Stock in the nine-month period ended September 30, 2016 for an aggregate purchase price of approximately $8.5 billion, and we repurchased 15 million warrants| Third Quarter 2017 Form 10-Q55


TABLE OF CONTENTS

ITEM 1 |Notes to purchase shares of AIG Common Stock for an aggregate purchase price of $263 million.Condensed Consolidated Financial Statements (unaudited) |12. Equity

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.

Accumulated Other Comprehensive Income

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

 

Unrealized Appreciation

 

 

 

 

 

 

 

 

 

Unrealized Appreciation (Depreciation) of Fixed Maturity Investments on Which Other-Than- Temporary Credit Impairments Were Taken

 

 

 

 

 

 

 

 

 

(Depreciation) of Fixed

 

Unrealized

 

 

 

 

 

 

 

 

Unrealized Appreciation (Depreciation) of All Other Investments

 

Foreign Currency Translation Adjustments

 

Retirement Plan Liabilities Adjustment

 

 

 

Maturity Securities on

 

Appreciation

 

Foreign

 

Retirement

 

 

 

 

 

 

Which Other-Than-

 

(Depreciation)

 

Currency

 

Plan

 

 

 

 

 

 

Temporary Credit

 

of All Other

 

Translation

 

Liabilities

 

 

(in millions)

 

 

Total

 

Impairments Were Taken

 

Investments

 

Adjustments

 

Adjustment

 

Total

Balance, December 31, 2016, net of tax

$

426

$

6,405

$

(2,629)

$

(972)

$

3,230

Change in unrealized appreciation of investments

 

564

 

3,693

 

-

 

-

 

4,257

Change in deferred policy acquisition costs adjustment and other*

 

(56)

 

(1,269)

 

-

 

-

 

(1,325)

Change in future policy benefits

 

-

 

(425)

 

-

 

-

 

(425)

Change in foreign currency translation adjustments

 

-

 

-

 

474

 

-

 

474

Change in net actuarial loss

 

-

 

-

 

-

 

134

 

134

Change in prior service cost

 

-

 

-

 

-

 

6

 

6

Change in deferred tax liability

 

(178)

 

(159)

 

(27)

 

(48)

 

(412)

Total other comprehensive income

 

330

 

1,840

 

447

 

92

 

2,709

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2017, net of tax

$

756

$

8,245

$

(2,182)

$

(880)

$

5,939

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015, net of tax

$

696

$

5,566

$

(2,879)

$

(846)

$

2,537

$

696

$

5,566

$

(2,879)

$

(846)

$

2,537

Change in unrealized appreciation (depreciation) of investments

 

(318)

 

10,873

 

-

 

-

 

10,555

 

(318)

 

10,873

 

-

 

-

 

10,555

Change in deferred policy acquisition costs adjustment and other*

 

(40)

 

(887)

 

-

 

-

 

(927)

Change in deferred policy acquisition costs adjustment and other

 

(40)

 

(887)

 

-

 

-

 

(927)

Change in future policy benefits

 

-

 

(2,099)

 

-

 

-

 

(2,099)

 

-

 

(2,099)

 

-

 

-

 

(2,099)

Change in foreign currency translation adjustments

 

-

 

-

 

179

 

-

 

179

 

-

 

-

 

179

 

-

 

179

Change in net actuarial loss

 

-

 

-

 

-

 

13

 

13

 

-

 

-

 

-

 

13

 

13

Change in prior service credit

 

-

 

-

 

-

 

(20)

 

(20)

 

-

 

-

 

-

 

(20)

 

(20)

Change in deferred tax asset (liability)

 

248

 

(1,585)

 

153

 

3

 

(1,181)

 

248

 

(1,585)

 

153

 

3

 

(1,181)

Total other comprehensive income (loss)

 

(110)

 

6,302

 

332

 

(4)

 

6,520

 

(110)

 

6,302

 

332

 

(4)

 

6,520

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2016, net of tax

$

586

$

11,868

$

(2,547)

$

(850)

$

9,057

$

586

$

11,868

$

(2,547)

$

(850)

$

9,057

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014, net of tax

$

1,043

$

12,327

$

(1,784)

$

(969)

$

10,617

Change in unrealized depreciation of investments

 

(315)

 

(6,372)

 

-

 

-

 

(6,687)

Change in deferred policy acquisition costs adjustment and other

 

-

 

763

 

-

 

-

 

763

Change in future policy benefits

 

92

 

807

 

-

 

-

 

899

Change in foreign currency translation adjustments

 

-

 

-

 

(901)

 

-

 

(901)

Change in net actuarial loss

 

-

 

-

 

-

 

417

 

417

Change in prior service credit

 

-

 

-

 

-

 

(210)

 

(210)

Change in deferred tax asset (liability)

 

54

 

1,493

 

167

 

(59)

 

1,655

Total other comprehensive income (loss)

 

(169)

 

(3,309)

 

(734)

 

148

 

(4,064)

Noncontrolling interests

 

-

 

-

 

(4)

 

-

 

(4)

Balance, September 30, 2015, net of tax

$

874

$

9,018

$

(2,514)

$

(821)

$

6,557

*    Includes net unrealized gains attributable to businesses held for sale.

63AIG | Third Quarter 2017 Form 10-Q56


TABLE OF CONTENTS

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

 

Item 1 / NOTE 11. EQUITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The following table presents the other comprehensive income reclassification adjustments for the three-monththree- and nine-month periods ended September 30, 20162017 and 2015,2016, respectively:

 

Unrealized Appreciation

 

 

 

 

 

 

 

 

 

(Depreciation) of Fixed

 

 

 

 

 

 

 

 

 

Unrealized Appreciation (Depreciation) of Fixed Maturity Investments on Which Other-Than- Temporary Credit Impairments Were Taken

 

 

 

 

 

 

 

 

 

Maturity Securities on

 

Unrealized

 

 

 

 

 

 

 

 

Unrealized Appreciation (Depreciation) of All Other Investments

 

Foreign Currency Translation Adjustments

 

Retirement Plan Liabilities Adjustment

 

 

 

Which Other-Than-

 

Appreciation

 

Foreign

 

Retirement

 

 

 

 

 

 

Temporary Credit

 

(Depreciation)

 

Currency

 

Plan

 

 

 

 

 

 

Impairments Were

 

of All Other

 

Translation

 

Liabilities

 

 

(in millions)

 

 

Total

 

Taken

 

Investments

 

Adjustment

 

Adjustment

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

160

$

831

$

328

$

38

$

1,357

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

included in net income

 

10

 

133

 

-

 

(58)

 

85

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

before income tax expense

 

150

 

698

 

328

 

96

 

1,272

Less: Income tax expense

 

53

 

206

 

3

 

33

 

295

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

net of income tax expense

$

97

$

492

$

325

$

63

$

977

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

147

$

816

$

21

$

(8)

$

976

$

147

$

816

$

21

$

(8)

$

976

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

6

 

163

 

-

 

(3)

 

166

 

6

 

163

 

-

 

(3)

 

166

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

141

 

653

 

21

 

(5)

 

810

 

141

 

653

 

21

 

(5)

 

810

Less: Income tax expense (benefit)

 

(76)

 

187

 

(90)

 

(9)

 

12

 

(76)

 

187

 

(90)

 

(9)

 

12

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

217

$

466

$

111

$

4

$

798

$

217

$

466

$

111

$

4

$

798

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

(98)

$

(1,275)

$

(217)

$

303

$

(1,287)

$

553

$

2,610

$

474

$

62

$

3,699

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

13

 

(17)

 

-

 

164

 

160

 

45

 

611

 

-

 

(78)

 

578

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

(111)

 

(1,258)

 

(217)

 

139

 

(1,447)

Less: Income tax expense (benefit)

 

(50)

 

(401)

 

21

 

47

 

(383)

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

(61)

$

(857)

$

(238)

$

92

$

(1,064)

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

before income tax expense

 

508

 

1,999

 

474

 

140

 

3,121

Less: Income tax expense

 

178

 

159

 

27

 

48

 

412

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

net of income tax expense

$

330

$

1,840

$

447

$

92

$

2,709

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

(252)

$

8,733

$

179

$

(18)

$

8,642

$

(252)

$

8,733

$

179

$

(18)

$

8,642

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

106

 

846

 

-

 

(11)

 

941

 

106

 

846

 

-

 

(11)

 

941

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

(358)

 

7,887

 

179

 

(7)

 

7,701

 

(358)

 

7,887

 

179

 

(7)

 

7,701

Less: Income tax expense (benefit)

 

(248)

 

1,585

 

(153)

 

(3)

 

1,181

 

(248)

 

1,585

 

(153)

 

(3)

 

1,181

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

(110)

$

6,302

$

332

$

(4)

$

6,520

$

(110)

$

6,302

$

332

$

(4)

$

6,520

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

(155)

$

(4,243)

$

(901)

$

324

$

(4,975)

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

included in net income

 

68

 

559

 

-

 

117

 

744

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

(223)

 

(4,802)

 

(901)

 

207

 

(5,719)

Less: Income tax expense (benefit)

 

(54)

 

(1,493)

 

(167)

 

59

 

(1,655)

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

(169)

$

(3,309)

$

(734)

$

148

$

(4,064)

64AIG | Third Quarter 2017 Form 10-Q57


TABLE OF CONTENTS

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

 

Item 1 / NOTE 11. EQUITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Three Months Ended September 30,

Three Months Ended September 30,

(in millions)

 

2016

2015

 

2017

2016

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

6

$

13

 

 

Other realized capital gains

 

$

10

$

6

 

 

Other realized capital gains

Total

 

 

6

 

13

 

 

 

 

 

10

 

6

 

 

 

Unrealized appreciation (depreciation) of all other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

182

 

(15)

 

 

Other realized capital gains

 

 

48

 

182

 

 

Other realized capital gains

Deferred acquisition costs adjustment

 

 

(19)

 

(2)

 

 

Amortization of deferred policy acquisition costs

 

 

85

 

(19)

 

 

Amortization of deferred policy acquisition costs

Future policy benefits

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

Total

 

 

163

 

(17)

 

 

 

 

 

133

 

163

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior - service credit

 

 

4

 

187

 

 

*

 

 

-

 

4

 

 

*

Actuarial losses

 

 

(7)

 

(23)

 

 

*

 

 

(58)

 

(7)

 

 

*

Total

 

 

(3)

 

164

 

 

 

 

 

(58)

 

(3)

 

 

 

Total reclassifications for the period

 

$

166

$

160

 

 

 

 

$

85

$

166

 

 

 

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Nine Months Ended September 30,

Nine Months Ended September 30,

(in millions)

 

2016

2015

 

2017

2016

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

106

$

68

 

 

Other realized capital gains

 

$

45

$

106

 

 

Other realized capital gains

Total

 

 

106

 

68

 

 

 

 

 

45

 

106

 

 

 

Unrealized appreciation (depreciation) of all other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

843

 

609

 

 

Other realized capital gains

 

 

415

 

843

 

 

Other realized capital gains

Deferred acquisition costs adjustment

 

 

3

 

(67)

 

 

Amortization of deferred policy acquisition costs

 

 

196

 

3

 

 

Amortization of deferred policy acquisition costs

Future policy benefits

 

 

-

 

17

 

 

Policyholder benefits and losses incurred

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

Total

 

 

846

 

559

 

 

 

 

 

611

 

846

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior - service credit

 

 

13

 

210

 

 

*

 

 

1

 

13

 

 

*

Actuarial losses

 

 

(24)

 

(93)

 

 

*

 

 

(79)

 

(24)

 

 

*

Total

 

 

(11)

 

117

 

 

-

 

 

(78)

 

(11)

 

 

-

Total reclassifications for the period

 

$

941

$

744

 

 

-

 

$

578

$

941

 

 

-

*    These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 1314 to the Condensed Consolidated Financial Statements.Statements

 

65AIG | Third Quarter 2017 Form 10-Q58


TABLE OF CONTENTS 

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

 

Item 1 / NOTE 12. EARNINGS PER SHARE (EPS)

13. Earnings Per Share (EPS)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

12. EARNINGS PER 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 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

Three Months Ended

 

Nine Months Ended

 

September 30,

September 30,

 

September 30,

(dollars in millions, except per share data)

 

 

2016

 

2015

 

2016

 

2015

 

2017

 

2016

 

 

2017

 

2016

Numerator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

433

$

(180)

$

2,211

$

4,071

$

(1,712)

$

433

 

$

609

$

2,211

Less: Net income (loss) from continuing operations attributable to noncontrolling interests

 

 

(26)

 

34

 

(35)

 

34

 

26

 

(26)

 

 

40

 

(35)

Income (loss) attributable to AIG common shareholders from continuing operations

 

 

459

 

(214)

 

2,246

 

4,037

 

(1,738)

 

459

 

 

569

 

2,246

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

 

 

3

 

(17)

 

(54)

 

-

 

(1)

 

3

 

 

7

 

(54)

Net income (loss) attributable to AIG common shareholders

 

 

462

 

(231)

 

2,192

 

4,037

$

(1,739)

$

462

 

$

576

$

2,192

Denominator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

1,071,295,892

 

1,279,072,748

 

1,113,650,878

 

1,324,407,969

 

908,667,044

 

1,071,295,892

 

 

938,130,832

 

1,113,650,878

Dilutive shares(a)

 

 

31,104,878

 

-

 

29,049,329

 

32,700,815

 

-

 

31,104,878

 

 

23,165,114

 

29,049,329

Weighted average shares outstanding - diluted(b)

 

 

1,102,400,770

 

1,279,072,748

 

1,142,700,207

 

1,357,108,784

Weighted average shares outstanding - diluted(a) (b)

 

908,667,044

 

1,102,400,770

 

 

961,295,946

 

1,142,700,207

Income per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.43

$

(0.17)

$

2.02

$

3.05

$

(1.91)

$

0.43

 

$

0.60

$

2.02

Income (loss) from discontinued operations

 

$

-

$

(0.01)

$

(0.05)

$

-

$

-

$

-

 

$

0.01

$

(0.05)

Income (loss) attributable to AIG

 

$

0.43

$

(0.18)

$

1.97

$

3.05

$

(1.91)

$

0.43

 

$

0.61

$

1.97

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.42

$

(0.17)

$

1.97

$

2.97

$

(1.91)

$

0.42

 

$

0.59

$

1.97

Income (loss) from discontinued operations

 

$

-

$

(0.01)

$

(0.05)

$

-

$

-

$

-

 

$

0.01

$

(0.05)

Income (loss) attributable to AIG

 

$

0.42

$

(0.18)

$

1.92

$

2.97

$

(1.91)

$

0.42

 

$

0.60

$

1.92

(a)Shares in the diluted EPS calculation represent basic shares for the three-month period ended September 30, 20152017 due to the net loss in that period. The shares excluded from the calculation were 22,459,868 shares.

(b)Dilutive shares include our share‑based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011. The number of shares excluded from diluted shares outstanding was 2.4 million and 2.0 million for the three- and nine-month periods ended September 30, 2017, respectively, and 0.1 million and 0.2 million for the three- and nine-month periods ended September 30, 2016, respectively, and 0.1 million and 0.2 million for the three- and nine-month periods ended September 30, 2015, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.

AIG | Third Quarter 2017 Form 10-Q59


13. EMPLOYEE BENEFITSTABLE OF CONTENTS

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

14. Employee Benefits

We sponsor various defined benefit pension plans, post-retirement medical and life insurance plans for eligible employees and retirees in the U.S. and certain non-U.S. countries. Effective January 1, 2016,

The following table presents the U.S. definedcomponents of net periodic benefit pension plans were frozen for current participantscost with respect to pensions and closed to new hires.  Accordingly, compensation-based benefits are no longer credited to the cash balance accounts of plan participants. other postretirement benefits:

  

Pension

 

Postretirement

  

 

U.S.

 

Non-U.S.

 

 

 

 

U.S.

 

Non-U.S.

 

 

(in millions)

 

Plans

 

Plans

 

Total

 

 

Plans

 

Plans

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

(5)

$

7

$

2

 

$

-

$

1

$

1

Interest cost

 

41

 

4

 

45

 

 

2

 

1

 

3

Expected return on assets

 

(66)

 

(6)

 

(72)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

-

 

-

 

-

Amortization of net (gain) loss

 

6

 

3

 

9

 

 

-

 

-

 

-

Curtailment gain

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

50

 

-

 

50

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

26

$

3

$

29

 

$

2

$

2

$

4

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

6

$

8

$

14

 

$

1

$

-

$

1

Interest cost

 

45

 

5

 

50

 

 

2

 

-

 

2

Expected return on assets

 

(72)

 

(7)

 

(79)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(2)

 

-

 

(2)

Amortization of net loss

 

7

 

2

 

9

 

 

(1)

 

1

 

-

Curtailment gain

 

-

 

(2)

 

(2)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

-

 

-

 

-

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

(14)

$

6

$

(8)

 

$

-

$

1

$

1

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

8

$

23

$

31

 

$

1

$

2

$

3

Interest cost

 

126

 

12

 

138

 

 

5

 

3

 

8

Expected return on assets

 

(194)

 

(18)

 

(212)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(1)

 

-

 

(1)

Amortization of net (gain) loss

 

20

 

9

 

29

 

 

-

 

-

 

-

Curtailment gain

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

50

 

-

 

50

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

10

$

21

$

31

 

$

5

$

5

$

10

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

15

$

23

$

38

 

$

2

$

2

$

4

Interest cost

 

136

 

15

 

151

 

 

5

 

2

 

7

Expected return on assets

 

(219)

 

(20)

 

(239)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(7)

 

-

 

(7)

Amortization of net loss

 

19

 

6

 

25

 

 

(1)

 

1

 

-

Curtailment gain

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

-

 

-

 

-

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

(49)

$

19

$

(30)

 

$

(1)

$

5

$

4

66AIG | Third Quarter 2017 Form 10-Q60


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /14. Employee Benefits NOTE 13. EMPLOYEE BENEFITS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Beginning in 2016, interest cost for pension and postretirement benefits for our U.S. plans and largest non-U.S. plans is measured by applying the specific spot rates along the yield curve to the plans’ corresponding discounted cash flows that comprise the obligation (the Spot Rate Approach). This method provides a more precise measurement of interest cost by aligning the timing of the plans’ discounted cash flows to the corresponding spot rates on the yield curve. Previously, we measured interest cost utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.    

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

  

Pension

 

Postretirement

  

 

U.S.

 

Non-U.S.

 

 

 

 

U.S.

 

Non-U.S.

 

 

(in millions)

 

Plans

 

Plans

 

Total

 

 

Plans

 

Plans

 

Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

6

$

8

$

14

 

$

1

$

-

$

1

Interest cost

 

45

 

5

 

50

 

 

2

 

-

 

2

Expected return on assets

 

(72)

 

(7)

 

(79)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(2)

 

-

 

(2)

Amortization of net (gain) loss

 

7

 

2

 

9

 

 

(1)

 

1

 

-

Curtailment gain

 

-

 

(2)

 

(2)

 

 

-

 

-

 

-

Net periodic benefit (income) cost

$

(14)

$

6

$

(8)

 

$

-

$

1

$

1

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

41

$

10

$

51

 

$

1

$

-

$

1

Interest cost

 

54

 

6

 

60

 

 

2

 

1

 

3

Expected return on assets

 

(74)

 

(5)

 

(79)

 

 

-

 

-

 

-

Amortization of prior service credit

 

(6)

 

(1)

 

(7)

 

 

(3)

 

-

 

(3)

Amortization of net loss

 

21

 

2

 

23

 

 

-

 

-

 

-

Curtailment gain

 

(179)

 

-

 

(179)

 

 

-

 

-

 

-

Net periodic benefit (income) cost

$

(143)

$

12

$

(131)

 

$

-

$

1

$

1

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

15

$

23

$

38

 

$

2

$

2

$

4

Interest cost

 

136

 

15

 

151

 

 

5

 

2

 

7

Expected return on assets

 

(219)

 

(20)

 

(239)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(7)

 

-

 

(7)

Amortization of net (gain) loss

 

19

 

6

 

25

 

 

(1)

 

1

 

-

Curtailment gain

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Net periodic benefit (income) cost

$

(49)

$

19

$

(30)

 

$

(1)

$

5

$

4

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

144

$

31

$

175

 

$

4

$

2

$

6

Interest cost

 

164

 

18

 

182

 

 

6

 

2

 

8

Expected return on assets

 

(218)

 

(17)

 

(235)

 

 

-

 

-

 

-

Amortization of prior service credit

 

(22)

 

(2)

 

(24)

 

 

(8)

 

-

 

(8)

Amortization of net loss

 

86

 

7

 

93

 

 

-

 

-

 

-

Curtailment gain

 

(179)

 

(1)

 

(180)

 

 

-

 

-

 

-

Net periodic benefit (income) cost

$

(25)

$

36

$

11

 

$

2

$

4

$

6

67


TABLE OF CONTENTS 

 

For the nine-month period ended September 30, 2017, we contributed $310 million to the U.S. AIG Retirement Plan.

Item 1 /The lump sum benefit payments through September 30, 2017 exceeded the annual service cost and interest cost components of the pension expense resulting in a settlement loss as of September 30, 2017. NOTE 14. INCOME TAXES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

14. INCOME TAXES15. Income Taxes

Interim Tax Calculation Method

We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item.  Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions. As of September 30, 2017, the annual effective tax rate includes the tax effects of significant catastrophe losses recognized in the third quarter of 2017. 

Interim Tax Expense (Benefit)

For the three-month period ended September 30, 2017, the effective tax rate on loss from continuing operations was 38.9 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, partially offset by tax charges related to losses in our European operations taxed at a statutory tax rate lower than 35 percent.

For the nine-month period ended September 30, 2017, the effective tax rate on income from continuing operations was not meaningful, due to a tax benefit on pre-tax income. The tax benefit was primarily due to tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement in accordance with ASU 2016-09, partially offset by tax charges related to increases in uncertain tax positions associated with the impact of settlement discussions with the IRS related to certain open tax issues and losses in our European operations taxed at a statutory tax rate lower than 35 percent.

For the three-month period ended September 30, 2016, the effective tax rate on income from continuing operations was 41.2 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent, partially offset by tax benefits associated with tax exempt interest income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities.  

For the nine-month period ended September 30, 2016, the effective tax rate on income from continuing operations was 34.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt interest income, the impact of an agreement reached with the Internal Revenue Service (IRS)IRS related to certain tax issues under audit and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, partially offset by a tax charge and related interest associated with increases in uncertain tax positions related to cross border financing transactions and foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.

For the three-month period ended September 30, 2015, the effective tax rate on loss from continuing operations was not meaningful, due to a tax charge on a pre-tax loss. The tax charge was primarily due to increases in uncertain tax positions related to cross-border financing transactions, partially offset by tax benefits associated with tax-exempt interest income and the partial completion of the IRS examination covering tax year 2006. 

For the nine-month period ended September 30, 2015, the effective tax rate on income from continuing operations was 34.5 percent. The effective tax rate on income from continuing operations for the nine-month period ended September 30, 2015 differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax-exempt interest income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the deferred tax asset valuation allowance previously released to accumulated other comprehensive income, and the partial completion of the IRS examination covering tax year 2006, partially offset by tax charges associated with increases in uncertain tax positions related to cross-border financing transactions and increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions. The nine-month period ended September 30, 2015 includes an increase in the deferred tax asset valuation allowance primarily attributable to the effects of changes in the Japanese tax law enacted on March 31, 2015, partially offset by changes in projections of future taxable income.

68AIG | Third Quarter 2017 Form 10-Q61


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /15. Income Taxes NOTE 14. INCOME TAXES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Assessment of Deferred Tax Asset Valuation Allowance

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

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

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

·     the sustainability of recent operating profitability of our subsidiaries;

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

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

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

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction.  Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss.  Our U.S. federal consolidated income tax group includes both life companies and non-life companies.  While the U.S. taxable income of our non-life companies can be offset by the 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 utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of September 30, 2016,2017, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

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

For the three- and nine-month periods ended September 30, 2016,2017, recent changes in market conditions, including falling interest rates,rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in an increase to the neta deferred tax liability related to net unrealized tax capital gains. As of June 30, 2016,2017, based on all available evidence, we concluded that the valuation allowance should be released. As a result, for the six-month period ended June 30, 2016,2017, we released $1.2 billion$468 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was recognized inallocated to other comprehensive income. As of September 30, 2016,2017, we continue to be in an overall unrealized tax gain position with respect to the U.S. Life Insurance Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Life Insurance Companies’ available for sale securities portfolioportfolio.

DuringFor the three- and nine-month periods ended September 30, 2016, we recognized2017, 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 net decrease of $2 million and $4 million, respectively, in our deferred tax assetliability related to net unrealized tax capital gains. As of June 30, 2017, based on all available evidence, we concluded that the valuation allowance should be released. As a result, for the six-month period ended June 30, 2017, we released $260 million of valuation allowance associated with certain foreign jurisdictions, primarily attributablethe unrealized tax losses in the U.S. Non-Life Companies’ available for sale securities portfolio, all of which was allocated to changesother comprehensive income. As of September 30, 2017, we continue to be in projections of taxable income.an overall unrealized tax gain position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.

 

69AIG | Third Quarter 2017 Form 10-Q62


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /15. Income Taxes NOTE 14. INCOME TAXES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

For the three- and nine-month periods ended September 30, 2017, we recognized net increases of $24 million and $1 million, respectively, in our deferred tax asset valuation allowance associated with certain foreign jurisdictions, primarily attributable to current year activity.

For both the three- and nine-month periods ended September 30, 2017, we recognized a $26 million decrease in our deferred tax asset valuation allowance associated with certain state jurisdictions, primarily as a result of the beneficial impact of tax law changes enacted in the third quarter of 2017.

Tax Examinations and Litigation

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. On March 29, 2013, theThe Southern District of New York denied our motion. On March 17, 2014,summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) granted ouraffirmed the denial. AIG’s petition for an immediate appeal ofcertiorari to the partial summary judgment decision. On September 9, 2015, the Second Circuit affirmedU.S. Supreme Court from the decision of the Southern District of New York. On October 13, 2015, we filed a petition for a writ of certiorari to the U.S Supreme Court. OnSecond Circuit was denied on March 7, 2016 the U.S. Supreme Court denied our petition for certiorari.2016.  As a result, the case will behas been remanded back to the Southern District of New York for a jury trial.

We will vigorously defend our position and continue to believe that we have adequate reserves for any liability that could result from these government actions. We continue to monitor legal and other developments in this area, including recent decisions affecting other taxpayers, and evaluate their effect, if any, on our position.

Accounting for Uncertainty in Income Taxes

At September 30, 20162017 and December 31, 2015,2016, our unrecognized tax benefits, excluding interest and penalties were $4.5$4.6 billion and $4.3$4.5 billion, respectively. The nine-month period ended September 30, 2016,2017 reflects an increaseincreases in amountsunrecognized tax benefits associated with cross border financing transactions, partially offset by benefits realized due to an agreement reachedthe impact of settlement discussions with the IRS related to certain open tax issues under audit.issues. At both September 30, 20162017 and December 31, 2015,2016, 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 $0.1 billion.  Accordingly, at September 30, 20162017 and December 31, 2015,2016, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.4$4.5 billion and $4.2$4.4 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense.  At both September 30, 20162017 and December 31, 2015,2016, we had accrued liabilities of $1.3 billion and $1.2 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the nine-month periods ended September 30, 20162017 and 2015,2016, we accrued a benefitexpense (benefit) of $16$102 million and an expense of $133$(16) million, respectively, for the payment of interest and penalties. The reduction in interest from December 31, 2015 is primarily related to benefits associated with an agreement reached with the IRS related to certain tax issues under audit, partially offset by an increase associated with cross border financing transactions.

We regularly evaluate adjustments proposed by taxing authorities. At September 30, 2016,2017, such proposed adjustments would not have resulted in a material change to our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period. Although it is reasonably possible that a change in the balance of unrecognized tax benefits may occur within the next 12 months, based on the information currently available, we do not expect any change to be material to our consolidated financial condition.

70AIG | Third Quarter 2017 Form 10-Q63


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /16. Information Provided in Connection with Outstanding Debt NOTE 15. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT

 

16.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Information Provided in Connection with Outstanding Debt

15.INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT

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

Condensed Consolidating Balance Sheets

 

American

 

  

 

  

 

  

 

  

 

American

 

  

 

 ��

 

  

 

  

 

International

 

  

 

  

Reclassifications

 

  

 

International

 

  

 

  

Reclassifications

 

  

 

Group, Inc.

 

  

 

Other

 

and

Consolidated

 

Group, Inc.

 

  

 

Other

 

and

Consolidated

(in millions)

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

September 30, 2016

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 $  

2,906

 $  

-

 $  

12,161

 $  

(4,322)

 $  

10,745

 $  

2,675

 $  

-

 $  

10,659

 $  

(3,559)

 $  

9,775

Other investments(a)

 

7,428

 

-

 

328,195

 

-

 

335,623

 

5,796

 

-

 

305,552

 

-

 

311,348

Total investments

 

10,334

 

-

 

340,356

 

(4,322)

 

346,368

 

8,471

 

-

 

316,211

 

(3,559)

 

321,123

Cash

 

217

 

6

 

2,275

 

-

 

2,498

 

3

 

2

 

2,428

 

-

 

2,433

Loans to subsidiaries(b)

 

35,106

 

-

 

504

 

(35,610)

 

-

 

35,014

 

-

 

574

 

(35,588)

 

-

Investment in consolidated subsidiaries(b)

 

55,878

 

31,307

 

-

 

(87,185)

 

-

 

43,014

 

31,323

 

-

 

(74,337)

 

-

Other assets, including deferred income taxes

 

24,721

 

136

 

138,004

 

(3,820)

 

159,041

 

21,483

 

251

 

160,018

 

(2,235)

 

179,517

Assets held for sale

 

-

 

-

 

6,661

 

-

 

6,661

 

-

 

-

 

-

 

-

 

-

Total assets

 $  

126,256

 $  

31,449

 $  

487,800

 $  

(130,937)

 $  

514,568

 $  

107,985

 $  

31,576

 $  

479,231

 $  

(115,719)

 $  

503,073

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance liabilities

 $  

-

 $  

-

 $  

278,608

 $  

-

 $  

278,608

 $  

-

 $  

-

 $  

282,469

 $  

-

 $  

282,469

Long-term debt

 

22,185

 

641

 

9,451

 

-

 

32,277

 

21,480

 

642

 

8,917

 

-

 

31,039

Other liabilities, including intercompany balances(a)

 

14,906

 

55

 

103,964

 

(8,316)

 

110,609

 

13,463

 

184

 

108,873

 

(5,967)

 

116,553

Loans from subsidiaries(b)

 

502

 

-

 

35,108

 

(35,610)

 

-

 

574

 

-

 

35,014

 

(35,588)

 

-

Liabilities held for sale

 

-

 

-

 

3,909

 

-

 

3,909

 

-

 

-

 

-

 

-

 

-

Total liabilities

 

37,593

 

696

 

431,040

 

(43,926)

 

425,403

 

35,517

 

826

 

435,273

 

(41,555)

 

430,061

Total AIG shareholders’ equity

 

88,663

 

30,753

 

56,258

 

(87,011)

 

88,663

 

72,468

 

30,750

 

43,414

 

(74,164)

 

72,468

Non-redeemable noncontrolling interests

 

-

 

-

 

502

 

-

 

502

 

-

 

-

 

544

 

-

 

544

Total equity

 

88,663

 

30,753

 

56,760

 

(87,011)

 

89,165

 

72,468

 

30,750

 

43,958

 

(74,164)

 

73,012

Total liabilities and equity

 $  

126,256

 $  

31,449

 $  

487,800

 $  

(130,937)

 $  

514,568

 $  

107,985

 $  

31,576

 $  

479,231

 $  

(115,719)

 $  

503,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

$

4,042

$

-

$

9,637

$

(3,547)

$

10,132

$

4,424

$

-

$

13,218

$

(5,340)

$

12,302

Other investments(a)

 

7,425

 

-

 

320,797

 

-

 

328,222

 

7,154

 

-

 

308,719

 

-

 

315,873

Total investments

 

11,467

 

-

 

330,434

 

(3,547)

 

338,354

 

11,578

 

-

 

321,937

 

(5,340)

 

328,175

Cash

 

34

 

116

 

1,479

 

-

 

1,629

 

2

 

34

 

1,832

 

-

 

1,868

Loans to subsidiaries(b)

 

35,927

 

-

 

578

 

(36,505)

 

-

 

34,692

 

-

 

576

 

(35,268)

 

-

Investment in consolidated subsidiaries(b)

 

51,151

 

30,239

 

-

 

(81,390)

 

-

 

42,582

 

27,309

 

-

 

(69,891)

 

-

Other assets, including deferred income taxes

 

23,299

 

258

 

135,690

 

(2,388)

 

156,859

 

24,099

 

239

 

140,743

 

(4,059)

 

161,022

Assets held for sale

 

-

 

-

 

7,199

 

-

 

7,199

Total assets

$

121,878

$

30,613

$

468,181

$

(123,830)

$

496,842

$

112,953

$

27,582

$

472,287

$

(114,558)

$

498,264

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance liabilities

$

-

$

-

$

271,645

$

-

$

271,645

$

-

$

-

$

275,120

$

-

$

275,120

Long-term debt

 

19,777

 

704

 

8,768

 

-

 

29,249

 

21,405

 

642

 

8,865

 

-

 

30,912

Other liabilities, including intercompany balances(a)

 

11,869

 

201

 

99,777

 

(6,109)

 

105,738

 

14,671

 

194

 

103,975

 

(9,572)

 

109,268

Loans from subsidiaries(b)

 

574

 

3

 

35,928

 

(36,505)

 

-

 

577

 

-

 

34,691

 

(35,268)

 

-

Liabilities held for sale

 

-

 

-

 

6,106

 

-

 

6,106

Total liabilities

 

32,220

 

908

 

416,118

 

(42,614)

 

406,632

 

36,653

 

836

 

428,757

 

(44,840)

 

421,406

Total AIG shareholders’ equity

 

89,658

 

29,705

 

51,511

 

(81,216)

 

89,658

 

76,300

 

26,746

 

42,972

 

(69,718)

 

76,300

Non-redeemable noncontrolling interests

 

-

 

-

 

552

 

-

 

552

 

-

 

-

 

558

 

-

 

558

Total equity

 

89,658

 

29,705

 

52,063

 

(81,216)

 

90,210

 

76,300

 

26,746

 

43,530

 

(69,718)

 

76,858

Total liabilities and equity

$

121,878

$

30,613

$

468,181

$

(123,830)

$

496,842

$

112,953

$

27,582

$

472,287

$

(114,558)

$

498,264

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

(b)  Eliminated in consolidation.

71AIG | Third Quarter 2017 Form 10-Q64


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /16. Information Provided in Connection with Outstanding Debt NOTE 15. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Condensed Consolidating Statements of Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American

 

  

 

  

 

  

 

  

 

American

 

  

 

  

 

  

 

  

 

International

 

  

 

  

 

Reclassifications

 

  

 

International

 

  

 

  

 

Reclassifications

 

  

 

Group, Inc.

 

  

 

Other

 

and

 

Consolidated

 

Group, Inc.

 

  

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

(2,098)

$

1,138

$

-

$

960

$

-

Other income

 

225

 

-

 

11,455

 

71

 

11,751

Total revenues

 

(1,873)

 

1,138

 

11,455

 

1,031

 

11,751

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

236

 

12

 

44

 

(2)

 

290

(Gain) loss on extinguishment of debt

 

2

 

-

 

(1)

 

-

 

1

Other expenses

 

177

 

1

 

14,154

 

(69)

 

14,263

Total expenses

 

415

 

13

 

14,197

 

(71)

 

14,554

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

benefit

 

(2,288)

 

1,125

 

(2,742)

 

1,102

 

(2,803)

Income tax benefit

 

(549)

 

(4)

 

(538)

 

-

 

(1,091)

Income (loss) from continuing operations

 

(1,739)

 

1,129

 

(2,204)

 

1,102

 

(1,712)

Loss from discontinued operations, net of income taxes

 

-

 

-

 

(1)

 

-

 

(1)

Net income (loss)

 

(1,739)

 

1,129

 

(2,205)

 

1,102

 

(1,713)

Less:

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

26

 

-

 

26

Net income (loss) attributable to AIG

$

(1,739)

$

1,129

$

(2,231)

$

1,102

$

(1,739)

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

1,002

$

528

$

-

$

(1,530)

$

-

$

1,002

$

528

$

-

$

(1,530)

$

-

Other income

 

145

 

-

 

12,952

 

(243)

 

12,854

 

145

 

-

 

12,952

 

(243)

 

12,854

Total revenues

 

1,147

 

528

 

12,952

 

(1,773)

 

12,854

 

1,147

 

528

 

12,952

 

(1,773)

 

12,854

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

249

 

12

 

69

 

(1)

 

329

 

249

 

12

 

69

 

(1)

 

329

Loss on extinguishment of debt

 

-

 

-

 

(14)

 

-

 

(14)

Gain on extinguishment of debt

 

-

 

-

 

(14)

 

-

 

(14)

Other expenses

 

238

 

1

 

11,821

 

(258)

 

11,802

 

238

 

1

 

11,821

 

(258)

 

11,802

Total expenses

 

487

 

13

 

11,876

 

(259)

 

12,117

 

487

 

13

 

11,876

 

(259)

 

12,117

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

660

 

515

 

1,076

 

(1,514)

 

737

 

660

 

515

 

1,076

 

(1,514)

 

737

Income tax expense (benefit)

 

197

 

(4)

 

111

 

-

 

304

 

197

 

(4)

 

111

 

-

 

304

Income (loss) from continuing operations

 

463

 

519

 

965

 

(1,514)

 

433

 

463

 

519

 

965

 

(1,514)

 

433

Income (loss) from discontinued operations, net of income taxes

 

(1)

 

-

 

4

 

-

 

3

 

(1)

 

-

 

4

 

-

 

3

Net income (loss)

 

462

 

519

 

969

 

(1,514)

 

436

 

462

 

519

 

969

 

(1,514)

 

436

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

(26)

 

-

 

(26)

 

-

 

-

 

(26)

 

-

 

(26)

Net income (loss) attributable to AIG

$

462

$

519

$

995

$

(1,514)

$

462

$

462

$

519

$

995

$

(1,514)

$

462

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

717

$

222

$

-

$

(939)

$

-

Other income

 

(221)

 

-

 

13,220

 

(177)

 

12,822

Total revenues

 

496

 

222

 

13,220

 

(1,116)

 

12,822

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

254

 

14

 

83

 

(30)

 

321

Loss on extinguishment of debt

 

345

 

-

 

1

 

-

 

346

Other expenses

 

352

 

-

 

12,064

 

(146)

 

12,270

Total expenses

 

951

 

14

 

12,148

 

(176)

 

12,937

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

(455)

 

208

 

1,072

 

(940)

 

(115)

Income tax expense (benefit)

 

(224)

 

(6)

 

295

 

-

 

65

Income (loss) from continuing operations

 

(231)

 

214

 

777

 

(940)

 

(180)

Loss from discontinued operations, net of income taxes

 

-

 

-

 

(17)

 

-

 

(17)

Net income (loss)

 

(231)

 

214

 

760

 

(940)

 

(197)

Less:

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

34

 

-

 

34

Net income (loss) attributable to AIG

$

(231)

$

214

$

726

$

(940)

$

(231)

 

72AIG | Third Quarter 2017 Form 10-Q65


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /16. Information Provided in Connection with Outstanding Debt NOTE 15. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American

 

  

 

  

 

  

 

  

 

American

 

  

 

  

 

  

 

  

 

International

 

  

 

  

 

Reclassifications

 

  

 

International

 

  

 

  

 

Reclassifications

 

  

 

Group, Inc.

 

  

 

Other

 

and

 

Consolidated

 

Group, Inc.

 

  

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

794

$

2,553

$

-

$

(3,347)

$

-

Other income

 

653

 

-

 

36,085

 

147

 

36,885

Total revenues

 

1,447

 

2,553

 

36,085

 

(3,200)

 

36,885

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

719

 

37

 

129

 

(5)

 

880

(Gain) loss on extinguishment of debt

 

2

 

-

 

(6)

 

-

 

(4)

Other expenses

 

693

 

2

 

34,865

 

(142)

 

35,418

Total expenses

 

1,414

 

39

 

34,988

 

(147)

 

36,294

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

33

 

2,514

 

1,097

 

(3,053)

 

591

Income tax expense (benefit)

 

(544)

 

(12)

 

538

 

-

 

(18)

Income (loss) from continuing operations

 

577

 

2,526

 

559

 

(3,053)

 

609

Income (loss) from discontinued operations, net of income taxes

 

(1)

 

-

 

8

 

-

 

7

Net income (loss)

 

576

 

2,526

 

567

 

(3,053)

 

616

Less:

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

40

 

-

 

40

Net income (loss) attributable to AIG

$

576

$

2,526

$

527

$

(3,053)

$

576

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

2,226

$

(267)

$

-

$

(1,959)

$

-

$

2,226

$

(267)

$

-

$

(1,959)

$

-

Other income

 

209

 

5

 

39,833

 

(690)

 

39,357

 

209

 

5

 

39,833

 

(690)

 

39,357

Total revenues

 

2,435

 

(262)

 

39,833

 

(2,649)

 

39,357

 

2,435

 

(262)

 

39,833

 

(2,649)

 

39,357

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

743

 

39

 

177

 

(4)

 

955

 

743

 

39

 

177

 

(4)

 

955

Loss on extinguishment of debt

 

77

 

-

 

(1)

 

-

 

76

(Gain) loss on extinguishment of debt

 

77

 

-

 

(1)

 

-

 

76

Other expenses

 

686

 

15

 

34,946

 

(702)

 

34,945

 

686

 

15

 

34,946

 

(702)

 

34,945

Total expenses

 

1,506

 

54

 

35,122

 

(706)

 

35,976

 

1,506

 

54

 

35,122

 

(706)

 

35,976

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

929

 

(316)

 

4,711

 

(1,943)

 

3,381

 

929

 

(316)

 

4,711

 

(1,943)

 

3,381

Income tax expense (benefit)

 

(1,265)

 

(17)

 

2,452

 

-

 

1,170

 

(1,265)

 

(17)

 

2,452

 

-

 

1,170

Income (loss) from continuing operations

 

2,194

 

(299)

 

2,259

 

(1,943)

 

2,211

 

2,194

 

(299)

 

2,259

 

(1,943)

 

2,211

Loss from discontinued operations, net of income taxes

 

(2)

 

-

 

(52)

 

-

 

(54)

 

(2)

 

-

 

(52)

 

-

 

(54)

Net income (loss)

 

2,192

 

(299)

 

2,207

 

(1,943)

 

2,157

 

2,192

 

(299)

 

2,207

 

(1,943)

 

2,157

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

(35)

 

-

 

(35)

 

-

 

-

 

(35)

 

-

 

(35)

Net income (loss) attributable to AIG

$

2,192

$

(299)

$

2,242

$

(1,943)

$

2,192

$

2,192

$

(299)

$

2,242

$

(1,943)

$

2,192

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

5,793

$

1,744

$

-

$

(7,537)

$

-

Other income

 

(57)

 

-

 

45,050

 

(497)

 

44,496

Total revenues

 

5,736

 

1,744

 

45,050

 

(8,034)

 

44,496

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

810

 

44

 

213

 

(90)

 

977

Loss on extinguishment of debt

 

703

 

-

 

46

 

7

 

756

Other expenses

 

899

 

42

 

36,016

 

(407)

 

36,550

Total expenses

 

2,412

 

86

 

36,275

 

(490)

 

38,283

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

3,324

 

1,658

 

8,775

 

(7,544)

 

6,213

Income tax expense (benefit)

 

(714)

 

(69)

 

2,925

 

-

 

2,142

Income (loss) from continuing operations

 

4,038

 

1,727

 

5,850

 

(7,544)

 

4,071

Income (loss) from discontinued operations, net of income taxes

 

(1)

 

-

 

1

 

-

 

-

Net income (loss)

 

4,037

 

1,727

 

5,851

 

(7,544)

 

4,071

Less:

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

34

 

-

 

34

Net income (loss) attributable to AIG

$

4,037

$

1,727

$

5,817

$

(7,544)

$

4,037

*    Eliminated in consolidation.

73AIG | Third Quarter 2017 Form 10-Q66


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /16. Information Provided in Connection with Outstanding Debt NOTE 15. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Condensed Consolidating Statements of Comprehensive Income

 

 

American

 

 

 

 

 

 

 

 

 

 

International

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

462

$

519

$

969

$

(1,514)

$

436

Other comprehensive income (loss)

 

798

 

(56)

 

7

 

49

 

798

Comprehensive income (loss)

 

1,260

 

463

 

976

 

(1,465)

 

1,234

Total comprehensive loss attributable to noncontrolling interests

 

-

 

-

 

(26)

 

-

 

(26)

Comprehensive income (loss) attributable to AIG

$

1,260

$

463

$

1,002

$

(1,465)

$

1,260

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(231)

$

214

$

760

$

(940)

$

(197)

Other comprehensive income (loss)

 

(1,063)

 

(548)

 

187

 

360

 

(1,064)

Comprehensive income (loss)

 

(1,294)

 

(334)

 

947

 

(580)

 

(1,261)

Total comprehensive income attributable to noncontrolling interests

 

-

 

-

 

33

 

-

 

33

Comprehensive income (loss) attributable to AIG

$

(1,294)

$

(334)

$

914

$

(580)

$

(1,294)

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

2,192

$

(299)

$

2,207

$

(1,943)

$

2,157

Other comprehensive income (loss)

 

6,520

 

7,204

 

48,555

 

(55,759)

 

6,520

Comprehensive income (loss)

 

8,712

 

6,905

 

50,762

 

(57,702)

 

8,677

Total comprehensive loss attributable to noncontrolling interests

 

-

 

-

 

(35)

 

-

 

(35)

Comprehensive income (loss) attributable to AIG

$

8,712

$

6,905

$

50,797

$

(57,702)

$

8,712

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

4,037

$

1,727

$

5,851

$

(7,544)

$

4,071

Other comprehensive income (loss)

 

(4,060)

 

3,942

 

52,820

 

(56,766)

 

(4,064)

Comprehensive income (loss)

 

(23)

 

5,669

 

58,671

 

(64,310)

 

7

Total comprehensive income attributable to noncontrolling interests

 

-

 

-

 

30

 

-

 

30

Comprehensive income (loss) attributable to AIG

$

(23)

$

5,669

$

58,641

$

(64,310)

$

(23)

 

 

American

 

 

 

 

 

 

 

 

 

 

International

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,739)

$

1,129

$

(2,205)

$

1,102

$

(1,713)

Other comprehensive income (loss)

 

977

 

1,274

 

(30,625)

 

29,351

 

977

Comprehensive income (loss)

 

(762)

 

2,403

 

(32,830)

 

30,453

 

(736)

Total comprehensive income attributable to noncontrolling interests

 

-

 

-

 

26

 

-

 

26

Comprehensive income (loss) attributable to AIG

$

(762)

$

2,403

$

(32,856)

$

30,453

$

(762)

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

462

$

519

$

969

$

(1,514)

$

436

Other comprehensive income (loss)

 

798

 

(56)

 

7

 

49

 

798

Comprehensive income (loss)

 

1,260

 

463

 

976

 

(1,465)

 

1,234

Total comprehensive loss attributable to noncontrolling interests

 

-

 

-

 

(26)

 

-

 

(26)

Comprehensive income (loss) attributable to AIG

$

1,260

$

463

$

1,002

$

(1,465)

$

1,260

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

576

$

2,526

$

567

$

(3,053)

$

616

Other comprehensive income (loss)

 

2,709

 

7,056

 

18,864

 

(25,920)

 

2,709

Comprehensive income (loss)

 

3,285

 

9,582

 

19,431

 

(28,973)

 

3,325

Total comprehensive income attributable to noncontrolling interests

 

-

 

-

 

40

 

-

 

40

Comprehensive income (loss) attributable to AIG

$

3,285

$

9,582

$

19,391

$

(28,973)

$

3,285

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

2,192

$

(299)

$

2,207

$

(1,943)

$

2,157

Other comprehensive income (loss)

 

6,520

 

7,204

 

48,555

 

(55,759)

 

6,520

Comprehensive income (loss)

 

8,712

 

6,905

 

50,762

 

(57,702)

 

8,677

Total comprehensive loss attributable to noncontrolling interests

 

-

 

-

 

(35)

 

-

 

(35)

Comprehensive income (loss) attributable to AIG

$

8,712

$

6,905

$

50,797

$

(57,702)

$

8,712

74AIG | Third Quarter 2017 Form 10-Q67


TABLE OF CONTENTS 

 

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /16. Information Provided in Connection with Outstanding Debt NOTE 15. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Condensed Consolidating Statements of Cash Flows

 

American

 

 

  

 

 

 

 

 

 

American

 

 

  

 

 

 

 

 

 

International

 

 

  

 

 

Reclassifications

 

 

 

International

 

 

  

 

 

Reclassifications

 

 

 

Group, Inc.

 

 

  

Other

 

and

 

Consolidated

 

Group, Inc.

 

 

  

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries*

 

Eliminations*

 

AIG

 

(As Guarantor)

 

AIGLH

 

Subsidiaries*

 

Eliminations*

 

AIG

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

$

793

$

1,105

$

(8,773)

$

(2,320)

$

(9,195)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Sales of investments

 

5,428

 

-

 

58,914

 

(3,508)

 

60,834

Sales of divested businesses, net

 

40

 

-

 

565

 

-

 

605

Purchase of investments

 

(1,781)

 

-

 

(49,675)

 

3,508

 

(47,948)

Loans to subsidiaries - net

 

38

 

-

 

5

 

(43)

 

-

Contributions from (to) subsidiaries - net

 

990

 

-

 

-

 

(990)

 

-

Net change in restricted cash

 

-

 

-

 

(23)

 

-

 

(23)

Net change in short-term investments

 

1,925

 

-

 

890

 

-

 

2,815

Other, net

 

(17)

 

(4)

 

(1,488)

 

-

 

(1,509)

Net cash (used in) provided by investing activities

 

6,623

 

(4)

 

9,188

 

(1,033)

 

14,774

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

1,108

 

-

 

1,297

 

-

 

2,405

Repayments of long-term debt

 

(1,354)

 

-

 

(1,397)

 

-

 

(2,751)

Purchase of common stock

 

(6,275)

 

-

 

-

 

-

 

(6,275)

Intercompany loans - net

 

(5)

 

-

 

(38)

 

43

 

-

Cash dividends paid

 

(884)

 

(1,133)

 

(1,187)

 

2,320

 

(884)

Other, net

 

(5)

 

-

 

1,394

 

990

 

2,379

Net cash (used in) provided by financing activities

 

(7,415)

 

(1,133)

 

69

 

3,353

 

(5,126)

Effect of exchange rate changes on cash

 

-

 

-

 

(21)

 

-

 

(21)

Change in cash

 

1

 

(32)

 

463

 

-

 

432

Cash at beginning of year

 

2

 

34

 

1,832

 

-

 

1,868

Change in cash of businesses held for sale

 

-

 

-

 

133

 

-

 

133

Cash at end of period

$

3

$

2

$

2,428

$

-

$

2,433

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

$

1,671

$

1,664

$

2,277

$

(3,859)

$

1,753

$

1,671

$

1,664

$

2,277

$

(3,859)

$

1,753

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of investments

 

3,242

 

-

 

59,669

 

(9,567)

 

53,344

 

3,242

 

-

 

59,669

 

(9,567)

 

53,344

Purchase of investments

 

(659)

 

-

 

(62,293)

 

9,567

 

(53,385)

 

(659)

 

-

 

(62,293)

 

9,567

 

(53,385)

Loans to subsidiaries - net

 

1,025

 

-

 

73

 

(1,098)

 

-

 

1,025

 

-

 

73

 

(1,098)

 

-

Contributions from (to) subsidiaries - net

 

1,593

 

-

 

-

 

(1,593)

 

-

 

1,593

 

-

 

-

 

(1,593)

 

-

Net change in restricted cash

 

-

 

-

 

(49)

 

-

 

(49)

 

-

 

-

 

(49)

 

-

 

(49)

Net change in short-term investments

 

1,006

 

-

 

(1,861)

 

-

 

(855)

 

1,006

 

-

 

(1,861)

 

-

 

(855)

Other, net

 

(179)

 

-

 

1,449

 

-

 

1,270

 

(179)

 

-

 

1,449

 

-

 

1,270

Net cash (used in) provided by investing activities

 

6,028

 

-

 

(3,012)

 

(2,691)

 

325

 

6,028

 

-

 

(3,012)

 

(2,691)

 

325

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

3,831

 

-

 

7,599

 

-

 

11,430

 

3,831

 

-

 

7,599

 

-

 

11,430

Repayments of long-term debt

 

(1,454)

 

(62)

 

(6,167)

 

-

 

(7,683)

 

(1,454)

 

(62)

 

(6,167)

 

-

 

(7,683)

Purchase of common stock

 

(8,506)

 

-

 

-

 

-

 

(8,506)

 

(8,506)

 

-

 

-

 

-

 

(8,506)

Intercompany loans - net

 

(73)

 

(3)

 

(1,022)

 

1,098

 

-

 

(73)

 

(3)

 

(1,022)

 

1,098

 

-

Cash dividends paid

 

(1,051)

 

(1,709)

 

(2,150)

 

3,859

 

(1,051)

 

(1,051)

 

(1,709)

 

(2,150)

 

3,859

 

(1,051)

Other, net

 

(263)

 

-

 

3,183

 

1,593

 

4,513

 

(263)

 

-

 

3,183

 

1,593

 

4,513

Net cash (used in) provided by financing activities

 

(7,516)

 

(1,774)

 

1,443

 

6,550

 

(1,297)

 

(7,516)

 

(1,774)

 

1,443

 

6,550

 

(1,297)

Effect of exchange rate changes on cash

 

-

 

-

 

88

 

-

 

88

 

-

 

-

 

88

 

-

 

88

Change in cash

 

183

 

(110)

 

796

 

-

 

869

 

183

 

(110)

 

796

 

-

 

869

Cash at beginning of year

 

34

 

116

 

1,479

 

-

 

1,629

 

34

 

116

 

1,479

 

-

 

1,629

Cash at end of period

$

217

$

6

$

2,275

$

-

$

2,498

$

217

$

6

$

2,275

$

-

$

2,498

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

$

3,675

$

1,386

$

508

$

(3,335)

$

2,234

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Sales of investments

 

5,610

 

-

 

52,234

 

(3,363)

 

54,481

Purchase of investments

 

(1,373)

 

-

 

(49,465)

 

3,363

 

(47,475)

Loans to subsidiaries - net

 

(1,227)

 

-

 

2,690

 

(1,463)

 

-

Contributions from (to) subsidiaries - net

 

-

 

-

 

-

 

-

 

-

Net change in restricted cash

 

-

 

-

 

1,476

 

-

 

1,476

Net change in short-term investments

 

1,940

 

-

 

(2,968)

 

-

 

(1,028)

Other, net

 

(4)

 

-

 

(770)

 

-

 

(774)

Net cash (used in) provided by investing activities

 

4,946

 

-

 

3,197

 

(1,463)

 

6,680

 

75AIG | Third Quarter 2017 Form 10-Q68


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ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |Item 1 /16. Information Provided in Connection with Outstanding Debt NOTE 15. INFORMATION PROVIDED IN CONNECTION WITH OUTSTANDING DEBT

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

5,540

 

-

 

909

 

-

 

6,449

Repayments of long-term debt

 

(5,728)

 

(115)

 

(2,500)

 

-

 

(8,343)

Purchase of common stock

 

(7,473)

 

-

 

-

 

-

 

(7,473)

Intercompany loans - net

 

(236)

 

-

 

(1,227)

 

1,463

 

-

Cash dividends paid

 

(687)

 

(1,359)

 

(1,976)

 

3,335

 

(687)

Other, net

 

(43)

 

-

 

1,033

 

-

 

990

Net cash (used in) provided by financing activities

 

(8,627)

 

(1,474)

 

(3,761)

 

4,798

 

(9,064)

Effect of exchange rate changes on cash

 

-

 

-

 

(39)

 

-

 

(39)

Change in cash

 

(6)

 

(88)

 

(95)

 

-

 

(189)

Cash at beginning of year

 

26

 

91

 

1,641

 

-

 

1,758

Cash at end of period

$

20

$

3

$

1,546

$

-

$

1,569

Supplementary Disclosure of Condensed Consolidating Cash Flow Information

 

 

American

 

 

 

 

 

 

 

 

 

 

International

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries*

 

Eliminations*

 

AIG

Cash (paid) received during the 2017 period for:

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

Third party

$

(791)

$

(47)

$

(208)

$

-

$

(1,046)

Intercompany

 

(1)

 

(1)

 

2

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(324)

$

-

$

(166)

$

-

$

(490)

Intercompany

 

1,852

 

-

 

(1,852)

 

-

 

-

Cash (paid) received during the 2016 period for:

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

Third party

$

(797)

$

(51)

$

(161)

$

-

$

(1,009)

Intercompany

 

-

 

-

 

-

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(11)

$

-

$

(197)

$

-

$

(208)

Intercompany

 

782

 

-

 

(782)

 

-

 

-

 

 

American

 

 

 

 

 

 

 

 

 

 

International

 

 

 

 

 

Reclassifications

 

 

 

 

Group, Inc.

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries*

 

Eliminations*

 

AIG

Cash (paid) received during the 2016 period for:

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

Third party

$

(797)

$

(51)

$

(161)

$

-

$

(1,009)

Intercompany

 

-

 

-

 

-

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(11)

$

-

$

(197)

$

-

$

(208)

Intercompany

 

782

 

-

 

(782)

 

-

 

-

Cash (paid) received during the 2015 period for:

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

Third party

$

(846)

$

(57)

$

(209)

$

-

$

(1,112)

Intercompany

 

-

 

-

 

-

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(17)

$

-

$

(389)

$

-

$

(406)

Intercompany

 

1,769

 

-

 

(1,769)

 

-

 

-

American International Group, Inc. (As Guarantor) supplementary disclosure of non-cash activities:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2017

 

2016

Intercompany non-cash financing and investing activities:

 

 

 

 

Capital contributions

$

198

$

3,086

Dividends received in the form of securities

 

735

 

4,055

Return of capital

 

26

 

-

Fixed maturity securities received in exchange for equity securities

 

-

 

440

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2016

 

2015

Intercompany non-cash financing and investing activities:

 

 

 

 

Capital contributions

$

3,086

$

111

Dividends received in the form of securities

 

4,055

 

1,997

Fixed maturity securities received in exchange for equity securities

 

440

 

-

Non-cash financing/investing activities:

 

 

 

 

Consideration received from sale of shares of AerCap

 

-

 

500

17.Subsequent Events  

Dividends Declared

On November 2, 2017, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 22, 2017 to shareholders of record on December 8, 2017.

76AIG | Third Quarter 2017 Form 10-Q69


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Item 1 / NOTE 16. SUBSEQUENT EVENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

16.SUBSEQUENT EVENTS  

Dividends Declared and Increase in Share Repurchase Authorization

On November 2, 2016, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 22, 2016 to shareholders of record on December 8, 2016.

On November 2, 2016, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of $3.0 billion, resulting in an aggregate remaining authorization on such date of approximately $4.4 billion.

Sales of Businesses

On October 18, 2016, we entered into agreements to sell certain insurance operations to FairfaxITEM 2 | Management’s Discussion and Analysis of Financial Holdings Limited (Fairfax). The agreements include the saleCondition and Results of our subsidiary operations in Argentina, Chile, Colombia, Uruguay and Venezuela, as well as insurance operations in Turkey. Fairfax will also acquire renewal rights for the portfolios of local business written by our operations in Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovakia, and assume certain of our operating assets and employees. Total cash consideration to us is expected to be approximately $240 million. The transactions are subject to obtaining the relevant regulatory approvals and other customary closing conditions.Operations

77Glossary and Acronyms of Selected Insurance Terms and References


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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, thein our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 20162017 and June 30, 20162017 and in our Annual Report on Form 10-K for the year ended December 31, 2015 (20152016 (the 2016 Annual Report) to assist readers seeking additional information related to a particular subject.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATIONCautionary 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, 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 our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as "will,"“will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” "goal" or “estimate.” These projections, goals, assumptions and statements may address, among other things, our:

     exposures to subprime mortgages, monoline insurers, the residential and commercial real estate markets, state and municipal bond issuers, sovereign bond issuers, the energy sector and currency exchange rates;

     exposure to European governments and European financial institutions;

     strategy for risk management;

     actual and anticipated sales, monetizations and/or acquisitions of businesses;businesses or assets;

     restructuring of business operations;operations, including anticipated restructuring charges and annual cost savings;

     generation of deployable capital;

     strategies to increase return on equity and earnings per share;

     strategies to grow net investment income, efficiently manage capital, grow book value per common share, and reduce expenses;

     anticipated restructuring chargesorganizational, business and annual cost savings;

anticipated business or asset divestitures or monetizations;

anticipated organizational and businessregulatory changes;

     strategies for customer retention, growth, product development, market position, financial results and reserves;

management of the impact that innovation and technology changes may have on customer preferences, the frequency or severity of losses and/or the way we distribute and underwrite our products;

segments’ revenues and combined ratios; and

     subsidiaries' revenuesmanagement succession and combined ratios.retention plans.

 

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

     changes in market conditions;

     negative impacts on customers, business partners and other stakeholders;

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

     significant legal, regulatory or governmental proceedings;

     the timing and applicable requirements of any new regulatory framework to which we are subject, as a nonbank systemically important financial institution (SIFI) andincluding as a global systemically important insurer (G‑SII);

     concentrations in our investment portfolios;

     actions by credit rating agencies;

     judgments concerning casualty insurance underwriting and insurance liabilities;

     our ability to successfully manage run-off insuranceLegacy portfolios;

     our ability to successfully reduce costs and expenses and make business and organizational changes without negatively impacting client relationships or our competitive position;

     our ability to successfully dispose of, monetize and/or monetize,acquire businesses or assets, including our ability to successfully consummate the sale of United Guaranty Corporation (UGC or United Guaranty) and certain related affiliates to Arch Capital Group, Ltd. (Arch);assets;

     judgments concerning the recognition of deferred tax assets;

     judgments concerning estimated restructuring charges and estimated cost savings; and

     such other factors discussed in:

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

   Part I, Item 2. MD&A and Part II, Item 1A. Risk Factors of the Quarterly Reports on Form 10‑Q10-Q for the quarterly periods ended March 31, 20162017 and June 30, 2016;2017; and

   Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of our 2015the 2016 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.

79AIG | Third Quarter 2017 Form 10-Q71



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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 SEC rules and regulations. GAAP is the acronym for “accounting principles generally accepted in the United States.” The non‑GAAP financial measures we present may not be comparable to similarly‑named measures reported by other companies.

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

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

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 in the Results of Operations section of this MD&A on a consolidated basis.

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Item 2 / USE OF NON-GAAP MEASURES

After-tax operating income attributable to AIG is derived by excluding the following items from net income attributable to AIG. 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. For example, certain ratios and other metrics described below exclude:

INDEX TO ITEM 2

deferred income tax valuation allowance releases and charges;

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

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

other income and expense — net, related to Corporate and Other run-off insurance lines;

loss on extinguishment of debt;

net realized capital gains and losses;

non‑qualifying derivative hedging activities, excluding net realized capital gains and losses;

income or loss from discontinued operations;

income and loss from divested businesses, including:

gain on the sale of International Lease Finance Corporation (ILFC);

gain on the sale of NSM Insurance Group (NSM) and AIG Advisor Group; and

certain post-acquisition transaction expenses incurred by AerCap Holdings N.V. (AerCap) in connection with its acquisition of ILFC and the difference between expensing AerCap’s maintenance rights assets over the remaining lease term as compared to the remaining economic life of the related aircraft and related tax effects;

legacy tax adjustments primarily related to certain changes in uncertain tax positions and other tax adjustments;

non-operating litigation reserves and settlements;

reserve development related to non-operating run-off insurance business; and

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

Operating revenue excludes Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes).

We use the following operating performance measures within our Commercial Insurance and Consumer Insurance reportable segments as well as Corporate and Other.

Commercial Insurance; Consumer Insurance: Personal Insurance;Corporate and Other: United Guaranty

Pre‑tax operating income: includes both underwriting income and loss and net investment income, but excludes net realized capital gains and losses, other income and expense — net, gain on the sale of NSM, and non-operating litigation reserves and settlements. Underwriting income and loss is derived by reducing net premiums earned by losses and loss adjustment expenses incurred, acquisition expenses and general operating expenses.

·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, 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 information

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Item 2 / USE OF NON-GAAP MEASURES

calculated under GAAP, and thus may not be comparable to similar ratios calculated for regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and associated ratios.

Accident year loss and combined ratios, as adjusted: both the accident year loss and combined ratios, as adjusted, exclude catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Natural catastrophe losses are generally weather or seismic events having a net impact in excess of $10 million each. Catastrophes also include certain man-made events, such as terrorism and civil disorders, that meet the $10 million threshold. We believe the as adjusted ratios are meaningful measures of our underwriting results on an on-going 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.

·Consumer Insurance: Retirement and Life; Corporate and Other: Institutional Markets

Pre‑tax operating income is derived by excluding the following items from pre‑tax income:

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

changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains and losses; andPage

net realized capital gains and losses;

gain on the saleUse of AIG Advisor Group;Non-GAAP Measures

non-operating litigation reserves and settlements.

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 and mutual funds.

·Corporate and Other — Pre‑tax operating income and loss is derived by excluding the following items from pre‑tax income and loss:

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

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Item 2 / EXECUTIVE 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 AIG’s securities. You should read this Quarterly Report on Form 10‑Q, together with the 2015 Annual Report, in its entirety for a complete description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

We report our results of operations as follows:

·Commercial Insurance– Commercial Insurance offers property casualty insurance products and services to commercial customers worldwide. Product lines include Casualty, Property, Specialty, and Financial lines. These products are distributed through a diversified multichannel distribution network that includes independent insurance brokers, and through an independent agency network. 

·Consumer Insurance – Consumer Insurance offers a broad portfolio of retirement, life insurance and property casualty products and services to individuals and groups. Consumer Insurance products include term life, whole life, universal life, accident and health, variable and index annuities, fixed annuities, group retirement plans, mutual funds, financial planning, automobile and homeowners insurance, travel insurance, and warranty and service programs. Consumer Insurance offers its products and services through a diverse, multi-channel distribution network, which includes broker-dealers, agencies and independent marketing organizations, banks, brokers, partnerships, travel agents, affiliated financial advisors, and direct-to-consumer platforms.

·Corporate and Other Corporate and Other consists of income from assets held by AIG Parent and other corporate subsidiaries, results from United Guaranty and Institutional Markets, general operating expenses not attributable to specific reportable segments and interest expense. It also includes run-off lines of insurance business.

Prior to the third quarter of 2016, we presented United Guaranty and Institutional Markets as operating segments of Commercial Insurance. Beginning in the third quarter of 2016, in order to align our financial reporting with the manner in which our chief operating decision makers review the businesses to assess performance and make decisions about resources to be allocated, United Guaranty and Institutional Markets are presented in the Corporate and Other category for all periods presented. As a result, Commercial Insurance operations now consist of our commercial property and casualty business.

 As a result of the transaction agreement discussed in Note 4 to the Condensed Consolidated Financial Statements, the associated assets and liabilities of UGC have been classified as held-for-sale at September 30, 2016. 

In the second quarter of 2015, a United Guaranty subsidiary and certain of our property casualty companies entered into a 50 percent quota share arrangement whereby the United Guaranty subsidiary (1) ceded 50 percent of the risk relating to policies written in 2014 that were current as of January 1, 2015 and (2) ceded 50 percent of the risk relating to all policies written in 2015 and 2016, each in exchange for a 30 percent ceding commission and reimbursements of 50 percent of the losses and loss adjustment expenses incurred on covered policies. Beginning in the third quarter of 2016, the effects of these intercompany reinsurance arrangements are included in the results of Commercial Insurance and Corporate and Other for all periods presented. Previously, these arrangements were eliminated for purposes of segment reporting.

Prior periods have been revised to conform to the current period presentation for the above segment changes.

On January 26, 2016, we announced several actions designed to create a leaner, more profitable and focused insurer. These actions include a plan to reorganize our operating model into “modular”, more self-contained business units to enhance transparency and accountability. Additionally, we are introducing a new Legacy Portfolio that aims to maximize value and release capital of certain run-off non-strategic assets and highlight progress on improving the return on equity (ROE) of our Operating Portfolio.  When the new operating structure is finalized in the fourth quarter, the presentation of our segment results will be modified and prior periods’ presentation will be revised to conform to the new structure.

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2016 Divestiture and Reinsurance Transaction Highlights

Since the first quarter of 2016, we have entered into or consummated the following transactions:

In May 2016, we completed the sale of the Advisor Group to investment funds affiliated with Lightyear Capital LLC and PSP Investments.

In August 2016, we entered into an agreement to sell our 100 percent interest in UGC and certain related affiliates to Arch for total consideration of $3.4 billion.  Consummation of this transaction is subject to obtaining the requisite regulatory approvals or non-disapprovals and other customary closing conditions.

In August 2016, we sold our controlling interest in NSM Insurance Group (NSM), a managing general agent, to ABRY Partners for consideration of $201 million. We retained an equity interest in a newly formed joint venture and will continue to provide underwriting capacity to NSM.

In September 2016, we entered into an agreement to sell our 20 percent interest in Ascot Underwriting Holdings Ltd. and our 100 percent interest in the related syndicate-funding subsidiary Ascot Corporate Name Ltd. to Canada Pension Plan Investment Board (CPPIB). Consummation of the transaction is subject to receipt of regulatory approvals and other customary closing conditions.  Total consideration for the transaction is $1.1 billion, inclusive of CPPIB’s recapitalization of Syndicate 1414’s Funds at Lloyd’s (FAL) capital requirements. We expect to receive approximately $240 million in net cash proceeds from the transaction after the FAL recapitalization and release of the AIG-guaranteed letter of credit currently supporting the syndicate’s FAL.

In September 2016, we entered into a reinsurance agreement involving certain whole life and universal life businesses of one of our domestic life insurance subsidiaries. This transaction reduced certain statutory reserves that were above economic requirements, which released excess statutory capital of $1.0 billion that was included in dividend payments to AIG Parent.

In October 2016, we entered into an agreement with Fairfax Financial Holdings Limited (Fairfax), as part of a strategic partnership that will further focus and streamline our global insurance operations. We agreed to sell to Fairfax our country subsidiary operations in Argentina, Chile, Colombia, Uruguay, Venezuela, as well as insurance operations in Turkey. Fairfax will also acquire renewal rights for the portfolio of local business written by our operations in Bulgaria, Czech Republic, Hungary, Poland, Romania, and Slovakia, and assume certain of our operating assets and employees. Total cash consideration to us is expected to be approximately $240 million. The transactions are subject to obtaining the relevant regulatory approvals and other customary closing conditions.  This divesture furthers our strategic goal of focusing our geographic footprint for Commercial Insurance and Personal insurance, while maintaining our global multinational capabilities. 

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ITEM 2 | Use of Non-GAAP Measures

Use of Non-GAAP Measures

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

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

After-tax operating income attributable to AIG is derived by excluding the tax effected pre-tax operating income (PTOI) adjustments described below and the following tax items from net income attributable to AIG:

deferred income tax valuation allowance releases and charges; and

uncertain tax positions and other tax items related to legacy matters having no relevance to our current businesses or operating performance.

General operating expenses, operating basis is derived by making the following adjustments to general operating and other expenses: include (i) certain loss adjustment expenses, reported as policyholder benefits and losses incurred and (ii) certain investment and other expenses reported as net investment income, and exclude (i) advisory fee expenses, (ii) non-deferrable insurance commissions, (iii) direct marketing and acquisition expenses, net of deferrals, (iv) non-operating litigation reserves and (v) other expense related to an asbestos retroactive reinsurance agreement. We use General operating expenses, operating basis, because we believe it provides a more meaningful indication of our ordinary course of business operating costs, regardless of within which financial statement line item these expenses are reported externally within our segment results. The majority of these expenses are employee-related costs.  For example, Other acquisition expenses and Losses and loss adjustment expenses primarily represent employee-related costs in the underwriting and claims functions, respectively.  Excluded from this measure are non-operating expenses (such as restructuring costs and litigation reserves), direct marketing expenses, insurance company assessments and non-deferrable commissions.

AIG | Third Quarter 2017 Form 10-Q73


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ITEM 2 | Use of Non-GAAP Measures

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.

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

Pre-tax operating income is derived by excluding the following items from income from continuing operations before income tax. This definition is consistent across our modules (including geography). 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. PTOI is a GAAP measure for our operating segments.

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

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

loss (gain) on extinguishment of debt;

net realized capital gains and losses;

non‑qualifying derivative hedging activities, excluding net realized capital gains and losses;

income or loss from discontinued operations;

net loss reserve discount benefit (charge);

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

income and loss from divested businesses;

non-operating litigation reserves and settlements;

reserve development related to non-operating run-off insurance business;

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

·Commercial Insurance: Liability and Financial Lines, Property and Special Risks; Consumer Insurance: Personal 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 Commercial Insurance excludes net loss reserve discount), and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100 indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. Our ratios are calculated using the relevant segment information calculated under GAAP, and thus may not be comparable to similar ratios calculated for regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and associated ratios.

   Accident year loss and combined ratios, as adjusted:both the accident year loss and combined ratios, as adjusted, exclude catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Natural catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each. Catastrophes also include certain man-made events, such as terrorism and civil disorders that meet the $10 million threshold. We believe the 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.

·Consumer Insurance: Individual Retirement, Group Retirement, and Life Insurance; Other Operations: Institutional Markets

   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 and mutual funds.

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

AIG | Third Quarter 2017 Form 10-Q74


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ITEM 2 |Critical Accounting Estimates

Critical Accounting Estimates

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

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

·loss reserves;

·reinsurance assets;

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

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

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

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

·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 assets.

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, you should read Part II, Item 7. MD&A — Critical Accounting Estimates in the 2016 Annual Report.

AIG | Third Quarter 2017 Form 10-Q75


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ITEM 2 |Executive Summary

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 2016 Annual Report,  in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

AIG’S OPERATING MODEL

Our Core businesses include Commercial Insurance and Consumer Insurance, as well as Other Operations.  Commercial Insurance includes two modules – Liability and Financial Lines and Property and Special Risks. Consumer Insurance is comprised of four modules – Individual Retirement, Group Retirement, Life Insurance and Personal Insurance.  As we continue to focus on operating improvement, we are exiting certain lines of business and market regions that we consider non-core and unprofitable while still maintaining a global presence for our Core businesses. The Legacy Portfolio consists of our run-off insurance lines and legacy investments. Other Operations consists of businesses and items not attributed to our Commercial Insurance and Consumer Insurance modules or our Legacy Portfolio.

Our multinational capabilities provide a diverse mix of businesses through our global offices and branches in more than 80 countries and jurisdictions. Accordingly, we also review and assess the performance of our Core business through the broad locations of our insurance operations across three key geographic modules: the United States, Europe, and Japan. Our disclosure of geography is based on the significant legal entity insurance companies (including branches) operating in those geographic areas. The other geography includes AIG Parent, United Guaranty Corporation (United Guaranty), AIG Fuji Life Insurance Company, Ltd. (Fuji Life), our insurance operations in remaining geographies around the globe and certain legal entities not deemed significant in the key geographic areas. Geography disclosures exclude our Legacy Portfolio.

On September 25, 2017, we announced prospective changes to our organizational structure, which will become effective during the fourth quarter. Commercial Insurance and Consumer Insurance segments are expected to transition to General Insurance and Life and Retirement, respectively. General Insurance and Life and Retirement will each have distinct business units that reflect how business is marketed and underwritten. General Insurance is expected to include U.S. and International results for Commercial Insurance and Personal Insurance. Life and Retirement is expected to include Individual Retirement, Group Retirement, Life Insurance and Institutional Markets.

Other Operations is expected to include AIG Parent and our new technology-focused subsidiary, Blackboard, formerly operating as Hamilton USA, which was acquired on October 2, 2017. Our Legacy Portfolio will continue to consist of our run-off insurance lines and legacy investments.  When the new operating structure is finalized in the fourth quarter, the presentation of our segment results will be modified and prior periods’ presentation will be revised to conform to the new structure.

AIG | Third Quarter 2017 Form 10-Q76


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ITEM 2 |Executive Summary

Business Modules

Commercial Insurance

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

 

Consumer Insurance

Consumer Insurance is a unique franchise that brings together a broad portfolio of retirement, life insurance and personal insurance products offered through multiple distribution networks. It holds long-standing, leading market positions in many of its U.S. product lines, and its global footprint provides the opportunity to leverage its multinational servicing capabilities and pursue select opportunities in attractive markets. With its strong capital position, customer-focused service, innovative product development capabilities and deep distribution relationships across multiple channels, Consumer Insurance is well positioned to provide clients with valuable solutions, delivered through the channels they prefer.

 

Other Operations

Other Operationsconsists of businesses and items not attributed to our Commercial and Consumer modules or our Legacy Portfolio. It includes AIG Parent, Institutional Markets, United Guaranty(a), Fuji Life(b), deferred tax operating income increasedassets related to tax attributes and intercompany eliminations.

(a) United Guaranty was sold in December 31, 2016.

(b) Fuji Life was sold on April 30, 2017.

Legacy Portfolio

Legacy Portfolio includes Legacy Property and Casualty Run-Off Insurance Lines, Legacy Life Insurance Run-Off Lines and Legacy Investments.

Geography Modules

United States

includes the following major property and casualty and life insurance companies: National Union Fire Insurance Company of Pittsburgh, Pa. (National Union), American Home Assurance Company (American Home U.S.), Lexington Insurance Company (Lexington), American General Life Insurance Company (American General), The Variable Annuity Life Insurance Company (VALIC), and the United States Life Insurance Company in the three-month period endedCity of New York (U.S. Life).

Europe

includes AIG Europe Limited and its branches, which are property and casualty companies.

Japan

includes the following major property and casualty insurance companies: Fuji Fire and Marine Insurance Company (Fuji Fire), AIUI Japan, and American Home Assurance Company, Ltd. (American Home Japan).

AIG | Third Quarter 2017 Form 10-Q77


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ITEM 2 |Executive Summary

Financial Performance Summary

Net Income (Loss) Attributable To AIG

Three Months Ended September 30,

($ in millions)

2017 and 2016 Quarterly Comparison

Decreased due to lower income from insurance operations, reflecting aggregate pre-tax catastrophe losses of $3.0 billion, which included losses from Hurricanes Harvey, Irma and Maria and the earthquake in Mexico, compared to catastrophe losses of $282 million in the same period in the prior year primarily due to higher returns on alternative investments andyear; an increase in fair value of assets accounted for under the fair value option, partially offset by an increase in underwriting loss. The increase in underwriting loss was driven primarily by higher catastrophe losses and higher net adverseunfavorable prior year loss reserve development driven by higher than expected loss emergence mainly in Liability and Financial Lines primarily from U.S. program business within Specialty, partially offset by favorable Property development. This impact wasrelated to accident year 2016; lower net investment income; and higher net realized capital losses. These decreases were partially offset by lower general operating and other expenses lower acquisition costs, and an improvement ina net positive adjustment from the accident year loss ratio, as adjusted, reflecting lower severe losses,update of actuarial assumptions compared to a net negative adjustment in the same period in the prior year.

