UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, |
OR |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number 1-8787 |
American International Group, Inc. (Exact name of registrant as specified in its charter) |
Delaware | 13-2592361 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
175 Water Street, New York, New York | 10038 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 770-7000
________________
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, Par Value $2.50 Per Share | AIG | New York Stock Exchange |
Warrants (expiring January 19, 2021) | AIG WS | New York Stock Exchange |
5.75% Series A-2 Junior Subordinated Debentures | AIG 67BP | New York Stock Exchange |
4.875% Series A-3 Junior Subordinated Debentures | AIG 67EU | New York Stock Exchange |
Stock Purchase Rights | New York Stock Exchange | |
Depositary Shares Each Representing a 1/1,000th Interest in a Share of Series A 5.85% Non-Cumulative Perpetual Preferred Stock | AIG PRA | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☑ | Accelerated filer ☐ | |||
Non-accelerated filer ☐ |
| Smaller reporting company ☐ | ||
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☑
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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As of May 2, 2019,April 30, 2020, there were 869,753,584861,290,649 shares outstanding of the registrant’s common stock.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
March 31, 2019
Table of Contents
FORM 10-Q | ||||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
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AIG | First Quarter 20192020 Form 10-Q1
Part I – Financial Information
Item 1. |FinancialFinancial Statements
American International Group, Inc.
Condensed Consolidated Balance Sheets (unaudited)
| March 31, | December 31, | ||
(in millions, except for share data) |
| 2020 |
| 2019 |
Assets: |
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Investments: |
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Fixed maturity securities: |
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Bonds available for sale, at fair value (net of allowance for credit losses of $211 in 2020) |
|
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(amortized cost: 2020 - $234,586; 2019 - $233,230) | $ | 241,776 | $ | 251,086 |
Other bond securities, at fair value (See Note 6) |
| 5,353 |
| 6,682 |
Equity securities, at fair value (See Note 6) |
| 624 |
| 841 |
Mortgage and other loans receivable, net of allowance for credit losses of $787 in 2020 and $438 in 2019 |
| 46,844 |
| 46,984 |
Other invested assets (portion measured at fair value: 2020 - $6,576; 2019 - $6,827) |
| 17,966 |
| 18,792 |
Short-term investments, including restricted cash of $324 in 2020 and $188 in 2019 |
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(portion measured at fair value: 2020 - $8,186; 2019 - $5,343) |
| 19,773 |
| 13,230 |
Total investments |
| 332,336 |
| 337,615 |
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Cash |
| 2,738 |
| 2,856 |
Accrued investment income |
| 2,312 |
| 2,334 |
Premiums and other receivables, net of allowance for credit losses and disputes of $210 in 2020 and $178 in 2019 |
| 12,072 |
| 10,274 |
Reinsurance assets, net of allowance for credit losses and disputes of $310 in 2020 and $151 in 2019 |
| 39,927 |
| 37,977 |
Deferred income taxes |
| 13,975 |
| 13,146 |
Deferred policy acquisition costs |
| 11,889 |
| 11,207 |
Other assets, net of allowance for credit losses of $52 in 2020, including restricted cash of $257 in 2020 and $243 in 2019 |
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(portion measured at fair value: 2020 - $3,311; 2019 - $3,151) |
| 16,392 |
| 16,383 |
Separate account assets, at fair value |
| 78,836 |
| 93,272 |
Total assets | $ | 510,477 | $ | 525,064 |
Liabilities: |
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Liability for unpaid losses and loss adjustment expenses, net of allowance for credit losses of $14 in 2020 | $ | 77,747 | $ | 78,328 |
Unearned premiums |
| 20,128 |
| 18,269 |
Future policy benefits for life and accident and health insurance contracts |
| 49,803 |
| 50,512 |
Policyholder contract deposits (portion measured at fair value: 2020 - $8,153; 2019 - $6,910) |
| 154,067 |
| 151,869 |
Other policyholder funds |
| 3,460 |
| 3,428 |
Other liabilities (portion measured at fair value: 2020 - $637; 2019 - $1,100) |
| 29,183 |
| 26,609 |
Long-term debt (portion measured at fair value: 2020 - $2,276; 2019 - $2,062) |
| 25,268 |
| 25,479 |
Debt of consolidated investment entities |
| 10,142 |
| 9,871 |
Separate account liabilities |
| 78,836 |
| 93,272 |
Total liabilities |
| 448,634 |
| 457,637 |
Contingencies, commitments and guarantees (See Note 11) |
| nil |
| nil |
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AIG shareholders’ equity: |
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Series A Non-cumulative preferred stock and additional paid in capital, $5.00 par value; 100,000,000 shares |
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authorized; shares issued: 2020 - 20,000 and 2019 - 20,000; liquidation preference $500 |
| 485 |
| 485 |
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2020 - 1,906,671,492 and |
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2019 - 1,906,671,492 |
| 4,766 |
| 4,766 |
Treasury stock, at cost; 2020 - 1,045,380,884 shares; 2019 - 1,036,672,461 shares of common stock |
| (49,334) |
| (48,987) |
Additional paid-in capital |
| 81,188 |
| 81,345 |
Retained earnings |
| 24,062 |
| 23,084 |
Accumulated other comprehensive income (loss) |
| (994) |
| 4,982 |
Total AIG shareholders’ equity |
| 60,173 |
| 65,675 |
Non-redeemable noncontrolling interests |
| 1,670 |
| 1,752 |
Total equity |
| 61,843 |
| 67,427 |
Total liabilities and equity | $ | 510,477 | $ | 525,064 |
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See accompanying Notes to Condensed Consolidated Financial Statements. |
| March 31, | December 31, | ||
(in millions, except for share data) |
| 2019 |
| 2018 |
Assets: |
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Investments: |
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Fixed maturity securities: |
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Bonds available for sale, at fair value (amortized cost: 2019 - $228,608; 2018 - $225,780) | $ | 238,201 | $ | 229,391 |
Other bond securities, at fair value (See Note 6) |
| 11,511 |
| 11,415 |
Equity Securities, at fair value (See Note 6) |
| 841 |
| 1,253 |
Mortgage and other loans receivable, net of allowance |
| 43,834 |
| 43,135 |
Other invested assets (portion measured at fair value: 2019 - $5,759; 2018 - $5,894) |
| 19,343 |
| 19,341 |
Short-term investments, including restricted cash of $251 in 2019 and $142 in 2018 |
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(portion measured at fair value: 2019 - $4,040; 2018 - $3,015) |
| 11,133 |
| 9,674 |
Total investments |
| 324,863 |
| 314,209 |
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Cash |
| 2,565 |
| 2,873 |
Accrued investment income |
| 2,482 |
| 2,389 |
Premiums and other receivables, net of allowance |
| 12,655 |
| 11,011 |
Reinsurance assets, net of allowance |
| 40,558 |
| 38,172 |
Deferred income taxes |
| 14,545 |
| 15,221 |
Deferred policy acquisition costs |
| 12,128 |
| 12,694 |
Other assets, including restricted cash of $363 in 2019 and $343 in 2018 |
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(portion measured at fair value: 2019 - $951; 2018 - $973) |
| 14,308 |
| 13,568 |
Separate account assets, at fair value |
| 88,818 |
| 81,847 |
Total assets | $ | 512,922 | $ | 491,984 |
Liabilities: |
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Liability for unpaid losses and loss adjustment expenses | $ | 82,496 | $ | 83,639 |
Unearned premiums |
| 20,812 |
| 19,248 |
Future policy benefits for life and accident and health insurance contracts |
| 46,508 |
| 44,935 |