Net Income Attributable To AIG

Commercial Insurance pre‑tax operating income decreased in the nine-month period endedNine Months Ended September 30,

($ in millions)

2017 and 2016 compared to the same period in the prior year primarilyYear-to-Date Comparison

Decreased due to lower returns on alternative investments, as well as an underwriting loss compared to underwriting income for the same period in the prior year. The underwriting results were impacted by significantlyfrom insurance operations, reflecting higher catastrophe losses, and a netan increase in unfavorable prior year loss reserve discount chargedevelopment driven by higher than expected loss emergence mainly in Liability and Financial Lines primarily related to accident year 2016, a loss on sale of divested businesses due to the sale of Fuji Life in 2017 compared to a benefitgain on sale of divested businesses due to the sale of AIG Advisor Group Inc. (AIG Advisor Group) and NSM Insurance Group LLC (NSM) in 2016 and higher net realized capital losses. These decreases were partially offset by lower general operating and other expenses, a net positive adjustment from the update of actuarial assumptions compared to a net negative adjustment in the same period in the prior year as a result of decreasesand fair value gains on derivative positions in the forward yield curve rates used for discounting. These results were partially offset by an improvement in the accident year loss ratio,Legacy Portfolio, as adjusted, and lower net adverse prior year loss reserve development compared to the same period in the prior year.

Consumer Insurance pre-tax operating income increased in the three-month period ended September 30, 2016 compared to the same period in the prior year, due to higher underwriting income in Personal Insurance, higher net positive adjustments to reflect the update of actuarial assumptions in Retirement and Life, higher returns on alternative investments and lower domestic general operating expenses in Retirement and Life. Retirement pre-tax operating income increased in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a higher net positive adjustment from the review and update of actuarial assumptions,well as higher net investment income the impact of lower equity market performance in the prior yeardue to increased income from alternative investments and higher policy fees from growth inappreciation on assets under management. Life pre-tax operating income increasedin the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a lower net negative adjustment from the review and update of actuarial assumptions, higher net investment income and lower domestic general operating expenses.  Personal Insurance pre-tax operating income increased in the three-month period ended September 30, 2016 compared to the same period in the prior year, reflecting strategic actions to reduce expenses and refocus direct marketing activities, partially offset by higher current accident year losses.

Consumer Insurance pre-tax operating income increased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to higher net positive adjustments to reflect the update of actuarial assumptions in Retirement and Life, favorable mortality experience in Life, lower domestic general operating expenses in Retirement and Life and improved underwriting results in Personal Insurance, which reflected strategic actions to reduce expenses and refocus direct marketing activities together with higher net favorable prior year loss reserve development and lower general operating expenses, partially offset by lower returns on alternative investments in Retirement and Life.

Corporate and Other reported a higher pre-tax operating loss in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a pre-tax operating loss in Institutional Markets driven by loss recognition expense on certain payout annuities from the update of actuarial assumptions. This was partially offset by higher earnings on investments for which the fair value option was elected.

For further discussion see Also,MD&A – Consolidated Results of Operations

AIG | Third Quarter 2017 Form 10-Q78


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ITEM 2 |Executive Summary

Pre-Tax Operating Income (Loss)*

Three Months Ended September 30,

($ in millions)

2017 and 2016 Quarterly Comparison

Decreased due to lower income from insurance operations, reflecting higher aggregate pre-tax catastrophe losses of $3.0 billion, which included losses from Hurricanes Harvey, Irma and Maria and the three-month period ended September 30, 2015 included a pension curtailment credit. Additionally, the run-off insurance lines reported underwriting incomeearthquake in the three-month period ended September 30, 2016Mexico, compared to underwriting losscatastrophe losses of $282 million in the same period in the prior year, primarily driven by lower net adversean increase in unfavorable prior year loss reserve development as well asdriven by higher than expected loss emergence mainly in Liability and Financial Lines primarily related to accident year 2016 and lower net investment income. These decreases were partially offset by lower general operating and other expenses and a decreasenet positive adjustment from the update of actuarial assumptions compared to a net negative adjustment in netthe same period in the prior year.

Pre-Tax Operating Income*

Nine Months Ended September 30,

($ in millions)

2017 and 2016 Year-to-Date Comparison

Decreased due to lower income from insurance operations, reflecting higher pre-tax catastrophe losses and an increase in unfavorable prior year loss reserve discount chargedevelopment driven by higher than expected loss emergence mainly in Liability and in Financial Lines primarily related to excess workers’ compensation business largely drivenaccident year 2016. These decreases were partially offset by interest rate movements.

Corporatelower general operating and Other reportedother expenses, a pre-tax operating loss innet positive adjustment from the nine-month period ended September 30, 2016,update of actuarial assumptions compared to pre-tax operating incomea net negative adjustment in the same period in the prior year primarilyand fair value gains on derivative positions in the Legacy Portfolio as well as higher net investment income due to a pre-tax operating lossincreased income from Institutional Markets,

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lower earningsalternative investments and higher appreciation on investmentsassets for which the fair value option was elected, as well as an absence of equity earnings from shareselected.

For further discussion see MD&A – Business Segment Operations

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

AIG | Third Quarter 2017 Form 10-Q79


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ITEM 2 |Executive Summary

Three Months Ended September 30,

($ in AerCap, which were sold in the prior-year period. millions)In addition, the nine-month period ended September 30, 2015 included a pension curtailment credit. Additionally, Run-off insurance lines reported a pre-tax operating loss in the nine-month period ended September 30, 2016 compared to pre-tax operating income in the same period in the prior year. The pre-tax operating loss in Run-off insurance lines was driven by a charge for the discount on excess workers’ compensation reserves in the nine-month period ended September 30, 2016 compared to a benefit in the same period in the prior year, largely driven by decreases in the forward yield curve rates used for discounting.

Our investment portfolio performance General Operating and Other Expenses

improved in the three-month period ended September 30,2017 and 2016 compared to the same period in the prior year primarily due to higher returns on alternative investments. Our investment portfolio performance declined in the nine-month period ended September 30, 2016 compared to the same period in the prior yearQuarterly Comparison

Declined due to lower income on alternative investmentsemployee-related expenses and lower reinvestment yields, partially offset by an increase in invested assetsprofessional fee reductions related to our ongoing efficiency program, divestitures of businesses, including United Guaranty and higher gains on securities for which the fair value option was elected.

Net realized capital lossesincreased in the three-month period ended September 30, 2016 compared to the same period in the prior year primarily due to higherNSM, and a favorable foreign exchange losses related to the weakeningimpact of the British pound following the Brexit vote, which more than offset lower other-than temporary impairment charges and higher gains on the sale of securities.$19 million.

We recorded net realized capital losses in the nine-month period ended September 30, 2016 primarily due to foreign exchange losses and impairments, which were higher than the gain recognized on the sale of a portion of our holdings in People’s Insurance Company (Group) of China Limited and PICC Property & Casualty Company Limited (collectively, our PICC Investment), compared to net realized capital gains in the same period in the prior year, which was driven primarily by foreign exchange gains and net gains on the sales of various securities such as the Class B shares of Prudential Financial and common shares of Springleaf Holdings, Inc.  See MD&A – Investments – Net Realized Capital Gains and Losses for further discussion.

In keeping with our broad and on-goingongoing efforts to transform AIG for long-term competitiveness, resultsgeneral operating and other expenses for the three-third quarters of 2017 and nine-month periods ended September 30, 2016 included approximately $0.2 billion$31 million and $0.5 billion, respectively,$210 million of pre-tax restructuring and other costs, respectively, which were primarily composedcomprised of employee severance charges.

General Operating Expenses, Operating Basis*

Nine Months Ended September 30,

($ in millions)

General Operating and Other Expenses

contract termination charges. Results2017 and 2016 Year-to-Date Comparison

Declined due to lower employee-related expenses and professional fee reductions related to our ongoing efficiency program and divestitures of businesses, including United Guaranty, AIG Advisor Group, Fuji Life and NSM, and a favorable foreign exchange impact of $19 million.

General operating and other expenses for both the three- and nine-month periods ended September 30, 20152017 and 2016 included approximately $0.3 billion$259 million and $488 million of pre-tax restructuring and other costs.costs, respectively, which were primarily comprised of employee severance charges.

We continue to execute initiatives focused on organizational simplification, operational efficiency, and business rationalization, which are expected to result in aggregate pre-tax restructuring and other costs of approximately $1.2$1.5 billion (of which approximately $1.0$1.45 billion has been recognized)recognized since the third quarter of 2015) as well as generate pre-tax annualized savings of approximately $1.2$1.4 billion to $1.3$1.5 billion when fully implemented.implemented by 2018.

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Item 2 / EXECUTIVE OVERVIEW

Our Performance – Selected IndicatorsGeneral Operating Expenses, Operating Basis*

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

 

AIG | Third Quarter 2017 Form 10-Q80


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ITEM 2 |Executive Summary

Capital Returned to Shareholders

Nine Months Ended September 30,

($ in millions)

We have returned $20.3 billion in capital to our shareholders through dividends and share and warrant repurchases from January 1, 2016 to September 30, 2017.

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

(in millions, except per share data and ratios)

 

 

 

2016

 

2015

 

 

2016

 

 

2015

 

Results of operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

$

12,854

$

12,822

 

$

39,357

 

$

44,496

 

Income (loss) from continuing operations

 

 

 

433

 

(180)

 

 

2,211

 

 

4,071

 

Net income (loss) attributable to AIG

 

 

 

462

 

(231)

 

 

2,192

 

 

4,037

 

Net Income (loss) per common share attributable to AIG (diluted)

 

0.42

 

(0.18)

 

 

1.92

 

 

2.97

 

After-tax operating income attributable to AIG

 

 

$

1,097

$

691

 

$

2,983

 

$

4,275

 

After-tax operating income per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to AIG (diluted)

 

 

 

1.00

 

0.52

 

 

2.61

 

 

3.15

 

Key metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax operating income

 

 

$

729

$

592

 

$

2,306

 

$

2,990

 

Loss ratio

 

 

 

77.7

 

72.8

 

 

73.1

 

 

70.4

 

Accident year loss ratio, as adjusted

 

 

64.8

 

66.7

 

 

63.4

 

 

65.7

 

Combined ratio

 

 

 

105.3

 

102.3

 

 

100.9

 

 

99.3

 

Accident year combined ratio, as adjusted

 

 

92.4

 

96.2

 

 

91.2

 

 

94.6

 

Net premiums written

 

 

$

4,357

$

5,275

 

$

13,221

 

$

16,157

 

Consumer Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax operating income

 

 

$

1,384

$

657

 

$

3,276

 

$

2,625

 

Personal Insurance loss ratio

 

 

 

56.3

 

53.4

 

 

54.8

 

 

55.0

 

Personal Insurance accident year loss ratio, as adjusted

 

 

 

56.5

 

53.0

 

 

54.9

 

 

54.1

 

Personal Insurance combined ratio

 

 

 

96.3

 

99.6

 

 

95.2

 

 

100.9

 

Personal Insurance accident year combined ratio, as adjusted

 

 

96.5

 

99.2

 

 

95.3

 

 

100.0

 

Personal Insurance net premiums written

 

 

$

2,919

$

3,016

 

$

8,653

 

$

8,861

 

Retirement premiums

 

 

 

45

 

37

 

 

151

 

 

127

 

Retirement premiums and deposits

 

 

 

5,172

 

6,625

 

 

18,456

 

 

18,204

 

Life premiums

 

 

 

791

 

675

 

 

2,289

 

 

2,085

 

Life premiums and deposits

 

 

 

1,363

 

1,223

 

 

3,931

 

 

3,695

 

Life Insurance Companies assets under management

 

 

359,109

 

332,886

 

 

359,109

 

 

332,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Repurchases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate repurchases of common stock

 

 

$

2,258

$

3,730

 

$

8,506

 

$

7,473

 

Total number of common shares repurchased

 

 

 

40

 

61

 

 

153

 

 

130

*

Aggregate repurchase of warrants

 

 

 

-

 

-

 

 

263

 

 

-

 

Total number of warrants repurchased

 

 

 

-

 

-

 

 

15

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* The total number of shares of AIG Common Stock repurchased in the nine-month period ended September 30, 2015 includes (but the aggregate purchase

price does not include) approximately 3.5 million shares of AIG Common Stock received in January 2015 upon the settlement of an ASR agreement

executed in the fourth quarter of 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in millions, except per share data)

 

 

 

 

 

 

 

 

2016

 

 

2015

 

Balance sheet data:

��

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

$

514,568

 

$

496,842

 

Long-term debt

 

 

 

 

 

 

 

 

32,277

 

 

29,249

 

Total AIG shareholders’ equity

 

 

 

 

 

 

 

 

88,663

 

 

89,658

 

Book value per common share

 

 

 

 

 

 

 

 

85.02

 

 

75.10

 

Book value per common share, excluding AOCI

 

 

 

 

 

 

 

 

76.33

 

 

72.97

 

Book value per common share, excluding AOCI and DTA

 

 

 

 

 

 

 

61.41

 

 

58.94

 

88


TABLE OF CONTENTS

Item 2 / EXECUTIVE OVERVIEW

 

 

Three Months Ended

 

Nine Months Ended

 

Year Ended

 

 

 

September 30,

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

 

2015

 

 

2015

 

Return on equity

 

2.1

%

(0.9)

%

3.3

%

 

5.1

%

 

2.2

%

Return on equity - after-tax operating income, excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

AOCI

 

5.4

 

2.9

 

4.8

 

 

6.0

 

 

3.1

 

Return on equity - after-tax operating income, excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

AOCI and DTA

 

6.7

 

3.5

 

6.0

 

 

7.1

 

 

3.7

 

The following table presents a reconciliation of Book value per common share to Book value per common share, excluding AOCI, and Book value per common share, excluding AOCI and DTA, which are non-GAAP measures.  See Use of Non‑GAAP Measures for additional information.

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions, except per share data)

 

 

 

 

 

 

2016

 

2015

Total AIG shareholders' equity

 

 

 

 

 

$

88,663

$

89,658

Accumulated other comprehensive income

 

 

 

 

 

 

9,057

 

2,537

Total AIG shareholders' equity, excluding AOCI

 

 

 

 

 

 

79,606

 

87,121

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

 

 

 

 

 

15,567

 

16,751

Total AIG shareholders' equity, excluding AOCI and DTA

 

 

 

 

 

$

64,039

$

70,370

 

 

 

 

 

 

 

 

 

 

Total common shares outstanding

 

 

 

 

 

 

1,042,888,556

 

1,193,916,617

Book value per common share

 

 

 

 

 

$

85.02

$

75.10

Book value per common share, excluding AOCI

 

 

 

 

 

 

76.33

 

72.97

Book value per common share, excluding AOCI and DTA

 

 

 

 

 

$

61.41

$

58.94

The following table presents a reconciliation of Return on equity to Return on equity, after-tax operating income, excluding AOCI, and Return on equity, after-tax operating income, excluding AOCI and DTA, which are non-GAAP measures.  See Use of Non‑GAAP Measures for additional information.Equity

 

Three Months Ended

 

Nine Months Ended

 

 

Year Ended

 

 

September 30,

 

September 30,

 

 

December 31,

 

(dollars in millions)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

2015

 

Actual or annualized net income (loss) attributable to AIG

$

1,848

 

$

(924)

 

$

2,923

 

$

5,383

 

 

$

2,196

 

Actual or annualized after-tax operating income attributable to AIG

 

4,388

 

 

2,764

 

 

3,977

 

 

5,700

 

 

 

2,927

 

Average AIG Shareholders' equity

 

89,305

 

 

101,629

 

 

89,196

 

 

104,534

 

 

 

101,558

 

Average AOCI

 

8,658

 

 

7,089

 

 

6,344

 

 

8,863

 

 

 

7,598

 

Average AIG Shareholders' equity, excluding average AOCI

 

80,647

 

 

94,540

 

 

82,852

 

 

95,671

 

 

 

93,960

 

Average DTA

 

15,591

 

 

15,271

 

 

16,189

 

 

15,567

 

 

 

15,803

 

Average AIG Shareholders' equity, excluding average AOCI and DTA

$

65,056

 

$

79,269

 

$

66,663

 

$

80,104

 

 

$

78,157

 

ROE

 

2.1

%

 

(0.9)

%

 

3.3

%

 

5.1

%

 

 

2.2

%

ROE - after-tax operating income, excluding AOCI

 

5.4

 

 

2.9

 

 

4.8

 

 

6.0

 

 

 

3.1

 

ROE - after-tax operating income, excluding AOCI and DTA

 

6.7

 

 

3.5

 

 

6.0

 

 

7.1

 

 

 

3.7

 

89


 

Item 2 / EXECUTIVE OVERVIEW

Total revenues

 (in millions)

Income (loss) from continuing operations

 (in millions)

Net income (Loss) ATTRIBUTABLE TO AIG

(in millions)

Net INCOME (loss) PER COMMON SHARE ATTRIBUTABLE TO AIG (DILUTED)

 

after-tax operating income attributable to aig (excludes net realized capital gains and certain other items)

(in millions)

Pre-tax operating income (loss) by segment

(in millions)

 

90


TABLE OF CONTENTS

Item 2 /Adjusted Return on Equity* EXECUTIVE OVERVIEW

TOTAL ASSETS

(in millions)

Long-term debt

(in millions)

Total AIG shareholders’ equity

(in millions)

Book value per COMMON share, book value per common share excluding AOCI and book value per common share excluding AOCI and dta

*   Includes operating borrowings of other subsidiaries and consolidated investments and hybrid debt securities.

Investment HighlightsThree Months Ended September 30,

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

 

AIG | Third Quarter 2017 Form 10-Q81


TABLE OF CONTENTS

ITEM 2 |Executive Summary

Book Value Per Common Share

Adjusted Book Value Per Common Share*

Net investment income increased to $3.8 billion in the three-month period ended September 30, 2016 compared to $3.2

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

AIG’s Outlook – Industry and economic factors

Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in the first nine months of 2017, characterized by factors such as historically low interest rates, the Department of Labor’s (the DOL) final fiduciary duty rule (the DOL Fiduciary Rule), volatile energy markets, slowing growth in China and Euro-Zone economies, and the formal commencement of the United Kingdom’s (the UK) withdrawal from its membership in the European Union (the EU) (commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.

Impact of Changes in the Interest Rate Environment

Interest rates decreased marginally in the first nine months of 2017 and have remained at historically low levels. Certain markets in which we operate have experienced negative interest rates. A sustained low interest rate environment negatively affects sales of interest rate sensitive products in our industry and may negatively impact the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios.  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.

Annuity Sales and Surrenders

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

AIG | Third Quarter 2017 Form 10-Q82


TABLE OF CONTENTS

ITEM 2 |Executive Summary

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 a historically low interest rate environment. The low interest rate environment makes it more difficult to profitably price many of our products and puts margin pressure on existing products, due to the challenge of investing recurring premiums and deposits and reinvesting investment portfolio cash flows in the low rate environment while maintaining satisfactory investment quality and liquidity. 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.

For investment-oriented products in our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets businesses, our spread management strategies include disciplined pricing and product design for new business, modifying or limiting the sale of products that do not achieve targeted spreads, using asset-liability management to match assets to liabilities to the extent practicable, and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-established intervals. For example, competitors including private equity-held annuity writers are currently offering higher crediting rates.  As a result, the timing and extent of crediting rate decreases may differ from the corresponding declines in investment yields, which could reduce our spreads and future profitability.

Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 73 percent were crediting at the contractual minimum guaranteed interest rate at September 30, 2017. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 70 percent at both September 30, 2017 and December 31, 2016. These businesses continue to focus on pricing discipline and strategies to reduce the minimum guaranteed interest crediting rates offered on new sales. In the core universal life business in our Life Insurance business, 71 percent of the account values were crediting at the contractual minimum guaranteed interest rate at September 30, 2017.

AIG | Third Quarter 2017 Form 10-Q83


TABLE OF CONTENTS

ITEM 2 |Executive Summary

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

 

Current Crediting Rates

September 30, 2017

 

 

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%

$

5,353

$

4,034

$

12,638

$

22,025

 

> 1% - 2%

 

7,125

 

142

 

1,927

 

9,194

 

> 2% - 3%

 

14,009

 

31

 

441

 

14,481

 

> 3% - 4%

 

10,358

 

44

 

7

 

10,409

 

> 4% - 5%

 

562

 

-

 

4

 

566

 

> 5% - 5.5%

 

34

 

-

 

5

 

39

 

Total Individual Retirement

$

37,441

$

4,251

$

15,022

$

56,714

 

Group Retirement*

 

 

 

 

 

 

 

 

 

1%

$

1,378

$

2,570

$

2,579

$

6,527

 

> 1% - 2%

 

6,261

 

662

 

156

 

7,079

 

> 2% - 3%

 

15,448

 

-

 

167

 

15,615

 

> 3% - 4%

 

905

 

-

 

-

 

905

 

> 4% - 5%

 

7,163

 

-

 

-

 

7,163

 

> 5% - 5.5%

 

162

 

-

 

-

 

162

 

Total Group Retirement

$

31,317

$

3,232

$

2,902

$

37,451

 

Universal life insurance

 

 

 

 

 

 

 

 

 

1%

$

-

$

-

$

8

$

8

 

> 1% - 2%

 

27

 

177

 

205

 

409

 

> 2% - 3%

 

566

 

529

 

943

 

2,038

 

> 3% - 4%

 

1,785

 

353

 

6

 

2,144

 

> 4% - 5%

 

3,383

 

214

 

-

 

3,597

 

> 5% - 5.5%

 

303

 

-

 

-

 

303

 

Total universal life insurance

$

6,064

$

1,273

$

1,162

$

8,499

 

Total

$

74,822

$

8,756

$

19,086

$

102,664

 

Percentage of total

 

73

%

8

%

19

%

100

%

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

Assumption Updates and Loss Recognition

Spreads and surrender rates are important components of the future profit assumptions that drive the rate we use to amortize DAC and related reserves for investment-oriented products. If future profit assumptions change significantly, we may be required to recalculate DAC and related reserves, and reflect any resulting adjustments in current period income. In addition to investment-oriented products, certain traditional long-duration products for which we do not have the ability to adjust interest rates, such as payout annuities, are exposed to reduced earnings and potential loss recognition reserve increases in a sustained low interest rate environment.

See Insurance Reserves – Life and Annuity Reserves and DAC – Update of Actuarial Assumptions for discussion of such adjustments recorded in the three- and nine-month periods ended September 30, 2017 and 2016 in our Consumer Insurance and Legacy Life Insurance Run-Off Lines.

Commercial Insurance

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

AIG | Third Quarter 2017 Form 10-Q84


TABLE OF CONTENTS

ITEM 2 |Executive Summary

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

Additionally, sustained low interest rates on discounting of projected benefit cash flows for our pension plans may result in higher pension expense.

Department of Labor Fiduciary Rule

Our Individual Retirement and Group Retirement operating segments provide products and services to certain employee benefit plans that are subject to restrictions imposed by the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code, including the requirements of the DOL Fiduciary Rule, related exemption amendments, and subsequent interpretative guidance and bulletins.  Overall, the DOL Fiduciary Rule, as currently promulgated, would result in increased compliance costs and may create increased exposure to legal claims under certain circumstances, including class actions. Following the extension of the applicability dates of the DOL Fiduciary Rule and related exemptions announced by the DOL in April 2017, the new definition of fiduciary and the impartial conduct standards under the DOL Fiduciary Rule became applicable on June 9, 2017, with the remaining provisions of the rule scheduled to become applicable on January 1, 2018.

In late August 2017, the DOL issued a proposed rule to further extend the applicability date of all remaining elements of the DOL Fiduciary Rule and related exemptions from January 1, 2018 to July 1, 2019.  The comment period for this proposed rule ended on September 15, 2017.  The delay announced in April 2017 and the current proposed delay in the applicability of the DOL Fiduciary Rule followed a February 3, 2017 presidential memorandum that directed the DOL to review the rule and determine whether the DOL Fiduciary Rule will adversely impact the ability of retirement savers to access retirement information and financial advice. Continued uncertainties in the annuity market around the impact and implementation of this rule, including potential delays and possible modifications, have continued to significantly affect distributors, negatively impacting industry sales of annuity products, including those offered by Individual Retirement. We believe, based on our understanding of the DOL Fiduciary Rule, that we have implemented the adjustments necessary to achieve compliance with the applicable provisions of the rule. In addition to the re-examination of the DOL Fiduciary Rule, other federal and state-level authorities have also initiated efforts to evaluate standards of conduct for investment advice and to impose fiduciary duties on financial advisers who give such advice. While we cannot yet predict what impact these developments will have on our businesses, we are closely following the DOL’s ongoing review and assessment of the DOL Fiduciary Rule as well as these other federal and state-level developments.

Impact of Currency Volatility

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

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

Liability and Financial Lines, Property and Special Risks, International Life Insurance and Personal 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

2017

2016

 

Change

 

 

2017

2016

 

Change

 

Currency:

 

 

 

 

 

 

 

 

 

 

 

JPY

110.99

103.53

 

7

%

 

112.51

110.72

 

2

%

EUR

0.87

0.90

 

(3)

%

 

0.91

0.90

 

1

%

GBP

0.77

0.74

 

4

%

 

0.79

0.71

 

11

%

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

AIG | Third Quarter 2017 Form 10-Q85


TABLE OF CONTENTS

ITEM 2 |Executive Summary

Other Industry Developments

On September 7, 2017, the UK Ministry of Justice announced, a proposal to increase the Ogden rate from negative 0.75 percent to between zero and one percent. This proposal has to be passed by Parliament. We will continue to monitor the progress with this potential change.

In early October 2017, a series of wildfires spread across Northern California causing significant property damage, business interruption and loss of lives. As of November 2, 2017, our preliminary estimate of the amount of pre-tax losses from these wildfires is approximately $500 million, net of reinsurance, impacting both our Commercial Insurance and Personal Insurance businesses.  These losses will be reflected in our fourth quarter 2017 results.  This preliminary estimate involves the exercise of considerable judgment. Due to the complexity of factors contributing to the losses, there can be no assurance that AIG’s ultimate losses associated with these events will not differ from this estimate, perhaps materially.

AIG | Third Quarter 2017 Form 10-Q86


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, 2017 and 2016. Factors that relate primarily to a specific business are discussed in more detail within the business segment operations section.

For a discussion of the Critical Accounting Estimates that affect our results of operations see the Critical Accounting Estimates section of this MD&A and Part II, Item 7. MD&A — Critical Accounting Estimates in the 2016 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)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

8,063

$

  8,581

 

(6)

%

 

$

23,459

$

  26,138

 

(10)

%

Policy fees

 

728

 

  646

 

13

 

 

 

2,177

 

  2,029

 

7

 

Net investment income

 

3,416

 

  3,783

 

(10)

 

 

 

10,715

 

  10,479

 

2

 

Net realized capital losses

 

(922)

 

  (765)

 

(21)

 

 

 

(1,106)

 

  (829)

 

(33)

 

Other income

 

466

 

  609

 

(23)

 

 

 

1,640

 

  1,540

 

6

 

Total revenues

 

11,751

 

  12,854

 

(9)

 

 

 

36,885

 

  39,357

 

(6)

 

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

10,322

 

  7,489

 

38

 

 

 

22,653

 

  20,748

 

9

 

Interest credited to policyholder account balances

 

867

 

  887

 

(2)

 

 

 

2,683

 

  2,798

 

(4)

 

Amortization of deferred policy acquisition costs

 

912

 

  1,018

 

(10)

 

 

 

3,135

 

  3,625

 

(14)

 

General operating and other expenses

 

2,149

 

  2,536

 

(15)

 

 

 

6,774

 

  8,125

 

(17)

 

Interest expense

 

290

 

  329

 

(12)

 

 

 

880

 

  955

 

(8)

 

(Gain) loss on extinguishment of debt

 

1

 

  (14)

 

NM

 

 

 

(4)

 

  76

 

NM

 

Net (gain) loss on sale of divested businesses

 

13

 

  (128)

 

NM

 

 

 

173

 

  (351)

 

NM

 

Total benefits, losses and expenses

 

14,554

 

  12,117

 

20

 

 

 

36,294

 

  35,976

 

1

 

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense (benefit)

 

(2,803)

 

  737

 

NM

 

 

 

591

 

  3,381

 

(83)

 

Income tax expense (benefit)

 

(1,091)

 

  304

 

NM

 

 

 

(18)

 

  1,170

 

NM

 

Income (loss) from continuing operations

 

(1,712)

 

  433

 

NM

 

 

 

609

 

  2,211

 

(72)

 

Income (loss) from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

 

(1)

 

  3

 

NM

 

 

 

7

 

  (54)

 

NM

 

Net income (loss)

 

(1,713)

 

  436

 

NM

 

 

 

616

 

  2,157

 

(71)

 

Less: Net income (loss) attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

26

 

  (26)

 

NM

 

 

 

40

 

  (35)

 

NM

 

Net income (loss) attributable to AIG

$

(1,739)

$

  462

 

NM

%

 

$

576

$

  2,192

 

(74)

%

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in millions, except per share data)

 

 

 

 

 

 

 

 

2017

 

 

2016

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

$

503,073

 

$

498,264

 

Long-term debt

 

 

 

 

 

 

 

 

31,039

 

 

30,912

 

Total AIG shareholders’ equity

 

 

 

 

 

 

 

 

72,468

 

 

76,300

 

Book value per common share

 

 

 

 

 

 

 

 

80.62

 

 

76.66

 

Book value per common share, excluding AOCI

 

 

 

 

 

 

 

 

74.01

 

 

73.41

 

Adjusted book value per common share

 

 

 

 

 

 

 

57.44

 

 

58.57

 

AIG | Third Quarter 2017 Form 10-Q87


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

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

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions, except per share data)

 

 

 

 

 

 

2017

 

2016

Total AIG shareholders' equity

 

 

 

 

 

$

72,468

$

76,300

Accumulated other comprehensive income

 

 

 

 

 

 

5,939

 

3,230

Total AIG shareholders' equity, excluding AOCI

 

 

 

 

 

 

66,529

 

73,070

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

 

 

 

 

 

14,897

 

14,770

Adjusted shareholders' equity

 

 

 

 

 

$

51,632

$

58,300

 

 

 

 

 

 

 

 

 

 

Total common shares outstanding

 

 

 

 

 

 

898,880,087

 

995,335,841

Book value per common share

 

 

 

 

 

$

80.62

$

76.66

Book value per common share, excluding AOCI

 

 

 

 

 

 

74.01

 

73.41

Adjusted book value per common share

 

 

 

 

 

 

57.44

 

58.57

The following table presents a reconciliation of Return on equity to Adjusted Return on 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)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

2016

 

Actual or annualized net income (loss) attributable to AIG

$

(6,956)

 

$

1,848

 

$

768

 

$

2,923

 

 

$

(849)

 

Actual or annualized after-tax operating income attributable to AIG

 

(4,444)

 

 

4,460

 

 

2,273

 

 

4,257

 

 

 

406

 

Average AIG Shareholders' equity

 

73,100

 

 

89,305

 

 

74,142

 

 

89,196

 

 

 

86,617

 

Average AOCI

 

5,451

 

 

8,658

 

 

4,477

 

 

6,344

 

 

 

5,722

 

Average AIG Shareholders' equity, excluding average AOCI

 

67,649

 

 

80,647

 

 

69,665

 

 

82,852

 

 

 

80,895

 

Average DTA

 

14,592

 

 

15,591

 

 

14,635

 

 

16,189

 

 

 

15,905

 

Average adjusted AIG Shareholders' equity

$

53,057

 

$

65,056

 

$

55,030

 

$

66,663

 

 

$

64,990

 

ROE

 

(9.5)

%

 

2.1

%

 

1.0

%

 

3.3

%

 

 

(1.0)

%

Adjusted Return on Equity

 

(8.4)

%

 

6.9

%

 

4.1

%

 

6.4

%

 

 

0.6

%

The following table presents a reconciliation of General operating and other expenses to General operating expense, operating basis, which is a Non-GAAP measure:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

General operating and other expenses

$

2,149

$

2,536

 

(15)

%

 

$

6,774

$

8,125

 

(17)

%

Restructuring and other costs

 

(31)

 

(210)

 

85

 

 

 

(259)

 

(488)

 

47

 

Other (income) expense related to retroactive reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

agreement

 

-

 

(4)

 

NM

 

 

 

-

 

8

 

NM

 

Pension expense related to a one-time lump sum payment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to former employees

 

(49)

 

-

 

NM

 

 

 

(50)

 

-

 

NM

 

Non-operating litigation reserves

 

-

 

2

 

NM

 

 

 

70

 

(1)

 

NM

 

Total general operating and other expenses included

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in pre-tax operating income

 

2,069

 

2,324

 

(11)

 

 

 

6,535

 

7,644

 

(15)

 

Loss adjustment expenses, reported as policyholder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

benefits and losses incurred

 

289

 

340

 

(15)

 

 

 

889

 

1,031

 

(14)

 

Advisory fee expenses

 

(84)

 

(76)

 

(11)

 

 

 

(238)

 

(566)

 

58

 

Non-deferrable insurance commissions and other

 

(148)

 

(107)

 

(38)

 

 

 

(410)

 

(350)

 

(17)

 

Direct marketing and acquisition expenses, net of deferrals, and other

 

(56)

 

(52)

 

(8)

 

 

 

(226)

 

(329)

 

31

 

Investment expenses reported as net investment income and other

 

32

 

15

 

113

 

 

 

49

 

45

 

9

 

Total general operating expenses, operating basis

$

2,102

$

2,444

 

(14)

%

 

$

6,599

$

7,475

 

(12)

%

AIG | Third Quarter 2017 Form 10-Q88


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

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

Three Months Ended September 30,

2017

 

2016

 

 

 

 

Total Tax

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

(Benefit)

 

After

 

 

 

 

(Benefit)

 

After

(in millions, except per share data)

Pre-tax

 

Charge

 

Tax

 

Pre-tax

 

Charge

 

Tax

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

$

(2,803)

$

(1,091)

$

(1,714)

 

$

737

$

304

$

465

Noncontrolling interest

 

 

 

 

 

(25)

 

 

 

 

 

 

(3)

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

$

(2,803)

$

(1,091)

$

(1,739)

 

$

737

$

304

$

462

Uncertain tax positions and other tax adjustments

 

 

 

(11)

 

11

 

 

 

 

(42)

 

42

Deferred income tax valuation allowance releases

 

 

 

2

 

(2)

 

 

 

 

2

 

(2)

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

 

(26)

 

(9)

 

(17)

 

 

(17)

 

(6)

 

(11)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses)

 

(84)

 

(29)

 

(55)

 

 

67

 

24

 

43

Unfavorable (favorable) prior year development and related amortization changes ceded

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

(7)

 

(2)

 

(5)

 

 

(3)

 

(1)

 

(2)

(Gain) loss on extinguishment of debt

 

1

 

1

 

-

 

 

(14)

 

(5)

 

(9)

Net realized capital losses

 

922

 

316

 

606

 

 

765

 

210

 

555

Noncontrolling interest on net realized capital losses

 

 

 

 

 

1

 

 

 

 

 

 

(29)

(Income) loss from discontinued operations

 

 

 

 

 

1

 

 

 

 

 

 

(3)

(Income) loss from divested businesses

 

13

 

7

 

6

 

 

(128)

 

(45)

 

(83)

Non-operating litigation reserves and settlements

 

-

 

-

 

-

 

 

(5)

 

(2)

 

(3)

Net loss reserve discount (benefit) charge

 

48

 

20

 

28

 

 

32

 

14

 

18

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

 

49

 

16

 

33

 

 

-

 

-

 

-

Restructuring and other costs

 

31

 

10

 

21

 

 

210

 

73

 

137

Pre-tax operating income (loss)/After-tax operating income (loss)

$

(1,856)

$

(770)

$

(1,111)

 

$

1,644

$

526

$

1,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

908.7

 

 

 

 

 

 

1,102.4

Income (loss) per common share attributable to AIG (diluted)

 

 

 

 

$

(1.91)

 

 

 

 

 

$

0.42

After-tax operating income (loss) per common share attributable to AIG (diluted)*

 

 

 

 

$

(1.22)

 

 

 

 

 

$

1.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2017

 

2016

 

 

 

 

Total Tax

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

(Benefit)

 

After

 

 

 

 

(Benefit)

 

After

(in millions, except per share data)

Pre-tax

 

Charge

 

Tax

 

Pre-tax

 

Charge

 

Tax

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

$

591

$

(18)

$

610

 

$

3,381

$

1,170

$

2,197

Noncontrolling interest

 

 

 

 

 

(34)

 

 

 

 

 

 

(5)

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

$

591

$

(18)

$

576

 

$

3,381

$

1,170

$

2,192

Uncertain tax positions and other tax adjustments

 

 

 

(27)

 

27

 

 

 

 

(184)

 

184

Deferred income tax valuation allowance releases

 

 

 

23

 

(23)

 

 

 

 

4

 

(4)

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

 

(117)

 

(41)

 

(76)

 

 

(270)

 

(95)

 

(175)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses)

 

(195)

 

(68)

 

(127)

 

 

91

 

32

 

59

Unfavorable (favorable) prior year development and related amortization changes ceded

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

258

 

91

 

167

 

 

(15)

 

(5)

 

(10)

(Gain) loss on extinguishment of debt

 

(4)

 

(1)

 

(3)

 

 

76

 

26

 

50

Net realized capital losses

 

1,106

 

401

 

705

 

 

829

 

217

 

612

Noncontrolling interest on net realized capital losses

 

 

 

 

 

6

 

 

 

 

 

 

(40)

(Income) loss from discontinued operations

 

 

 

 

 

(7)

 

 

 

 

 

 

54

(Income) loss from divested businesses

 

173

 

41

 

132

 

 

(351)

 

(123)

 

(228)

Non-operating litigation reserves and settlements

 

(86)

 

(30)

 

(56)

 

 

(43)

 

(15)

 

(28)

Net loss reserve discount (benefit) charge

 

283

 

101

 

182

 

 

323

 

113

 

210

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

 

50

 

17

 

33

 

 

-

 

-

 

-

Restructuring and other costs

 

259

 

90

 

169

 

 

488

 

171

 

317

Pre-tax operating income/After-tax operating income

$

2,318

$

579

$

1,705

 

$

4,509

$

1,311

$

3,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

961.3

 

 

 

 

 

 

1,142.7

Income per common share attributable to AIG (diluted)

 

 

 

 

$

0.60

 

 

 

 

 

$

1.92

After-tax operating income per common share attributable to AIG (diluted)

 

 

 

 

$

1.77

 

 

 

 

 

$

2.79

*   For the three-month period ended September 30, 2017, because we reported a net loss and an after-tax operating loss, all common stock equivalents are anti-dilutive and are therefore excluded from the calculation of diluted shares and diluted per share amounts. The shares excluded from these calculations were 22,459,868 shares.

AIG | Third Quarter 2017 Form 10-Q89


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

quarterly pre-tax income (loss) Comparison for 2017 and 2016

Pre-tax results decreased in the three-month period ended September 30, 2017 compared to the same period in 2016 primarily due to:

higher aggregate pre-tax catastrophe losses of $3.0 billion, which included losses from Hurricanes Harvey, Irma and Maria and the earthquake in Mexico, compared to catastrophe losses of $282 million in the same period in the prior year;

an increase in unfavorable prior year loss reserve development driven by higher than expected loss emergence mainly in Liability and Financial Lines primarily related to accident year 2016;

a decrease in net investment income due to lower invested assets, lower income on our hedge fund portfolio, and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called;

an increase in net realized capital losses reflecting:

higher derivative losses from variable annuity GMWB, net of hedges, including losses from guaranteed living benefit embedded derivatives, net of hedging, primarily due to a higher net negative adjustment from updates of actuarial assumptions, movement in the non-performance or “own credit” spread adjustment (NPA), driven by tightening credit spreads and lower expected GMWB payments due to higher equity markets; and

higher impairments on investments in life settlements.

Partially offset by:

foreign exchange gains in the three-month period ended September 30, 2017 compared to foreign exchange losses in the same period in the prior year due to $528 million of remeasurement losses for a short-term intercompany balance in 2016.

These decreases were partially offset by:

lower general operating and other expenses reflecting strategic actions to reduce expenses; and

a net positive adjustment from the update of actuarial assumptions compared to a net negative adjustment in the same period in the prior year.

year-to-date pre-tax income Comparison for 2017 and 2016

Pre-tax results decreased in the nine-month period ended September 30, 2017 compared to the same period in 2016 primarily due to:

higher aggregate pre-tax catastrophe losses of $3.4 billion, which included losses from Hurricanes Harvey, Irma and Maria and the earthquake in Mexico, compared to catastrophe losses of $947 million in the same period in the prior year;

an increase in unfavorable prior year loss reserve development driven by higher than expected loss emergence mainly in Liability and Financial Lines primarily related to accident year 2016;

a loss on sale of divested businesses due to the sale of Fuji Life in the nine-month period ended September 30, 2017 compared to a gain on sale from divested businesses on the sale of AIG Advisor Group and NSM in the same period in the prior year;

an increase in net realized capital losses reflecting:

higher derivative losses from variable annuity GMWB, net of hedges, including losses from guaranteed living benefit embedded derivatives, net of hedging, primarily due to a higher net negative adjustment from updates of actuarial assumptions, movement in the NPA, driven by tightening credit spreads and lower expected GMWB payments due to higher equity markets; and

gains in the same period in the prior year on the sale of a portion of our investment in People’s Insurance Company (Group) of China Limited and PICC Property & Casualty Company Limited (collectively, our PICC Investment).

Partially offset by:

foreign exchange gains in the nine-month period ended September 30, 2017 compared to foreign exchange losses in the same period in the prior year due to $906 million of remeasurement losses for a short-term intercompany balance in 2016; and

lower other-than-temporary impairments.

These decreases were partially offset by:

lower general operating and other expenses reflecting strategic actions to reduce expenses;

a net positive adjustment from the update of actuarial assumptions compared to a net negative adjustment in the same period in the prior year;

higher Legacy Portfolio fair value gains on certain investments; and 

an increase in net investment income due to higher income on alternative investments, primarily in our hedge fund portfolio.

AIG | Third Quarter 2017 Form 10-Q90


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

Income Tax expense analysis

For the three-month period ended September 30, 2017, the effective tax rate on loss from continuing operations was 38.9 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, partially offset by tax charges related to losses in our European operations taxed at a statutory tax rate lower than 35 percent.

For the nine-month period ended September 30, 2017, the effective tax rate on income from continuing operations was not meaningful, due to a tax benefit on pre-tax income. The tax benefit was primarily due to tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement in accordance with ASU 2016-09, partially offset by tax charges related to increases in uncertain tax positions associated with the impact of settlement discussions with the IRS related to certain open tax issues and losses in our European operations taxed at a statutory tax rate lower than 35 percent.

For the three-month period ended September 30, 2016, the effective tax rate on income from continuing operations was 41.2 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent, partially offset by tax benefits associated with tax exempt interest income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities.  

For the nine-month period ended September 30, 2016, the effective tax rate on income from continuing operations was 34.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt interest income, the impact of an agreement reached with the IRS related to certain tax issues under audit and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, partially offset by a tax charge and related interest associated with increases in uncertain tax positions related to cross border financing transactions and foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.

AIG | Third Quarter 2017 Form 10-Q91


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

Business Segment Operations

Our business operations consist of Commercial Insurance, Consumer Insurance, Other Operations, and a Legacy Portfolio.

Commercial Insurance consists of two modules: Liability and Financial Lines and Property and Special Risks. Consumer Insurance consists of four modules: Group Retirement, Individual Retirement, Life Insurance and Personal Insurance. Other Operations consists of businesses and items not allocated to our other businesses, which are primarily AIG Parent, Institutional Markets, United Guaranty and Fuji Life. Our Legacy Portfolio consists of our Legacy Property and Casualty Run-Off Insurance Lines, Legacy Life Insurance Run-Off Lines and Legacy Investments. 

The following table summarizes Pre-tax operating income (loss) from our business segment operations. See alsoNote 3 to the Condensed Consolidated Financial Statements.  

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

September 30,

 

 

 

 

September 30,

(in millions)

 

2017

 

2016

 

 

 

 

 

2017

 

2016

Core business:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Insurance

 

 

 

 

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

(257)

$

948

 

 

 

 

$

903

$

2,332

Property and Special Risks

 

(2,605)

 

(263)

 

 

 

 

 

(2,200)

 

(44)

Commercial Insurance

 

(2,862)

 

685

 

 

 

 

 

(1,297)

 

2,288

Consumer Insurance

 

 

 

 

 

 

 

 

 

 

 

 

Individual Retirement

 

718

 

920

 

 

 

 

 

1,815

 

1,727

Group Retirement

 

249

 

214

 

 

 

 

 

758

 

670

Life Insurance

 

112

 

(54)

 

 

 

 

 

272

 

(27)

Personal Insurance

 

(71)

 

148

 

 

 

 

 

471

 

510

Consumer Insurance

 

1,008

 

1,228

 

 

 

 

 

3,316

 

2,880

Other Operations

 

(287)

 

(164)

 

 

 

 

 

(835)

 

(565)

Consolidations, eliminations and other adjustments

 

(1)

 

(6)

 

 

 

 

 

75

 

-

Total Core

 

(2,142)

 

1,743

 

 

 

 

 

1,259

 

4,603

Legacy Portfolio

 

286

 

(99)

 

 

 

 

 

1,059

 

(94)

Pre-tax operating income (loss)

$

(1,856)

$

1,644

 

 

 

 

$

2,318

$

4,509

AIG | Third Quarter 2017 Form 10-Q92


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

Commercial Insurance

PRODUCTS AND DISTRIBUTION

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

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

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

Special Risks: Products include aerospace, political risk, trade credit, portfolio solutions, surety and marine insurance.

Distribution

Commercial Insurance products are primarily distributed through a network of independent retail and wholesale brokers.

BUSINESSSTRATEGY 

Customer:We provide commercial insurance solutions to the full spectrum of enterprises — from large, multinational, and mid-sized companies to small businesses, entrepreneurs, and non-profit organizations across the globe. We expect that investments in underwriting, claimsservices, client risk services, science and data will continue to differentiate us fromour peers and drive a superior clientexperience. 

Sharpen Commercial Focus:Create a leaner, more focused, and more profitable Commercial Insurance organization.Deliver a more competitive return on equity across our businesses primarily through improvements in our loss ratio. Optimizeour business portfolio through riskselection by using enhanced data, analytics and the application of science todeliver superiorrisk-adjusted returns. Exit or remediate targetedsub-segments of underperforming portfolios or non-core businesses that do notmeet our risk acceptance or profitability objectives. Maintain and grow profitable accounts and deliver a better client experience.

Invest to Grow:Grow our higher-value businesses while investing in transformative opportunities, continuing initiatives to modernize our technology and infrastructure, advancing our engineering capabilities, innovating new products and client risk solutions and delivering a better client experience.

AIG | Third Quarter 2017 Form 10-Q93


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

COMPETITION and challenges

Operatingin ahighly competitive industry, Commercial Insurance competesagainst several hundred companies, specialtyinsurance organizations, mutual companies and other underwriting organizations in theU.S. In internationalmarkets, we compete forbusiness with theforeign insurance operations of large global insurance groups and localcompanies in specific market areas and product types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. Commercial Insurance seeks to distinguish itself in the insurance industry primarily based on its well-established brand, global franchise, multinational capabilities, financial and capital strength, innovative products, claims expertise to handle complex claims, expertise in providing specialized coverages and customer service.

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

Our challenges include:

information technology infrastructure modernization, which puts pressure on our efforts to reduce operating expenses;

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

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

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

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

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

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

Liability and Financial Lines

The Liability and Financial Lines markets remain challenging, with excess capacity continuing to negatively impact the rate environment. Despite this, we continue to achieve rate increases in challenged areas of the portfolio, particularly for directors and officers liability (D&O) within U.S. Financial lines, and more broadly across U.S. Casualty Lines. Within U.S. Casualty, we expect continued execution of our risk selection strategy alongside disciplined underwriting to allow us to achieve rate increases through the remainder of 2017. We have continued to observe higher loss cost trends, which are impacting not only the primary books, but also having a leveraged impact on excess layers. Liability and Financial Lines has large international exposures within the Commercial Insurance portfolio and will therefore remain sensitive to volatility in foreign currencies.

Property and Special Risks

In the first nine months of 2017, Property and Special Risks experienced growth in certain of our targeted lines of business, including Middle Markets; however, we faced certain challenges in other lines driven by the competitive market environment. Rates in more commoditized lines of business such as U.S. excess and surplus continue to be unsatisfactory and we intend to continue to reduce our net premiums written in these areas. Property premiums declined in the first nine months of 2017, primarily due to reductions in the portfolio driven by actions to address accounts with inadequate prices and unfavorable terms and conditions.

Overall, Property and Special Risks experienced rate pressure in the first nine months of 2017; however, recent hurricane and earthquake activity is expected to positively impact market pricing. Property and Special Risks continues to differentiate its underwriting capacity from its peers by leveraging its global footprint, diverse product offering, risk engineering expertise and significant underwriting experience.

AIG | Third Quarter 2017 Form 10-Q94


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

COMMERCIAL INSURANCE RESULTS

Three Months Ended September 30,

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

3,815

$

4,475

 

(15)

%

 

$

11,286

$

13,908

 

(19)

%

Net investment income

 

777

 

941

 

(17)

 

 

 

2,522

 

2,350

 

7

 

Total operating revenues

 

4,592

 

5,416

 

(15)

 

 

 

13,808

 

16,258

 

(15)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

6,426

 

3,455

 

86

 

 

 

11,868

 

9,958

 

19

 

Amortization of deferred policy acquisition costs

 

423

 

514

 

(18)

 

 

 

1,273

 

1,576

 

(19)

 

General operating and other expenses(a)

 

605

 

762

 

(21)

 

 

 

1,964

 

2,436

 

(19)

 

Total operating expenses

 

7,454

 

4,731

 

58

 

 

 

15,105

 

13,970

 

8

 

Pre-tax operating income (loss)

$

(2,862)

$

685

 

NM

%

 

$

(1,297)

$

2,288

 

NM

%

Loss ratio(b)

 

168.4

 

77.3

 

91.1

 

 

 

105.2

 

71.5

 

33.7

 

Acquisition ratio

 

14.5

 

15.3

 

(0.8)

 

 

 

15.2

 

15.8

 

(0.6)

 

General operating expense ratio

 

12.5

 

13.2

 

(0.7)

 

 

 

13.5

 

13.0

 

0.5

 

Expense ratio

 

27.0

 

28.5

 

(1.5)

 

 

 

28.7

 

28.8

 

(0.1)

 

Combined ratio(b)

 

195.4

 

105.8

 

89.6

 

 

 

133.9

 

100.3

 

33.6

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(71.2)

 

(5.6)

 

(65.6)

 

 

 

(27.5)

 

(5.9)

 

(21.6)

 

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

 

(22.1)

 

(7.0)

 

(15.1)

 

 

 

(8.5)

 

(2.4)

 

(6.1)

 

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

 

-

 

-

 

NM

 

 

 

(0.3)

 

-

 

(0.3)

 

Accident year loss ratio, as adjusted

 

75.1

 

64.7

 

10.4

 

 

 

68.9

 

63.2

 

5.7

 

Accident year combined ratio, as adjusted

 

102.1

 

93.2

 

8.9

 

 

 

97.6

 

92.0

 

5.6

 

(a)  Includes general operating expenses, commissions and other acquisition expenses.

(b)  Consistent with our definition of PTOI, 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 Commercial Insurance net premiums written by module, showing change on both a reported and constant dollar basis:

Three Months Ended September 30,

Three Months

Ended September 30,

 

Percentage

Change in

 

Nine Months

Ended September 30,

 

Percentage

Change in

(in millions)

 

2017

 

2016

 

U.S. dollars

 

 

Original currency

 

 

 

2017

 

2016

 

U.S. dollars

 

 

Original currency

 

Liability and Financial Lines

$

2,175

$

2,389

 

(9)

%

 

(9)

%

 

$

6,476

$

7,219

 

(10)

%

 

(9)

%

Property and Special Risks

 

1,595

 

1,965

 

(19)

 

 

(19)

 

 

 

4,749

 

6,007

 

(21)

 

 

(20)

 

Total net premiums written

$

3,770

$

4,354

 

(13)

%

 

(13)

%

 

$

11,225

$

13,226

 

(15)

%

 

(14)

%

AIG | Third Quarter 2017 Form 10-Q95


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

The following tables present Commercial accident year catastrophes and severe losses by geography(a) and number of events:

Catastrophes(b)

 

# of

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Events

 

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

996

$

-

$

87

$

48

$

1,131

Windstorms and hailstorms

7

 

 

1,380

 

9

 

111

 

58

 

1,558

Earthquakes

1

 

 

26

 

-

 

10

 

(6)

 

30

Total catastrophe-related charges

8

 

$

2,402

$

9

$

208

$

100

$

2,719

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

1

 

$

97

$

-

$

(10)

$

-

$

87

Windstorms and hailstorms

7

 

 

103

 

19

 

10

$

2

 

134

Wildfire

-

 

 

11

 

-

 

1

 

9

 

21

Earthquakes

-

 

 

21

 

(11)

 

(1)

 

(2)

 

7

Other

-

 

 

-

 

-

 

-

 

3

 

3

Total catastrophe-related charges

8

 

$

232

$

8

$

-

$

12

$

252

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

996

$

-

$

87

$

48

$

1,131

Windstorms and hailstorms

17

 

 

1,694

 

9

 

115

 

58

 

1,876

Tropical cyclone

1

 

 

20

 

-

 

-

 

41

 

61

Earthquakes

1

 

 

26

 

-

 

10

 

(6)

 

30

Total catastrophe-related charges

19

 

$

2,736

$

9

$

212

$

141

$

3,098

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

3

 

$

134

$

-

$

34

$

-

$

168

Windstorms and hailstorms

18

 

 

413

 

21

 

10

 

8

 

452

Wildfire

1

 

 

48

 

-

 

1

 

33

 

82

Earthquakes

2

 

 

68

 

5

 

1

 

16

 

90

Other

1

 

 

-

 

-

 

32

 

3

 

35

Total catastrophe-related charges

25

 

$

663

$

26

$

78

$

60

$

827

(a) Geography shown in the table represents where the ultimate liability resides, after intercompany reinsurance agreements, and is not necessarily indicative of where the catastrophe or severe loss events have occurred.  This presentation follows our geography modules.  For further discussion on our geography modules seeMD&A – Executive Summary

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

(c) Flooding events reported in the three- and nine-month periods ended September 30, 2017 are a subset of windstorm events.

Severe Losses(d)

 

# of

 

 

 

 

 

 

 

 

 

 

(in millions)

Events

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

12

$

164

$

-

$

48

$

20

$

232

2016

7

$

54

$

-

$

36

$

5

$

95

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

20

$

242

$

-

$

125

$

30

$

397

2016

17

$

173

$

-

$

129

$

31

$

333

(d)  Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.

AIG | Third Quarter 2017 Form 10-Q96


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

Liability and Financial Lines Results

Nine Months Ended September 30,

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

2,175

$

2,389

 

(9)

%

 

$

6,476

$

7,219

 

(10)

%

Decrease in unearned premiums

 

70

 

221

 

(68)

 

 

 

36

 

951

 

(96)

 

Net premiums earned

 

2,245

 

2,610

 

(14)

 

 

 

6,512

 

8,170

 

(20)

 

Losses and loss adjustment expenses incurred

 

2,538

 

1,768

 

44

 

 

 

5,783

 

5,643

 

2

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

215

 

242

 

(11)

 

 

 

624

 

862

 

(28)

 

Other acquisition expenses

 

77

 

76

 

1

 

 

 

251

 

234

 

7

 

Total acquisition expenses

 

292

 

318

 

(8)

 

 

 

875

 

1,096

 

(20)

 

General operating expenses

 

275

 

345

 

(20)

 

 

 

882

 

1,047

 

(16)

 

Underwriting income (loss)

 

(860)

 

179

 

NM

 

 

 

(1,028)

 

384

 

NM

 

Net investment income

 

603

 

769

 

(22)

 

 

 

1,931

 

1,948

 

(1)

 

Pre-tax operating income (loss)

$

(257)

$

948

 

NM

%

 

$

903

$

2,332

 

(61)

%

Loss ratio(a)

 

113.1

 

67.7

 

45.4

 

 

 

88.8

 

69.1

 

19.7

 

Acquisition ratio

 

13.0

 

12.2

 

0.8

 

 

 

13.4

 

13.4

 

-

 

General operating expense ratio

 

12.2

 

13.2

 

(1.0)

 

 

 

13.5

 

12.8

 

0.7

 

Expense ratio

 

25.2

 

25.4

 

(0.2)

 

 

 

26.9

 

26.2

 

0.7

 

Combined ratio(a)

 

138.3

 

93.1

 

45.2

 

 

 

115.7

 

95.3

 

20.4

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses(b) and reinstatement premiums

 

(0.9)

 

(0.2)

 

(0.7)

 

 

 

(0.3)

 

(0.1)

 

(0.2)

 

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

 

(34.1)

 

0.5

 

(34.6)

 

 

 

(13.5)

 

(1.0)

 

(12.5)

 

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

 

-

 

-

 

NM

 

 

 

(0.5)

 

-

 

(0.5)

 

Accident year loss ratio, as adjusted

 

78.1

 

68.0

 

10.1

 

 

 

74.5

 

68.0

 

6.5

 

Accident year combined ratio, as adjusted

 

103.3

 

93.4

 

9.9

 

 

 

101.4

 

94.2

 

7.2

 

(a)Consistent with our definition of PTOI, 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.

(b)The catastrophe losses resulted from commercial auto physical damage claims related to hurricane activity in the third quarter of 2017.

Business and Financial Highlights

Liability and Financial Lines pre-tax operating income decreased in the three- and nine-month periods ended September 30, 2017, due to higher unfavorable prior year loss reserve development, mainly in U.S. and European Casualty and Financial Lines, primarily in accident year 2016. These decreases were partially offset by the amortization of the deferred gain from National Indemnity Company (NICO) reinsurance agreement. The decrease was also driven by higher current accident year loss ratios, as adjusted, primarily in U.S. Casualty Lines. Net premiums written decreased primarily due to continued execution of strategic portfolio optimization actions across the U.S. businesses as well as disciplined underwriting in challenging market conditions. General operating expenses continued to decrease due to expense saving initiatives.

Net investment income reflected lower interest and dividends in the three- and nine-month periods ended September 30, 2017, due to lower invested assets resulting from the first quarter 2017 funding of the adverse development reinsurance agreement with NICO. In the nine-month period ended September 30, 2017, the lower net investment income was partially offset by higher income on alternative investments and gains on securities where we elected the fair value option.

For further discussion on the NICO transaction see MD&A – Insurance Reserves.

AIG | Third Quarter 2017 Form 10-Q97


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

Liability and Financial Lines Pre-Tax Operating Income (Loss)

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income decreased due to:

higher unfavorable prior year loss reserve development, partially offset by the amortization of the deferred gain from the NICO reinsurance agreement;

higher current accident year loss ratios, as adjusted, mainly in U.S. Casualty Lines, driven by an increase in loss estimates as a result of  2016 year-end and second and third quarter 2017 detailed reserve valuation reviews; and

lower net investment income reflecting lower interest and dividends due to lower invested assets resulting from funding of the NICO reinsurance agreement.

This decrease was partially offset by:

lower acquisition expenses driven by lower insurance taxes, licenses and fees; and

lower general operating expenses driven by continued strategic actions to reduce operating expenses.

Liability and Financial Lines Pre-Tax Operating Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income decreased due to:

higher unfavorable prior year loss reserve development, partially offset by the net losses ceded under the NICO reinsurance agreement and the amortization of the deferred gain from the NICO reinsurance agreement;

higher current accident year loss ratios, as adjusted, mainly in U.S. Casualty Lines, driven by an increase in loss estimates as a result of 2016 year-end and second and third quarter 2017 detailed reserve valuation reviews; and

lower net investment income reflecting lower interest and dividends due to lower invested assets resulting from funding of the NICO reinsurance agreement, partially offset by higher income on alternative investments and an increase in the fair market value of assetsgains on securities where we elected the fair value optionoption.

This decrease was elected.partially offset by:

lower acquisition expenses driven by lower insurance taxes, licenses and fees; and

lower general operating expenses driven by continued strategic actions to reduce operating expenses.

AIG | Third Quarter 2017 Form 10-Q98


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

Liability and Financial Lines Net investment incomePremiums Written

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Net premiums written decreased to $10.5 billionprimarily due to:

continued execution of our risk selection strategy in the nine-month period ended September 30, 2016 compared to $10.9 billionU.S. Casualty as we optimize our product portfolio; and

lower production primarily in the same period in the prior yearD&O and M&A products within U.S. Financial Lines due to lower income on alternative investments and lower reinvestment yields, partially offset by an increase in invested assets and higher gains on securities for which the fair value option was elected. While corporate debt securities represented the core of new investment allocations, we continuedefforts to make investments in structured securities, mortgage loans and other fixed income investments with favorable risk versus return characteristics to improve yields and increase net investment income.

Net unrealized gains in our available for sale portfolio increased to approximately $19.6 billion as of September 30, 2016, from approximately $8.8 billion as of December 31, 2015, due to a decline in interest rates and a narrowing of credit spreads.

The overall credit rating of our fixed maturity securities portfolio remains largely unchanged from December 31, 2015.

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Item 2 / EXECUTIVE OVERVIEW

Liquidity and Capital Resources Highlights

We maintained financial flexibility at AIG Parent in the nine-month period ended September 30, 2016 through $2.5 billion in dividends in the form of cash and fixed maturity securities from our Non-Life Insurance Companies and $3.8 billion in dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies. AIG Parent also received $2.2 billion in tax sharing payments in the form of cash and fixed maturity securities from our insurance businesses in the nine-month period ended September 30, 2016, including $595 million of such payments in the third quarter of 2016.

Our Board of Directors increased our previous share repurchase authorization of AIG Common Stock, par value $2.50 per share (AIG Common Stock), by an additional $3.0 billion on November 2, 2016, resulting in a remaining authorization on such date of approximately $4.4 billion. During the nine-month period ended September 30, 2016, we repurchased approximately 153 million shares of AIG Common Stock for an aggregate purchase price of approximately $8.5 billion pursuant to this authorization, and we repurchased 15 million warrants to purchase shares of AIG Common Stock, for an aggregate purchase price of $263 million pursuant to this authorization. Pursuant to Securities Exchange Act of 1934 (Exchange Act) Rule 10b5-1 repurchase plans, from October 1 to November 2, 2016, we have repurchased approximately $946 million of additional shares of AIG Common Stock.

We paid a cash dividend on AIG Common Stock of $0.32 per share on each of March 28, 2016, June 27, 2016 and September 29, 2016.

Our Board of Directors declared a cash dividend on AIG Common Stock on November 2, 2016 of $0.32 per share, payable on December 22, 2016 to shareholders of record on December 8, 2016.

Strategic Outlook

Industry Trends

Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in 2016, characterized by factors such as historically low interest rates, instability in the global equity markets, volatile energy markets, slowing growth in China and Euro-Zone economies and the United Kingdom (the UK) advisory referendum in which a majority voted for the UK to withdraw its membership in the European Union (the EU) (commonly referred to as Brexit). The Brexit vote has also affected the U.S. dollar/British pound exchange rate, increased the volatility of exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), and created volatility in the financial markets, which may continue for some time.

Interest rates remain low relative to historical levels, and certain markets in which we operate are experiencing negative interest rates. A sustained low interest rate environment negatively affects sales of interest rate sensitive products in our industry and may negatively impact the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios.  We actively manage our exposure to the interest rate environment through economic hedging of interest rate risk from guarantee features in our variable annuities and spread management strategies for our investment-oriented products.

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Item 2 / EXECUTIVE OVERVIEW

For investment-oriented products in our Retirement and Life operating segments and our Institutional Markets operations, our spread management strategies include disciplined pricing and product design for new business, 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. Lowering interest crediting rates can help offset the impact of lower investment 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 a result, the timing and extent of crediting rate decreases may differ from the corresponding declines in investment yields, which could reduce our spreads and future profitability. A sustained low interest rate environment may favorably affect surrender activity of contract holders whose contractual minimum crediting rates are above those currently available in the marketplace. In addition, customers are currently seeking fixed annuities with longer surrender charge periods in pursuit of higher returns, which may help mitigate the increase of surrenders if interest rates rise rapidly in the future.

Spreads and surrender rates are important components of the future profit assumptions that drive the rate we use to amortize DAC and related reserves for investment-oriented products. If future profit assumptions change significantly, we may be required to recalculate DAC and related reserves, and reflect any resulting adjustments in current period income. Additionally, for certain traditional long-duration products for which we are unable to adjust interest rates, including structured settlements and other payout annuities, our future earnings may be reduced in a sustained low interest rate environment, and we may be required to record additional reserves.

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

For our Commercial Insurance segment, and run-off insurance lines reported within Corporate and Other, 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.

Additionally, sustained low interest rates on discounting of projected benefit cash flows for our pension plans may result in higher pension expense.

Currency volatility in the first nine months  of 2016 was acute compared to recent years, as the  British pound weakened considerably against the U.S. dollar, although the Japanese yen strengthened against the U.S. dollar in that period.  The euro also weakened modestly against the U.S. dollar. 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 expected exit from the EU, and such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item comparability.

See Results of Operations – Foreign Currency Impact; Results of Operations – Segment Results – Quarterly and Year-to-date Pre-Tax Income Comparison for 2016 and 2015; Results of Operations – Commercial Insurance Net Premiums Written by Region; and Results of Operations – Consumer Insurance – Personal Insurance Net Premiums Written by Region.

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AIG Priorities for 2016 and Beyond

AIG is focused on the following priorities for 2016 and beyond:

·Improving our ROE

·Creating a leaner, more profitable and focused insurer by reorganizing our operating model into “modular”, more self-contained business units to enhance transparency and accountability, including through the introduction of a new Legacy Portfolio that aims to maximize value and release capital from the run-off of non-strategic assets

·Reducing general operating expenses

·Improving the Commercial Insurance accident year loss ratio

·Returning excess capital to shareholders

·Growing book value per common share

Outlook for Our Operating Businesses

The outlook for each of our businesses and management initiatives to improve growth and performance in 2016 and over the longer term is summarized below. See our 2015 Annual Report for additional information concerning strategic initiatives and opportunities for each of our businesses.

COMMERCIAL INSURANCE Outlook and Strategic initiatives

Market Conditions and Industry Trends

Commercial Insurance expects the current low interest rate environment relative to historical levels, currency volatility, and ongoing uncertainty in global economic conditions will continue to limit growth and profitability in some markets and challenge growth of net investment income. Due to these conditions and overcapacity in the property casualty insurance industry, Commercial Insurance has continued to diversify its business focusing on growing profitable segments and geographies, exiting unprofitable lines and developing advanced data and analytics to improve profitability.

Commercial Insurance has observed improving trends in certain key indicators that may partially offset the effect of current economic challenges. In the first nine months of 2016, the property casualty insurance industry experienced growth in certain classes of business in Property and Financial lines. Commercial Insurance also expects that expansion in certain growth economies will continue at a faster pace than in developed countries, but at levels lower than those previously expected due to revised economic assumptions. As a result of its ongoing strategy to optimize its portfolio and maintain underwriting discipline Commercial Insurance expects that netin the current competitive market environment.

Liability and Financial Lines Net Premiums Written

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Net premiums written for thedecreased primarily due to:

continued execution of our risk selection strategy in U.S. Casualty line,as we optimize our product portfolio; and to a lesser extent, certain lines within Specialty and Property, will continue to decrease throughout the remainder of the year. In addition, the Brexit referendum may negatively affect premium production in the European market, both on a reported basis and in original currency.

Overall, Commercial Insurance experienced a modest increase in rate pressure in the first nine months of 2016. Commercial Insurance expects that trend to continue in the near term, particularly in certain lines includinglower production primarily in the U.S. Property Excess and Surplus market. Commercial Insurance continuesdue to differentiate itsefforts to maintain underwriting capacity from its peers by leveraging its global footprint, diverse product offering, risk engineering expertise and significant underwriting experience.discipline in the current competitive market environment.

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In the U.S., Commercial Insurance’s exposure to terrorism risk is mitigated by the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)in addition to limited private reinsurance protections. For additional information on TRIPRA, see Item 1A. Risk Factors — Reserves and Exposures and Item 7. MD&A — Enterprise Risk Management — Insurance Operations Risks — Non-Life Insurance Companies Key Insurance Risks — Terrorism Risk in our 2015 Annual Report.

Strategic Initiatives

 

 

Customer — Strive to be our clients’ most valued insurer by offering innovative products, superior service and access to an extensive global network.

AIG | Third Quarter 2017 Form 10-Q99


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ITEM 2 | Business Segment Operations| Commercial Insurance

Liability and Financial Lines Combined Ratios

Three Months Ended September 30,

Quarterly 2017 and 2016 Comparison

The increase in combined ratio reflected an increase in the loss ratio slightly offset by a decrease in the expense ratio.

The increase in the loss ratio was due to: 

an increase in prior year unfavorable loss reserve development largely in reaction to early unfavorable loss emergence in U.S. Casualty and Financial Lines in accident year 2016, and an increased number of large claims in European Casualty and Financial Lines primarily in accident year 2016; and

higher current accident year loss ratios, as adjusted,  in certain U.S. Casualty Lines, driven by an increase in loss estimates as a result of 2016 year-end and second and third quarter 2017 detailed reserve valuation reviews.

Sharpen Commercial Focus — Achieve ROE in excess of target across our businesses primarily through improvements in our loss ratio.  Improve our business portfolio through risk selection by using enhanced data, analytics and the application of science to deliver superior risk-adjusted returns. Exit or remediate targeted sub-segments of underperforming portfolios that do not meet our risk acceptance or profitability objectives.

Drive Efficiency — Reorganize our operating model into “modular”, more self-contained business units to enhance decision making, transparency and accountability, driving performance improvement and strategic flexibility over time; increase capital fungibility and diversification, streamline our legal entity structure, optimize reinsurance, improve tax efficiency and reduce expenses.

Invest to Grow — Grow our higher-value businesses while investing in transformative opportunities, continuing initiatives to modernize our technology and infrastructure, advancing our engineering capabilities, innovating new products and client risk solutions and delivering a better client experience.

Customer

Our vision is to be our clients’ most valued insurer. We expect that investments in underwriting, claims services, client risk solutions, science and data will continue to differentiate us from our peers and drive a superior client experience. For example, during the fourth quarter of 2015, we increased global commercial property limits to $2.5 billion per occurrence from $1.5 billion, in response to increased demand for capacity and services from clients managing complex global risks and increasing property values. This increase was slightly offset by a decrease in the expense ratio due to a lower general operating expense ratio that was almost entirely offset by a higher acquisition ratio.

* Excludes adjustment for ceded premiums under reinsurance contracts related to prior accident years.

Liability and Financial Lines Combined Ratios

Nine Months Ended September 30,

Year-to-Date 2017 and 2016 Comparison

The increase in combined ratio reflected an increase in both the loss ratio and the expense ratio.

The increase in the loss ratio was due to: 

an increase in prior year unfavorable loss reserve development largely in reaction to early unfavorable loss emergence in U.S. Casualty and Financial Lines in accident year 2016, and an increased number of large claims in European Casualty and Financial Lines primarily in accident year 2016; and

higher current accident year loss ratios, as adjusted,  in certain U.S. Casualty Lines, driven by an increase in loss estimates as a result of recent investments in engineering2016 year-end and analytical capabilities, which in turn allowed us to secure meaningful support from a panelsecond and third quarter of long-standing reinsurers.2017 detailed reserve valuation reviews.

Sharpen Commercial Focus

Exit or remediate targeted underperforming portfolios

Commercial Insurance is focused on serving our clients by providing the products and services where we have the most potential to deliver value.  Experience and emerging data indicate that there are consistently under-performing sub-segments of our business.  We will invest and grow where we see opportunity and we will exit or remediate underperforming portfolios. For example, in 2015 we transferred approximately $1.2 billion of loss reserves to our run-off insurance lines andThe increase in the expense ratio reflected a higher general operating expense ratio due to a decrease in net premiums earned reflecting portfolio optimization, which more than offset expense reductions.

* Excludes adjustment for ceded premiums under reinsurance contracts related to prior accident years.

AIG | Third Quarter 2017 Form 10-Q100


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ITEM 2 | Business Segment Operations| Commercial Insurance

Property and Special Risks Results

Three Months Ended September 30,

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

1,595

$

1,965

 

(19)

%

 

$

4,749

$

6,007

 

(21)

%

(Increase) decrease in unearned premiums

 

(25)

 

(100)

 

75

 

 

 

25

 

(269)

 

NM

 

Net premiums earned

 

1,570

 

1,865

 

(16)

 

 

 

4,774

 

5,738

 

(17)

 

Losses and loss adjustment expenses incurred

 

3,888

 

1,687

 

130

 

 

 

6,085

 

4,315

 

41

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

208

 

272

 

(24)

 

 

 

649

 

714

 

(9)

 

Other acquisition expenses

 

52

 

94

 

(45)

 

 

 

192

 

390

 

(51)

 

Total acquisition expenses

 

260

 

366

 

(29)

 

 

 

841

 

1,104

 

(24)

 

General operating expenses

 

201

 

247

 

(19)

 

 

 

639

 

765

 

(16)

 

Underwriting loss

 

(2,779)

 

(435)

 

NM

 

 

 

(2,791)

 

(446)

 

NM

 

Net investment income

 

174

 

172

 

1

 

 

 

591

 

402

 

47

 

Pre-tax operating loss

$

(2,605)

$

(263)

 

NM

%

 

$

(2,200)

$

(44)

 

NM

%

Loss ratio(a)

 

247.6

 

90.5

 

157.1

 

 

 

127.5

 

75.2

 

52.3

 

Acquisition ratio

 

16.6

 

19.6

 

(3.0)

 

 

 

17.6

 

19.2

 

(1.6)

 

General operating expense ratio

 

12.8

 

13.2

 

(0.4)

 

 

 

13.4

 

13.3

 

0.1

 

Expense ratio

 

29.4

 

32.8

 

(3.4)

 

 

 

31.0

 

32.5

 

(1.5)

 

Combined ratio(a)

 

277.0

 

123.3

 

153.7

 

 

 

158.5

 

107.7

 

50.8

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(172.0)

 

(13.3)

 

(158.7)

 

 

 

(64.6)

 

(14.3)

 

(50.3)

 

Prior year development

 

(4.9)

 

(17.3)

 

12.4

 

 

 

(1.7)

 

(4.5)

 

2.8

 

Accident year loss ratio, as adjusted

 

70.7

 

59.9

 

10.8

 

 

 

61.2

 

56.4

 

4.8

 

Accident year combined ratio, as adjusted

 

100.1

 

92.7

 

7.4

 

 

 

92.2

 

88.9

 

3.3

 

(a)            Consistent with our definition of PTOI, 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

Property and Special Risks pre-tax operating income decreased in the three- and nine-month periods ended September 30, 2017 primarily due to higher catastrophe and severe losses, and an elevated current accident year loss ratio, as adjusted, primarily in U.S. and Europe commercial property. Property and Special Risks net premiums written decreased mainly in U.S. and Europe commercial property and in U.S. programs due to portfolio optimization and continued challenging market conditions. The sale of our interest in the Ascot business in the fourth quarter of 2016 and the changes made to our 2017 catastrophe reinsurance program, specifically the large North American catastrophe reinsurance cover, also resulted in a decline in net premiums written. General operating expenses continued to decrease due to expense savings initiatives.

Net investment income reflected higher year-to-date income from alternative investments and gains on securities where we elected the fair value option compared to the prior year, which was partially offset in the nine-month period ended September 30, 2017 by lower interest and dividends due to portfolio rebalancing.

AIG | Third Quarter 2017 Form 10-Q101


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ITEM 2 | Business Segment Operations| Commercial Insurance

Property and Special Risks Pre-Tax Operating Income (Loss)

Three Months Ended September 30, 2016 we transferred another $1.3 billion. This enables us to focus on growth opportunities while allowing for more proactive management of the transferred reserves by run-off specialists. We also did not renew certain accounts that did not meet our profit objectives in our Casualty and Property lines and, to a lesser extent, in our Specialty lines.

We will continue to further enhance our risk selection process and refine technical pricing through enhanced tools and analytics to achieve this goal.

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Drive Efficiency

Narrow geographic footprint while continuing to maintain and improve multinational capabilities

Commercial Insurance, along with our other businesses, continues to evaluate the markets and geographies that provide the greatest opportunities, while maintaining the global footprint that our multinational clients greatly value.  Additionally, we will continue to leverage our various off-shore centers, taking advantage of opportunities to centralize and standardize processes and platforms. We believe there is great opportunity to further streamline our global operating model.

Expand(in millions)

Quarterly 2017 and optimize the use of reinsurance2016 Comparison

Pre-tax operating income decreased primarily due to:

higher catastrophe losses driven by hurricanes Harvey, Irma and other risk mitigating strategies

Commercial Insurance continues to execute capital management initiatives by enhancing broad‑based risk tolerance guidelines for its operating units, implementing underwriting strategies to increase ROE by line of business and reducing exposure to businesses with inadequate pricing and increased loss trends. Commercial Insurance remains focused on enhancing its global reinsurance strategy to improve overall capital efficiency, although this strategy may lead to periodic income statement volatility.

In accordance with our strategic plan, during the first quarter of 2016, we entered into a two-year reinsurance arrangement with the Swiss Re Group, under which a proportional share of our new and renewal U.S. Casualty portfolio is being ceded. This arrangement is reducing the impact of the U.S. Casualty loss ratio on our overall loss ratio.

Accelerate micro-segmentation of risks using internal and external data

Commercial Insurance continues to improve decision-making, risk acceptance and pricing based on its ongoing efforts to refine segmentation by customer, industry and geography. For example, after enhancing the segmentation of workers’ compensation, Commercial Insurance has observed different experience and trends, which helps inform its risk appetite, pricing and loss mitigation decisions.

Invest to Grow

Grow most profitable lines

Commercial Insurance continues to focus on growth in our higher-value businesses while investing in transformative opportunities, continuing initiatives to modernize our technology and infrastructure, advancing our engineering capabilities, innovating new products and client risk solutions and delivering a better client experience.  Commercial Insurance expects to grow in businesses such as Financial lines, including D&O, Cyber and Mergers & Acquisitions, Large Limit and Middle Market Property, Multinational and certain areas internationally.

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consumer insurance outlook and STRATEGIC INITIATIVES

Market Conditions and Industry Trends

Retirement

Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income securities are leading Americans to seek additional financial security as they approach retirement. The strong demand for individual variable and fixed index annuities with guaranteed income features has attracted increased competition in this product space. In response to the continued low interest rate environment, which has added pressure to profit margins, we have developed guaranteed income benefits for both variable and fixed index annuities with margins that are less sensitive to the level of interest rates.  In addition, higher tax rates and a desire for better investment returns have prompted less risk-averse investors to elect products without guaranteed living benefits.

The sustained low interest rate environment has a significant impact on the annuity industry. Low long-term interest rates put pressure on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits on certain existing fixed rate products, although our disciplined rate setting has helped to mitigate some of the pressure on investment spreads. In addition, mutual insurance companies and more highly leveraged competitors are currently offering higher crediting rates. As long as the low interest rate environment continues, conditions will be challenging for the fixed annuity market. Rapidly rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Customers are, however, currently buying fixed annuities with longer surrender periods in pursuit of higher returns, which may help mitigate the rate of increase in surrenders in a rapidly rising rate environment. In addition, older contracts that have higher minimum interest rates and continue to be attractive to the contract holders are driving better than expected persistency.  Low interest rates have also driven growth in our fixed index annuity products, which provide additional interest crediting tied to favorable performance in certain equity market indices.

Consumer Insurance provides products and services to certain employee benefit plans that are subject to restrictions imposed by ERISA and the Internal Revenue Code, including rules that generally restrict the provision of investment advice by a fiduciary to ERISA plans and participants and Individual Retirement Accounts (IRAs) if the investment recommendation results in fees paid to the fiduciary individual advisor, his or her firm or their affiliates that vary according to the investment recommendation chosen.  On April 8, 2016, the DOL published its final fiduciary duty rule (the Final Rule), substantially expanding the definition of fiduciary investment advice.  As a result, the circumstances under which financial services providers and financial advisors could be deemed a fiduciary under ERISA or the Internal Revenue Code when providing investment advice with respect to ERISA plans or IRAs are greatly expanded.  For additional information on the Final Rule, see Part I, Item 2. MD&A – Regulatory Environment section of the Quarterly Report on Form 10-Q for the period ended March 31, 2016.  We are analyzing the Final Rule’s potential impact on our customers, distribution partners, financial advisors and us, and preparing to implement the necessary adjustments to come into compliance with the Final Rule.  The Final Rule could require us, and our competitors, to make material changes to certain of our business practices and product designs, and could materially affect our ability and the ability of our distribution partners and financial advisors to sell or service certain annuities and other investment products.  The initial compliance date of the final rule is April 10, 2017, with full compliance required by January 1, 2018.  Once we have completed our analysis of the Final Rule’s potential impact, we intend to strategically invest in the most attractive post-DOL opportunities across the market.