Policyholder contract deposits (portion measured at fair value: 2019 - $4,878; 2018 - $4,116) |
| 145,380 |
| 142,262 |
Other policyholder funds |
| 3,493 |
| 3,568 |
Other liabilities (portion measured at fair value: 2019 - $1,421; 2018 - $1,265) |
| 27,546 |
| 24,636 |
Long-term debt (portion measured at fair value: 2019 - $2,263; 2018 - $2,213) |
| 35,776 |
| 34,540 |
Separate account liabilities |
| 88,818 |
| 81,847 |
Total liabilities |
| 450,829 |
| 434,675 |
Contingencies, commitments and guarantees (See Note 11) |
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AIG shareholders’ equity: |
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Series A Non-cumulative preferred stock and additional paid in capital, $5.00 par value; 100,000,000 shares |
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authorized; shares issued: 2019 - 20,000 and 2018 - 0; liquidation preference $500 |
| 485 |
| - |
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2019 - 1,906,671,492 and |
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2018 - 1,906,671,492 |
| 4,766 |
| 4,766 |
Treasury stock, at cost; 2019 - 1,036,934,591 shares; 2018 - 1,040,062,063 shares of common stock |
| (48,999) |
| (49,144) |
Additional paid-in capital |
| 81,148 |
| 81,268 |
Retained earnings |
| 21,259 |
| 20,884 |
Accumulated other comprehensive income (loss) |
| 2,128 |
| (1,413) |
Total AIG shareholders’ equity |
| 60,787 |
| 56,361 |
Non-redeemable noncontrolling interests |
| 1,306 |
| 948 |
Total equity |
| 62,093 |
| 57,309 |
Total liabilities and equity | $ | 512,922 | $ | 491,984 |
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See accompanying Notes to Condensed Consolidated Financial Statements. |
2AIG | First Quarter 20192020 Form 10-Q
American International Group, Inc.
Condensed Consolidated Statements of Income (unaudited)
| Three Months Ended March 31, | ||||
(dollars in millions, except per common share data) |
| 2020 |
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| 2019 |
Revenues: |
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Premiums | $ | 7,443 |
| $ | 8,070 |
Policy fees |
| 755 |
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| 735 |
Net investment income |
| 2,508 |
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| 3,879 |
Net realized capital gains (losses) |
| 3,519 |
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| (446) |
Other income |
| 218 |
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| 218 |
Total revenues |
| 14,443 |
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| 12,456 |
Benefits, losses and expenses: |
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Policyholder benefits and losses incurred |
| 6,325 |
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| 6,679 |
Interest credited to policyholder account balances |
| 957 |
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| 940 |
Amortization of deferred policy acquisition costs |
| 1,862 |
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| 1,289 |
General operating and other expenses |
| 2,153 |
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| 2,053 |
Interest expense |
| 355 |
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| 349 |
(Gain) loss on extinguishment of debt |
| 17 |
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| (2) |
Net (gain) loss on sale or disposal of divested businesses |
| 216 |
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| (6) |
Total benefits, losses and expenses |
| 11,885 |
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| 11,302 |
Income from continuing operations before income tax expense |
| 2,558 |
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| 1,154 |
Income tax expense |
| 904 |
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| 217 |
Income from continuing operations |
| 1,654 |
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| 937 |
Income (loss) from discontinued operations, net of income taxes |
| - |
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| - |
Net income |
| 1,654 |
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| 937 |
Less: |
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Net income (loss) from continuing operations attributable to noncontrolling interests |
| (95) |
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| 283 |
Net income attributable to AIG |
| 1,749 |
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| 654 |
Less: Dividends on preferred stock |
| 7 |
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| - |
Net income attributable to AIG common shareholders | $ | 1,742 |
| $ | 654 |
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Income per common share attributable to AIG common shareholders: |
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Basic: |
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Income from continuing operations | $ | 1.99 |
| $ | 0.75 |
Income from discontinued operations | $ | - |
| $ | - |
Net income attributable to AIG common shareholders | $ | 1.99 |
| $ | 0.75 |
Diluted: |
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Income from continuing operations | $ | 1.98 |
| $ | 0.75 |
Income from discontinued operations | $ | - |
| $ | - |
Net income attributable to AIG common shareholders | $ | 1.98 |
| $ | 0.75 |
Weighted average shares outstanding: |
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Basic |
| 874,213,630 |
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| 875,383,084 |
Diluted |
| 878,866,213 |
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| 877,512,244 |
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See accompanying Notes to Condensed Consolidated Financial Statements. |
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| Three Months Ended March 31, | ||||
(dollars in millions, except per share data) |
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| 2019 |
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| 2018 |
Revenues: |
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Premiums |
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| $ | 8,070 |
| $ | 7,275 |
Policy fees |
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| 735 |
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| 764 |
Net investment income |
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| 3,879 |
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| 3,261 |
Net realized capital losses: |
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Total other-than-temporary impairments on available for sale securities |
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| (80) |
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| (75) |
Portion of other-than-temporary impairments on available for sale |
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fixed maturity securities recognized in Other comprehensive income (loss) |
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| (3) |
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| (12) |
Net other-than-temporary impairments on available for sale |
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securities recognized in net income |
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| (83) |
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| (87) |
Other realized capital gains (losses) |
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| (363) |
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| 68 |
Total net realized capital losses |
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| (446) |
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| (19) |
Other income |
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| 218 |
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| 431 |
Total revenues |
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| 12,456 |
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| 11,712 |
Benefits, losses and expenses: |
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Policyholder benefits and losses incurred |