Life

Populations are living longer and have increased needs for financial protection for beneficiaries, estate planning and wealth creation. The Life operating segment addresses the need for protection against the risk of premature death through a broad spectrum of products that include both term and permanent life insurance. In addition, the Life operating segment has numerous product designs and benefits that offset other risks such as chronic and critical illness.

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In response to a sustained low interest rate environment, the Life operating segment has been actively re-pricing products and shifting its focus away from products with long-duration interest rate guarantees by introducing new products with shorter guaranteesMaria, as well as index universal life products.other catastrophes including the recent Mexico earthquake; and

Personal Insurancea higher current accident year loss ratio, as adjusted, in the U.S. and Europe primarily from higher severe losses in commercial property.

The decrease was partially offset by:

lower unfavorable prior year development in the U.S. programs business within Special Risks; and

lower general operating expenses driven by lower employee-related expenses and other expense reduction initiatives.

 

Property and Special Risks Pre-Tax Operating Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income decreased primarily due to:

The needhigher catastrophe losses driven by hurricanes Harvey, Irma and Maria, as well as other catastrophes including the recent Mexico earthquake; and

a higher current accident year loss ratio, as adjusted, primarily in U.S. and Europe commercial property.

This decrease was partially offset by:

lower unfavorable prior year development in the U.S. programs business within Special Risks;

higher net investment income on alternative investments driven by improvement in equity market performance, and gains on securities where we elected the fair value option; and

lower general operating expenses driven by lower employee-related expenses and other expense reduction initiatives.

AIG | Third Quarter 2017 Form 10-Q102


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ITEM 2 | Business Segment Operations| Commercial Insurance

Property and Special Risks Net Premiums Written

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Net premiums written decreased primarily due to:

lower production in U.S. and Europe commercial property primarily driven by remediation efforts and a competitive market environment;

reduced production primarily in U.S. programs driven by actions to address portfolio profitability;

the sale of our interest in the Ascot business; and

higher ceded premiums related to the additional layer of coverage added to the North American catastrophe reinsurance cover for full life cycle products2017.

This decrease was partially offset by recognition of ceded return premiums on our excess of loss reinsurance covers.  

Property and coverage, increases Special Risks Net Premiums Written

Nine Months Ended September 30,

(in personal wealth accumulation,millions)

Year-to-Date 2017 and awareness2016 Comparison

Net premiums written decreased primarily due to:

lower production in U.S. and Europe commercial property primarily driven by remediation efforts and a competitive market environment;

reduced production primarily in U.S. programs driven by actions to address portfolio profitability;

the sale of insurance protectionour interest in the Ascot business; and risk management continue to support the growth of the Personal Insurance industry. Our Personal Insurance operations focus on group and corporate clients, together with individual customers within national markets.  We expect the demand for multinational cross-boundary coverage and services to increase

higher ceded premiums due to changes made to the internationalization of clients and customers. Our global presence provides Personal Insurance a distinct competitive advantage. North American catastrophe reinsurance cover for 2017.

In Japan, the competition for auto insurance has intensified, in part drivenThis decrease was partially offset by a decline in new car sales and the existencerecognition of fewer but larger insurers. In addition, the overall market size in homeowners insurance contracted after the duration restrictionceded return premiums on long-term fire insurance became effective in October 2015. In the U.S., we compete in the high net worth market and will continue to expand our innovative products and services to distribution partners and clients.  Outsideexcess of Japan and the U.S., our Personal Insurance operating segment continues to invest selectively in markets where we believe higher potential for sustainable profitability exists.loss reinsurance covers.  

Strategic Initiatives

 

 

Customer — Strive to be our clients’ most valued insurer. Through our unique franchise, which brings together a broad portfolio of retirement, life insurance and personal insurance products offered through multiple distribution networks, Consumer Insurance aims to provide customers with the products and services they desire, delivered through the channels they prefer.

Information-driven Strategy — Utilize customer insight, analytics and the application of science to optimize customer acquisition, product profitability, product mix, channel performance and risk management capabilities.

Sharpen Consumer Focus — Invest in areas where Consumer Insurance can grow profitably and sustainably. Target growth in select markets according to market size, growth potential, market maturity and customer demographics and narrow our footprint in less profitable markets with insufficient scale.

Operational Effectiveness — Simplify processes and enhance operating environments to increase competitiveness, improve service and product capabilities and facilitate delivery of our target customer experience.

Investment Strategy — Maintain a diversified, high quality portfolio of fixed maturity securities that largely matches the duration characteristics of the related insurance liabilities, and pursue selective yield-enhancement opportunities that meet liquidity, risk and return objectives.

Profitability and Capital Management — Deliver solid earnings through disciplined pricing, sustainable underwriting improvements, expense reductions and diversification of risk, and increase capital efficiency within insurance entities to enhance return on equity.

AIG | Third Quarter 2017 Form 10-Q103


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ITEM 2 | Business Segment Operations| Commercial Insurance

Property and Special Risks Combined Ratios

Three Months Ended September 30,

Quarterly 2017 and 2016 Comparison

The increase in combined ratio reflected an increase in the loss ratio partially offset by a decrease in the expense ratio.

The increase in the loss ratio was primarily due to higher catastrophe losses and a higher current accident year loss ratio, as adjusted, mainly driven by higher severe losses partially offset by lower unfavorable prior year development in the U.S. programs business within Special Risks.

This increase was partially offset by a decrease in the expense ratio driven by:

a decrease in the general operating expense ratio due to lower employee-related expenses and other expense reduction initiatives; and

a decrease in the acquisition ratio due to the sale of our interest in the Ascot business, reduced production and increased operating efficiency.

 

Property and Special Risks Combined Ratios

98Nine Months Ended September 30,

Year-to-Date 2017 and 2016 Comparison

The increase in combined ratio reflected an increase in the loss ratio partially offset by a decrease in the expense ratio.

The increase in the loss ratio was primarily due to higher catastrophe losses and a higher current accident year loss ratio, as adjusted, mainly driven by higher severe losses partially offset by lower unfavorable prior year development in the U.S. programs business within Special Risks.

The decrease in the expense ratio was due to a lower acquisition ratio driven by the sale of our interest in the Ascot business, reduced production and increased operating efficiency.

AIG | Third Quarter 2017 Form 10-Q104


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ITEM 2 |Business Segment Operations | Consumer Insurance

Consumer Insurance

 

PRODUCTS AND DISTRIBUTION

 

TABLE OF CONTENTSVariable 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.

Item 2 /Index Annuities: EXECUTIVE OVERVIEW

Customer

In striving to be our clients’ most valued insurer, we have implemented initiatives to better serve our target segments. Our focus on ease of doing business for consumers and producers includes enhancements to our platforms and services.  We are working to expand relationships with key distribution partners to offer our products across multiple distribution channels.

Information-driven Strategy

We believe that strengthening our information-driven decision making and marketing capabilities through the use of enhanced analytics, stronger platforms and tools, a well-designed product portfolio and expanded relationships may allow us to bring more effective product solutions to our chosen markets. 

We focus on rate adequacy through our global underwriting practices and tools and analytics, and seek to optimize the value of our business lines through product and portfolio management and refined technical pricing. We strive to deliver leading customer experience and efficiency through claims best practices, deployment of enhanced operating structures and standardized processes and systems, while managing claims-handling efficiency.

Sharpen Consumer Focus

Retirement Income Solutions intends to continue capitalizing on the opportunity to meet consumer demand for guaranteed income by maintaining competitive variable annuity product offerings, while managing risk from guarantee features through risk-mitigating product design and well-developed economic hedging capabilities. Retirement Income Solutions continues to invest in hedging and market risk management capabilities. Retirement Income Solutions has diversified its product portfolio by offeringProducts include fixed index annuities that alsoprovide growth potential based in part on the performance of a market index. Certain fixed index annuity products offer guaranteed withdrawal features, which provide additional lifetimeoptional income solutions for consumers approaching retirement.protection features. Fixed index annuities are distributed primarily through banks, broker dealers, independent marketing organizations and independent insurance agents.

Fixed AnnuitiesAnnuities: sales will continue to be challenged by the low interest rate environment. Sales ofProducts include single premium fixed annuities, could improve if interest rates rise and the yield curve steepens, as these market conditions make fixed annuity products more attractive compared to alternatives such as bank deposits; however, they could also lead to higher surrender activity. During periods of equity market volatility, our fixed annuity products provide diversity in our annuity product suite by offering stable returns for retirement savings. The growing market for immediate annuities and deferred income products, driven by customers seeking guaranteed income products, provides an opportunity forannuities. The Fixed Annuities to increaseproduct line maintains its industry-leading position in the diversification of its product portfolio.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 sales and related administration and servicing operations. Retail Mutual Funds are distributed primarily through broker-dealers.

 

Group Retirement:Products and servicesinclude groupmutual funds,group fixedannuities, group variable annuities, individual annuity and investment products, and financial planning and advisory services.

Products and services are marketed by VALIC under the VALIC brand and include investment offerings and plan administrative and compliance services. VALIC career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services.

Life Insurance: will continue to invest to position itself for growth, serve its customers more effectively, and maintain pricing discipline in its overall strategy. Life’s organization has been aligned to focus onIn the demographic, governmental and socioeconomic trends unique to each area in which we operate. To improve capital efficiency, we entered into a reinsurance agreement in September 2016 involving certain of our wholeU.S., primarily includes term life and universal life businesses. The transaction reduced certain statutory reserves that are above economic requirements in our domestic Life business, which released excess statutory capital that was includedinsurance. International operations include the distribution of life and health products in the dividends paid UK and Ireland.  Life products in the U.S. are primarily distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing.

Individual:Products include personal auto and property in Japan and other selected international markets and insurance for high net worth individuals offered through AIG Private Client Group, including auto, homeowners, umbrella, yacht, fine art and collections insurance, with a focus on the U.S. and multi-national coverage offerings. Products are distributed through various channels, including agents and brokers.

Group: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations, a broad range of travel insurance products and services for leisure and business travelers as well as extended warranty insurance covering electronics, appliances, and HVAC industries. Products are distributed through various channels, including agents, brokers, affinity partners, airlines and travel agents.

AIG | Third Quarter 2017 Form 10-Q105


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ITEM 2 |Business Segment Operations | Consumer Insurance

BUSINESSSTRATEGY 

Customer:Deliver client-centric solutions through our unique franchise, which brings together a broad portfolio of retirement, life insurance and personal insurance products offered through multiple distribution networks. Consumer Insurance focuses on ease of doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.

Sharpen Consumer Focus:Invest in areas where Consumer Insurance can grow profitability and sustainably, andachieve and maintain industry leading positions. 

Individual Retirementwill continue to capitalize on the opportunityto meet consumer demand for guaranteed income by maintaining innovative variable and index annuity productswhile also managing risk from guaranteefeatures through risk-mitigating product design and well-developed economic hedging capabilities. 

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

Group Retirementcontinues to enhance its technology platform to improve thecustomer experience for plansponsors and individual participants. VALIC’s self-service tools paired with its career financial advisors provide compelling service platform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their demand for income in retirement.

Life Insurance Companies in the three-month period ended September 30, 2016.continues to invest to position itself for growth, while executingon strategies to enhance returns.

In October 2016, we made a strategic decision Life Insurance is focused on rationalizingits product portfolio, aligning distribution with itsmost productive channels, consolidatingsystems to refocus our group benefits business, which included the decision to cease quoting new business in Life’s U.S. employerstate-of-the-art platforms, and voluntary group benefits lines and seek strategic alternatives for group products distributed through sponsored organizations.employing innovative underwriting enhancements.

Personal Insurance aims to provide clients with the products and services they desire, delivered through the channels they prefer.  We continue to focus and invest in the most profitable markets and segments, while narrowing our footprint where appropriate. We are also leveraging our multinational capabilities to meet the increasing demand for cross-border coverage and services. Personal Insurance will continue to utilize its strong risk management and market expertise to foster growth by providing innovative and competitive solutions to its customers and distributors.

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Item 2 / EXECUTIVE OVERVIEW

Operational Effectiveness

We are continuing to invest in initiatives that we believe will make our operating platforms simpler and more agile, enabling us to provide superior service and accommodate future growth. In Japan, we continue to invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. In the U.S. Life business, we are focused on leveraging our most efficient systems and increasing automation of our underwriting process. We believe that simplifying our operating models will enhance productivity and support further profitable growth.

Investment Strategy

Our investment objective is to maintain a diversified, high quality portfolio of fixed maturity securities having weighted average durations that are matched to the duration and cash flow profile of our liabilities, to the extent practicable. Our investment strategy is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset-liability matching and available investment opportunities. While a portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio. See Investments for additional discussion of investment strategies. If these reductions were to include the sale of alternative investments that support certain payout annuities, we could incur additional loss recognition expense on such products, due to updating assumptions to reflect reinvestment at lower future yields. See Critical Accounting Estimates — Insurance Liabilities — Future Policy Benefits for Life and Accident and Health Insurance Contracts (Life Insurance Companies) for discussion of assumptions related to loss recognition testing in our 2015 Annual Report.

Profitability and Capital Management

We are focused on enhancing profitability and capital efficiency within our insurance entities through disciplined pricing, in-force profitability management, effective management of risk and expense reductions. For product lines where we have significant equity market risk and exposure to changes in interest rates, we use risk management tools, such as the risk mitigation product features and hedging program in our Retirement Income Solutions and Group Retirement annuity businesses. Additionally, our scale and the breadth of our product offerings provide diversification of risk. Within our Non-Life Insurance Companies, we continue to increase capital efficiency.

In conjunction with our strategic divestiture program, in May 2016, we completed the sale of AIG Advisor Group, our network of independent broker-dealers, to investment funds affiliated with Lightyear Capital LLC and PSP Investments, and recognized a pre-tax gain of $238 million.

See Results of Operations — Consumer Insurance and Insurance Reserves for additional information about our Consumer Insurance businesses.

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Corporate and Other strategic initiatives and OUTLOOK

United Guaranty

On August 15, 2016, we entered into an agreement to sell our 100 percent interest in UGC and certain related affiliates to Arch. Total consideration for the transaction is expected to be $3.4 billion. In the second quarter of 2015, a United Guaranty subsidiary and certain of our property casualty companies entered into a 50 percent quota share arrangement whereby  the United Guaranty subsidiary (1) ceded 50 percent of the risk relating to policies written in 2014 that were current as of January 1, 2015 and (2) ceded 50 percent of the risk relating to all policies written in 2015 and 2016, each in exchange for a 30 percent ceding commission and reimbursements of 50 percent of the losses and loss adjustment expenses incurred on covered policies. Beginning in the third quarter of 2016, the effects of these intercompany reinsurance arrangements are included in the results of Commercial Insurance and Corporate and Other for all periods presented. Previously, these arrangements were eliminated for purposes of segment reporting.

The closing of the transaction is subject to certain conditions, including obtaining the requisite regulatory approvals or non-disapprovals and other customary closing conditions.

Institutional Markets

Institutional Markets is expected to continue growing its assets under management from the structured settlement business, stable value wrap business and GICs, as well as from disciplined growth through the pursuit of select opportunities related to pension buyouts and corporate markets. Volatility in the earnings of our alternative investment portfolio will continue to affect Institutional Markets’ results. Institutional Markets could incur additional loss recognition expense if future yield assumptions were lowered on assets that support certain long-duration products, primarily structured settlements, for which we do not have the ability to adjust interest rates. Lower assumptions for future yields on such assets could result from reinvestment of portfolio cash flows in the sustained low interest rate environment, which may include proceeds from the strategic sale of alternative investments that currently support such products.

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Item 2 / RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following section provides a comparative discussion of our Results of Operations on a reported basis for the three- and nine-month periods ended September 30, 2016 and 2015. Factors that relate primarily to a specific business segment are discussed in more detail within that business segment discussion. For a discussion of the Critical Accounting Estimates that affect the Results of Operations, see the Critical Accounting Estimates section of this MD&A and Part II, Item 7. MD&A — Critical Accounting Estimates in the 2015 Annual Report.

The following table presents our consolidated results of operations:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

8,581

$

  8,862

 

(3)

%

 

$

26,138

$

  27,229

 

(4)

%

Policy fees

 

646

 

  701

 

(8)

 

 

 

2,029

 

  2,066

 

(2)

 

Net investment income

 

3,783

 

  3,206

 

18

 

 

 

10,479

 

  10,870

 

(4)

 

Net realized capital gains (losses)

 

(765)

 

  (342)

 

(124)

 

 

 

(829)

 

  1,125

 

NM

 

Other income

 

609

 

  395

 

54

 

 

 

1,540

 

  3,206

 

(52)

 

Total revenues

 

12,854

 

  12,822

 

-

 

 

 

39,357

 

  44,496

 

(12)

 

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

7,489

 

  6,936

 

8

 

 

 

20,748

 

  20,587

 

1

 

Interest credited to policyholder account balances

 

887

 

  881

 

1

 

 

 

2,798

 

  2,758

 

1

 

Amortization of deferred policy acquisition costs

 

1,018

 

  1,275

 

(20)

 

 

 

3,625

 

  3,981

 

(9)

 

General operating and other expenses

 

2,536

 

  3,175

 

(20)

 

 

 

8,125

 

  9,214

 

(12)

 

Interest expense

 

329

 

  321

 

2

 

 

 

955

 

  977

 

(2)

 

(Gain) loss on extinguishment of debt

 

(14)

 

  346

 

NM

 

 

 

76

 

  756

 

(90)

 

Net (gain) loss on sale of divested businesses

 

(128)

 

  3

 

NM

 

 

 

(351)

 

  10

 

NM

 

Total benefits, losses and expenses

 

12,117

 

  12,937

 

(6)

 

 

 

35,976

 

  38,283

 

(6)

 

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense

 

737

 

  (115)

 

NM

 

 

 

3,381

 

  6,213

 

(46)

 

Income tax expense

 

304

 

  65

 

368

 

 

 

1,170

 

  2,142

 

(45)

 

Income (loss) from continuing operations

 

433

 

  (180)

 

NM

 

 

 

2,211

 

  4,071

 

(46)

 

Income (loss) from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense

 

3

 

  (17)

 

NM

 

 

 

(54)

 

  -

 

NM

 

Net income (loss)

 

436

 

  (197)

 

NM

 

 

 

2,157

 

  4,071

 

(47)

 

Less: Net income (loss) attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

(26)

 

  34

 

NM

 

 

 

(35)

 

  34

 

NM

 

Net income (loss) attributable to AIG

$

462

$

  (231)

 

NM

%

 

$

2,192

$

  4,037

 

(46)

%

For the three-month period ended September 30, 2016, the effective tax rate on income from continuing operations was 41.2 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent, partially offset by tax benefits associated with tax exempt interest income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities.  

For the nine-month period ended September 30, 2016, the effective tax rate on income from continuing operations was 34.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax exempt interest income, the impact of an agreement reached with the IRS related to certain tax issues under audit and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, partially offset by a tax charge and related interest associated with increases in uncertain tax positions related to cross border financing transactions and foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.

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For the three-month period ended September 30, 2015, the effective tax rate on loss from continuing operations was not meaningful, due to a tax charge on a pre-tax loss. The tax charge was primarily due to increases in uncertain tax positions related to cross-border financing transactions, partially offset by tax benefits associated with tax-exempt interest income and the partial completion of the IRS examination covering tax year 2006. 

For the nine-month period ended September 30, 2015, the effective tax rate on income from continuing operations was 34.5 percent. The effective tax rate on income from continuing operations for the nine-month period ended September 30, 2015 differs from the statutory tax rate of 35 percent primarily due to tax benefits associated with tax-exempt interest income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the deferred tax asset valuation allowance previously released to accumulated other comprehensive income, and the partial completion of the IRS examination covering tax year 2006, partially offset by tax charges associated with increases in uncertain tax positions related to cross-border financing transactions and increases in the deferred tax asset valuation allowances associated with certain foreign jurisdictions. The nine-month period ended September 30, 2015 includes an increase in the deferred tax asset valuation allowanceprimarily attributable tothe effects of changes in the Japanese tax law enacted on March 31, 2015, partially offset by changes in projections of future taxable income.

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

Three Months Ended September 30,

2016

 

2015

 

 

 

 

Total

 

After

 

 

 

 

Total

 

After

(in millions)

Pre-tax

 

Tax

 

Tax

 

Pre-tax

 

Tax

 

Tax

Operating income, excluding noncontrolling interests

$

1,612

$

512

$

1,100

 

$

848

$

164

$

684

Noncontrolling interest

 

 

 

 

 

(3)

 

 

 

 

 

 

7

Operating income, net of noncontrolling interests

$

1,612

$

512

$

1,097

 

$

848

$

164

$

691

Uncertain tax positions and other tax adjustments

 

 

 

42

 

(42)

 

 

 

 

233

 

(233)

Deferred income tax valuation allowance releases (charges)

 

 

 

(2)

 

2

 

 

 

 

8

 

(8)

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

 

17

 

6

 

11

 

 

4

 

1

 

3

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

 

 

 

 

 

 

 

 

 

 

 

 

 

capital gains (losses)

 

(67)

 

(24)

 

(43)

 

 

(2)

 

-

 

(2)

Other (income) expense - net

 

3

 

1

 

2

 

 

-

 

-

 

-

Loss on extinguishment of debt

 

14

 

5

 

9

 

 

(346)

 

(121)

 

(225)

Net realized capital losses

 

(765)

 

(210)

 

(555)

 

 

(342)

 

(121)

 

(221)

Noncontrolling interest on net realized capital losses

 

 

 

 

 

29

 

 

 

 

 

 

(41)

Income (loss) from discontinued operations

 

 

 

 

 

3

 

 

 

 

 

 

(17)

Income (loss) from divested businesses

 

128

 

45

 

83

 

 

(3)

 

(2)

 

(1)

Non-operating litigation reserves and settlements

 

5

 

2

 

3

 

 

30

 

10

 

20

Reserve development related to non-operating run-off

 

 

 

 

 

 

 

 

 

 

 

 

 

insurance business

 

-

 

-

 

-

 

 

(30)

 

(10)

 

(20)

Restructuring and other costs

 

(210)

 

(73)

 

(137)

 

 

(274)

 

(97)

 

(177)

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

$

737

$

304

$

462

 

$

(115)

$

65

$

(231)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

1,102,400,770

 

 

 

 

 

 

1,279,072,748

Income (loss) per common share attributable to AIG (diluted)

 

 

 

 

$

0.42

 

 

 

 

 

$

(0.18)

After-tax operating income per common share attributable to AIG (diluted)*

 

 

 

 

$

1.00

 

 

 

 

 

$

0.52

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Nine Months Ended September 30,

2016

 

2015

 

 

 

 

Total

 

After

 

 

 

 

Total

 

After

 

Pre-tax

 

Tax

 

Tax

 

Pre-tax

 

Tax

 

Tax

Operating income, excluding noncontrolling interests

$

4,186

$

1,198

$

2,988

 

$

6,243

$

1,974

$

4,269

Noncontrolling interest

 

 

 

 

 

(5)

 

 

 

 

 

 

6

Operating income, net of noncontrolling interests

$

4,186

$

1,198

$

2,983

 

$

6,243

$

1,974

$

4,275

Uncertain tax positions and other tax adjustments

 

 

 

184

 

(184)

 

 

 

 

142

 

(142)

Deferred income tax valuation allowance releases (charges)

 

 

 

(4)

 

4

 

 

 

 

61

 

(61)

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

 

270

 

95

 

175

 

 

(39)

 

(14)

 

(25)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

capital gains (losses)

 

(91)

 

(32)

 

(59)

 

 

(84)

 

(29)

 

(55)

Other (income) expense - net

 

15

 

5

 

10

 

 

-

 

-

 

-

Loss (gain) on extinguishment of debt

 

(76)

 

(26)

 

(50)

 

 

(756)

 

(265)

 

(491)

Net realized capital gains (losses)

 

(829)

 

(217)

 

(612)

 

 

1,125

 

394

 

731

Noncontrolling interest on net realized capital gains (losses)

 

 

 

 

 

40

 

 

 

 

 

 

(40)

Income (loss) from discontinued operations

 

 

 

 

 

(54)

 

 

 

 

 

 

-

Income (loss) from divested businesses

 

351

 

123

 

228

 

 

(58)

 

(44)

 

(14)

Non-operating litigation reserves and settlements

 

43

 

15

 

28

 

 

86

 

30

 

56

Reserve development related to non-operating run-off

 

 

 

 

 

 

 

 

 

 

 

 

 

insurance business

 

-

 

-

 

-

 

 

(30)

 

(10)

 

(20)

Restructuring and other costs

 

(488)

 

(171)

 

(317)

 

 

(274)

 

(97)

 

(177)

Pre-tax income/net income attributable to AIG

$

3,381

$

1,170

$

2,192

 

$

6,213

$

2,142

$

4,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

1,142,700,207

 

 

 

 

 

 

1,357,108,784

Income per common share attributable to AIG (diluted)

 

 

 

 

$

1.92

 

 

 

 

 

$

2.97

After-tax operating income per common share attributable to AIG (diluted)

 

 

 

 

$

2.61

 

 

 

 

 

$

3.15

* For the quarter ended September 30, 2015, because we reported a net loss, 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 after-tax operating income, the calculation of after-tax operating income per diluted share includes dilutive shares of 40,356,170.

Net income attributable to AIG increased in the three-month period ended September 30, 2016 compared to the same period in the prior year due to higher income from insurance operations, reflecting increased net investment income, lower loss on extinguishment of debt, gain on sale of divested business and higher income on assets held by AIG Parent, partially offset by loss recognition expense on certain payout annuities in Institutional Markets and higher net realized capital losses, which included increases in the fair value of embedded derivatives related to variable annuity guaranteed living benefits, net of hedges in the three-month period ended September 30, 2016.

Net income attributable to AIG decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year due to lower income on assets held by AIG Parent, a decrease in income from insurance operations, reflecting decreased net investment income, loss recognition expense on certain payout annuities in Institutional Markets, and net realized capital losses in the nine month period ended September 30, 2016 compared to net realized capital gains in the same period in the prior year, partially offset by lower loss on extinguishment of debt. Net realized capital losses in the nine-month period ended September 30, 2016 included increases in the fair value of embedded derivatives related to variable annuity guaranteed living benefits, net of hedges, compared to net realized capital gains from decreases in such liabilities in the same period in the prior year (see Insurance Reserves – Life Insurance Companies – Variable Annuity Guaranteed Benefit Features and Hedging Program).

After-tax operating income attributable to AIG increased in the three-month period ended September 30, 2016 compared to the same period in the prior year primarily due to an increase in income from insurance operations, reflecting increased net investment income and higher income on assets held by AIG Parent, partially offset by losses from Institutional Markets driven by loss recognition expense on certain payout annuities from the update of actuarial assumptions.  After-tax operating income attributable to AIG decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year primarily due to a decrease in income from insurance operations, reflecting decreased net investment income and lower income on assets held by AIG Parent, and losses from Institutional Markets driven by loss recognition expense on certain payout annuities from the update of actuarial assumptions.

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For the three- and nine-month periods ended September 30, 2016, the effective tax rate on pre-tax operating income was 31.8 percent and 28.6 percent, respectively. The significant factors that contributed to the difference from the statutory rate of 35 percent included tax benefits resulting from tax-exempt interest income and other permanent tax items and the impact of other discrete tax benefits. The nine-month period ended September 30, 2016 also includes certain tax benefits associated with an agreement reached with the IRS related to certain tax issues under audit.

For the three-month period ended September 30, 2015, the effective tax rate on pre-tax operating income was 19.3 percent. The significant factors that contributed to the difference from the statutory rate included tax benefits resulting from tax-exempt interest income and other permanent tax items, certain tax benefits associated with the partial completion of the IRS examination covering tax year 2006 and the impact of other discrete tax benefits. For the nine-month period ended September 30, 2015, the effective tax rate on pre-tax operating income was 31.6 percent. The significant factors that contributed to the difference from the statutory rate included tax benefits resulting from tax-exempt interest income and other permanent tax items, certain tax benefits associated with the partial completion of the IRS examination covering tax year 2006 and the impact of other discrete tax benefits.

SEGMENT RESULTS

We report the results of our operations through two reportable segments: Commercial Insurance and Consumer Insurance. The Corporate and Other category consists of businesses and items not allocated to our reportable segments.

The following table summarizes the operations of each reportable segment and Corporate and Other. See also Note 3 to the Condensed Consolidated Financial Statements.

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30,

Percentage

 

 

September 30,

Percentage

 

(in millions)

 

 

2016

 

2015

Change

 

 

 

2016

 

2015

Change

 

Commercial Insurance

 

$

729

$

592

23

%

 

$

2,306

$

2,990

(23)

%

Consumer Insurance

 

 

1,384

 

657

111

 

 

 

3,276

 

2,625

25

 

Corporate and Other

 

 

(522)

 

(396)

(32)

 

 

 

(1,411)

 

697

NM

 

Consolidations, eliminations and other adjustments

 

 

21

 

(5)

NM

 

 

 

15

 

(69)

NM

 

Pre-tax operating income

 

$

1,612

$

848

90

 

 

$

4,186

$

6,243

(33)

 

pre-tax operating income

(in millions)

COMMERCIAL INSURANCE

CONSUMER INSURANCE

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QUARTERLY PRE-TAX INCOME COMPARISON FOR 2016 AND 2015

Pre-tax results increased in the three-month period ended September 30, 2016 compared to the same period in the prior year primarily due to:

an increase in Commercial Insurance pre-tax operating income due to an increase in net investment income, reflecting higher return on alternative investments and an increase in the fair market value of assets accounted for under the fair value option, partially offset by an increase in underwriting loss;

an increase in Consumer Insurance pre-tax operating income due to improved underwriting income in Personal Insurance, higher net positive adjustments to reflect the update of actuarial assumptions in Retirement and Life, higher returns on alternative investments in all Consumer Insurance operating segments and lower domestic general operating expenses in Retirement and Life;

a gain on extinguishment of debt compared to a loss in the same period in the prior year from ongoing liability management activities;

lower restructuring and other costs; and

higher income from divested businesses due to a gain of $105 million on the sale of NSM Insurance Group (NSM).

These increases were partially offset by:

an increase in realized capital losses primarily due to higher foreign exchange losses related to the weakening of the British pound following the Brexit vote;

a net decrease of $361 million in consolidated pre-tax income related to guaranteed living benefits, net of hedges, primarily due to movement in the non-performance or “own credit” spread adjustment (NPA) component of the embedded derivative fair value measurement, which reflected significant gains in the three-month period ended September 30, 2015 from the widening of credit spreads (see Insurance Reserves – Life Insurance Companies – Variable Annuity Guaranteed Benefit Features and Hedging Program); and

higher pre-tax operating losses in Corporate and Other, primarily due to a pre-tax operating loss in Institutional Markets driven by loss recognition expense on certain payout annuities from the update of actuarial assumptions, partially offset by higher earnings on Corporate and Other investments for which the fair value option was elected, including ABS CDOs and part of our PICC Investment.  In addition, the three-month period ended September 30, 2015 included a pension curtailment credit. Additionally, the underwriting loss decreased in Run-off insurance lines in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily driven by lower net adverse prior year loss reserve development as well as a decrease in net loss reserve discount charge related to excess workers’ compensation business largely driven by interest rate movements.

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YEAR-TO-DATE PRE-TAX INCOME COMPARISON FOR 2016 AND 2015

Pre-tax results decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year primarily due to:

a decrease in Commercial Insurance pre-tax operating income due to lower net investment income, reflecting lower income on alternative investments and fair market value declines of assets accounted for under the fair value option, as well as an underwriting loss compared to underwriting income in the same period in the prior year;

lower Corporate and Other pre-tax operating results, primarily due to a pre-tax operating loss in Institutional Markets driven by loss recognition expense on certain payout annuities from the update of actuarial assumptions, lower earnings on investments for which the fair value option was elected, including ABS CDOs and part of our PICC Investment as well as the absence of equity earnings from shares in AerCap, which were sold in the prior-year period. In addition, the nine-month period ended September 30, 2015 included a pension curtailment credit.  Additionally, Run-off insurance lines reported a pre-tax operating loss in the nine-month period ended September 30, 2016 compared to pre-tax operating income in the same periods in the prior year. The pre-tax operating loss in Run-off insurance lines was driven by a charge for the discount on excess workers’ compensation reserves in the nine-month period ended September 30, 2016 compared to a benefit in the same period in the prior year, largely driven by decreases in the forward yield curve rates used for discounting;

net realized capital losses primarily due to foreign exchange losses compared to net realized gains due to foreign exchange gains and the sale of Class B shares of Prudential Financial Inc. and common shares of Springleaf Holdings, Inc. in the same period in the prior year;

a net decrease of $678 million in consolidated pre-tax income related to guaranteed living benefits, net of hedges, primarily due to movement in the NPA component of the embedded derivative fair value measurement (see Insurance Reserves – Life Insurance Companies – Variable Annuity Guaranteed Benefit Features and Hedging Program); and

higher restructuring and other costs.

These decreases were partially offset by:

an increase in Consumer Insurance pre-tax operating income, primarily due to higher net positive adjustments to reflect the update of actuarial assumptions in Retirement and Life, favorable mortality experience in Life, lower domestic general operating expenses in Retirement and Life, and improved underwriting results in Personal Insurance reflecting strategic actions to reduce expenses and refocus direct marketing activities together with higher net favorable prior year loss reserve development, partially offset by lower returns on alternative investments in Retirement and Life;

lower loss on extinguishment of debt from ongoing liability management activities;

lower interest expense from ongoing liability management activities described in Liquidity and Capital Resources; and

higher income from divested businesses due to gains of $238 million and $105 million on the sales of AIG Advisor Group and NSM, respectively.

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Net Investment Income

Net investment income is attributed to Commercial Insurance, the operating segments of Consumer Insurance and the operations of Institutional Markets based on internal models consistent with the nature of the underlying businesses.

For Commercial Insurance and Consumer Insurance — Personal Insurance, we estimate investable funds based primarily on loss reserves and unearned premiums. The net investment income allocation is calculated based on these estimated investable funds consistent with the approximate duration of the liabilities and the capital allocation for each operating segment.

For Consumer Insurance — Retirement, Consumer Insurance — Life and Corporate and Other — Institutional Markets, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life Insurance Companies. The fundamental investment strategy for these product line portfolios is to maintain primarily a diversified, high quality portfolio of fixed maturity securities and, to the extent practicable, to approximately match established duration targets based on characteristics of the underlying liabilities. All invested assets of the Life Insurance Companies in excess of liabilities are allocated based on internal estimates of target statutory capital for each product line.

Foreign Currency Impact

Commercial Insurance, International Life and Personal Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the currencies that have the most significant impact on our businesses:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

Rate for 1 USD *

2016

2015

 

Change

 

 

2016

2015

 

Change

 

Currency:

 

 

 

 

 

 

 

 

 

 

 

JPY

103.53

123.35

 

(16)

%

 

110.72

120.79

 

(8)

%

EUR

0.90

0.90

 

-

%

 

0.90

0.89

 

1

%

GBP

0.74

0.64

 

16

%

 

0.71

0.65

 

9

%

*  For the three-month period ended September 30, 2016, foreign currency rates are based on the fiscal quarterly weighted average rate for the three-month period ended August 31, 2016.

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

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COMMERCIAL INSURANCE

Commercial Insurance provides insurance solutions for large and small businesses. The products offered by include general liability, commercial automobile liability, workers’ compensation, excess casualty, crisis management (including customized structured programs for large corporate and multinational customers), commercial, industrial and energy-related property insurance products and services that cover exposures to man-made and natural disasters, including business interruption, aerospace, environmental, political risk, trade credit, surety, marine, various small and medium sized enterprises insurance lines, director and officers’ liability (D&O), errors and omissions (E&O), fidelity, employment practices, fiduciary liability, cybersecurity risk, and kidnap and ransom. These products are primarily distributed through a network of independent retail and wholesale brokers, and through an independent agency network.

See Part I, Item 1. Business in AIG’s 2015 Annual Report for further discussion of our products and geographic regions where we distribute our products.

Commercial Insurance Results

The following table presents Commercial Insurance results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

4,357

$

5,275

 

(17)

%

 

$

13,221

$

16,157

 

(18)

%

(Increase) decrease in unearned premiums

 

138

 

(235)

 

NM

 

 

 

722

 

(1,030)

 

NM

 

Net premiums earned

 

4,495

 

5,040

 

(11)

 

 

 

13,943

 

15,127

 

(8)

 

Losses and loss adjustment expenses incurred

 

3,491

 

3,668

 

(5)

 

 

 

10,191

 

10,644

 

(4)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

517

 

581

 

(11)

 

 

 

1,601

 

1,771

 

(10)

 

Other acquisition expenses

 

178

 

252

 

(29)

 

 

 

605

 

644

 

(6)

 

Total acquisition expenses

 

695

 

833

 

(17)

 

 

 

2,206

 

2,415

 

(9)

 

General operating expenses

 

545

 

657

 

(17)

 

 

 

1,673

 

1,944

 

(14)

 

Underwriting income (loss)

 

(236)

 

(118)

 

(100)

 

 

 

(127)

 

124

 

NM

 

Net investment income

 

965

 

710

 

36

 

 

 

2,433

 

2,866

 

(15)

 

Pre-tax operating income

$

729

$

592

 

23

%

 

$

2,306

$

2,990

 

(23)

%

NET PREMIUMS WRITTEN

(in millions

Pre-Tax oPERATING INCOME

(in millions

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Commercial Insurance Quarterly Results

Pre‑tax operating income increased in the three-month period ended September 30, 2016 compared to the same period in the prior year due to higher net investment income driven by higher returns on alternative investments and an increase in the fair market value of assets accounted for under the fair value option, partially offset by an increase in underwriting loss compared to the same period in the prior year. These underwriting results were primarily driven by:

higher catastrophe losses compared to the same period in the prior year;

higher net adverse prior year loss reserve development compared to the same period in the prior year, primarily reflecting unfavorable loss reserve development from U.S. program business within Specialty, partially offset by favorable loss reserve development in Property;

improvements in the accident year loss ratio, as adjusted, reflecting continued execution of our strategic actions to retain more profitable business;

lower net loss reserve discount charge compared to the same period in the prior year; and

lower general operating expenses resulting from lower employee-related expenses, our expense savings initiatives, as well as lower acquisition costs.

Catastrophe losses were $253 million in the three-month period ended September 30, 2016, compared to $88 million in the same period in the prior year. Net adverse prior year loss reserve development, including return premiums, was $306 million and $186 million in the three-month periods ended September 30, 2016 and 2015, respectively. See Insurance Reserves – Non-Life Insurance Companies –Net Loss Development for further discussion. The current accident year losses for the three-month period ended September 30, 2016 included seven severe losses totaling $95 million compared to six severe losses totaling $209 million in the same period in the prior year. The net loss reserve discount charge was $17 million in the three-month period ended September 30, 2016, compared to $41 million in the same period in the prior year, primarily reflecting a decrease in the reserve discount curve consisting of the U.S. Treasury forward yield curve and a liquidity margin. See Insurance Reserves – Non-Life Insurance Companies – Discounting of Reserves for further discussion.

Acquisition expenses decreased in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a decrease in net commission expense, particularly in Casualty and Property, reflecting the effect of reinsurance arrangements, lower production, as well as a reduction in costs of personnel engaged in sales support activities.

General operating expenses decreased in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to lower employee-related expenses resulting from actions to streamline our management structure and general cost containment measures commenced in 2015 and continuing through September 30, 2016.

Net investment income increased in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to higher income on alternative investments as well as fair market value increases of assets accounted for under the fair value option. In the same period in the prior year, Commercial Insurance recorded losses related to assets accounted for under the fair value option and hedge fund investments.

See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.

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Commercial Insurance Year-to-Date Results

Pre‑tax operating income decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year due to lower net investment income driven by lower returns on alternative investments, as well as underwriting loss compared to underwriting income for the same period in the prior year. These underwriting results were primarily driven by:

higher catastrophe losses compared to the same period in the prior year;

a net loss reserve discount charge in the nine-month period ended September 30, 2016 compared to a net loss reserve discount benefit for the same period in the prior year;

lower net adverse prior year loss reserve development in the current year which reflected approximately $100 million reserve charge attributable to Florida court rulings in the second quarter of 2016 that have increased the potential liability for workers’ compensation claims in that state by reversing certain aspects of regulations in place since 2003, as well as U.S. program business within Specialty;

improvements in the accident year loss ratio, as adjusted, from our strategic actions to retain more profitable business; and

lower general operating expenses resulting from lower employee-related expenses and our expense savings initiatives, as well as lower acquisition costs.

Catastrophe losses were $828 million in the nine-month period ended September 30, 2016, compared to $368 million in the same period in the prior year. Net adverse prior year loss reserve development, including return premiums, was $354 million and $493 million in the nine-month periods ended September 30, 2016 and 2015, respectively. See Insurance Reserves – Non-Life Insurance Companies – Net Loss Development for further discussion. The current accident year losses for the nine-month period ended September 30, 2016 included 17 severe losses totaling $334 million compared to 22 severe losses totaling $527 million in the same period in the prior year. The net loss reserve discount charge was $182 million in the nine-month period ended September 30, 2016, compared to a benefit of $136 million in the same period in the prior year, primarily reflecting a decrease in the reserve discount curve consisting of the U.S. Treasury forward yield curve and a liquidity margin. See Insurance Reserves – Non-Life Insurance Companies – Discounting of Reserves for further discussion.

Acquisition expenses decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a decrease in net commission expense, particularly in Casualty, reflecting lower production, the effect of reinsurance arrangements, as well as the strengthening of the U.S. dollar against the euro and British pound. These decreases were partially offset by higher guaranty fund and other assessments primarily due to favorable guaranty fund and other assessment settlements in the prior-year period.

General operating expenses decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to lower employee-related expenses resulting from actions to streamline our management structure and general cost containment measures commenced in 2015 and continuing through 2016.

Net investment income decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to lower income on alternative investments as well as fair market value declines of assets accounted for under the fair value option. In the same period in the prior year, Commercial Insurance recorded net investment income related to assets accounted for under the fair value option, as well as gains related to hedge funds.

See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.

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Commercial Insurance Net Premiums Written

The following table presents Commercial Insurance’s net premiums written by major line of business:

 

Three Months Ended

 

Percentage Change in

 

Nine Months Ended

 

Percentage Change in

 

September 30,

 

U.S.

 

 

Original

 

 

September 30,

 

U.S.

 

 

Original

 

(in millions)

 

2016

 

2015

 

dollars

 

 

Currency

 

 

 

2016

 

2015

 

dollars

 

 

Currency

 

Casualty

$

1,252

$

1,711

 

(27)

%

 

(27)

%

 

$

3,724

$

5,405

 

(31)

%

 

(31)

%

Property

 

1,253

 

1,482

 

(15)

 

 

(15)

 

 

 

3,719

 

4,117

 

(10)

 

 

(8)

 

Specialty

 

784

 

970

 

(19)

 

 

(18)

 

 

 

2,567

 

3,094

 

(17)

 

 

(16)

 

Financial lines

 

1,068

 

1,112

 

(4)

 

 

(3)

 

 

 

3,211

 

3,541

 

(9)

 

 

(8)

 

Total Commercial Insurance net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

premiums written

$

4,357

$

5,275

 

(17)

%

 

(17)

%

 

$

13,221

$

16,157

 

(18)

%

 

(17)

%

Commercial INsurance NET PREMIUMS WRITTEN by Line of Business

(in millions)

Commercial Insurance Quarterly and Year-to-Date Net Premiums Written

Commercial Insurance net premiums written decreased in all lines of business in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, in line with our planned portfolio optimization. This decrease was primarily due to the continued execution of our strategy to enhance risk selection in our Casualty and Property product portfolios, the non-renewal of certain underperforming classes of business, and the increased use of reinsurance and adherence to our underwriting discipline in competitive market conditions. In the three-month period ended September 30, 2016, the effect of foreign exchange on net premiums written was immaterial, as the strengthening of the U.S. dollar against the British pound was mostly offset by the weakening of the U.S. dollar against the Japanese Yen. In the nine-month period ended September 30, 2016, the decrease in the net premiums written reflected the effect of foreign exchange, primarily due to the strengthening of the U.S. dollar against the British pound. Additionally, for the nine-month period ended September 30, 2015, net premiums written benefited from the renewal of a multi-year E&O policy in U.S. Financial lines. The following paragraphs discuss the changes within our lines of business exclusive of the effect of foreign exchange.

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Casualty net premiums written decreased, particularly in the U.S., in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year reflecting the continued execution of our strategy to enhance risk selection and to optimize our product portfolio, which includes non-renewal of certain underperforming classes of business, revising rates, terms and conditions in certain underperforming portfolios, and the effect of the two-year reinsurance arrangement with the Swiss Re Group.

Property net premiums written decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to lower renewal retention and decreases in new business across all regions reflecting rate pressure and the effort to adhere to our underwriting discipline, partially offset by changes to our catastrophe reinsurance programs to retain more favorable risks.

Specialty net premiums written decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to the execution of our strategy to restructure the U.S environmental business, which includes non-renewal of certain pollution legal liability business in the U.S. and Canada, increased use of reinsurance, and a decline in EMEA Aerospace. These declines were partially offset by an increase in certain targeted growth products, particularly in the U.S. and Asia.

Financial lines net premiums written decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to lower renewal retention and decreases in new business, particularly in the U.S. and EMEA, reflecting rate pressure and efforts to adhere to our underwriting discipline. For the nine-month period ended September 30, 2016, net premiums written decreased, compared to the same period in the prior year, primarily due to lower renewal retention and decreases in new business, particularly in the U.S., partially offset by an increase in targeted growth products in EMEA. Additionally, in the first nine months of 2015, net premiums written benefited from the renewal of a multi-year E&O policy in the U.S.

Commercial Insurance Net Premiums Written by Region

The following table presents Commercial Insurance’s net premiums written by region:

 

 

 

 

 

 

Percentage

 

 

Percentage

 

 

 

 

 

 

 

Percentage

 

 

Percentage

 

 

Three Months Ended

 

Change in

 

 

Change in

 

 

Nine Months Ended

 

Change in

 

 

Change in

 

 

September 30,

 

U.S.

 

 

Original

 

 

September 30,

 

U.S.

 

 

Original

 

(in millions)

 

2016

 

2015

 

dollars

 

 

Currency

 

 

 

2016

 

2015

 

dollars

 

 

Currency

 

Commercial Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

$

2,865

$

3,598

 

(20)

%

 

(20)

%

 

$

8,188

$

10,691

 

(23)

%

 

(23)

%

Asia Pacific

 

517

 

519

 

-

 

 

(7)

 

 

 

1,398

 

1,461

 

(4)

 

 

(5)

 

EMEA

 

975

 

1,158

 

(16)

 

 

(12)

 

 

 

3,635

 

4,005

 

(9)

 

 

(5)

 

Total net premiums written

$

4,357

$

5,275

 

(17)

%

 

(17)

%

 

$

13,221

$

16,157

 

(18)

%

 

(17)

%

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Commercial Insurance NET PREMIUMS WRITTEN by Region

(in millions)

The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which exclude the effect of foreign exchange.

The Americas net premiums written decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to the continued execution of our strategy to optimize our product portfolio in the Casualty and Environmental businesses, increased use of reinsurance, and lower new and renewal business in Property and Financial lines. These declines were partially offset by an increase in certain targeted growth products in Specialty. Additionally, for the nine-month period ended September 30, 2015, net premiums written benefited from the renewal of a multi-year E&O policy in U.S. Financial lines.

Asia Pacific net premiums written decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to lower new and renewal business, particularly in Property, reflecting rate pressure and the effort to adhere to our underwriting discipline, partially offset by an increase in certain targeted growth products in Specialty.

EMEA net premiums written decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to lower new and renewal business across all lines,particularly in Property, reflecting rate pressure and the effort to adhere to our underwriting discipline.  Net premiums written decreased in the nine-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to lower new and renewal business, particularly in Specialty and Property, partially offset by an increase in certain targeted growth products in Financial lines.

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Commercial Insurance Underwriting Ratios

Our Commercial Insurance business experiences period-to-period volatility, which may affect observable trends in key metrics, particularly underwriting ratios, and makes it difficult to predict future results by extrapolating movements in these metrics from quarter-to-quarter. Future results should not be extrapolated based on quarter-to-quarter movements in these metrics.

The following tables present the Commercial Insurance combined ratios based on GAAP data and reconciliation to the accident year combined ratio, as adjusted:

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Increase

 

September 30,

 

Increase

 

2016

 

2015

 

(Decrease)

 

2016

 

2015

 

(Decrease)

Loss ratio

77.7

 

72.8

 

4.9

 

73.1

 

70.4

 

2.7

Catastrophe losses and reinstatement premiums

(5.7)

 

(1.8)

 

(3.9)

 

(5.9)

 

(2.5)

 

(3.4)

Prior year development net of premium adjustments

(6.9)

 

(3.5)

 

(3.4)

 

(2.4)

 

(3.1)

 

0.7

Net reserve discount benefit (charge)

(0.3)

 

(0.8)

 

0.5

 

(1.4)

 

0.9

 

(2.3)

Accident year loss ratio, as adjusted*

64.8

 

66.7

 

(1.9)

 

63.4

 

65.7

 

(2.3)

Acquisition ratio

15.5

 

16.5

 

(1.0)

 

15.8

 

16.0

 

(0.2)

General operating expense ratio

12.1

 

13.0

 

(0.9)

 

12.0

 

12.9

 

(0.9)

Expense ratio

27.6

 

29.5

 

(1.9)

 

27.8

 

28.9

 

(1.1)

Combined ratio

105.3

 

102.3

 

3.0

 

100.9

 

99.3

 

1.6

Catastrophe losses and reinstatement premiums

(5.7)

 

(1.8)

 

(3.9)

 

(5.9)

 

(2.5)

 

(3.4)

Prior year development net of premium adjustments

(6.9)

 

(3.5)

 

(3.4)

 

(2.4)

 

(3.1)

 

0.7

Net reserve discount benefit (charge)

(0.3)

 

(0.8)

 

0.5

 

(1.4)

 

0.9

 

(2.3)

Accident year combined ratio, as adjusted*

92.4

 

96.2

 

(3.8)

 

91.2

 

94.6

 

(3.4)

* Includes the impact of the 50 percent quota share arrangement with a United Guaranty subsidiary in each period presented.

Commercial Insurance ratios

Three Months Ended September 30,

Nine Months Ended September 30,

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See Insurance Reserves – Non-Life Insurance Companies for further discussion of discounting of reserves and prior year development.

The following tables present Commercial Insurance’s accident year catastrophe and severe losses by region and number of events:

Catastrophes (a)

 

# of

 

Asia

 

 

 

(in millions)

Events

Americas

Pacific

EMEA

 

Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Natural catastrophes:

 

 

 

 

 

 

 

 

 

Flooding

1

$

97

$

-

$

(10)

$

87

Windstorms and hailstorms

7

 

92

 

31

 

12

 

135

Wildfire

-

 

19

 

-

 

2

 

21

Earthquakes

-

 

3

 

4

 

-

 

7

Other events

-

 

-

 

-

 

3

 

3

Total catastrophe-related charges

8

$

211

$

35

$

7

$

253

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

Natural catastrophes:

 

 

 

 

 

 

 

 

 

Flooding

-

$

(1)

$

-

$

-

$

(1)

Windstorms and hailstorms

2

 

1

 

42

 

(2)

 

41

Wildfire

1

 

9

 

-

 

-

 

9

Tropical cyclone

1

 

-

 

14

 

-

 

14

Earthquakes

1

 

25

 

-

 

-

 

25

Total catastrophe-related charges

5

$

34

$

56

$

(2)

$

88

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Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Natural catastrophes:

 

 

 

 

 

 

 

 

 

Flooding

3

$

134

$

-

$

36

$

170

Windstorms and hailstorms

18

 

393

 

46

 

14

 

453

Wildfire

1

 

70

 

-

 

12

 

82

Earthquakes

2

 

57

 

28

 

5

 

90

Other events

1

 

-

 

-

 

33

 

33

Total catastrophe-related charges

25

$

654

$

74

$

100

$

828

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

Natural catastrophes:

 

 

 

 

 

 

 

 

 

Flooding

2

$

66

$

-

$

2

$

68

Windstorms and hailstorms

10

 

175

 

56

 

21

 

252

Wildfire

1

 

9

 

-

 

-

 

9

Tropical cyclone

1

 

-

 

14

 

-

 

14

Earthquakes

1

 

25

 

-

 

-

 

25

Total catastrophe-related charges

15

$

275

$

70

$

23

$

368

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

Severe Losses(b)

 

# of

 

Asia

 

 

 

(in millions)

Events

Americas

Pacific

EMEA

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

2016

7

$

49

$

10

$

36

$

95

2015

6

$

53

$

2

$

154

$

209

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2016

17

$

155

$

22

$

157

$

334

2015

22

$

288

$

2

$

237

$

527

(b)  Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.

Commercial Insurance Quarterly and Year-to-Date Insurance Ratios

The combined ratio increased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to an increase in the loss ratio partially offset by a lower expense ratio.

The accident year combined ratio, as adjusted, decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to a decrease in the accident year loss ratio, as adjusted, as well as a lower expense ratio.

The loss ratio increased in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to higher catastrophe losses and net adverse prior year development, partially offset by an improvement in accident year losses and a lower net loss reserve discount charge. The loss ratio increased in the nine-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to a net loss reserve discount charge compared to net loss reserve discount benefit in the same periods in the prior year and higher catastrophe losses. These increases were partially offset by an improvement in accident year losses, as well as a lower net adverse prior year loss reserve development.

The accident year loss ratio, as adjusted, decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, reflecting the continued execution of our strategy to enhance risk selection, improve underwriting discipline and manage exposures, including the use of reinsurance, and overall lower severe losses. In the three-month period ended September 30, 2016, the accident year loss ratio, as adjusted, improved in Casualty and Property, primarily due to the non-renewal of certain underperforming classes of business, the effect of reinsurance as well as lower severe losses. These decreases were partially offset by higher current accident year losses in Specialty and Financial

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Item 2 / results of operations / COMMERCIAL INSURANCE

lines. The accident year loss ratio, as adjusted, decreased in the nine-month period ended September 30, 2016, compared to the same periods in the prior year, reflecting an improvement in Casualty, primarily due to the non-renewal of certain underperforming classes of business, as well as the effect of reinsurance.  Financial lines improved across all regions due to our pricing discipline, and Specialty benefited from lower severe and attritional losses. These decreases were partially offset by higher attritional losses in Property. Severe losses represented approximately 2.1 points and 2.4 points of the accident year loss ratio, as adjusted, in the three- and nine-month periods ended September 30, 2016, respectively, compared to 4.1 points and 3.5 points, respectively, in the same periods in the prior year.

The acquisition ratio decreased by 1.0 points and 0.2 points in both the three- and nine-month periods ended September 30, 2016 compared to the same periods in the prior year, primarily due to lower net commission expenses, particularly in U.S. Casualty, reflecting the effect of reinsurance arrangements, as well as a reduction in costs of personnel engaged in sales support activities. Additionally, for the nine-month period ended September 30, 2015, the acquisition ratio benefitted from favorable guaranty fund and other assessments settlements.

The general operating expense ratio decreased by 0.9 points in both the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to lower employee-related costs resulting from ongoing actions to streamline our management structure and general cost containment measures commenced in 2015 and continuing through September 30, 2016.

CONSUMER INSURANCE

Consumer Insurance presents its operating results in three operating segments – Retirement, Life and Personal Insurance.

Retirement provides a broad portfolio of retirement products and services to individual consumers. The primary products offered by the Retirement operating segment include individual fixed and variable annuities, group retirement plans, retail mutual funds and financial planning services. Retirement products are distributed through affiliated channels, including The Variable Annuity Life Insurance Company (VALIC) career financial advisors, and through non-affiliated channels, which include banks, wirehouses, regional and independent broker-dealers, independent marketing organizations and independent insurance agents.

Life products offered in the U.S. primarily include term life and universal life insurance. International products include term and whole life insurance, supplemental health, cancer and critical illness insurance. Life products are primarily distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing. In October 2016, we announced a strategic decision to refocus our group benefits business, which included the decision to cease quoting new business in Life’s U.S. employer and voluntary group benefits lines and seek strategic alternatives for group products distributed through sponsored organizations. This change was made to maintain Life’s strategic focus on U.S. and international individual businesses.

Personal Insuranceaims to provides accident and health and personal lines insurance products and services provide clients with valuablesolutions, delivered throughthe channels they prefer. We continue to individuals, organizations focus and families. Theinvestin productsthe most profitable markets and services offered by segments

Weare alsoleveraging ourmultinational capabilitiesto meet the increasingdemand for cross-bordercoverage and services. Personal Insurance operating segment include voluntarywill continue to useour strong risk management and sponsor-paid personal accident market expertise tofoster growth by providing innovativeand supplemental health products for individuals, employees, associations competitive solutions to its customersand other organizations as well as a broad range of travel insurance products and services for leisure and business travelers. Personal Lines products include automobile and homeowners insurance, extended warranty, and consumer specialty products, such as identity theft and credit card protection. Personal Insurance also provides insurance for high net worth individuals offered through AIG Private Client Group, including auto, homeowners, umbrella, yacht, fine art and collections insurance. Personal Insurance products and services are distributed through various channels, including agents, brokers, affinity partners, airlines and travel agents, as well as direct marketing.distributors.

See Part I, Item 1. Business in AIG’s 2015 Annual Report for further discussion of our products and geographic regions where we distribute our products.

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Item 2 / results of operations / CONSUMER INSURANCE

 

Consumer Insurance Results

The following table presents Consumer Insurance results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

3,751

$

3,531

 

6

%

 

$

10,987

$

10,636

 

3

%

Policy fees

 

596

 

653

 

(9)

 

 

 

1,876

 

1,919

 

(2)

 

Net investment income

 

2,163

 

1,944

 

11

 

 

 

6,153

 

6,351

 

(3)

 

Other income

 

218

 

524

 

(58)

 

 

 

1,058

 

1,575

 

(33)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

2,833

 

2,741

 

3

 

 

 

8,021

 

7,981

 

1

 

Interest credited to policyholder account balances

 

779

 

789

 

(1)

 

 

 

2,473

 

2,459

 

1

 

Amortization of deferred policy acquisition costs

 

493

 

694

 

(29)

 

 

 

2,047

 

2,146

 

(5)

 

General operating and other expenses*

 

1,239

 

1,771

 

(30)

 

 

 

4,257

 

5,270

 

(19)

 

Pre-tax operating income

$

1,384

$

657

 

111

%

 

$

3,276

$

2,625

 

25

%

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

Consumer Insurance Results by Operating Segment

The following section provides a comparative discussion of Consumer Insurance Results of Operations for the three- and nine-month periods ended September 30, 2016 and 2015 by operating segment.

Retirement Results

The following table presents Retirement results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

45

$

37

 

22

%

 

$

151

$

127

 

19

%

Policy fees

 

282

 

261

 

8

 

 

 

813

 

802

 

1

 

Net investment income

 

1,552

 

1,396

 

11

 

 

 

4,428

 

4,584

 

(3)

 

Advisory fee and other income

 

205

 

509

 

(60)

 

 

 

1,015

 

1,543

 

(34)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

19

 

198

 

(90)

 

 

 

257

 

406

 

(37)

 

Interest credited to policyholder account balances

 

659

 

665

 

(1)

 

 

 

2,110

 

2,089

 

1

 

Amortization of deferred policy acquisition costs

 

(56)

 

32

 

NM

 

 

 

271

 

332

 

(18)

 

Non deferrable insurance commissions

 

80

 

72

 

11

 

 

 

226

 

210

 

8

 

Advisory fee expenses

 

76

 

339

 

(78)

 

 

 

566

 

1,012

 

(44)

 

General operating expenses

 

198

 

262

 

(24)

 

 

 

667

 

768

 

(13)

 

Pre-tax operating income

$

1,108

$

635

 

74

%

 

$

2,310

$

2,239

 

3

%

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Item 2 / results of operations / CONSUMER INSURANCE

 

Operational Effectiveness:Simplify processes and enhance operating environments to increase competitiveness, improve service and product capabilities and facilitate deliveryof our target customer experience.Wcontinueto invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. In the U.S. Life business, we are focused on leveraging our most efficient systems and increasing automation of our underwriting process. We believe that simplifying our operating models will enhance productivity and support further profitable growth.

Balance Sheet Management: Lead a rigorous product and portfolio approach with enhanced product design and high quality investments that match our asset and liability exposures and are designed to ensure our ability to meet cash and liquidity needs under all operating scenarios.

Value Creation and Capital Management: Strive to deliversolid earnings throughdisciplined pricing, sustainableunderwriting improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance entitiesto enhance return on equity.

 

RETIREMENT pre-tax OPERATING INCOME (in millions)

AIG | Third Quarter 2017 Form 10-Q106


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ITEM 2 |Business Segment Operations | Consumer Insurance

COMPETITION and challenges

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

Consumer Insurance remains competitive due to its long-standing market leading positions, innovative products, distribution relationships across multiple channels, customer-focused service, multi-national capabilities and strong financial ratings.

Our primary challenges include:

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

increased competition in our primary markets, including aggressive pricing of annuities by private equity-backed annuity writers, increased competition and consolidation of employer groups in the group retirement planning market, and increased competition for auto and homeowners’ insurance in Japan;

increasingly complex new and proposed regulatory requirements have created uncertainty that is affecting industry growth; and

investments to upgrade our technology and underwriting processes challenge our management of general operating expenses.

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

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

Individual Retirement

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

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

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

Individual Retirement provides products and services to certain employee benefit plans that are subject to the requirements of the DOL Fiduciary Rule. 

For additional information on the DOL Fiduciary Rule see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Department of Labor Fiduciary Rule.

Group Retirement

Group Retirement competes in the defined contribution market under the VALIC brand.  VALIC is a leadingretirement plan provider in the U.S. for K-12 schools and school districts, highereducation, healthcare, government andother not-for-profit institutions.The defined contribution market is a highly efficient and competitive market that requires supportfor bothplan sponsors and individualparticipants. Tmeet this challenge, VALIC isinvesting in client-focused technology platform tosupport improved compliance and self-service functionality.VALIC’s servicemodel pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.

AIG | Third Quarter 2017 Form 10-Q107


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ITEM 2 |Business Segment Operations | Consumer Insurance

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

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

Group Retirement provides products and services to certain employee benefit plans that are subject to the requirements of the DOL Fiduciary Rule.

For additional information on the DOL Fiduciary Rule see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Department of Labor Fiduciary Rule

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, as well as to supplement retirement income.  

In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio has been evolving. We implemented a strategy to de-emphasize products with long-duration interest rate guarantees and placed a stronger focus on indexed universal life products.

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

As life insurance ownership remains at historical lows in the United States, 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

Personal Insurance

Theneed forfull life cycle productsand coverage, increases inpersonal wealth accumulation, and awarenessof insurance protection and riskmanagement continue to support the growth of the Personal Insurance industry. PersonalInsurance focuses on group and corporateclients, together with individual customers within national markets.We expect thedemand for multinational cross-border coverage and servicesto increasedue to the internationalization of clients andcustomers. We believe our globalpresence provides PersonalInsurance distinct competitive advantage.

In Japan, the competition for auto insurance has intensified, in part driven by a decline in new car sales and the existence of fewer but largerinsurers. Inaddition, theoverall market sizein homeowners insurance contracted after the durationrestriction on long-term fire insurance became effective in October 2015. In the U.S., we compete in the high net worthmarket andwill continueto expand our innovative products and servicesto distribution partnersand clients.Outside ofJapan and the U.S., Personal Insurance continues to invest selectivelyin markets that webelieve have higher potential for sustainable profitability.

Recent Developments

In August 2017, Hurricane Harvey made landfall in Texas and Louisiana causing widespread flooding and property damage in various southern counties within the region. Certain business modules in our Consumer Insurance segment have operations in Houston, Texas and have been directly impacted by the storm. As of September 30, 2017, we have incurred approximately $27 million of storm-related costs. We continue to assess the full financial impact of Hurricane Harvey and its impact to our business operations.

 

AIG | Third Quarter 2017 Form 10-Q108


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ITEM 2 |Business Segment Operations | Consumer Insurance

CONSUMER INSURANCE RESULTS

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

3,237

$

3,313

 

(2)

%

 

$

9,601

$

9,754

 

(2)

%

Policy fees

 

646

 

573

 

13

 

 

 

1,940

 

1,792

 

8

 

Net investment income

 

1,843

 

1,903

 

(3)

 

 

 

5,665

 

5,427

 

4

 

Other income

 

228

 

220

 

4

 

 

 

670

 

1,059

 

(37)

 

Total operating revenue

 

5,954

 

6,009

 

(1)

 

 

 

17,876

 

18,032

 

(1)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

2,426

 

2,367

 

2

 

 

 

6,669

 

6,701

 

-

 

Interest credited to policyholder account balances

 

742

 

755

 

(2)

 

 

 

2,319

 

2,398

 

(3)

 

Amortization of deferred policy acquisition costs

 

539

 

455

 

18

 

 

 

1,984

 

1,929

 

3

 

General operating and other expenses*

 

1,207

 

1,181

 

2

 

 

 

3,515

 

4,059

 

(13)

 

Interest expense

 

32

 

23

 

39

 

 

 

73

 

65

 

12

 

Total operating expenses

 

4,946

 

4,781

 

3

 

 

 

14,560

 

15,152

 

(4)

 

Pre-tax operating income

$

1,008

$

1,228

 

(18)

%

 

$

3,316

$

2,880

 

15

%

*    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 modules in Consumer Insurance are subject to variances in net investment income on the asset portfolios that support insurance liabilities and surplus.

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

The Individual Retirement, Group Retirement and Life Insurance modules review and update estimated gross profit assumptions used to amortize DAC and related items for investment-oriented products, as well as other actuarial assumptions, at least annually. As a result, the pre-tax operating earnings of these businesses include adjustments to policy fees, policyholder benefits, interest credited and DAC amortization to reflect such assumption updates, which may be significant.

For the amount of adjustments recorded to reflect such assumption updates by product line and financial statement line item and for related discussion of the assumption changes that resulted in these adjustments see Insurance Reserves – Life and Annuity Reserves and DAC – Update of Actuarial Assumptions.

AIG | Third Quarter 2017 Form 10-Q109


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ITEM 2 |Business Segment Operations | Consumer Insurance

Individual Retirement Quarterly Results

The following table presents individual retirement results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

22

$

37

 

(41)

%

 

$

81

$

129

 

(37)

%

Policy fees

 

190

 

183

 

4

 

 

 

567

 

528

 

7

 

Net investment income

 

973

 

1,009

 

(4)

 

 

 

2,983

 

2,868

 

4

 

Advisory fee and other income

 

158

 

151

 

5

 

 

 

468

 

857

 

(45)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

15

 

(20)

 

NM

 

 

 

88

 

133

 

(34)

 

Interest credited to policyholder account balances

 

366

 

370

 

(1)

 

 

 

1,193

 

1,259

 

(5)

 

Amortization of deferred policy acquisition costs

 

(20)

 

(119)

 

83

 

 

 

235

 

165

 

42

 

Non deferrable insurance commissions

 

82

 

59

 

39

 

 

 

227

 

166

 

37

 

Advisory fee expenses

 

61

 

58

 

5

 

 

 

179

 

514

 

(65)

 

General operating expenses

 

103

 

99

 

4

 

 

 

321

 

381

 

(16)

 

Interest expense

 

18

 

13

 

38

 

 

 

41

 

37

 

11

 

Pre-tax operating income

$

718

$

920

 

(22)

%

 

$

1,815

$

1,727

 

5

%

Fixed Annuities base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield

 

4.69

%

4.95

%

(26)

bps

 

 

4.84

%

4.95

%

(11)

bps

Cost of funds

 

2.65

 

2.74

 

(9)

 

 

 

2.65

 

2.76

 

(11)

 

Fixed Annuities base net investment spread

 

2.04

%

2.21

%

(17)

bps

 

 

2.19

%

2.19

%

-

bps

Business and Financial Highlights

The market environment reflected continued uncertainty about the DOL Fiduciary Rule and interest rates, which remained low relative to historical levels. As a result, deposits in the three- and nine-month periods ended September 30, 2017 were lower than the same periods in the prior year in most product lines. Net investment income in the three-month period ended September 30, 2017 included lower alternative investment income primarily due to a reduction in the overall size of the hedge fund portfolio, partially offset by higher gains on securities for which the fair value option was elected. In the nine-month period ended September 30, 2017, net investment income included higher gains on securities for which the fair value option was elected and higher returns from alternative investments, partially offset by a reduction in the overall size of the hedge fund portfolio. Pre-tax operating income also included adjustments in each period to update actuarial assumptions, particularly from updates to assumptions for lapses, spreads, and separate account long-term asset growth rate.

Fixed Annuities base net investment spread decreased in the three-month period ended September 30, 2017 compared to the same period in the prior year, primarily due to lower reinvestment yields, accretion income and commercial mortgage loan prepayments, partially mitigated by disciplined pricing and active crediting rate management. In the nine-month period ended September 30, 2017, base net investment spread was comparable to the same period in the prior year, as the impact of lower reinvestment yields, accretion income and prepayments on commercial mortgage loans was mostly mitigated by disciplined pricing and active crediting rate management.

AIG | Third Quarter 2017 Form 10-Q110


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

Individual Retirement Pre-Tax Operating Income

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income in the three-month period ended September 30, 2016 increased compared to the same period in the prior year,decreased primarily due to a higherto:

lower net positive adjustment from the review and update of actuarial assumptions, higherwhich was $242 million compared to $369 million in the prior year;

lower net investment income the impact of better equity market performance on policyholder benefit expense and DAC amortization, and higher policy fees from growth in assets under management. Excluding thealternative investments due to continued impact of the actuarial assumption updates and the equity market performance in each period, DAC amortization was higherreduction in the three-month period ended September 30, 2016 compared tooverall size of the same period in the prior year, due to a higher rate of amortization in Fixed Annuities as a result of assumption updates in the prior-year period, and higher amortization related to growth in Retirement Income Solutions. The sale of AIG Advisor Group in May 2016 resulted in decreases in advisory fee income, advisory fee expense and general operating expenses in the three-month period ended September 30, 2016 compared to the same period in the prior year, but did not result in a significant variance in pre-tax operating income.

In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $330 million in the three-month period ended September 30, 2016, which reflected lower surrender assumptions, primarily due to lower long-term interest rates, as well as updates to investment yield and crediting rate assumptions compared to those previously modeled. In the three-month period ended September 30, 2015, the update of estimated gross profit assumptions in Fixed Annuities resulted in a net positive adjustment of $92 million, which reflected refinements to investment spread assumptions, lower terminations than previously assumed and decreases to expense assumptions.

In Retirement Income Solutions, the update of estimated gross profit assumptions resulted in a net positive adjustment of $39 million in the three-month period ended September 30, 2016, primarily due to updated assumptions for long-term volatility, surrenders, mortality and policy expenses,hedge fund portfolio, partially offset by a decrease in the separate account long-term asset growth rate assumption. The net positive adjustment for the assumption update in the three-month period ended September 30, 2016 included a net negative adjustment of approximately $24 million related to the conversion to a more robust modeling platform for variable annuities, primarily due to refinements to assumptions for guaranteed minimum interest rates and investment fees, partially offset by the impact of other refinements identified during the conversion. In the three-month period ended September 30, 2015, there were offsetting updates to assumed investment fees, modeled expenses, and terminations, resulting in no net adjustment to pre-tax operating income in Retirement Income Solutions.

In Group Retirement, the update of estimated gross profit assumptions resulted in a net negative adjustment of $47 million in the three-month period ended September 30, 2016, primarily due to refinements in surrender and partial withdrawal

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assumptions and a decrease in the separate account long-term asset growth rate assumption. In the three-month period ended September 30, 2015, a net positive adjustment from the update of estimated gross profit assumptions of $48 million in Group Retirement was primarily due to revisions to mortality and surrender assumptions, partially offset by decreased spread assumptions.

See Insurance Reserves - Life Insurance Companies DAC and Reserves – Update of Actuarial Assumptions for adjustments by product line and financial statement line item, and see Insurance Reserves – Life Insurance Companies DAC and Reserves – Variable Annuity Guaranteed Benefit Features and Hedging Program for a discussion of adjustments related to the update of assumptions for the valuation of variable annuity guaranteed minimum withdrawal benefit (GMWB) features, which are excluded from pre-tax operating income.

Net investment incomefor the three-month period ended September 30, 2016 increased compared to the same period in the prior year, primarily due to income on alternative investments, which was positive in the current period compared to losses in the same period in the prior year, reflecting better performance from alternative investments in hedge funds. Base net investment income was higher in the three-month period ended September 30, 2016, due to growth in average invested assets from positive net flows and higher accretion income and commercial mortgage loan prepayment income, partially offset by lower reinvestment yields compared to the same period in the prior year. Yield enhancements were higher primarily due to gains on securities for which the fair value option was elected.elected;

Baselower base net investment income for the three-month period ended September 30, 2016 increased compared to the same periodspread in the prior yearFixed Annuities primarily due to higherlower reinvestment yields, accretion income and commercial mortgage loan prepayment income, while Retirement fixed maturity portfolio yieldsprepayments, partially mitigated by disciplined pricing and active crediting rate management;

higher policyholder benefit expense primarily due to growth in the three-month period ended September 30, 2016 declined compared to the same periodIndex Annuities and lower benefit expense in the prior year driven by reductions in variable annuity reserves; and

higher commission expense primarily as a result of investment purchases and investment of portfolio cash flows, which continueddue to be at rates below the weighted average yield of the existing portfoliogrowth in account values from improvements in the sustained low interest rate environment. The decreaseequity markets and an allocation of life reinsurance risk charges, as all U.S. life segments benefited from the reduction in yields was partially offset byrequired statutory capital resulting from a reinsurance agreement entered into in 2016 involving certain whole life, term life and universal life businesses (Life Insurance Reinsurance Transactions);

Partially offsetting these decreases were:

higher policy fee and advisory fee income, net of expenses, primarily due to growth in average invested assets due to positive net flowsaccount values from improvements in the past twelve months, reinvestment of proceeds from hedge fund divestiture activity,equity markets; and an increase in assets to support higher variable annuity statutory reserves. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.

In Fixed Annuities, average crediting rates in the three-month period ended September 30, 2016 were lower compared to the same period in the prior year, and base spreads decreased slightly due to lower base yields. In Group Retirement, lower base yields resulted in base spread compression in the three-month period ended September 30, 2016 compared to the same period in the prior year, as lowerhigher base net investment income due to lower yields was only partially offset by lower average interest crediting rates. See Spread Management below for additional discussion.

General operating expensesdecreasedspread in the three-month period ended September 30, 2016 compared to the same period in the prior year, due to decreases in employee-related expenses, as well as the sale of AIG Advisor Group in May 2016. General operating expenses in the three-month period ended September 30, 2016 also included interest expense related to real estate of consolidated partnerships, which was more than offset by related investment income.

Retirement Year-to-Date Results

Pre-tax operating incomein the nine-month period ended September 30, 2016 increased compared to the same period in the prior year,Variable and Index Annuities primarily due to a higher net positive adjustment from the review and update of actuarial assumptions, higher net investment income, the impact of better equity market performance on policyholder benefit expense and DAC amortization, and lower general operating expenses, partially offset by lower net investment income on alternative investments. Excluding the impact of the actuarial assumption updates and the equity market performance in each period, DAC amortization was higher in the nine-month period ended September 30, 2016 compared to the same period in the prior year, due to a higher rate of amortization in Fixed Annuities as a result of assumption updates in the prior-year period, and higher amortization related to growth in invested assets, higher commercial mortgage loan prepayments, and disciplined pricing and active crediting rate management.

AIG | Third Quarter 2017 Form 10-Q111


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ITEM 2 |Business Segment Operations | Consumer Insurance

Individual Retirement Pre-Tax Operating Income Solutions. The sale of AIG Advisor Group in May 2016 resulted in decreases in advisory fee income, advisory fee expense and general operating expenses in the nine-month period ended

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 compared to the same period in the prior year, but did not result in a significant variance in pre-taxComparison

Pre-tax operating income.

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Net investment incomefor the nine-month period ended September 30, 2016 decreased compared to the same period in the prior year, increased primarily due to lower income on alternative investments, which included losses in the first three months of 2016, compared to a strong performance in alternative investments in the nine-month period ended September 30, 2015. The decrease in alternativeto:

net investment income in the nine-month period ended September 30, 2016 was partially offset by higher yield enhancement income, which included higher bond call and tender income and gains on securities for which the fair value option was elected and higher returns on alternative investments, partially offset by a reduction in the overall size of the hedge fund portfolio;

higher base net investment spread in Variable and Index Annuities primarily due to growth in invested assets, and disciplined pricing and active crediting rate management, partially offset by lower commercial mortgage loan prepayments and accretion income;

lower policyholder benefit expense primarily due to a reduction in immediate annuity reserves, partially offset by growth in Index Annuities and lower benefit expense in the prior year driven by reductions in variable annuity reserves;

excluding the impact of the actuarial assumption updates, lower DAC amortization primarily due to improved equity market performance; and

higher policy fee and advisory fee income, net of expenses, due to growth in annuity account values from improvement in the equity markets.

Partially offsetting these increases were:

lower net positive adjustment from the review and update of actuarial assumptions as discussed above;

higher commission expense primarily due to growth in account values from improvements in the equity markets and the allocation of reinsurance risk charges from Life Insurance Reinsurance Transactions; and

the sale of AIG Advisor Group in May 2016, which drove the decreases in advisory fee income, advisory expenses and general operating expenses, and resulted in a net $14 million decrease in pre-tax operating income.

AIG | Third Quarter 2017 Form 10-Q112


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ITEM 2 |Business Segment Operations | Consumer Insurance

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 decreased in the three- and nine-month periods ended September 30, 2017 compared to the same periods in the prior year, primarily due to stronger sales of immediate annuities in the prior-year periods, in which higher equity market volatility made immediate annuities more attractive to customers seeking less volatile returns.

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

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 premiums and deposits to GAAP premiums:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Premiums

$

22

$

37

 

$

81

$

129

Deposits

 

2,504

 

3,328

 

 

8,723

 

12,854

Other

 

-

 

(2)

 

 

(4)

 

1

Premiums and deposits

$

2,526

$

3,363

 

$

8,800

$

12,984

Surrender Rates

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

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

2016

 

 

2017

 

2016

 

Surrenders as a percentage of average reserves

 

 

 

 

 

 

 

 

 

Fixed Annuities

5.9

%

7.2

%

 

6.6

%

7.6

%

Variable and Index Annuities

5.6

 

5.2

 

 

5.9

 

5.0

 

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

 

 

 

 

September 30, 2017

 

 

 

 

December 31, 2016

  

 

 

 

 

 

 

Variable

 

 

 

 

 

 

 

Variable

 

 

 

 

 

 

Fixed

 

and Index

 

 

 

 

 

Fixed

 

and Index

 

(in millions)

 

 

 

 

Annuities

 

Annuities

 

 

 

 

 

Annuities

 

Annuities

 

No surrender charge

 

 

 

$

33,029

$

17,818

 

 

 

 

$

34,674

$

15,338

 

Greater than 0% - 2%

 

 

 

 

1,649

 

5,692

 

 

 

 

 

857

 

4,558

 

Greater than 2% - 4%

 

 

 

 

1,596

 

8,267

 

 

 

 

 

2,221

 

5,741

 

Greater than 4%

 

 

 

 

12,920

 

34,823

 

 

 

 

 

12,599

 

34,966

 

Non-surrenderable

 

 

 

 

1,535

 

417

 

 

 

 

 

1,606

 

380

 

Total reserves

 

 

 

$

50,729

$

67,017

 

 

 

 

$

51,957

$

60,983

 

Individual Retirement annuities are typically subject to a four- to seven-year surrender charge period, depending on the product. For Variable and Index Annuities, the proportion of reserves subject to surrender charges at September 30, 2017 has decreased compared to December 31, 2016 due to normal aging of the business and slower sales, which were due in part to uncertainty around the implementation of the DOL Fiduciary Rule. The increase in reserves with no surrender charge contributed to the increase in the surrender rate in the three- and nine-month periods ended September 30, 2017 compared to the same periods in the prior year.