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| 6,679 |
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| 5,667 |
Interest credited to policyholder account balances |
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| 940 |
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| 916 |
Amortization of deferred policy acquisition costs |
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| 1,289 |
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| 1,358 |
General operating and other expenses |
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| 2,053 |
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| 2,271 |
Interest expense |
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| 349 |
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| 277 |
(Gain) loss on extinguishment of debt |
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| (2) |
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| 4 |
Net gain on sale of divested businesses |
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| (6) |
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| (8) |
Total benefits, losses and expenses |
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| 11,302 |
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| 10,485 |
Income from continuing operations before income tax expense |
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| 1,154 |
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| 1,227 | |||
Income tax expense |
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| 217 |
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| 277 |
Income from continuing operations |
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| 937 |
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| 950 |
Loss from discontinued operations, net of income tax expense |
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| - |
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| (1) |
Net income |
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| 937 |
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| 949 |
Less: |
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Net income from continuing operations attributable to |
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noncontrolling interests |
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| 283 |
|
| 11 |
Net income attributable to AIG |
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| $ | 654 |
| $ | 938 |
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Income per common share attributable to AIG: |
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Basic: |
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Income from continuing operations |
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| $ | 0.75 |
| $ | 1.03 |
Income from discontinued operations |
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| $ | - |
| $ | - |
Net income attributable to AIG |
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| $ | 0.75 |
| $ | 1.03 |
Diluted: |
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Income from continuing operations |
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| $ | 0.75 |
| $ | 1.01 |
Income from discontinued operations |
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| $ | - |
| $ | - |
Net income attributable to AIG |
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| $ | 0.75 |
| $ | 1.01 |
Weighted average shares outstanding: |
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Basic |
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| 875,383,084 |
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| 907,951,597 |
Diluted |
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| 877,512,244 |
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| 925,266,577 |
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See accompanying Notes to Condensed Consolidated Financial Statements. |
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AIG | First Quarter 20192020 Form 10-Q3
American International Group, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)
| Three Months Ended March 31, | ||||
(in millions) |
| 2020 |
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| 2019 |
Net income | $ | 1,654 |
| $ | 937 |
Other comprehensive income (loss), net of tax |
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Change in unrealized appreciation (depreciation) of fixed maturity securities on which |
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allowance for credit losses were taken |
| (359) |
|
| - |
Change in unrealized appreciation of fixed maturity securities on which |
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other-than-temporary credit impairments were taken |
| - |
|
| 676 |
Change in unrealized appreciation (depreciation) of all other investments |
| (5,542) |
|
| 2,708 |
Change in foreign currency translation adjustments |
| (85) |
|
| 164 |
Change in retirement plan liabilities adjustment |
| (7) |
|
| (1) |
Change in fair value of liabilities under fair value option attributable to changes in own credit risk |
| 3 |
|
| - |
Other comprehensive income (loss) |
| (5,990) |
|
| 3,547 |
Comprehensive income (loss) |
| (4,336) |
|
| 4,484 |
Comprehensive income (loss) attributable to noncontrolling interests |
| (109) |
|
| 289 |
Comprehensive income (loss) attributable to AIG | $ | (4,227) |
| $ | 4,195 |
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See accompanying Notes to Condensed Consolidated Financial Statements. |
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| Three Months Ended March 31, | ||||
(in millions) |
| 2019 |
|
| 2018 |
Net income | $ | 937 |
| $ | 949 |
Other comprehensive income (loss), net of tax |
|
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|
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Change in unrealized appreciation (depreciation) of fixed maturity securities on which |
|
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|
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other-than-temporary credit impairments were taken |
| 676 |
|
| (150) |
Change in unrealized appreciation (depreciation) of all other investments |
| 2,708 |
|
| (2,708) |
Change in foreign currency translation adjustments |
| 164 |
|
| 158 |
Change in retirement plan liabilities adjustment |
| (1) |
|
| 29 |
Change in fair value of liabilities under fair value option attributable to changes in own credit risk |
| - |
|
| 2 |
Other comprehensive income (loss) |
| 3,547 |
|
| (2,669) |
Comprehensive income (loss) |
| 4,484 |
|
| (1,720) |
Comprehensive income attributable to noncontrolling interests |
| 289 |
|
| 11 |
Comprehensive income (loss) attributable to AIG | $ | 4,195 |
| $ | (1,731) |
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements. |
|
|
|
|
|
4AIG | First Quarter 20192020 Form 10-Q
American International Group, Inc.
Condensed Consolidated Statements of Equity (unaudited)
|
| Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
| Non- |
|
|
| Stock and |
|
|
|
|
|
|
|
|
| Accumulated |
| Total AIG |
| redeemable |
|
| |
| Additional |
|
|
|
|
| Additional |
|
|
| Other |
| Share- |
| Non- |
|
| |
|
| Paid-in |
| Common |
| Treasury |
| Paid-in |
| Retained | Comprehensive |
| holders' |
| controlling |
| Total | |
(in millions) |
| Capital |
| Stock |
| Stock |
| Capital |
| Earnings | Income (Loss) |
| Equity |
| Interests |
| Equity | |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year | $ | - | $ | 4,766 | $ | (49,144) | $ | 81,268 | $ | 20,884 | $ | (1,413) | $ | 56,361 | $ | 948 | $ | 57,309 |
Preferred stock issued |
| 485 |
| - |
| - |
| - |
| - |
| - |
| 485 |
| - |
| 485 |
Common stock issued under stock plans |
| - |
| - |
| 145 |
| (222) |
| - |
| - |
| (77) |
| - |
| (77) |
Purchase of common stock |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Net income attributable to AIG or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| - |
| 654 |
| - |
| 654 |
| 283 |
| 937 |
Dividends |
| - |
| - |
| - |
| - |
| (278) |
| - |
| (278) |
| - |
| (278) |
Other comprehensive income |
| - |
| - |
| - |
| - |
| - |
| 3,541 |
| 3,541 |
| 6 |
| 3,547 |
Current and deferred income taxes |
| - |
| - |
| - |
| (1) |
| - |
| - |
| (1) |
| - |
| (1) |
Net increase due to acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and consolidations |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 108 |
| 108 |
Contributions from noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 12 |
| 12 |
Distributions to noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| (59) |
| (59) |
Other |
| - |
| - |
| - |
| 103 |
| (1) |
| - |
| 102 |
| 8 |
| 110 |
Balance, end of period | $ | 485 | $ | 4,766 | $ | (48,999) | $ | 81,148 | $ | 21,259 | $ | 2,128 | $ | 60,787 | $ | 1,306 | $ | 62,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year | $ | - | $ | 4,766 | $ | (47,595) | $ | 81,078 | $ | 21,457 | $ | 5,465 | $ | 65,171 | $ | 537 | $ | 65,708 |
Cumulative effect of change in accounting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
principle, net of tax |
| - |
| - |
| - |
| - |
| 568 |
| (576) |
| (8) |
| - |
| (8) |
Common stock issued under stock plans |
| - |
| - |
| 186 |
| (336) |
| - |
| - |
| (150) |
| - |
| (150) |
Purchase of common stock |
| - |
| - |
| (298) |
| - |
| - |
| - |
| (298) |
| - |
| (298) |
Net income attributable to AIG or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| - |
| 938 |
| - |
| 938 |
| 11 |
| 949 |
Dividends |
| - |
| - |
| - |
| - |
| (289) |
| - |
| (289) |
| - |
| (289) |
Other comprehensive income (loss) |
| - |
| - |
| - |
| - |
| - |
| (2,669) |
| (2,669) |
| - |
| (2,669) |
Net increase due to acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and consolidations |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 36 |
| 36 |
Contributions from noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 10 |
| 10 |
Distributions to noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| (25) |
| (25) |
Other |
| - |
| - |
| 1 |
| 99 |
| (3) |
| - |
| 97 |
| (4) |
| 93 |
Balance, end of period | $ | - | $ | 4,766 | $ | (47,706) | $ | 80,841 | $ | 22,671 | $ | 2,220 | $ | 62,792 | $ | 565 | $ | 63,357 |
|
| Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
| Non- |
|
|
| Stock and |
|
|
|
|
|
|
|
|
| Accumulated |
| Total AIG |
| redeemable |
|
| |
| Additional |
|
|
|
|
| Additional |
|
|
| Other |
| Share- |
| Non- |
|
| |
|
| Paid-in |
| Common |
| Treasury |
| Paid-in |
| Retained | Comprehensive |
| holders' |
| controlling |
| Total | |
(in millions) |
| Capital |
| Stock |
| Stock |
| Capital |
| Earnings | Income (Loss) |
| Equity |
| Interests |
| Equity | |
Three Months Ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year | $ | 485 | $ | 4,766 | $ | (48,987) | $ | 81,345 | $ | 23,084 | $ | 4,982 | $ | 65,675 | $ | 1,752 | $ | 67,427 |
Cumulative effect of change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting principle, net of tax |
| - |
| - |
| - |
| - |
| (487) |
| - |
| (487) |
| - |
| (487) |
Preferred stock issued |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Common stock issued under stock plans |
| - |
| - |
| 160 |
| (255) |
| - |
| - |
| (95) |
| - |
| (95) |
Purchase of common stock |
| - |
| - |
| (500) |
| - |
| - |
| - |
| (500) |
| - |
| (500) |
Net income (loss) attributable to AIG or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| - |
| 1,749 |
| - |
| 1,749 |
| (95) |
| 1,654 |
Dividends on preferred stock |
| - |
| - |
| - |
| - |
| (7) |
| - |
| (7) |
| - |
| (7) |
Dividends on common stock |
| - |
| - |
| - |
| - |
| (276) |
| - |
| (276) |
| - |
| (276) |
Other comprehensive loss |
| - |
| - |
| - |
| - |
| - |
| (5,976) |
| (5,976) |
| (14) |
| (5,990) |
Net increase due to acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and consolidations |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 48 |
| 48 |
Contributions from noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 1 |
| 1 |
Distributions to noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| (22) |
| (22) |
Other |
| - |
| - |
| (7) |
| 98 |
| (1) |
| - |
| 90 |
| - |
| 90 |
Balance, end of period | $ | 485 | $ | 4,766 | $ | (49,334) | $ | 81,188 | $ | 24,062 | $ | (994) | $ | 60,173 | $ | 1,670 | $ | 61,843 |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year | $ | - | $ | 4,766 | $ | (49,144) | $ | 81,268 | $ | 20,884 | $ | (1,413) | $ | 56,361 | $ | 948 | $ | 57,309 |
Preferred stock issued |
| 485 |
| - |
| - |
| - |
| - |
| - |
| 485 |
| - |
| 485 |
Common stock issued under stock plans |
| - |
| - |
| 145 |
| (222) |
| - |
| - |
| (77) |
| - |
| (77) |
Purchase of common stock |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Net income attributable to AIG or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| - |
| 654 |
| - |
| 654 |
| 283 |
| 937 |
Dividends on preferred stock |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Dividends on common stock |
| - |
| - |
| - |
| - |
| (278) |
| - |
| (278) |
| - |
| (278) |
Other comprehensive income |
| - |
| - |
| - |
| - |
| - |
| 3,541 |
| 3,541 |
| 6 |
| 3,547 |
Current and deferred income taxes |
| - |
| - |
| - |
| (1) |
| - |
| - |
| (1) |
| - |
| (1) |
Net increase due to acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and consolidations |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 108 |
| 108 |
Contributions from noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 12 |
| 12 |
Distributions to noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| (59) |
| (59) |
Other |
| - |
| - |
| - |
| 103 |
| (1) |
| - |
| 102 |
| 8 |
| 110 |
Balance, end of period | $ | 485 | $ | 4,766 | $ | (48,999) | $ | 81,148 | $ | 21,259 | $ | 2,128 | $ | 60,787 | $ | 1,306 | $ | 62,093 |
See accompanying Notes to Condensed Consolidated Financial Statements.
AIG | First Quarter 20192020 Form 10-Q5
American International Group, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
| Three Months Ended March 31, | |||
(in millions) |
| 2020 |
| 2019 |
Cash flows from operating activities: |
|
|
|
|
Net income | $ | 1,654 | $ | 937 |
(Income) loss from discontinued operations |
| - |
| - |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
Noncash revenues, expenses, gains and losses included in income: |
|
|
|
|
Net gains on sales of securities available for sale and other assets |
| (265) |
| (22) |
Net (gain) loss on sale or disposal of divested businesses |
| 216 |
| (6) |
(Gains) losses on extinguishment of debt |
| 17 |
| (2) |
Unrealized (gains) losses in earnings - net |
| (2,549) |
| 367 |
Equity in (income) loss from equity method investments, net of dividends or distributions |
| 167 |
| (83) |
Depreciation and other amortization |
| 1,878 |
| 1,299 |
Impairments of assets |
| 25 |
| 125 |
Changes in operating assets and liabilities: |
|
|
|
|
Insurance reserves |
| 1,651 |
| 596 |
Premiums and other receivables and payables - net |
| (62) |
| 315 |
Reinsurance assets and funds held under reinsurance treaties |
| (2,131) |
| (2,495) |
Capitalization of deferred policy acquisition costs |
| (1,379) |
| (1,420) |
Current and deferred income taxes - net |
| 842 |
| 167 |
Other, net |
| (78) |
| (754) |
Total adjustments |
| (1,668) |
| (1,913) |
Net cash used in operating activities |
| (14) |
| (976) |
Cash flows from investing activities: |
|
|
|
|
Proceeds from (payments for) |
|
|
|
|
Sales or distributions of: |
|
|
|
|
Available for sale securities |
| 7,040 |
| 6,370 |
Other securities |
| 1,577 |
| 1,034 |
Other invested assets |
| 1,447 |
| 1,118 |
Maturities of fixed maturity securities available for sale |
| 6,768 |
| 4,957 |
Principal payments received on and sales of mortgage and other loans receivable |
| 1,014 |
| 861 |
Purchases of: |
|
|
|
|
Available for sale securities |
| (15,121) |
| (12,757) |
Other securities |
| (317) |
| (287) |
Other invested assets |
| (717) |
| (567) |
Mortgage and other loans receivable |
| (1,733) |