AIG | Third Quarter 2017 Form 10-Q113


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ITEM 2 |Business Segment Operations | Consumer Insurance

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)

Quarterly 2017 and 2016 Comparison  

Fixed Annuities premiums and deposits were slightly higher than the prior-year period primarily due to strategic crediting rate enhancements for certain products. Net flows continued to be negative but improved compared to the sameprior-year period, primarily due to lower surrenders, in addition to higher premiums and deposits.

Variable and Index Annuities premiums and deposits and net flows declined, primarily due to lower sales of variable annuities, due in part to continued uncertainty in the prior year.annuity market around the implementation of the DOL Fiduciary Rule. Lower sales combined with higher surrenders compared to the prior-year period resulted in lower net flows.

BaseRetail Mutual Funds had negative net investment income forflows in the nine-monththree-month period ended September 30, 2016 increased2017 compared to the same period in the prior year, as a result of commercial mortgage loan prepayment income in the nine-month period ended September 30, 2016, partially offset by overall continued lower base yields on investment purchases. Retirement fixed maturity portfolio yields in the nine-month period ended September 30, 2016 declined compared to the same period in the prior year, primarily as a result of investment purchases and reinvestment of portfolio cash flows, which continued to be at rates below the weighted average yield of the existing portfolio in the sustained low interest rate environment. The decrease in yields was partially offset (more than offset in Retirement Income Solutions) by growth in average invested assets compared to the same period in the prior year, primarily due to positive net flows in the past twelve months. See Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Retirement business.

In Fixed Annuities and Group Retirement, base spreads decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, due to lower yields on reinvestment of portfolio cash flows and higher accretion income in the same period in the prior year, partially offset byreflecting lower average interest crediting rates. See Spread Management below for additional discussion.deposits due to negative industry trends in U.S. equity actively managed funds and uncertainty surrounding the DOL Fiduciary Rule.

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

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison  

General operating expensesFixed Annuities decreasedpremiums and deposits were lower than the prior-year period, and net flows continued to be negative, primarily due to disciplined pricing in the nine-month period ended September 30, 2016 compared to the same period in the prior year, due to decreases in employee-related expenses, as well as the sale of AIG Advisor Group in May 2016. General operating expenses in the nine-month period ended September 30, 2016 also included interest expense related to real estate of consolidated partnerships, which was more than offset by related investment income.

Spread Management

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

Disciplined pricing on new business and active crediting rate management are usedhigher equity market volatility in the Retirement operating segmentprior-year period, which made fixed annuities more attractive to partially offset the impact of a continued decline in base yields resulting from investment of available cash flows in the low interest rate environment.

Disciplined pricing on new business is used to pursue new sales of annuity products at targeted net investment spreads in the current rate environment. Retirement has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Retirement cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products that had higher minimum rate guarantees have been re-filed with lower crediting rates as permitted under state insurance laws for new sales. As a result, new sales of fixed annuity products generally have minimum interest rate guarantees of one percent.customers seeking less volatile returns.

Renewal crediting rate management Variable and Index Annuitiesis done under contractual provisions in annuity products 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. Retirement will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields. In addition to deferred annuity products, certain traditional long-duration products for which Retirement does not have the ability to adjust interest rates, such as payout annuities, are exposed to reduced earnings and potential loss recognition reserve increases in a sustained low interest rate environment.

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As of September 30, 2016, Retirement’s fixed annuity reserves, which include fixed options offered within variable annuities sold in the Group Retirement and Retirement Income Solutions product lines as well as reserves of the Fixed Annuities product line, had minimum guaranteed interest rates ranging from 1.0 percent to 5.5 percent, with the higher rates representing guarantees on older in-force products. As indicated in the table below, approximately 73 percent of annuity account values were at their minimum crediting rates at both September 30, 2016 and December 31, 2015. As a result of disciplined pricing on new business and the run-off of older business with higher minimum crediting rates, fixed annuity account values having contractual minimum guaranteed rates above 1 percent decreased from 74 percent of total fixed annuity reserves at December 31, 2015 to 71 percent at September 30, 2016.

The following table presents fixed annuity account values by contractual minimum guaranteed interest rate and current crediting rates:

 

Current Crediting Rates

September 30, 2016

 

 

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

 

Fixed annuities *

 

 

 

 

 

 

 

 

 

1%

$

6,615

$

5,971

$

15,483

$

28,069

 

> 1% - 2%

 

13,595

 

985

 

2,285

 

16,865

 

> 2% - 3%

 

30,084

 

385

 

582

 

31,051

 

> 3% - 4%

 

11,835

 

47

 

7

 

11,889

 

> 4% - 5%

 

7,746

 

-

 

4

 

7,750

 

> 5% - 5.5%

 

198

 

-

 

5

 

203

 

Total

$

70,073

$

7,388

$

18,366

$

95,827

 

Percentage of total

 

73

%

8

%

19

%

100

%

*    Fixed annuities shown include fixed options within variable annuities sold in Group Retirement and Retirement Income Solutions product lines.

Retirement Premiums and Deposits, Surrenders and Net Flows

Premiums

For Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums and deposits is a non‑GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts and mutual funds.

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Premiums and deposits*

$

5,172

$

6,625

 

$

18,456

$

18,204

Deposits

 

(5,128)

 

(6,542)

 

 

(18,306)

 

(18,079)

Other

 

1

 

(46)

 

 

1

 

2

Premiums

$

45

$

37

 

$

151

$

127

* Excludes activity related to closed blocks of fixed and variable annuities.

Premiumsincreased in the three- and nine-month periods ended September 30, 2016 compared to the same periods in the prior year, primarily due to higher sales of immediate annuities in the Fixed Annuities product line.

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Premiums and Deposits and Net Flows

The following table presents Retirement premiums and deposits and net flows by product line:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Fixed Annuities

$

560

$

1,121

 

(50)

%

 

$

3,402

$

2,455

 

39

%

Retirement Income Solutions

 

1,701

 

2,758

 

(38)

 

 

 

5,715

 

8,151

 

(30)

 

Retail Mutual Funds

 

1,090

 

843

 

29

 

 

 

3,825

 

2,622

 

46

 

Group Retirement

 

1,821

 

1,903

 

(4)

 

 

 

5,514

 

4,976

 

11

 

Total Retirement premiums and deposits*

$

5,172

$

6,625

 

(22)

%

 

$

18,456

$

18,204

 

1

%

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Net flows

 

 

 

 

 

 

 

 

 

Fixed Annuities

$

(881)

$

(337)

 

$

(1,150)

$

(2,023)

Retirement Income Solutions

 

732

 

1,824

 

 

2,990

 

5,271

Retail Mutual Funds

 

414

 

192

 

 

1,659

 

676

Group Retirement

 

(107)

 

(664)

 

 

(53)

 

(1,695)

Total Retirement net flows*

$

158

$

1,015

 

$

3,446

$

2,229

*    Excludes activity relateddeclined, reflecting lower sales of index annuities, along with a continued decrease in variable annuity industry sales due in part to closed blocksuncertainty around the implementation of fixed and variable annuities, which had reserves of approximately $4.3 billion and $5.0 billion at September 30, 2016 and 2015, respectively.

RETIREMENT PREMIUMS AND DEPOSITS by Product Line (in millions)

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Premiums and deposits for Retirement decreased in the three-month period ended September 30, 2016,DOL Fiduciary Rule. Lower sales combined with higher surrenders compared to the sameprior-year period resulted in the prior year, primarily due to lower salesa decrease in Retirement Income Solutions and Fixed Annuities, partially offset by higher sales in Retail Mutual Funds. Premiums and deposits increased in the nine-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to higher sales in Fixed Annuities, Retail Mutual Funds and Group Retirement, partially offset by lower sales in Retirement Income Solutions.

Net flows for annuity products included in Fixed Annuities, Retirement Income Solutions and Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows from mutual funds, which are included in both Retail Mutual Funds and Group Retirement, represent deposits less withdrawals.

Total net flows for Retirementthe index annuity product line and negative net flows compared to positive net flows in the three-monthprior-year period ended September 30, 2016 decreased compared tofor the same period in the prior year primarily due to lower sales in Retirement Income Solutions and Fixed Annuities, partially offset by higher sales in variable annuity product line.

Retail Mutual Funds and lower surrenders in Group Retirement. Higher sales of Fixed Annuities, higher sales and lower surrenders in Group Retirement, and higher sales of Retail Mutual Funds, partially offset by lower sales in Retirement Income Solutions were the primary drivers of the improvement in had negative net flows in the nine-month period ended September 30, 20162017 compared to the same period in the prior year.

Premiums and Deposits and Net Flows by Product Line

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

Fixed Annuities deposits decreased, in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarilyreflecting lower deposits due to continued focus on disciplined pricingnegative industry trends in a challenging interest rate environment. Deposits increased, inU.S. equity actively managed funds and uncertainty surrounding the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to higher sales in the bank and broker-dealer distribution channels. Net flows were negative in both the three- and nine-month periods ended September 30, 2016, but improved for the nine-month period compared to the same period in the prior year due to higher sales.DOL Fiduciary Rule.

Retirement Income Solutions

AIG | Third Quarter 2017 Form 10-Q114net flows were positive in the three- and nine-month periods ended September 30, 2016, but were significantly lower compared to the same periods in the prior year, due to a decrease in premiums and deposits, compared to the same periods in the prior year, which was primarily due to lower sales of variable annuities. Surrenders were comparable in the three-month period ended September 30, 2016 and lower in the nine-month period ended September 30, 2016, compared to the same periods in the prior year, and the improvement in surrender rates (see Surrender Rates below) also reflected the significant growth in account value driven by positive net flows over the past twelve months, which has increased the proportion of business that is within the surrender charge period.

Retail Mutual Funds net flows increased in the three- and nine-month periods ended September 30, 2016 compared to the same periods in the prior year due to improvement in the level of deposits, which was partially offset by higher surrenders, both driven by activity within the Focused Dividend Strategy Fund.


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ITEM 2 |Business Segment Operations | Consumer Insurance

Group Retirement Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

8

$

9

 

(11)

%

 

$

21

$

21

 

-

%

Policy fees

 

113

 

99

 

14

 

 

 

313

 

285

 

10

 

Net investment income

 

524

 

554

 

(5)

 

 

 

1,614

 

1,588

 

2

 

Advisory fee and other income

 

57

 

55

 

4

 

 

 

168

 

159

 

6

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

10

 

14

 

(29)

 

 

 

36

 

31

 

16

 

Interest credited to policyholder account balances

 

283

 

289

 

(2)

 

 

 

845

 

849

 

-

 

Amortization of deferred policy acquisition costs

 

12

 

63

 

(81)

 

 

 

59

 

106

 

(44)

 

Non deferrable insurance commissions

 

28

 

20

 

40

 

 

 

80

 

59

 

36

 

Advisory fee expenses

 

22

 

18

 

22

 

 

 

59

 

52

 

13

 

General operating expenses

 

88

 

92

 

(4)

 

 

 

256

 

267

 

(4)

 

Interest expense

 

10

 

7

 

43

 

 

 

23

 

19

 

21

 

Pre-tax operating income

$

249

$

214

 

16

%

 

$

758

$

670

 

13

%

Base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield

 

4.52

%

4.71

%

(19)

bps

 

 

4.56

%

4.82

%

(26)

bps

Cost of funds

 

2.78

 

2.86

 

(8)

 

 

 

2.80

 

2.90

 

(10)

 

Base net investment spread

 

1.74

%

1.85

%

(11)

bps

 

 

1.76

%

1.92

%

(16)

bps

Business and Financial Highlights

Group Retirement premiums in the three- and nine-month periods ended September 30, 2017 were comparable to the same periods in the prior year, while premiums and deposits in the three- and nine-month period ended September 30, 2017 increased compared to the same periods in the prior year. The increase in premiums and deposits was primarily driven by higher deposits from group acquisitions, which, along with lower surrenders, drove the improvement in net flows in the three-month period ended September 30, 2017. Net flows in the nine-month period ended September 30, 2017 declined and continued to be negative primarily due to higher surrenders reflecting continued pressure from the consolidation of healthcare providers and other employers in our target markets.

Low base net investment yields and lower commercial mortgage loan prepayments in the three- and nine-month periods ended September 30, 2017 continued to pressure investment spreads, partially mitigated by crediting rate management. Net investment income in the three-month period ended September 30, 2017 included lower alternative investment income primarily due to a reduction in the overall size of the hedge fund portfolio. In the nine-month period ended September 30, 2017, net investment income included higher gains on securities for which the fair value option was elected and higher returns from alternative investments, partially offset by a reduction in the overall size of the hedge fund portfolio. Pre-tax operating income also included adjustments in each period to update actuarial assumptions, particularly from updates to separate account long-term asset growth rate assumption.

AIG | Third Quarter 2017 Form 10-Q115


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

Group Retirement net flows in the three- and nine-month periods ended September 30, 2016 improved significantly compared to the same periods in the prior year. In the three-month period ended September 30, 2016, the improvement in net flows was primarily driven by lower surrender activity compared to the same period in the prior year. In the nine-month period ended September 30, 2016, the improvement in net flows was due to both higher deposits and lower surrender activity compared to the same period in the prior year, which included large group surrenders of approximately $1.1 billion. The large group market has been impacted by the consolidation of healthcare providers and other employers in our target markets, and additional group surrenders are expected in the remainder of 2016.

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Item 2 / results of operations / CONSUMER INSURANCE

Surrender Rates

The following table presents reserves for annuity product lines by surrender charge category:

 

 

September 30, 2016

 

 

 

December 31, 2015

 

  

 

 

 

 

 

Retirement

 

 

 

 

 

 

 

Retirement

 

 

 

Group

 

Fixed

 

Income

 

 

 

Group

 

Fixed

 

Income

 

(in millions)

 

Retirement(a)

 

Annuities

 

Solutions

 

 

 

Retirement(a)

 

Annuities

 

Solutions

 

No surrender charge(b)

$

64,070

$

35,093

$

15,422

 

 

$

60,720

$

34,331

$

14,184

 

Greater than 0% - 2%

 

989

 

1,190

 

4,478

 

 

 

1,199

 

1,543

 

4,517

 

Greater than 2% - 4%

 

1,100

 

2,186

 

5,605

 

 

 

1,363

 

2,285

 

4,565

 

Greater than 4%

 

5,333

 

12,756

 

35,431

 

 

 

5,952

 

13,138

 

31,683

 

Non-surrenderable

 

768

 

3,832

 

376

 

 

 

676

 

3,723

 

358

 

Total reserves

$

72,260

$

55,057

$

61,312

 

 

$

69,910

$

55,020

$

55,307

 

(a) Excludes mutual fund assets under management of $16.2 billion and $14.5 billion at September 30, 2016 and December 31, 2015, respectively.

(b) Group Retirement Products in this category include reserves of approximately $6.2 billion at both September 30, 2016 and December 31, 2015, that are subject to 20 percent annual withdrawal limitations.

The following table presents annualized surrender rates for deferred annuities by product line:

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

2015

 

 

2016

 

2015

 

Surrenders as a percentage of average account value

 

 

 

 

 

 

 

 

 

Fixed Annuities

6.9

%

6.5

%

 

7.3

%

6.8

%

Retirement Income Solutions

5.2

 

6.0

 

 

5.0

 

6.2

 

Group Retirement

8.2

 

11.4

 

 

7.9

 

9.9

 

Life Results

The following table presents Life results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

791

$

675

 

17

%

 

$

2,289

$

2,085

 

10

%

Policy fees

 

314

 

392

 

(20)

 

 

 

1,063

 

1,117

 

(5)

 

Net investment income

 

544

 

496

 

10

 

 

 

1,554

 

1,589

 

(2)

 

Other income

 

13

 

15

 

(13)

 

 

 

43

 

32

 

34

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

1,174

 

1,037

 

13

 

 

 

3,077

 

2,944

 

5

 

Interest credited to policyholder account balances

 

120

 

124

 

(3)

 

 

 

363

 

370

 

(2)

 

Amortization of deferred policy acquisition costs

 

1

 

158

 

(99)

 

 

 

241

 

333

 

(28)

 

Non deferrable insurance commissions

 

27

 

51

 

(47)

 

 

 

124

 

167

 

(26)

 

General operating expenses

 

242

 

248

 

(2)

 

 

 

757

 

729

 

4

 

Pre-tax operating income (loss)

$

98

$

(40)

 

NM

 

 

$

387

$

280

 

38

 

126


TABLE OF CONTENTS

Item 2 / results of operations / CONSUMER INSURANCE

Life pre-tax OPERATING INCOME (loss) (in millions)

Life Quarterly ResultsPre-Tax Operating Income

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income increased in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to to:

a lower net negativepositive adjustment from the review and update of actuarial assumptions, which was $13 million compared to a $47 million net negative adjustment in the prior year; and

higher policy fee income due to growth in account values from improvement in the equity markets.

Partially offsetting these increases were:

lower base net investment spread primarily due to lower reinvestment yields and commercial mortgage loan prepayments, partially mitigated by effective crediting rate management;

lower net investment income onfrom alternative investments due to continued impact of the reduction in the overall size of the hedge fund portfolio; and yield enhancements and lower domestic general operating expenses.

Inhigher commission expense primarily due to the allocation of reinsurance risk charges from Life Insurance Reinsurance Transactions.

Group Retirement Pre-Tax Operating Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income increased primarily due to:

a net positive adjustment from the review and update of actuarial assumptions resulted incompared to a net negative adjustment of $84 million, which decreased pre-tax operating income in the three-month period ended September 30, 2016, primarily due to refinement to reserves for universal life insurance with secondary guarantees due to lower assumed surrender rates. The update to Life assumptions in the three-month period ended September 30, 2016 also included lower yield and interest credited assumptions.

In the three-month period ended September 30, 2015, the net negative adjustment of $157 million related to the update of actuarial assumptions, which reduced pre-tax operating income of the Life operating segment, was primarily due to lower assumed surrender rates for certain later-duration universal life with secondary guarantees and more favorable than expected mortality experience. The net negative adjustment also reflected lower investment spread assumptions and loss recognition expense of $39 million for certain discontinued long-term care products primarily due to lower future premium assumptions. These negative adjustments were partially offset by a decrease in certain group benefit claim reserves based on updated experience data.

Net investment income increased in the three-month period ended September 30, 2016 compared to the same period in the prior year primarily due to higher income on alternative investments and higher yield enhancementas discussed above;

net investment income, which included bond call and tender income andhigher gains on securities for which the fair value option was elected. See Investments – Life Insurance Companies for additional discussionelected and higher returns on alternative investments, partially offset by a reduction in the overall size of the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.hedge fund portfolio;

Generalhigher policy fee income due to growth in account values from improvement in the equity markets; and

lower general operating expenses decreased in the three-month period ended September 30, 2016 comparedprimarily due to the same period in the prior year. A decrease in domestic employee-relatedlower legal expenses, in the three-month period ended September 30, 2016 compared to the same period in the prior year was partially offset by higher expenses spending for implementation of the DOL Fiduciary Rule.

Partially offsetting these increases were:

lower base net investment spread primarily due to lower reinvestment yields and commercial mortgage loan prepayments, partially mitigated by effective crediting rate management; and

higher commission expense primarily due to the allocation of reinsurance risk charges from Life Insurance Reinsurance Transactions.

AIG | Third Quarter 2017 Form 10-Q116


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

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, 2017, which primarily represent immediate annuities, were comparable to the same periods in the prior year.

Premiums and deposits is a non‑GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts 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 premiums and deposits to GAAP premiums:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Premiums

$

8

$

9

 

$

21

$

21

Deposits

 

1,852

 

1,812

 

 

5,681

 

5,493

Premiums and deposits

$

1,860

$

1,821

 

$

5,702

$

5,514

Surrender Rates

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,

 

 

2017

 

2016

 

 

2017

 

2016

 

Surrenders as a percentage of average reserves and mutual funds

7.4

%

8.3

%

 

8.5

%

8.0

%

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

 

September 30,

 

December 31,

 

(in millions)

 

2017

(a)

 

2016

(a)

No surrender charge(b)

$

67,856

 

$

64,160

 

Greater than 0% - 2%

 

1,230

 

 

906

 

Greater than 2% - 4%

 

1,133

 

 

1,395

 

Greater than 4%

 

5,188

 

 

5,434

 

Non-surrenderable

 

450

 

 

417

 

Total reserves

$

75,857

 

$

72,312

 

(a)  Excludes mutual fund assets under administration of $19.1 billion and $16.3 billion at September 30, 2017 and December 31, 2016, respectively.

(b)  Group Retirement amounts in this category include reserves of approximately $6.3 billion, at both September 30, 2017 and December 31, 2016, which are subject to 20 percent annual withdrawal limitations.

Group Retirement annuities are typically subject to a five- to seven-year surrender charge period, depending on the product. The increase in the amount and proportion of Group Retirement annuity reserves that have no surrender charge at September 30, 2017 compared to December 31, 2016 was primarily due to normal aging of this book of business, withdrawal limitations on certain plan assets and lower than expected surrenders of older contracts with higher minimum interest rates on fixed account balances that have continued to be attractive to the contract holders in the low interest rate environment.

AIG | Third Quarter 2017 Form 10-Q117


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

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 Japanmillions)

Quarterly 2017 and interest expense related2016 Comparison

Premiums and deposits increased primarily driven by higher deposits from group acquisitions. Net flows continued to real estate of consolidated partnerships;be negative but improved compared to the latterprior-year period, primarily due to lower surrenders, in addition to higher premiums and deposits.

Group Retirement Premiums and Deposits and Net Flows

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Premiums and deposits increased primarily driven by higher deposits from group acquisitions. Net flows declined and continued to be negative as the growth in sales was more than offset by related investment income. Expensessurrenders, including group plan surrenders of approximately $350 million, which were within expectations but higher than in Japanthe prior-year period.

��

AIG | Third Quarter 2017 Form 10-Q118


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

Life Insurance Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

384

$

349

 

10

%

 

$

1,168

$

1,068

 

9

%

Policy fees

 

343

 

291

 

18

 

 

 

1,060

 

979

 

8

 

Net investment income

 

260

 

267

 

(3)

 

 

 

781

 

772

 

1

 

Other income

 

13

 

14

 

(7)

 

 

 

34

 

43

 

(21)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

587

 

730

 

(20)

 

 

 

1,795

 

1,851

 

(3)

 

Interest credited to policyholder account balances

 

93

 

96

 

(3)

 

 

 

281

 

290

 

(3)

 

Amortization of deferred policy acquisition costs

 

37

 

(43)

 

NM

 

 

 

161

 

113

 

42

 

Non deferrable insurance commissions

 

32

 

37

 

(14)

 

 

 

88

 

122

 

(28)

 

General operating expenses

 

135

 

152

 

(11)

 

 

 

437

 

504

 

(13)

 

Interest expense

 

4

 

3

 

33

 

 

 

9

 

9

 

-

 

Pre-tax operating income (loss)

$

112

$

(54)

 

NM

%

 

$

272

$

(27)

 

NM

%

Business and Financial Highlights

New individual life premiums and deposits in the three- and nine-month periods ended September 30, 2017 reflected higher universal life deposits and term life premiums compared to the prior-year periods. Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. General operating expenses decreased in the three- and nine-month periods ended September 30, 2017 compared to the same periods in the prior year, primarily due to the strategic decision to refocus the group benefits business. Pre-tax operating income also included adjustments in each period to update actuarial assumptions, which was a net positive adjustment in the three- and nine-month periods ended September 30, 2017 compared to a net negative adjustment in the same periods in the prior year.

AIG | Third Quarter 2017 Form 10-Q119


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

Life Insurance Pre-Tax Operating Income (Loss)

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income increased primarily due to the growth of in-force insurance, higher overhead expenses and the impact of foreign exchange from strengthening of the Japanese yen against the U.S. dollar.

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TABLE OF CONTENTS      

Item 2 / results of operations / CONSUMER INSURANCE

Life Year-to-Date Results

Pre-tax operating income increased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, due to a lower net negativepositive adjustment from the review and update of actuarial assumptions, more favorable mortality experience, which was $29 million compared to a $92 million net negative adjustment in the prior year;

higher policy fee income primarily from growth in universal life; and

lower general operating expenses primarily due to the strategic decision to refocus the group benefits business, reductions in domestic life acquisition expenses and lower employee-related expenses higher yield enhancement income and an IBNR reserve release, partially offset byon international life.  

Partially offsetting these increases was lower net investment income onfrom alternative investments. investments due to continued impact of the reduction in the overall size of the hedge fund portfolio and lower income from yield enhancements, partially offset by higher commercial mortgage loan prepayments.

Life Insurance Pre-Tax Operating Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income increased primarily due to:

a net positive adjustment from the review and update of actuarial assumptions compared to a net negative adjustment in the nine-month period ended September 30, 2016 benefited from a $25 million reductionprior year as discussed above;

lower general operating expenses primarily due to the strategic decision to refocus the group benefits business and reductions in the reserve for IBNR death claims related to enhanced claims practices, which was recorded in the three-month period ended March 31, 2016. Excludingdomestic life acquisition expenses;

excluding the impact of the actuarial assumption updates, lower DAC amortization increased, which was largely offset by higher amortization of unearned revenue reserves reported in policy fees, and by reserve releases associated with increased lapses of term and traditional life products.

Net investment income decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to lapse assumptions on international life;

lower policyholder benefit expense due to favorable loss experience and a reserve reduction in group benefits business;

higher policy fee income primarily from growth in universal life; and

higher net investment income reflecting higher commercial loan prepayments and higher returns on alternative investments, partially offset by higher yield enhancement income, which included bond call and tender income. See Investments – Life Insurance Companies for additional discussiona reduction in the overall size of the investment strategy, asset-liability management processhedge fund portfolio and invested assets of our Life Insurance Companies, which include the invested assets of the Life business.

General operating expenses increased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to an increase in international expenses in Japan andlower income from Laya Healthcare, which was acquired on March 31, 2015, as well as interest expense related to real estate of consolidated partnerships; the latter was more than offset by related investment income. Expenses in Japan increased primarily due to the growth of in-force insurance, higher overhead expenses and the impact of foreign exchange from strengthening of the Japanese yen against the U.S. dollar. The increases were partially offset by a decrease in domestic operating expenses in the nine-month period ended September 30, 2016 compared to the same period in the prior year, principally driven by lower employee-related expenses.yield enhancements.

Spread Management

Disciplined pricing on new business is used to pursue new sales of life products at targeted net investment spreads in the current interest rate environment. Life has an active product management process to ensure that new business offerings appropriately reflect the current interest rate environment. To the extent that Life cannot achieve targeted net investment spreads on new business, products are re-priced or no longer sold. Additionally, where appropriate, existing products with higher minimum rate guarantees have been re-filed with lower crediting rates, as permitted under state insurance laws for new sales. Universal life insurance interest rate guarantees are generally two to three percent on new non-indexed products and zero to two percent on new indexed products, and are designed to meet targeted net investment spreads.

In-force Management. Crediting rates for in-force policies are adjusted in accordance with contractual provisions that were designed to allow crediting rates to be reset subject to minimum crediting rate guarantees.

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Item 2 / results of operations / CONSUMER INSURANCE

The following table presents universal life account values by contractual minimum guaranteed interest rate and current crediting rates:

 

Current Crediting Rates

September 30, 2016

 

 

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

 

Universal life insurance

 

 

 

 

 

 

 

 

 

1%

$

-

$

-

$

6

$

6

 

> 1% - 2%

 

31

 

192

 

233

 

456

 

> 2% - 3%

 

567

 

381

 

1,391

 

2,339

 

> 3% - 4%

 

2,004

 

582

 

935

 

3,521

 

> 4% - 5%

 

3,827

 

207

 

-

 

4,034

 

> 5% - 5.5%

 

321

 

-

 

-

 

321

 

Total

$

6,750

$

1,362

$

2,565

$

10,677

 

Percentage of total

 

63

%

13

%

24

%

100

%

Life Premiums and Deposits

AIG | Third Quarter 2017 Form 10-Q120


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

Life Insurance GAAP Premiums and Premiums and Deposits

Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life, and group benefit policies. Premiums increased in the three- and nine-month periods ended September 30, 2017 compared to the same period in the prior year, excluding the effect of foreign exchange, primarily due to assumed premiums related to business distributed by Laya Healthcare and growth in term life and international life and health, partially offset by lower premiums on group benefits policies.

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 premiums and deposits to GAAP premiums:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Premiums

$

384

$

349

 

$

1,168

$

1,068

Deposits

 

371

 

355

 

 

1,120

 

1,050

Other

 

180

 

176

 

 

504

 

490

Premiums and deposits

$

935

$

880

 

$

2,792

$

2,608

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

Life Insurance Premiums and Deposits

Three Months Ended September 30,

(in millions)

Premiums and deposits for Life 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 premiums and deposits to GAAP premiums:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Premiums and deposits

$

1,363

$

1,223

 

$

3,931

$

3,695

Deposits

 

(375)

 

(369)

 

 

(1,111)

 

(1,127)

Other

 

(197)

 

(179)

 

 

(531)

 

(483)

Premiums

$

791

$

675

 

$

2,289

$

2,085

Life premiums grew 14 percent and 6by six percent, excluding the effect of foreign exchange, in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year, principally driven by assumed premiums related to business distributed by Laya Healthcare and growth in universal life, term life and international life and health, sales. The growth partially offset by lower premiums on group benefits policies.

Life Insurance Premiums and Deposits

Nine Months Ended September 30,

(in premiums resulted in growth in premiumsmillions)

Premiums and deposits of 10 percent and 6grew by eight percent, excluding the effect of foreign exchange, principally driven by assumed premiums related to business distributed by Laya Healthcare and growth in the three-universal life, term life and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year.international life and health, partially offset by lower premiums on group benefits policies.

AIG | Third Quarter 2017 Form 10-Q121


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

Personal Insurance Results

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Underwriting results:

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

Net premiums written

$

2,807

$

2,922

 

(4)

%

 

$

8,321

$

8,655

 

(4)

%

(Increase) decrease in unearned premiums

 

16

 

(4)

 

NM

 

 

 

10

 

(119)

 

NM

 

Net premiums earned

 

2,823

 

2,918

 

(3)

 

 

 

8,331

 

8,536

 

(2)

 

Losses and loss adjustment expenses incurred

 

1,814

 

1,643

 

10

 

 

 

4,750

 

4,686

 

1

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

510

 

554

 

(8)

 

 

 

1,529

 

1,545

 

(1)

 

Other acquisition expenses

 

215

 

215

 

-

 

 

 

639

 

677

 

(6)

 

Total acquisition expenses

 

725

 

769

 

(6)

 

 

 

2,168

 

2,222

 

(2)

 

General operating expenses

 

441

 

431

 

2

 

 

 

1,229

 

1,317

 

(7)

 

Underwriting income (loss)

 

(157)

 

75

 

NM

 

 

 

184

 

311

 

(41)

 

Net investment income

 

86

 

73

 

18

 

 

 

287

 

199

 

44

 

Pre-tax operating income (loss)

$

(71)

$

148

 

NM

%

 

$

471

$

510

 

(8)

%

Loss ratio

 

64.3

 

56.3

 

8.0

 

 

 

57.0

 

54.9

 

2.1

 

Acquisition ratio

 

25.7

 

26.4

 

(0.7)

 

 

 

26.0

 

26.0

 

-

 

General operating expense ratio

 

15.6

 

14.8

 

0.8

 

 

 

14.8

 

15.4

 

(0.6)

 

Expense ratio

 

41.3

 

41.2

 

0.1

 

 

 

40.8

 

41.4

 

(0.6)

 

Combined ratio

 

105.6

 

97.5

 

8.1

 

 

 

97.8

 

96.3

 

1.5

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(10.6)

 

(0.9)

 

(9.7)

 

 

 

(3.9)

 

(1.4)

 

(2.5)

 

Prior year development

 

-

 

1.1

 

NM

 

 

 

-

 

1.5

 

NM

 

Accident year loss ratio, as adjusted

 

53.7

 

56.5

 

(2.8)

 

 

 

53.1

 

55.0

 

(1.9)

 

Accident year combined ratio, as adjusted

 

95.0

 

97.7

 

(2.7)

 

 

 

93.9

 

96.4

 

(2.5)

 

The following table presents Personal Insurance net premiums written, 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)

 

2017

 

2016

 

U.S. dollars

 

 

Original currency

 

 

 

2017

 

2016

 

U.S. dollars

 

 

Original currency

 

Net premiums written

$

2,807

$

2,922

 

(4)

%

 

(2)

%

 

$

8,321

$

8,655

 

(4)

%

 

(3)

%

AIG | Third Quarter 2017 Form 10-Q122


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ITEM 2 |Business Segment Operations | Consumer Insurance

The following tables present Personal Insurance accident year catastrophes and severe losses by geography(a) and the number of events:

Catastrophes(b)

 

# of

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Events

 

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

80

$

-

$

-

$

-

$

80

Windstorms and hailstorms

5

 

 

195

 

11

 

-

 

-

 

206

Earthquakes

1

 

 

11

 

-

 

-

 

-

 

11

Total catastrophe-related charges

6

 

$

286

$

11

$

-

$

-

$

297

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

1

 

$

5

$

-

$

-

$

-

$

5

Windstorms and hailstorms

6

 

 

5

 

19

 

-

 

2

 

26

Earthquakes

-

 

 

(2)

 

-

 

-

 

(2)

 

(4)

Total catastrophe-related charges

7

 

$

8

$

19

$

-

$

-

$

27

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

80

$

-

$

-

$

-

$

80

Windstorms and hailstorms

14

 

 

219

 

11

 

-

 

-

 

230

Tropical cyclone

1

 

 

2

 

-

 

-

 

3

 

5

Earthquakes

1

 

 

11

 

-

 

-

 

-

 

11

Total catastrophe-related charges

16

 

$

312

$

11

$

-

$

3

$

326

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

3

 

$

8

$

-

$

1

$

-

$

9

Windstorms and hailstorms

16

 

 

40

 

21

 

-

 

2

 

63

Earthquakes

2

 

 

12

 

23

 

-

 

7

 

42

Other

1

 

 

-

 

-

 

1

 

-

 

1

Total catastrophe-related charges

22

 

$

60

$

44

$

2

$

9

$

115

(a) Geography shown in the table represents where the ultimate liability resides, after intercompany reinsurance agreements, and is not necessarily indicative of where the catastrophe or severe loss events have occurred.  This presentation follows our geography modules.  For further discussion on our geography modules seeMD&A – Executive Summary

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

(c) Flooding events reported in the three- and nine-month periods ended September 30, 2017 are a subset of windstorm events.

Severe Losses(d)

 

# of

 

 

 

 

 

 

 

 

 

 

(in millions)

Events

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

1

$

11

$

-

$

-

$

-

$

11

2016

-

$

-

$

-

$

-

$

-

$

-

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

2

$

20

$

-

$

-

$

8

$

28

2016

1

$

16

$

-

$

-

$

-

$

16

(d)            Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.

Business and Financial Highlights

Personal Insurance operating results decreased in the three- and nine-month periods ended September 30, 2017 compared to the same periods in 2016, driven by multiple catastrophe events in the current quarter. Personal Insurance continued its execution of strategic and portfolio actions while implementing underwriting actions and maintaining pricing discipline. Although market competition in the Personal Insurance industry has intensified, the accident year loss ratio, as adjusted, continued to reflect the underwriting quality, portfolio diversity, and low volatility of short-tailed risk in our Personal Insurance book.

AIG | Third Quarter 2017 Form 10-Q123


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Personal Insurance Results

The following table presents Personal Insurance results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

2,919

$

3,016

 

(3)

%

 

$

8,653

$

8,861

 

(2)

%

Increase in unearned premiums

 

(4)

 

(197)

 

98

 

 

 

(106)

 

(437)

 

76

 

Net premiums earned

 

2,915

 

2,819

 

3

 

 

 

8,547

 

8,424

 

1

 

Losses and loss adjustment expenses incurred

 

1,640

 

1,506

 

9

 

 

 

4,687

 

4,631

 

1

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

548

 

504

 

9

 

 

 

1,535

 

1,481

 

4

 

Other acquisition expenses

 

215

 

296

 

(27)

 

 

 

690

 

868

 

(21)

 

Total acquisition expenses

 

763

 

800

 

(5)

 

 

 

2,225

 

2,349

 

(5)

 

General operating expenses

 

401

 

503

 

(20)

 

 

 

1,227

 

1,516

 

(19)

 

Underwriting income (loss)

 

111

 

10

 

NM

 

 

 

408

 

(72)

 

NM

 

Net investment income

 

67

 

52

 

29

 

 

 

171

 

178

 

(4)

 

Pre-tax operating income

$

178

$

62

 

187

%

 

$

579

$

106

 

446

%

NET PREMIUMS WRITTEN

(in millions

Pre-Tax oPERATING INCOME

(in millions

Personal Insurance Quarterly ResultsPre-Tax Operating Income (Loss)

Pre‑taxThree Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income decreased due to:

increased inhigher catastrophe losses driven by hurricanes Harvey, Irma and Maria, as well as other catastrophes including the three-month period ended September 30, 2016 compared to the same period in the prior year due to improved underwriting results. The underwriting results reflected strategic actions to reduce expensesrecent Mexico earthquake; and refocus direct marketing activities, partially offset by higher accident year losses in the current quarter. Net favorable prior year loss reserve development was $34 million in the three-month period ended September 30, 2016, compared to $46 million in the same period in the prior year. Catastrophe losses were $26 million in the three-month period ended September 30, 2016, compared to $58 million in the same period in the prior year.

Acquisition expenses decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year due to a decrease in non-deferred direct marketing expenses. The non-deferred direct marketing expenses,

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excluding commissions, for the three-month period ended September 30, 2016, were approximately $34 million, and decreased by approximately $36 million from the same period in the prior year.

General operating expenses decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to lower employee-related expenses arising from organizational realignment activities together with lower strategic investment expenditures.

Net investment income increased in the three-month period ended September 30, 2016, compared to the same period in the prior year due to higher income on interest and alternative investment returns.

See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.

Personal Insurance Year-to-Date Results

Pre‑tax operating income increased in the nine-month period ended September 30, 2016 compared to the same period in the prior year due to improved underwriting results, partially offset by a slight decrease in net investment income. The improvement in the underwriting results primarily reflected strategic actions to reduce expenses and refocus direct marketing activities partially offset by higher accident year losses. Net favorable prior year loss reserve development was $121 million in the nine-month period ended September 30, 2016, compared to $59 million in the same period in the prior year. Catastrophe losses were $114 million in the nine-month period ended September 30, 2016, compared to $135 million in the same period in the prior year.

Acquisition expenses decreased in the nine-month period ended September 30, 2016, compared to the same period in the prior year due to a decrease in non-deferred direct marketing expenses. The non-deferred direct marketing expenses, excluding commissions, for the nine-month period ended September 30, 2016, were approximately $114 million, and decreased by approximately $105 million from the same period in the prior year.

General operating expenses decreased in the nine-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to lower employee-related expenses arising from organizational realignment activities together with lower strategic investment expenditures.

Net investment income decreased in the nine-month period ended September 30, 2016, compared to the same period in the prior year due to lower income on alternative investments, partially offset by higher interest income.

See MD&A — Investments for additional information on the Non-Life Insurance Companies invested assets, investment strategy, and asset-liability management process.

Personal Insurance Net Premiums Written

The following table presents Personal Insurance net premiums written by major line of business:

 

Three Months Ended

 

Percentage Change in

 

 

Nine Months Ended

 

Percentage Change in

 

 

September 30,

 

U.S.

 

 

Original

 

 

September 30,

 

U.S.

 

 

Original

 

(in millions)

 

2016

 

2015

 

dollars

 

 

Currency

 

 

 

2016

 

2015

 

dollars

 

 

Currency

 

Accident and Health

$

1,209

$

1,320

 

(8)

%

 

(11)

%

 

$

3,736

$

3,906

 

(4)

%

 

(4)

%

Personal Lines

 

1,710

 

1,696

 

1

 

 

(2)

 

 

 

4,917

 

4,955

 

(1)

 

 

-

 

Total Personal Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net premiums written

$

2,919

$

3,016

 

(3)

%

 

(6)

%

 

$

8,653

$

8,861

 

(2)

%

 

(2)

%

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Personal Insurance net premiums written by line of business

(in millions)

Personal Insurance Quarterly and Year-to-Date Net Premiums Written

Personal Insurance net premiums written decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year both on a reported basis and after excluding the effect of foreign exchange.

 The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which excludes the effect of foreign exchange.

Accident and Health net premiums written decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to continued underwriting actions across our businesses to strengthen our portfolio and maintain pricing discipline, together with lower sales as a result of refocusing our direct marketing activities.

Personal Lines net premiums written decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year reflecting decreases in the automobile and personal property business in Japan, partially offset by an increase in personal property business in the U.S. The decrease in the nine-month period ended September 30, 2016 compared to the same period in the prior year was primarily due to decreases in the automobile and personal property business in Japan, including the impact of a duration restriction on long-term fire insurance put in place in the fourth quarter of 2015, and in warranty service programs in the U.S. This was partially offset by an increase in the U.S. due to new business sales in the AIG Private Client Group including changes to optimize our reinsurance structure to retain more favorable risks, while continuing to manage aggregate exposure. 

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Personal Insurance Net Premiums Written by Region

The following table presents Personal Insurance net premiums written by region:

 

Three Months Ended

 

Percentage

 

 

Percentage

 

 

Nine Months Ended

 

Percentage

 

Percentage

 

 

September 30,

 

Change in

 

 

Change in

 

 

September 30,

 

Change in

 

Change in

 

(in millions)

 

2016

 

2015

 

U.S. dollars

 

 

Original Currency

 

 

 

2016

 

2015

 

U.S. dollars

 

Original Currency

 

Americas

$

961

$

1,047

 

(8)

%

 

(2)

%

 

$

2,894

$

2,906

 

-

%

 

5

%

Asia Pacific

 

1,543

 

1,523

 

1

 

 

(9)

 

 

 

4,393

 

4,492

 

(2)

 

 

(6)

 

EMEA

 

415

 

446

 

(7)

 

 

(4)

 

 

 

1,366

 

1,463

 

(7)

 

 

(3)

 

Total net premiums written

$

2,919

$

3,016

 

(3)

%

 

(6)

%

 

$

8,653

$

8,861

 

(2)

%

 

(2)

%

Personal insurance NET PREMIUMS WRITTEN by Region

(in millions)

The following paragraphs discuss the changes in net premiums written on a constant dollar basis, which excludes the effect of foreign exchange.

The Americas net premiums written decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to a decrease in Accident and Health and warranty service programs, partially offset by growth in personal property and automobile businesses.  Net premiums written in the nine-month period ended September 30, 2016 increased reflecting growth in personal property and automobile businesses and the reinsurance optimization discussed above partially offset by a decrease in Accident and Health business.

Asia Pacific net premiums written decreased in the three- and nine-month periods ended September 30, 2016, compared to the same periods in the prior year, primarily due to a decrease in Accident and Health business and decreased production in personal property reflecting the long-term fire insurance duration restriction in Japan discussed above.

EMEA net premiums written decreased in the three- and nine-month periods ended September 30, 2016 compared to the same periods in the prior year, primarily due to a decrease in Accident and Health business, partially offset by an increase in warranty service programs.

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Personal Insurance Underwriting Ratios

The following tables present the Personal Insurance combined ratios based on GAAP data and reconciliation to the accident year combined ratio, as adjusted:

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Increase

 

September 30,

 

Increase

 

2016

 

2015

 

(Decrease)

 

2016

 

2015

 

(Decrease)

Loss ratio

56.3

 

53.4

 

2.9

 

54.8

 

55.0

 

(0.2)

Catastrophe losses and reinstatement premiums

(0.9)

 

(2.0)

 

1.1

 

(1.3)

 

(1.6)

 

0.3

Prior year development net of premium adjustments

1.1

 

1.6

 

(0.5)

 

1.4

 

0.7

 

0.7

Accident year loss ratio, as adjusted

56.5

 

53.0

 

3.5

 

54.9

 

54.1

 

0.8

Acquisition ratio

26.2

 

28.4

 

(2.2)

 

26.0

 

27.9

 

(1.9)

General operating expense ratio

13.8

 

17.8

 

(4.0)

 

14.4

 

18.0

 

(3.6)

Expense ratio

40.0

 

46.2

 

(6.2)

 

40.4

 

45.9

 

(5.5)

Combined ratio

96.3

 

99.6

 

(3.3)

 

95.2

 

100.9

 

(5.7)

Catastrophe losses and reinstatement premiums

(0.9)

 

(2.0)

 

1.1

 

(1.3)

 

(1.6)

 

0.3

Prior year development net of premium adjustments

1.1

 

1.6

 

(0.5)

 

1.4

 

0.7

 

0.7

Accident year combined ratio, as adjusted

96.5

 

99.2

 

(2.7)

 

95.3

 

100.0

 

(4.7)

Personal Insuranceratios 

Three Months Ended September 30,

Nine Months Ended September 30,

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The following tables present Personal Insurance accident year catastrophe and severe losses by region and the number of events:

Catastrophes (a)

 

# of

 

Asia

 

 

 

(in millions)

Events

Americas

Pacific

EMEA

 

Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Flooding

1

$

5

$

-

$

-

$

5

Windstorms and hailstorms

6

 

6

 

19

 

-

 

25

Earthquakes

-

 

(4)

 

-

 

-

 

(4)

Total catastrophe-related charges

7

$

7

$

19

$

-

$

26

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

Windstorms and hailstorms

2

$

4

$

33

$

-

$

37

Wildfire

1

 

1

 

-

 

-

 

1

Tropical cyclone

1

 

-

 

20

 

-

 

20

Total catastrophe-related charges

4

$

5

$

53

$

-

$

58

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Flooding

3

$

8

$

-

$

2

$

10

Windstorms and hailstorms

16

 

38

 

24

 

-

 

62

Earthquakes

2

 

20

 

22

 

-

 

42

Total catastrophe-related charges

21

$

66

$

46

$

2

$

114

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

Flooding

2

$

4

$

-

$

-

$

4

Windstorms and hailstorms

9

 

77

 

33

 

-

 

110

Wildfire

1

 

1

 

-

 

-

 

1

Tropical cyclone

1

 

-

 

20

 

-

 

20

Total catastrophe-related charges

13

$

82

$

53

$

-

$

135

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

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Severe Losses(b)

 

# of

 

Asia

 

 

 

(in millions)

Events

Americas

Pacific

EMEA

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

2016

-

$

-

$

-

$

-

$

-

2015

-

$

-

$

-

$

-

$

-

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

2016

1

$

16

$

-

$

-

$

16

2015

1

$

12

$

-

$

-

$

12

(b) Severe losses are defined as non-catastrophe individual first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.

Personal Insurance Quarterly and Year-to-Date Insurance Ratios

The combined ratio decreased by 3.3 points and 5.7 points in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year, principally driven by an improvement in the expense ratio. The accident year combined ratio, as adjusted, decreased by 2.7 points and 4.7 points in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year principally driven by improvement in the expense ratio.

The loss ratio increased by 2.9 points in the three-month period ended September 30, 2016 compared to the same period in the prior year. The increase reflected higher accident year losses and lower net favorable prior year loss reserve developmentdevelopment.

Partially offsetting these decreases were:

lower accident year losses; and

higher net investment income from alternative investments partially offset by lower catastrophe losses. The decrease in the loss ratio of 0.2 points in the nine-month period endedinterest and dividends due to portfolio rebalancing.

Personal Insurance Pre-Tax Operating Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 compared to the same period in the prior year, was primarilyComparison

Pre-tax operating income decreased due to to:

higher catastrophe losses;

a lower earned premium base; and

lower net favorable prior year loss reserve development and lower catastrophe losses, more thandevelopment.

Partially offsetting higher accident year losses.

The accident year loss ratio, as adjusted, increased by 3.5 points in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to a higher number of large but not severe losses, particularly in the U.S. business.  The accident year loss ratio, as adjusted, increased by 0.8 points in the nine-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to higher accident year losses in the Accident and Health business.

The acquisition ratio decreased by 2.2 points and 1.9 points in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year, which reflected lower Accident and Health direct marketing expenses as we refocused our activities.

The general operating expense ratio decreased by 4.0 points and 3.6 points in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year, primarily due to lower employee-related expenses arising from organization realignment activities together with lower strategic investment expenditures.

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CORPORATE AND OTHER

Corporate and Other Results

The following table presents AIG’s Corporate and Other results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Corporate and Other pre-tax operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in pre-tax operating earnings of AerCap(a)

$

-

$

-

 

NM

%

 

$

-

$

255

 

NM

%

Fair value of PICC Investment(b)

 

28

 

(195)

 

NM

 

 

 

(91)

 

22

 

NM

 

Income from other assets, net(c)

 

363

 

15

 

NM

 

 

 

440

 

1,088

 

(60)

 

Corporate general operating expenses

 

(276)

 

(133)

 

(108)

 

 

 

(859)

 

(653)

 

(32)

 

Interest expense

 

(261)

 

(266)

 

2

 

 

 

(779)

 

(849)

 

8

 

Institutional Markets

 

(526)

 

84

 

NM

 

 

 

(410)

 

382

 

NM

 

Run-off insurance Lines

 

22

 

(54)

 

NM

 

 

 

(111)

 

37

 

NM

 

United Guaranty

 

130

 

133

 

(2)

 

 

 

401

 

394

 

2

 

Consolidation and eliminations

 

(2)

 

20

 

NM

 

 

 

(2)

 

21

 

NM

 

Total Corporate and Other pre-tax operating income (loss)

$

(522)

$

(396)

 

(32)

%

 

$

(1,411)

$

697

 

NM

%

(a) Represents our share of AerCap’s pre-tax operating income, which excludes certain post-acquisition transaction expenses incurred by AerCap in connection with its acquisition of ILFC and the difference between expensing AerCap’s maintenance rights assets over the remaining lease term as compared to the remaining economic life of the related aircraft.

(b) During the first quarter of 2015, Non-Life Insurance Companies sold a portion of their PICC Investment to AIG Parent.

(c)  Consists of the results of investments held by AIG Parent to support various corporate needs as well as the remaining positions of AIGFP, life settlements, real estate, equipment leasing and lending and other secured lending investments held by AIG Parent and certain subsidiaries.

Corporate and Other Quarterly Results

Corporate and Other reported a higher pre-tax operating loss in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to a pre-tax operating loss in Institutional Markets, partially offset by fair value gains on our PICC Investment compared to fair value losses in the same period in the prior year, and an increase in Income from other assets, net. The pre-tax operating loss in Institutional Markets was primarily due to loss recognition expense on certain payout annuities from the update of actuarial assumptions. Income from other assets, net, increased primarily due to higher fair value gains on ABS CDOs and credit valuation adjustments on assets for which the fair value option was elected. In addition, the three-month period ended September 30, 2015 included a pension curtailment credit reflected in Corporate general operating expenses.

Run-off insurance lines reported underwriting income in the three-month period ended September 30, 2016 compared to underwriting loss in the same period in the prior year, primarily driven by lower net adverse prior year loss reserve development as well as a decrease in net loss reserve discount charge related to excess workers’ compensation business largely driven by interest rate movements, partially offset by a reserve increase in life insurance run-off lines.

Corporate and Other Year-to-Date Results

Corporate and Other reported a pre-tax operating loss in the nine-month period ended September 30, 2016, compared to pre-tax operating income in the same period in the prior year, primarily due to a pre-tax operating loss in Institutional Markets and a decline in Income from other assets, net. The pre-tax operating loss in Institutional Markets was primarily due to loss recognition expense on certain payout annuities from the update of actuarial assumptions. Income from other assets, net decreased primarily due to fair value losses on ABS CDOs compared to fair value gains in the same period in the prior year and lower credit valuation adjustments on assets for which the fair value option was elected and gains recognized in the nine-month period ended September 30, 2015 upon the unwinding of certain positions. The pre-tax operating results also reflected fair value losses on our PICC Investment compared to fair value gains in the same period in the prior year. In addition, the

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Item 2 / results of operations / CORPORATE AND OTHER

nine-month period ended September 30, 2015 included our share of AerCap’s pre-tax income, which was accounted for under the equity method through the date of sale of most of our shares in the second quarter of 2015 and a pension curtailment credit. These declines were partially offset by lower interest expense from ongoing liability management activities described in Liquidity and Capital Resources.

Run-off insurance lines reported a pre-tax operating loss in the nine-month period ended September 30, 2016 compared to pre-tax operating income in the same period in the prior year primarily due to higher underwriting losses during the nine-month period ended September 30, 2016 compared to the same period in the prior year, partially offset by an increase in the allocation of net investment income. The decrease in underwriting results primarily reflected:these decreases were:

     excess workers’ compensation net loss reserve discount charges in the nine-month period ended September 30, 2016 comparedlower accident year losses;

strategic actions to a benefit in the same period in the prior year, reflecting a decrease in the reserve discount curve consisting of Treasury rates partially offset by an increase in credit spreads. See Insurance Reserves – Non-Life Insurance Companies – Discounting of Reserves for further discussion;reduce expenses; and

     higher accident year losses, primarilynet investment income on alternative investments.

AIG | Third Quarter 2017 Form 10-Q124


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ITEM 2 |Business Segment Operations | Consumer Insurance

Personal Insurance Net Premiums Written

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

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

lower production in automobile and personal property; and

higher ceded premiums related to the additional layer of coverage added to the North American catastrophe reinsurance cover for 2017.

These decreases were partially offset by higher production growth in the AIG private client group business, Accident and Health, and warranty service programs.

Personal Insurance Net Premiums Written

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Net premiums written decreased, excluding the impact of foreign exchange, reflecting the transfersfollowing:

decreased production in Accident and Health including increased reinsurance purchases on certain blocks of certain casualty lines, including environmental liability, excess casualtybusiness to manage aggregate exposure;

lower automobile and healthcarepersonal property production in our Japan business; and

higher ceded premiums due to the lower attachment point and the additional layer of coverage that ceased to be offeredon our catastrophe reinsurance programs.

These decreases were partially offset by Commercial Insurance;production growth in the AIG private client group business.

AIG | Third Quarter 2017 Form 10-Q125


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ITEM 2 |Business Segment Operations | Consumer Insurance

Personal Insurance Combined Ratios

Three Months Ended September 30,

Quarterly 2017 and 2016 Comparison

The increase in combined ratio primarily reflected a higher loss ratio.

The higher loss ratio was driven by:

higher losses arising from multiple catastrophe events; and

     lower net adversefavorable prior year loss reserve development. 

The loss ratio increase was partially offset by improved accident year losses.

The expense ratio remained flat due to a higher general operating expense ratio almost entirely offset by a lower acquisition ratio.

Personal Insurance Combined Ratios

Nine Months Ended September 30,

Year-to-Date 2017 and 2016 Comparison

The increase in combined ratio reflected a higher loss ratio, partially offset by improvement in expense ratio.

The increase in loss ratio was driven by:

higher catastrophe losses; and

lower net favorable prior year loss reserve development.

In addition,The loss ratio increase was partially offset by improved accident year losses.

The improvement in the nine-month period ended September 30, 2016, the underwriting loss included an $86 million out of period charge that was recorded in the three-month period ended June 30, 2016. The out of period charge, which reduced net earned premium, was relatedexpense ratio reflected continued strategic actions to the substantiation of an opening balance brought forward from an earlier ledger conversion initiative prior to 2011. The inclusion of this adjustment in Corporate and Other is consistent with how our results of operations are reported to our chief operating decision makers.reduce expenses.

Institutional Markets Results

The following table presents Institutional Markets results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

103

$

115

 

(10)

%

 

$

553

$

854

 

(35)

%

Policy fees

 

51

 

49

 

4

 

 

 

152

 

148

 

3

 

Net investment income

 

445

 

414

 

7

 

 

 

1,208

 

1,372

 

(12)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

993

 

363

 

174

 

 

 

1,931

 

1,603

 

20

 

Interest credited to policyholder account balances

 

102

 

102

 

-

 

 

 

304

 

306

 

(1)

 

Amortization of deferred policy acquisition costs

 

2

 

1

 

100

 

 

 

3

 

2

 

50

 

Other acquisition expenses

 

9

 

9

 

-

 

 

 

27

 

24

 

13

 

General operating expenses

 

19

 

19

 

-

 

 

 

58

 

57

 

2

 

Pre-tax operating income (loss)

$

(526)

$

84

 

NM

%

 

$

(410)

$

382

 

NM

%

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Item 2 / results of operations / CORPORATE AND OTHER

INSTITUTIONAL MARKETS pre-tax OPERATING INCOME (Loss) (in millions)

AIG | Third Quarter 2017 Form 10-Q126


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ITEM 2 |Business Segment Operations| Other Operations

Other Operations

The following table presents Other Operations results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Pre-tax operating income (loss) by activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United Guaranty

$

-

$

130

 

NM

%

 

$

-

$

401

 

NM

%

Institutional Markets

 

79

 

69

 

14

 

 

 

204

 

190

 

7

 

Fuji Life

 

-

 

7

 

NM

 

 

 

43

 

3

 

NM

 

Parent and Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate General operating expenses

 

(172)

 

(167)

 

(3)

 

 

 

(563)

 

(514)

 

(10)

 

Interest expense

 

(243)

 

(248)

 

2

 

 

 

(729)

 

(740)

 

1

 

Other income, net

 

49

 

45

 

9

 

 

 

210

 

95

 

121

 

Total Parent and Other

 

(366)

 

(370)

 

1

 

 

 

(1,082)

 

(1,159)

 

7

 

Pre-tax operating loss before eliminations

 

(287)

 

(164)

 

(75)

 

 

 

(835)

 

(565)

 

(48)

 

Consolidation, eliminations and other adjustments

 

(1)

 

(6)

 

83

 

 

 

75

 

-

 

NM

 

Pre-tax operating loss

$

(288)

$

(170)

 

(69)

%

 

$

(760)

$

(565)

 

(35)

%

Quarterly 2017 and 2016 Comparison

Pre-tax operating loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.

Institutional Markets pre-tax operating income increased due to favorable mortality experience.

Parent and Other pre-tax operating loss was flat compared to the same period in the prior year due to higher gains on securities where we elected the fair value option, offset by higher corporate general operating expenses.

year-to-date 2017 and 2016 Comparison

Pre-tax operating loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.

Institutional Markets pre-tax operating income increased due to higher net spreads driven by growth in business.

Parent and Other pre-tax operating loss decreased as a result of gains on securities where we elected the fair value option, partially offset by higher general operating expenses related to one time payments for recent executive leadership changes.

Fuji Life pre-tax operating results increased primarily as a result of increases in underwriting income as a result of new products launched during 2016 as well as growth within existing product lines. Fuji Life was sold on April 30, 2017.

AIG | Third Quarter 2017 Form 10-Q127


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ITEM 2 |Business Segment Operations| Legacy Portfolio

Legacy Portfolio

Legacy Insurance Lines represent exited or discontinued product lines, policy forms or distribution channels.

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

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

Legacy Investments include investment classes that we have placed into run-off (life settlements, Legacy Global Real Estate and the Direct Investment book) and equity-like securities with high yield, high-risk characteristics.

BUSINESSSTRATEGY 

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

Third party and affiliated reinsurance and retrocessions to improve capital efficiency

Commutations of assumed reinsurance and direct policy buy-backs

Enhance insured policyholder options and claims resolution strategies

Enhanced asset liability management and expense management

For Legacy Investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while sourcing for our insurance companies attractive assets for their portfolios. Where the asset is under our sole control, we expect to achieve this through a combination of unaffiliated and affiliated sales and securitizations. Where the asset is not under our sole control, there are fewer options as we may, for example, have fiduciary duty obligations to joint venture partners (such as in our Legacy Global Real Estate book).

AIG | Third Quarter 2017 Form 10-Q128


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ITEM 2 |Business Segment Operations| Legacy Portfolio

LEGACY PORTFOLIO RESULTS

The following table presents Legacy Portfolio results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

136

$

180

 

(24)

%

 

$

449

$

526

 

(15)

%

Policy fees

 

38

 

29

 

31

 

 

 

105

 

103

 

2

 

Net investment income

 

690

 

810

 

(15)

 

 

 

2,142

 

2,153

 

(1)

 

Other income (loss)

 

149

 

293

 

(49)

 

 

 

539

 

221

 

144

 

Total operating revenues

 

1,013

 

1,312

 

(23)

 

 

 

3,235

 

3,003

 

8

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses and loss adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses incurred

 

500

 

1,137

 

(56)

 

 

 

1,470

 

2,194

 

(33)

 

Interest credited to policyholder account balances

 

61

 

73

 

(16)

 

 

 

181

 

211

 

(14)

 

Amortization of deferred policy acquisition costs

 

28

 

21

 

33

 

 

 

70

 

82

 

(15)

 

General operating and other expenses

 

105

 

110

 

(5)

 

 

 

352

 

373

 

(6)

 

Interest expense

 

33

 

70

 

(53)

 

 

 

103

 

237

 

(57)

 

Total benefits and expenses

 

727

 

1,411

 

(48)

 

 

 

2,176

 

3,097

 

(30)

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Pre-tax operating income (loss) by type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Casualty Run-Off Insurance Lines

$

63

$

68

 

(7)

%

 

$

207

$

94

 

120

%

Life Insurance Run-Off Lines

 

79

 

(510)

 

NM

 

 

 

308

 

(356)

 

NM

 

Legacy Investments

 

144

 

343

 

(58)

 

 

 

544

 

168

 

224

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Business and Financial Highlights

In the nine-month period ended September 30, 2017, the Legacy Investment portfolio executed several transactions with external parties for total consideration of approximately $676 million, which included sales of a portion of our life settlements portfolio with a face value (death benefits) of approximately $1.9 billion, resulting in a loss on the sale of $123 million. The majority of the consideration received was used to pay down intercompany loans and notes with affiliated insurance companies. In addition, the Legacy Investment portfolio returned approximately $1.0 billion of cash proceeds to AIG Parent in the nine-month period ended September 30, 2017, including $191 million from the sale of an AIG-sponsored fund that occurred in the fourth quarter of 2016.

On September 26, 2017, we signed a Purchase and Sale Agreement to sell the remaining life settlements contracts. The sale was completed on November 1, 2017. As a result, an impairment charge of $273 million was recorded in net realized capital losses in the third quarter of 2017 to write down the contracts to their fair market value.

AIG | Third Quarter 2017 Form 10-Q129


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ITEM 2 |Business Segment Operations| Legacy Portfolio

Institutional Markets Quarterly ResultsLegacy Portfolio Pre-Tax Operating Income (Loss)

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income decreased to a loss in the three-month period ended September 30, 2016 compared to income in the same period in the prior year, primarily increased due to higher Legacy Life pre-tax operating income due to significantly lower loss recognition expense on certain payout annuities from the update of actuarial assumptions, partially offset by higher net investment income on alternative investments and yield enhancements. Excluding the impact of the loss recognition expense, variances in premiums and benefits and expenses were primarily due to premiums received and future policy benefit reserves established from the sale of terminal funding annuities and structured settlements. The decrease in premiums, compared to the same period in the prior year, was due to lower premiums from structured settlements.

The update of actuarial assumptions resulted in $622 million of loss recognition expense on structured settlement and terminal funding payout annuities, which drove the pre-tax operating loss in the three-month period ended September 30, 2016. The loss recognition reflected the establishment of additional reserves primarily as a result of mortality experience studies, which indicated increased longevity, particularly on disabled lives on a block of structured settlements underwritten pre-2010. This legacy block accounted for over 80% of the charge recognized in the three-month period ended September 30, 2016. These contracts are expected to become part of the Legacy Portfolio when our new operating structure is finalized. Compared to the legacy structured settlement contracts, our more recently issued contracts contain a lower proportion of substandard business and those lives are less severely impaired, on average. There was no impact on pre-tax operating income of Institutional Markets from the update of actuarial assumptions in the three-month period ended September 30, 2015.

Net investment income in the three-month period ended September 30, 2016 increased2017 compared to the same period in the prior year,year.

Partially offsetting the increase was lower Legacy Investment pre-tax operating income driven primarily due to higher income on alternative investments and higher yield enhancement income, which included bond call and tender income andby lower gains on securitiesportfolios for which the fair value option was elected. Certain traditional long-duration products for which Institutional Markets does not have the ability to adjust interest rates, such as life-contingent structured settlements, are exposed to reduced earningselected, and potential additional loss recognition reserve increases in a sustained low interest rate environment. See MD&A – Investments – Life Insurance Companies for additional informationlower income on the investment strategy, asset-liability management process and invested assetslife settlements portfolio as a result of our Life Insurance Companies, which include the invested assets of Institutional Markets.partial sales.

General operating expenses in the three-month period ended September 30, 2016 were comparable to the same period in the prior year.

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Item 2 / results of operations / CORPORATE AND OTHER

Institutional Markets Year-to-Date ResultsLegacy Portfolio Pre-Tax Operating Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income increased due to: 

decreased to asignificantly lower loss in the nine-month period ended September 30, 2016 compared to income in the same period in the prior year, primarily due to loss recognition expense on certain payout annuities from the update of actuarial assumptions as well as lower net investment income on alternative investments. The decrease in premiums was primarily due to a large terminal funding annuity issued in the nine-month period ended September 30, 2015.

Net investment income in the nine-month period ended September 30, 2016 decreased2017 compared to the same period in the prior year, primarily dueyear;

increased Legacy Investment pre-tax operating income in 2017 compared to lower income on alternative investments, partially offset2016 driven by higher base net investment income primarily due to growth in average invested assets, and higher yield enhancement income, which included bond call and tender income andfair value gains on securitiesportfolios for which the fair value option was elected.elected; and

Base net investmentincreased Legacy Property and Casualty pre-tax operating income for the nine-month period ended September 30, 2016 increased compareddue to the same periodunfavorable prior year development in the prior year, dueyear.

AIG | Third Quarter 2017 Form 10-Q130


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ITEM 2 | Investments

Investments

Overview

Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business modules and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of fixed maturity securities.

Investment Highlights during the Nine Months Ended September 30, 2017

A decrease in interest rates and narrowing credit spreads resulted in a net unrealized gain in our investment portfolio. Net unrealized gains in our available for sale portfolio increased to commercialapproximately $14.1 billion as of September 30, 2017 from approximately $9.7 billion as of December 31, 2016.

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

During the first quarter of 2017, we funded the adverse development reinsurance agreement entered into with NICO. The approximate $10.2 billion funding of this agreement was the primary reason for the decrease in the invested asset portfolio in the nine-month period ended September 30, 2016 and growth in2017.

During the nine-month period ended September 30, 2017, we reduced our hedge fund portfolio by approximately $1.8 billion as a result of redemptions consistent with our planned reduction of exposure. Our hedge fund portfolio experienced above average base invested assets. See MD&A – Investments – Life Insurance Companies for additional information on the investment strategy, asset-liability management process and invested assets of our Life Insurance Companies, which include the invested assets of Institutional Markets.

General operating expensesreturns in the nine-month period ended September 30, 2016 increased slightly compared to the same period in the prior year, primarily2017 due to higher interest expense related to consolidated real estate partnerships (which was moreequity market performance.

Blended investment yields on new investments were lower than offset by related investment income).blended rates on investments that were sold, matured or called.

Institutional Markets Premiums and Deposits

For Institutional Markets, premiums represent amounts received on traditional life insurance policies and life-contingent payout annuities or structured settlements. Premiums and deposits is a non‑GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance and investment-type annuity contracts, including GICs and stable value wrap funding agreements.

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Premiums and deposits

$

203

$

159

 

$

1,013

$

985

Deposits

 

(95)

 

(33)

 

 

(444)

 

(104)

Other

 

(5)

 

(11)

 

 

(16)

 

(27)

Premiums

$

103

$

115

 

$

553

$

854

Premiums for the three-month period ended September 30, 2016Other-than-temporary impairments decreased due to lower impairments in our structured settlement premiums. Premiums for the nine-month period ended September 30, 2016 decreased compared to the same periods in the prior year, primarily due to a large single premium for a terminal funding annuity issued in the three-month period ended June 30, 2015. The decrease in premiums was offset by an increase in deposits in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a $254 million ten-year, floating-rate funding agreement issued to the Federal Home Loan Bank of Dallas in the nine-month period ended September 30, 2016.

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securities and corporate bond portfolios.

Item 2 / results of operations / CORPORATE AND OTHER

United Guaranty Results

The following table presents United Guaranty results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

 

Percentage

 

(dollars in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

 

2015

 

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

158

$

199

 

(21)

%

 

$

499

 

$

484

 

 

3

%

(Increase) decrease in unearned premiums

 

22

 

(1)

 

NM

 

 

 

46

 

 

116

 

 

(60)

 

Net premiums earned

 

180

 

198

 

(9)

 

 

 

545

 

 

600

 

 

(9)

 

Losses and loss adjustment expenses incurred

 

28

 

40

 

(30)

 

 

 

92

 

 

141

 

 

(35)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

8

 

7

 

14

 

 

 

21

 

 

20

 

 

5

 

Other acquisition expenses

 

11

 

12

 

(8)

 

 

 

33

 

 

36

 

 

(8)

 

Total acquisition expenses

 

19

 

19

 

-

 

 

 

54

 

 

56

 

 

(4)

 

General operating expenses

 

35

 

40

 

(13)

 

 

 

102

 

 

112

 

 

(9)

 

Underwriting income

 

98

 

99

 

(1)

 

 

 

297

 

 

291

 

 

2

 

Net investment income

 

32

 

34

 

(6)

 

 

 

104

 

 

103

 

 

1

 

Pre-tax operating income

 

130

 

133

 

(2)

 

 

 

401

 

 

394

 

 

2

 

Key metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior year loss reserve development (favorable)/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

unfavorable

$

(16)

$

(18)

 

(11)

%

 

$

(33)

 

$

(35)

 

 

(6)

%

Domestic first-lien:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New insurance written

$

12,762

$

14,483

 

(12)

 

 

$

34,574

 

$

40,215

 

 

(14)

 

Combined ratio

 

51.2

 

52.2

 

 

 

 

 

48.9

 

 

53.6

 

 

 

 

Primary risk in force

 

 

 

 

 

 

 

 

$

35,235

 

$

36,883

 

 

(4)

 

60+ day delinquency ratio on primary loans(a)

 

 

 

 

 

 

 

 

 

2.9

%

 

3.5

%

 

 

 

Domestic second-lien:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk in force(b)

 

 

 

 

 

 

 

 

$

350

 

$

415

 

 

(16)

 

(a) Based on number of policies.

(b) Represents the full amount of second-lien loans insured reduced for contractual aggregate loss limits on certain pools of loans, which is usually 10 percent of the full amount of loans insured in each pool. Certain second-lien pools have reinstatement provisions, which will expire as the loan balances are repaid.

Pre-Tax oPERATING INCOME

(in millions)

domestic first-lien new insurance written ON MORTGAGE LOANS

(in millions)

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The following table presents United Guaranty first-lien results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(dollars in millions)

 

2016

 

2015

 

Change

 

 

 

2016

 

2015

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

151

$

187

 

(19)

%

 

$

471

$

445

 

6

%

(Increase) decrease in unearned premiums

 

21

 

(3)

 

NM

 

 

 

44

 

113

 

(61)

 

Net premiums earned

 

172

 

184

 

(7)

 

 

 

515

 

558

 

(8)

 

Losses and loss adjustment expenses incurred

 

31

 

43

 

(28)

 

 

 

106

 

144

 

(26)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

8

 

7

 

14

 

 

 

21

 

20

 

5

 

Other acquisition expenses

 

11

 

12

 

(8)

 

 

 

33

 

36

 

(8)

 

Total acquisition expenses

 

19

 

19

 

-

 

 

 

54

 

56

 

(4)

 

General operating expenses

 

38

 

34

 

12

 

 

 

92

 

99

 

(7)

 

Underwriting income

 

84

 

88

 

(5)

 

 

 

263

 

259

 

2

 

Net investment income

 

29

 

31

 

(6)

 

 

 

96

 

95

 

1

 

Pre-tax operating income

$

113

$

119

 

(5)

%

 

$

359

$

354

 

1

%

United Guaranty Quarterly Results

Pre-tax operating income decreased in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a decrease in net premiums earned due to higher ceded premiums under the 50 percent quota share agreement between United Guaranty and our subsidiaries for business originated from 2014 through 2016 offsetting a decline in incurred losses driven by lower delinquency rates and higher cure rates. Direct premiums written declined primarily due to reductions in new insurance volume, driven by the decline in mortgage originations in 2016, and continued reductions in run-off businesses.

First-Lien Results

First-lien pre-tax operating income decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year, reflecting a decrease in net premiums earned due to higher ceded premiums under the 50 percent quota share agreement discussed above. First-lien net premiums earned decreased in the three-month period ended September 30, 2016, compared to the same period in the prior year, primarily due to the increase in ceded premiums. First-lien losses and loss adjustment expenses incurred in the three-month period ended September 30, 2016 decreased by $12 million compared to the same period in the prior year driven by fewer new delinquencies and an increase in cure rates. The combined ratio decreased by 1.0 point to 51.2 points in the three-month period ended September 30, 2016, compared to the same period in the prior year, reflecting a decrease in losses incurred.

Acquisition expenses were flat in the three-month period ended September 30, 2016 compared to the same period in the prior year.

General operating expenses increased in the three-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to an increase in expenses relating to the pending sale of United Guaranty.

Other Business Results

Other business results include second-lien mortgage insurance, student loan insurance and non-domestic mortgage insurance operations.

The Other business’ pre-tax operating income for the three-month period ended September 30, 2016 decreased by $3 million to $17 million, compared to the same period in the prior year, primarily due to a decrease in net premiums earned as these portfolios continued to run off, partially offset by a decrease in losses and loss adjustment expenses.

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United Guaranty Year-to-Date Results

Pre-tax operating income decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a decrease in net premiums earned due to higher ceded premiums from the 50 percent quota share agreement discussed above. Partially offsetting the premium decrease was a decline in incurred losses driven by lower delinquency rates and higher cure rates.

First-Lien Results

First-lien pre-tax operating income was flat in the nine-month period ended September 30, 2016, compared to the same period in the prior year. First-lien net premiums earned decreased in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily as a result of the 50 percent quota share agreement discussed above. First-lien losses and loss adjustment expenses incurred in the nine-month period ended September 30, 2016 decreased by $38 million, compared to the same period in the prior year, due to a decline in newly reported delinquencies and an increase in cure rates. The combined ratio decreased by 4.7 points to 48.9 points in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily reflecting a decrease  in losses incurred.

Acquisition expenses decreased by $2 million to $54 million in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to reductions in expenses related to reduced new insurance written.

General operating expenses decreased by $3 million to $93 million in the nine-month period ended September 30, 2016 compared to the same period in the prior year, primarily due to a reduction in employee-related expenses, partially offset by an increase in expenses relating to the pending sale of United Guaranty.

Other Business Results

The Other business’ pre-tax operating income for the nine-month period ended September 30, 2016 was approximately $42 million compared to $40 million in the same period in the prior year. The $2 million increase in pre-tax operating income was primarily due to a decrease in losses and loss adjustment expenses, partially offset by a decrease in net premiums earned as these portfolios continued to run off.

New Insurance Written on Domestic First-Lien Mortgage Loans

United Guaranty’s domestic first-lien new insurance written was $12.8 billion and $34.6 billion in the three- and nine-month periods ended September 30, 2016, respectively, compared to $14.5 billion and $40.2 billion, respectively, in the same periods in the prior year.  The decrease was primarily caused by lower mortgage interest rates in late 2014 and early 2015 resulting in an increase in refinancing activity in early 2015.

Delinquency Inventory

The delinquency inventory for domestic first-lien business declined during the three-month period ended September 30, 2016 compared to the same period in the prior year as a result of cures and paid claims exceeding the number of newly reported delinquencies. United Guaranty’s first-lien primary delinquency ratio at September 30, 2016 was 2.9 percent compared to 3.5 percent at September 30, 2015. Over the last several years, United Guaranty has experienced a decline in newly reported delinquencies and an increase in cure rates.

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The following table provides a summary of activity in United Guaranty’s domestic first lien delinquency inventory:

Nine Months Ended September 30,

 

 

 

(number of policies)

2016

 

2015*

Number of primary delinquencies at the beginning of the year

30,471

 

37,622

Newly reported

27,176

 

29,375

Cures

(24,484)

 

(27,766)

Claims paid

(4,797)

 

(6,701)

Other

(2,064)

 

(1,405)

Number of primary delinquencies at the end of the period

26,302

 

31,125

*  InDuring the second quarter of 2016, United Guaranty’s number of delinquent loans was revised to remove modified pool policies and reflect primary first-lien only policies. The prior period has been revised to conform to the current period presentation.

United Guaranty Quarterly and Year-to-Date Underwriting Ratios

The following tables present the United Guaranty combined ratios based on GAAP data:

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Increase

 

September 30,

 

Increase

 

 

2016

 

2015

 

(Decrease)

 

 

2016

 

2015

 

(Decrease)

Loss ratio

 

15.6

 

20.2

 

(4.6)

 

 

16.9

 

23.5

 

(6.6)

Acquisition ratio

 

10.6

 

9.6

 

1.0

 

 

9.9

 

9.3

 

0.6

General operating expense ratio

 

19.4

 

20.2

 

(0.8)

 

 

18.7

 

18.7

 

-

Expense ratio

 

30.0

 

29.8

 

0.2

 

 

28.6

 

28.0

 

0.6

Combined ratio

 

45.6

 

50.0

 

(4.4)

 

 

45.5

 

51.5

 

(6.0)

The combined ratio decreased by 4.4 points and 6.0 points in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year, primarily due to a lower loss ratio offset in part by an increase in the expense ratio. The decrease in the loss ratio in the three- and nine-month periods ended September 30, 2016 was driven primarily by a decline in incurred losses driven by fewer new delinquencies and an increase in cure rates.

The acquisition ratio increased by 1.0 point and 0.6 points in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year. The acquisition ratio increased due to a reduction in net premiums earned from the 50 percent quota share agreement and amortization of previously capitalized costs offsetting the reduction in sales support activities.

The general operating expense ratio decreased by 0.8 points and remained flat in the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in the prior year, primarily due to a decrease in technology-related expenses.

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INVESTMENTS

Overview

Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business models for Non-Life Insurance Companies, Life Insurance Companies and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of fixed maturity securities.

Investments Highlights during the Nine Months Ended September 30, 2016

A decline in interest rates and narrowing of credit spreads resulted in an increase in our net unrealized gain position in our investment portfolio. Net unrealized gains in our available for2017, partial sale portfolio increased to approximately $19.6 billion as of September 30, 2016 from approximately $8.8 billion as of December 31, 2015.

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

During the nine months ended September 30, 2016, we reduced our hedge fund portfolio by $2.7 billion as a result of redemptions consistent with our planned reduction of exposure. Our alternative investments portfolio performance also experienced a decline in the nine-month period ended September 30, 2016 due to increased volatility in equity markets, primarily in the first quarter of 2016.

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

Other-than-temporary impairments decreased due to lower impairments within the corporate bond portfolio, primarily in the energy sector.

We recognized gains on sales of securities in the nine-month period ended September 30, 2016, primarily due to the sale of a portion of our PICC Investment.

The Brexit vote has created increased volatility in exchange rates as well as within the equity markets, which may continue for some time.

Investment Strategies

Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.

Some of our key investment strategies are as follows:

Fixed maturity securities held by the U.S. insurance companies included in Non-Life Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.