| (1,504) |
Net change in short-term investments |
| (6,023) |
| (1,221) |
Other, net |
| 5,432 |
| 17 |
Net cash used in investing activities |
| (633) |
| (1,979) |
Cash flows from financing activities: |
|
|
|
|
Proceeds from (payments for) |
|
|
|
|
Policyholder contract deposits |
| 4,979 |
| 5,629 |
Policyholder contract withdrawals |
| (4,337) |
| (4,195) |
Issuance of long-term debt and debt of consolidated investment entities |
| 673 |
| 1,449 |
Repayments of long-term debt and debt of consolidated investment entities |
| (884) |
| (589) |
Borrowings under syndicated credit facility |
| 1,300 |
| - |
Issuance of preferred stock, net of issuance costs |
| - |
| 485 |
Purchase of common stock |
| (500) |
| - |
Dividends paid on preferred stock |
| (7) |
| - |
Dividends paid on common stock |
| (276) |
| (278) |
Other, net |
| (288) |
| 263 |
Net cash provided by financing activities |
| 660 |
| 2,764 |
Effect of exchange rate changes on cash and restricted cash |
| 10 |
| 12 |
Net increase (decrease) in cash and restricted cash |
| 23 |
| (179) |
Cash and restricted cash at beginning of year |
| 3,287 |
| 3,358 |
Change in cash of businesses held for sale |
| 9 |
| - |
Cash and restricted cash at end of period | $ | 3,319 | $ | 3,179 |
| Three Months Ended March 31, | |||
(in millions) |
| 2019 |
| 2018 |
Cash flows from operating activities: |
|
|
|
|
Net income | $ | 937 | $ | 949 |
Loss from discontinued operations |
| - |
| 1 |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
Noncash revenues, expenses, gains and losses included in income: |
|
|
|
|
Net gains on sales of securities available for sale and other assets |
| (22) |
| (120) |
Net gain on sale of divested businesses |
| (6) |
| (8) |
(Gains) losses on extinguishment of debt |
| (2) |
| 4 |
Unrealized losses in earnings - net |
| 367 |
| 268 |
Equity in income from equity method investments, net of dividends or distributions |
| (83) |
| (86) |
Depreciation and other amortization |
| 1,299 |
| 1,382 |
Impairments of assets |
| 125 |
| 105 |
Changes in operating assets and liabilities: |
|
|
|
|
Insurance reserves |
| 596 |
| 137 |
Premiums and other receivables and payables - net |
| 315 |
| 400 |
Reinsurance assets and funds held under reinsurance treaties |
| (2,495) |
| (1,706) |
Capitalization of deferred policy acquisition costs |
| (1,420) |
| (1,397) |
Current and deferred income taxes - net |
| 167 |
| 250 |
Other, net |
| (754) |
| (1,117) |
Total adjustments |
| (1,913) |
| (1,888) |
Net cash used in operating activities |
| (976) |
| (938) |
Cash flows from investing activities: |
|
|
|
|
Proceeds from (payments for) |
|
|
|
|
Sales or distributions of: |
|
|
|
|
Available for sale securities |
| 6,370 |
| 5,638 |
Other securities |
| 1,034 |
| 1,385 |
Other invested assets |
| 1,118 |
| 1,064 |
Divested businesses, net |
| - |
| 6 |
Maturities of fixed maturity securities available for sale |
| 4,957 |
| 5,347 |
Principal payments received on and sales of mortgage and other loans receivable |
| 861 |
| 1,037 |
Purchases of: |
|
|
|
|
Available for sale securities |
| (12,757) |
| (9,042) |
Other securities |
| (287) |
| (384) |
Other invested assets |
| (567) |
| (847) |
Mortgage and other loans receivable |
| (1,504) |
| (2,490) |
Net change in short-term investments |
| (1,221) |
| (3,040) |
Other, net |
| 17 |
| (646) |
Net cash used in investing activities |
| (1,979) |
| (1,972) |
Cash flows from financing activities: |
|
|
|
|
Proceeds from (payments for) |
|
|
|
|
Policyholder contract deposits |
| 5,629 |
| 7,069 |
Policyholder contract withdrawals |
| (4,195) |
| (4,160) |
Issuance of long-term debt |
| 1,449 |
| 3,039 |
Repayments of long-term debt |
| (589) |
| (1,327) |
Issuance of preferred stock |
| 485 |
| - |
Purchase of common stock |
| - |
| (298) |
Dividends paid |
| (278) |
| (289) |
Other, net |
| 263 |
| (1,548) |
Net cash provided by financing activities |
| 2,764 |
| 2,486 |
Effect of exchange rate changes on cash and restricted cash |
| 12 |
| 58 |
Net decrease in cash and restricted cash |
| (179) |
| (366) |
Cash and restricted cash at beginning of year |
| 3,358 |
| 2,737 |
Cash and restricted cash at end of period | $ | 3,179 | $ | 2,371 |
6AIG | First Quarter 20192020 Form 10-Q
American International Group, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)(continued)
Supplementary Disclosure of Condensed Consolidated Cash Flow Information
| Three Months Ended March 31, | |||
(in millions) |
| 2019 |
| 2018 |
Cash | $ | 2,565 | $ | 2,103 |
Restricted cash included in Short-term investments* |
| 251 |
| 47 |
Restricted cash included in Other assets* |
| 363 |
| 221 |
Total cash and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 3,179 | $ | 2,371 |
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest | $ | 315 | $ | 357 |
Taxes | $ | 50 | $ | 28 |
Non-cash investing/financing activities: |
|
|
|
|
Interest credited to policyholder contract deposits included in financing activities | $ | 878 | $ | 825 |
|
|
|
|
|
| Three Months Ended March 31, | |||
(in millions) |
| 2020 |
| 2019 |
Cash | $ | 2,738 | $ | 2,565 |
Restricted cash included in Short-term investments* |
| 324 |
| 251 |
Restricted cash included in Other assets* |
| 257 |
| 363 |
Total cash and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 3,319 | $ | 3,179 |
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest | $ | 323 | $ | 315 |
Taxes | $ | 62 | $ | 50 |
Non-cash investing activities: |
|
|
|
|
Fixed maturity securities available for sale received in connection with pension risk transfer transactions | $ | 553 | $ | - |
Non-cash financing activities: |
|
|
|
|
Interest credited to policyholder contract deposits included in financing activities | $ | 869 | $ | 878 |
|
|
|
|
|
*Includes funds held for tax sharing payments to AIG Parent, security deposits, and replacement reserve deposits related to our affordable housing investments.
See accompanying Notes to Condensed Consolidated Financial Statements.
AIG | First Quarter 20192020 Form 10-Q7
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |1. Basis of Presentation
American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 80 countries and jurisdictions. AIG companies serve commercial and individual customers through one of the most extensive worldwide property‑casualtyproperty-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG). Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.
These unaudited Condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited Consolidated Financial Statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 20182019 (the 20182019 Annual Report). The condensed consolidated financial information as of December 31, 20182019 included herein has been derived from the audited Consolidated Financial Statements in the 20182019 Annual Report.
Certain of our foreign subsidiaries included in the Condensed Consolidated Financial Statements report on the basis of fiscal period ending November 30. The effect on our consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these Condensed Consolidated Financial Statements has been considered for adjustment and/or disclosure. In the opinion of management, these Condensed Consolidated Financial Statements contain normal recurring adjustments, including eliminations of material intercompany accounts and transactions, necessary for a fair statement of the results presented herein.
Interim-period operating Operating results mayfor the three months ended March 31, 2020, are not benecessarily indicative of the operating results that may be expected for a full year. the year ended December 31, 2020, especially when considering the risks and uncertainties associated COVID-19 and the impact it may have on our business, results of operations and financial condition.
We evaluated the need to recognize or disclose events that occurred subsequent to March 31, 20192020 and prior to the issuance of these Condensed Consolidated Financial Statements.