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Outside of the U.S., fixed maturity securities held by Non-Life Insurance Companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.

While more of a focus is placed on asset-liability management in Life Insurance Companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristicsin Arch Capital Group Ltd. (Arch), which we received as part of the assets within a target range based on comparable liability characteristics,consideration for selling United Guaranty to Arch in 2016.

Investment Strategies

Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.

Some of our key investment strategies are as follows:

Fixed maturity securities held by the U.S. insurance companies included in Property Casualty Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.

Outside of the U.S., fixed maturity securities held by Property Casualty Insurance Companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.

While more of a focus is placed on asset-liability management in Life Insurance Companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.

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

AIG | Third Quarter 2017 Form 10-Q131


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ITEM 2 | Investments

The following table presents the components of Net Investment Income:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Interest and dividends

$

2,960

$

3,213

 

$

9,037

$

9,698

Alternative investments(a)

 

355

 

365

 

 

1,174

 

309

Other investment income(b)

 

237

 

320

 

 

894

 

810

Total investment income

 

3,552

 

3,898

 

 

11,105

 

10,817

Investment expenses

 

136

 

115

 

 

390

 

338

Total net investment income

$

3,416

$

3,783

 

$

10,715

$

10,479

(a)  Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag.

(b)  Primarily includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and income on life settlements. For the three-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $138 million and $98 million, respectively, and on life settlements was $55 million and $161 million, respectively. For the nine-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $479 million and $370 million, respectively, and on life settlements was $256 million and $360 million, respectively.

Net investment income for the three-month period ended September 30, 2017 was lower than the same period in the prior year due to lower invested assets, lower income on our hedge fund portfolio, and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called partially offset by higher gains on assets for which we elected the fair value option. Net investment income for the nine-month period ended September 30, 2017 was higher than the same period in the prior year as higher income on our alternative investments, primarily in our hedge fund portfolio, and higher gains on assets for which we elected the fair value option, more than offset lower invested assets and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called.

Attribution of Net Investment Income to Operating Modules

Net investment income is attributed to our businesses based on internal models consistent with the nature of the underlying businesses.

For Commercial Insurance — Liability and Financial Lines, Property and Special Risks and Consumer Insurance — Personal Insurance and Legacy Property Casualty Insurance Run-Off Lines, we estimate investable funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the Property Casualty Insurance Companies to modules is calculated based on these estimated investable funds, consistent with the approximate duration of the liabilities and the required economic capital allocation for each module.

For Consumer Insurance — Individual Retirement, Group Retirement, and Life Insurance, Other Operations — Institutional Markets and Legacy Life Insurance Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life Insurance Companies. All invested assets of the Life Insurance Companies in excess of liabilities are allocated based on estimates of required economic capital allocation for each module.

Asset Liability Measurement

For the Property Casualty Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the Property Casualty Insurance Companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.

The Property Casualty Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Property Casualty Insurance Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the Property Casualty Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.

In addition, the Property Casualty Insurance Companies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. 

AIG | Third Quarter 2017 Form 10-Q132


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ITEM 2 | Investments

Fixed maturity securities of the Property Casualty Insurance Companies domestic operations, with an average duration of 4.1 years, are currently comprised of corporate bonds, structured securities, taxable municipal bonds and government and agency bonds as well as tax-exempt securities, which provide attractive risk-adjusted after-tax returns. The majority of these high quality investments are rated A or higher based on composite ratings.

Fixed maturity securities held in the Property Casualty Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 3.4 years.

The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.

The Life Insurance Companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life Insurance Companies' fundamental investment strategy is to maintain a diversified, high quality portfolio of fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration.  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.

The Life Insurance Companies invest 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.

In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.  While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio.

Fixed maturity securities of the Life Insurance Companies domestic operations, with an average duration of 7.2 years, are comprised primarily of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.

Fixed maturity securities held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 20.6 years.

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

Investments by Legal Entity Category

The following tables summarize the composition of AIG's investments:

 

 

Non-Life

 

Life

 

 

 

 

 

 

 

Insurance

 

Insurance

 

Corporate

 

 

 

(in millions)

 

Companies

 

Companies

 

and Other(b)

 

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

 

Fixed maturity securities(a):

 

 

 

 

 

 

 

 

 

Bonds available for sale, at fair value

$

82,625

$

171,375

$

6,649

 

$

260,649

Other bond securities, at fair value

 

1,409

 

3,828

 

9,535

 

 

14,772

Equity securities:

 

 

 

 

 

 

 

 

 

Common and preferred stock available for sale, at fair value

 

1,837

 

209

 

(502)

 

 

1,544

Other Common and preferred stock, at fair value

 

-

 

3

 

495

 

 

498

Mortgage and other loans receivable, net of allowance

 

9,419

 

24,773

 

(1,779)

 

 

32,413

Other invested assets

 

10,923

 

9,486

 

5,338

 

 

25,747

Short-term investments

 

3,672

 

4,613

 

2,460

 

 

10,745

Total investments

 

109,885

 

214,287

 

22,196

 

 

346,368

Cash

 

1,331

 

733

 

434

 

 

2,498

Total invested assets

$

111,216

$

215,020

$

22,630

 

$

348,866

December 31, 2015

 

 

 

 

 

 

 

 

 

Fixed maturity securities(a):

 

 

 

 

 

 

 

 

 

Bonds available for sale, at fair value

$

80,759

$

157,150

$

10,336

 

$

248,245

Other bond securities, at fair value

 

1,463

 

3,589

 

11,730

 

 

16,782

Equity securities:

 

 

 

 

 

 

 

 

 

Common and preferred stock available for sale, at fair value

 

2,821

 

144

 

(50)

 

 

2,915

Other Common and preferred stock, at fair value

 

355

 

-

 

566

 

 

921

Mortgage and other loans receivable, net of allowance

 

8,277

 

23,979

 

(2,691)

 

 

29,565

Other invested assets

 

10,569

 

12,398

 

6,827

 

 

29,794

Short-term investments

 

3,066

 

2,877

 

4,189

 

 

10,132

Total investments

 

107,310

 

200,137

 

30,907

 

 

338,354

Cash

 

974

 

557

 

98

 

 

1,629

Total invested assets

$

108,284

$

200,694

$

31,005

 

$

339,983

(a) At both September 30, 2016 and December 31, 2015, approximately 90 percent and 10 percent of investments were held by domestic and foreign entities, respectively.

(b) Includes the effect of eliminations and consolidations.

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The following table presents the components of Net Investment Income:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Interest and dividends

$

3,213

$

3,204

 

$

9,698

$

9,599

Alternative investments(a)

 

365

 

(18)

 

 

309

 

1,226

Other investment income(b)

 

320

 

153

 

 

810

 

447

Total investment income

 

3,898

 

3,339

 

 

10,817

 

11,272

Investment expenses

 

115

 

133

 

 

338

 

402

Total net investment income

$

3,783

$

3,206

 

$

10,479

$

10,870

(a) Beginning in the first quarter of 2016, the presentation of income on alternative investments has been refined to include only income from hedge funds, private equity funds and affordable housing partnerships. Prior period disclosures have been reclassified to conform to this presentation. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag. 

(b) Includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and which are used to economically hedge interest rate and other risks related to our variable annuity guaranteed living benefits. For the three-month periods ended September 30, 2016 and 2015, the net investment income (loss) recorded on these securities was $17 million and $4 million, respectively. For the nine-month periods ended September 30, 2016 and 2015, the net investment income (loss) recorded on these securities was $270 million and $(39) million, respectively.

Net investment income increased for the three-month period ended September 30, 2016 compared to the same period in the prior year primarily due to higher income on alternative investments and an increase in the fair market value of assets accounted for under the fair value option. Net investment income decreased for the nine-month period ended September 30, 2016 compared to the same period in the prior year due to lower income on alternative investments and lower reinvestment yields, partially offset by an increase in invested assets and higher gains on securities for which the fair value option was elected.

Non-Life Insurance Companies

For the Non-Life Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the Non-Life Insurance Companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.

The Non-Life Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Non-Life Insurance Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the Non-Life Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.

In addition, the Non-Life Insurance Companies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. 

Fixed maturity investments of the Non-Life Insurance Companies domestic operations, with a duration of 4.7 years, are currently comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns, as well as taxable municipal bonds, government and agency bonds, and corporate bonds. The majority of these high quality investments are rated A or higher based on composite ratings.

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Fixed maturity investments held in the Non-Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings with a duration averaging 3.5 years.

Life Insurance Companies

The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.

The Life Insurance Companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life Insurance Companies' fundamental investment strategy is to maintain a diversified, high quality portfolio of fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration.  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.

The Life Insurance Companies invest 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.

In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.  While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio. 

The Life Insurance Companies monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. The Life Insurance Companies frequently review their interest rate assumptions and actively manage the crediting rates used for their new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in a historically low interest rate environment. The low interest rate environment makes it more difficult to profitably price many of our products and puts margin pressure on existing products, due to the challenge of investing recurring premiums and deposits and reinvesting investment portfolio cash flows in the low rate environment while maintaining satisfactory investment quality and liquidity. 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.

Fixed maturity investments of the Life Insurance Companies domestic operations, with a duration of 7.0 years, are comprised of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.

Fixed maturity investments held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings with a duration averaging 16.3 years.

NAIC Designations of Fixed Maturity Securities

The Securities Valuation Office (SVO) of the National Association of Insurance Companies (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

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as below investment grade. The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities.  These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies.  The following tables summarize the ratings distribution of Life U.S. Insurance Companies 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.  See Investments – Credit Ratings herein for

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

AIG | Third Quarter 2017 Form 10-Q133


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ITEM 2 | Investments

The following table presents the fixed maturity security portfolio of LifeU.S. Insurance Companies categorized by NAIC Designation, at fair value:

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

NAIC Designation

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

Other fixed maturity securities

$

48,901

$

60,346

$

109,247

 

$

5,973

$

2,926

$

781

$

112

$

9,792

$

119,039

$

73,490

$

69,224

$

142,714

 

$

6,105

$

4,686

$

1,264

$

154

$

12,209

$

154,923

Mortgage-backed, asset-backed and collateralized

 

45,691

 

2,796

 

48,487

 

 

238

 

311

 

61

 

1,001

 

1,611

 

50,098

 

63,960

 

3,059

 

67,019

 

 

407

 

81

 

137

 

2,364

 

2,989

 

70,008

Total*

$

94,592

$

63,142

$

157,734

 

$

6,211

$

3,237

$

842

$

1,113

$

11,403

$

169,137

$

137,450

$

72,283

$

209,733

 

$

6,512

$

4,767

$

1,401

$

2,518

$

15,198

$

224,931

*    Excludes $6.1$25.5 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within LifeU.S. Insurance Companies that do not require a statutory filing.

The following table presents the fixed maturity security portfolio of LifeU.S. Insurance Companiescategorized by composite AIG credit rating, at fair value:

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

CCC and

 

Investment

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

CCC and

 

Investment

 

 

Composite AIG Credit Rating

 

AAA/AA/A

 

BBB

 

Grade

 

 

BB

 

B

 

Lower

 

Grade

 

Total

 

AAA/AA/A

 

BBB

 

Grade

 

 

BB

 

B

 

Lower

 

Grade

 

Total

Other fixed maturity securities

$

49,983

$

59,889

$

109,872

 

$

5,318

$

3,146

$

703

$

9,167

$

119,039

$

74,088

$

69,232

$

143,320

 

$

5,580

$

4,653

$

1,370

$

11,603

$

154,923

Mortgage-backed, asset-backed and collateralized

 

30,627

 

4,063

 

34,690

 

 

1,177

 

784

 

13,447

 

15,408

 

50,098

 

44,390

 

4,737

 

49,127

 

 

992

 

709

 

19,180

 

20,881

 

70,008

Total*

$

80,610

$

63,952

$

144,562

 

$

6,495

$

3,930

$

14,150

$

24,575

$

169,137

$

118,478

$

73,969

$

192,447

 

$

6,572

$

5,362

$

20,550

$

32,484

$

224,931

*    Excludes $6.1$25.5 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within LifeU.S. Insurance Companies that do not require a statutory filing.

Credit Ratings

At September 30, 2016,2017, approximately 9091 percent of our fixed maturity securities were held by our domestic entities. Approximately 17 percent of suchthese securities were rated AAA by one or more of the principal rating agencies, and approximately 1615 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in the internal analysis.

A significant portion of our foreign entities’ fixed maturity securities portfolio is rated by 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.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, 2016,2017, approximately 1723 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 78 percent were below investment grade or not rated. Approximately 4839 percent of the

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foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

AIG | Third Quarter 2017 Form 10-Q134


TABLE OF CONTENTS

ITEM 2 | Investments

Composite AIG Credit Ratings

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

See Enterprise Risk Management herein forFor a discussion of credit risks associated with Investments.Investments see Enterprise Risk Management.

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

Available for Sale

 

Other

 

Total

 

Available for Sale

 

Other

 

Total

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

(in millions)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

13,235

 

$

12,274

 

$

3,192

 

$

3,222

 

$

16,427

 

$

15,496

 

$

11,332

 

$

11,791

 

$

2,731

 

$

2,807

 

$

14,063

 

$

14,598

 

AA

 

36,597

 

 

35,344

 

 

282

 

 

207

 

 

36,879

 

 

35,551

 

 

30,059

 

 

33,647

 

 

221

 

 

250

 

 

30,280

 

 

33,897

 

A

 

52,277

 

 

50,741

 

 

1,769

 

 

1,781

 

 

54,046

 

 

52,522

 

 

43,879

 

 

45,619

 

 

1,635

 

 

1,612

 

 

45,514

 

 

47,231

 

BBB

 

73,772

 

 

71,766

 

 

112

 

 

186

 

 

73,884

 

 

71,952

 

 

71,591

 

 

68,700

 

 

142

 

 

76

 

 

71,733

 

 

68,776

 

Below investment grade

 

13,863

 

 

12,305

 

 

20

 

 

133

 

 

13,883

 

 

12,438

 

 

12,584

 

 

12,832

 

 

17

 

 

17

 

 

12,601

 

 

12,849

 

Non-rated

 

967

 

 

920

 

 

-

 

 

-

 

 

967

 

 

920

 

 

1,048

 

 

890

 

 

-

 

 

-

 

 

1,048

 

 

890

 

Total

$

190,711

 

$

183,350

 

$

5,375

 

$

5,529

 

$

196,086

 

$

188,879

 

$

170,493

 

$

173,479

 

$

4,746

 

$

4,762

 

$

175,239

 

$

178,241

 

Mortgage-backed, asset-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed and collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

29,063

 

$

26,382

 

$

1,148

 

$

1,756

 

$

30,211

 

$

28,138

 

$

29,648

 

$

28,593

 

$

894

 

$

1,055

 

$

30,542

 

$

29,648

 

AA

 

6,324

 

 

5,003

 

 

699

 

 

708

 

 

7,023

 

 

5,711

 

 

7,593

 

 

6,114

 

 

615

 

 

714

 

 

8,208

 

 

6,828

 

A

 

8,841

 

 

7,462

 

 

286

 

 

416

 

 

9,127

 

 

7,878

 

 

7,843

 

 

8,504

 

 

364

 

 

307

 

 

8,207

 

 

8,811

 

BBB

 

4,970

 

 

4,394

 

 

326

 

 

497

 

 

5,296

 

 

4,891

 

 

4,591

 

 

4,996

 

 

178

 

 

303

 

 

4,769

 

 

5,299

 

Below investment grade

 

20,725

 

 

21,638

 

 

6,857

 

 

7,771

 

 

27,582

 

 

29,409

 

 

17,578

 

 

19,838

 

 

5,838

 

 

6,790

 

 

23,416

 

 

26,628

 

Non-rated

 

15

 

 

16

 

 

81

 

 

105

 

 

96

 

 

121

 

 

25

 

 

13

 

 

18

 

 

67

 

 

43

 

 

80

 

Total

$

69,938

 

$

64,895

 

$

9,397

 

$

11,253

 

$

79,335

 

$

76,148

 

$

67,278

 

$

68,058

 

$

7,907

 

$

9,236

 

$

75,185

 

$

77,294

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

42,298

 

$

38,656

 

$

4,340

 

$

4,978

 

$

46,638

 

$

43,634

 

$

40,980

 

$

40,384

 

$

3,625

 

$

3,862

 

$

44,605

 

$

44,246

 

AA

 

42,921

 

 

40,347

 

 

981

 

 

915

 

 

43,902

 

 

41,262

 

 

37,652

 

 

39,761

 

 

836

 

 

964

 

 

38,488

 

 

40,725

 

A

 

61,118

 

 

58,203

 

 

2,055

 

 

2,197

 

 

63,173

 

 

60,400

 

 

51,722

 

 

54,123

 

 

1,999

 

 

1,919

 

 

53,721

 

 

56,042

 

BBB

 

78,742

 

 

76,160

 

 

438

 

 

683

 

 

79,180

 

 

76,843

 

 

76,182

 

 

73,696

 

 

320

 

 

379

 

 

76,502

 

 

74,075

 

Below investment grade

 

34,588

 

 

33,943

 

 

6,877

 

 

7,904

 

 

41,465

 

 

41,847

 

 

30,162

 

 

32,670

 

 

5,855

 

 

6,807

 

 

36,017

 

 

39,477

 

Non-rated

 

982

 

 

936

 

 

81

 

 

105

 

 

1,063

 

 

1,041

 

 

1,073

 

 

903

 

 

18

 

 

67

 

 

1,091

 

 

970

 

Total

$

260,649

 

$

248,245

 

$

14,772

 

$

16,782

 

$

275,421

 

$

265,027

 

$

237,771

 

$

241,537

 

$

12,653

 

$

13,998

 

$

250,424

 

$

255,535

 

150AIG | Third Quarter 2017 Form 10-Q135


TABLE OF CONTENTS 

ITEM 2 | Investments

Item 2 / INVESTMENTS

Available for Available‑for‑Sale Investments

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

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

2017

 

2016

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

 

 

 

 

$

2,223

$

1,844

 

 

 

 

 

$

2,384

$

1,992

Obligations of states, municipalities and political subdivisions

 

 

 

 

 

 

26,578

 

27,323

 

 

 

 

 

 

18,831

 

24,772

Non-U.S. governments

 

 

 

 

 

 

20,706

 

18,195

 

 

 

 

 

 

15,593

 

14,535

Corporate debt

 

 

 

 

 

 

141,204

 

135,988

 

 

 

 

 

 

133,685

 

132,180

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

37,815

 

36,227

 

 

 

 

 

 

37,509

 

37,374

CMBS

 

 

 

 

 

 

15,073

 

13,571

 

 

 

 

 

 

13,518

 

14,271

CDO/ABS

 

 

 

 

 

 

17,050

 

15,097

 

 

 

 

 

 

16,251

 

16,413

Total mortgage-backed, asset-backed and collateralized

 

 

 

 

 

 

69,938

 

64,895

 

 

 

 

 

 

67,278

 

68,058

Total bonds available for sale*

 

 

 

 

 

 

260,649

 

248,245

 

 

 

 

 

 

237,771

 

241,537

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

1,232

 

2,401

 

 

 

 

 

 

1,056

 

1,065

Preferred stock

 

 

 

 

 

 

18

 

22

 

 

 

 

 

 

577

 

752

Mutual funds

 

 

 

 

 

 

294

 

492

 

 

 

 

 

 

74

 

261

Total equity securities available for sale

 

 

 

 

 

 

1,544

 

2,915

 

 

 

 

 

 

1,707

 

2,078

Total

 

 

 

 

 

$

262,193

$

251,160

 

 

 

 

 

$

239,478

$

243,615

*    At September 30, 20162017 and December 31, 2015,2016, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $35.6$31.2 billion and $34.9$33.6 billion, respectively.

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

September 30,

 

December 31,

September 30,

 

December 31,

(in millions)

 

2016

 

 

2015

 

2017

 

 

2016

Japan

$

6,257

 

$

5,416

$

1,820

 

$

2,140

Germany

 

1,357

 

 

832

 

1,635

 

 

1,168

United Kingdom

 

1,263

 

 

815

Canada

 

1,318

 

 

1,453

 

1,065

 

 

1,115

France

 

931

 

 

784

 

882

 

 

667

United Kingdom

 

828

 

 

661

Mexico

 

751

 

 

563

 

609

 

 

637

Netherlands

 

605

 

 

511

 

561

 

 

445

Indonesia

 

452

 

 

366

Norway

 

479

 

 

503

 

438

 

 

456

Indonesia

 

426

 

 

260

Singapore

 

424

 

 

426

Chile

 

352

 

 

360

Other

 

7,384

 

 

6,836

 

6,571

 

 

6,417

Total

$

20,760

 

$

18,245

$

15,648

 

$

14,586

151AIG | Third Quarter 2017 Form 10-Q136


TABLE OF CONTENTS 

ITEM 2 | Item 2 /Investments INVESTMENTS

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

September 30, 2016

 

 

September 30, 2017

 

 

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2015

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2016

(in millions)

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

Euro-Zone countries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

France

$

931

$

1,100

$

2,154

$

-

$

4,185

$

4,018

$

882

$

1,172

$

2,020

$

-

$

4,074

$

3,788

Germany

 

1,357

 

158

 

2,066

 

2

 

3,583

 

3,365

 

1,635

 

146

 

1,971

 

1

 

3,753

 

3,227

Netherlands

 

605

 

940

 

1,462

 

166

 

3,173

 

3,404

 

561

 

871

 

1,274

 

56

 

2,762

 

2,658

Belgium

 

190

 

107

 

893

 

-

 

1,190

 

1,075

Ireland

 

-

 

51

 

551

 

792

 

1,394

 

1,274

 

11

 

-

 

582

 

551

 

1,144

 

1,263

Belgium

 

268

 

129

 

773

 

-

 

1,170

 

855

Spain

 

28

 

53

 

913

 

14

 

1,008

 

1,102

 

-

 

89

 

924

 

-

 

1,013

 

918

Italy

 

1

 

125

 

804

 

12

 

942

 

1,009

 

-

 

176

 

584

 

-

 

760

 

842

Luxembourg

 

-

 

12

 

442

 

-

 

454

 

496

 

-

 

17

 

425

 

-

 

442

 

430

Finland

 

83

 

53

 

115

 

-

 

251

 

229

 

57

 

33

 

78

 

-

 

168

 

198

Austria

 

87

 

3

 

13

 

-

 

103

 

124

 

23

 

3

 

4

 

-

 

30

 

95

Other - EuroZone

 

818

 

39

 

172

 

2

 

1,031

 

929

 

742

 

41

 

234

 

-

 

1,017

 

1,104

Total Euro-Zone

$

4,178

$

2,663

$

9,465

$

988

$

17,294

$

16,805

$

4,101

$

2,655

$

8,989

$

608

$

16,353

$

15,598

Remainder of Europe

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

$

828

$

3,173

$

8,499

$

3,905

$

16,405

$

15,286

$

1,263

$

3,402

$

8,398

$

3,671

$

16,734

$

15,293

Switzerland

 

48

 

1,142

 

1,238

 

-

 

2,428

 

2,519

 

40

 

1,265

 

990

 

-

 

2,295

 

2,360

Sweden

 

124

 

436

 

141

 

-

 

701

 

827

 

130

 

413

 

159

 

-

 

702

 

691

Norway

 

479

 

45

 

103

 

-

 

627

 

688

 

438

 

44

 

168

 

-

 

650

 

582

Russian Federation

 

54

 

6

 

75

 

-

 

135

 

122

 

105

 

20

 

158

 

-

 

283

 

169

Other - Remainder of Europe

 

289

 

114

 

104

 

-

 

507

 

443

 

160

 

116

 

77

 

-

 

353

 

285

Total - Remainder of Europe

$

1,822

$

4,916

$

10,160

$

3,905

$

20,803

$

19,885

$

2,136

$

5,260

$

9,950

$

3,671

$

21,017

$

19,380

Total

$

6,000

$

7,579

$

19,625

$

4,893

$

38,097

$

36,690

$

6,237

$

7,915

$

18,939

$

4,279

$

37,370

$

34,978

Investments in Municipal Bonds

At September 30, 2016, 2017, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backed bonds with over 9592 percent of the portfolio rated A or higher.

152AIG | Third Quarter 2017 Form 10-Q137


TABLE OF CONTENTS 

ITEM 2 | Item 2 /Investments INVESTMENTS

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

September 30, 2016

 

 

September 30, 2017

 

 

 

State

 

Local

 

 

 

Total

December 31,

 

State

 

Local

 

 

 

Total

December 31,

 

General

 

General

 

 

 

Fair

 

2015

 

General

 

General

 

 

 

Fair

 

2016

(in millions)

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

$

27

$

634

$

3,853

$

4,514

$

4,613

$

20

$

559

$

3,009

$

3,588

$

4,170

California

 

729

 

486

 

2,483

 

3,698

 

3,841

 

683

 

423

 

2,184

 

3,290

 

3,471

Texas

 

290

 

1,603

 

1,662

 

3,555

 

3,415

 

195

 

674

 

1,109

 

1,978

 

3,287

Massachusetts

 

753

 

1

 

701

 

1,455

 

1,387

 

477

 

-

 

490

 

967

 

1,396

Illinois

 

107

 

182

 

936

 

1,225

 

1,486

 

72

 

129

 

657

 

858

 

1,171

Florida

 

62

 

-

 

657

 

719

 

1,016

Washington

 

421

 

96

 

624

 

1,141

 

1,359

 

256

 

13

 

377

 

646

 

1,059

Florida

 

153

 

-

 

958

 

1,111

 

1,135

Virginia

 

47

 

5

 

773

 

825

 

878

 

8

 

-

 

632

 

640

 

789

Ohio

 

94

 

-

 

492

 

586

 

536

Georgia

 

207

 

216

 

376

 

799

 

870

 

131

 

167

 

266

 

564

 

747

Washington D.C.

 

37

 

-

 

460

 

497

 

671

Pennsylvania

 

276

 

25

 

475

 

776

 

676

 

161

 

23

 

223

 

407

 

719

Washington DC

 

189

 

-

 

533

 

722

 

705

Ohio

 

97

 

-

 

483

 

580

 

531

Arizona

 

-

 

69

 

462

 

531

 

576

Maryland

 

168

 

92

 

126

 

386

 

423

All other states(a)

 

960

 

546

 

4,140

 

5,646

 

5,851

 

419

 

356

 

2,930

 

3,705

 

5,317

Total(b)(c)

$

4,256

$

3,863

$

18,459

$

26,578

$

27,323

$

2,783

$

2,436

$

13,612

$

18,831

$

24,772

(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 $1.7$0.9 billion 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

 

 

Fair Value at

 

Fair Value at

 

Industry Category

 

September 30,

 

December 31,

 

 

September 30,

 

December 31,

 

(in millions)

 

2016

 

2015

 

 

2017

 

2016

 

Financial institutions:

 

 

 

 

 

 

 

 

 

 

Money Center /Global Bank Groups

$

9,619

$

9,104

 

Money Center/Global Bank Groups

$

9,285

$

8,892

 

Regional banks — other

 

654

 

568

 

 

562

 

606

 

Life insurance

 

3,305

 

3,295

 

 

3,652

 

3,100

 

Securities firms and other finance companies

 

389

 

380

 

 

375

 

392

 

Insurance non-life

 

5,528

 

5,421

 

 

5,013

 

5,213

 

Regional banks — North America

 

7,260

 

6,823

 

 

6,372

 

6,844

 

Other financial institutions

 

8,854

 

7,808

 

 

9,589

 

8,435

 

Utilities

 

18,994

 

18,497

 

 

18,498

 

17,938

 

Communications

 

10,835

 

10,251

 

 

9,872

 

10,025

 

Consumer noncyclical

 

16,348

 

15,391

 

 

15,935

 

15,338

 

Capital goods

 

8,656

 

8,973

 

 

7,853

 

8,339

 

Energy

 

14,391

 

13,861

 

 

13,274

 

13,618

 

Consumer cyclical

 

9,572

 

9,767

 

 

9,011

 

8,606

 

Basic

 

7,301

 

7,512

 

 

6,128

 

6,582

 

Other

 

19,498

 

18,337

 

 

18,266

 

18,252

 

Total *

$

141,204

$

135,988

 

$

133,685

$

132,180

 

*    At both September 30, 20162017 and December 31, 2015,2016, approximately 91 percent of these investments were rated investment grade.

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Item 2 / INVESTMENTS

Our investments in the energy category, as a percentage of total investments in available for saleavailable-for-sale fixed maturities, were 5.5 percent at September 30, 2016 andwas 5.6 percent at both September 30, 2017 and December 31, 2015.2016. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.

AIG | Third Quarter 2017 Form 10-Q138


TABLE OF CONTENTS

ITEM 2 | Investments

Investments in RMBS

The following table presents AIG’s RMBS available for sale investments by year of vintage:

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

2016

 

2015

Total RMBS

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

$

3,199

$

-

2015

 

 

 

 

 

 

 

 

 

 

2,692

 

2,273

2014

 

 

 

 

 

 

 

 

 

 

1,152

 

1,096

2013

 

 

 

 

 

 

 

 

 

 

2,059

 

2,178

2012

 

 

 

 

 

 

 

 

 

 

1,519

 

1,944

2011 and prior*

 

 

 

 

 

 

 

 

 

 

27,194

 

28,736

Total RMBS

 

 

 

 

 

 

 

 

 

$

37,815

$

36,227

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

$

2,417

$

-

2015

 

 

 

 

 

 

 

 

 

 

2,417

 

2,025

2014

 

 

 

 

 

 

 

 

 

 

1,026

 

1,000

2013

 

 

 

 

 

 

 

 

 

 

1,960

 

2,094

2012

 

 

 

 

 

 

 

 

 

 

1,508

 

1,877

2011 and prior

 

 

 

 

 

 

 

 

 

 

4,406

 

5,555

Total Agency

 

 

 

 

 

 

 

 

 

$

13,734

$

12,551

Alt-A

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

-

 

-

2015

 

 

 

 

 

 

 

 

 

 

-

 

-

2014

 

 

 

 

 

 

 

 

 

 

16

 

-

2013

 

 

 

 

 

 

 

 

 

 

-

 

-

2012

 

 

 

 

 

 

 

 

 

$

-

$

-

2011 and prior

 

 

 

 

 

 

 

 

 

 

12,700

 

12,831

Total Alt-A

 

 

 

 

 

 

 

 

 

$

12,716

$

12,831

Subprime

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

-

 

-

2015

 

 

 

 

 

 

 

 

 

 

-

 

-

2014

 

 

 

 

 

 

 

 

 

 

-

 

-

2013

 

 

 

 

 

 

 

 

 

 

-

 

-

2012

 

 

 

 

 

 

 

 

 

 

-

 

-

2011 and prior

 

 

 

 

 

 

 

 

 

$

2,825

$

2,376

Total Subprime

 

 

 

 

 

 

 

 

 

$

2,825

$

2,376

Prime non-agency

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

$

705

$

-

2015

 

 

 

 

 

 

 

 

 

 

13

 

-

2014

 

 

 

 

 

 

 

 

 

 

3

 

-

2013

 

 

 

 

 

 

 

 

 

 

19

 

8

2012

 

 

 

 

 

 

 

 

 

 

-

 

53

2011 and prior

 

 

 

 

 

 

 

 

 

 

6,953

 

7,589

Total Prime non-agency

 

 

 

 

 

 

 

 

 

$

7,693

$

7,650

Total Other housing related

 

 

 

 

 

 

 

 

 

$

847

$

819

154


TABLE OF CONTENTS

Item 2 / INVESTMENTSsecurities:

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

2017

 

2016

Agency RMBS

 

 

 

 

 

 

 

 

 

$

14,942

$

13,854

Alt-A RMBS

 

 

 

 

 

 

 

 

 

 

11,841

 

12,387

Subprime RMBS

 

 

 

 

 

 

 

 

 

 

3,058

 

2,905

Prime non-agency

 

 

 

 

 

 

 

 

 

 

6,890

 

7,422

Other housing related

 

 

 

 

 

 

 

 

 

 

778

 

806

Total RMBS(a)(b)

 

 

 

 

 

 

 

 

 

$

37,509

$

37,374

 *(a)  Includes approximately $13.2$12.5 billion and $12.9 billion at both September 30, 2016,2017, and December 31, 20152016, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. See For additional discussion on Purchased Credit Impaired (PCI) Securities see Note 6 to the Condensed Consolidated Financial Statements for additional discussion on Purchased Credit Impaired (PCI) Securities.

The following table presents our RMBS available for sale investments by credit rating:

 

 

 

 

 

 

 

 

 

 

Fair Value at

Fair Value at

 

 

 

 

 

 

 

September 30,

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

2016

 

2015

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total RMBS

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

 

 

 

 

 

 

 

$

16,159

$

14,884

AA

 

 

 

 

 

 

 

 

 

 

504

 

389

A

 

 

 

 

 

 

 

 

 

 

1,127

 

509

BBB

 

 

 

 

 

 

 

 

 

 

744

 

661

Below investment grade(a)

 

 

 

 

 

 

 

 

 

 

19,276

 

19,779

Non-rated

 

 

 

 

 

 

 

 

 

 

5

 

5

Total RMBS(b)

 

 

 

 

 

 

 

 

 

$

37,815

$

36,227

Agency RMBS

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

 

 

 

 

 

 

 

$

13,730

$

12,547

AA

 

 

 

 

 

 

 

 

 

 

4

 

4

Total Agency

 

 

 

 

 

 

 

 

 

$

13,734

$

12,551

Alt-A RMBS

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

 

 

 

 

 

 

 

$

1

$

5

AA

 

 

 

 

 

 

 

 

 

 

80

 

17

A

 

 

 

 

 

 

 

 

 

 

105

 

121

BBB

 

 

 

 

 

 

 

 

 

 

239

 

216

Below investment grade(a)

 

 

 

 

 

 

 

 

 

 

12,291

 

12,472

Total Alt-A

 

 

 

 

 

 

 

 

 

$

12,716

$

12,831

Subprime RMBS

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

 

 

 

 

 

 

 

$

14

$

15

AA

 

 

 

 

 

 

 

 

 

 

102

 

68

A

 

 

 

 

 

 

 

 

 

 

161

 

247

BBB

 

 

 

 

 

 

 

 

 

 

254

 

200

Below investment grade(a)

 

 

 

 

 

 

 

 

 

 

2,294

 

1,846

Total Subprime

 

 

 

 

 

 

 

 

 

$

2,825

$

2,376

Prime non-agency

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

 

 

 

 

 

 

 

 

 

$

1,986

$

1,986

AA

 

 

 

 

 

 

 

 

 

 

203

 

188

A

 

 

 

 

 

 

 

 

 

 

858

 

138

BBB

 

 

 

 

 

 

 

 

 

 

229

 

209

Below investment grade(a)

 

 

 

 

 

 

 

 

 

 

4,412

 

5,124

Non-rated

 

 

 

 

 

 

 

 

 

 

5

 

5

Total prime non-agency

 

 

 

 

 

 

 

 

 

$

7,693

$

7,650

Total Other housing related

 

 

 

 

 

 

 

 

 

$

847

$

819

(a) Includes certain RMBS that had experienced deterioration in credit quality since their origination. See Note 6 to the Condensed Consolidated Financial Statements for additional discussion on PCI Securities.

(b)  The weighted average expected life was six years at both September 30, 20162017 and December 31, 2015.2016.

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.

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Item 2 / INVESTMENTS

Investments in CMBS

The following table presents our CMBS available for sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

CMBS (traditional)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,401

$

11,132

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,864

 

1,622

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

808

 

817

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

15,073

$

13,571

The following table presents the fair value of our CMBS available for sale investments by rating agency designation and by vintage year:

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

(in millions)

 

AAA

 

AA

 

A

 

BBB

 

Grade

 

Non-Rated

 

Total

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

$

1,330

$

281

$

77

$

160

$

14

$

-

$

1,862

2015

 

1,225

 

470

 

521

 

245

 

18

 

-

 

2,479

2014

 

1,692

 

224

 

11

 

-

 

-

 

-

 

1,927

2013

 

2,649

 

412

 

72

 

25

 

-

 

-

 

3,158

2012

 

643

 

68

 

46

 

82

 

-

 

10

 

849

2011 and prior

 

1,786

 

568

 

615

 

572

 

1,257

 

-

 

4,798

Total

$

9,325

$

2,023

$

1,342

$

1,084

$

1,289

$

10

$

15,073

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

$

824

$

404

$

465

$

240

$

-

$

-

$

1,933

2014

 

1,604

 

183

 

11

 

-

 

-

 

-

 

1,798

2013

 

2,611

 

433

 

89

 

54

 

-

 

-

 

3,187

2012

 

737

 

60

 

31

 

83

 

-

 

10

 

921

2011 and prior

 

1,936

 

725

 

666

 

759

 

1,646

 

-

 

5,732

Total

$

7,712

$

1,805

$

1,262

$

1,136

$

1,646

$

10

$

13,571

156


TABLE OF CONTENTS

Item 2 / INVESTMENTS

The following table presents our CMBS available for sale investments by geographic region:

 

 

Fair Value at

 

Fair Value at

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2016

 

2015

 

Geographic region:

 

 

 

 

 

New York

$

3,668

$

3,149

 

California

 

1,472

 

1,244

 

Texas

 

856

 

791

 

Florida

 

528

 

520

 

New Jersey

 

473

 

433

 

Virginia

 

379

 

362

 

Illinois

 

355

 

323

 

Pennsylvania

 

319

 

295

 

Massachusetts

 

275

 

231

 

Georgia

 

257

 

253

 

Maryland

 

235

 

229

 

Washington, D.C.

 

232

 

107

 

All Other*

 

6,024

 

5,634

 

Total

$

15,073

$

13,571

 

*    Includes Non-U.S. locations.

The following table presents our CMBS available for sale investments by industry:securities:

 

 

Fair Value at

 

Fair Value at

 

 

 

September 30,

 

December 31,

 

(in millions)

 

2016

 

2015

 

Industry:

 

 

 

 

 

Office

$

4,591

$

3,896

 

Retail

 

4,070

 

3,978

 

Multi-family*

 

3,339

 

3,036

 

Lodging

 

1,038

 

1,005

 

Industrial

 

1,031

 

868

 

Other

 

1,004

 

788

 

Total

$

15,073

$

13,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

CMBS (traditional)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,883

$

11,782

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,986

 

1,737

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

649

 

752

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,518

$

14,271

*    Includes Agency-backed CMBS.

The fair value of CMBS holdings remained stable during the third quarter of 2016.2017. 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.

157


TABLE OF CONTENTS

Item 2 / INVESTMENTS

Investments in CDOs

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

 

 

 

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

2016

 

2015

Collateral Type:

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans (CLO)

 

 

 

 

 

 

 

 

$

8,349

$

7,962

Other

 

 

 

 

 

 

 

 

 

133

 

153

Total

 

 

 

 

 

 

 

 

$

8,482

$

8,115

The following table presents our CDO available for sale investmentssecurities by credit rating:collateral type:

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

2016

 

2015

Rating:

 

 

 

 

 

 

 

 

 

 

AAA

 

 

 

 

 

 

$

2,923

$

2,870

AA

 

 

 

 

 

 

 

2,750

 

2,543

A

 

 

 

 

 

 

 

2,386

 

2,247

BBB

 

 

 

 

 

 

 

300

 

298

Below investment grade

 

 

 

 

 

 

 

123

 

157

Total

 

 

 

 

 

 

$

8,482

$

8,115

 

 

 

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

2017

 

2016

Collateral Type:

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans (CLO)

 

 

 

 

 

 

 

 

$

7,777

$

8,548

Other

 

 

 

 

 

 

 

 

 

102

 

129

Total

 

 

 

 

 

 

 

 

$

7,879

$

8,677

Commercial Mortgage Loans

At September 30, 2016,2017, we had direct commercial mortgage loansloan exposure of $24$27.9 billion, of which approximately all99.7 percent of the loans were current. 

AIG | Third Quarter 2017 Form 10-Q139


TABLE OF CONTENTS

ITEM 2 | Investments

The following table presents the commercial mortgage loansloan 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, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

97

 

$

892

$

3,545

$

548

$

215

$

164

$

186

$

5,550

23

%

California

99

 

 

325

 

778

 

455

 

365

 

866

 

403

 

3,192

13

 

Texas

58

 

 

255

 

704

 

99

 

112

 

187

 

44

 

1,401

6

 

Florida

67

 

 

250

 

95

 

344

 

165

 

19

 

77

 

950

4

 

New Jersey

38

 

 

465

 

48

 

357

 

-

 

29

 

32

 

931

4

 

Massachusetts

19

 

 

369

 

115

 

362

 

-

 

-

 

27

 

873

4

 

Illinois

18

 

 

148

 

307

 

20

 

53

 

36

 

23

 

587

3

 

Connecticut

19

 

 

328

 

145

 

23

 

80

 

-

 

-

 

576

2

 

Pennsylvania

24

 

 

-

 

28

 

461

 

52

 

27

 

-

 

568

2

 

Ohio

34

 

 

171

 

17

 

207

 

53

 

-

 

5

 

453

2

 

Other states

271

 

 

1,274

 

1,207

 

1,621

 

464

 

562

 

200

 

5,328

22

 

Foreign

61

 

 

720

 

1,028

 

648

 

265

 

556

 

384

 

3,601

15

 

Total*

805

 

$

5,197

$

8,017

$

5,145

$

1,824

$

2,446

$

1,381

$

24,010

100

%

158


TABLE OF CONTENTS

Item 2 / INVESTMENTS

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

of

 

Class

 

 

of

 

(dollars in millions)

Loans

 

Apartments

 

Offices

 

Retail

Industrial

Hotel

 

Others

 

Total

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

97

 

$

823

$

2,968

$

516

$

301

$

166

$

186

$

4,960

22

%

97

 

$

1,538

$

3,653

$

527

$

226

$

119

$

178

$

6,241

22

%

California

95

 

 

87

 

547

 

433

 

533

 

788

 

308

 

2,696

12

 

86

 

 

324

 

1,071

 

303

 

315

 

847

 

396

 

3,256

12

 

Texas

60

 

 

120

 

696

 

106

 

147

 

187

 

48

 

1,304

6

 

56

 

 

327

 

936

 

162

 

84

 

154

 

38

 

1,701

6

 

Massachusetts

22

 

 

673

 

337

 

405

 

-

 

-

 

27

 

1,442

5

 

New Jersey

45

 

 

441

 

338

 

324

 

-

 

29

 

33

 

1,165

5

 

38

 

 

574

 

47

 

448

 

-

 

28

 

33

 

1,130

4

 

Florida

78

 

 

187

 

113

 

374

 

116

 

20

 

146

 

956

4

 

73

 

 

320

 

85

 

380

 

227

 

19

 

76

 

1,107

4

 

Pennsylvania

25

 

 

67

 

22

 

573

 

47

 

26

 

-

 

735

3

 

Illinois

21

 

 

174

 

369

 

21

 

32

 

36

 

23

 

655

3

 

14

 

 

258

 

305

 

11

 

26

 

-

 

23

 

623

2

 

Massachusetts

19

 

 

56

 

168

 

360

 

-

 

-

 

33

 

617

3

 

Ohio

24

 

 

131

 

11

 

206

 

164

 

-

 

5

 

517

2

 

Connecticut

20

 

 

314

 

152

 

23

 

81

 

-

 

-

 

570

3

 

19

 

 

341

 

66

 

22

 

80

 

-

 

-

 

509

2

 

Pennsylvania

28

 

 

6

 

29

 

436

 

62

 

27

 

4

 

564

3

 

Ohio

37

 

 

122

 

28

 

211

 

67

 

-

 

5

 

433

2

 

Other states

302

 

 

1,118

 

1,203

 

1,514

 

414

 

595

 

229

 

5,073

23

 

251

 

 

1,516

 

1,240

 

1,607

 

620

 

586

 

180

 

5,749

20

 

Foreign

47

 

 

471

 

1,234

 

520

 

161

 

250

 

438

 

3,074

14

 

71

 

 

1,205

 

938

 

745

 

358

 

628

 

1,046

 

4,920

18

 

Total*

849

 

$

3,919

$

7,845

$

4,838

$

1,914

$

2,098

$

1,453

$

22,067

100

%

776

 

$

7,274

$

8,711

$

5,389

$

2,147

$

2,407

$

2,002

$

27,930

100

%

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

96

 

$

1,391

$

3,527

$

534

$

215

$

163

$

185

$

6,015

24

%

California

89

 

 

325

 

761

 

282

 

286

 

870

 

401

 

2,925

12

 

Texas

58

 

 

255

 

857

 

97

 

108

 

154

 

44

 

1,515

6

 

Florida

67

 

 

322

 

94

 

340

 

165

 

19

 

76

 

1,016

4

 

Massachusetts

20

 

 

415

 

114

 

408

 

50

 

-

 

27

 

1,014

4

 

New Jersey

39

 

 

529

 

47

 

355

 

-

 

29

 

33

 

993

4

 

Illinois

19

 

 

258

 

307

 

20

 

52

 

36

 

23

 

696

3

 

Pennsylvania

24

 

 

-

 

28

 

473

 

51

 

26

 

-

 

578

2

 

Ohio

29

 

 

151

 

17

 

211

 

165

 

-

 

5

 

549

2

 

Connecticut

19

 

 

343

 

67

 

23

 

80

 

-

 

-

 

513

2

 

Other states

269

 

 

1,309

 

1,239

 

1,670

 

481

 

560

 

199

 

5,458

22

 

Foreign

59

 

 

707

 

906

 

784

 

245

 

532

 

596

 

3,770

15

 

Total*

788

 

$

6,005

$

7,964

$

5,197

$

1,898

$

2,389

$

1,589

$

25,042

100

%

*    Does not reflect allowance for credit losses.

SeeFor additional discussion on commercial mortgage loans see Note 6 to the Consolidated Financial Statements in the 20152016 Annual Report for additional discussion on commercial mortgage loans.Report.

Impairments

The following table presents impairments by investment type:

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

 

2017

 

2016

 

 

2017

 

2016

Other-than-temporary Impairments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities, available for sale

$

69

$

167

 

$

361

$

330

$

72

$

69

 

$

185

$

361

Equity securities, available for sale

 

3

 

75

 

 

7

 

161

 

2

 

3

 

 

10

 

7

Private equity funds and hedge funds

 

30

 

31

 

 

46

 

74

 

14

 

30

 

 

28

 

46

Subtotal

 

102

 

273

 

 

414

 

565

 

88

 

102

 

 

223

 

414

Other impairments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in life settlements

 

80

 

58

 

 

329

 

200

 

273

 

80

 

 

360

 

329

Other investments

 

25

 

22

 

 

52

 

69

 

16

 

25

 

 

20

 

52

Real estate

 

2

 

-

 

 

6

 

5

Real estate*

 

9

 

2

 

 

61

 

6

Total

$

209

$

353

 

$

801

$

839

$

386

$

209

 

$

664

$

801

159AIG | Third Quarter 2017 Form 10-Q140


TABLE OF CONTENTS 

ITEM 2 | Investments

*    Impairments include $35 million related to other assets that were sold during the three-month period ended June 30, 2017.

Item 2 / INVESTMENTSOther-Than-Temporary Impairments

Other-Than-Temporary Impairments

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

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

Other-than-temporary impairment charges by reportable segment and impairment type:

 

 

Non-Life

 

Life

 

Corporate

 

 

  

 

Insurance

 

Insurance

 

and Other

 

  

(in millions)

 

Companies

 

Companies

 

Operations

 

Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

Severity

$

10

$

-

$

-

$

10

Change in intent

 

-

 

2

 

-

 

2

Foreign currency declines

 

7

 

-

 

-

 

7

Issuer-specific credit events

 

16

 

61

 

-

 

77

Adverse projected cash flows

 

3

 

3

 

-

 

6

Total

$

36

$

66

$

-

$

102

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

Severity

$

10

$

-

$

-

$

10

Change in intent

 

3

 

76

 

2

 

81

Foreign currency declines

 

5

 

-

 

-

 

5

Issuer-specific credit events

 

107

 

69

 

-

 

176

Adverse projected cash flows

 

-

 

1

 

-

 

1

Total

$

125

$

146

$

2

$

273

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

Severity

$

15

$

-

$

-

$

15

Change in intent

 

9

 

26

 

-

 

35

Foreign currency declines

 

13

 

1

 

-

 

14

Issuer-specific credit events

 

76

 

225

 

2

 

303

Adverse projected cash flows

 

16

 

31

 

-

 

47

Total

$

129

$

283

$

2

$

414

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

Severity

$

12

$

-

$

-

$

12

Change in intent

 

5

 

107

 

81

 

193

Foreign currency declines

 

19

 

18

 

-

 

37

Issuer-specific credit events

 

161

 

153

 

-

 

314

Adverse projected cash flows

 

3

 

6

 

-

 

9

Total

$

200

$

284

$

81

$

565

160


TABLE OF CONTENTS

Item 2 / INVESTMENTS

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

  

 

 

 

 

 

Other Fixed

Equities/Other

 

 

(in millions)

RMBS

CDO/ABS

CMBS

Maturity

 Invested Assets*

 

Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

10

$

10

Change in intent

 

-

 

-

 

-

 

2

 

-

 

2

Foreign currency declines

 

-

 

-

 

-

 

7

 

-

 

7

Issuer-specific credit events

 

20

 

-

 

13

 

21

 

23

 

77

Adverse projected cash flows

 

6

 

-

 

-

 

-

 

-

 

6

Total

$

26

$

-

$

13

$

30

$

33

$

102

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

10

$

10

Change in intent

 

-

 

-

 

1

 

73

 

7

 

81

Foreign currency declines

 

-

 

-

 

-

 

5

 

-

 

5

Issuer-specific credit events

 

10

 

-

 

5

 

72

 

89

 

176

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

-

 

1

Total

$

11

$

-

$

6

$

150

$

106

$

273

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

15

$

15

Change in intent

 

-

 

-

 

-

 

35

 

-

 

35

Foreign currency declines

 

-

 

-

 

-

 

14

 

-

 

14

Issuer-specific credit events

 

80

 

1

 

25

 

159

 

38

 

303

Adverse projected cash flows

 

47

 

-

 

-

 

-

 

-

 

47

Total

$

127

$

1

$

25

$

208

$

53

$

414

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

12

$

12

Change in intent

 

3

 

-

 

1

 

104

 

85

 

193

Foreign currency declines

 

-

 

-

 

-

 

37

 

-

 

37

Issuer-specific credit events

 

63

 

2

 

8

 

103

 

138

 

314

Adverse projected cash flows

 

9

 

-

 

-

 

-

 

-

 

9

Total

$

75

$

2

$

9

$

244

$

235

$

565

*    Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.

161


TABLE OF CONTENTS

Item 2 / INVESTMENTS

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

  

 

 

 

 

 

Other Fixed

Equities/Other

 

 

(in millions)

RMBS

CDO/ABS

CMBS

Maturity

 Invested Assets*

 

Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

-

$

-

$

-

$

1

$

-

$

1

AA

 

-

 

-

 

-

 

3

 

-

 

3

A

 

-

 

-

 

-

 

2

 

-

 

2

BBB

 

-

 

-

 

-

 

1

 

-

 

1

Below investment grade

 

26

 

-

 

13

 

23

 

-

 

62

Non-rated

 

-

 

-

 

-

 

-

 

33

 

33

Total

$

26

$

-

$

13

$

30

$

33

$

102

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

-

$

-

$

-

$

3

$

-

$

3

AA

 

-

 

-

 

-

 

2

 

-

 

2

A

 

-

 

-

 

-

 

1

 

-

 

1

BBB

 

1

 

-

 

-

 

9

 

-

 

10

Below investment grade

 

10

 

-

 

6

 

135

 

-

 

151

Non-rated

 

-

 

-

 

-

 

-

 

106

 

106

Total

$

11

$

-

$

6

$

150

$

106

$

273

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

-

$

-

$

-

$

3

$

-

$

3

AA

 

-

 

-

 

-

 

6

 

-

 

6

A

 

-

 

-

 

-

 

7

 

-

 

7

BBB

 

5

 

-

 

-

 

16

 

-

 

21

Below investment grade

 

122

 

1

 

25

 

176

 

-

 

324

Non-rated

 

-

 

-

 

-

 

-

 

53

 

53

Total

$

127

$

1

$

25

$

208

$

53

$

414

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

-

$

-

$

-

$

7

$

-

$

7

AA

 

-

 

-

 

-

 

8

 

-

 

8

A

 

1

 

-

 

-

 

7

 

-

 

8

BBB

 

2

 

-

 

-

 

29

 

-

 

31

Below investment grade

 

72

 

2

 

9

 

189

 

-

 

272

Non-rated

 

-

 

-

 

-

 

4

 

235

 

239

Total

$

75

$

2

$

9

$

244

$

235

$

565

  

 

 

 

 

 

Other Fixed

Equities/Other

 

 

(in millions)

RMBS

CDO/ABS

CMBS

Maturity

 Invested Assets*

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

-

$

-

Change in intent

 

-

 

-

 

-

 

1

 

-

 

1

Foreign currency declines

 

-

 

-

 

-

 

1

 

-

 

1

Issuer-specific credit events

 

5

 

-

 

7

 

57

 

16

 

85

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

-

 

1

Total

$

6

$

-

$

7

$

59

$

16

$

88

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

10

$

10

Change in intent

 

-

 

-

 

-

 

2

 

-

 

2

Foreign currency declines

 

-

 

-

 

-

 

7

 

-

 

7

Issuer-specific credit events

 

20

 

-

 

13

 

21

 

23

 

77

Adverse projected cash flows

 

6

 

-

 

-

 

-

 

-

 

6

Total

$

26

$

-

$

13

$

30

$

33

$

102

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

2

$

2

Change in intent

 

-

 

-

 

-

 

9

 

-

 

9

Foreign currency declines

 

-

 

-

 

-

 

11

 

-

 

11

Issuer-specific credit events

 

21

 

33

 

28

 

79

 

36

 

197

Adverse projected cash flows

 

4

 

-

 

-

 

-

 

-

 

4

Total

$

25

$

33

$

28

$

99

$

38

$

223

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

15

$

15

Change in intent

 

-

 

-

 

-

 

35

 

-

 

35

Foreign currency declines

 

-

 

-

 

-

 

14

 

-

 

14

Issuer-specific credit events

 

80

 

1

 

25

 

159

 

38

 

303

Adverse projected cash flows

 

47

 

-

 

-

 

-

 

-

 

47

Total

$

127

$

1

$

25

$

208

$

53

$

414

*    Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.

We recorded other-than-temporary impairment charges in the three- and nine-month periods ended September 30, 20162017 and 20152016 related to:

     issuer-specific credit events;

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

     declines due to foreign exchange rates;

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

     securities that experienced severe market valuation declines.

AIG | Third Quarter 2017 Form 10-Q141


TABLE OF CONTENTS

ITEM 2 | Investments

In addition, impairments are recorded on real estate and investments in life settlements.

162


TABLE OF CONTENTS

Item 2 / INVESTMENTS

In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $187$147 million and $197$187 million in the three-month periods ended September 30, 20162017 and 2015,2016, respectively, and $645$523 million and $565$645 million in the nine-month periods ended September 30, 2017 and 2016, and 2015, respectively. See

For a discussion of our other-than-temporary impairment accounting policy seeNote 56 to the Consolidated Financial Statements in the 20152016 Annual Report for a discussion of our other-than-temporary impairment accounting policy.

The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity 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, 2016

Less Than or Equal

 

 

Greater Than 20%

 

 

Greater Than 50%

 

 

  

September 30, 2017

September 30, 2017

Less Than or Equal

 

 

Greater Than 20%

 

 

Greater Than 50%

 

 

  

 

to 20% of Cost(b)

 

 

to 50% of Cost(b)

 

 

of Cost(b)

 

 

Total

 

to 20% of Cost(b)

 

 

to 50% of Cost(b)

 

 

of Cost(b)

 

 

Total

Aging(a)

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

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)

 

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

$

10,048

$

113

1,593

 

$

-

$

-

-

 

$

-

$

-

 

$

10,048

$

113

1,593

$

18,397

$

179

2,138

 

$

90

$

32

3

 

$

-

$

-

 

$

18,487

$

211

2,141

7-11 months

 

2,543

 

64

262

 

 

-

 

-

-

 

 

-

 

-

 

 

2,543

 

64

262

 

6,910

 

167

753

 

 

36

 

12

6

 

 

8

 

6

3

 

 

6,954

 

185

762

12 months or more

 

8,002

 

326

1,024

 

 

209

 

50

25

 

 

16

 

9

4

 

 

8,227

 

385

1,053

 

11,768

 

543

1,264

 

 

339

 

115

20

 

 

14

 

8

4

 

 

12,121

 

666

1,288

Total

$

20,593

$

503

2,879

 

$

209

$

50

25

 

$

16

$

9

4

 

$

20,818

$

562

2,908

$

37,075

$

889

4,155

 

$

465

$

159

29

 

$

22

$

14

7

 

$

37,562

$

1,062

4,191

Below investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

grade bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

2,577

$

65

938

 

$

20

$

7

23

 

$

6

$

5

2

 

$

2,603

$

77

963

$

2,080

$

48

1,289

 

$

22

$

5

30

 

$

-

$

-

1

 

$

2,102

$

53

1,320

7-11 months

 

1,596

 

62

268

 

 

210

 

73

16

 

 

7

 

7

3

 

 

1,813

 

142

287

 

448

 

16

166

 

 

11

 

3

5

 

 

-

 

-

 

 

459

 

19

171

12 months or more

 

6,722

 

432

1,031

 

 

363

 

105

58

 

 

147

 

85

17

 

 

7,232

 

622

1,106

 

2,383

 

134

397

 

 

223

 

60

34

 

 

9

 

9

2

 

 

2,615

 

203

433

Total

$

10,895

$

559

2,237

 

$

593

$

185

97

 

$

160

$

97

22

 

$

11,648

$

841

2,356

$

4,911

$

198

1,852

 

$

256

$

68

69

 

$

9

$

9

3

 

$

5,176

$

275

1,924

Total bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

12,625

$

178

2,531

 

$

20

$

7

23

 

$

6

$

5

2

 

$

12,651

$

190

2,556

$

20,477

$

227

3,427

 

$

112

$

37

33

 

$

-

$

-

1

 

$

20,589

$

264

3,461

7-11 months

 

4,139

 

126

530

 

 

210

 

73

16

 

 

7

 

7

3

 

 

4,356

 

206

549

 

7,358

 

183

919

 

 

47

 

15

11

 

 

8

 

6

3

 

 

7,413

 

204

933

12 months or more

 

14,724

 

758

2,055

 

 

572

 

155

83

 

 

163

 

94

21

 

 

15,459

 

1,007

2,159

 

14,151

 

677

1,661

 

 

562

 

175

54

 

 

23

 

17

6

 

 

14,736

 

869

1,721

Total(e)

$

31,488

$

1,062

5,116

 

$

802

$

235

122

 

$

176

$

106

26

 

$

32,466

$

1,403

5,264

$

41,986

$

1,087

6,007

 

$

721

$

227

98

 

$

31

$

23

10

 

$

42,738

$

1,337

6,115

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-11 months

$

244

$

15

142

 

$

15

$

4

9

 

$

-

$

-

 

$

259

$

19

151

$

158

$

8

65

 

$

6

$

1

7

 

$

-

$

-

 

$

164

$

9

72

12 months or more

 

1

 

-

2

 

 

-

 

-

1

 

 

-

 

-

 

 

1

 

-

3

Total

$

244

$

15

142

 

$

15

$

4

9

 

$

-

$

-

 

$

259

$

19

151

$

159

$

8

67

 

$

6

$

1

8

 

$

-

$

-

 

$

165

$

9

75

(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, 2016.2017.

(c)  For bonds, represents amortized cost.

(d)  The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.

(e)  Item count is by CUSIP by subsidiary.

Institutional Markets

Change in Unrealized Gains and Losses on Investments79

69

14

204

190

7

 

The change Fuji Life

-

7

NM

43

3

NM

Parent and Other:

Corporate General operating expenses

(172)

(167)

(3)

(563)

(514)

(10)

Interest expense

(243)

(248)

2

(729)

(740)

1

Other income, net

49

45

9

210

95

121

Total Parent and Other

(366)

(370)

1

(1,082)

(1,159)

7

Pre-tax operating loss before eliminations

(287)

(164)

(75)

(835)

(565)

(48)

Consolidation, eliminations and other adjustments

(1)

(6)

83

75

-

NM

Pre-tax operating loss

$

(288)

$

(170)

(69)

%

$

(760)

$

(565)

(35)

%

Quarterly 2017 and 2016 Comparison

Pre-tax operating loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.

Institutional Markets pre-tax operating income increased due to favorable mortality experience.

Parent and Other pre-tax operating loss was flat compared to the same period in the prior year due to higher gains on securities where we elected the fair value option, offset by higher corporate general operating expenses.

year-to-date 2017 and 2016 Comparison

Pre-tax operating loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.

Institutional Markets pre-tax operating income increased due to higher net spreads driven by growth in business.

Parent and Other pre-tax operating loss decreased as a result of gains on securities where we elected the fair value option, partially offset by higher general operating expenses related to one time payments for recent executive leadership changes.

Fuji Life pre-tax operating results increased primarily as a result of increases in underwriting income as a result of new products launched during 2016 as well as growth within existing product lines. Fuji Life was sold on April 30, 2017.

AIG | Third Quarter 2017 Form 10-Q127


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations| Legacy Portfolio

Legacy Portfolio

Legacy Insurance Lines represent exited or discontinued product lines, policy forms or distribution channels.

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

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

Legacy Investments include investment classes that we have placed into run-off (life settlements, Legacy Global Real Estate and the Direct Investment book) and equity-like securities with high yield, high-risk characteristics.

BUSINESSSTRATEGY 

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

Third party and affiliated reinsurance and retrocessions to improve capital efficiency

Commutations of assumed reinsurance and direct policy buy-backs

Enhance insured policyholder options and claims resolution strategies

Enhanced asset liability management and expense management

For Legacy Investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while sourcing for our insurance companies attractive assets for their portfolios. Where the asset is under our sole control, we expect to achieve this through a combination of unaffiliated and affiliated sales and securitizations. Where the asset is not under our sole control, there are fewer options as we may, for example, have fiduciary duty obligations to joint venture partners (such as in our Legacy Global Real Estate book).

AIG | Third Quarter 2017 Form 10-Q128


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations| Legacy Portfolio

LEGACY PORTFOLIO RESULTS

The following table presents Legacy Portfolio results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

136

$

180

 

(24)

%

 

$

449

$

526

 

(15)

%

Policy fees

 

38

 

29

 

31

 

 

 

105

 

103

 

2

 

Net investment income

 

690

 

810

 

(15)

 

 

 

2,142

 

2,153

 

(1)

 

Other income (loss)

 

149

 

293

 

(49)

 

 

 

539

 

221

 

144

 

Total operating revenues

 

1,013

 

1,312

 

(23)

 

 

 

3,235

 

3,003

 

8

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses and loss adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses incurred

 

500

 

1,137

 

(56)

 

 

 

1,470

 

2,194

 

(33)

 

Interest credited to policyholder account balances

 

61

 

73

 

(16)

 

 

 

181

 

211

 

(14)

 

Amortization of deferred policy acquisition costs

 

28

 

21

 

33

 

 

 

70

 

82

 

(15)

 

General operating and other expenses

 

105

 

110

 

(5)

 

 

 

352

 

373

 

(6)

 

Interest expense

 

33

 

70

 

(53)

 

 

 

103

 

237

 

(57)

 

Total benefits and expenses

 

727

 

1,411

 

(48)

 

 

 

2,176

 

3,097

 

(30)

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Pre-tax operating income (loss) by type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Casualty Run-Off Insurance Lines

$

63

$

68

 

(7)

%

 

$

207

$

94

 

120

%

Life Insurance Run-Off Lines

 

79

 

(510)

 

NM

 

 

 

308

 

(356)

 

NM

 

Legacy Investments

 

144

 

343

 

(58)

 

 

 

544

 

168

 

224

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Business and Financial Highlights

In the nine-month period ended September 30, 2017, the Legacy Investment portfolio executed several transactions with external parties for total consideration of approximately $676 million, which included sales of a portion of our life settlements portfolio with a face value (death benefits) of approximately $1.9 billion, resulting in a loss on the sale of $123 million. The majority of the consideration received was used to pay down intercompany loans and notes with affiliated insurance companies. In addition, the Legacy Investment portfolio returned approximately $1.0 billion of cash proceeds to AIG Parent in the nine-month period ended September 30, 2017, including $191 million from the sale of an AIG-sponsored fund that occurred in the fourth quarter of 2016.

On September 26, 2017, we signed a Purchase and Sale Agreement to sell the remaining life settlements contracts. The sale was completed on November 1, 2017. As a result, an impairment charge of $273 million was recorded in net realized capital losses in the third quarter of 2017 to write down the contracts to their fair market value.

AIG | Third Quarter 2017 Form 10-Q129


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ITEM 2 |Business Segment Operations| Legacy Portfolio

Legacy Portfolio Pre-Tax Operating Income (Loss)

Three Months Ended September 30,

(in net unrealized gainsmillions)

Quarterly 2017 and losses2016 Comparison

Pre-tax operating income increased due to higher Legacy Life pre-tax operating income due to significantly lower loss recognition on investmentscertain payout annuities from the update of actuarial assumptions in the third quarter of 2016 was primarily attributable to increases in the fair value of fixed maturity securities. For the nine-monththree-month period ended September 30, 2016, net unrealized gains related to fixed maturity and equity securities increased by $10.8 billion due to a decrease in interest rates and narrowing of credit spreads.

The change in net unrealized gains and losses on investments in the third quarter of 2015 was primarily attributable to decreases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2015, net unrealized gains related to fixed maturity and equity securities decreased by $6.1 billion primarily due to the widening of credit spreads.

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Item 2 / INVESTMENTS

See also Note 6 to the Condensed Consolidated Financial Statements for further discussion of our investment portfolio.

Net Realized Capital Gains and Losses

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

 

2015

Sales of fixed maturity securities

$

135

$

(16)

 

$

(103)

 

$

150

Sales of equity securities

 

53

 

16

 

 

1,051

 

 

528

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

 

Severity

 

(10)

 

(10)

 

 

(15)

 

 

(12)

Change in intent

 

(2)

 

(81)

 

 

(35)

 

 

(193)

Foreign currency declines

 

(7)

 

(5)

 

 

(14)

 

 

(37)

Issuer-specific credit events

 

(77)

 

(176)

 

 

(303)

 

 

(314)

Adverse projected cash flows

 

(6)

 

(1)

 

 

(47)

 

 

(9)

Provision for loan losses

 

8

 

32

 

 

8

 

 

43

Foreign exchange transactions

 

(639)

 

(16)

 

 

(1,197)

 

 

304

Derivatives and hedge accounting

 

(226)

 

13

 

 

(129)

 

 

509

Impairments on investments in life settlements

 

(80)

 

(58)

 

 

(329)

 

 

(200)

Other*

 

86

 

(40)

 

 

284

 

 

356

Net realized capital gains (losses)

$

(765)

$

(342)

 

$

(829)

 

$

1,125

Includes $107 million of realized gains due to a purchase price adjustment on the sale of Class B shares of Prudential Financial, Inc. for the nine months ended September 30, 2016 and $357 million of realized gains due to the sale of common shares of SpringLeaf Holdings, $428 million of realized gains due to the sale of Class B shares of Prudential Financial, Inc. and $463 million of realized losses due to the sale of ordinary shares of AerCap for the nine months ended September 30, 2015.

Net realized capital losses were higher in the three month period ended September 30, 20162017 compared to the same period in the prior year,year.

Partially offsetting the increase was lower Legacy Investment pre-tax operating income driven primarily due to higher foreign exchange losses related to British pound weakening following the Brexit vote more than offsettingby lower Other-than-temporary -impairment charges and higher gains on portfolios for which the salefair value option was elected, and lower income on the life settlements portfolio as a result of securities. Net realized capital lossespartial sales.

Legacy Portfolio Pre-Tax Operating Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income increased due to: 

significantly lower loss recognition on certain payout annuities from the update of actuarial assumptions in the nine-month period ended September 30, 2016 were primarily related to foreign exchange losses and impairments, which were higher than the gain recognized on the sale of a portion of our PICC Investment,2017 compared to net realized capital gains in the same period in the prior year, which wereyear;

increased Legacy Investment pre-tax operating income in 2017 compared to 2016 driven primarily by foreign exchange gains and nethigher fair value gains on portfolios for which the sales of various securities such as the Class B shares of Prudential Financial, Inc.fair value option was elected; and common shares of Springleaf Holdings Inc.

Foreign exchange gains (losses) were primarilyincreased Legacy Property and Casualty pre-tax operating income due to $528 million and $906 million of remeasurement lossesunfavorable prior year development in the three- and nine-month periods endedprior year.

AIG | Third Quarter 2017 Form 10-Q130


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ITEM 2 | Investments

Investments

Overview

Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business modules and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of fixed maturity securities.

Investment Highlights during the Nine Months Ended September 30, 2016, respectively, for2017

A decrease in interest rates and narrowing credit spreads resulted in a short term intercompany balance that was matched withnet unrealized gain in our investment portfolio. Net unrealized gains in our available for sale portfolio increased to approximately $14.1 billion as of September 30, 2017 from approximately $9.7 billion as of December 31, 2016.

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

During the first quarter of 2017, we funded the adverse development reinsurance agreement entered into with NICO. The approximate $10.2 billion funding of this agreement was the primary reason for the decrease in the same foreign currencies. Unrealized gains and losses on the available for sale investments were recorded in other comprehensive income resulting in an immaterial impact on our overall equity or book value per share from this arrangement.

Net realized capital losses in the three-month period ended September 30, 2015 were primarily driven by higher other-than-temporary impairments within the energy and emerging markets sectors, driven primarily by slowing growth in China and weakness in commodity markets, partially offset by foreign exchange losses, which included $48 million of losses in the three-month period ended September 30, 2015, related to the intercompany notional cash pooling arrangement, discussed above.

Net realized capital gainsinvested asset portfolio in the nine-month period ended September 30, 2015 were primarily driven by gains on sales of our PICC Investment, Class B shares of Prudential Financial, Inc., and common shares of Springleaf Holdings, Inc. and foreign exchange gains, which included $107 million of gains in nine-month periods ended September 30, 2015, related to the intercompany notional cash pooling arrangement, discussed above. These realized gains were partially offset by realized losses related to the sale of ordinary shares of AerCap. 

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2017.

Item 2 / INVESTMENTS

See also Note 6 to the Condensed Consolidated Financial Statements for further discussion of our investment portfolio.

Insurance Reserves

The following section provides discussion of insurance reserves for both the Non-Life Insurance Companies and the Life Insurance Companies, including those of Institutional Markets and Eaglestone Reinsurance Company, the results of which are reported in Corporate and Other.

Non-Life Insurance Companies

The following section provides discussion of the consolidated liability for unpaid losses and loss adjustment expenses for the Non-Life Insurance Companies.

The following table presents the components of AIG’s gross loss reserves by major lines of business on a U.S. statutory basis*:

 

September 30,

December 31,

(in millions)

 

2016

 

2015

Other liability occurrence (including asbestos and environmental)

$

23,685

$

24,856

Workers' compensation (net of discount)

 

15,143

 

14,978

Other liability claims made

 

12,983

 

14,006

Property

 

5,673

 

5,823

Auto liability

 

5,106

 

4,692

Accident and health

 

1,949

 

1,783

Products liability

 

1,636

 

1,681

Medical malpractice

 

1,516

 

1,603

Aircraft

 

1,305

 

1,286

Other

 

3,460

 

4,234

Total

$

72,456

$

74,942

Total U.S. & Canada

$

56,588

$

58,890

Total International

$

15,868

$

16,052

*    Presented by lines of business pursuant to statutory reporting requirements as prescribed by the NAIC.

Gross loss reserves represent the accumulation of estimates of ultimate losses, including estimates for IBNR and loss expenses, less estimated salvage and subrogation and applicable discount. The Non-Life Insurance Companies regularly review and update the methods and assumptions used to determine loss reserve estimates and to establish the resulting reserves. Any adjustments resulting from this review are reflected in pre‑tax operating income. Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase prior years’ estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease prior years’ estimates of ultimate cost are referred to as favorable development. See MD&A – Critical Accounting Estimates – Details of the Loss Reserving Process in the 2015 Annual Report.

Net loss reserves represent gross loss reserves reduced by reinsurance recoverable, net of an allowance for unrecoverable reinsurance.

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The following table presents the components of net loss reserves:

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

2016

 

2015

Gross loss reserves before reinsurance and discount

 

 

 

 

 

$

75,281

$

78,090

Less: discount

 

 

 

 

 

 

(2,825)

 

(3,148)

Gross loss reserves, net of discount, before reinsurance

 

 

 

 

 

 

72,456

 

74,942

Less: reinsurance recoverable*

 

 

 

 

 

 

(14,501)

 

(14,339)

Net liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

$

57,955

$

60,603

*    Includes $1.7 billion and $1.8 billion of reinsurance recoverable under a retroactive reinsurance agreement at September 30, 2016 and December 31, 2015, respectively.

Gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $13.1 billion and $12.6 billion at September 30, 2016 and December 31, 2015, respectively. These recoverable amounts are related to certain policies with high deductibles (meaning, the policy attachment point is above high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements; each referred to here generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim the Non-Life Insurance Companies manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. The Non-Life Insurance Companies held collateral of approximately $9.6 billion at both September 30, 2016 and December 31, 2015 for these deductible recoverable amounts, consisting primarily of letters of credit and assets in trusts.

The following table classifies the components of net loss reserves by business unit:

 

September 30,

December 31,

(in millions)

 

2016

 

2015

Commercial Insurance:

 

 

 

 

Casualty

$

29,924

$

32,620

Financial lines

 

9,014

 

9,265

Specialty

 

5,249

 

5,197

Property(a)

 

3,587

 

4,013

Total Commercial Insurance

 

47,774

 

51,095

Consumer Personal Insurance:

 

 

 

 

Personal lines

 

2,998

 

2,661

Accident and health

 

1,808

 

1,662

Total Consumer Personal Insurance

 

4,806

 

4,323

Other run-off insurance lines(b)

 

5,375

 

4,472

Corporate and Other United Guaranty(a)

 

-

 

713

Net liability for unpaid losses and loss adjustment expenses

$

57,955

$

60,603

(a) Beginning in the third quarter of 2016, UGC and Ascot Underwriting Holdings Ltd. (AUHL) loss reserves are reported as held for sale. As of December 31, 2015 UGC net loss reserves are reported in Corporate and Other United Guaranty, whereas AUHL loss reserves are reported in Commercial Insurance Property.

(b) InDuring the nine-month period ended September 30, 2016 and in the full year 2015, $1.32017, we reduced our hedge fund portfolio by approximately $1.8 billion and $1.2 billion, respectively,as a result of loss reserves for certain environmental liability, casualty, healthcare, and specialty coverages, previously reported in Commercial Casualty and Specialty linesredemptions consistent with our planned reduction of business, were transferred to Other run-off insurance lines.

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Discounting of Reserves

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

 

September 30, 2016

 

December 31, 2015

 

 

 

 

Run-off

 

 

 

 

 

 

Run-off

 

 

 

 

Property

 

Insurance

 

 

 

 

Property

 

Insurance

 

 

(in millions)

 

Casualty

 

Lines

 

Total

 

 

Casualty

 

Lines

 

Total

U.S. workers' compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tabular

$

635

$

218

$

853

 

$

635

$

218

$

853

Non-tabular

 

1,360

 

607

 

1,967

 

 

1,542

 

746

 

2,288

Asbestos

 

-

 

5

 

5

 

 

-

 

7

 

7

Total reserve discount

$

1,995

$

830

$

2,825

 

$

2,177

$

971

$

3,148

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

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2016

 

2015

 

2016

 

2015

 

 

 

Run-off

 

 

 

 

 

 

Run-off

 

 

 

 

 

Run-off

 

 

 

 

 

 

Run-off

 

 

 

 

Property

 

Insurance

 

 

 

 

Property

 

Insurance

 

 

 

 

Property

 

Insurance

 

 

 

 

Property

 

Insurance

 

 

(in millions)

 

Casualty

 

Lines

 

Total

 

 

Casualty

 

Lines

 

Total

 

 

Casualty

 

Lines

 

Total

 

 

Casualty

 

Lines

 

Total

Current accident year

$

37

$

-

$

37

 

$

45

$

-

$

45

 

$

118

$

-

$

118

 

$

149

$

-

$

149

Accretion and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments to prior

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

year discount - U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workers' compensation

 

(43)

 

(12)

 

(55)

 

 

(48)

 

(13)

 

(61)

 

 

(104)

 

(40)

 

(144)

 

 

(157)

 

(54)

 

(211)

Accretion and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

adjustments to prior

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

year discount - Asbestos

 

-

 

-

 

-

 

 

-

 

(1)

 

(1)

 

 

-

 

(2)

 

(2)

 

 

-

 

(3)

 

(3)

Effect of interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

changes

 

(11)

 

(3)

 

(14)

 

 

(38)

 

(23)

 

(61)

 

 

(196)

 

(99)

 

(295)

 

 

144

 

78

 

222

Net reserve discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

benefit (charge)

$

(17)

$

(15)

$

(32)

 

$

(41)

$

(37)

$

(78)

 

$

(182)

$

(141)

$

(323)

 

$

136

$

21

$

157

Comprised of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation

$

(17)

$

(15)

$

(32)

 

$

(41)

$

(36)

$

(77)

 

$

(182)

$

(139)

$

(321)

 

$

136

$

24

$

160

Asbestos

$

-

$

-

$

-

 

$

-

$

(1)

$

(1)

 

$

-

$

(2)

$

(2)

 

$

-

$

(3)

$

(3)

U.S. Workers’ Compensation

exposure. Our Non-Life Insurance Companies discount certain workers’ compensation reserves in accordance with practices prescribed or permitted by New York, Pennsylvania and Delaware. New York rules generally do not permit non-tabular discounting on IBNR and prescribe a fixed 5 percent discount rate for application to case reserves. Pennsylvania permits non-tabular discounting of IBNR and approved variable discount rates determined using risk-free rates based on the U.S. Treasury forward yield curve plus a liquidity margin, applicable to IBNR and case reserves. Delaware has permitted discounting on the same basis as the Pennsylvania domiciled companies.

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Item 2 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES

The net decreases in workers’ compensation discount in the amounts of $32 million and $321 million, respectively, in the three- and nine-month periods ended September 30, 2016 compared to the prior-year periods were primarily due to the decrease in forward yield curve rates used for discounting under the prescribed or permitted practices. The decrease in the forward yield curve component of the discount rates resulted in a $14 million and $295 million decrease in the loss reserve discount in the three- and nine-month periods ended September 30, 2016 compared to the prior-year periods, due to a decrease in Treasury rates along the payout pattern horizon. In addition, there was a $55 million and $144 million reduction for accident years 2015 and prior for the three- and nine-month periods ended September 30, 2016, respectively, primarily from accretion of discount on reserves for those periods. This decrease was partially offset by a $37 million and $118 million addition for newly established reserves for accident year 2016 in the three- and nine-month periods ended September 30, 2016, respectively. The impact of changes in treasury rates and credit spreads on workers' compensation reserve discount generally is economically offset by unrealized gains and losses on available for sale securities backing these reserves recorded in Other comprehensive income resulting in a modest impact on our overall equity and book value per common share.

Quarterly Reserving Conclusion

AIG net loss reserves represent our best estimate of the liability for net losses and loss adjustment expenses as of September 30, 2016. While we regularly review the adequacy of established loss reserves, there can be no assurance that our recorded loss reserves will not develop adversely in future years and materially exceed our loss reserves as of September 30, 2016. In our opinion, such adverse development and resulting increase in reserves are not likely to have a material adverse effect on our consolidated financial condition, although such events could have a material adverse effect on our consolidated results of operations for an individual reporting period.