Sales/disposals of Businesses
Fortitude Holdings
On November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Group Holdings, LLC (Fortitude Holdings) to TC Group Cayman Investments Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P. (Carlyle) (2018 Fortitude Sale). Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of Fortitude Reinsurance Company Ltd (Fortitude Re) and AIG had an 80.1 percent ownership interest in Fortitude Holdings. We received $381 million in cash and will receive up to $95 million of deferred compensation following December 31, 2023, which is subject to a purchase price adjustment wherein AIG will reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude. Any amount due to TCG in respect of this purchase price adjustment will be offset by the amount of the $95 million otherwise due from TCG to AIG. To the extent we do not receive all or a portion of the planned distributions by May 13, 2020, TCG will pay us up to an additional $100 million, which amount shall adjust in proportion with the amount of the dividend received by AIG. In connection with the 2018 Fortitude Sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment management fee payments within 36 months following the closing. We also will be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such investment commitment targets.
8 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |1. Basis of Presentation
On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL, an investment fund advised by an affiliate of Carlyle (Carlyle FRL), T&D United Capital Co., Ltd. (T&D) and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude Holdings (Majority Interest Fortitude Sale). Upon closing of the Majority Interest Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude Holdings. The purchase price under the Majority Interest Fortitude Sale is subject to a post-closing purchase price adjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to a maximum payment of $500 million. In connection with the Majority Interest Fortitude Sale agreement, AIG, Fortitude Holdings and TCG have agreed that, effective as of the closing of the Majority Interest Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be assumed by Fortitude Holdings and AIG will be released therefrom, (ii) the purchase price adjustment that AIG had agreed to provide TCG in the 2018 Fortitude Sale will be terminated, and (iii) Carlyle will remain obligated to pay AIG $95 million of deferred compensation at December 31, 2023 and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned distributions by May 13, 2020, which amount shall adjust in proportion with the amount of the dividend received by AIG. We expect to contribute approximately $1.45 billion of the proceeds of the Majority Interest Fortitude Sale to certain of our insurance company subsidiaries for a period of time following the closing of the transaction. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to consummate the Majority Interest Fortitude Sale.
For further details on this transaction see Note 4 to the Condensed Consolidated Financial Statements.
Blackboard
At the end of March 2020, AIG decided to place Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s technology-driven subsidiary, into run-off. As a result of this decision, AIG recognized a pre-tax loss of $210 million, primarily consisting of asset impairment charges.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and assumptions are considered our critical accounting estimates and are related to the determination of:
•liability for unpaid losses and loss adjustment expenses (loss reserves);
•reinsurance assets;
•valuation of future policy benefit liabilities and timing and extent of loss recognition;
•valuation of liabilities for guaranteed benefit features of variable annuity products;
•valuation of embedded derivatives for fixed index annuity and life products;
•estimated gross profits to value deferred policy acquisition costs for investment-oriented products;
•reinsurance assets;
impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets including investments in life settlements, and goodwill impairment;
•allowances for loan losses;credit losses primarily on loans, available for sale fixed maturity securities, reinsurance assets and premiums and other receivables;
•liability for legal contingencies;
•fair value measurements of certain financial assets and liabilities; and
•income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset and estimates associated with the Tax Act.Cuts and Jobs Act (the Tax Act).
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.
8AIG | First Quarter 20192020 Form 10-Q9
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |2. Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Accounting Standards Adopted During 20192020
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard that requires lessees with lease terms of more than 12 months to recognize a right of use asset and a corresponding lease liability on their balance sheets. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating leases or finance leases. Lessor accounting remained largely the same, with the exception of certain specified changes.
We adopted the standard on its effective date of January 1, 2019, using a modified retrospective approach and did not adjust prior comparative periods in accordance with the standard’s transition guidance. The majority of the Company’s lease obligations pertain to real estate utilized in the operation of our businesses. Consequently, the primary impact of adoption resulted in the recognition of discounted lease liabilities of $823 million and corresponding right-of-use assets of $724 million for operating leases pertaining to our real estate portfolio, which are reflected in Other Liabilities and Other Assets, respectively. The standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued an accounting standard that shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. The standard does not require an accounting change for securities held at a discount, which continue to be amortized to maturity.
We adopted the standard using a modified retrospective approach on its effective date of January 1, 2019. The standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
Derivatives and Hedging
In August 2017, the FASB issued an accounting standard that improves and expands hedge accounting for both financial and commodity risks. The provisions of the standard are intended to better align the accounting with an entity’s risk management activities, enhance the transparency on how the economic results are presented in the financial statements and disclosures, and simplify the application of hedge accounting treatment.
We adopted the standard on its effective date of January 1, 2019. The standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
Future Application of Accounting Standards
Financial Instruments - Credit Losses
In June 2016, the FASB issued an accounting standard that will changechanged how entities account for current expected credit losses (CECL) for most financial assets, premiums receivable, trade receivables, off-balance sheet exposures and reinsurance receivables.receivables (the Financial Instruments Credit Losses Standard). The standard will replacerequires an allowance for credit losses based on the existing incurred loss impairment model with a new “current expectedexpectation of lifetime credit loss model” that generally will result in earlier recognition of credit losses. The standard will applylosses related to such financial assets subject to credit losses, including loans measured at amortized cost, reinsurance receivables and certain off-balance sheet credit exposures. Additionally, the impairment of available-for-sale debt securities, including purchased credit deteriorated securities, areis subject to the new guidance and will beis measured in a similar manner, except that losses will beare recognized as allowances rather than reductions in the amortized cost of the securities. The standard will also require additional information to be disclosedallows for reversals of credit impairments in the footnotes.event that the credit of an issuer improves. The standard also requires additional disclosures.
We plan to adoptadopted the standard on its effective date of January 1, 2020. We are continuing2020 using a modified retrospective method, which requires a cumulative effect adjustment to develop our implementation plan to adopt the standard and are assessingretained earnings. As of January 1, 2020, the impact of the adoption of the standard onwas a reduction in opening retained earnings of $487 million (after-tax) primarily driven by commercial mortgage loans, and, to a lesser extent, reinsurance receivables and recoverables.
The following table provides a rollforward of our reported consolidated financial condition, resultsallowance, including credit losses, in connection with the adoption of operations, cash flows and required disclosures. While we expect an increase in our allowancesthe Financial Instruments Credit Losses Standard as well as cross references to the applicable notes herein for additional information:
Three Months Ended March 31, 2020 |
| Balance, |
| Cumulative Effect |
| Purchased Credit |
|
|
| Balance, |
|
| Beginning |
| Adjustment as of |
| Deteriorated Initial |
| Increase |
| End of |
(in millions) |
| of Year |
| January 1, 2020 |
| Allowance |
| (Decrease) |
| Period |
Securities available for sale(a) | $ | - | $ | - | $ | 13 | $ | 198 | $ | 211 |
Mortgage and other loan receivables(b) |
| 438 |
| 318 |
| - |
| 31 |
| 787 |
Reinsurance recoverables (inclusive of |
|
|
|
|
|
|
|
|
|
|
deposit accounted assets)(c) |
| 151 |
| 224 |
| - |
| (13) |
| 362 |
Premiums and other receivables(d) |
| 178 |
| 34 |
| - |
| (2) |
| 210 |
Contractual deductible recoverables(e) |
| - |
| 14 |
| - |
| - |
| 14 |
Commercial mortgage loan commitments(f) |
| - |
| 51 |
| - |
| 7 |
| 58 |
Total | $ | 767 | $ | 641 | $ | 13 | $ | 221 | $ | 1,642 |
Secondary impacts to certain long-duration |
|
|
|
|
|
|
|
|
|
|
insurance contracts(g) |
|
|
| (27) |
|
|
|
|
|
|
Tax impact |
|
|
| (127) |
|
|
|
|
|
|
Total cumulative effect adjustment |
|
| $ | 487 |
|
|
|
|
|
|
(a)The allowance for credit losses is reported in Bonds available for sale in the financial instruments within scopeCondensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income. Refer to Note 6 for additional information.
(b)The allowance for credit losses is reported in Mortgage and other loans receivable in the standard, givenCondensed Consolidated Balance Sheets. Changes in the objectiveallowance for credit losses are reported in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income. Refer to Note 7 for additional information.
(c)The allowance for credit losses is reported for Reinsurance assets for reinsurance contracts that contain sufficient insurance risk, and reported in Other assets for insurance and reinsurance contracts that do not contain sufficient insurance risk in the new standard,Condensed Consolidated Balance Sheets. Changes in the amountallowance for credit losses are reported in Policyholder benefits and losses incurred for reinsurance contracts that do contain sufficient insurance risk and Premiums for contracts that do not contain sufficient insurance risk in the Condensed Consolidated Statements of any change will be dependent on our portfolios’ compositionIncome. Refer to Note 2 for additional information.
(d)The allowance for credit losses is reported in Premiums and quality atother receivables in the adoption dateCondensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in General operating and other expenses in the Condensed Consolidated Statements of Income. Refer to Note 2 for additional information.
(e)The allowance for credit losses is reported in Liability for unpaid losses and loss adjustment expenses in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Policyholder benefits and losses incurred in the Condensed Consolidated Statements of Income. Refer to Note 10 for additional information.
(f)The allowance for credit losses is reported in Other liabilities in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income. Refer to Note 7 for additional information.
(g)This reflects adjustments to the amortization of DAC, unearned revenue reserve and sales inducement assets as well as economic conditionsimpacts on the future policy benefits for certain universal life and forecasts at that time.variable annuity contracts.
10AIG | First Quarter 20192020 Form 10-Q9
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |2. Summary of Significant Accounting Policies
The following presents the impact of the adoption of the standard on reinsurance recoverables and premiums and other receivables.
Reinsurance — Credit Losses
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves. Similarly, Other assets include reinsurance recoverable for contracts which are accounted for as deposits.
We assess the collectability of reinsurance recoverable balances in each reporting period, through either historical trends of disputes and credit events or financial analysis of the credit quality of the reinsurer. We record adjustments to reflect the results of these assessments through an allowance for credit losses and disputes on uncollectable reinsurance that reduces the carrying amount of reinsurance and other assets on the consolidated balance sheets (collectively, the reinsurance recoverable balances). This estimate requires significant judgment for which key considerations include:
paid and unpaid amounts recoverable;
whether the balance is in dispute or subject to legal collection;
the relative financial health of the reinsurer as determined by the Obligor Risk Ratings (ORRs) we assign to each reinsurer based upon our financial reviews; insurers that are financially troubled (i.e., in run-off, have voluntarily or involuntarily been placed in receivership, are insolvent, are in the process of liquidation or otherwise subject to formal or informal regulatory restriction) are assigned ORRs that will generate significant allowance; and
whether collateral and collateral arrangements exist.
An estimate of the reinsurance recoverable’s lifetime expected credit losses is established utilizing a probability of default and loss given default method, which reflects the reinsurer’s ORR rating. The allowance for credit losses excludes disputed amounts. An allowance for disputes is established for a reinsurance recoverable using the losses incurred model for contingencies.
The total reinsurance recoverables as of March 31, 2020 were $42.2 billion. As of that date, utilizing AIG’s ORRs, (i) approximately 87 percent of the reinsurance recoverables are investment grade, of which 82 percent relate to General Insurance and 5 percent relate to Life and Retirement; (ii) approximately 12 percent of the reinsurance recoverables are non-investment grade, the majority of which relates to General Insurance; (iii) less than one percent of the non-investment grade reinsurance recoverables related to Life and Retirement and (iv) approximately one percent of the reinsurance recoverables relate to entities that are not rated by AIG.
As of March 31, 2020, approximately 76 percent of our non-investment grade reinsurance exposure relates to captive insurers. These arrangements are typically collateralized by letters of credit, funds held or trust agreements.
Reinsurance Recoverable Allowance
The following table presents a rollforward of the reinsurance recoverable allowance:
Three Months Ended March 31, 2020 |
| General |
| Life and |
|
|
(in millions) |
| Insurance |
| Retirement |
| Total |
Balance, beginning of year | $ | 111 | $ | 40 | $ | 151 |
Initial allowance upon CECL adoption |
| 202 |
| 22 |
| 224 |
Current period provision for expected credit losses and disputes |
| (4) |
| 2 |
| (2) |
Write-offs charged against the allowance for credit losses and disputes |
| (3) |
| (4) |
| (7) |
Other changes |
| (4) |
| - |
| (4) |
Balance, end of period | $ | 302 | $ | 60 | $ | 362 |
There were no recoveries of credit losses previously written off for the three-month period ended March 31, 2020.
Past-Due Status
We consider a reinsurance asset to be past due when it is 90 days past due. Past due balances were not significant for any of the periods presented.
AIG | First Quarter 2020 Form 10-Q 11
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 2. Summary of Significant Accounting Policies
Premiums and other receivables — Credit Losses
Premiums and other receivables, net of allowance for credit losses include premium balances receivable, amounts due from agents and brokers and policyholders, trade receivables for the Direct Investment book and Global Capital Markets (GCM) and other receivables. Trade receivables for GCM include cash collateral posted to derivative counterparties that is not eligible to be netted against derivative liabilities. The allowance for credit losses and disputes for premiums and other receivables was $210 million at March 31, 2020. Our allowance for credit losses for premium receivables considers a combination of internal and external information relating to past events, current conditions and reasonable and supportable forecasts. Our allowance contemplates our contractual provisions. Upon default or delinquency of the policyholder we may be able to cease coverage for the remaining period. In certain jurisdictions we are unable to cancel coverage even in the event of delinquency or default by the policyholder. We consider premium and other receivable balances to be past due if the payment is not received after 90 days from the contractual obligation due date and record an allowance for disputes when there is reasonable uncertainty of the collectability of a disputed amount during the reporting period.
For further information regarding the impacts of the adoption of this standard see Notes 5, 6, 7, 10 and 12 to the Condensed Consolidated Financial Statements.
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.
TheWe adopted the standard ison its effective ondate of January 1, 2020. The adoption of the standard did not have a material impact on our financial position, results of operations or cash flows.
Cloud Computing Arrangements
In August 2018, the FASB issued an accounting standard that aligns the requirements for capitalizing implementation costs incurred in a cloud computing (or hosting) arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Capitalized implementation costs must be amortized over the term of the hosting arrangement. The accounting for the service element is not affected by the amendments in this update.