The following table presents the rollforward of net loss reserves:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Net liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

 

at beginning of period

$

59,623

$

59,093

 

$

60,603

$

61,612

Foreign exchange effect

 

(147)

 

(121)

 

 

53

 

(1,087)

Change due to retroactive asbestos reinsurance

 

-

 

39

 

 

-

 

139

Losses and loss adjustment expenses incurred:

 

 

 

 

 

 

 

 

 

Current year, undiscounted

 

4,961

 

5,067

 

 

14,896

 

15,205

Prior years unfavorable development, undiscounted*

 

273

 

191

 

 

214

 

532

Change in discount

 

32

 

78

 

 

323

 

(157)

Losses and loss adjustment expenses incurred

 

5,266

 

5,336

 

 

15,433

 

15,580

Losses and loss adjustment expenses paid

 

5,727

 

6,057

 

 

17,074

 

17,954

Reclassified to liabilities of businesses held for sale

 

1,060

 

-

 

 

1,060

 

-

Net liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

 

at end of period

$

57,955

$

58,290

 

$

57,955

$

58,290

* See tables below for details of prior year development by business unit, accident year and major class of business.

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The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss expenses for prior years, net of reinsurance, by business unit and major class of business:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

 

2015

 

 

2016

 

 

2015

Prior accident year development by major class of business:

 

 

 

 

 

 

 

 

 

 

 

Commercial Insurance - U.S. & Canada:

 

 

 

 

 

 

 

 

 

 

 

Excess casualty

$

-

 

$

-

 

$

-

 

$

318

Financial lines including professional liability

 

(5)

 

 

10

 

 

(5)

 

 

13

On-going Environmental

 

-

 

 

104

 

 

-

 

 

109

Primary casualty:

 

 

 

 

 

 

 

 

 

 

 

Loss-sensitive (offset by premium adjustments below)*

 

11

 

 

(30)

 

 

(17)

 

 

(53)

Primary workers' compensation and other

 

-

 

 

21

 

 

98

 

 

139

Healthcare

 

-

 

 

150

 

 

-

 

 

156

Specialty

 

349

 

 

(26)

 

 

349

 

 

20

Property excluding catastrophes

 

(6)

 

 

(14)

 

 

(60)

 

 

(123)

Catastrophes

 

(4)

 

 

4

 

 

121

 

 

(37)

All other, net

 

(17)

 

 

36

 

 

(15)

 

 

69

Total Commercial Insurance - U.S. & Canada

 

328

 

 

255

 

 

471

 

 

611

Commercial Insurance - International:

 

 

 

 

 

 

 

 

 

 

 

Primary casualty

 

-

 

 

(2)

 

 

-

 

 

5

Financial lines

 

-

 

 

(3)

 

 

-

 

 

(30)

Specialty

 

30

 

 

(12)

 

 

(14)

 

 

(29)

Property excluding catastrophes

 

(34)

 

 

(69)

 

 

(100)

 

 

(104)

Catastrophes

 

(13)

 

 

(13)

 

 

(22)

 

 

(14)

All other, net

 

6

 

 

-

 

 

2

 

 

1

Total Commercial Insurance - International

 

(11)

 

 

(99)

 

 

(134)

 

 

(171)

Total Commercial Insurance

 

317

 

 

156

 

 

337

 

 

440

Consumer Personal Insurance - U.S. & Canada:

 

 

 

 

 

 

 

 

 

 

 

Catastrophes

 

-

 

 

(1)

 

 

(5)

 

 

(6)

All other, net

 

(19)

 

 

(31)

 

 

(32)

 

 

(68)

Total Consumer Personal Insurance - U.S. & Canada

 

(19)

 

 

(32)

 

 

(37)

 

 

(74)

Consumer Personal Insurance - International:

 

 

 

 

 

 

 

 

 

 

 

Catastrophes

 

-

 

 

-

 

 

2

 

 

-

All other, net

 

(15)

 

 

(14)

 

 

(86)

 

 

15

Total Consumer Personal Insurance - International

 

(15)

 

 

(14)

 

 

(84)

 

 

15

Total Consumer Personal Insurance

 

(34)

 

 

(46)

 

 

(121)

 

 

(59)

Run-off Insurance Lines

 

 

 

 

 

 

 

 

 

 

 

Asbestos and environmental (1986 and prior)

 

-

 

 

2

 

 

-

 

 

51

Run-off environmental

 

7

 

 

52

 

 

7

 

 

89

Run-off healthcare

 

-

 

 

50

 

 

-

 

 

50

Other run-off

 

(1)

 

 

-

 

 

(1)

 

 

-

All other, net

 

-

 

 

(5)

 

 

25

 

 

(4)

Total Run-off Insurance Lines

 

6

 

 

99

 

 

31

 

 

186

Corporate and Other United Guaranty

 

(16)

 

 

(18)

 

 

(33)

 

 

(35)

Total prior year unfavorable development

$

273

 

$

191

 

$

214

 

$

532

 

 

 

 

 

 

 

 

 

 

 

 

Premium adjustments on primary casualty loss sensitive business

 

(11)

 

 

30

 

 

17

 

 

53

Total prior year development, net of premium adjustments

$

262

 

$

221

 

$

231

 

$

585

*    Represents prior year development on active retrospectively rated components of risk-sharing policies.

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Quarterly and Year-to-Date Net Loss Development

Net Loss Development

In determining the loss development from prior accident years, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes (including challenges and recommendations from our Enterprise Risk Management group) as well as the views of third party actuarial firms.  We use these sources to improve our evaluation techniques and to analyze and assess the change in estimated ultimate loss for each accident year by class of business. Our analyses produce a range of indications from various methods, from which we select our best estimate.

We analyze and evaluate the change in estimated ultimate loss for each accident year by class of business. For example, if loss emergence for a class of business is different than expected for certain accident years, we examine the indicated effect such emergence would have on the reserves of that class of business. In some cases, the lower or higher than expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no adjustment would be made to the reserves for the class of business. In other cases, the lower or higher than expected emergence may result in a change, either favorable or unfavorable. As appropriate, we make adjustments in response to the difference between the actual and expected loss emergence for each accident year. As part of our reserving process, we also consider notices of claims received with respect to emerging and/or evolving issues, in particular those related to complex, claims-related class action litigation and latent exposure claims.

In the three-month period ended September 30, 2016, the adverse prior year loss reserve development was $273 million, which was primarily driven by adverse development from our U.S. program business within Specialty, partially offset by Property excluding catastrophes, and Consumer - Personal Insurance. The U.S. program prior year development was driven by higher than expected loss emergence in the most recent calendar year from a subset of the U.S. programs businesses, which consists of both casualty and property lines written by Managing General Agencies (MGAs) for which third party administrators handled the majority of the claims.

In the nine-month period ended September 30, 2016, the adverse prior year loss reserve development was $214 million, which was primarily driven by program business in the U.S., domestic catastrophes, and the Florida court rulings described below, partially offset by favorable development from Property excluding catastrophes, and Consumer - Personal Insurance.

During the second quarter of 2016, the Florida Supreme Court issued two separate rulings that have increased the potential liability for workers’ compensation claims in that state by undoing certain aspects of regulations in place since 2003. The Castellanos ruling eliminated statutory caps on claimant attorney fees in certain cases, and the Westphal ruling eliminated the 104-week limitation on temporary total disability benefits.  Also in the second quarter, the Florida Court of Appeals issued the Miles decision, declaring unconstitutional certain restrictions on claimant-paid attorney fees.

We have evaluated the potential impact of these decisions on our loss reserves, and have recognized adverse prior year development for primary workers’ compensationhedge fund portfolio experienced above average returns in the nine-month period ended September 30, 2016 of approximately $100 million. We are continuing2017 due to monitor the impact of these decisions, and may adjust our estimate as new facts and data emerge.

In the three- and nine-month periods ended September 30, 2015, the adverse prior year loss reserve development was $191 million and $532 million, respectively,  which was driven by increased automobile claim severity in Excess and Primary Casualty, as well as adverse development from Asbestos and Environmental (1986 and prior), and Run-off Environmental (1987 to 2004). This was partially offset by Property excluding catastrophes, both domestically and internationally.

We recognized additional premiums on loss sensitive business of $11 million and return premiums of $17 million for the three- and nine-month periods ended September 30, 2016, respectively, which entirely offset development in that business. We recognized return premiums on loss sensitive business of $30 million and $53 million for the three- and nine-month periods ended September 30, 2015, respectively, which entirely offset favorable development in that business.

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higher equity market performance.

Item 2 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES

See Results of Operations — Commercial Insurance and Results of Operations — Consumer Personal Insurance Results herein for further discussion of net loss development.

The following table summarizes development, (favorable)Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or unfavorable, ofincurred losses and loss adjustment expenses for prior years, net of reinsurance, by accident year:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Prior accident year development by accident year:

 

 

 

 

 

 

 

 

 

Accident Year

 

 

 

 

 

 

 

 

 

2015

$

76

$

-

 

$

(56)

$

-

2014

 

122

 

(65)

 

 

54

 

(87)

2013

 

37

 

27

 

 

11

 

92

2012

 

(1)

 

(83)

 

 

68

 

69

2011

 

11

 

1

 

 

27

 

23

2010

 

13

 

40

 

 

16

 

42

2009

 

27

 

21

 

 

51

 

(9)

2008

 

(20)

 

57

 

 

19

 

70

2007

 

1

 

17

��

 

8

 

(30)

2006

 

(3)

 

29

 

 

(1)

 

21

2005

 

(1)

 

6

 

 

21

 

4

2004 and prior (see table below)

 

11

 

141

 

 

(4)

 

337

Total prior year unfavorable development

$

273

$

191

 

$

214

$

532

The following table summarizes development, (favorable) or unfavorable, of incurred losses and loss adjustment expenses for accident year 2004 and prior by major class of business and driver of development:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

2004 and prior accident year development by major class of

 

 

 

 

 

 

 

 

 

business and driver of development:

 

 

 

 

 

 

 

 

 

Excess Casualty - all other

$

-

$

-

 

$

-

$

1

Primary Casualty - loss sensitive business(a)

 

-

 

12

 

 

(8)

 

(3)

Primary Casualty - all other(b)

 

-

 

58

 

 

5

 

94

Run-off environmental (1987 to 2004)

 

7

 

39

 

 

7

 

86

Asbestos and environmental (1986 and prior)

 

-

 

2

 

 

-

 

51

Commutations and arbitrations(c)

 

-

 

(4)

 

 

-

 

(5)

All Other

 

4

 

34

 

 

(8)

 

113

Total prior year (favorable) unfavorable development

$

11

$

141

 

$

(4)

$

337

(a) Loss sensitive business that is offset by premium adjustments and has no income statement impact. Approximated based on prior accident year development recognized from policy year premium charges.

(b) Includes loss development on excess of deductible exposures in workers’ compensation, general liability and commercial auto.

(c) The effects of commutations are shown separately from the related classes of business, primarily excess workers’ compensation. Commutations are reflected for the years in which they were contractually binding.

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Asbestos and Environmental Reserves

Loss Reserve Estimates - Asbestos and Environmental

The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many years ago is subject to greater uncertainty than other types of claimsOther-than-temporary impairments decreased due to inconsistent court decisions as well as judicial interpretationslower impairments in our structured securities and legislative actions that in some cases have tended to broaden coverage beyond the original intent of such policies and in others have expanded theories of liability.corporate bond portfolios.

As described more fully in the 2015 Annual Report, our reserves relating to asbestos and environmental claims reflect comprehensive ground‑up and top-down analyses performed periodically. In the nine-month period ended September 30, 2016, we increased our gross asbestos incurred losses by $4 million due to accretion of discount, while our net asbestos incurred losses increased by $2 million.  For the same period, our gross and net environmental incurred losses remained unchanged. In the nine-month period ended September 30, 2015, we increased our gross asbestos reserves by $20 million and our net asbestos reserves by $11 million due to minor changes in estimates, accretion of discount, and anticipated uncollectible reinsurance. For the same period, we increased our gross environmental reserves by $66 million and our net environmental reserves by $43 million to reflect the results of a top-down analysis of accident years 1986 and prior completed inDuring the second quarter of 2015.

In addition to the U.S. asbestos and environmental reserve amounts shown2017, partial sale of our investment in the tables below, the Non-Life Insurance Companiesalso have asbestos reserves relating to foreign risks written by non‑U.S. entities of $107 million gross and $85 million netArch Capital Group Ltd. (Arch), which we received as of September 30, 2016. The asbestos reserves relating to non‑U.S. risks written by non‑U.S. entities were $121 million gross and $93 million net as of December 31, 2015.

The following table provides a summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims:

As of or for the Nine Months Ended September 30,

 

2016

 

2015

(in millions)

Gross

 

Net

 

Gross

 

Net

Asbestos:

 

 

 

 

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

at beginning of year

$

3,595

$

446

$

4,117

$

388

Change in net loss reserves due to retroactive reinsurance

 

-

 

-

 

-

 

135

Losses and loss adjustment expenses incurred:

 

 

 

 

 

 

 

 

Undiscounted

 

-

 

-

 

13

 

7

Change in discount

 

4

 

2

 

7

 

4

Losses and loss adjustment expenses incurred

 

4

 

2

 

20

 

11

Losses and loss adjustment expenses paid

 

(546)

 

(218)

 

(438)

 

(230)

Liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

at end of period

$

3,053

$

230

$

3,699

$

304

Environmental:

 

 

 

 

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

at beginning of year

$

545

$

276

$

368

$

185

Losses and loss adjustment expenses incurred

 

-

 

-

 

66

 

43

Losses and loss adjustment expenses paid

 

(19)

 

(14)

 

(30)

 

(24)

Other changes

 

-

 

-

 

-

 

6

Liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

at end of period

$

526

$

262

$

404

$

210

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Combined:

 

 

 

 

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

at beginning of year

$

4,140

$

722

$

4,485

$

573

Change in net loss reserves due to retroactive reinsurance

 

-

 

-

 

-

 

135

Losses and loss adjustment expenses incurred:

 

 

 

 

 

 

 

 

Undiscounted

 

-

 

-

 

79

 

50

Change in discount

 

4

 

2

 

7

 

4

Losses and loss adjustment expenses incurred

 

4

 

2

 

86

 

54

Losses and loss adjustment expenses paid

 

(565)

 

(232)

 

(468)

 

(254)

Other changes

 

-

 

-

 

-

 

6

Liability for unpaid losses and loss adjustment expenses

 

 

 

 

 

 

 

 

at end of period

$

3,579

$

492

$

4,103

$

514

Life Insurance Companies DAC and Reserves

The following section provides discussion of deferred policy acquisition costs and insurance reserves for Life Insurance Companies.

Update of Actuarial Assumptions

The Life Insurance Companies review and update estimated gross profit assumptions used to amortize DAC and related items for investment-oriented products at least annually. Estimated gross profit assumptions include net investment income and spreads, net realized capital gains and losses, fees, surrender charges, expenses, and mortality gains and losses. If the assumptions used for estimated gross profits change significantly, DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserve) are recalculated using the new assumptions, and any resulting adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products.

In addition to estimated gross profit assumptions, the update of actuarial assumptions in the three- and nine-month periods ended September 30, 2016 included loss recognition expense related to payout annuities in Institutional Markets. Loss recognition expense is included in Other reserve changes in the reserve rollforward table presented in Insurance Reserves. Assumptions related to investment yields, mortality experience and expenses are reviewed periodically and updated as appropriate, which could result in additional loss recognition reserves.

The update of actuarial assumptions in the three- and nine-month periods ended September 30, 2016 and 2015 also included adjustments to reserves for universal life with secondary guarantees, and in the 2015 periods only, group benefit claim reserves and loss recognition for certain long-term care products.

The update of actuarial assumptions in the three- and nine-month periods ended September 30, 2016 and 2015 included, in both years, adjustments to the valuation of variable annuity GMWB features that are accounted for as embedded derivatives and measured at fair value, which are primarily in the Retirement Income Solutions and Group Retirement product lines. Changes in the fair value of such embedded derivatives are recorded in net realized capital gains (losses) and, together with related DAC adjustments, are excluded from pre-tax operating income. See Variable Annuity Guaranteed Benefit Features and Hedging Program for additional discussionpart of the reserving assumptionsconsideration for GMWB. 

The net increases (decreases)selling United Guaranty to pre-tax operating income and pre-tax income as a result of the update of actuarial assumptions for the three- and nine-month periods ended September 30, 2016 and 2015 are shownArch in the following tables.

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Investment Strategies

Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.

Some of our key investment strategies are as follows:

Fixed maturity securities held by the U.S. insurance companies included in Property Casualty Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.

Outside of the U.S., fixed maturity securities held by Property Casualty Insurance Companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.

While more of a focus is placed on asset-liability management in Life Insurance Companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.

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

The following table presents the increase (decrease) in pre-tax operating income resulting from the update of actuarial assumptions for the domestic Life Insurance Companies, by product line:

Three Months and Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2016

 

2015

Consumer Insurance:

 

 

 

 

Retirement

 

 

 

 

Fixed Annuities

$

330

$

92

Retirement Income Solutions

 

39

 

-

Group Retirement

 

(47)

 

48

Total Retirement

 

322

 

140

Life

 

(84)

 

(157)

Total Consumer Insurance

 

238

 

(17)

Corporate and Other:

 

 

 

 

Institutional Markets

 

(622)

 

-

Total increase (decrease) in pre-tax operating income from update of assumptions

$

(384)

$

(17)

The following table presents the increase (decrease) in pre-tax income resulting from the update of actuarial assumptions of the domestic Life Insurance Companies, by line item as reported in Results of Operations:

Three Months and Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2016

 

2015

Policy fees

$

(54)

$

21

Interest credited to policyholder account balances

 

65

 

74

Amortization of deferred policy acquisition costs

 

325

 

79

Policyholder benefits and losses incurred

 

(720)

 

(191)

Decrease in pre-tax operating income

 

(384)

 

(17)

Change in DAC related to net realized capital gains (losses)

 

13

 

21

Net realized capital gains (losses)

 

(56)

 

(39)

Decrease in pre-tax income

$

(427)

$

(35)

As a result of the update of actuarial assumptions, Consumer Insurance pre-tax operating income included a net positive adjustment of $238 million in the three- and nine-month periods ended September 30, 2016, primarily driven by lower surrender assumptions in Fixed Annuities, partially offset by an increase in reserves for universal life with secondary guarantees, compared to a net reduction of $17 million in Consumer Insurance pre-tax operating income in the three- and nine-month periods ended September 30, 2015. The adjustments related to the update of actuarial assumptions in each period are discussed by operating segment below.

The addition of $622 million of loss recognition reserves for Institutional Markets payout annuities, including certain structured settlements and terminal funding annuities, was reported as a reduction to Corporate and Other pre-tax operating income in the three- and nine-month periods ended September 30, 2016, primarily as a result of updated mortality assumptions.

Pre-tax income also reflected the update of assumptions for GMWB and fixed index guarantee features accounted for as embedded derivatives, and related adjustments to DAC, which in the aggregate reduced pre-tax income by $43 million in the three- and nine-month periods ended September 30, 2016 and reduced pre-tax income by $18 million in the three- and nine-month periods ended September 30, 2015. See Variable Annuity Guaranteed Benefit Features and Hedging Program for additional discussion of the assumption updates for GMWB.

A discussion of the adjustments to reflect the update of assumptions for Retirement, Life and Institutional Markets follows.

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Update of Actuarial Assumptions by Product Line

Retirement

The update of actuarial assumptions resulted in net positive adjustments to pre-tax operating income of the Retirement operating segment of $322 million in the three- and nine-month periods ended September 30, 2016 and $140 million in the three- and nine-month periods ended September 30, 2015.

In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $330 million in the three- and nine-month periods ended September 30, 2016, which reflected lower surrender assumptions, primarily due to lower long-term interest rates, as well as updates to investment yield and crediting rate assumptions compared to those previously modeled. In the three- and nine-month periods ended September 30, 2015, the update of estimated gross profit assumptions in Fixed Annuities resulted in a net positive adjustment of $92 million, which reflected refinements to investment spread assumptions, lower terminations than previously assumed and decreases to expense assumptions.

In Retirement Income Solutions, the update of estimated gross profit assumptions resulted in a net positive adjustment of $39 million in the three- and nine-month periods ended September 30, 2016, primarily due to favorable updates to assumptions for long-term volatility, surrenders, mortality and policy expenses, partially offset by a decrease in the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before expenses that reduce the asset base from which future fees are projected). The net positive adjustment in the three- and nine-month periods ended September 30, 2016 included a net negative adjustment of approximately $24 million in connection with the conversion to a more robust modeling platform for variable annuities, primarily due to refinements to assumptions for guaranteed minimum interest rates and investment fees, partially offset by the impact of other refinements identified during the conversion. In the three- and nine-month periods ended September 30, 2015, there were offsetting updates to assumed investment fees, modeled expenses, and terminations, resulting in no net adjustment to pre-tax operating income in Retirement Income Solutions.

In Group Retirement, the update of estimated gross profit assumptions resulted in a net negative adjustment of $47 million in the three- and nine-month periods ended September 30, 2016, primarily due to refinements in surrender and partial withdrawal assumptions and a decrease in the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before expenses that reduce the asset base from which future fees are projected). In the three- and nine-month periods ended September 30, 2015, a net positive adjustment from the update of estimated gross profit assumptions of $48 million in Group Retirement was primarily due to revisions to mortality and surrender assumptions, partially offset by decreased spread assumptions.

Adjustments related to the update of assumptions for the valuation of variable annuity GMWB and fixed index guarantee features accounted for as embedded derivatives and measured at fair value, which are primarily in the Retirement Income Solutions and Group Retirement product lines, are recorded in net realized capital gains (losses) and excluded from pre-tax operating income. See Variable Annuity Guaranteed Benefit Features and Hedging Program for additional discussion of the assumption updates for GMWB.

Life

In Life, the update of actuarial assumptions resulted in a net negative adjustment of $84 million in the three- and nine-month periods ended September 30, 2016. This decrease in pre-tax operating income in the three- and nine-month periods ended September 30, 2016 was primarily due to refinement to reserves for universal life insurance with secondary guarantees due to lower assumed surrender rates. The update to Life assumptions also included lower yield and interest credited assumptions.

In the three- and nine-month periods ended September 30, 2015, the net negative adjustment of $157 million related to the update of actuarial assumptions, which reduced pre-tax operating income of the Life operating segment, was primarily due to lower assumed surrender rates for certain later-duration universal life with secondary guarantees. The net negative adjustment also reflected lower investment spread assumptions, partially offset by more favorable than expected mortality, as well as loss recognition expense of $39 million for certain discontinued long-term care products primarily due to lower future premium assumptions. These negative adjustments were partially offset by a decrease in certain group benefit claim reserves based on updated experience data.

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AIG | Third Quarter 2017 Form 10-Q131


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ITEM 2 | Investments

The following table presents the components of Net Investment Income:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Interest and dividends

$

2,960

$

3,213

 

$

9,037

$

9,698

Alternative investments(a)

 

355

 

365

 

 

1,174

 

309

Other investment income(b)

 

237

 

320

 

 

894

 

810

Total investment income

 

3,552

 

3,898

 

 

11,105

 

10,817

Investment expenses

 

136

 

115

 

 

390

 

338

Total net investment income

$

3,416

$

3,783

 

$

10,715

$

10,479

(a)  Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag.

(b)  Primarily includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and income on life settlements. For the three-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $138 million and $98 million, respectively, and on life settlements was $55 million and $161 million, respectively. For the nine-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $479 million and $370 million, respectively, and on life settlements was $256 million and $360 million, respectively.

Net investment income for the three-month period ended September 30, 2017 was lower than the same period in the prior year due to lower invested assets, lower income on our hedge fund portfolio, and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called partially offset by higher gains on assets for which we elected the fair value option. Net investment income for the nine-month period ended September 30, 2017 was higher than the same period in the prior year as higher income on our alternative investments, primarily in our hedge fund portfolio, and higher gains on assets for which we elected the fair value option, more than offset lower invested assets and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called.

Attribution of Net Investment Income to Operating Modules

Net investment income is attributed to our businesses based on internal models consistent with the nature of the underlying businesses.

For Commercial Insurance — Liability and Financial Lines, Property and Special Risks and Consumer Insurance — Personal Insurance and Legacy Property Casualty Insurance Run-Off Lines, we estimate investable funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the Property Casualty Insurance Companies to modules is calculated based on these estimated investable funds, consistent with the approximate duration of the liabilities and the required economic capital allocation for each module.

For Consumer Insurance — Individual Retirement, Group Retirement, and Life Insurance, Other Operations — Institutional Markets and Legacy Life Insurance Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life Insurance Companies. All invested assets of the Life Insurance Companies in excess of liabilities are allocated based on estimates of required economic capital allocation for each module.

Asset Liability Measurement

For the Property Casualty Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the Property Casualty Insurance Companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.

The Property Casualty Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Property Casualty Insurance Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the Property Casualty Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.

In addition, the Property Casualty Insurance Companies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. 

AIG | Third Quarter 2017 Form 10-Q132 


TABLE OF CONTENTS

ITEM 2 | Investments

Fixed maturity securities of the Property Casualty Insurance Companies domestic operations, with an average duration of 4.1 years, are currently comprised of corporate bonds, structured securities, taxable municipal bonds and government and agency bonds as well as tax-exempt securities, which provide attractive risk-adjusted after-tax returns. The majority of these high quality investments are rated A or higher based on composite ratings.

Fixed maturity securities held in the Property Casualty Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 3.4 years.

The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.

The Life Insurance Companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life Insurance Companies' fundamental investment strategy is to maintain a diversified, high quality portfolio of fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration.  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.

The Life Insurance Companies invest 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.

In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.  While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio.

Fixed maturity securities of the Life Insurance Companies domestic operations, with an average duration of 7.2 years, are comprised primarily of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.

Fixed maturity securities held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 20.6 years.

NAIC Designations of Fixed Maturity Securities

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

AIG | Third Quarter 2017 Form 10-Q133


TABLE OF CONTENTS

ITEM 2 | Investments

The following table presents the fixed maturity security portfolio of U.S. Insurance Companies categorized by NAIC Designation, at fair value:

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

NAIC Designation

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

Other fixed maturity securities

$

73,490

$

69,224

$

142,714

 

$

6,105

$

4,686

$

1,264

$

154

$

12,209

$

154,923

Mortgage-backed, asset-backed and collateralized

 

63,960

 

3,059

 

67,019

 

 

407

 

81

 

137

 

2,364

 

2,989

 

70,008

Total*

$

137,450

$

72,283

$

209,733

 

$

6,512

$

4,767

$

1,401

$

2,518

$

15,198

$

224,931

*    Excludes $25.5 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

The following table presents the fixed maturity security portfolio of U.S. Insurance Companies categorized by composite AIG credit rating, at fair value:

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

$

74,088

$

69,232

$

143,320

 

$

5,580

$

4,653

$

1,370

$

11,603

$

154,923

Mortgage-backed, asset-backed and collateralized

 

44,390

 

4,737

 

49,127

 

 

992

 

709

 

19,180

 

20,881

 

70,008

Total*

$

118,478

$

73,969

$

192,447

 

$

6,572

$

5,362

$

20,550

$

32,484

$

224,931

*    Excludes $25.5 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

Credit Ratings

At September 30, 2017, approximately 91 percent of our fixed maturity securities were held by our domestic entities. Approximately 17 percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 15 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in the internal analysis.

Moody’s Investors’ Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At September 30, 2017, approximately 23 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 8 percent were below investment grade or not rated. Approximately 39 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

AIG | Third Quarter 2017 Form 10-Q134


TABLE OF CONTENTS

ITEM 2 | Investments

Composite AIG Credit Ratings

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

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

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

 

Available for Sale

 

Other

 

Total

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

11,332

 

$

11,791

 

$

2,731

 

$

2,807

 

$

14,063

 

$

14,598

 

AA

 

30,059

 

 

33,647

 

 

221

 

 

250

 

 

30,280

 

 

33,897

 

A

 

43,879

 

 

45,619

 

 

1,635

 

 

1,612

 

 

45,514

 

 

47,231

 

BBB

 

71,591

 

 

68,700

 

 

142

 

 

76

 

 

71,733

 

 

68,776

 

Below investment grade

 

12,584

 

 

12,832

 

 

17

 

 

17

 

 

12,601

 

 

12,849

 

Non-rated

 

1,048

 

 

890

 

 

-

 

 

-

 

 

1,048

 

 

890

 

Total

$

170,493

 

$

173,479

 

$

4,746

 

$

4,762

 

$

175,239

 

$

178,241

 

Mortgage-backed, asset-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed and collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

29,648

 

$

28,593

 

$

894

 

$

1,055

 

$

30,542

 

$

29,648

 

AA

 

7,593

 

 

6,114

 

 

615

 

 

714

 

 

8,208

 

 

6,828

 

A

 

7,843

 

 

8,504

 

 

364

 

 

307

 

 

8,207

 

 

8,811

 

BBB

 

4,591

 

 

4,996

 

 

178

 

 

303

 

 

4,769

 

 

5,299

 

Below investment grade

 

17,578

 

 

19,838

 

 

5,838

 

 

6,790

 

 

23,416

 

 

26,628

 

Non-rated

 

25

 

 

13

 

 

18

 

 

67

 

 

43

 

 

80

 

Total

$

67,278

 

$

68,058

 

$

7,907

 

$

9,236

 

$

75,185

 

$

77,294

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

40,980

 

$

40,384

 

$

3,625

 

$

3,862

 

$

44,605

 

$

44,246

 

AA

 

37,652

 

 

39,761

 

 

836

 

 

964

 

 

38,488

 

 

40,725

 

A

 

51,722

 

 

54,123

 

 

1,999

 

 

1,919

 

 

53,721

 

 

56,042

 

BBB

 

76,182

 

 

73,696

 

 

320

 

 

379

 

 

76,502

 

 

74,075

 

Below investment grade

 

30,162

 

 

32,670

 

 

5,855

 

 

6,807

 

 

36,017

 

 

39,477

 

Non-rated

 

1,073

 

 

903

 

 

18

 

 

67

 

 

1,091

 

 

970

 

Total

$

237,771

 

$

241,537

 

$

12,653

 

$

13,998

 

$

250,424

 

$

255,535

 

AIG | Third Quarter 2017 Form 10-Q135


TABLE OF CONTENTS

ITEM 2 | Investments

Available‑for‑Sale Investments

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

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

2017

 

2016

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

 

 

 

 

 

$

2,384

$

1,992

Obligations of states, municipalities and political subdivisions

 

 

 

 

 

 

 

18,831

 

24,772

Non-U.S. governments

 

 

 

 

 

 

 

15,593

 

14,535

Corporate debt

 

 

 

 

 

 

 

133,685

 

132,180

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

 

37,509

 

37,374

CMBS

 

 

 

 

 

 

 

13,518

 

14,271

CDO/ABS

 

 

 

 

 

 

 

16,251

 

16,413

Total mortgage-backed, asset-backed and collateralized

 

 

 

 

 

 

 

67,278

 

68,058

Total bonds available for sale*

 

 

 

 

 

 

 

237,771

 

241,537

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

1,056

 

1,065

Preferred stock

 

 

 

 

 

 

 

577

 

752

Mutual funds

 

 

 

 

 

 

 

74

 

261

Total equity securities available for sale

 

 

 

 

 

 

 

1,707

 

2,078

Total

 

 

 

 

 

 

$

239,478

$

243,615

*    At September 30, 2017 and December 31, 2016, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $31.2 billion and $33.6 billion, respectively.

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

 

September 30,

 

December 31,

(in millions)

 

2017

 

 

2016

Japan

$

1,820

 

$

2,140

Germany

 

1,635

 

 

1,168

United Kingdom

 

1,263

 

 

815

Canada

 

1,065

 

 

1,115

France

 

882

 

 

667

Mexico

 

609

 

 

637

Netherlands

 

561

 

 

445

Indonesia

 

452

 

 

366

Norway

 

438

 

 

456

Chile

 

352

 

 

360

Other

 

6,571

 

 

6,417

Total

$

15,648

 

$

14,586

AIG | Third Quarter 2017 Form 10-Q136


TABLE OF CONTENTS

ITEM 2 | Investments

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

 

September 30, 2017

 

 

 

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2016

(in millions)

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

Euro-Zone countries:

 

 

 

 

 

 

 

 

 

 

 

 

France

$

882

$

1,172

$

2,020

$

-

$

4,074

$

3,788

Germany

 

1,635

 

146

 

1,971

 

1

 

3,753

 

3,227

Netherlands

 

561

 

871

 

1,274

 

56

 

2,762

 

2,658

Belgium

 

190

 

107

 

893

 

-

 

1,190

 

1,075

Ireland

 

11

 

-

 

582

 

551

 

1,144

 

1,263

Spain

 

-

 

89

 

924

 

-

 

1,013

 

918

Italy

 

-

 

176

 

584

 

-

 

760

 

842

Luxembourg

 

-

 

17

 

425

 

-

 

442

 

430

Finland

 

57

 

33

 

78

 

-

 

168

 

198

Austria

 

23

 

3

 

4

 

-

 

30

 

95

Other - EuroZone

 

742

 

41

 

234

 

-

 

1,017

 

1,104

Total Euro-Zone

$

4,101

$

2,655

$

8,989

$

608

$

16,353

$

15,598

Remainder of Europe

 

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

$

1,263

$

3,402

$

8,398

$

3,671

$

16,734

$

15,293

Switzerland

 

40

 

1,265

 

990

 

-

 

2,295

 

2,360

Sweden

 

130

 

413

 

159

 

-

 

702

 

691

Norway

 

438

 

44

 

168

 

-

 

650

 

582

Russian Federation

 

105

 

20

 

158

 

-

 

283

 

169

Other - Remainder of Europe

 

160

 

116

 

77

 

-

 

353

 

285

Total - Remainder of Europe

$

2,136

$

5,260

$

9,950

$

3,671

$

21,017

$

19,380

Total

$

6,237

$

7,915

$

18,939

$

4,279

$

37,370

$

34,978

Investments in Municipal Bonds

At September 30, 2017, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backed bonds with over 92 percent of the portfolio rated A or higher.

AIG | Third Quarter 2017 Form 10-Q137


TABLE OF CONTENTS

ITEM 2 | Investments

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

 

September 30, 2017

 

 

 

 

State

 

Local

 

 

 

Total

December 31,

 

 

General

 

General

 

 

 

Fair

 

2016

(in millions)

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

State:

 

 

 

 

 

 

 

 

 

 

New York

$

20

$

559

$

3,009

$

3,588

$

4,170

California

 

683

 

423

 

2,184

 

3,290

 

3,471

Texas

 

195

 

674

 

1,109

 

1,978

 

3,287

Massachusetts

 

477

 

-

 

490

 

967

 

1,396

Illinois

 

72

 

129

 

657

 

858

 

1,171

Florida

 

62

 

-

 

657

 

719

 

1,016

Washington

 

256

 

13

 

377

 

646

 

1,059

Virginia

 

8

 

-

 

632

 

640

 

789

Ohio

 

94

 

-

 

492

 

586

 

536

Georgia

 

131

 

167

 

266

 

564

 

747

Washington D.C.

 

37

 

-

 

460

 

497

 

671

Pennsylvania

 

161

 

23

 

223

 

407

 

719

Maryland

 

168

 

92

 

126

 

386

 

423

All other states(a)

 

419

 

356

 

2,930

 

3,705

 

5,317

Total(b)(c)

$

2,783

$

2,436

$

13,612

$

18,831

$

24,772

(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 $0.9 billion 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)

 

2017

 

2016

 

Financial institutions:

 

 

 

 

 

Money Center/Global Bank Groups

$

9,285

$

8,892

 

Regional banks — other

 

562

 

606

 

Life insurance

 

3,652

 

3,100

 

Securities firms and other finance companies

 

375

 

392

 

Insurance non-life

 

5,013

 

5,213

 

Regional banks — North America

 

6,372

 

6,844

 

Other financial institutions

 

9,589

 

8,435

 

Utilities

 

18,498

 

17,938

 

Communications

 

9,872

 

10,025

 

Consumer noncyclical

 

15,935

 

15,338

 

Capital goods

 

7,853

 

8,339

 

Energy

 

13,274

 

13,618

 

Consumer cyclical

 

9,011

 

8,606

 

Basic

 

6,128

 

6,582

 

Other

 

18,266

 

18,252

 

Total *

$

133,685

$

132,180

 

*    At both September 30, 2017 and December 31, 2016, approximately 91 percent of these investments were rated investment grade.

Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.6 percent at both September 30, 2017 and December 31, 2016. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.

AIG | Third Quarter 2017 Form 10-Q138


TABLE OF CONTENTS

ITEM 2 | Investments

Investments in RMBS

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

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

2017

 

2016

Agency RMBS

 

 

 

 

 

 

 

 

 

$

14,942

$

13,854

Alt-A RMBS

 

 

 

 

 

 

 

 

 

 

11,841

 

12,387

Subprime RMBS

 

 

 

 

 

 

 

 

 

 

3,058

 

2,905

Prime non-agency

 

 

 

 

 

 

 

 

 

 

6,890

 

7,422

Other housing related

 

 

 

 

 

 

 

 

 

 

778

 

806

Total RMBS(a)(b)

 

 

 

 

 

 

 

 

 

$

37,509

$

37,374

(a)  Includes approximately $12.5 billion and $12.9 billion at September 30, 2017, and December 31, 2016, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination.  For additional discussion on Purchased Credit Impaired (PCI) Securities see Note 6 to the Condensed Consolidated Financial Statements

(b)  The weighted average expected life was six years at both September 30, 2017 and December 31, 2016.

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

CMBS (traditional)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,883

$

11,782

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,986

 

1,737

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

649

 

752

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,518

$

14,271

The fair value of CMBS holdings remained stable during the third quarter of 2017. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.

Investments in CDOs

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

 

 

 

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

2017

 

2016

Collateral Type:

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans (CLO)

 

 

 

 

 

 

 

 

$

7,777

$

8,548

Other

 

 

 

 

 

 

 

 

 

102

 

129

Total

 

 

 

 

 

 

 

 

$

7,879

$

8,677

Commercial Mortgage Loans

At September 30, 2017, we had direct commercial mortgage loan exposure of $27.9 billion, of which 99.7 percent of the loans were current. 

AIG | Third Quarter 2017 Form 10-Q139


TABLE OF CONTENTS

ITEM 2 | Investments

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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

97

 

$

1,538

$

3,653

$

527

$

226

$

119

$

178

$

6,241

22

%

California

86

 

 

324

 

1,071

 

303

 

315

 

847

 

396

 

3,256

12

 

Texas

56

 

 

327

 

936

 

162

 

84

 

154

 

38

 

1,701

6

 

Massachusetts

22

 

 

673

 

337

 

405

 

-

 

-

 

27

 

1,442

5

 

New Jersey

38

 

 

574

 

47

 

448

 

-

 

28

 

33

 

1,130

4

 

Florida

73

 

 

320

 

85

 

380

 

227

 

19

 

76

 

1,107

4

 

Pennsylvania

25

 

 

67

 

22

 

573

 

47

 

26

 

-

 

735

3

 

Illinois

14

 

 

258

 

305

 

11

 

26

 

-

 

23

 

623

2

 

Ohio

24

 

 

131

 

11

 

206

 

164

 

-

 

5

 

517

2

 

Connecticut

19

 

 

341

 

66

 

22

 

80

 

-

 

-

 

509

2

 

Other states

251

 

 

1,516

 

1,240

 

1,607

 

620

 

586

 

180

 

5,749

20

 

Foreign

71

 

 

1,205

 

938

 

745

 

358

 

628

 

1,046

 

4,920

18

 

Total*

776

 

$

7,274

$

8,711

$

5,389

$

2,147

$

2,407

$

2,002

$

27,930

100

%

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

96

 

$

1,391

$

3,527

$

534

$

215

$

163

$

185

$

6,015

24

%

California

89

 

 

325

 

761

 

282

 

286

 

870

 

401

 

2,925

12

 

Texas

58

 

 

255

 

857

 

97

 

108

 

154

 

44

 

1,515

6

 

Florida

67

 

 

322

 

94

 

340

 

165

 

19

 

76

 

1,016

4

 

Massachusetts

20

 

 

415

 

114

 

408

 

50

 

-

 

27

 

1,014

4

 

New Jersey

39

 

 

529

 

47

 

355

 

-

 

29

 

33

 

993

4

 

Illinois

19

 

 

258

 

307

 

20

 

52

 

36

 

23

 

696

3

 

Pennsylvania

24

 

 

-

 

28

 

473

 

51

 

26

 

-

 

578

2

 

Ohio

29

 

 

151

 

17

 

211

 

165

 

-

 

5

 

549

2

 

Connecticut

19

 

 

343

 

67

 

23

 

80

 

-

 

-

 

513

2

 

Other states

269

 

 

1,309

 

1,239

 

1,670

 

481

 

560

 

199

 

5,458

22

 

Foreign

59

 

 

707

 

906

 

784

 

245

 

532

 

596

 

3,770

15

 

Total*

788

 

$

6,005

$

7,964

$

5,197

$

1,898

$

2,389

$

1,589

$

25,042

100

%

*    Does not reflect allowance for credit losses.

For additional discussion on commercial mortgage loans see Note 6 to the Consolidated Financial Statements in the 2016 Annual Report.

Impairments

The following table presents impairments by investment type:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Other-than-temporary Impairments:

 

 

 

 

 

 

 

 

 

   Fixed maturity securities, available for sale

$

72

$

69

 

$

185

$

361

   Equity securities, available for sale

 

2

 

3

 

 

10

 

7

   Private equity funds and hedge funds

 

14

 

30

 

 

28

 

46

Subtotal

 

88

 

102

 

 

223

 

414

Other impairments:

 

 

 

 

 

 

 

 

 

   Investments in life settlements

 

273

 

80

 

 

360

 

329

   Other investments

 

16

 

25

 

 

20

 

52

   Real estate*

 

9

 

2

 

 

61

 

6

Total

$

386

$

209

 

$

664

$

801

AIG | Third Quarter 2017 Form 10-Q140


TABLE OF CONTENTS

ITEM 2 | Investments

*    Impairments include $35 million related to other assets that were sold during the three-month period ended June 30, 2017.

Other-Than-Temporary Impairments

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

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

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

  

 

 

 

 

 

Other Fixed

Equities/Other

 

 

(in millions)

RMBS

CDO/ABS

CMBS

Maturity

 Invested Assets*

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

-

$

-

Change in intent

 

-

 

-

 

-

 

1

 

-

 

1

Foreign currency declines

 

-

 

-

 

-

 

1

 

-

 

1

Issuer-specific credit events

 

5

 

-

 

7

 

57

 

16

 

85

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

-

 

1

Total

$

6

$

-

$

7

$

59

$

16

$

88

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

10

$

10

Change in intent

 

-

 

-

 

-

 

2

 

-

 

2

Foreign currency declines

 

-

 

-

 

-

 

7

 

-

 

7

Issuer-specific credit events

 

20

 

-

 

13

 

21

 

23

 

77

Adverse projected cash flows

 

6

 

-

 

-

 

-

 

-

 

6

Total

$

26

$

-

$

13

$

30

$

33

$

102

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

2

$

2

Change in intent

 

-

 

-

 

-

 

9

 

-

 

9

Foreign currency declines

 

-

 

-

 

-

 

11

 

-

 

11

Issuer-specific credit events

 

21

 

33

 

28

 

79

 

36

 

197

Adverse projected cash flows

 

4

 

-

 

-

 

-

 

-

 

4

Total

$

25

$

33

$

28

$

99

$

38

$

223

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

15

$

15

Change in intent

 

-

 

-

 

-

 

35

 

-

 

35

Foreign currency declines

 

-

 

-

 

-

 

14

 

-

 

14

Issuer-specific credit events

 

80

 

1

 

25

 

159

 

38

 

303

Adverse projected cash flows

 

47

 

-

 

-

 

-

 

-

 

47

Total

$

127

$

1

$

25

$

208

$

53

$

414

*    Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.

We recorded other-than-temporary impairment charges in the three- and nine-month periods ended September 30, 2017 and 2016 related to:

issuer-specific credit events;

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

declines due to foreign exchange rates;

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

securities that experienced severe market valuation declines.

AIG | Third Quarter 2017 Form 10-Q141


TABLE OF CONTENTS

ITEM 2 | Investments

In addition, impairments are recorded on real estate and investments in life settlements.

In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $147 million and $187 million in the three-month periods ended September 30, 2017 and 2016, respectively, and $523 million and $645 million in the nine-month periods ended September 30, 2017 and 2016, respectively.

For a discussion of our other-than-temporary impairment accounting policy seeNote 6 to the Consolidated Financial Statements in the 2016 Annual Report

The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity 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, 2017

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

$

18,397

$

179

2,138

 

$

90

$

32

3

 

$

-

$

-

-

 

$

18,487

$

211

2,141

7-11 months

 

6,910

 

167

753

 

 

36

 

12

6

 

 

8

 

6

3

 

 

6,954

 

185

762

12 months or more

 

11,768

 

543

1,264

 

 

339

 

115

20

 

 

14

 

8

4

 

 

12,121

 

666

1,288

Total

$

37,075

$

889

4,155

 

$

465

$

159

29

 

$

22

$

14

7

 

$

37,562

$

1,062

4,191

Below investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

grade bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

2,080

$

48

1,289

 

$

22

$

5

30

 

$

-

$

-

1

 

$

2,102

$

53

1,320

7-11 months

 

448

 

16

166

 

 

11

 

3

5

 

 

-

 

-

-

 

 

459

 

19

171

12 months or more

 

2,383

 

134

397

 

 

223

 

60

34

 

 

9

 

9

2

 

 

2,615

 

203

433

Total

$

4,911

$

198

1,852

 

$

256

$

68

69

 

$

9

$

9

3

 

$

5,176

$

275

1,924

Total bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

20,477

$

227

3,427

 

$

112

$

37

33

 

$

-

$

-

1

 

$

20,589

$

264

3,461

7-11 months

 

7,358

 

183

919

 

 

47

 

15

11

 

 

8

 

6

3

 

 

7,413

 

204

933

12 months or more

 

14,151

 

677

1,661

 

 

562

 

175

54

 

 

23

 

17

6

 

 

14,736

 

869

1,721

Total(e)

$

41,986

$

1,087

6,007

 

$

721

$

227

98

 

$

31

$

23

10

 

$

42,738

$

1,337

6,115

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-11 months

$

158

$

8

65

 

$

6

$

1

7

 

$

-

$

-

-

 

$

164

$

9

72

12 months or more

 

1

 

-

2

 

 

-

 

-

1

 

 

-

 

-

-

 

 

1

 

-

3

Total

$

159

$

8

67

 

$

6

$

1

8

 

$

-

$

-

-

 

$

165

$

9

75

(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, 2017.

(c)  For bonds, represents amortized cost.

(d)  The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.

(e)  Item count is by CUSIP by subsidiary.

Institutional Markets

The update of actuarial assumptions resulted in $622 million of loss recognition expense on structured settlement

79

69

14

204

190

7

Fuji Life

-

7

NM

43

3

NM

Parent and terminal funding payout annuities, which drove the pre-taxOther:

Corporate General operating expenses

(172)

(167)

(3)

(563)

(514)

(10)

Interest expense

(243)

(248)

2

(729)

(740)

1

Other income, net

49

45

9

210

95

121

Total Parent and Other

(366)

(370)

1

(1,082)

(1,159)

7

Pre-tax operating loss in Institutional Markets reported in Corporatebefore eliminations

(287)

(164)

(75)

(835)

(565)

(48)

Consolidation, eliminations and Other in the three- and nine-month periodsother adjustments

(1)

(6)

83

75

-

NM

Pre-tax operating loss

$

(288)

$

(170)

(69)

%

$

(760)

$

(565)

(35)

%

Quarterly 2017 and 2016 Comparison

Pre-tax operating loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.

Institutional Markets pre-tax operating income increased due to favorable mortality experience.

Parent and Other pre-tax operating loss was flat compared to the same period in the prior year due to higher gains on securities where we elected the fair value option, offset by higher corporate general operating expenses.

year-to-date 2017 and 2016 Comparison

Pre-tax operating loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.

Institutional Markets pre-tax operating income increased due to higher net spreads driven by growth in business.

Parent and Other pre-tax operating loss decreased as a result of gains on securities where we elected the fair value option, partially offset by higher general operating expenses related to one time payments for recent executive leadership changes.

Fuji Life pre-tax operating results increased primarily as a result of increases in underwriting income as a result of new products launched during 2016 as well as growth within existing product lines. Fuji Life was sold on April 30, 2017.

AIG | Third Quarter 2017 Form 10-Q127


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations| Legacy Portfolio

Legacy Portfolio

Legacy Insurance Lines represent exited or discontinued product lines, policy forms or distribution channels.

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

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

Legacy Investments include investment classes that we have placed into run-off (life settlements, Legacy Global Real Estate and the Direct Investment book) and equity-like securities with high yield, high-risk characteristics.

BUSINESSSTRATEGY 

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

Third party and affiliated reinsurance and retrocessions to improve capital efficiency

Commutations of assumed reinsurance and direct policy buy-backs

Enhance insured policyholder options and claims resolution strategies

Enhanced asset liability management and expense management

For Legacy Investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while sourcing for our insurance companies attractive assets for their portfolios. Where the asset is under our sole control, we expect to achieve this through a combination of unaffiliated and affiliated sales and securitizations. Where the asset is not under our sole control, there are fewer options as we may, for example, have fiduciary duty obligations to joint venture partners (such as in our Legacy Global Real Estate book).

AIG | Third Quarter 2017 Form 10-Q128


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations| Legacy Portfolio

LEGACY PORTFOLIO RESULTS

The following table presents Legacy Portfolio results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

136

$

180

 

(24)

%

 

$

449

$

526

 

(15)

%

Policy fees

 

38

 

29

 

31

 

 

 

105

 

103

 

2

 

Net investment income

 

690

 

810

 

(15)

 

 

 

2,142

 

2,153

 

(1)

 

Other income (loss)

 

149

 

293

 

(49)

 

 

 

539

 

221

 

144

 

Total operating revenues

 

1,013

 

1,312

 

(23)

 

 

 

3,235

 

3,003

 

8

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses and loss adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses incurred

 

500

 

1,137

 

(56)

 

 

 

1,470

 

2,194

 

(33)

 

Interest credited to policyholder account balances

 

61

 

73

 

(16)

 

 

 

181

 

211

 

(14)

 

Amortization of deferred policy acquisition costs

 

28

 

21

 

33

 

 

 

70

 

82

 

(15)

 

General operating and other expenses

 

105

 

110

 

(5)

 

 

 

352

 

373

 

(6)

 

Interest expense

 

33

 

70

 

(53)

 

 

 

103

 

237

 

(57)

 

Total benefits and expenses

 

727

 

1,411

 

(48)

 

 

 

2,176

 

3,097

 

(30)

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Pre-tax operating income (loss) by type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Casualty Run-Off Insurance Lines

$

63

$

68

 

(7)

%

 

$

207

$

94

 

120

%

Life Insurance Run-Off Lines

 

79

 

(510)

 

NM

 

 

 

308

 

(356)

 

NM

 

Legacy Investments

 

144

 

343

 

(58)

 

 

 

544

 

168

 

224

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Business and Financial Highlights

In the nine-month period ended September 30, 2017, the Legacy Investment portfolio executed several transactions with external parties for total consideration of approximately $676 million, which included sales of a portion of our life settlements portfolio with a face value (death benefits) of approximately $1.9 billion, resulting in a loss on the sale of $123 million. The majority of the consideration received was used to pay down intercompany loans and notes with affiliated insurance companies. In addition, the Legacy Investment portfolio returned approximately $1.0 billion of cash proceeds to AIG Parent in the nine-month period ended September 30, 2017, including $191 million from the sale of an AIG-sponsored fund that occurred in the fourth quarter of 2016.

On September 26, 2017, we signed a Purchase and Sale Agreement to sell the remaining life settlements contracts. The sale was completed on November 1, 2017. As a result, an impairment charge of $273 million was recorded in net realized capital losses in the third quarter of 2017 to write down the contracts to their fair market value.

AIG | Third Quarter 2017 Form 10-Q129


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ITEM 2 |Business Segment Operations| Legacy Portfolio

Legacy Portfolio Pre-Tax Operating Income (Loss)

Three Months Ended September 30, 2016. The loss recognition reflected the establishment of additional reserves primarily as a result of mortality experience studies, which indicated

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income increased longevity, particularly on disabled lives on a block of structured settlements underwritten pre-2010. This legacy block accounted for over 80% of the charge recognized in the three- and nine-month periods ended September 30, 2016. These contracts are expecteddue to become part of thehigher Legacy Portfolio when our new operating structure is finalized. Compared to the legacy structured settlement contracts, our more recently issued contracts contain a lower proportion of substandard business and those lives are less severely impaired, on average. There was no impact onLife pre-tax operating income of Institutional Marketsdue to significantly lower loss recognition on certain payout annuities from the update of actuarial assumptions in the three- and nine-month periods ended September 30, 2015.

Variable Annuity Guaranteed Benefit Features and Hedging Program

Our Retirement Income Solutions and Group Retirement businesses offer variable annuity products with riders that provide guaranteed living benefit features, which include GMWB and GMAB. The liabilities for GMWB and GMAB 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 and market volatility.

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 and GMAB, including exposures to changes in interest rates, equity prices, credit spreads and volatilities. 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. See Enterprise Risk Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Program in the 2015Annual Report for additional discussion of market risk management related to these product features.

Impact on Quarterly and Year-to-Date Pre-tax Income

Changes in the fair value of the GMWB and GMAB embedded derivatives, and changes in the fair value of related derivative hedging instruments, are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of the fixed maturity securities used in the variable annuity hedging program, for which the fair value option has been elected, are excluded from pre-tax operating income of the Retirement operating segment.

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 differences between the GAAP valuation of the embedded derivatives and the economic hedge target. The non-performance or “own credit” spread adjustment (NPA), which adjusts the rate used to discount projected benefit cash flows for the GAAP valuation of the embedded derivatives, is excluded from the economic hedge target.  When corporate credit spreads widen, the change in the NPA 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 generally increases the fair value of the embedded derivative liabilities, resulting in a loss. See Differences in Valuation of Embedded Derivatives and Economic Hedge Target, below.

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Item 2 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES

The following table presents the net increase (decrease) to consolidated pre-tax income from changes in the fair value of the GMWB and GMAB embedded derivatives and related hedges:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2016

 

2015

 

 

2016

 

2015

Change in fair value of embedded derivatives, excluding update of actuarial

 

 

 

 

 

 

 

 

 

assumptions and NPA

$

101

$

(1,057)

 

$

(1,279)

$

(739)

Change in fair value of variable annuity hedging portfolio:

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

17

 

4

 

 

270

 

(39)

Interest rate derivative contracts

 

27

 

548

 

 

1,411

 

463

Equity derivative contracts

 

(350)

 

376

 

 

(650)

 

239

Change in fair value of variable annuity hedging portfolio

 

(306)

 

928

 

 

1,031

 

663

Change in fair value of embedded derivatives, excluding NPA, net of hedging portfolio

 

(205)

 

(129)

 

 

(248)

 

(76)

Change due to update of actuarial assumptions, excluding NPA

 

(19)

 

(39)

 

 

(19)

 

(39)

Change in fair value of embedded derivatives due to NPA

 

(68)

 

237

 

 

55

 

581

Net impact on pre-tax income

$

(292)

$

69

 

$

(212)

$

466

In the three-month period ended September 30, 2016, gains from decreases in the fair value of the GMWB and GMAB embedded derivative liabilities, excluding the update of actuarial assumptions and the NPA, were more than offset by losses in the fair value of the related hedging portfolio, primarily from equity hedges. In the nine-month period ended September 30, 2016, losses from the increase in the fair value of the GMWB and GMAB embedded derivative liabilities, excluding the update of actuarial assumptions and the NPA, were primarily due2017 compared to decreases in market interest rates and were significantly offset by changes in the fair value of the related hedging portfolio.

The update of actuarial assumptions in the three- and nine-month periods ended September 30, 2016 included net increases in both the economic hedge target and the embedded derivative liabilities, which primarily reflected lower surrender and mortality assumptions, partially offset by a decrease due to updated assumptions for utilization of withdrawal benefits. The impact of these updated assumptions, which were based on experience studies, was less significant to the embedded derivative liabilities than to the economic hedge target, because the discount rates used to value the embedded derivatives include the additional spread adjustment for the NPA, as well as other explicit risk margins. In addition, the increase in the embedded derivative liabilities from the assumption updates was partially offset by a reduction due to an update of these risk margins. As a result, the net increase in the GMWB and GMAB embedded derivative liabilities from the update of assumptions was $19 million in the three- and nine-month periods ended September 30, 2016.

The three-month period ended September 30, 2016 included losses from the change in the NPA, as a result of corporate credit spreads tightening. However, for the nine-month period ended September 30, 2016, widening in credit spreads resulted in a positive impact on pre-tax income from the change in the NPA, although to a lesser extent than in the same period in the prior year.

InPartially offsetting the three- and nine-month periods ended September 30, 2015, the impact of widening credit spreads resulted inincrease was lower Legacy Investment pre-tax operating income driven primarily by lower gains from changes in the NPA, which were the primary driver of the net positive impact on pre-tax income in those periods. A decrease in market interest rates and lower equity market performance in the three- and nine-month periods ended September 30, 2015 resulted in increases in the GMWB and GMAB embedded derivative liabilities in those period, excluding the update of actuarial assumptions and the NPA, which were significantly offset by changes in the value of the hedging portfolio. The three- and nine-month periods ended September 30, 2015 included a net increase in the GMWB liabilities of $39 million due to the update of actuarial assumptions, which reflected improved mortality, lapse and withdrawal assumptions.

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Item 2 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES

The changes in the fair value of the embedded derivatives, excluding the update of actuarial assumptions and the NPA, were significantly offset in the three- and nine-month periods ended September 30, 2016 and 2015 by the following changes in the fair value of the variable annuity hedging portfolio.

Changes in the fair value of fixed maturity securities,portfolios for which the fair value option has beenwas elected, are used as a capital-efficient way to economically hedge interest rate and credit spread-related risk. Effective June 30, 2015, we discontinued our U.S. Treasury bond interest rate hedging program and initiated a corporate bond hedging program, which is intended to provide the same capital efficiency as the previous U.S. Treasury bond hedging program. The change in the fair value of the corporate bond hedging program in the three-month periods ended September 30, 2016 and 2015 was not significant. The nine-month period ended September 30, 2016 included gains from the change in fair value of the corporate bond hedging program, primarily due to decreases in market interest rates. The nine-month period ended September 30, 2015 reflected decreases primarily in the fair value of the U.S. Treasury bond hedging program primarily due to increases in market interest rates in the first six months of 2015. The change in the fair value of the hedging bonds is reported in net investmentlower income on the Consolidated Statementslife settlements portfolio as a result of partial sales.

Legacy Portfolio Pre-Tax Operating Income (Loss).

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income increased due to: 

     Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in gains in the three- and nine-month periods ended September 30, 2016, primarily due to decreasing market interest rates in the first six months of 2016. In the three- and nine-month periods ended September 30, 2015, gains in the three-month period from decreases in market interest rates largely offset the impact of increases in rates in the first six months of 2015.

The change in the fair value of equity derivative contracts, which included futures and options, resulted in losses in the three- and nine-month periods ended September 30, 2016, compared to gains in the same periods in the prior year, due to more favorable change in equity market returns in the current year periods.

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 drivers of the embedded derivatives. The economic hedge target differs from the GAAP valuation of the GMWB and GMAB embedded derivatives due to the following:

Rider fees are 100 percent included in the economic hedge target present value calculations; the GAAP valuation reflects those collected fees attributed to the embedded derivative such that the initial value at contract issue equals zero;

Actuarial assumptions for GAAP are adjusted to remove explicit risk margins, including margins for policyholder behavior, mortality, and volatility for valuing the present value of fees, and use best estimate assumptions for the economic hedge target; and

NPA is excluded from the discount rates used for the economic hedge target.

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 Insurance 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 related to items not subject to hedging, particularly policyholder behavior; and

Risk exposures that we have elected not to explicitly or fully hedge.

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Item 2 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES

DAC

The following table summarizes the major components of the changes in Life Insurance Companies DAC, including VOBA:

Nine Months Ended September 30,

 

 

 

 

 

 

(in millions)

 

 

 

2016

 

2015

Balance, beginning of year

 

 

$

8,467

$

7,258

Acquisition costs deferred

 

 

 

920

 

935

Amortization expense:

 

 

 

 

 

 

Update of assumptions included in pre-tax operating income

 

 

 

325

 

79

Related to realized capital gains and losses

 

 

 

4

 

(65)

All other operating amortization

 

 

 

(831)

 

(746)

Increase (decrease) in DAC due to foreign exchange

 

 

 

28

 

(32)

Change related to unrealized depreciation (appreciation) of investments

 

 

 

(971)

 

464

Balance, end of period*

 

 

$

7,942

$

7,893

* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.5 billion and $8.9 billion at September 30, 2016 and 2015, respectively.

The net adjustments to DAC amortizationsignificantly lower loss recognition on certain payout annuities from the update of actuarial assumptions for estimated gross profits, including those reported within change in DAC related to net realized capital gains (losses), represented three percent and one percent of the DAC balance, excluding the amount related to unrealized depreciation (appreciation) of investments, as of September 30, 2016 and 2015, respectively.

DAC and Reserves Related to Unrealized Appreciation of Investments

DAC for universal life and investment-type products (collectively, investment-oriented products) is adjusted at each balance sheet date to reflect the change in DAC as if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow DAC). Shadow DAC generally moves in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio, reducing the reported DAC balance when market interest rates decline. In addition, significant unrealized appreciation of investments in a prolonged low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves). Market interest rates decreased in the nine-month period ended September 30, 2016. As2017 compared to the same period in the prior year;

increased Legacy Investment pre-tax operating income in 2017 compared to 2016 driven by higher fair value gains on portfolios for which the fair value option was elected; and

increased Legacy Property and Casualty pre-tax operating income due to unfavorable prior year development in the prior year.

AIG | Third Quarter 2017 Form 10-Q130


TABLE OF CONTENTS

ITEM 2 | Investments

Investments

Overview

Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business modules and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of fixed maturity securities.

Investment Highlights during the Nine Months Ended September 30, 2017

A decrease in interest rates and narrowing credit spreads resulted in a result,net unrealized gain in our investment portfolio. Net unrealized gains in our available for sale portfolio increased to approximately $14.1 billion as of September 30, 2017 from approximately $9.7 billion as of December 31, 2016.

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

During the Life Insurance Companies’ unrealized appreciationfirst quarter of investments2017, we funded the adverse development reinsurance agreement entered into with NICO. The approximate $10.2 billion funding of this agreement was the primary reason for the decrease in the invested asset portfolio in the nine-month period ended September 30, 2016 increased by $8.5 billion compared to December 31, 2015, which resulted in an increase in the shadow DAC offset and an increase in shadow loss reserves. Shadow loss reserves increased by $2.4 billion at September 30, 2016 compared to December 31, 2015.

Life Insurance Companies Reserves

The following table presents a rollforward of Life Insurance Companies’ insurance reserves, including separate accounts and mutual fund assets under management, by operating segment:

 

Three Months Ended

 

 

Nine Months Ended

 

September 30,

 

 

September 30,

(in millions)

 

2016

 

2015

 

 

 

2016

 

2015

Retirement:

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

216,577

$

207,868

 

 

$

208,333

$

204,627

Premiums and deposits

 

5,184

 

6,639

 

 

 

18,498

 

18,244

Surrenders and withdrawals

 

(4,197)

 

(4,767)

 

 

 

(12,474)

 

(13,433)

Death and other contract benefits

 

(947)

 

(997)

 

 

 

(2,951)

 

(2,965)

Subtotal

 

40

 

875

 

 

 

3,073

 

1,846

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2017.

Item 2 / INSURANCE RESERVES / LIFE INSURANCE COMPANIES

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

policy fees

 

3,895

 

(5,754)

 

 

 

7,631

 

(4,862)

Cost of funds

 

689

 

688

 

 

 

2,054

 

2,037

Other reserve changes

 

(113)

 

15

 

 

 

(3)

 

44

Balance at end of period

 

221,088

 

203,692

 

 

 

221,088

 

203,692

Reserves related to unrealized appreciation of investments

 

230

 

15

 

 

 

230

 

15

Reinsurance ceded

 

(378)

 

(363)

 

 

 

(378)

 

(363)

Total insurance reserves and mutual fund assets under management

$

220,940

$

203,344

 

 

$

220,940

$

203,344

Life:

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

34,758

$

33,640

 

 

$

34,170

$

33,536

Premiums and deposits

 

1,330

 

1,223

 

 

 

3,858

 

3,695

Surrenders and withdrawals

 

(226)

 

(189)

 

 

 

(694)

 

(575)

Death and other contract benefits

 

(229)

 

(257)

 

 

 

(718)

 

(764)

Subtotal

 

875

 

777

 

 

 

2,446

 

2,356

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

policy fees

 

(183)

 

(266)

 

 

 

(602)

 

(594)

Cost of funds

 

121

 

124

 

 

 

364

 

370

Other reserve changes

 

9

 

(436)

 

 

 

(798)

 

(1,829)

Balance at end of period

 

35,580

 

33,839

 

 

 

35,580

 

33,839

Reserves related to unrealized appreciation of investments

 

-

 

1

 

 

 

-

 

1

Reinsurance ceded

 

(1,357)

 

(1,430)

 

 

 

(1,357)

 

(1,430)

Total insurance reserves

$

34,223

$

32,410

 

 

$

34,223

$

32,410

Institutional Markets:

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

36,197

$

35,523

 

 

$

35,823

$

35,080

Premiums and deposits

 

203

 

159

 

 

 

1,013

 

985

Surrenders and withdrawals

 

(228)

 

(133)

 

 

 

(507)

 

(389)

Death and other contract benefits

 

(430)

 

(396)

 

 

 

(1,267)

 

(1,193)

Subtotal

 

(455)

 

(370)

 

 

 

(761)

 

(597)

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

policy fees

 

364

 

206

 

 

 

1,036

 

763

Cost of funds

 

102

 

102

 

 

 

304

 

306

Other reserve changes*

 

607

 

(61)

 

 

 

413

 

(152)

Balance at end of period

 

36,815

 

35,400

 

 

 

36,815

 

35,400

Reserves related to unrealized appreciation of investments

 

1,711

 

288

 

 

 

1,711

 

288

Reinsurance ceded

 

(5)

 

(5)

 

 

 

(5)

 

(5)

Total insurance reserves

$

38,521

$

35,683

 

 

$

38,521

$

35,683

Total Life Insurance Companies:

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

287,532

$

277,031

 

 

$

278,326

$

273,243

Premiums and deposits

 

6,717

 

8,021

 

 

 

23,369

 

22,924

Surrenders and withdrawals

 

(4,651)

 

(5,089)

 

 

 

(13,675)

 

(14,397)

Death and other contract benefits

 

(1,606)

 

(1,650)

 

 

 

(4,936)

 

(4,922)

Subtotal

 

460

 

1,282

 

 

 

4,758

 

3,605

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

policy fees

 

4,076

 

(5,814)

 

 

 

8,065

 

(4,693)

Cost of funds

 

912

 

914

 

 

 

2,722

 

2,713

Other reserve changes

 

503

 

(482)

 

 

 

(388)

 

(1,937)

Balance at end of period

 

293,483

 

272,931

 

 

 

293,483

 

272,931

Reserves related to unrealized appreciation of investments

 

1,941

 

304

 

 

 

1,941

 

304

Reinsurance ceded

 

(1,740)

 

(1,798)

 

 

 

(1,740)

 

(1,798)

Total insurance reserves and mutual fund assets under management

$

293,684

$

271,437

 

 

$

293,684

$

271,437

* Institutional Markets’ Other reserve changes include $622 million of loss recognition expense inDuring the three- and nine-month periodsperiod ended September 30, 2016.

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2017, we reduced our hedge fund portfolio by approximately $1.8 billion as a result of redemptions consistent with our planned reduction of exposure. Our hedge fund portfolio experienced above average returns in the nine-month period ended September 30, 2017 due to higher equity market performance.

Item 2 / INSURANCE RESERVES / LIFE INSURANCE COMPANIESBlended investment yields on new investments were lower than blended rates on investments that were sold, matured or called.

Other-than-temporary impairments decreased due to lower impairments in our structured securities and corporate bond portfolios.

Life Insurance Companies’ insurance reserves including separate accounts and mutual fund assets under management were comprisedDuring the second quarter of 2017, partial sale of our investment in Arch Capital Group Ltd. (Arch), which we received as part of the following balances:consideration for selling United Guaranty to Arch in 2016.

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

2016

 

2015

Future policy benefits*

 

 

$

45,856

$

41,820

Policyholder contract deposits

 

 

 

133,013

 

127,704

Other policy funds

 

 

 

1,629

 

1,503

Separate account liabilities

 

 

 

82,616

 

79,564

Total insurance reserves

 

 

 

263,114

 

250,591

Mutual fund assets under management

 

 

 

32,310

 

27,735

Total insurance reserves and mutual fund assets under management

 

 

$

295,424

$

278,326

* Excludes certain intercompany assumed reinsurance.

Investment Strategies

Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.

Some of our key investment strategies are as follows:

Fixed maturity securities held by the U.S. insurance companies included in Property Casualty Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.

Outside of the U.S., fixed maturity securities held by Property Casualty Insurance Companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.

While more of a focus is placed on asset-liability management in Life Insurance Companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.

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

AIG | Third Quarter 2017 Form 10-Q131


TABLE OF CONTENTS

ITEM 2 | Investments

The following table presents the components of Net Investment Income:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Interest and dividends

$

2,960

$

3,213

 

$

9,037

$

9,698

Alternative investments(a)

 

355

 

365

 

 

1,174

 

309

Other investment income(b)

 

237

 

320

 

 

894

 

810

Total investment income

 

3,552

 

3,898

 

 

11,105

 

10,817

Investment expenses

 

136

 

115

 

 

390

 

338

Total net investment income

$

3,416

$

3,783

 

$

10,715

$

10,479

(a)  Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag.

(b)  Primarily includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and income on life settlements. For the three-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $138 million and $98 million, respectively, and on life settlements was $55 million and $161 million, respectively. For the nine-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $479 million and $370 million, respectively, and on life settlements was $256 million and $360 million, respectively.

Net investment income for the three-month period ended September 30, 2017 was lower than the same period in the prior year due to lower invested assets, lower income on our hedge fund portfolio, and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called partially offset by higher gains on assets for which we elected the fair value option. Net investment income for the nine-month period ended September 30, 2017 was higher than the same period in the prior year as higher income on our alternative investments, primarily in our hedge fund portfolio, and higher gains on assets for which we elected the fair value option, more than offset lower invested assets and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called.

Attribution of Net Investment Income to Operating Modules

Net investment income is attributed to our businesses based on internal models consistent with the nature of the underlying businesses.

For Commercial Insurance — Liability and Financial Lines, Property and Special Risks and Consumer Insurance — Personal Insurance and Legacy Property Casualty Insurance Run-Off Lines, we estimate investable funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the Property Casualty Insurance Companies to modules is calculated based on these estimated investable funds, consistent with the approximate duration of the liabilities and the required economic capital allocation for each module.

For Consumer Insurance — Individual Retirement, Group Retirement, and Life Insurance, Other Operations — Institutional Markets and Legacy Life Insurance Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life Insurance Companies. All invested assets of the Life Insurance Companies in excess of liabilities are allocated based on estimates of required economic capital allocation for each module.

Asset Liability Measurement

For the Property Casualty Insurance Companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the Property Casualty Insurance Companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.

The Property Casualty Insurance Companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Property Casualty Insurance Companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the Property Casualty Insurance Companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.

In addition, the Property Casualty Insurance Companies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. 

AIG | Third Quarter 2017 Form 10-Q132


TABLE OF CONTENTS

ITEM 2 | Investments

Fixed maturity securities of the Property Casualty Insurance Companies domestic operations, with an average duration of 4.1 years, are currently comprised of corporate bonds, structured securities, taxable municipal bonds and government and agency bonds as well as tax-exempt securities, which provide attractive risk-adjusted after-tax returns. The majority of these high quality investments are rated A or higher based on composite ratings.

Fixed maturity securities held in the Property Casualty Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 3.4 years.

The investment strategy of the Life Insurance Companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.

The Life Insurance Companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life Insurance Companies' fundamental investment strategy is to maintain a diversified, high quality portfolio of fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration.  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.

The Life Insurance Companies invest 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.

In addition, the Life Insurance Companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.  While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies, we intend to reduce the overall size of the hedge fund portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio.

Fixed maturity securities of the Life Insurance Companies domestic operations, with an average duration of 7.2 years, are comprised primarily of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.

Fixed maturity securities held in the Life Insurance Companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 20.6 years.

NAIC Designations of Fixed Maturity Securities

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

AIG | Third Quarter 2017 Form 10-Q133


TABLE OF CONTENTS

ITEM 2 | Investments

The following table presents the fixed maturity security portfolio of U.S. Insurance Companies categorized by NAIC Designation, at fair value:

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

NAIC Designation

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

Other fixed maturity securities

$

73,490

$

69,224

$

142,714

 

$

6,105

$

4,686

$

1,264

$

154

$

12,209

$

154,923

Mortgage-backed, asset-backed and collateralized

 

63,960

 

3,059

 

67,019

 

 

407

 

81

 

137

 

2,364

 

2,989

 

70,008

Total*

$

137,450

$

72,283

$

209,733

 

$

6,512

$

4,767

$

1,401

$

2,518

$

15,198

$

224,931

*    Excludes $25.5 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

The following table presents the fixed maturity security portfolio of U.S. Insurance Companies categorized by composite AIG credit rating, at fair value:

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

$

74,088

$

69,232

$

143,320

 

$

5,580

$

4,653

$

1,370

$

11,603

$

154,923

Mortgage-backed, asset-backed and collateralized

 

44,390

 

4,737

 

49,127

 

 

992

 

709

 

19,180

 

20,881

 

70,008

Total*

$

118,478

$

73,969

$

192,447

 

$

6,572

$

5,362

$

20,550

$

32,484

$

224,931

*    Excludes $25.5 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

Credit Ratings

At September 30, 2017, approximately 91 percent of our fixed maturity securities were held by our domestic entities. Approximately 17 percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 15 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for consideration in the internal analysis.

Moody’s Investors’ Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At September 30, 2017, approximately 23 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 8 percent were below investment grade or not rated. Approximately 39 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

AIG | Third Quarter 2017 Form 10-Q134


TABLE OF CONTENTS

ITEM 2 | Investments

Composite AIG Credit Ratings

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

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

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

 

Available for Sale

 

Other

 

Total

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

11,332

 

$

11,791

 

$

2,731

 

$

2,807

 

$

14,063

 

$

14,598

 

AA

 

30,059

 

 

33,647

 

 

221

 

 

250

 

 

30,280

 

 

33,897

 

A

 

43,879

 

 

45,619

 

 

1,635

 

 

1,612

 

 

45,514

 

 

47,231

 

BBB

 

71,591

 

 

68,700

 

 

142

 

 

76

 

 

71,733

 

 

68,776

 

Below investment grade

 

12,584

 

 

12,832

 

 

17

 

 

17

 

 

12,601

 

 

12,849

 

Non-rated

 

1,048

 

 

890

 

 

-

 

 

-

 

 

1,048

 

 

890

 

Total

$

170,493

 

$

173,479

 

$

4,746

 

$

4,762

 

$

175,239

 

$

178,241

 

Mortgage-backed, asset-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed and collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

29,648

 

$

28,593

 

$

894

 

$

1,055

 

$

30,542

 

$

29,648

 

AA

 

7,593

 

 

6,114

 

 

615

 

 

714

 

 

8,208

 

 

6,828

 

A

 

7,843

 

 

8,504

 

 

364

 

 

307

 

 

8,207

 

 

8,811

 

BBB

 

4,591

 

 

4,996

 

 

178

 

 

303

 

 

4,769

 

 

5,299

 

Below investment grade

 

17,578

 

 

19,838

 

 

5,838

 

 

6,790

 

 

23,416

 

 

26,628

 

Non-rated

 

25

 

 

13

 

 

18

 

 

67

 

 

43

 

 

80

 

Total

$

67,278

 

$

68,058

 

$

7,907

 

$

9,236

 

$

75,185

 

$

77,294

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

40,980

 

$

40,384

 

$

3,625

 

$

3,862

 

$

44,605

 

$

44,246

 

AA

 

37,652

 

 

39,761

 

 

836

 

 

964

 

 

38,488

 

 

40,725

 

A

 

51,722

 

 

54,123

 

 

1,999

 

 

1,919

 

 

53,721

 

 

56,042

 

BBB

 

76,182

 

 

73,696

 

 

320

 

 

379

 

 

76,502

 

 

74,075

 

Below investment grade

 

30,162

 

 

32,670

 

 

5,855

 

 

6,807

 

 

36,017

 

 

39,477

 

Non-rated

 

1,073

 

 

903

 

 

18

 

 

67

 

 

1,091

 

 

970

 

Total

$

237,771

 

$

241,537

 

$

12,653

 

$

13,998

 

$

250,424

 

$

255,535

 

 

LIQUIDITY AND CAPITAL RESOURCES

Overview

AIG | Third Quarter 2017 Form 10-Q135


TABLE OF CONTENTS

ITEM 2 | Investments

Available‑for‑Sale Investments

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

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

2017

 

2016

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

 

 

 

 

 

$

2,384

$

1,992

Obligations of states, municipalities and political subdivisions

 

 

 

 

 

 

 

18,831

 

24,772

Non-U.S. governments

 

 

 

 

 

 

 

15,593

 

14,535

Corporate debt

 

 

 

 

 

 

 

133,685

 

132,180

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

 

37,509

 

37,374

CMBS

 

 

 

 

 

 

 

13,518

 

14,271

CDO/ABS

 

 

 

 

 

 

 

16,251

 

16,413

Total mortgage-backed, asset-backed and collateralized

 

 

 

 

 

 

 

67,278

 

68,058

Total bonds available for sale*

 

 

 

 

 

 

 

237,771

 

241,537

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

1,056

 

1,065

Preferred stock

 

 

 

 

 

 

 

577

 

752

Mutual funds

 

 

 

 

 

 

 

74

 

261

Total equity securities available for sale

 

 

 

 

 

 

 

1,707

 

2,078

Total

 

 

 

 

 

 

$

239,478

$

243,615

*    At September 30, 2017 and December 31, 2016, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $31.2 billion and $33.6 billion, respectively.

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

 

September 30,

 

December 31,

(in millions)

 

2017

 

 

2016

Japan

$

1,820

 

$

2,140

Germany

 

1,635

 

 

1,168

United Kingdom

 

1,263

 

 

815

Canada

 

1,065

 

 

1,115

France

 

882

 

 

667

Mexico

 

609

 

 

637

Netherlands

 

561

 

 

445

Indonesia

 

452

 

 

366

Norway

 

438

 

 

456

Chile

 

352

 

 

360

Other

 

6,571

 

 

6,417

Total

$

15,648

 

$

14,586

AIG | Third Quarter 2017 Form 10-Q136


TABLE OF CONTENTS

ITEM 2 | Investments

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

 

September 30, 2017

 

 

 

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2016

(in millions)

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

Euro-Zone countries:

 

 

 

 

 

 

 

 

 

 

 

 

France

$

882

$

1,172

$

2,020

$

-

$

4,074

$

3,788

Germany

 

1,635

 

146

 

1,971

 

1

 

3,753

 

3,227

Netherlands

 

561

 

871

 

1,274

 

56

 

2,762

 

2,658

Belgium

 

190

 

107

 

893

 

-

 

1,190

 

1,075

Ireland

 

11

 

-

 

582

 

551

 

1,144

 

1,263

Spain

 

-

 

89

 

924

 

-

 

1,013

 

918

Italy

 

-

 

176

 

584

 

-

 

760

 

842

Luxembourg

 

-

 

17

 

425

 

-

 

442

 

430

Finland

 

57

 

33

 

78

 

-

 

168

 

198

Austria

 

23

 

3

 

4

 

-

 

30

 

95

Other - EuroZone

 

742

 

41

 

234

 

-

 

1,017

 

1,104

Total Euro-Zone

$

4,101

$

2,655

$

8,989

$

608

$

16,353

$

15,598

Remainder of Europe

 

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

$

1,263

$

3,402

$

8,398

$

3,671

$

16,734

$

15,293

Switzerland

 

40

 

1,265

 

990

 

-

 

2,295

 

2,360

Sweden

 

130

 

413

 

159

 

-

 

702

 

691

Norway

 

438

 

44

 

168

 

-

 

650

 

582

Russian Federation

 

105

 

20

 

158

 

-

 

283

 

169

Other - Remainder of Europe

 

160

 

116

 

77

 

-

 

353

 

285

Total - Remainder of Europe

$

2,136

$

5,260

$

9,950

$

3,671

$

21,017

$

19,380

Total

$

6,237

$

7,915

$

18,939

$

4,279

$

37,370

$

34,978

Investments in Municipal Bonds

At September 30, 2017, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backed bonds with over 92 percent of the portfolio rated A or higher.

AIG | Third Quarter 2017 Form 10-Q137


TABLE OF CONTENTS

ITEM 2 | Investments

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

 

September 30, 2017

 

 

 

 

State

 

Local

 

 

 

Total

December 31,

 

 

General

 

General

 

 

 

Fair

 

2016

(in millions)

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

State:

 

 

 

 

 

 

 

 

 

 

New York

$

20

$

559

$

3,009

$

3,588

$

4,170

California

 

683

 

423

 

2,184

 

3,290

 

3,471

Texas

 

195

 

674

 

1,109

 

1,978

 

3,287

Massachusetts

 

477

 

-

 

490

 

967

 

1,396

Illinois

 

72

 

129

 

657

 

858

 

1,171

Florida

 

62

 

-

 

657

 

719

 

1,016

Washington

 

256

 

13

 

377

 

646

 

1,059

Virginia

 

8

 

-

 

632

 

640

 

789

Ohio

 

94

 

-

 

492

 

586

 

536

Georgia

 

131

 

167

 

266

 

564

 

747

Washington D.C.

 

37

 

-

 

460

 

497

 

671

Pennsylvania

 

161

 

23

 

223

 

407

 

719

Maryland

 

168

 

92

 

126

 

386

 

423

All other states(a)

 

419

 

356

 

2,930

 

3,705

 

5,317

Total(b)(c)

$

2,783

$

2,436

$

13,612

$

18,831

$

24,772

(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 $0.9 billion 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)

 

2017

 

2016

 

Financial institutions:

 

 

 

 

 

Money Center/Global Bank Groups

$

9,285

$

8,892

 

Regional banks — other

 

562

 

606

 

Life insurance

 

3,652

 

3,100

 

Securities firms and other finance companies

 

375

 

392

 

Insurance non-life

 

5,013

 

5,213

 

Regional banks — North America

 

6,372

 

6,844

 

Other financial institutions

 

9,589

 

8,435

 

Utilities

 

18,498

 

17,938

 

Communications

 

9,872

 

10,025

 

Consumer noncyclical

 

15,935

 

15,338

 

Capital goods

 

7,853

 

8,339

 

Energy

 

13,274

 

13,618

 

Consumer cyclical

 

9,011

 

8,606

 

Basic

 

6,128

 

6,582

 

Other

 

18,266

 

18,252

 

Total *

$

133,685

$

132,180

 

*    At both September 30, 2017 and December 31, 2016, approximately 91 percent of these investments were rated investment grade.

Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.6 percent at both September 30, 2017 and December 31, 2016. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.

AIG | Third Quarter 2017 Form 10-Q138


TABLE OF CONTENTS

ITEM 2 | Investments

Investments in RMBS

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

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

2017

 

2016

Agency RMBS

 

 

 

 

 

 

 

 

 

$

14,942

$

13,854

Alt-A RMBS

 

 

 

 

 

 

 

 

 

 

11,841

 

12,387

Subprime RMBS

 

 

 

 

 

 

 

 

 

 

3,058

 

2,905

Prime non-agency

 

 

 

 

 

 

 

 

 

 

6,890

 

7,422

Other housing related

 

 

 

 

 

 

 

 

 

 

778

 

806

Total RMBS(a)(b)

 

 

 

 

 

 

 

 

 

$

37,509

$

37,374

(a)  Includes approximately $12.5 billion and $12.9 billion at September 30, 2017, and December 31, 2016, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination.  For additional discussion on Purchased Credit Impaired (PCI) Securities see Note 6 to the Condensed Consolidated Financial Statements

(b)  The weighted average expected life was six years at both September 30, 2017 and December 31, 2016.

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

CMBS (traditional)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,883

$

11,782

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,986

 

1,737

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

649

 

752

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,518

$

14,271

The fair value of CMBS holdings remained stable during the third quarter of 2017. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.

Investments in CDOs

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

 

 

 

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

2017

 

2016

Collateral Type:

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans (CLO)

 

 

 

 

 

 

 

 

$

7,777

$

8,548

Other

 

 

 

 

 

 

 

 

 

102

 

129

Total

 

 

 

 

 

 

 

 

$

7,879

$

8,677

Commercial Mortgage Loans

At September 30, 2017, we had direct commercial mortgage loan exposure of $27.9 billion, of which 99.7 percent of the loans were current. 

AIG | Third Quarter 2017 Form 10-Q139


TABLE OF CONTENTS

ITEM 2 | Investments

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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

97

 

$

1,538

$

3,653

$

527

$

226

$

119

$

178

$

6,241

22

%

California

86

 

 

324

 

1,071

 

303

 

315

 

847

 

396

 

3,256

12

 

Texas

56

 

 

327

 

936

 

162

 

84

 

154

 

38

 

1,701

6

 

Massachusetts

22

 

 

673

 

337

 

405

 

-

 

-

 

27

 

1,442

5

 

New Jersey

38

 

 

574

 

47

 

448

 

-

 

28

 

33

 

1,130

4

 

Florida

73

 

 

320

 

85

 

380

 

227

 

19

 

76

 

1,107

4

 

Pennsylvania

25

 

 

67

 

22

 

573

 

47

 

26

 

-

 

735

3

 

Illinois

14

 

 

258

 

305

 

11

 

26

 

-

 

23

 

623

2

 

Ohio

24

 

 

131

 

11

 

206

 

164

 

-

 

5

 

517

2

 

Connecticut

19

 

 

341

 

66

 

22

 

80

 

-

 

-

 

509

2

 

Other states

251

 

 

1,516

 

1,240

 

1,607

 

620

 

586

 

180

 

5,749

20

 

Foreign

71

 

 

1,205

 

938

 

745

 

358

 

628

 

1,046

 

4,920

18

 

Total*

776

 

$

7,274

$

8,711

$

5,389

$

2,147

$

2,407

$

2,002

$

27,930

100

%

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

96

 

$

1,391

$

3,527

$

534

$

215

$

163

$

185

$

6,015

24

%

California

89

 

 

325

 

761

 

282

 

286

 

870

 

401

 

2,925

12

 

Texas

58

 

 

255

 

857

 

97

 

108

 

154

 

44

 

1,515

6

 

Florida

67

 

 

322

 

94

 

340

 

165

 

19

 

76

 

1,016

4

 

Massachusetts

20

 

 

415

 

114

 

408

 

50

 

-

 

27

 

1,014

4

 

New Jersey

39

 

 

529

 

47

 

355

 

-

 

29

 

33

 

993

4

 

Illinois

19

 

 

258

 

307

 

20

 

52

 

36

 

23

 

696

3

 

Pennsylvania

24

 

 

-

 

28

 

473

 

51

 

26

 

-

 

578

2

 

Ohio

29

 

 

151

 

17

 

211

 

165

 

-

 

5

 

549

2

 

Connecticut

19

 

 

343

 

67

 

23

 

80

 

-

 

-

 

513

2

 

Other states

269

 

 

1,309

 

1,239

 

1,670

 

481

 

560

 

199

 

5,458

22

 

Foreign

59

 

 

707

 

906

 

784

 

245

 

532

 

596

 

3,770

15

 

Total*

788

 

$

6,005

$

7,964

$

5,197

$

1,898

$

2,389

$

1,589

$

25,042

100

%

*    Does not reflect allowance for credit losses.

For additional discussion on commercial mortgage loans see Note 6 to the Consolidated Financial Statements in the 2016 Annual Report.

Impairments

The following table presents impairments by investment type:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Other-than-temporary Impairments:

 

 

 

 

 

 

 

 

 

   Fixed maturity securities, available for sale

$

72

$

69

 

$

185

$

361

   Equity securities, available for sale

 

2

 

3

 

 

10

 

7

   Private equity funds and hedge funds

 

14

 

30

 

 

28

 

46

Subtotal

 

88

 

102

 

 

223

 

414

Other impairments:

 

 

 

 

 

 

 

 

 

   Investments in life settlements

 

273

 

80

 

 

360

 

329

   Other investments

 

16

 

25

 

 

20

 

52

   Real estate*

 

9

 

2

 

 

61

 

6

Total

$

386

$

209

 

$

664

$

801

AIG | Third Quarter 2017 Form 10-Q140


TABLE OF CONTENTS

ITEM 2 | Investments

*    Impairments include $35 million related to other assets that were sold during the three-month period ended June 30, 2017.

Other-Than-Temporary Impairments

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

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

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

  

 

 

 

 

 

Other Fixed

Equities/Other

 

 

(in millions)

RMBS

CDO/ABS

CMBS

Maturity

 Invested Assets*

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

-

$

-

Change in intent

 

-

 

-

 

-

 

1

 

-

 

1

Foreign currency declines

 

-

 

-

 

-

 

1

 

-

 

1

Issuer-specific credit events

 

5

 

-

 

7

 

57

 

16

 

85

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

-

 

1

Total

$

6

$

-

$

7

$

59

$

16

$

88

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

10

$

10

Change in intent

 

-

 

-

 

-

 

2

 

-

 

2

Foreign currency declines

 

-

 

-

 

-

 

7

 

-

 

7

Issuer-specific credit events

 

20

 

-

 

13

 

21

 

23

 

77

Adverse projected cash flows

 

6

 

-

 

-

 

-

 

-

 

6

Total

$

26

$

-

$

13

$

30

$

33

$

102

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

2

$

2

Change in intent

 

-

 

-

 

-

 

9

 

-

 

9

Foreign currency declines

 

-

 

-

 

-

 

11

 

-

 

11

Issuer-specific credit events

 

21

 

33

 

28

 

79

 

36

 

197

Adverse projected cash flows

 

4

 

-

 

-

 

-

 

-

 

4

Total

$

25

$

33

$

28

$

99

$

38

$

223

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

15

$

15

Change in intent

 

-

 

-

 

-

 

35

 

-

 

35

Foreign currency declines

 

-

 

-

 

-

 

14

 

-

 

14

Issuer-specific credit events

 

80

 

1

 

25

 

159

 

38

 

303

Adverse projected cash flows

 

47

 

-

 

-

 

-

 

-

 

47

Total

$

127

$

1

$

25

$

208

$

53

$

414

*    Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments.

We recorded other-than-temporary impairment charges in the three- and nine-month periods ended September 30, 2017 and 2016 related to:

issuer-specific credit events;

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

declines due to foreign exchange rates;

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

securities that experienced severe market valuation declines.

AIG | Third Quarter 2017 Form 10-Q141


TABLE OF CONTENTS

ITEM 2 | Investments

In addition, impairments are recorded on real estate and investments in life settlements.

In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $147 million and $187 million in the three-month periods ended September 30, 2017 and 2016, respectively, and $523 million and $645 million in the nine-month periods ended September 30, 2017 and 2016, respectively.

For a discussion of our other-than-temporary impairment accounting policy seeNote 6 to the Consolidated Financial Statements in the 2016 Annual Report

The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity 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, 2017

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

$

18,397

$

179

2,138

 

$

90

$

32

3

 

$

-

$

-

-

 

$

18,487

$

211

2,141

7-11 months

 

6,910

 

167

753

 

 

36

 

12

6

 

 

8

 

6

3

 

 

6,954

 

185

762

12 months or more

 

11,768

 

543

1,264

 

 

339

 

115

20

 

 

14

 

8

4

 

 

12,121

 

666

1,288

Total

$

37,075

$

889

4,155

 

$

465

$

159

29

 

$

22

$

14

7

 

$

37,562

$

1,062

4,191

Below investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

grade bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

2,080

$

48

1,289

 

$

22

$

5

30

 

$

-

$

-

1

 

$

2,102

$

53

1,320

7-11 months

 

448

 

16

166

 

 

11

 

3

5

 

 

-

 

-

-

 

 

459

 

19

171

12 months or more

 

2,383

 

134

397

 

 

223

 

60

34

 

 

9

 

9

2

 

 

2,615

 

203

433

Total

$

4,911

$

198

1,852

 

$

256

$

68

69

 

$

9

$

9

3

 

$

5,176

$

275

1,924

Total bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

20,477

$

227

3,427

 

$

112

$

37

33

 

$

-

$

-

1

 

$

20,589

$

264

3,461

7-11 months

 

7,358

 

183

919

 

 

47

 

15

11

 

 

8

 

6

3

 

 

7,413

 

204

933

12 months or more

 

14,151

 

677

1,661

 

 

562

 

175

54

 

 

23

 

17

6

 

 

14,736

 

869

1,721

Total(e)

$

41,986

$

1,087

6,007

 

$

721

$

227

98

 

$

31

$

23

10

 

$

42,738

$

1,337

6,115

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-11 months

$

158

$

8

65

 

$

6

$

1

7

 

$

-

$

-

-

 

$

164

$

9

72

12 months or more

 

1

 

-

2

 

 

-

 

-

1

 

 

-

 

-

-

 

 

1

 

-

3

Total

$

159

$

8

67

 

$

6

$

1

8

 

$

-

$

-

-

 

$

165

$

9

75

(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, 2017.

(c)  For bonds, represents amortized cost.

(d)  The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.

(e)  Item count is by CUSIP by subsidiary.

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 manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity at both AIG Parent and subsidiaries to meet our financial obligations over a twelve-month period under a liquidity stress scenario. See Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement in the 2015 Annual Report and Enterprise Risk Management — Liquidity Risk Management below 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 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 for both 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 as was the case in 2008. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.

Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share repurchases. 

181


TABLE OF CONTENTS

Item 2 /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, 2017 and 2016 was primarily attributable to increases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2017 and 2016, net unrealized gains related to fixed maturity and equity securities increased by $4.4 billion and $10.8 billion, respectively, due primarily to a decrease in rates and a narrowing of credit spreads.

For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.

AIG | Third Quarter 2017 Form 10-Q142


TABLE OF CONTENTS

ITEM 2 | Investments

Net Realized Capital Gains and Losses

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

 

2016

Sales of fixed maturity securities

$

54

$

135

 

$

374

 

$

(103)

Sales of equity securities

 

4

 

53

 

 

86

 

 

1,051

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

 

Severity

 

-

 

(10)

 

 

(2)

 

 

(15)

Change in intent

 

(1)

 

(2)

 

 

(9)

 

 

(35)

Foreign currency declines

 

(1)

 

(7)

 

 

(11)

 

 

(14)

Issuer-specific credit events

 

(85)

 

(77)

 

 

(197)

 

 

(303)

Adverse projected cash flows

 

(1)

 

(6)

 

 

(4)

 

 

(47)

Provision for loan losses

 

(38)

 

8

 

 

(56)

 

 

8

Foreign exchange transactions

 

66

 

(639)

 

 

299

 

 

(1,197)

Variable annuity embedded derivatives, net of related hedges

 

(430)

 

(309)

 

 

(1,023)

 

 

(482)

All other derivatives and hedge accounting

 

(136)

 

83

 

 

(217)

 

 

353

Impairments on investments in life settlements

 

(273)

 

(80)

 

 

(360)

 

 

(329)

Other*

 

(81)

 

86

 

 

14

 

 

284

Net realized capital losses

$

(922)

$

(765)

 

$

(1,106)

 

$

(829)

*    Includes $107 million of realized gains due to a purchase price adjustment on the sale of Class B shares of Prudential Financial, Inc. for the nine months ended September 30, 2016.

Net realized capital losses in the three-month period ended September 30, 2017 were higher than the net realized capital losses in the same period in the prior year due primarily to higher hedge accounting losses, higher impairments on investments in life settlements, and lower gains on the sales of securities, which more than offset foreign exchange gains versus losses in the prior year. Net realized capital losses in the three-month period ended September 30, 2017 were primarily related to hedge accounting losses and impairments. Net realized capital losses increased in the nine-month period ended September 30, 2017 compared to the same period in the prior year due primarily to higher hedge accounting losses and lower gains on the sales of securities, which more than offset foreign exchange gains versus losses in the prior year and lower other-than-temporary impairments. Net realized capital losses in the nine-month period ended September 30, 2017 consisted primarily of hedge accounting losses and impairments, which were partially offset by gains on the sales of securities and foreign exchange gains.

Derivative and hedge accounting losses were primarily a result of the fair value changes in derivative instruments used to economically hedge market risk from variable annuities with guaranteed minimum withdrawal benefits (GMWB), which were impacted by interest rates and equity market performance in the first nine months of 2017, and changes in actuarial assumptions in our variable annuity program.

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 Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Programs in the 2016 Annual Report. For more information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.

Net realized capital losses in the three-month period ended September 30, 2016 were primarily due to foreign exchange losses related to British pound weakening following the Brexit vote, hedge accounting losses, and other-than-temporary-impairment charges, which more than offset gains on the sale of securities. Net realized capital losses in the nine-month period ended September 30, 2016 were primarily related to foreign exchange losses and impairments, which were higher than the gain recognized on the sale of a portion of our PICC Investment. Foreign exchange gains (losses) were primarily due to $528 million and $906 million of remeasurement losses in the three- and nine-month periods ended September 30, 2016, respectively, for a short term intercompany balance that was matched with available for sale investments in fixed maturity securities denominated in the same foreign currencies. Unrealized gains and losses on the available for sale investments were recorded in other comprehensive income resulting in an immaterial impact on our overall equity or book value per share from this arrangement.

For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.

AIG | Third Quarter 2017 Form 10-Q143


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Insurance Reserves

Liability for unpaid losses and loss adjustment expenses (Loss Reserves)

The following table presents the components of our gross and net loss reserves by segment and major lines of business:

 

September 30, 2017

 

December 31, 2016

 

Net liability for

Reinsurance

Gross liability

 

Net liability

Reinsurance

Gross liability

 

unpaid losses

recoverable on

 for unpaid

 

for unpaid

recoverable on

 for unpaid

 

and loss

unpaid losses and

losses and

 

losses and

unpaid losses and

losses and

 

adjustment

loss adjustment

loss adjustment

 

loss adjustment

loss adjustment

loss adjustment

(in millions)

expenses

expenses

expenses

 

expenses

expenses

expenses

Commercial Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability and Financial Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' Compensation*

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

$

9,738

$

3,077

$

12,815

 

$

10,486

$

2,879

$

13,365

U.S. Excess Casualty

 

8,405

 

1,188

 

9,593

 

 

8,749

 

1,115

 

9,864

U.S. Other Casualty

 

8,661

 

3,430

 

12,091

 

 

8,746

 

3,209

 

11,955

U.S. Financial Lines

 

6,097

 

1,275

 

7,372

 

 

6,102

 

1,195

 

7,297

Europe Casualty and Financial Lines

 

6,345

 

1,002

 

7,347

 

 

5,587

 

1,313

 

6,900

Other product lines

 

2,410

 

1,028

 

3,438

 

 

2,279

 

986

 

3,265

Retroactive reinsurance

 

(10,801)

 

10,800

 

(1)

 

 

-

 

-

 

-

Unallocated loss adjustment expenses

 

2,322

 

294

 

2,616

 

 

2,260

 

252

 

2,512

Total Liability and Financial Lines

 

33,177

 

22,094

 

55,271

 

 

44,209

 

10,949

 

55,158

Property and Special Risks:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. and Europe

 

7,855

 

1,546

 

9,401

 

 

5,913

 

1,596

 

7,509

Other product lines

 

2,011

 

510

 

2,521

 

 

1,139

 

536

 

1,675

Retroactive reinsurance

 

(717)

 

718

 

1

 

 

-

 

-

 

-

Unallocated loss adjustment expenses

 

270

 

52

 

322

 

 

279

 

47

 

326

Total Property and Special Risks

 

9,419

 

2,826

 

12,245

 

 

7,331

 

2,179

 

9,510

Total Commercial Insurance

 

42,596

 

24,920

 

67,516

 

 

51,540

 

13,128

 

64,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Personal Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Europe and Japan

 

3,875

 

574

 

4,449

 

 

3,454

 

377

 

3,831

Other product lines

 

876

 

188

 

1,064

 

 

744

 

184

 

928

Retroactive reinsurance

 

(115)

 

115

 

-

 

 

-

 

-

 

-

Unallocated loss adjustment expenses

 

106

 

4

 

110

 

 

202

 

4

 

206

Total Consumer Personal Insurance

 

4,742

 

881

 

5,623

 

 

4,400

 

565

 

4,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Property

 

 

 

 

 

 

 

 

 

 

 

 

 

and Casualty Insurance Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Long Tail Insurance lines

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

 

4,736

 

28

 

4,764

 

 

6,659

 

-

 

6,659

Other run-off product lines

 

1,651

 

50

 

1,701

 

 

160

 

46

 

206

Retroactive reinsurance

 

(1,608)

 

1,608

 

-

 

 

(1,679)

 

1,679

 

-

Unallocated loss adjusted expenses

 

325

 

122

 

447

 

 

347

 

114

 

461

Total Legacy Portfolio - Run-off Property

 

 

 

 

 

 

 

 

 

 

 

 

 

and Casualty Insurance Lines

 

5,104

 

1,808

 

6,912

 

 

5,487

 

1,839

 

7,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operations

 

36

 

-

 

36

 

 

118

 

-

 

118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

52,478

$

27,609

$

80,087

 

$

61,545

$

15,532

$

77,077

*    Includes loss reserve discount of $1.8 billion and $3.6 billion for the nine-month period ended September 30, 2017 and year ended December 31, 2016, respectively.  For discussion of loss reserve discount see Note 10 to the Condensed Consolidated Financial Statements.  

AIG | Third Quarter 2017 Form 10-Q144


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 and major lines of business:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

Commercial Insurance

 

 

 

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

760

 

$

(5)

 

$

839

 

$

69

Property and Special Risks

 

77

 

 

322

 

 

83

 

 

268

Total Commercial Insurance

 

837

 

 

317

 

 

922

 

 

337

Consumer Personal Insurance

 

-

 

 

(33)

 

 

(3)

 

 

(120)

Legacy Portfolio - Property and Casualty Run off Insurance Lines

 

(1)

 

 

6

 

 

(17)

 

 

31

Other Operations

 

-

 

 

(16)

 

 

-

 

 

(34)

Total prior year unfavorable development*

$

836

 

$

274

 

$

902

 

$

214

*    Includes the amortization attributed to the deferred gain at inception from the NICO reinsurance agreement of $62 million and $165 million in the three and nine-month periods ended September 30, 2017, respectively.  Consistent with our definition of PTOI, the three- and nine-month periods ended September 30, 2017 exclude the portion of unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreement of $3 million and $287 million, respectively, and related changes in amortization of the deferred gain of $13 million and $30 million, respectively.

Net Loss Development

In the three-month period ended September 30, 2017, we recognized unfavorable prior year loss reserve development of $836 million. This unfavorable development was primarily a result of the following:

Higher than expected losses for European Casualty and Financial Lines – We observed a significant increase in large claims activity in our European long-tail business, primarily emanating from accident years 2015 and 2016;

Unfavorable development in U.S. Other Casualty – Commercial auto loss experience for accident year 2016 has been emerging higher than expected, driven by an increase in the frequency of large claims. While we observed this trend in loss severity for several quarters, the rate of growth continues to exceed our revised expectations. We have similarly strengthened our estimate for primary general liability in consideration of similar underlying severity trends;

Unfavorable development in U.S. Excess Casualty – This was driven by emerging loss experience in accident year 2016. The loss frequency and severity to date has exceeded initial expectations and is coinciding with increased loss severity in the underlying primary auto and general liability segments;

Higher than expected losses in Property and Special Risks – We have observed unfavorable results in U.S. programs commercial auto business in accident years 2015 and 2016 primarily from terminated programs, along with some individual severe loss experience in aviation and surety. This was partially offset by favorable development in commercial property.

In the nine-month period ended September 30, 2017, we recognized unfavorable prior year loss reserve development of $902 million, primarily due to the impact of the factors noted above in the third quarter. In addition, during the second quarter we observed unfavorable claim experience in the U.S. primary general liability and U.S. excess casualty segments, notably due to construction defects and multi-year construction projects that cover all contractors on the site (“wrap business”). The majority of this activity came from accident years 2015 and prior, including a significant proportion from accident years 2006 and prior. We also observed higher than expected losses in property and special risks driven by unexpected development on several large international claims including aviation, marine and trade credit primarily from accident year 2016.

In addition, in the first quarter of 2017, we increased our loss reserves by $102 million as a result of the decision made by the UK Ministry of Justice to reduce the discount rate applied to lump-sum bodily injury payouts, known as the Ogden rate, to negative 0.75 percent. Our carried reserves at December 31, 2016 were estimated using our assumption that the Ogden rate would decline to 1.0 percent. This discount rate change primarily impacted the Europe casualty and financial lines.

These prior year loss reserve increases were partially offset by the recognition of the amortization of the deferred gain from the adverse development reinsurance agreement with NICO of $62 million and $165 million in the three and nine-month periods ended September 30, 2017, respectively.

Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratios we select. We increased our selections in the second and third quarter resulting in approximately $188 million and $212 million increase in net losses incurred in the three- and nine month periods ended September, 30 2017.

AIG | Third Quarter 2017 Form 10-Q145


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

In the three- and nine-month periods ended September 30, 2016, we recognized unfavorable prior year loss reserve development of $274 million and $214 million, respectively, primarily in U.S. programs business and U.S. worker’s compensation.  The U.S. programs unfavorable prior year development was driven by higher than expected loss emergence in the most recent calendar year emanating from terminated programs. The increase in our U.S. workers’ compensation loss reserves of approximately $100 million resulted from two separate rulings issued by the Florida Supreme Court that increased the potential liability for workers’ compensation claims in that state by reversing certain aspects of regulations in place since 2003. Also in the second quarter of 2016, the Florida Court of Appeals issued the Miles decision, declaring unconstitutional certain restrictions on claimant-paid attorney fees. We are continuing to monitor the impact of these decisions and may adjust our estimate as new facts and data emerge. This development was partially offset by favorable development from U.S. property, excluding catastrophes, and consumer personal insurance.

The following tables summarize incurred (favorable) or unfavorable prior year development net of reinsurance, by accident year groupings:

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2016

 

2015-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

760

$

666

$

21

$

28

$

45

Property and Special Risks

 

77

 

31

 

19

 

5

 

22

Consumer Personal Insurance

 

-

 

8

 

(6)

 

-

 

(2)

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

(1)

 

-

 

-

 

(15)

 

14

Total

$

836

$

705

$

34

$

18

$

79

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2015

 

2014-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

(5)

$

1

$

(38)

$

36

$

(4)

Property and Special Risks

 

322

 

100

 

223

 

(12)

 

11

Consumer Personal Insurance

 

(33)

 

(18)

 

(14)

 

1

 

(2)

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

6

 

-

 

-

 

-

 

6

Other Operations

 

(16)

 

(5)

 

(3)

 

(7)

 

(1)

Total

$

274

$

78

$

168

$

18

$

10

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2016

 

2015-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

839

$

681

$

(8)

$

60

$

106

Property and Special Risks

 

83

 

49

 

(2)

 

3

 

33

Consumer Personal Insurance

 

(3)

 

(15)

 

(2)

 

12

 

2

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

(17)

 

29

 

(26)

 

(27)

 

7

Total

$

902

$

744

$

(38)

$

48

$

148

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2015

 

2014-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

69

$

20

$

(61)

$

99

$

11

Property and Special Risks

 

268

 

(25)

 

309

 

(9)

 

(7)

Consumer Personal Insurance

 

(120)

 

(42)

 

(71)

 

(1)

 

(6)

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

31

 

-

 

-

 

11

 

20

Other Operations

 

(34)

 

(9)

 

(17)

 

(7)

 

(1)

Total

$

214

$

(56)

$

160

$

93

$

17

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. These reclassifications are shown as development in the respective years in the tables above.  This may affect the comparability of the data presented in our tables.

AIG | Third Quarter 2017 Form 10-Q146


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Significant Reinsurance Agreements

Effective January 1, 2016, we entered into a two-year reinsurance arrangement with the Swiss Reinsurance Company Ltd, under which we ceded a proportional share of our new and renewal U.S. Casualty portfolio in order to reduce the concentration of casualty business in our portfolio.

Our 2017 catastrophe reinsurance program includes coverage for natural catastrophes and some coverage for terrorism events. It consists of a large North American occurrence cover (without reinstatement) to protect against large North America losses and Japan cover to protect against losses in Japan.  The attachment point for this reinsurance program is $1.5 billion for North America losses (down from $3.0 billion in 2016) and varies for the Japan cover, and through September 8, 2017 provided up to $3.2 billion of coverage on a per event basis, with approximately $525 million of coverage provided via reinsurance purchased from catastrophe bond issuers.  Effective September 8, 2017, we added approximately an additional $1.3 billion of coverage to the North American cover, making our total coverage $4.5 billion for the remainder of 2017.

In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, a subsidiary of Berkshire, 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.  At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion.  The covered losses ceded to NICO were $13.1 billion and the unexpired limit was $6.9 billion at September 30, 2017. 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. This transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred.

The table below shows the calculation of the inception to date deferred gain and the effect of discounting of loss reserves and amortization of the deferred gain. The deferred gain is amortized over the settlement period of the reinsured losses.

 

 

 

 

 

Inception-To-Date

 

Third

 

 

 

 

 

First

 

Second

 

Third

 

Quarter

 

 

At

 

 

Quarter

 

Quarter

 

Quarter

 

2017

(in millions)

 

Inception

 

 

2017

 

2017

 

2017

 

Change

Gross Covered Losses

 

 

 

 

 

 

 

 

 

 

 

Covered reserves before discount

$

33,510

 

$

31,614

$

30,399

$

28,778

$

(1,621)

Losses paid

 

7,543

 

 

9,454

 

11,010

 

12,631

 

1,621

Attachment point

 

(25,000)

 

 

(25,000)

 

(25,000)

 

(25,000)

 

-

Covered losses above attachment point

$

16,053

 

$

16,068

$

16,409

$

16,409

$

-

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Gain Development

 

 

 

 

 

 

 

 

 

 

 

Covered losses above attachment ceded to NICO (80%)

$

12,843

 

$

12,854

$

13,127

$

13,127

$

-

Consideration paid including interest

 

(10,188)

 

 

(10,188)

 

(10,188)

 

(10,188)

 

-

Pre-tax deferred gain before discount and amortization

 

2,655

 

 

2,666

 

2,939

 

2,939

 

-

Discount on ceded losses

 

(1,539)

 

 

(1,655)

 

(1,547)

 

(1,494)

 

53

Pre-tax deferred gain before amortization

 

1,116

 

 

1,011

 

1,392

 

1,445

 

53

Amortization attributed to deferred gain at inception

 

-

 

 

(41)

 

(103)

 

(165)

 

(62)

Amortization attributed to changes in deferred gain*

 

-

 

 

(2)

 

(12)

 

(19)

 

(7)

Deferred gain liability reflected in AIG's balance sheet

$

1,116

 

$

968

$

1,277

$

1,261

$

(16)

* Excluded from our definition of PTOI.

AIG | Third Quarter 2017 Form 10-Q147


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

The following table presents the rollforward of activity in the deferred gain:

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2017

 

September 30, 2017

(in millions)

Before Discount

 

Discount

 

Net

 

Before Discount

 

Discount

 

Net

Balance at beginning of period

$

2,824

$

(1,547)

$

1,277

 

$

-

$

-

$

-

Gain at inception

 

-

 

-

 

-

 

 

2,655

 

(1,539)

 

1,116

Unfavorable prior year reserve development ceded to NICO(a)

 

-

 

-

 

-

 

 

284

 

-

 

284

Amortization attributed to deferred gain at inception(b)

 

(62)

 

-

 

(62)

 

 

(165)

 

-

 

(165)

Amortization attributed to changes in deferred gain

 

(7)

 

-

 

(7)

 

 

(19)

 

-

 

(19)

Changes in discount on ceded loss reserves

 

-

 

53

 

53

 

 

-

 

45

 

45

Balance at end of period

$

2,755

$

(1,494)

$

1,261

 

$

2,755

$

(1,494)

$

1,261

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

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

The lines of business subject to this agreement have been the source of substantially all of the prior year adverse development charges over the past several years. The agreement resulted in lower capital charges for reserve risks at our U.S. insurance subsidiaries.  Under U.S. GAAP, any potential future prior year development would be recognized immediately as losses are incurred; however, the related recoveries under the reinsurance agreement would be deferred and recognized over the expected recovery period.  However, consistent with our definition of PTOI, we exclude 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.  In addition, amortization of the deferred gain is recognized in PTOI based on the original amortization schedule at the time we entered into the agreement.

For a summary of significant reinsurers seePart II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Reinsurance Activities – Reinsurance Recoverable in our 2016 Annual Report

LIFE AND ANNUITY reserves and dac

The following section provides discussion of life and annuity reserves and deferred policy acquisition costs.

Update of Actuarial Assumptions

The Life Insurance Companies review and update estimated gross profit projections used to amortize DAC and related items for investment-oriented products at least annually. Estimated gross profit projections include assumptions for investment-related returns and spreads, product-related fees and expenses, mortality gains and losses, policyholder behavior and other factors. In estimating future gross profits, lapse assumptions require judgment and can have a material impact on DAC amortization. If the assumptions used for estimated gross profits change significantly, DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue 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 which 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, 2017:

we reduced our separate account long-term asset growth rate assumption related to equity market performance by 50 basis points to 7.0 percent and increased our reversion to the mean rates (gross of fees) to 3.74 percent for the Variable Annuity product line in Individual Retirement and 3.78 percent for the Variable Annuity product line in Group Retirement; and

we lowered our ultimate projected yields on invested assets by approximately five to 10 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 asset 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 annuity products and five years for life insurance products.

AIG | Third Quarter 2017 Form 10-Q148


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

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. Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. Underlying assumptions are reviewed periodically and updated as appropriate.

The net increases (decreases) to pre-tax operating income and pre-tax income as a result of the update of actuarial assumptions for the three- and nine-month periods ended September 30, 2017 and 2016 are shown in the following tables.

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

Three Months and Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2017

 

2016

Consumer Insurance:

 

 

 

 

Individual Retirement

 

 

 

 

Fixed Annuities

$

130

$

330

Variable and Indexed Annuities

 

112

 

39

Total Individual Retirement

 

242

 

369

Group Retirement

 

13

 

(47)

Life Insurance

 

29

 

(92)

Total Consumer Insurance

 

284

 

230

Other:

 

 

 

 

Institutional Markets

 

-

 

-

Legacy Life Run-off

 

(14)

 

(614)

Total increase (decrease) in pre-tax operating income from update of assumptions

$

270

$

(384)

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

Three Months and Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2017

 

2016

Policy fees

$

(2)

$

(54)

Interest credited to policyholder account balances

 

49

 

65

Amortization of deferred policy acquisition costs

 

184

 

325

Policyholder benefits and losses incurred

 

39

 

(720)

Increase (decrease) in pre-tax operating income

 

270

 

(384)

Change in DAC related to net realized capital gains (losses)

 

44

 

13

Net realized capital gains (losses)

 

(246)

 

(56)

Increase (decrease) in pre-tax income

$

68

$

(427)

In the three- and nine-month periods ended September 30, 2017, pre-tax operating income included a net positive adjustment of $270 million, primarily driven by lower lapse assumptions in Fixed Annuities, improved mortality assumptions in Life Insurance, and an increase in the reversion to the mean rates in Variable Annuities. The positive adjustments were partially offset by lower spread assumptions in Fixed Annuities and a loss recognition expense on long-term care business in the Legacy Life Insurance Run-Off Lines.

In the three- and nine-month periods ended September 30, 2016, pre-tax operating income included a net negative adjustment of $384 million, primarily driven by $622 million of loss recognition reserves for pre-2010 payout annuities in the Legacy Portfolio, and an increase in Life Insurance reserves for universal life with secondary guarantees. These negative adjustments were partially offset by positive adjustments, primarily due to lower lapse assumptions in Fixed Annuities.

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

AIG | Third Quarter 2017 Form 10-Q149


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Update of Actuarial Assumptions by Business Module

Individual Retirement

The update of actuarial assumptions resulted in net positive adjustments to pre-tax operating income of Individual Retirement of $242 million and $369 million in the three- and nine-month periods ended September 30, 2017 and 2016, respectively.

In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $130 million in the three- and nine-month periods ended September 30, 2017, which reflected lower lapse assumptions, partially offset by lower spread assumptions. In the three- and nine-month periods ended September 30, 2016, a net positive adjustment of $330 million reflected lower lapse assumptions, primarily due to lower long-term interest rates, as well as updates to spread assumptions.

In Variable and Index Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $112 million in the three- and nine-month periods ended September 30, 2017, primarily due to an increase in the reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and changes in volatility assumptions. The net positive adjustment was partially offset by a decrease in the separate account long-term asset growth rate assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from which future fees are projected) and a negative adjustment in connection with the conversion to a new modeling platform for Index Annuities.

In the three- and nine-month periods ended September 30, 2016, the update of estimated gross profit assumptions resulted in a net positive adjustment of $39 million primarily due to favorable updates to assumptions for volatility, lapses, mortality and policy expenses, partially offset by a decrease in the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before expenses that reduce the asset base from which future fees are projected). The net positive adjustment included a net negative adjustment of approximately $24 million in connection with the conversion to a new modeling platform for variable annuities, primarily due to refinements to assumptions for guaranteed minimum interest rates and investment fees, partially offset by the impact of other refinements identified during the conversion.

Group Retirement

In Group Retirement, the update of estimated gross profit assumptions resulted in a net positive adjustment of $13 million in the three- and nine-month periods ended September 30, 2017, primarily due to an increase in the reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and changes in maintenance expense assumptions. The net positive adjustment was partially offset by a decrease in the separate account long-term asset growth rate assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from which future fees are projected) and decreases in fixed annuity spread and separate account fee assumptions. In the three- and nine-month periods ended September 30, 2016, a net negative adjustment of $47 million was primarily due to refinements in lapse and partial withdrawal assumptions and a decrease in the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before expenses that reduce the asset base from which future fees are projected).

Life Insurance

In Life Insurance, the update of actuarial assumptions resulted in a net positive adjustment of $29 million in the three- and nine-month periods ended September 30, 2017, primarily due to improved mortality assumptions, partially offset by lower spread assumptions. In the three- and nine-month periods ended September 30, 2016, a net negative adjustment of $92 million was primarily due to refinement to reserves for universal life insurance with secondary guarantees due to lower assumed surrender rates. The update to Life Insurance assumptions in the three- and nine-month periods ended September 30, 2016 also included lower spread assumptions.

Legacy Portfolio

The update of actuarial assumptions resulted in a net negative adjustment of $14 million in the three- and nine-month periods ended September 30, 2017, primarily due to $13 million of loss recognition expense on long-term care business in the Legacy Life Insurance Run-Off Lines resulting from model enhancements.

The update of actuarial assumptions resulted in $622 million of loss recognition expense in the three- and nine-month periods ended September 30, 2016 on payout annuities in the Legacy Life Insurance Run-Off Lines. The loss recognition reflected the establishment of additional reserves primarily as a result of mortality experience studies, which indicated increased longevity, particularly on disabled lives on a block of structured settlements underwritten prior to 2010.

AIG | Third Quarter 2017 Form 10-Q150


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

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 seePart II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Programs in our 2016 Annual Report

Differences in Valuation of Embedded Derivatives and Economic Hedge Target

The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic risks in our GMWB riders. The economic hedge target differs from the U.S. GAAP valuation of the GMWB embedded derivatives primarily due to the following:

The economic hedge target includes 100 percent of rider fees in present value calculations; the U.S. GAAP valuation reflects only those fees attributed to the embedded derivative such that the initial value at contract issue equals zero;

The economic hedge target uses best estimate actuarial assumptions and excludes explicit risk margins used for U.S. GAAP valuation, such as margins for policyholder behavior, mortality, and volatility; and

The economic hedge target excludes the non-performance or “own credit” risk adjustment used in the U.S. GAAP valuation, which reflects a market participant’s view of our claims-paying ability by incorporating an additional spread (the NPA spread) to the swap curve used to discount projected benefit cash flows. For more information on our valuation methodology for embedded derivatives within policyholder contract deposits seeNote 5 to the Condensed Consolidated Financial Statements. Because the discount rate includes the NPA spread and other explicit risk margins, the U.S. GAAP valuation is generally less sensitive to movements in interest rates and other market factors, and to changes from actuarial assumption updates, than the economic hedge target.

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 Insurance Companies have cash and invested assets available to cover future claims payable under these guarantees.  The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:

Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;

Realized volatility versus implied volatility;

Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder behavior; and

Risk exposures that we have elected not to explicitly or fully hedge.

The following table presents a reconciliation between the fair value of the U.S. GAAP embedded derivatives and the value of our economic hedge target:

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

2017

 

2016

Reconciliation of embedded derivatives and economic hedge target:

 

 

 

 

 

 

 

 

 

Embedded derivative liability

 

 

 

 

 

$

2,104

$

1,777

Exclude non-performance risk adjustment

 

 

 

 

 

 

(2,425)

 

(3,148)

Embedded derivative liability, excluding NPA

 

 

 

 

 

 

4,529

 

4,925

Adjustments for risk margins and differences in valuation

 

 

 

 

 

 

(1,904)

 

(2,251)

Economic hedge target liability

 

 

 

 

 

$

2,625

$

2,674

AIG | Third Quarter 2017 Form 10-Q151


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Impact on Pre-tax Income (Loss)

The impact on our pre-tax income (loss) of the variable annuity guaranteed living benefits and related hedging results includes changes in the fair value of the GMWB embedded derivatives, and changes in the fair value of related derivative hedging instruments, both of which are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of fixed maturity securities used in the hedging program, are excluded from pre-tax operating income of Individual Retirement and Group Retirement.

The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to the differences in valuation between the economic hedge target, the U.S. GAAP embedded derivatives, and changes in 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.

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)

 

2017

 

2016

 

 

2017

 

2016*

Change in fair value of embedded derivatives, excluding update of actuarial

 

 

 

 

 

 

 

 

 

assumptions and NPA

$

284

$

25

 

$

856

$

(2,502)

Change in fair value of variable annuity hedging portfolio:

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

26

 

17

 

 

117

 

270

Interest rate derivative contracts

 

(20)

 

27

 

 

10

 

1,411

Equity derivative contracts

 

(310)

 

(350)

 

 

(978)

 

(650)

Change in fair value of variable annuity hedging portfolio

 

(304)

 

(306)

 

 

(851)

 

1,031

Change in fair value of embedded derivatives excluding update of actuarial assumptions

 

 

 

 

 

 

 

 

 

and NPA, net of hedging portfolio

 

(20)

 

(281)

 

 

5

 

(1,471)

Change in fair value of embedded derivatives due to NPA spread

 

(82)

 

(68)

 

 

(485)

 

55

Change in fair value of embedded derivatives due to change in NPA volume

 

(114)

 

158

 

 

(238)

 

1,305

Change in fair value of embedded derivatives due to update of actuarial assumptions

 

(188)

 

(101)

 

 

(188)

 

(101)

Total change due to update of actuarial assumptions and NPA

 

(384)

 

(11)

 

 

(911)

 

1,259

Net impact on pre-tax income (loss)

$

(404)

$

(292)

 

$

(906)

$

(212)

*   The change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA includes revisions for the three-month periods ended March 31, 2016 from $(1,116) million to $(1,586) million and June 30, 2016 from $(885) million to $(941) million. The change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA, net of hedging portfolio includes revisions for the three-month periods ended March 31, 2016 from $(270) million to $(740) million and June 30, 2016 from $(394) million to $(450) million.  The change in fair value of embedded derivatives due to change in NPA volume includes revisions for the three-month periods ended March 31, 2016 from $203 million to $673 million and June 30, 2016 from $418 million to $474 million.  The total change due to update of actuarial assumptions and NPA includes revisions for the three-month periods ended March 31, 2016 from $358 million to $828 million and June 30, 2016 from $386 million to $442 million. These changes had no impact on pre-tax income (loss) and are not considered material to previously issued financial statements.

The net impact on pre-tax income from the GMWB and related hedges in the three- and nine-month periods ended September 30, 2017 (excluding related DAC amortization) was primarily driven by losses from actuarial assumption updates to lapse and volatility assumptions, tightening credit spreads on the NPA spread and the impact on the NPA (volume) of lower expected GMWB payments, driven by higher equity markets. In the three- and nine-month periods ended September 30, 2016, the net impact on pre-tax income was primarily driven by losses from actuarial assumption updates to lapse and mortality assumptions and changes in interest rates, partially offset by the impact on the NPA (volume) of higher expected GMWB claims.

The change in the fair value of embedded derivatives, excluding update of actuarial assumptions and NPA, in the three- and nine-month periods ended September 30, 2017 was substantially offset by the related hedging portfolio. However, in the three- and nine-month periods ended September 30, 2016, the change in fair value of the hedging portfolio were more than offset by losses from the change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA, primarily due to changes in interest rates, which impacted the embedded derivative liability excluding NPA more than the related impact to the hedging portfolio. Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a U.S. GAAP basis, due to the NPA and other risk margins used for U.S. GAAP valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio. On an economic basis, the changes in the fair value of the hedge portfolio were partially offset by the decrease in the economic hedge target, as discussed below.

AIG | Third Quarter 2017 Form 10-Q152


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Change in Economic Hedge Target

The slight decrease in the economic hedge target liability at September 30, 2017 compared to December 31, 2016 was primarily due to positive equity markets and increases in market interest rates, partially offset by tighter credit spreads and lower equity volatility.

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 derivatives, were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:

Changes in the fair value of fixed maturity securities, primarily corporate bonds for which the fair value option has been elected, 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 nine-month period ended September 30, 2017 reflected gains primarily due to tightening of credit spreads, while the nine-months period ended September 30, 2016 reflected higher gains primarily due to decreases in market interest rates. Changes in the fair value of the hedging bonds in the three-month period ended September 30, 2017 and 2016 were not significant. The change in the fair value of the hedging bonds, which is excluded from the pre-tax operating income of the Individual Retirement and Group Retirement segments, is reported in net investment income on the Consolidated Statements of Income (Loss).

Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in a loss in the three-month period ended September 30, 2017 and smaller net gain in the nine-month period ended September 30, 2017 compared to significant gains from interest rate declines in the nine-month period ended September 30, 2016. The change in the fair value of interest rate derivative contracts in the three-month period ended September 30, 2016 was not significant.

The change in the fair value of equity derivative contracts, which included futures and options, resulted in losses in the three- and nine-month periods ended September 30, 2017 and 2016, based on the relative change in equity market performance in the respective periods.

DAC

The following table summarizes the major components of the changes in DAC, including VOBA, within the life insurance companies, excluding DAC of Institutional Markets and Legacy Portfolio:

Nine Months Ended September 30,

 

 

 

 

(in millions)

 

2017

 

2016

Balance, beginning of year

$

7,543

$

7,149

Acquisition costs deferred

 

693

 

782

Amortization expense:

 

 

 

 

Update of assumptions included in pre-tax operating income

 

194

 

315

Related to realized capital gains and losses

 

190

 

5

All other operating amortization

 

(649)

 

(699)

Increase (decrease) in DAC due to foreign exchange

 

49

 

(28)

Change related to unrealized depreciation (appreciation) of investments

 

(494)

 

(948)

Other

 

-

 

-

Balance, end of period*

$

7,526

$

6,576

*   DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $8.8 billion and $8.1 billion at September 30, 2017 and 2016, respectively.

AIG | Third Quarter 2017 Form 10-Q153


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

DAC and Reserves Related to Unrealized Appreciation of Investments

DAC for universal life and investment-type products (collectively, investment-oriented products) is adjusted at each balance sheet date to reflect the change in DAC as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow DAC). Shadow DAC generally moves in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio, reducing the reported DAC balance when market interest rates decline. Market interest rates decreased in the nine-month period ended September 30, 2017. As a result, the unrealized appreciation of fixed maturity securities held in the Life Insurance Companies that support the businesses at September 30, 2017 increased by $3.6 billion compared to December 31, 2016, which resulted in a decrease in DAC to reflect the shadow DAC adjustment.

Reserves

The following table presents a rollforward of insurance reserves for Individual Retirement, Group Retirement and Life Insurance modules, including future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Individual Retirement

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

133,211

$

128,033

 

$

129,321

$

121,474

Premiums and deposits

 

2,526

 

3,363

 

 

8,800

 

12,984

Surrenders and withdrawals

 

(2,499)

 

(2,401)

 

 

(8,135)

 

(7,333)

Death and other contract benefits

 

(745)

 

(733)

 

 

(2,369)

 

(2,286)

Subtotal

 

(718)

 

229

 

 

(1,704)

 

3,365

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

2,735

 

1,781

 

 

6,999

 

4,284

Cost of funds*

 

384

 

407

 

 

1,147

 

1,220

Other reserve changes

 

(152)

 

(104)

 

 

(303)

 

3

Balance at end of period

 

135,460

 

130,346

 

 

135,460

 

130,346

Reinsurance ceded

 

(324)

 

(352)

 

 

(324)

 

(352)

Total Individual Retirement insurance reserves and mutual fund assets

$

135,136

$

129,994

 

$

135,136

$

129,994

Group Retirement

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

92,649

$

85,943

 

$

88,622

$

84,145

Premiums and deposits

 

1,860

 

1,821

 

 

5,702

 

5,514

Surrenders and withdrawals

 

(1,740)

 

(1,796)

 

 

(5,863)

 

(5,141)

Death and other contract benefits

 

(135)

 

(122)

 

 

(417)

 

(395)

Subtotal

 

(15)

 

(97)

 

 

(578)

 

(22)

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

2,078

 

2,074

 

 

6,115

 

3,247

Cost of funds*

 

280

 

280

 

 

833

 

830

Balance at end of period

 

94,992

 

88,200

 

 

94,992

 

88,200

Total Group Retirement insurance reserves and mutual fund assets

$

94,992

$

88,200

 

$

94,992

$

88,200

AIG | Third Quarter 2017 Form 10-Q154


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Life Insurance

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

18,694

$

18,050

 

$

18,397

$

18,006

Premiums and deposits

 

860

 

841

 

 

2,600

 

2,522

Surrenders and withdrawals

 

(143)

 

(149)

 

 

(437)

 

(481)

Death and other contract benefits

 

(151)

 

(144)

 

 

(441)

 

(394)

Subtotal

 

566

 

548

 

 

1,722

 

1,647

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

(242)

 

(204)

 

 

(675)

 

(770)

Cost of funds*

 

93

 

96

 

 

281

 

290

Other reserve changes

 

(275)

 

(184)

 

 

(889)

 

(867)

Balance at end of period

 

18,836

 

18,306

 

 

18,836

 

18,306

Reinsurance ceded

 

(1,049)

 

(1,079)

 

 

(1,049)

 

(1,079)

Total Life Insurance reserves

$

17,787

$

17,227

 

$

17,787

$

17,227

Total insurance reserves and mutual fund assets

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

244,554

$

232,026

 

$

236,340

$

223,625

Premiums and deposits

 

5,246

 

6,025

 

 

17,102

 

21,020

Surrenders and withdrawals

 

(4,382)

 

(4,346)

 

 

(14,435)

 

(12,955)

Death and other contract benefits

 

(1,031)

 

(999)

 

 

(3,227)

 

(3,075)

Subtotal

 

(167)

 

680

 

 

(560)

 

4,990

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

4,571

 

3,651

 

 

12,439

 

6,761

Cost of funds*

 

757

 

783

 

 

2,261

 

2,340

Other reserve changes

 

(427)

 

(288)

 

 

(1,192)

 

(864)

Balance at end of period

 

249,288

 

236,852

 

 

249,288

 

236,852

Reinsurance ceded

 

(1,373)

 

(1,431)

 

 

(1,373)

 

(1,431)

Total insurance reserves and mutual fund assets

$

247,915

$

235,421

 

$

247,915

$

235,421

*    Excludes amortization of deferred sales inducements

Insurance reserves of Individual Retirement, Group Retirement and Life Insurance modules, and Retail Mutual Funds and Group Retirement mutual fund assets under administration, were comprised of the following balances:

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

2017

 

2016

Future policy benefits

 

 

$

7,517

$

7,380

Policyholder contract deposits

 

 

 

121,420

 

119,644

Other policy funds

 

 

 

334

 

378

Separate account liabilities

 

 

 

83,492

 

76,619

Total insurance reserves

 

 

 

212,763

 

204,021

Mutual fund assets

 

 

 

36,525

 

32,319

Total insurance reserves and mutual fund assets

 

 

$

249,288

$

236,340

AIG | Third Quarter 2017 Form 10-Q155


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ITEM 2 |Liquidity and Capital Resources

Liquidity and Capital Resources

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations.  It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We 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 subsidiaries to meet our financial obligations for a minimum of six-months under a liquidity stress scenario.

For additional information see Part II, Item 7. MD&A – Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement in the 2016 Annual Report and Enterprise Risk Management — Liquidity Risk Management below.

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 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 for both 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, as was the case in 2008. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.

Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share repurchases. 

AIG | Third Quarter 2017 Form 10-Q156


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ITEM 2 |Liquidity and Capital Resources

LIQUIDITY AND CAPITAL RESOURCES ACTIVITY FOR the NINE-month period ended SEPTEMBER 30, 2017

Sources

Liquidity and Capital Resources Activity for the Nine-Month Period Ended September 30, 2016

Sources

AIG Parent Funding from Subsidiaries

During the nine-month period ended September 30, 2016, AIG Parent received $6.3 billion in dividends and loan repayments from subsidiaries. Of this amount, $2.5 billion was dividends in the form of cash and fixed maturity securities from our Non-Life Insurance Companies and $3.8 billion was dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies.

AIG Parent also received $2.2 billion in tax sharing payments in the form of cash and fixed maturity securities from our insurance businesses in the nine-month period ended September 30, 2016, including $595 million of such payments in the third quarter of 2016. The tax sharing payments may be subject to adjustment in future periods.

The dividends and tax sharing payments from our Non-Life and Life Insurance Companies were funded, in part, by proceeds from the sale of 740 million ordinary H shares of PICC Property & Casualty Company Limited for approximately $1.25 billion in May 2016 and by the sale of AIG Advisor Group in May 2016.

Debt Issuances

In February 2016, we issued $1.5 billion aggregate principal amount of 3.300% Notes due 2021.

In March 2016, we issued $1.5 billion aggregate principal amount of 3.900% Notes due 2026.

In June 2016, we issued €750 million aggregate principal amount of 1.500% Notes due 2023.

Legacy Assets

During the nine-month period ended September 30, 2016, we monetized approximately $3.1 billion of legacy assets.

Uses

Debt Reduction

In March 2016, we repurchased, through a cash tender offer, approximately $736 million aggregate principal amount of certain notes and debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $825 million.

We also made other repurchases and repayments of approximately $7.1 billion during the nine-month period ended September 30, 2016. AIG Parent made interest payments on our debt instruments totaling $797 million during the nine-month period ended September 30, 2016.

Dividend 

AIG Parent Funding from Subsidiaries

During the nine-month period ended September 30, 2017, AIG Parent received $1.6 billion in dividends from subsidiaries. Of this amount, $350 million was dividends in the form of cash and fixed maturity securities from our Property Casualty Insurance Companies, $1.3 billion was dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies and $2 million was cash dividends from AIG Federal Savings Bank.

AIG Parent also received $3.4 billion in tax sharing payments in the form of cash and fixed maturity securities from our insurance businesses in the nine-month period ended September 30, 2017, including $309 million of such payments in the third quarter of 2017. The tax sharing payments may be subject to adjustment in future periods.

The dividends, loan repayments and tax sharing payments from our Life Insurance Companies resulted from and were funded, in part, by excess statutory capital released by Life Insurance Reinsurance Transactions. For information regarding the Life Insurance Reinsurance Transactions, see Business Segment Operations — Consumer Insurance.

Debt Issuance

In June 2017, we issued €1.0 billion aggregate principal amount ($1.1 billion at closing) of 1.875% Notes Due 2027.

Legacy Investments

During the nine-month period ended September 30, 2017, we generated approximately $1.0 billion in return of capital from Legacy Investments.

Arch

In June 2017, AIG Parent and National Union received gross proceeds of approximately $391 million and $261 million, respectively, from the sale of approximately four million and three million shares, respectively, of common stock of Arch Capital Group Ltd. by means of an underwritten public offering.

Uses

Debt Reduction

On July 17, 2017, we redeemed $290 million aggregate principal amount of our outstanding 4.90% Callable Notes Due July 17, 2045.

On September 25, 2017, we redeemed $420 million aggregate principal amount of our outstanding 4.90% Callable Notes Due September 25, 2045.

We also made other repurchases of and repayments on debt instruments of approximately $2.1 billion during the nine-month period ended September 30, 2017. AIG Parent made interest payments on our debt instruments totaling $789 million during the nine-month period ended September 30, 2017.

Dividend

We paid a cash dividend of $0.32 per share on AIG Common Stock during each of the first, second and third quarters of 2017 totaling $885 million.

Repurchase of Common Stock

We paid a cash dividend of $0.32 per share on AIG Common Stock during each of the first, second and third quarters of 2016.

Repurchase of Common Stock(*)

We repurchased approximately 153 million shares of AIG Common Stock during the nine-month period ended September 30, 2016, for an aggregate purchase price of approximately $8.5 billion.

Repurchase of Warrants

We repurchased 15 million warrants to purchase shares of AIG Common Stock during the nine-month period ended September 30, 2016, for an aggregate purchase price of $263 million.

AIG Parent Funding to Subsidiaries

In January 2016, AIG Parent made a capital contribution of approximately $2.9 billion to our Non-Life Insurance Companies.

* Pursuant to Exchange Act Rule 10b5-1 repurchase plans, from October 1 to November 2, 2016, we have repurchased approximately $946100 million of additional shares of AIG Common Stock. AsStock during the nine-month period ended September 30, 2017, for an aggregate purchase price of November 2, 2016, approximately $4.4 billion remained under our share repurchase authorization.$6.3 billion.

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AIG | Third Quarter 2017 Form 10-Q157


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ITEM 2 |Liquidity and Capital Resources

Analysis of Sources and Uses of Cash

The following table presents selected data from AIG's Condensed Consolidated Statements of Cash Flows:

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

2016

 

2015

 

 

 

2017

 

2016

Sources:

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

1,753

$

2,234

 

 

$

-

$

1,753

Net cash provided by changes in restricted cash

 

 

 

-

 

 1,476   

Net cash provided by other investing activities

 

 

 

374

 

5,204

 

 

 

14,797

 

374

Changes in policyholder contract balances

 

 

 

3,598

 

1,415

 

 

 

1,801

 

3,598

Issuance of long-term debt

 

 

 

11,430

 

6,449

 

 

 

2,405

 

11,430

Net cash provided by other financing activities

 

 

 

581

 

1,178

Total sources

 

 

 

17,155

 

16,778

 

 

 

19,584

 

18,333

Uses:

 

 

 

  

 

  

 

 

 

  

 

  

Net cash used in operating activities

 

 

 

(9,195)

 

-

Change in restricted cash

 

 

 

(49)

 

-

 

 

 

(23)

 

(49)

Repayments of long-term debt

 

 

 

(7,683)

 

(8,343)

 

 

 

(2,751)

 

(7,683)

Purchases of AIG Common Stock

 

 

 

(8,506)

 

(7,473)

 

 

 

(6,275)

 

(8,506)

Net cash used in other financing activities

 

 

 

(136)

 

(1,112)

Dividends paid

 

 

 

(884)

 

(1,051)

Purchases of warrants

 

 

 

(3)

 

(263)

Total uses

 

 

 

(16,374)

 

(16,928)

 

 

 

(19,131)

 

(17,552)

Effect of exchange rate changes on cash

 

 

 

88

 

(39)

 

 

 

(21)

 

88

Increase (decrease) in cash

 

 

$

869

$

(189)

Increase in cash

 

 

$

432

$

869

The following table presents a summary of AIG’s Condensed Consolidated StatementsStatement of Cash Flows:

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

2016

 

2015

 

 

 

 

2017

 

2016

Summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

 

$

1,753

$

2,234

Net cash provided by (used in) operating activities

 

 

 

$

(9,195)

$

1,753

Net cash provided by investing activities

 

 

 

 

325

 

6,680

 

 

 

 

14,774

 

325

Net cash used in financing activities

 

 

 

 

(1,297)

 

(9,064)

 

 

 

 

(5,126)

 

(1,297)

Effect of exchange rate changes on cash

 

 

 

 

88

 

(39)

 

 

 

 

(21)

 

88

Increase (decrease) in cash

 

 

 

 

869

 

(189)

Increase in cash

 

 

 

 

432

 

869

Cash at beginning of year

 

 

 

 

1,629

 

1,758

 

 

 

 

1,868

 

1,629

Change in cash of businesses held for sale

 

 

 

 

-

 

-

 

 

 

 

133

 

-

Cash at end of period

 

 

 

$

2,498

$

1,569

 

 

 

$

2,433

$

2,498

Operating Cash Flow Activities

Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates and operating expenses.

Interest payments totaled $1.0 billion in both the nine-month periods ended September 30, 2017 and 2016. Excluding interest payments, AIG had operating cash outflows of $8.2 billion in the nine-month period ended September 30, 20162017 compared to $1.1 billion in the same period in the prior year. Excluding interest payments, AIG generated positive operating cash flow of $3.2$2.8 billion forin the nine-month period ended September 30, 2016 compared to $3.3 billion for2016. The operating cash outflow in the nine-month period ended September 30, 2015.2017 was primarily due to payment for the adverse development reinsurance agreement entered into with NICO.

AIG | Third Quarter 2017 Form 10-Q158


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ITEM 2 |Liquidity and Capital Resources

Investing Cash Flow Activities

Net cash provided by investing activities in the nine-month period ended September 30, 2017 was $14.8 billion compared to investing cash inflows of $325 million in the nine-month period ended September 30, 2016. The nine-month period ended September 30, 2017 included sales of certain investments to fund the adverse development reinsurance agreement entered into with NICO.

Financing Cash Flow Activities

Net cash used in operatingfinancing activities in the nine-month period ended September 30, 2017 included:

approximately $884 million in the aggregate to pay a dividend of our Non-Life Insurance Companies$0.32 per share on AIG Common Stock in each of the first, second and third quarters of 2017;

approximately $6.3 billion to repurchase approximately 100 million shares of AIG Common Stock; and

approximately $346 million in net outflows from the issuance and repayment of long-term debt.

Net cash used in financing activities in the nine-month period ended September 30, 2016 was $149 million compared to $172 million of cash used in the same period in the prior year, primarily attributable to decrease in premiums and other receivables and increase in other assets in the nine-month period ended September 30, 2016.

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Cash provided by operating activities of our Life Insurance Companies was $1.8 billion in the nine-month period ended September 30, 2016, compared to cash provided of $2.1 billion in the same period in the prior year, primarily due to increases in premiums and other receivables and other assets in the nine-month period ended September 30, 2016, compared to decreases in the same period in the prior year.

Investing Cash Flow Activities

Net cash provided by investing activities in the nine-month periods ended September 30, 2016 and 2015 included approximately $660 million and $694 million, respectively, of cash collateral received in connection with our Life Insurance Companies’ securities lending program. In addition, the nine-month period ended September 30, 2015 included approximately $4.2 billion of net cash proceeds from the sale of ordinary shares of AerCap.

Financing Cash Flow Activities

Net cash used in financing activities in the nine-month period ended September 30, 2016 included:

     approximately $1.1 billion 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 2016;

     approximately $8.5 billion to repurchase approximately 153 million shares of AIG Common Stock; and

     $263 million to repurchase 15 million warrants to purchase shares of AIG Common Stock; andStock.

These items were partially offset by approximately $7.7$3.7 billion to repayin net inflows from the issuance and repayment of long-term debt.

Net cash used in financing activities in the nine-month period ended September 30, 2015 included:

approximately $687 million in the aggregate to pay a dividend of $0.125 per share on AIG Common Stock in each of the first and second quarters of 2015 and $0.28 per share on AIG Common Stock in the third quarter 2015;

·approximately $7.5 billion to repurchase approximately 129 million shares of AIG Common Stock; and

·approximately $8.3 billion to repay long-term debt.

Liquidity and Capital Resources of AIG Parent and Subsidiaries

AIG Parent

As of September 30, 2016,2017, AIG Parent had approximately $13.1$11.2 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. 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, 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 and subsidiary capital needs.

We generally manage capital flows between AIG Parent and its subsidiaries through internal, Board-approved policies and standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain

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subsidiaries. Regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.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 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 share 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 for distribution to shareholders. Additionally, it is expected that capital associated with businesses or investments that do not directly support our insurance operations may be availablebusiness strategies, for distribution to shareholders or deployment towardsfor liability management upon its monetization.management.

In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: theAIG’s business and strategic plans, expectations for capital resources available to support our insurance operationsgeneration and business strategies,utilization, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation,as well as rating agency expectations, for capital, as well as regulatory standards and internal stress tests for capitalcapital.

AIG | Third Quarter 2017 Form 10-Q159


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ITEM 2 |Liquidity and capital distributions.Capital Resources

In January 2016, AIG Parent made a capital contribution of approximately $2.9 billion to our Non-Life Insurance Companies as a result of our fourth quarter 2015 reserve strengthening.

The following table presents AIG Parent's liquidity sources:

As of

As of

As of

As of

(In millions)

September 30, 2016

December 31, 2015

September 30, 2017

December 31, 2016

Cash and short-term investments(a)

$

2,349

$

3,497

$

2,184

$

3,950

Unencumbered fixed maturity securities(b)

 

6,222

 

5,723

 

4,560

 

4,470

Total AIG Parent liquidity

 

8,571

 

9,220

 

6,744

 

8,420

Available capacity under syndicated credit facility(c)

 

4,500

 

4,500

 

4,500

 

4,500

Total AIG Parent liquidity sources

$

13,071

$

13,720

$

11,244

$

12,920

(a)  Cash and short-term investments include reverse repurchase agreements totaling $1.1$1.6 billion and $1.5$1.0 billion as of September 30, 20162017 and December 31, 2015,2016, 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 syndicated credit facility see Credit Facilities below.below

Non-Life Insurance Companies

We expect that our Non-Life Insurance Companiesinsurance 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 Non-Life Insurance Companies’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 Non-Life Insurance Companies’material insurance companies’ liquidity is monitored through the use of various internal liquidity risk measures.  The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income.The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investments and collateral requirements.

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Our Non-LifeProperty Casualty 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 the subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.

Certain Non-LifeOn January 20, 2017, certain of our Property Casualty Insurance Companies are members of the Federal Home Loan Banks (FHLBs) in their respective districts. Borrowings from the FHLBs may be used to supplement liquidity or for other uses deemed appropriate by management. Our Non-Life Insurance Companies had outstanding borrowings from the FHLBs in an aggregate amount of approximately $792 million and $0 as of September 30, 2016 and December 31, 2015, respectively. The outstanding borrowings are being used primarily for interest rate risk management purposes in connection with certain reinsurance arrangements, and the balances are expected to decline as underlying premiums are collected.

AIG Parent and Ascot Corporate Name Limited (ACNL), a Non-Life Insurance Company, are parties to a $725 million letter of credit facility. ACNL, as a member of the Lloyd’s of London insurance syndicate (Lloyd’s), is required to hold capital at Lloyd’s, known as Funds at Lloyds (FAL). Under the facility, the entire FAL capital requirement of $640 million as of September 30, 2016, which supports the 2016 and 2017 years of account, was satisfied with a letter of credit in that amount issued under the facility.  In September 2016, AIG entered into an adverse development reinsurance agreement with NICO under which they transferred to sell its interest in Ascot Underwriting Holdings Ltd.NICO 80 percent of reserve risk on substantially all of their U.S. Commercial long-tail exposures for accident years 2015 and ACNL pursuantprior. Under this agreement, these Property Casualty Insurance Companies ceded to which AIG expects the releaseNICO 80 percent of the letterpaid losses on subject business paid on or after January 1, 2016 in excess of credit facility at closing.

In the nine-month period ended September 30, 2016, our Non-Life Insurance Companies$25 billion of net paid approximately $2.5 billionlosses, up to AIG Parent in dividends in the forman aggregate limit of cash and fixed maturity securities.$25 billion. The 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.

Life Insurance Companies

We expect that our Life Insurance Companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations,total consideration paid, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our Life Insurance Companies’ liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.

Each of our Life Insurance Companies’ liquidity is monitored through the use of various internal liquidity risk measures.  The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income. The primary uses of liquidity are benefit claims, interest, payments, surrenders, withdrawals, dividends, expenses, investments and collateral requirements.was $10.2 billion.

Management believes that because of the size and liquidity of our Life Insurance Companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life Insurance Companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, as we saw in 2008, in times of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life Insurance 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. Life Insurance Companiesinsurance companies are members of the FHLBsFederal Home Loan Banks (FHLBs) in their respective districts. Borrowings from the FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. LifeProperty Casualty Insurance Companies had outstanding borrowings from the FHLBs in an aggregate amount of approximately $452$556 million and $2$733 million at September 30, 20162017 and December 31, 2015,2016, respectively. The amount outstanding borrowings are being used primarily for interest rate risk management purposes in connection with certain reinsurance arrangements, and the related balances are expected to decline as underlying premiums are collected. Our U.S. Life Insurance Companies had no outstanding borrowings in the form of cash advances from the FHLBs at September 30, 2016 did not include $2542017, and aggregate borrowings in the form of cash advances of approximately $2 million at December 31, 2016. In addition, $606 million and $429 million were due to the FHLB of Dallas at September 30, 2017  and December 31, 2016, respectively, under a funding agreementagreements issued by our Institutional Markets business, which were reported in June 2016.Policyholder contract deposits.

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Item 2 / LIQUIDITY AND CAPITAL RESOURCES

Certain of our U.S. Life Insurance 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 Insurance 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. Additionally, the aggregate amount of securities that a Life Insurance Company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. At September 30, 2016 and December 31, 2015, ourOur U.S. Life Insurance Companies had $2.2$2.9 billion and $1.1$2.4 billion respectively, of securities subject to these agreements at September 30, 2017 and $2.3December 31, 2016, respectively, and $3.0 billion and $1.1$2.5 billion respectively, of liabilities to borrowers for collateral received.received at September 30, 2017 and December 31, 2016, respectively.

AIG generally manages capital between AIG Parent and its subsidiariesour insurance companies through internal, Board-approved policies and guidelines.limits, as well as management standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.

AIG Parent is party to a CMA with AGC Life Insurance Company. Among other things, the CMA provides that AIG Parent will maintain the total adjusted capital of AGC Life Insurance Company at or above a specified minimum percentage of its projected NAIC Company Action Level Risk-Based Capital (RBC). As of September 30, 2016,2017, the specified minimum percentage under this CMA was 250 percent.

During 2016, we created a new Switzerland-domiciled international holding company, AIG International Holdings, GmbH (AIGIH), which is intended to be the ultimate holding company for all of our international entities. This international holding company structure is part of our ongoing efforts to simplify our organizational structure, and is expected to facilitate the optimization of our international capital strategy from both a regulatory and tax perspective. Through November 2, 2017, the following international operations have been transferred to AIGIH: Europe, Canada, Asia Pacific and Latin America/Caribbean.

In the nine-month period ended September 30, 2016,2017, our U.S. LifeProperty Casualty Insurance Companies paid approximately $3.8 billion to AIG Parent$350 million in dividends and loan repayments in the form of cash and fixed maturity securities.securities to AIG Parent. The fixed maturity securities primarily included U.S. government and government-sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.

In the nine-month period ended September 30, 2017, the Life Insurance Companies collectively declared a total of $2.1 billion of dividends, return of capital and loan repayments. Of this amount, $867 million was paid in the form of cash, $387 million was paid in the form of fixed maturity securities, and $890 million was retained at an intermediate life insurance holding company to fund tax sharing payments to AIG Parent. The Life Insurance Companies made tax sharing payments to AIG Parent in the nine-month period ended September 30, 2017 totaling $3.2 billion in the form of cash and fixed maturity securities, primarily as a result of the Life Insurance Reinsurance Transactions. Fixed maturity securities used to fund dividends and tax sharing payments included U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and non-U.S. governmentmunicipal bonds and certain other highly rated securities. Dividends paid in the three-month period ended September 30, 2016, included approximately $1.0 billion of excess statutory capital released as a result of a reinsurance agreement entered into by one of the Life Insurance Companies involving certain of its whole life and universal life businesses.

Corporate and Other

AIG generally manages capital between AIG Parent and its subsidiaries through internal, Board-approved policies and guidelines.  In addition, AIG Parent is party to a CMA with its Mortgage Guaranty insurance company. Among other things, the CMA provides that AIG Parent will maintain capital and surplus of the Mortgage Guaranty insurance company at or above a specified minimum required capital based on a specified risk-to-capital ratio. In addition, the CMA provides that if capital and surplus of the Mortgage Guaranty insurance company is in excess of that same specified minimum required capital, subject to its board approval and compliance with applicable insurance laws, the Mortgage Guaranty insurance company would declare and pay ordinary dividends to its equity holders up to an amount necessary to reduce projected or actual capital and surplus to a level equal to or not materially greater than such specified minimum required capital. As structured, the CMA contemplates that the specified minimum required capital would be reviewed and agreed upon at least annually. As of September 30, 2016, the minimum required capital for the CMA with the Mortgage Guaranty insurance company is based on a risk-to-capital ratio of 19 to 1.

Credit Facilities

We maintain a committed, revolving syndicated credit facility (the Five-Year Facility) as a potential source of liquidity for general corporate purposes. The Five-Year 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 November 2020.June 2022.

As of September 30, 2016,2017, a total of $4.5 billion remains available under the Five-Year Facility. Our ability to borrow under the Five-Year Facility is not contingent on our credit ratings. However, our ability to borrow under the Five-Year Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Five-Year 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 Five-Year Facility would restrict our access to the Five-Year Facility and could have a material adverse effect on our

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financial condition, results of operations and liquidity. We expect to borrow under the Five-Year Facility from time to time, and may use the proceeds for general corporate purposes.

AIG | Third Quarter 2017 Form 10-Q161


TABLE OF CONTENTS

ITEM 2 |Liquidity and Capital Resources

Contractual Obligations

The following table summarizes contractual obligations in total, and by remaining maturity:

September 30, 2016

 

  

 

Payments due by Period

September 30, 2017

 

  

 

Payments due by Period

 

Total

 

Remainder

 

2017-

 

2019-

 

 

 

 

 

Total

 

Remainder

 

2018 -

 

2020 -

 

 

 

 

(in millions)

 

Payments

 

of 2016

 

2018

 

2020

 

2021

 

Thereafter

 

Payments

 

of 2017

 

2019

 

2021

 

2022

 

Thereafter

Insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reserves

$

75,281

$

4,997

$

27,031

$

14,857

$

4,867

$

23,529

$

81,880

$

5,436

$

29,400

$

16,160

$

5,294

$

25,590

Insurance and investment contract liabilities

 

241,843

 

4,337

 

29,288

 

26,622

 

12,623

 

168,973

 

244,657

 

4,085

 

29,909

 

27,806

 

12,846

 

170,011

Borrowings

 

1,005

 

-

 

-

 

126

 

238

 

641

 

984

 

-

 

-

 

342

 

-

 

642

Interest payments on borrowings

 

953

 

1

 

99

 

99

 

50

 

704

 

903

 

1

 

99

 

99

 

50

 

654

Other long-term obligations

 

7

 

1

 

3

 

2

 

1

 

-

 

7

 

1

 

3

 

2

 

1

 

-

Total

$

319,089

$

9,336

$

56,421

$

41,706

$

17,779

$

193,847

$

328,431

$

9,523

$

59,411

$

44,409

$

18,191

$

196,897

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

$

25,851

$

776

$

3,330

$

2,470

$

1,774

$

17,501

$

24,478

$

396

$

3,359

$

3,113

$

1,553

$

16,057

Interest payments on borrowings

 

15,758

 

196

 

2,125

 

1,883

 

834

 

10,720

 

13,460

 

174

 

1,921

 

1,700

 

732

 

8,933

Other long-term obligations

 

207

 

9

 

72

 

80

 

-

 

46

 

220

 

12

 

125

 

41

 

-

 

42

Total

$

41,816

$

981

$

5,527

$

4,433

$

2,608

$

28,267

$

38,158

$

582

$

5,405

$

4,854

$

2,285

$

25,032

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reserves

$

75,281

$

4,997

$

27,031

$

14,857

$

4,867

$

23,529

$

81,880

$

5,436

$

29,400

$

16,160

$

5,294

$

25,590

Insurance and investment contract liabilities

 

241,843

 

4,337

 

29,288

 

26,622

 

12,623

 

168,973

 

244,657

 

4,085

 

29,909

 

27,806

 

12,846

 

170,011

Borrowings

 

26,856

 

776

 

3,330

 

2,596

 

2,012

 

18,142

 

25,462

 

396

 

3,359

 

3,455

 

1,553

 

16,699

Interest payments on borrowings

 

16,711

 

197

 

2,224

 

1,982

 

884

 

11,424

 

14,363

 

175

 

2,020

 

1,799

 

782

 

9,587

Other long-term obligations(a)

 

214

 

10

 

75

 

82

 

1

 

46

 

227

 

13

 

128

 

43

 

1

 

42

Total(b)

$

360,905

$

10,317

$

61,948

$

46,139

$

20,387

$

222,114

$

366,589

$

10,105

$

64,816

$

49,263

$

20,476

$

221,929

(a)  Primarily includes contracts to purchase future services and other capital expenditures.

(b)  Does not reflect unrecognized tax benefits of $4.5$4.6 billion, the timing of which is uncertain.

Loss Reserves

Loss reserves relate to our Non-LifeProperty Casualty Insurance Companies and represent estimates of future lossesloss and loss adjustment expense payments estimated based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our Non-LifeProperty Casualty Insurance Companies maintain adequate financial resources to meet the actual required payments under these obligations.

Insurance and Investment Contract Liabilities

Insurance and investment contract liabilities, including GIC liabilities, relate to our Life Insurance Companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.

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We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Condensed Consolidated Balance Sheets.

We believe that our Life Insurance Companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life Insurance Companies maintain significant levels of investmentgrade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.

AIG | Third Quarter 2017 Form 10-Q162


TABLE OF CONTENTS

ITEM 2 |Liquidity and Capital Resources

Borrowings

Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.

Off-Balance Sheet Arrangements and Commercial Commitments

The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:

September 30, 2016

 

  

 

Amount of Commitment Expiring

September 30, 2017

 

  

 

Amount of Commitment Expiring

 

Total Amounts

 

Remainder

 

2017-

 

2019 -

 

 

 

 

 

Total Amounts

 

Remainder

 

2018 -

 

2020 -

 

 

 

 

(in millions)

 

Committed

 

of 2016

 

2018

 

2020

 

2021

 

Thereafter

 

Committed

 

of 2017

 

2019

 

2021

 

2022

 

Thereafter

Insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standby letters of credit(a)

$

789

$

40

$

104

$

642

$

-

$

3

Standby letters of credit

$

67

$

35

$

21

$

-

$

-

$

11

Guarantees of indebtedness

 

111

 

84

 

27

 

-

 

-

 

-

 

71

 

71

 

-

 

-

 

-

 

-

All other guarantees(b)

 

3

 

-

 

1

 

-

 

2

 

-

All other guarantees(a)

 

2

 

-

 

-

 

2

 

-

 

-

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(c)

 

3,030

 

1,693

 

960

 

345

 

-

 

32

Investment commitments(b)

 

2,915

 

1,737

 

820

 

313

 

-

 

45

Commitments to extend credit

 

2,829

 

1,707

 

804

 

252

 

60

 

6

 

2,603

 

1,276

 

887

 

424

 

7

 

9

Letters of credit

 

5

 

-

 

5

 

-

 

-

 

-

 

5

 

5

 

-

 

-

 

-

 

-

Total(d)(c)

$

6,767

$

3,524

$

1,901

$

1,239

$

62

$

41

$

5,663

$

3,124

$

1,728

$

739

$

7

$

65

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity facilities(e)

$

74

$

-

$

-

$

-

$

-

$

74

Liquidity facilities(d)

$

74

$

-

$

-

$

-

$

-

$

74

Standby letters of credit

 

138

 

138

 

-

 

-

 

-

 

-

 

139

 

139

 

-

 

-

 

-

 

-

All other guarantees

 

88

 

-

 

88

 

-

 

-

 

-

 

84

 

-

 

21

 

28

 

14

 

21

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(c)

 

173

 

21

 

33

 

12

 

13

 

94

Commitments to extend credit(f)

 

500

 

-

 

-

 

500

 

-

 

-

Investment commitments(b)

 

198

 

6

 

32

 

40

 

69

 

51

Commitments to extend credit(e)

 

500

 

-

 

500

 

-

 

-

 

-

Letters of credit

 

24

 

5

 

19

 

-

 

-

 

-

 

24

 

6

 

18

 

-

 

-

 

-

Total(d)(g)

$

997

$

164

$

140

$

512

$

13

$

168

Total(c)(f)

$

1,019

$

151

$

571

$

68

$

83

$

146

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity facilities(d)

$

74

$

-

$

-

$

-

$

-

$

74

Standby letters of credit

 

206

 

174

 

21

 

-

 

-

 

11

Guarantees of indebtedness

 

71

 

71

 

-

 

-

 

-

 

-

All other guarantees(a)

 

86

 

-

 

21

 

30

 

14

 

21

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(b)

 

3,113

 

1,743

 

852

 

353

 

69

 

96

Commitments to extend credit(e)

 

3,103

 

1,276

 

1,387

 

424

 

7

 

9

Letters of credit

 

29

 

11

 

18

 

-

 

-

 

-

Total(c)(f)

$

6,682

$

3,275

$

2,299

$

807

$

90

$

211

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Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity facilities(e)

$

74

$

-

$

-

$

-

$

-

$

74

Standby letters of credit

 

927

 

178

 

104

 

642

 

-

 

3

Guarantees of indebtedness

 

111

 

84

 

27

 

-

 

-

 

-

All other guarantees(b)

 

91

 

-

 

89

 

-

 

2

 

-

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(c)

 

3,203

 

1,714

 

993

 

357

 

13

 

126

Commitments to extend credit(f)

 

3,329

 

1,707

 

804

 

752

 

60

 

6

Letters of credit

 

29

 

5

 

24

 

-

 

-

 

-

Total(d)(g)

$

7,764

$

3,688

$

2,041

$

1,751

$

75

$

209

(a) Includes $640 million of Standby letters of credit associated with Ascot, which is reported as held for sale.  See Note 4 to the Condensed Consolidated Financial Statements for further information.

(b)  Includes construction guarantees connected to affordable housing investments by our Life Insurance Companies. Excludes potential amounts for indemnification obligations included in asset sales agreements. See Note 10 to the CondensedConsolidated Financial Statements forFor further information on indemnification obligations.obligations see Note 11 to the Condensed Consolidated Financial Statements

(c)(b)  Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.

(d)(c)  Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.

(e)(d)  Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.

(f)(e)  Includes a five-year senior unsecured revolving credit facility of up to $500 million between AerCap Ireland Capital Limited, as borrower, and AIG Parent, as lender (the AerCap Credit Facility) scheduled to mature in May 2019. The AerCap Credit Facility permits loans for general corporate purposes. At September 30, 2016,2017, no amounts were outstanding under the AerCap Credit Facility.

AIG | Third Quarter 2017 Form 10-Q163


TABLE OF CONTENTS

(g)

ITEM 2 |Liquidity and Capital Resources

(f)  Excludes commitments with respect to pension plans. TheThere is no remaining annual pension contribution for 2016 is expected to be approximately $19 million2017 for U.S. and non-U.S. plans.

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.Statements.

Indemnification Agreements

We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations.

For additional information regarding our indemnification agreements see Note 1011 to the Condensed Consolidated Financial Statements.Statements.

We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.

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Debt

The following table provides the rollforward of AIG’s total debt outstanding:

 

Balance at

 

  

 

Maturities

 

Effect of

 

 

 

 

Balance at

 

Balance at

 

  

 

Maturities

 

Effect of

 

 

 

 

Balance at

Nine Months Ended September 30, 2016

 

December 31,

 

  

 

and

 

Foreign

 

Other

 

September 30,

Nine Months Ended September 30, 2017

 

December 31,

 

  

 

and

 

Foreign

 

Other

 

September 30,

(in millions)

 

2015

 

Issuances

Repayments

 

Exchange

 

Changes

 

 

2016

 

2016

 

Issuances

Repayments

 

Exchange

 

Changes

 

 

2017

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

$

17,047

$

3,831

$

(960)

$

(83)

$

1

 

$

19,836

$

19,432

$

1,108

$

(710)

$

236

$

12

 

$

20,078

Junior subordinated debt

 

1,327

 

-

 

(461)

 

(10)

 

5

 

 

861

 

843

 

-

 

(38)

 

30

 

1

 

 

836

AIG Japan Holdings Kabushiki Kaisha

 

106

 

209

 

-

 

49

 

-

 

 

364

 

330

 

-

 

-

 

12

 

-

 

 

342

AIGLH notes and bonds payable

 

284

 

-

 

(3)

 

-

 

-

 

 

281

 

281

 

-

 

-

 

-

 

-

 

 

281

AIGLH junior subordinated debt

 

420

 

-

 

(60)

 

-

 

-

 

 

360

 

361

 

-

 

-

 

-

 

-

 

 

361

Total AIG general borrowings

 

19,184

 

4,040

 

(1,484)

 

(44)

 

6

 

 

21,702

 

21,247

 

1,108

 

(748)

 

278

 

13

 

 

21,898

AIG borrowings supported by assets:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MIP notes payable

 

1,372

 

-

 

(33)

 

122

 

(4)

 

 

1,457

 

1,099

 

-

 

(606)

 

44

 

(2)

 

 

535

Series AIGFP matched notes and bonds payable

 

34

 

-

 

-

 

-

 

(1)

 

 

33

 

32

 

-

 

-

 

-

 

(1)

 

 

31

GIAs, at fair value

 

3,276

 

223

 

(429)

 

-

 

226

(b)

 

3,296

 

2,934

 

319

 

(493)

 

-

 

57

(b)

 

2,817

Notes and bonds payable, at fair value

 

394

 

119

 

(158)

 

-

 

13

(b)

 

368

 

494

 

1

 

(356)

 

-

 

42

(b)

 

181

Total AIG borrowings supported by assets

 

5,076

 

342

 

(620)

 

122

 

234

 

 

5,154

 

4,559

 

320

 

(1,455)

 

44

 

96

 

 

3,564

Total debt issued or guaranteed by AIG

 

24,260

 

4,382

 

(2,104)

 

78

 

240

 

 

26,856

 

25,806

 

1,428

 

(2,203)

 

322

 

109

 

 

25,462

Debt not guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other subsidiaries' notes, bonds, loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgages payable(c)

 

2

 

6,528

 

(5,284)

 

-

 

-

 

 

1,246

 

735

 

-

 

(178)

 

-

 

(1)

 

 

556

Debt of consolidated investments(c)(d)

 

4,987

 

520

 

(396)

 

78

 

(1,014)

(d)(f)

 

4,175

 

4,371

 

977

 

(467)

 

(2)

 

142

(e)

 

5,021

Total debt not guaranteed by AIG

 

4,989

 

7,048

 

(5,680)

 

78

 

(1,014)

 

 

5,421

 

5,106

 

977

 

(645)

 

(2)

 

141

 

 

5,577

Total debt(e)

$

29,249

$

11,430

$

(7,784)

$

156

$

(774)

 

$

32,277

$

30,912

$

2,405

$

(2,848)

$

320

$

250

 

$

31,039

(a)  AIG Parent guarantees all such debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $2.3$2.0 billion and $2.4$2.2 billion at September 30, 20162017 and December 31, 2015,2016, 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.

(b)  Primarily represents adjustments to the fair value of debt.

(c)  Includes primarily borrowings with Federal Home Loan Banks by our U.S. insurance companies.  These borrowings are short term in nature and related activity is presented net of issuances and maturities and repayments.

(d)  At September 30, 2017, includes debt of consolidated investment vehicles related to real estate investments of $2.0 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $1.2 billion. At December 31, 2016, includes debt of consolidated investment vehicles related to real estate investments of $1.7$1.9 billion, affordable housing partnership investments of $1.7 billion and other securitization vehicles of $781$771 million. At December 31, 2015, includes debt of consolidated investment vehicles related to real estate investments of $2.4 billion, affordable housing partnership investments of $1.5 billion and other securitization vehicles of $1.0 billion.

(d)(e)  Includes the effect of consolidating previously unconsolidated partnerships.

(e)  Includes debt issuance costs of $90 million and $101 million at September 30, 2016 and December 31, 2015, respectively. See Note 2 to the Condensed Consolidated Financial Statements.

(f)  Includes $1.2 billion related to certain real estate investments that were reclassified to Liabilities held for sale at September 30, 2016.  AIG | Third Quarter 2017 Form 10-QSee Note 4 to the Condensed Consolidated Financial Statements for further information.164

 

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Liquidity and Capital Resources

TotalTOTAL DEBT OUTSTANDING

(in millions)

Debt Maturities

The following table summarizes maturing debt at September 30, 20162017 of AIG (excluding $4.2$5.0 billion of borrowings of consolidated investments) for the next four quarters:

 

Fourth

 

First

 

Second

 

Third

 

 

 

Fourth

 

First

 

Second

 

Third

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

(in millions)

 

2016

 

2017

 

2017

 

2017

 

Total

 

2017

 

2018

 

2018

 

2018

 

Total

AIG general borrowings

$

308

$

-

$

-

$

-

$

308

$

183

$

1,107

$

-

$

-

$

1,290

AIG borrowings supported by assets

 

468

 

48

 

660

 

38

 

1,214

 

213

 

34

 

348

 

473

 

1,068

Other subsidiaries' notes, bonds, loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgages payable

 

513

 

314

 

314

 

105

 

1,246

 

366

 

190

 

-

 

-

 

556

Total

$

1,289

$

362

$

974

$

143

$

2,768

$

762

$

1,331

$

348

$

473

$

2,914

192AIG | Third Quarter 2017 Form 10-Q165


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Liquidity and Capital Resources

The following table presents maturities of long-term debt (including unamortized original issue discounts and debt issuance cost,discount, hedge accounting valuation adjustments and fair value adjustments, when applicable), excluding $4.2$5.0 billion in borrowings of debt of consolidated investments:

September 30, 2016

 

 

 

Remainder

Year Ending

September 30, 2017

 

 

 

Remainder

Year Ending

(in millions)

 

 

Total

 

of 2016

 

2017

 

2018

 

2019

 

2020

 

2021

 

Thereafter

 

 

Total

 

of 2017

 

2018

 

2019

 

2020

 

2021

 

2022

Thereafter

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

 

$

19,836

$

308

$

176

$

1,106

$

997

$

1,342

$

1,494

$

14,413

 

$

20,078

$

183

$

1,107

$

998

$

1,343

$

1,495

$

1,506

$

13,446

Junior subordinated debt

 

 

861

 

-

 

-

 

-

 

-

 

-

 

-

 

861

 

 

836

 

-

 

-

 

-

 

-

 

-

 

-

 

836

AIG Japan Holdings Kabushiki Kaisha

 

 

364

 

-

 

-

 

-

 

-

 

126

 

238

 

-

 

 

342

 

-

 

-

 

-

 

118

 

224

 

-

 

-

AIGLH notes and bonds payable

 

 

281

 

-

 

-

 

-

 

-

 

-

 

-

 

281

 

 

281

 

-

 

-

 

-

 

-

 

-

 

-

 

281

AIGLH junior subordinated debt

 

 

360

 

-

 

-

 

-

 

-

 

-

 

-

 

360

 

 

361

 

-

 

-

 

-

 

-

 

-

 

-

 

361

Total AIG general borrowings

 

 

21,702

 

308

 

176

 

1,106

 

997

 

1,468

 

1,732

 

15,915

 

 

21,898

 

183

 

1,107

 

998

 

1,461

 

1,719

 

1,506

 

14,924

AIG borrowings supported by assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MIP notes payable

 

 

1,457

 

243

 

809

 

405

 

-

 

-

 

-

 

-

 

 

535

 

178

 

357

 

-

 

-

 

-

 

-

 

-

Series AIGFP matched notes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds payable

 

 

33

 

-

 

10

 

-

 

-

 

-

 

-

 

23

 

 

31

 

10

 

-

 

-

 

-

 

-

 

-

 

21

GIAs, at fair value

 

 

3,296

 

56

 

210

 

484

 

92

 

39

 

280

 

2,135

 

 

2,817

 

22

 

507

 

265

 

31

 

244

 

47

 

1,701

Notes and bonds payable, at fair value

 

 

368

 

169

 

5

 

125

 

-

 

-

 

-

 

69

 

 

181

 

3

 

125

 

-

 

-

 

-

 

-

 

53

Total AIG borrowings supported by assets

 

 

5,154

 

468

 

1,034

 

1,014

 

92

 

39

 

280

 

2,227

Total AIG borrowings supported by assets

 

3,564

 

213

 

989

 

265

 

31

 

244

 

47

 

1,775

Total debt issued or guaranteed by AIG

 

 

26,856

 

776

 

1,210

 

2,120

 

1,089

 

1,507

 

2,012

 

18,142

 

 

25,462

 

396

 

2,096

 

1,263

 

1,492

 

1,963

 

1,553

 

16,699

Other subsidiaries' notes, bonds, loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other subsidiaries notes, bonds, loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and mortgages payable

 

 

1,246

 

513

 

733

 

-

 

-

 

-

 

-

 

-

 

 

556

 

366

 

190

 

-

 

-

 

-

 

-

 

-

Total

 

$

28,102

$

1,289

$

1,943

$

2,120

$

1,089

$

1,507

$

2,012

$

18,142

 

$

26,018

$

762

$

2,286

$

1,263

$

1,492

$

1,963

$

1,553

$

16,699

Credit Ratings

Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of October 28, 2016.27, 2017. 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)

AIG

P-2 (2nd of 3)

A-2 (2nd of 8)

 

Baa 1 (4th of 9)

A- (3rdBBB+ (4th of 8)9)

BBB+ (4th of 9)

 

Stable Outlook

 

 

Stable Outlook

Negative Outlook

StableNegative Outlook

AIG Financial Products Corp.(d)

P-2

A-2

 

Baa 1

A-BBB+

-

 

Stable Outlook

 

 

Stable Outlook

Negative Outlook

 

(a)  Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.

(b)  S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

(c)  Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

(d)  AIG guarantees all obligations of AIG Financial Products Corp.

These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.

We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.

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In the event of adverse actions on our long-term debt ratings by the major rating agencies, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative transactions or could experience termination of the transactions. Such requirements and terminations could adversely affect our business, our consolidated results of operations in a reporting period or our liquidity. In the event of a further downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral, and certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate their contracts early.

AIG | Third Quarter 2017 Form 10-Q166


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ITEM 2 |Liquidity and Capital Resources

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 the financial strength ratings of our insurance companies or our credit ratings see Note 9 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 20152016 Annual Report.Report.  

FINANCIAL STRENGTH Ratings

Financial Strength ratings estimate an insurance company’s ability to pay its obligations under an insurance policy.The following table presents the ratings of our significant insurance subsidiaries as of October 27, 2017.

A.M. Best

S&P

Fitch

Moody’s

National Union Fire Insurance Company of Pittsburgh, Pa.

A

A+ / A-1+

A

A2

Lexington Insurance Company

A

A+

A

A2

American Home Assurance Company  (US)

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 Limited

A

A+

A

A2

Fuji Fire and Marine Insurance Company

NR

A+

NR

NR

AIU Insurance Company, Ltd.

NR

A+

NR

NR

These financial strength ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. 

For a discussion of the effects of downgrades in our financial strength ratings see Note 9 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 2016 Annual Report.  

Regulation and Supervision

For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources see Part 1,I, Item 1. Business — Regulation and Part 1,I, Item 1A. Risk Factors — Regulation in our 20152016 Annual Report, Part 1, Item 2. MD&A – Regulatory Environment and Part II, Item 1A. Risk Factors in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, Part I, Item 2. MD&A – Regulatory Environment  and Part II, Item 1A. Risk Factors in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, and Part I, Item 2. MD&A – Regulatory Environment in this Quarterly Report on Form 10-Q.10-Q  and the Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2017 and March 31, 2017.

Dividends and Repurchases of AIG Common Stock

On February 11, 2016,14, 2017, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 28, 201629, 2017 to shareholders of record on March 14, 2016.15, 2017. On May 2, 2016,3, 2017, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 27, 201628, 2017 to shareholders of record on June 13, 2016. 14, 2017.  On August 2, 2016,2017, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 29, 20162017 to shareholders of record on September 15, 2016.2017. On November 2, 2016,2017, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 22, 20162017 to shareholders of record on December 8, 2016. 2017. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, including the regulatory framework applicable to us, as discussed further in Note 16 12 to the Condensed Consolidated Financial Statements in the 2015 Annual Report.Statements.

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock through a series of actions. On November 2, 2016,May 3, 2017, our Board of Directors authorizedapproved an additional increase of $3.0$2.5 billion to the share repurchase authorization, resulting in an aggregate remaining authorization on such dateauthorization.  As of November 2, 2017, approximately $4.4 billion.$2.2 billion remained under the authorization.  Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).  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, including the regulatory framework applicable to us. factors.

During the nine-month period ended September 30, 2016,2017, we repurchased approximately 153100 million shares of AIG Common Stock for an aggregate purchase price of approximately $8.5$6.3 billion pursuant to this authorization, and we repurchased 15 million warrants to purchase shares of authorization.

AIG Common Stock, for an aggregate purchase price of $263 million pursuant to this authorization. Pursuant to Exchange Act Rule 10b5-1 repurchase plans, from October 1 to November 2, 2016, we repurchased approximately $946 million of additional shares of AIG Common Stock.

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Dividend Restrictions

Item 2 / LIQUIDITY AND CAPITAL RESOURCES

Dividend Restrictions

Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities. See Note 18 to the Consolidated Financial Statements in the 2015 Annual Report for

For a discussion of restrictions on payments of dividends by our subsidiaries.subsidiaries see Note 19 to the Consolidated Financial Statements in the 2016 Annual Report.

Enterprise Risk Management

ENTERPRISE RISK MANAGEMENT

Risk management includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing returns. We consider risk management an integral part of managing our core businesses and a key element of our approach to corporate governance.

Overview

We have an integrated process for managing risks throughout our organization in accordance with our firm‑wide risk appetite. Our Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department supervises and integrates the risk management functions in each of our business units, providing senior management with a consolidated view of the firm’sAIG’s major risk positions. Within each business unit, senior leaders and executives approve risk‑taking policies and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management in the embedding of enterprise risk management in our key day-to-day business processes and in identifying, assessing, quantifying, managing, monitoring and reporting, and mitigating the risks taken by us and our businesses. 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.occur.

For a further discussion of AIG’s risk management program see Part II, Item 7. MD&A ─ Enterprise Risk Management in the 20152016 Annual Report.Report.

Credit Risk Management

Overview

Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay their contractual obligations when they become due. Credit risk may also result from a downgrade of a counterparty’s credit ratings or a widening of its credit spreads.

We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arise from, but are not limited to, fixed income investments, equity securities, deposits, commercial paper investments, reverse repurchase agreements and repurchase agreements, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk arising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties, financial guarantees and letters of credit.

We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk accumulations, whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require mitigants, such as third‑party guarantees, reinsurance or collateral, including commercial bank-issued letters of credit and trust

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collateral accounts. We treat these guarantees, reinsurance recoverables, and letters of credit as credit exposure and include them in our risk concentration exposure data. We also monitor closely the quality of any trust collateral accounts.

See Investments – Available for Sale Investments herein forFor further information on our credit concentrations and credit exposures.exposures see Investments – Available for Sale Securities.

AIG | Third Quarter 2017 Form 10-Q168


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ITEM 2 | Enterprise Risk Management

Our credit risk management framework incorporates the following elements:

Risk Identification

including the ongoing capture and monitoring of all existing, contingent, potential and emerging credit risk exposures, whether funded or unfunded

Risk Measurement

comprising risk ratings, default probabilities, loss given default and expected loss parameters, exposure calculations, stress testing and other risk analytics

Risk Limits

including, but not limited to, a system of single obligor or risk group-based AIG-wide house limits and sub-limits for corporates, financial institutions, sovereigns and sub-sovereigns when appropriate and a defined process for identifying, evaluating, documenting and approving, if appropriate, breaches of and exceptions to such limits

Risk Delegations

a comprehensive credit risk delegation framework from the AIG Chief Credit Officer (CCO) to authorized credit professionals throughout the company

Risk Evaluation, Monitoring and Reporting

including the ongoing analysis and assessment of credit risks, trending of those risks and reporting of other key risk metrics and limits to the AIG CCO and senior management, as may be required

Credit Reserving

including but not limited to development of a proper framework, policies and procedures for establishing accurate identification of (i) Allowance for Loan and Lease Losses, and (ii) other-than-temporary impairments for securities portfolios

Market Risk Management

Market risk is defined as the risk of adverse impact due to systemic movements in one or more of the following market risk drivers:  equity and commodity prices, residential and commercial real estate values, interest rates, credit spreads, foreign exchange, inflation, and their levels of volatility.

We are engaged in a variety of insurance, investment and other financial services businesses that generateexpose us to market risk, directly and indirectly. We are exposed to market risks primarily within our insurance and capital markets activities, on both the asset and liability side of our balance sheet through on and off-balance sheet exposures. The chief risk officer within each business is responsible for creating a framework to properly identify these risks, then ensuring that they are appropriately measured, monitored and managed in accordance with the risk governance framework established by the Chief Market Risk Officer (CMRO).

The scope and magnitude of our market risk exposures is managed under a robust framework that contains documented risk-taking authorities, defined risk limits and minimum standards for managing market risk in a manner consistent with our Risk Appetite Statement.risk appetite statement. Our market risk management framework focuses on quantifying the financial repercussions of changes in these broad market observables, as opposed to from the idiosyncratic risks associated with individual assets that are addressed through our credit risk management function.

Risk Identification

Market risk focuses on quantifying the financial repercussions of changes in broad, external, predominantly market observable risks. Financial repercussions can include an adverse impact on results of operations, financial condition, liquidity and capital.

AIG | Third Quarter 2017 Form 10-Q169


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ITEM 2 | Enterprise Risk Management

Each of the following systemic risks is considered a market risk:

Equity prices.  We are exposed to changes in equity market prices affecting a variety of instruments. Changes in equity prices can affect the valuation of publicly-traded equity shares, investments in private equity, hedge funds and mutual funds, exchange-traded funds, and other equity-linked capital market instruments as well as equity-linked insurance products, including but not limited to index annuities, variable annuities, universal life insurance and variable universal life insurance.

Residential and commercial real estate values.  Our investment portfolios are exposed to the risk of changing values in a variety of residential and commercial real estate investments. Changes in residential/commercial real estate prices can affect the valuation of residential/commercial mortgages, residential/commercial mortgage‑backed securities and other structured securities with underlying assets that include residential/commercial mortgages: trusts that include residential/commercial real estate and/or mortgages, residential mortgage insurance contracts and commercial real estate investments.

Interest rates.  Interest rate risk can arise from a mismatch in the interest rate exposure of assets versus liabilities. Lower interest rates generally result in lower investment income and make certain of our product offerings less attractive to investors. Conversely, higher interest rates are typically beneficial for the opposite reasons. However, when rates rise quickly, there can be a temporary asymmetric GAAP accounting effect where the existing securities lose market value, which is largely reported in Other comprehensive income, and the offsetting decrease in the value of related liabilities may not be recognized. Changes in interest rates can affect the valuation of fixed maturity securities, financial liabilities, insurance contracts including but not limited to fixed rate annuities, variable annuities and derivative contracts.

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Credit spreads.  Credit spreads measure an instrument’s risk premium or yield relative to that of a comparable duration, default‑free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities, including but not limited to corporate bonds, ABS, mortgage-backed securities, AIG-issued debt obligations, credit derivatives and derivative credit valuation adjustments. Much like higher interest rates, wider credit spreads with unchanged default losses mean more investment income in the long‑term. In the short term, quickly rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely reported in Other comprehensive income. A precipitous rise in credit spreads may also signal a fundamental weakness in the credit‑worthiness of bond obligors, potentially resulting in default losses.

Foreign exchange (FX) rates.  We are a globally diversified enterprise with significant income, assets and liabilities denominated in, and significant capital deployed in, a variety of currencies. Changes in FX rates can affect the valuation of a broad range of balance sheet and income statement items as well as the settlement of cash flows exchanged in specific transactions.

Commodity Prices.  Changes in commodity prices (the value of commodities) can affect the valuation of publicly‑traded commodities, commodity indices and derivatives on commodities and commodity indices. We are exposed to commodity prices primarily through their impact on the prices and credit quality of commodity producers’ debt and equity securities in our investment portfolio.

Inflation.  Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt obligations, derivatives and other contracts explicitly linked to inflation indices, and insurance contracts where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or wage levels.

Risk Measurement

Equity prices

We are exposed to changes in equity market prices affecting a variety of instruments. Changes in equity prices can affect the valuation of publicly-traded equity shares, investments in private equity, hedge funds and mutual funds, exchange-traded funds, and other equity-linked capital market instruments as well as equity-linked insurance products, including but not limited to index annuities, variable annuities, universal life insurance and variable universal life insurance.

Residential and commercial real estate values

Our investment portfolios are exposed to the risk of changing values in a variety of residential and commercial real estate investments. Changes in residential/commercial real estate prices can affect the valuation of residential/commercial mortgages, residential/commercial mortgage‑backed securities and other structured securities with underlying assets that include residential/commercial mortgages, trusts that include residential/commercial real estate and/or mortgages, residential mortgage insurance and reinsurance contracts and commercial real estate investments.

Interest rates

Interest rate risk can arise from a mismatch in the interest rate exposure of assets versus liabilities. Lower interest rates generally result in lower investment income and make some of our product offerings less attractive to investors. Conversely, higher interest rates are typically beneficial for the opposite reasons. However, when rates rise quickly, there can be a temporary asymmetric GAAP accounting effect where the existing securities lose market value, which is largely reported in Other comprehensive income, and the offsetting decrease in the value of related liabilities may not be recognized. Changes in interest rates can affect the valuation of fixed maturity securities, financial liabilities, insurance contracts including but not limited to fixed rate annuities, variable annuities and derivative contracts.

Credit spreads

Credit spreads measure an instrument’s risk premium or yield relative to that of a comparable duration, default‑free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities, including but not limited to corporate bonds, ABS, mortgage-backed securities, AIG-issued debt obligations, credit derivatives and derivative credit valuation adjustments. Much like higher interest rates, wider credit spreads with unchanged default losses mean more investment income in the long‑term. In the short term, quickly rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely reported in Other comprehensive income. A precipitous widening of credit spreads may also signal a fundamental weakness in the credit‑worthiness of bond obligors, potentially resulting in default losses.

Foreign exchange (FX) rates

We are a globally diversified enterprise with income, assets and liabilities denominated in, and capital deployed in, a variety of currencies. Changes in FX rates can affect the valuation of a broad range of balance sheet and income statement items as well as the settlement of cash flows exchanged in specific transactions.

Commodity Prices

Changes in commodity prices (the value of commodities) can affect the valuation of publicly‑traded commodities, commodity indices and derivatives on commodities and commodity indices. We are exposed to commodity prices primarily through their impact on the prices and credit quality of commodity producers’ debt and equity securities in our investment portfolio.

Inflation

Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt obligations, derivatives and other contracts explicitly linked to inflation indices, and insurance contracts where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or wage levels.

Risk Measurement

Our market risk measurement framework was developed with the main objective of communicating the range and scale of our market risk exposures. At the firm‑wide level market risk is measured in a manner that is consistent with AIG’s Risk Appetite Statement.risk appetite statement. This is designed to ensure that we remain within our stated risk tolerance levels and can determine how much additional market risk taking capacity is available within our framework. Our risk appetite is currently defined in terms of capital and liquidity levels. At the market risk level, the framework measures our overall exposure to each systemic market risk change on an economic basis.

In addition, we continue to use enhanced economic, GAAP accounting and statutory capital‑based risk measures at the market risk level, business‑unit level and firm‑wide levels. This process aims to ensure that we have a comprehensive view of the impact of our market risk exposures.

AIG | Third Quarter 2017 Form 10-Q170


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We use a number of approaches to measure our market risk exposure, including:

Examples include:

Sensitivity analysis. analysisSensitivity analysis

measures the impact from a unit change in a market risk input. Examples of such sensitivities include input

a one basis point increase in yield on fixed maturity securities,

a one basis point increase in credit spreads of fixed maturity securities, and

a one percent increase in prices of equity securities.

Scenario analysis.analysisScenario analysis

uses historical, hypothetical, or forward‑looking macroeconomic scenarios to assess and report exposures. Examples of hypothetical scenarios include exposures

a 100 basis point parallel shift in the yield curve, or

a 20 percent immediate and simultaneous decrease in world‑wide equity markets.

Scenarios may also utilize a stochastic framework to arrive at a probability distribution of losses.

Stress testing.testingStress testing is

a special form of scenario analysis in which the scenarios are designed to lead to a material adverse outcome. Examples of such scenarios include outcome

the stock market crash of October 1987 or the widening of yields or spreads of RMBS or CMBS during 2008.

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Market Risk Sensitivities

The following table provides estimates of our sensitivity to changes in yield curves, equity prices and foreign currency exchange rates:

Balance Sheet Exposure

 

 

 

Balance Sheet Effect

Balance Sheet Exposure

 

 

 

Balance Sheet Effect

September 30,

 

December 31,

 

 

 

September 30,

 

December 31,

September 30,

 

December 31,

 

 

 

September 30,

 

December 31,

(dollars in millions)

 

2016

 

2015

 

 

 

2016

 

 

2015

 

2017

 

2016

 

 

 

2017

 

 

2016

Sensitivity factor

 

 

 

 

 

 

100 bps parallel increase in all yield curves

 

 

 

 

 

 

100 bps parallel increase in all yield curves

Interest rate sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

272,276

 

260,689

 

 

 

(16,602)

 

 

(14,549)

 

247,330

 

 

251,784

 

 

 

(14,776)

 

 

(14,745)

Mortgage and other loans receivable

 

24,273

 

18,878

 

 

 

(1,398)

 

 

(1,092)

 

27,382

 

25,113

 

 

 

(1,479)

 

 

(1,352)

Preferred stock

 

14

 

20

 

 

 

(1)

 

 

(1)

 

14

 

17

 

 

 

(1)

 

 

(1)

Total interest rate sensitive assets

$

296,563

(a)

$

279,587

(a)

 

 

$

(18,001)

 

$

(15,642)

$

274,726

(a)

$

276,914

(a)

 

 

$

(16,256)

 

$

(16,098)

Sensitivity factor

 

 

 

 

 

 

 

 

20% decline in stock prices and value of

 

 

 

 

 

 

 

 

20% decline in stock prices and value of

 

 

 

 

 

 

 

 

alternative investments

 

 

 

 

 

 

 

 

alternative investments

Equity and alternative investments exposure:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate investments

 

7,465

 

 

6,900

 

 

 

 

(1,493)

 

 

(1,380)

Hedge funds

 

7,813

 

 

10,917

 

 

 

 

(1,563)

 

 

(2,183)

 

6,321

 

 

7,249

 

 

 

 

(1,264)

 

 

(1,450)

Private equity

 

6,414

 

 

7,233

 

 

 

 

(1,283)

 

 

(1,447)

 

5,721

 

 

6,130

 

 

 

 

(1,144)

 

 

(1,226)

Real estate investments

 

6,494

 

 

6,579

 

 

 

 

(1,299)

 

 

(1,316)

Common equity

 

1,170

 

 

1,369

 

 

 

 

(234)

 

 

(274)

PICC Investment

 

454

 

 

2,239

 

 

 

 

(91)

 

 

(448)

 

497

 

 

439

 

 

 

 

(99)

 

 

(88)

Common equity

 

1,570

 

 

1,574

 

 

 

 

(314)

 

 

(315)

Aircraft asset investments

 

356

 

 

477

 

 

 

 

(71)

 

 

(95)

 

218

 

 

321

 

 

 

 

(44)

 

 

(64)

Other investments

 

591

 

 

472

 

 

 

 

(117)

 

 

(94)

 

554

 

 

946

 

 

 

 

(111)

 

 

(189)

Total equity and alternative investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

exposure

$

23,692

 

$

29,491

 

 

 

$

(4,738)

 

$

(5,898)

$

21,946

 

$

23,354

 

 

 

$

(4,389)

 

$

(4,671)

Sensitivity factor

 

 

 

 

 

 

 

 

10% depreciation of all foreign currency

 

 

 

 

 

 

 

 

10% depreciation of all foreign currency

 

 

 

 

 

 

 

 

exchange rates against the U.S. dollar

 

 

 

 

 

 

 

 

exchange rates against the U.S. dollar

Foreign currency-denominated net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Great Britain pound

 

2,382

 

 

2,274

 

 

 

 

(238)

 

 

(227)

Japanese yen

 

952

 

 

2,345

 

 

 

 

(95)

 

 

(235)

Euro

 

2,204

 

 

2,053

 

 

 

 

(220)

 

 

(205)

 

945

 

 

2,000

 

 

 

 

(95)

 

 

(200)

Japanese yen

 

2,031

 

 

1,745

 

 

 

 

(203)

 

 

(174)

Great Britain pound

 

1,976

 

 

2,158

 

 

 

 

(198)

 

 

(216)

All other foreign currencies

 

3,175

 

 

4,703

 

 

 

 

(318)

 

 

(471)

 

2,122

 

 

3,210

 

 

 

 

(212)

 

 

(321)

Total foreign currency-denominated net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset position(b)

$

9,386

 

$

10,659

 

 

 

$

(939)

 

$

(1,066)

$

6,401

 

$

9,829

 

 

 

$

(640)

 

$

(983)

(a)  At September 30, 2016,2017, the analysis covered $296.6$274.7 billion of $311.9$289.4 billion interest-rate sensitive assets. Excluded were $8.1$8.7 billion of loans and $3.6$1.8 billion of investments in life settlements. In addition, $3.6$4.2 billion of assets across various asset categories were excluded due to modeling limitations. At December 31, 2015,2016, the analysis covered $279.6$276.9 billion of $298.7$292.5 billion interest-rate sensitive assets. Excluded were $10.7$8.1 billion of loans and $3.6$2.5 billion of investments in life settlements. In addition, $4.8$5.0 billion of assets across various asset categories were excluded due to modeling limitations.

(b)  The majority of the foreign currency exposure is reported on a one quarter lag.

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Foreign currency-denominated net asset position reflects our consolidated non‑U.S. dollar assets less our consolidated non‑U.S dollar liabilities on a GAAP basis.basis, with certain adjustments. We use a bottom-up approach in managing our foreign currency exchange rate exposures with the objective of protecting statutory capital at the regulated insurance entity level. At the AIG Parent level, we monitor our foreign currency exposures against single currency and aggregate currency portfolio limits.

Our foreign currency-denominated net asset position at September 30, 2016,2017, decreased by $1.3$3.4 billion compared to December 31, 2015.2016. The decrease was mostlyprimarily due to a $1.7$1.4 billion decrease in our Hong Kong dollar position, primarily resulting from the sale of our Non-Life Insurance Companies’ PICC Investment, partially offset by a $286 million increase in our Japanese yen position primarily due to yen strengthening.the sale of Fuji Life and a $1.1 billion decrease in our euro position primarily due to the issuance of 1.0 billion euro denominated debt.

For illustrative purposes, we modeled our sensitivities based on a 100 basis point increase in yield curves, a 20 percent decline in equities and alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against the

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U.S. dollar. The estimated results presented in the table above should not be taken as a prediction, but only as a demonstration of the potential effects of such events.events.

Liquidity Risk Management

Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to meet our short-term cash, collateral or other financial obligations. Failure to appropriately manage liquidity risk can result in insolvency, reduced operating flexibility, increased costs, reputational harm and regulatory action.

AIG and its legal entities seek to maintain sufficient liquidity during both the normal course of business and under defined liquidity stress scenarios to ensure that sufficient cash will be available to meet the obligations as they come due.

AIG Parent liquidity risk tolerance levels are designed to allow itus to meet itsour financial obligations overfor a twelve month horizon consistent with its risk appetite.minimum of six months under a liquidity stress scenario. We maintain minimum levels for required liquidity and/orlimits and minimum coverage ratios expecteddesigned to ensure that our short-term financial obligationsfunding needs are met under varying market conditions. If we project that we will breach these tolerances, we will assess and determine appropriate liquidity management actions. However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity sources or a reduction in liquidity requirements.

Risk Identification

The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they come due.

·Market/Monetization Risk: Assets cannot be readily transformed into cash due to unfavorable market conditions. Market liquidity risk may limit our ability to sell assets at reasonable values to meet liquidity needs or cause us to realize losses exceeding our expectations.  

·Cash Flow Mismatch Risk: Discrete and cumulative cash flow mismatches or gaps over short-term horizons under both expected and adverse business conditions may create future liquidity shortfalls.

·Event Funding Risk: Additional funding may be required as the result of a trigger event and may result from a downgrade in credit ratings, a market event, or some other event that creates a funding obligation or limits existing funding options.

·Financing Risk: We may be unable to raise additional cash on a secured or unsecured basis due to unfavorable market conditions, AIG-specific issues, or any other issue that impedes access to additional funding.

Risk Measurement

Market/Monetization Risk

Assets may not be readily transformed into cash due to unfavorable market conditions. Market liquidity risk may limit our ability to sell assets at reasonable values to meet liquidity needs.

Cash Flow Mismatch Risk

Discrete and cumulative cash flow mismatches or gaps over short-term horizons under both expected and adverse business conditions may create future liquidity shortfalls.

Event Funding Risk

Additional funding may be required as the result of a trigger event. Event funding risk comes in many forms and may result from a downgrade in credit ratings, a market event, or some other event that creates a funding obligation or limits existing funding options.

Financing Risk

We may be unable to raise additional cash on a secured or unsecured basis due to unfavorable market conditions, AIG-specific issues, or any other issue that impedes access to additional funding.

AIG | Third Quarter 2017 Form 10-Q172


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Risk Measurement

Comprehensive cash flow projections under normal conditions are the primary component for identifying and measuring liquidity risk. We produce comprehensive liquidity projections over varying time horizons that incorporate all relevant liquidity sources and uses and include known and likely cash inflows and outflows. In addition, we perform stress testing by identifying liquidity stress scenarios and assessing the effects of these scenarios on our cash flow and liquidity.

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Item 2 /We use a number of approaches to measure our liquidity risk exposure, including: ENTERPRISE RISK MANAGEMENT

We use a number of approaches to measure  our  liquidity  risk exposure, including:Minimum Liquidity Limits

TargetMinimum Liquidity Range: Target Liquidity Range specifiesLimits specify the amount of assets required to be maintained in specific liquidity portfolios to meet obligations as they arise over a twelve monthspecified time horizon under stressed liquidity conditions.

Coverage Ratios:Ratios

Coverage Ratios measure the adequacy of available liquidity sources, including the ability to monetize assets to meet the forecasted cash flows over a specified time horizon. The portfolio of potential assets to be monetized is selected based on our ability to convert those assets into cash under the assumed market conditions and within the specified time horizon.

Cash Flow Forecasts:Forecasts

Cash Flow Forecasts measure the liquidity needed for a specific legal entity over a specified time horizon.

Stress Testing:Testing

Asset liquidity and Coverage Ratios are re-measured under defined liquidity stress scenarios that will impact net cash flows, liquid assets and/or other funding sources.

Relevant liquidity reporting is produced and reported regularly to AIG Parent and business unit risk committees. The frequency, content, and nature of reporting will vary for each business unit and legal entity, based on its complexity, risk profile, activities and size.

Regulatory Environment

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:Overview

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

liability for unpaid losses and loss adjustment expenses;

reinsurance assets;

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

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

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

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

liability for legal contingencies; and

fair value measurements of certain financial assets and liabilities.

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

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operations and cash flows could be materially affected. For a complete discussion of our critical accounting estimates, you should read Part II, Item 7. MD&A — Critical Accounting Estimates in the 2015 Annual Report.

REGULATORY ENVIRONMENT

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.

Our insurance subsidiaries are subject to regulation and supervision by the states and jurisdictions in which they do business. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years.

Our insurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which they do business. 

Regulatory developments

On June 3, 2016,September 29, 2017, the Financial Stability Oversight Council (Council) rescinded its determination that material financial distress at AIG could pose a threat to U.S. financial stability and as a result, AIG is no longer designated as a nonbank systemically important financial institution (nonbank SIFI).  With the rescission of its designation as a nonbank SIFI, AIG is no longer subject to the consolidated supervision of the Board of Governors of the Federal Reserve System (FRB) issued for public comment a notice of proposed rulemaking (NPR) onor subject to the enhanced prudential standards set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and its implementing regulations.

AIG | Third Quarter 2017 Form 10-Q173


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U.S. REGULATION

Dodd-Frank

On July 21, 2010, Dodd-Frank, which brought about the most extensive changes to financial regulation in the United States in many years, was signed into law.  Although the Council has rescinded its designation of AIG as a nonbank SIFI, certain provisions of Dodd-Frank remain relevant to insurance groups generally.

·The Council has authority to determine, subject to certain statutory and regulatory standards, that would require insurerany nonbank SIFIs, suchfinancial company be designated as AIG,a nonbank SIFI subject to comply with a corporate governance and risk-management standard and a liquidity risk management standard.  These proposed standards build on the FRB’s current guidance for large financial institutions supervisedsupervision by the FRB and have been tailoredenhanced prudential standards. The Council may also recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices that we and other insurers or other financial services companies engage in.

·Title II of Dodd-Frank (Orderly Liquidation Authority) provides that a financial company whose largest United States subsidiary is an insurer may be subject to insurance companies.  The comment period has now closed and we anticipatea special orderly liquidation process outside the Bankruptcy Code. That process is to be administered by the FDIC upon a determination that the FRB will adopt a final rulecompany is: (i) in due course after evaluating all comments received. Under the proposal, the insurer nonbank SIFIsdefault or in danger of default, (ii) would have at least twelve monthsserious adverse effects on U.S. financial stability were it to comply.fail and be resolved, (iii) is not likely to attract private sector alternatives to default and (iv) is not suitable for resolution under the Bankruptcy Code. Dodd-Frank authorizes possible assessments to cover the costs of any special resolution of a financial company conducted under Title II. U.S. insurance subsidiaries of any such financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law.

On June 3, 2016,·Title VII of Dodd-Frank provides for significantly increased regulation of and restrictions on derivatives markets and transactions that have affected and, as additional regulations come into effect, could affect various activities of insurance and other financial services companies, including (i) regulatory reporting for swaps and security-based swaps, (ii) mandated clearing through central counterparties and execution through regulated swap execution facilities for certain swaps and security-based swaps and (iii) margin and collateral requirements.  Although the Commodities Futures Trading Commission (CFTC), which oversees and regulates the U.S. swap, commodities and futures markets, has finalized most of its requirements, the SEC has yet to finalize the majority of rules comprising its security-based swap regulatory regime. Increased regulation of and restrictions on derivatives markets and transactions could increase the cost of our trading and hedging activities, reduce liquidity and reduce the availability of customized hedging solutions and derivatives.

·Dodd-Frank mandated a study to determine whether stable value contracts should be included in the definition of "swap." If that study concludes that stable value contracts are swaps, Dodd-Frank authorizes certain federal regulators to determine whether an exemption from the definition of a swap for stable value contracts is appropriate and in the public interest. Certain of our affiliates participate in the stable value contract business. We cannot predict what regulations might emanate from the aforementioned study or be promulgated applicable to this business in the future.

·Title V of Dodd-Frank authorizes the United States to enter into covered agreements with foreign governments or entities regarding the business of insurance and reinsurance and on September 22, 2017, the U.S. and EU entered into such an agreement.  For additional information, see —International Regulation

·Dodd-Frank established the Consumer Financial Protection Bureau (CFPB) within the FRB to regulate consumer financial products and services offered primarily for personal, family or household purposes. Insurance products and services are not within the CFPB's general jurisdiction. Broker-dealers and investment advisers are not subject to the CFPB's jurisdiction when acting in their registered capacity.  The CFPB does have authority to regulate certain non-insurance consumer services.

·The Federal Insurance Office (FIO), an office within the Department of the Treasury, itself is not a regulator but performs certain duties related to the business of insurance.  Among other things, FIO is a non-voting member of the Council and has authority to collect information on the insurance industry, recommend prudential standards, participate in negotiations of international agreements affecting insurance, determine, after consulting with the relevant State and the United States Trade Representative, if certain regulations are preempted by covered agreements, and assist the Secretary in administering the Terrorism Insurance Program under the Terrorism Risk Insurance Act of 2002.

AIG | Third Quarter 2017 Form 10-Q174


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On February 3, 2017, the President of the United States signed an Executive Order that directed the Secretary of the Treasury, in consultation with federal financial regulators, to assess all laws, rules and policies that regulate the U.S. financial system, including requirements put into place under Dodd-Frank since 2010, and to recommend necessary changes to make sure they conform to certain core principles.  Treasury divided its review into four parts and has published three reports to date: Banks and Credit Unions (June 12, 2017), Capital Markets (October 6, 2017), and Asset Management and Insurance (October 26, 2017).  A fourth report on other nonbank financial institutions, financial technology, and financial innovation is to appear later.  In its report on insurance regulation, Treasury identified several areas for improvement at the federal and state levels and defined the role it intends for federal agencies.  Among its recommendations, Treasury expressed support for an activities-based approach to regulating systemic risk in the insurance industry rather than designating individual entities; it recommended continued U.S. engagement in international standard setting forums and charged FIO with coordinating the efforts of the federal government, state regulators, the National Association of Insurance Commissioners (NAIC), and other stakeholders on the issues within its scope, such as covered agreements, matters related to the Terrorism Risk Insurance Program, and standard setting at the International Association of Insurance Supervisors (IAIS), including discussions regarding capital and liquidity requirements; Treasury expressed support for robust liquidity risk management programs for insurers and encouraged regulators to continue work on addressing potential liquidity risk in the insurance sector; Treasury also releasedsupported the DOL in delaying full implementation of the DOL Fiduciary Rule until relevant issues are further evaluated and addressed by the DOL, SEC, and state insurance regulators working together.  For additional information regarding the DOL Fiduciary Rule, see Executive Summary — AIG’s Outlook — Industry and Economic Factors — Department of Labor Fiduciary Rule. We will monitor developments resulting from these recommendations closely.

Insurance Regulation

Certain states and other jurisdictions require registration and periodic reporting by insurance companies that are licensed in such jurisdictions and are controlled by other entities. Applicable legislation typically requires periodic disclosure concerning the entity that controls the registered insurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including in some instances payment of dividends by the insurance subsidiary, within the holding company system. This legislation also requires any person or entity desiring to purchase more than a specified percentage (commonly 10 percent) of our outstanding voting securities to obtain regulatory approval prior to such purchase. Our subsidiaries are registered under such legislation in those jurisdictions that have such requirements.

Our U.S. insurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which they do business. The method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to a state insurance official. The regulation and supervision relate primarily to the financial condition of the insurers and their corporate conduct and market conduct activities. This includes approval of policy forms and rates, the standards of solvency that must be met and maintained, including with respect to risk-based capital, the standards on transactions between insurance company subsidiaries and their affiliates, including restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks that may be insured under a single policy, deposits of securities for public commentthe benefit of policyholders, requirements for acceptability of reinsurers, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses and other purposes and enterprise risk management and corporate governance requirements. Our insurance subsidiaries are also subject to requirements on investments, which prescribe the kind, quality and concentration of investments they can make. In general, such regulation is for the protection of policyholders rather than the creditors or equity owners of these companies.

U.S. states have state insurance guaranty associations in which insurers doing business in the state are required by law to be members.  Member insurers may be assessed by the associations for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess member insurers in amounts related to the member’s proportionate share of the business written by all members in the state. The protection afforded by a state’s guaranty association to policyholders of insolvent insurers varies from state to state.

AIG | Third Quarter 2017 Form 10-Q175


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ITEM 2 | Regulatory Environment

In the U.S., the NAIC is a standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. The NAIC itself is not a regulator, but, with assistance from the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate regulatory oversight. Virtually every state has adopted, in substantial part, the Risk-Based Capital (RBC) Model Law promulgated by the NAIC, which allows states to act upon the results of RBC calculations, and provides four incremental levels of regulatory action regarding insurers whose RBC calculations fall below specific thresholds. Those levels of action range from the requirement to submit a plan describing how an advance noticeinsurer would regain a specified RBC ratio to a mandatory regulatory takeover of proposed rulemaking (ANPR) outlining two conceptualthe company. The RBC formula is designed to measure the adequacy of an insurer’s statutory surplus in relation to the risks inherent in its business and computes a risk-adjusted surplus level by applying discrete factors to various asset, premium, reserve and other financial statement items. These factors are developed to be risk-sensitive so that higher factors are applied to items exposed to greater risk.  The statutory surplus of each of our U.S. based insurance groupcompanies exceeded RBC minimum required levels as of December 31, 2016.

If any of our insurance entities fell below prescribed levels of statutory surplus, it would be our intention to provide appropriate capital frameworksor other types of support to that could applyentity. For additional information, see Liquidity and Capital Resources — Liquidity and Capital Resources of AIG Parent and Subsidiaries — Insurance Companies.

The NAIC’s Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) requires insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs. See Part I, Item 1A – Risk Factors and Note 18 to the Consolidated Financial Statements in our 2016 Annual Report for risks and additional information related to these statutory reserving requirements. In December 2012, the NAIC approved a new valuation manual containing a principle-based approach to life insurance company reserves. Principle-based reserving (PBR) is designed to tailor the reserving process to specific products in an effort to create a principle-based modeling approach to reserving rather than the factor-based approach historically employed. PBR became effective on January 1, 2017, after NAIC’s model Standard Valuation Law was enacted by the requisite number of states representing the required premium volume, replacing Regulation XXX and Guideline AXXX with respect to new life insurance business issued after that date. Two of our domiciliary states (Missouri and Texas) have adopted the regulations necessary to implement PBR. We have up to three years after January 1, 2017 to implement PBR, and have currently elected to defer implementation.

The NAIC has adopted revisions to the NAIC Insurance Holding Company System Regulatory Act (the Model Holding Company Act) and the Insurance Holding Company System Model Regulation.  The revised models include provisions authorizing NAIC commissioners to act as global group-wide supervisors for internationally active insurance groups supervised byand participate in international supervisory colleges, and the FRB—requirement that the ultimate controlling person of a building block approach, proposed for insurance institutions that are savings and loan holding companies or bank holding companies by virtue of owning depository institutions, andU.S. insurer file an annual enterprise risk report with its lead state regulator identifying risks likely to have a consolidated approach for insurer nonbank SIFIs, such as AIG.  In general,material adverse effect upon the consolidated approach would consolidate an insurance company’s assets and insurance liabilities into risk segments tailored to account for the liability structure and unique features of the insurance company, apply risk factors to each segment and then set minimum capital requirements. The ANPR does not provide details on specific risk weights, risk factors, capital adequacy ratios and other important elements that could be applied to AIG under the consolidated approach, and we cannot predict how such an approach, if applied to AIG, would affect our business, results of operations, financial condition or capitalliquidity of its licensed insurers or the insurance holding company system as a whole. All of the states where AIG has domestic insurers have enacted a version of the revised Model Holding Company Act, including the enterprise risk reporting requirement. The NAIC has also adopted the Risk Management and Own Risk and Solvency Assessment Model Act (ORSA).  ORSA requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and stressed environments. All of the states where AIG has domestic insurers have enacted a version of ORSA.

ERISA Considerations

We provide products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), or the Internal Revenue Code of 1986, as amended (the Internal Revenue Code).  Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans.  As a result, our activities are subject to the restrictions imposed by ERISA and the Internal Revenue Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that fiduciaries may not cause a covered plan to engage in certain prohibited transactions.  ERISA also provides for civil and criminal penalties and enforcement.

For additional information regarding the DOL Fiduciary Rule, see Executive Summary — AIG’s Outlook — Industry and Economic Factors — Department of Labor Fiduciary Rule.

AIG | Third Quarter 2017 Form 10-Q176


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Investment Adviser, Broker-Dealer and Investment Company Regulation

Our investment products and services are subject to federal and state securities, fiduciary, including ERISA, and other laws and regulations. The SEC, Financial Industry Regulatory Authority, CFTC, state securities commissions, state insurance departments and the DOL are the principal U.S. regulators of these operations.

The subsidiaries that manage the operations of our investment products are registered as investment advisers with the SEC under the Investment Advisers Act of 1940 and are required to supervise the activities of their personnel.  Our affiliates that offer interests in insurance company separate accounts, mutual funds and other pooled investment products, and that provide other financial services to customers, are registered as broker-dealers with the SEC under the Exchange Act and with certain states, and are also members of the Financial Industry Regulatory Authority (FINRA).  Our broker-dealer subsidiaries and their personnel are subject to examination by the SEC, FINRA, and the states for compliance with law, and certain personnel of these broker-dealers are also required to pass qualification examinations.  Sales to retirement accounts are subject to the DOL Fiduciary Rule.  The investment products that are offered by our affiliates may be registered under the Securities Act, which regulates disclosure regarding the products, and/or the Investment Company of 1940, which imposes substantive regulation on the structure and governance of the products, as well as being subject to insurance regulation in the case of separate accounts.  Some products may also be qualified for sale in various states, the District of Columbia and Puerto Rico.

Consumer Protection and Cybersecurity

We are subject to laws and regulations that require financial institutions and other businesses to protect the security and confidentiality of sensitive consumer information and to notify their customers and other stakeholders of their policies and practices relating to the collection and disclosure of health-related and customer information. In addition, we must comply with international privacy laws and regulations concerning the cross border transfer or use of employee and customer personal information. These laws and regulations also (i) require specific safeguards around the use of sensitive information such as social security numbers and require notice to affected individuals and regulators in the case of a breach of security, (ii) require the adoption of processes to prevent and mitigate the effects of identity theft and (iii) establish permissible uses of protected personal and consumer information.

The NAIC has been developing an Insurance Data Security Model Law, which would require insurers, insurance producers and other entities required to be licensed under state insurance laws to develop and maintain a written information security program, conduct risk assessments, and oversee the data security practices of third-party vendors.  It is not clear whether or not, or in what form, the Insurance Data Security Model Law will be adopted by states in which we have licensed insurers and other licensed subsidiaries.

In February 2017, the NY DFS announced the adoption of a new cybersecurity regulation requiring financial services institutions to implement a cybersecurity program designed to protect consumers’ private data. The regulation includes specific technical safeguards as well as governance, incident planning, data management, system testing and regulator notification requirements. The commentregulation went into effect on March 1, 2017, providing for a 180 day transitional period with compliance required in stages thereafter.

Thrift Regulator

AIG Federal Savings Bank, our trust-only federal thrift subsidiary, is supervised and regulated by the Office of the Comptroller of the Currency.

INTERNATIONAL REGULATION

Insurance Regulation

A substantial portion of our business is conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies. Generally, our subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements; licenses issued by foreign authorities to our subsidiaries are subject to modification or revocation by such authorities, and therefore these subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate.

Certain jurisdictions require registration and periodic reporting by insurance companies that are licensed in such jurisdictions and are controlled by other entities. Applicable legislation typically requires periodic disclosure concerning the entity that controls the registered insurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including in some instances payment of dividends by the insurance subsidiary within the holding company system. Our subsidiaries are registered under such legislation in those jurisdictions that have such requirements.

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In addition to these licensing and other requirements, our foreign operations are also regulated in various jurisdictions with respect to currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves, amount and type of capital to be held, amount and type of local investment and the share of profits to be returned to policyholders on participating policies. Some foreign countries regulate rates on various types of policies. Certain countries have established reinsurance institutions, wholly or partially owned by the local government, to which admitted insurers are obligated to cede a portion of their business on terms that may not always allow foreign insurers, including our subsidiaries, full compensation. In some countries, regulations governing constitution of technical reserves and remittance balances may hinder remittance of profits and repatriation of assets.

Legislation in the EU could also affect our international insurance operations. The European Parliament issues Directives on a wide range of topics that impact financial services. Insurance companies operating in the EU are subject to the Solvency II framework. The Prudential Regulatory Authority, the United Kingdom’s (UK’s) prudential regulator, is our lead EU prudential supervisor. For information on the UK’s pending withdrawal of its membership in the EU, see —Brexit. The UK’s Financial Conduct Authority has now closedoversight of AIG’s operations for consumer protection and competition matters within the UK. In addition, financial companies that operate in the EU are subject to a range of regulations enforced by the national regulators in each member state in which that firm operates. The EU has also established a set of regulatory requirements under the European Market Infrastructure Regulation (EMIR) that include, among other things, risk mitigation, risk management, regulatory reporting and clearing requirements. Solvency II governs the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. In accordance with Solvency II, the European Commission is required to make a determination as to whether a supervisory regime outside of the EU is “equivalent.”

On September 22, 2017, the U.S. Treasury Department and the Office of the U.S. Trade Representative, on behalf of the U.S., and the European Union signed the bilateral Covered Agreement, which is intended to address issues regarding the application of Solvency II requirements to U.S.-based insurance groups as well as other (re)insurance regulatory issues. While the signatures by both parties will allow for the provisional application of the agreement, the agreement is still subject to approval by the European Parliament before it enters into force. Other aspects of the agreement remain subject to an implementation timetable in the U.S. and the European Union, which may delay or even prevent the agreement from being fully implemented.  In particular, the U.S. states will be given a period of five years to comply with the agreement’s reinsurance collateral provisions.  After 42 months, FIO must begin evaluating a potential preemption determination with respect to any state law not in compliance with the aim of assuring full compliance within the five-year timeframe.  The agreement may be terminated (following mandatory consultation) by notice from one party to the other effective in 180 days, or at such time as the parties may agree.

The agreement provides that AIG will be supervised at the worldwide group level only by its relevant U.S. insurance supervisors, and that it will not have to satisfy EU Solvency II group capital, reporting and governance requirements for its worldwide group. The agreement, however, would permit the imposition of EU Solvency II group capital requirements if, after five years from the signing of the agreement, a U.S. insurer is not subject to a group capital assessment by its applicable state regulator. The NAIC is in the process of developing a group capital calculation that, once adopted by the states, is expected to satisfy this condition. The agreement further provides that if the summary risk reports submitted to the supervisory authority of a host jurisdiction expose any serious threat to policyholder protection or financial stability in such host state, the host supervisor may request further information from the insurance group and/or impose preventive or corrective measures with respect to the (re)insurer in its jurisdiction. The agreement also seeks to impose equal treatment of U.S. and EU-based reinsurers that meet certain qualifications.  In the U.S., once fully implemented, the agreement requires U.S. states to lift reinsurance collateral requirements on qualifying EU-based reinsurers and provide them equal treatment with U.S. reinsurers or be subject to federal preemption. While this provision does not preclude AIG from continuing to request collateral from an EU reinsurer that is party to a bilateral reinsurance transaction, it is unclear how much collateral AIG will be able to obtain from EU reinsurers going forward.

FSB and IAIS

The Financial Stability Board (FSB) consists of representatives of national financial authorities of the G20 countries. The FSB itself is not a regulator but is focused primarily on promoting international financial stability. It does so by coordinating the work of national financial authorities and international standard-setting bodies as well as developing and promoting the implementation of regulatory, supervisory and other financial policies. The FSB has issued a series of frameworks and recommendations intended to produce significant changes in how financial companies, particularly global systemically important financial institutions, should be regulated. These frameworks and recommendations address such issues as systemic financial risk, financial group supervision, capital and solvency standards, corporate governance including compensation, and a number of related issues associated with responses to the financial crisis.

AIG | Third Quarter 2017 Form 10-Q178


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The IAIS represents insurance regulators and supervisors of more than 200 jurisdictions (including regions and states) in nearly 140 countries and seeks to promote globally consistent insurance industry supervision. The IAIS itself is not a regulator, but one of its activities is to develop insurance regulatory standards for use by local authorities across the globe. The FSB has charged the IAIS with developing a framework for measuring systemic risks posed by insurance groups and has directed the IAIS to create standards relative to many of the areas of focus of the FSB, which go beyond the IAIS’ basic Insurance Core Principles (ICPs). The IAIS is developing ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs). ComFrame sets out qualitative and quantitative standards in order to assist supervisors in collectively addressing an IAIG’s activities and risks, identifying and avoiding regulatory gaps and coordinating supervisory activities.  ComFrame is expected to include standards for group supervision, governance and internal controls, enterprise risk management, and recovery and resolution planning.  Also in connection with ComFrame, the IAIS is in the process of developing a risk-based global insurance capital standard (ICS) applicable to IAIGs.  We currently meet the parameters set forth to define an IAIG.  ComFrame standards are expected to be finalized in 2019, and the IAIS is conducting field testing of ComFrame, including the ICS, ahead of that deadline.  It is expected that the ComFrame and ICS standards finally adopted by the IAIS would be ready for adoption by implementing member jurisdictions beginning in 2020.

Based on the IAIS’ assessment methodology for identifying global systemically important insurers (G-SIIs), the FSB has identified nine G-SIIs, including us. The IAIS intends G-SIIs to be subject to a policy framework that includes recovery and resolution planning, enhanced group-wide supervision, enhanced liquidity and systemic risk management planning; and group-wide capital standards, including higher loss absorbency (HLA) capital. The IAIS’ basic capital requirement (BCR) was endorsed by the FSB in October 2014 and by the G20 countries in November 2014.  The BCR covers all group activities, and we anticipatereport our BCR ratios to supervisory authorities annually on a confidential basis.  The BCR serves as the initial foundation for the application of HLA requirements.  In October 2015, the IAIS announced that it had concluded initial development of the FRBHLA requirements, according to which we reported on a confidential basis to supervisors in 2016.  In February 2017, the IAIS announced the adoption of a three-year systemic risk assessment and policy workplan due to be finalized by year-end 2019. This initiative is comprised of a new macroprudential activities-based approach to regulating systemic risk which will issuebe developed in conjunction with the IAIS’ previously announced work in finalizing ComFrame, including the global insurance capital standard, as well as any improvements to the existing G-SII methodology. Expected revisions to the HLA requirements will occur once the systemic risk assessment and policy workplan have been finalized and adopted. It is not known what effect the removal of AIG’s designation as a notice of proposed rulemakingnonbank SIFI will have on its status as a G-SII or how any standards that might result from the IAIS’ initiatives might be implemented in due course after evaluating all comments received.the U.S. and other jurisdictions around the world, or how they might apply to AIG.

The standards issued by the FSB and/or the IAIS are not binding on the United States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations.  At this time, it is not known how the IAIS’ frameworks and/or standards might be implemented in the United States and other jurisdictions around the world, or how they might apply to us.

Brexit

On June 23, 2016, the UK held a referendum in which a majority voted for the UK to withdraw its membership in the EU, commonly referred to as Brexit. The referendum is advisory, and the terms of withdrawal are subject to a formal negotiation period which as publicly stated bywas initiated on March 29, 2017 through the UK Prime Minister, is expected to be triggered byinvocation of Article 50 of the end of March 2017, andTreaty on European Union. Negotiations on Brexit could, by treaty, last up to two years. It is not clear at this stage (and may not be for some time) what form the UK’s future relationship with the remaining EU member states will take. We have significant operations and employees in the UK and other EU member states, including AIG Europe Ltd. (AEL), which enjoys certain benefits based on the UK’s membership in the EU. DependingIn order to adapt to Brexit, on the final terms of the UK exit,March 8, 2017, we may be requiredannounced plans to reorganize our operations and legal entity structure in the UK and the EU through the establishment of a new European subsidiary in Luxembourg. The reorganization is expected to be completed in the fourth quarter of 2018, subject to regulatory approvals.

Derivatives

Regulation of and restrictions on derivatives markets and transactions have been proposed or adopted outside the United States.  For instance, the EU has also established a mannerset of new regulatory requirements for EU derivatives activities under EMIR. These requirements include, among other things, various risk mitigation, risk management, margin posting and regulatory reporting requirements that have already become effective and clearing requirements that were outlined in EU delegated legislation at the end of 2015 and are phased in over three years. These requirements could be less efficientresult in increased administrative costs with respect to our EU derivatives activities and more expensive. overlapping or inconsistent regulation depending on the ultimate application of cross-border regulatory requirements between and among U.S. and non-U.S. jurisdictions.

In additionWe expect that the domestic and international regulations applicable to us and our regulated entities will continue to evolve for the information set forth in this Quarterly Report onforeseeable future.

AIG | Third Quarter 2017 Form 10-Q our regulatory status is also discussed in Part I, Item 2. MD&A – Regulatory Environment and Part II, Item 1A. Risk Factors in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, Part I, Item 2. MD&A – Regulatory Environment and Part II, Item 1A. Risk Factors in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, and in Part I, Item 1. Business – Regulation, Part I, Item 1A. Risk Factors – Regulation and Note 18 to the Consolidated Financial Statements in the 2015 Annual Report.

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Glossary

Accident year  

Item 2 / 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.

Assets under administrationinclude assets under management and Retail Mutual Funds and Group Retirement mutual fund assets that we sell or administer. Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.

Base SpreadNet 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 AOCIvalue per common share, excluding accumulated other comprehensive income (AOCI) and Book Value Per Common Share Excludingvalue per common share, excluding AOCI and DTAdeferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and are used to show the amount of our net worth on a per-share basis. Book Value Per Common Share, Excludingvalue per common share excluding AOCI is derived by dividing Totaltotal AIG shareholders’ equity, excluding AOCI, by Totaltotal common shares outstanding.Book Value Per Common Share, Excluding AOCI and DTA Adjusted book value per common share is derived by dividing Totaltotal AIG shareholders’ equity, excluding AOCI and DTA (Adjusted Shareholders’ Equity), by Totaltotal 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.

CVACredit Valuation Adjustment  The CVA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. Also, the CVA reflects the fair value movement in AIGFP's asset portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign exchange rates. Finally, the CVA also accounts for our own credit risk in the fair value measurement of all derivative net liability positions and liabilities where AIG has elected the fair value option, when appropriate.

DAC  Deferred Policy Acquisition Costs  Deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business.

DAC Related to Unrealized Appreciation (Depreciation) of InvestmentsAn adjustment to DAC for investment-oriented products, equal to the change in DAC amortization that would have been recorded if fixed maturity and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (also referred to as “shadow DAC”).

AIG | Third Quarter 2017 Form 10-Q180


Deferred Gain on Retroactive ReinsuranceRetroactive 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.

First-Lien  Priority over all other liens or claims on a property in the event of default on a mortgage.

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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.

G-SII  Global Systemically Important Insurer  An insurer that is deemed globally systemically important (that is, of such size, market importance and global interconnectedness that the distress or failure of the insurer would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries) by the Financial Stability Board, in consultation with and based on a methodology developed by the International Association of Insurance Supervisors.

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.

LAELoss Adjustment Expenses  The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs.

Loss Ratio Losses and loss adjustment expenses incurred divided by net premiums earned. Loss adjustment expenses are directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster’s fees and claims department personnelthe portion of general expenses allocated to claim settlement costs.

Life Insurance Companies include the following major operating companies: American General, VALIC and U.S. Life.

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 yearsas a result of the re-estimation of liability for unpaid losses and loss adjustment expensesreserves 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.

LTVLoan-to-Value Ratio  Principal amount of loan amount divided by appraised value of collateral securing the loan.

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 lossesare generally weather or seismic events having a net impact on AIG in excess of $10 million each. Catastrophes also include certain man-made events, such as terrorism and civil disorders that meet 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.

Nonbank SIFINonbank Systemically Important Financial Institutions  Financial institutions are deemed nonbank systemically important (that is, the failure of the financial institution could pose a threat to the financial stability of the United States) by the Financial Stability Oversight Council based on a three-stage analytical process.

Noncontrolling interest  The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.

Operating revenueexcludes Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes).

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.

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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 2017 Form 10-Q181


Premiums and deposits – Institutional MarketsIndividual Retirement, Group Retirement and Life Insurance include direct and assumed amounts received and earned on group benefit policies and life-contingent payout annuities, and deposits received on investment-type annuity contracts, including GICs.

Premiums and deposits – Retirement and – Life include direct and assumed amounts received on traditional life insurance policies and group benefit policies, and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts and mutual funds.

Prior year developmentIncrease (referred to as unfavorable or adverse development orSee Loss reserve strengthening) or decrease (referred to as favorable development) in estimates of losses and loss expenses for prior years that is included in earnings.development.

Property Casualty Insurance Companies include the following major operating companies: National Union; American Home; Lexington; Fuji Fire; American Home Japan; AIG Asia Pacific Insurance, Pte, Ltd.; and AIG Europe Limited.

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 premium  Additional premiums payable to reinsurers to restore coverage limits that have been exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.

Reinsurance  The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.

Rescission  Denial of claims and termination of coverage on loans related to fraudulent or undocumented claims, underwriting guideline violations and other deviations from contractual terms.

Retroactive Reinsurance Seeee Deferred Gain on Retroactive Reinsurance.Reinsurance.

Return on Equityequity – After-tax Operating Income Excluding AOCI and Return on Equity – After-tax Operating Income Excludingoperating income excluding AOCI and DTA (Adjusted Return on Equity)are non-GAAP measures and  areis a non-GAAP measure and is used to show the rate of return on shareholders’ equity. Adjusted Return on Equity – After-tax Operating Income Excluding AOCI is derived by dividing actual or annualized after-tax operating income attributable to AIG by average AIG shareholders’ equity, excluding average AOCI. Adjusted Shareholders’ Equity.

Return on Equity – After-tax Operating Income Excluding AOCI and DTA is derived by dividing actualpremium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or annualized after-tax operating income attributable to AIG by average AIG shareholders’ equity, excluding average AOCI and DTA.an overpayment of an advance premium.

SalvageThe amount that can be recovered by usan insurer for the sale of damaged goods for which oura policyholder has been indemnified (and to which title was transferred to us)transferred).

Second-lien  Subordinate in ranking to the first-lien holder claims on a property in the event of default on a mortgage.

Severe losses Individual non-catastrophe first party losses and surety losses greater than $10 million, net of related reinsurance and salvage and subrogation.  Severe losses include claims related to satellite explosions, plane crashes, and shipwrecks.

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 account value.reserves and Group Retirement mutual fund assets under administration.

Unearned premium reserveLiabilities 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 businessesbusinesses.

AIG | Third Quarter 2017 Form 10-Q.  ��             

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Item 2 / ACRONYMSAcronyms 

 

ACRONYMS

Acronyms

ABS  A&HAsset-Backed Securities Accident and Health Insurance

GMWB  Guaranteed Minimum Withdrawal Benefits

CDO  ABSCollateralized Debt Obligations  Asset-Backed Securities

ISDA  International Swaps and Derivatives Association, Inc.

CDS  CDOCredit Default Swap  Collateralized Debt Obligations

Moody's Moody's Investors’ Service Inc.

CMA  CDSCapital Maintenance Agreement  Credit Default Swap

NAIC  National Association of Insurance Commissioners

CMBS  CMACommercial Mortgage-Backed Securities  Capital Maintenance Agreement

NM  Not Meaningful

FASB  CMBS  Commercial Mortgage-Backed Securities

OTC Over-the-Counter

EGPs  Estimated gross profits

OTTI  Other-Than-Temporary Impairment

FASBFinancial Accounting Standards Board

RMBS  Residential Mortgage-Backed Securities

FRBNYFederal Reserve Bank of New York

S&P  Standard & Poor’s Financial Services LLC

GAAPAccounting principles generally accepted in the United States of America

SEC  Securities and Exchange Commission

GMAB  GMDBGuaranteed Minimum AccumulationDeath Benefits

URR  Unearned revenue reserve

GMIB  Guaranteed Minimum Income Benefits

VIE  Variable Interest Entity

GMIB  Guaranteed Minimum Income Benefits

 

 

 

 

 

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TABLE OF CONTENTS 

ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk

 

ItemITEM 3 /| Quantitative and Qualitative Disclosures About Market Risk 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. /ITEM 4 | 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 AIG’s management, with the participation of AIG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of AIG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, AIG’s Chief Executive Officer and Chief Financial Officer have concluded that AIG’s disclosure controls and procedures were effective as of September 30, 2016.2017.

There has been no change in AIG’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2016,2017, that has materially affected, or is reasonably likely to materially affect, AIG’s internal control over financial reporting.

206AIG | Third Quarter 2017 Form 10-Q184


PARTPart II – OTHER INFORMATIONOther Information

ItemITEM 1 /| Legal Proceedings

For a discussion of legal proceedings see Note 1011 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 1A | Risk Factors

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 II, Item 1A. Risk Factors in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2016 and June 30, 2016 and in Part I, Item 1A. Risk Factors in our 20152016 Annual Report.

ITEM 2 /| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds

The following table provides the information with respect to purchases made by or on behalf of AIG or any “affiliated purchaser” (as defined in Rule 10b‑18(a)(3) under the Securities Exchange Act of 1934) of AIG Common Stock and warrants to purchase AIG Common Stock during the three months ended September 30, 2016:2017:

 

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

12,031,023

$

53.03

12,031,023

 

$

1,160

 

August 1 - 31

8,549,810

 

57.21

8,549,810

 

 

3,671

 

September 1 - 30

19,256,816

 

58.71

19,256,816

 

 

2,409

 

Total*

 39,837,649  

$

56.67

39,837,649

 

$

2,409

 

 

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

-

$

-

-

 

$

2,540

 

August 1 – 31(a)

 3,255,000  

 

60.59

3,255,000

 

 

2,341

(b)

September 1 – 30(a)

 1,290,000  

 

60.22

1,290,000

 

 

2,241

(b)

Total(c)

 4,545,000  

$

60.49

4,545,000

 

$

2,241

 

*(a)  During the August 1-31 period, we also repurchased 115,000 warrants to purchase shares of AIG Common Stock, at an average purchase price per warrant of $18.43, for an aggregate purchase price of $2 million. During the September 1-30 period, we also repurchased 70,000 warrants to purchase shares of AIG Common Stock, at an average purchase price per warrant of $18.24, for an aggregate purchase price of $1 million.

(b)  Reflects the purchase of 115,000 and 70,000 warrants to purchase shares of AIG Common Stock in the August 1-31 and September 1-30 periods, respectively, which reduced the dollar value of the remaining repurchase authorization.

(c)  On November 2, 2016,May 3, 2017, our Board of Directors authorized an additional increase of $2.5 billion to the share repurchase authorizationauthorization.  As of AIG Common Stock of $3.0November 2, 2017, approximately $2.2 billion resulting in an aggregate remaining authorization on such date of approximately $4.4 billion.remained under the authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).  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, including the regulatory framework applicable to us.

During the three-month period ended September 30, 2016,2017, we repurchased approximately 405 million shares of AIG Common Stock under this authorization for an aggregate purchase price of approximately $2.3 billion.  Pursuant$275 million. We also repurchased 185,000 warrants to Exchange Act Rule 10b5-1 plans, from October 1 to November 2, 2016, we have repurchased approximately $946 million of additionalpurchase shares of AIG Common Stock.Stock during the three-monthperiod ended September  30, 2017 for an aggregate purchase price of $3 million.

 

ItemITEM 4 /| Mine Safety Disclosures

Not applicable.

Item 6 / Exhibits 

See accompanying Exhibit Index.

Not applicable.

 

207AIG | Third Quarter 2017 Form 10-Q185


ITEM 6 | Exhibits 

SIGNATURESExhibit Index

Exhibit
Number

Description

Location

10

(1) Letter Agreement, dated July 3, 2017, between American International Group, Inc. and Peter Zaffino*

Incorporated by reference to Exhibit 10.1 to AIG’s Current Report on Form 8-K filed with the SEC on July 6, 2017 (File No. 1-8787).

(2) Non-Solicitation and Non-Disclosure Agreement, dated July 5, 2017, between American International Group, Inc. and Peter Zaffino*

Incorporated by reference to Exhibit 10.1 to AIG’s Current Report on Form 8-K filed with the SEC on July 6, 2017 (File No. 1-8787).

(3) Form of Stock Option Award Agreement, between American International Group, Inc. and Peter Zaffino*

Incorporated by reference to Exhibit 10.2 to AIG’s Current Report on Form 8-K filed with the SEC on July 6, 2017 (File No. 1-8787).

(4) Letter Agreement, dated June 28, 2017, between American International Group, Inc. and Seraina Macia*

Incorporated by reference to Exhibit 10.1 to AIG’s Current Report on Form 8-K filed with the SEC on July 18, 2017 (File No. 1-8787).

(5) Non-Solicitation and Non-Disclosure Agreement, dated July 12, 2017, between American International Group, Inc. and Seraina Macia*

Incorporated by reference to Exhibit 10.2 to AIG’s Current Report on Form 8-K filed with the SEC on July 18, 2017 (File No. 1-8787).

11

Statement re: Computation of Per Share Earnings

Included in Note 13 to the Condensed Consolidated Financial Statements.

12

Computation of Ratios of Earnings to Fixed Charges

Filed herewith.

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: (i) the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016, (iii) the Condensed Consolidated Statements of Equity for the nine months ended September 30, 2017 and 2016, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, (v) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 and (vi) the Notes to the Condensed Consolidated Financial Statements

Filed herewith.

*    This exhibit is a management contract or a compensatory plan or 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.

AIG | Third Quarter 2017 Form 10-Q186


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/ SIDDHARTHA SANKARAN

 

Siddhartha Sankaran

 

Executive Vice President

 

Chief Financial Officer

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

/S/ ELIAS F. HABAYEB

 

Elias F. Habayeb

 

Senior Vice President,

 

Deputy Chief Financial Officer and

 

Group Controller

 

(Principal Accounting Officer)

 

 

 

Dated: November 3, 20162017

 

208AIG | Third Quarter 2017 Form 10-Q187


EXHIBIT INDEX

Exhibit
Number

Description

Location

10

(1) American International Group, Inc. 2012 Executive Severance Plan (as amended)*

Incorporated by reference to Exhibit 10.1 to AIG’s Quarterly Report on Form 10-Q filed with the SEC on August 2, 2016 (File No. 1-8787).

(2) Amendment Letter to the Third Amended and Restated Credit Agreement, effective as of July 15, 2016, among AIG, the

subsidiary borrowers party thereto, the lenders party

thereto, JPMorgan Chase Bank, N.A., as Administrative

Agent, and each Several L/C Agent party thereto

Incorporated by reference to Exhibit 10.1 to AIG's Current Report on Form 8-K filed with the SEC on July 15, 2016 (File No. 1-8787).

(3) Stock Purchase Agreement dated as of August 15, 2016 between American International Group, Inc. and Arch Capital Group Ltd.

Incorporated by reference to Exhibit 2.1 to AIG’s Current Report on Form 8-K filed with the SEC on August 16, 2016 (File No. 1-8787).

11

Statement re: Computation of Per Share Earnings

Included in Note 13 to the Condensed Consolidated Financial Statements.

12

Computation of Ratios of Earnings to Fixed Charges

Filed herewith.

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: (i) the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015, (iii) the Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2016 and 2015, (iv) the Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2016 and 2015, (v) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 and (vi) the Notes to the Condensed Consolidated Financial Statements.

Filed herewith.

*    This exhibit is a management contract or a compensatory plan or 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.

209