We adopted the standard prospectively on its effective date of January 1, 2020. The adoption of the standard did not have a material impact on our consolidated financial position, results of operations or cash flows.
Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates
In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to simplify and streamline the disclosure requirements for guarantors and issuers of guaranteed securities registered or being registered, and issuers’ affiliates whose securities collateralize securities registered or being registered. Currently, the SEC permits the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides summarized financial information of the subsidiary issuers and guarantors. The amendments, among other things, allow companies to cease providing summarized financial information if the subsidiary issuer’s or guarantor’s reporting obligation has been suspended.
The amendments are effective January 4, 2021, with early adoption permitted. We are evaluatingEffective March 31, 2020, AIG early adopted the timingamendment and ceased providing the summarized information for the subsidiary issuers and guarantors because the subsidiaries issuer’s reporting obligations have been suspended.
Future Application of our adoption. Any impact of the standard will be dependent on the market conditions of the reporting units at the time of adoption.Accounting Standards
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued an accounting standard update with the objective of making targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The standard prescribes significant and comprehensive changes to recognition, measurement, presentation and disclosure as summarized below:
12 AIG | First Quarter 2020 Form 10-Q
·
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 2. Summary of Significant Accounting Policies
Requires the review and if necessary update of future policy benefit assumptions at least annually for traditional and limited pay long duration contracts, with the recognition and separate presentation of any resulting re-measurement gain or loss (except for discount rate changes as noted below) in the income statement.
·Requires the discount rate assumption to be updated at the end of each reporting period using an upper medium grade (low-credit risk) fixed income instrument yield that maximizes the use of observable market inputs and recognizes the impact of changes to discount rates in other comprehensive income.
·Simplifies the amortization of deferred policy acquisition costs (DAC) to a constant level basis over the expected term of the related contracts with adjustments for unexpected terminations, but no longer requires an impairment test.
·Requires the measurement of all market risk benefits associated with deposit (or account balance) contracts at fair value through the income statement with the exception of instrument-specific credit risk changes, which will be recognized in other comprehensive income.
·Increased disclosures of disaggregated roll-forwards of policy benefits, account balances, market risk benefits, separate account liabilities and information about significant inputs, judgments and methods used in measurement and changes thereto and impact of those changes.
In October 2019, the FASB affirmed its decision to defer the effective date of the standard to January 1, 2022. We plan to adopt the standard on its effective date of January 1, 2021.date. We have started our implementation efforts and we are evaluating the method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures. The adoption of this standard is expected to have a significant impact on our consolidated financial condition, results of operations, cash flows and required disclosures, as well as systems, processes and controls.
RECLASSIFICATIONSIncome Tax
InOn December 18, 2019, the first quarterFASB issued an accounting standard that simplifies the accounting for income taxes by eliminating certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of 2019, we began reporting investment income from our non-insurance subsidiariesdeferred tax liabilities for outside basis differences. The amendments also simplified other areas including the accounting for franchise taxes and enacted tax laws or rates, and clarified the accounting for transactions that result in Net investment income insteadthe step-up in the tax basis of Other incomegoodwill. The standard is effective on a prospective basis to be consistentJanuary 1, 2021, with how we report investment income from our General Insurance and Life and Retirement reporting segments. This reclassification has noearly adoption permitted. We are assessing the impact toof the standard on our consolidated statementfinancial condition, results of operations. operations and cash flows.
On March 12, 2020, the FASB issued an accounting standard that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The standard allows us to account for certain contract modifications that result from the discontinuation of the London Inter-Bank Offered Rate (LIBOR) or another reference rate as a continuation of the existing contract without additional analysis.
This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. We have started our implementation efforts and we are evaluating the method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.
Clarification of Accounting for Certain Equity Method Investments
On January 16, 2020, the FASB issued an accounting standard to clarify how a previously issued standard regarding a company’s ability to measure the fair value of certain equity securities without a readily determinable fair value should interact with equity method investments standards. The previously issued standard provides that such equity securities could be measured at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (measurement alternative). The new standard clarifies that a company should consider observable transactions that require the company to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with the equity method immediately before applying or upon discontinuing the equity method.
The standard further clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.
The standard is effective for interim and annual reporting periods beginning after December 15, 2020. We are evaluating the impact adoption of this standard will have on our consolidated financial condition, results of operations, cash flows and required disclosures.
10AIG | First Quarter 20192020 Form 10-Q13
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |3. Segment Information
3. Segment Information
We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources, as follows:
General Insurance
General Insurance business is presented as two2 operating segments:
·North America— consists of insurance businesses in the United States, Canada and Bermuda.This also includes the results of Validus Reinsurance, Ltd. (Validus), Western World Insurance Group, Inc. and Glatfelter Insurance Group. as of their respective acquisition dates.Group (Glatfelter).
·International— consists of regional insurance businesses in Japan, the United Kingdom,UK, Europe, Asia Pacific, Latin America Puerto Rico, Australia, theand Caribbean, Middle East and Africa.Africa, and China. This also includes the results of Talbot Holdings, Ltd. as of its acquisition date.
Results are presented before internal reinsurance transactions. North America and International operating segments consist of the following products:
–Commercial Lines — consists of Liability, Financial Lines, Property and Special Risks.
–Personal Insurance — consists of Personal Lines and Accident and Health.
Life and Retirement
Life and Retirement business is presented as four4 operating segments:
·Individual Retirement— consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.
·Group Retirement — consists of group mutual funds, group annuities, individual annuity and investment products, and financial planning and advisory services.
·Life Insurance— primary products in the U.S. include term life and universal life insurance. International operations include distribution of life and health products in the UK and Ireland.
·Institutional Markets— consists of stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs).
Other Operations
Other Operations category consists primarily of:
·Income from assets held by AIG Parent and other corporate subsidiaries.
·General operating expenses not attributable to specificAIG reporting segments.
·Certain compensation expenses attributable to Other Operations and reporting segments.
Amortization of value of distribution network acquired related to the Validus and Glatfelter acquisitions.
Interest expense.expense attributable to AIG long-term debt as well as debt associated with consolidated investment entities.
·Results also include Blackboard U.S. Holdings, Inc. — a subsidiaryand its subsidiaries which are focused on delivering commercial insurance solutions using digital technology, data analytics and automation. At the end of March 2020, AIG decided to place Blackboard into run-off.
Legacy Portfolio
Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our Bermuda domiciled composite reinsurer, Fortitude Reinsurance Company Ltd. (Fortitude Re),Re, is included in our Legacy Portfolio.
·Legacy Life and Retirement Run-Off Lines — Reserves consist of certain structured settlements, pension risk transfer annuities and single premium immediate annuities written prior to April 2012. Also includes exposures to whole life, long-term care and exited accident & health product lines.
·Legacy General Insurance Run-Off Lines — Reserves consist of excess workers’ compensation, environmental exposures and exposures to other products within General Insurance that are no longer actively marketed. Also includes the remaining reserves in Eaglestone Reinsurance Company (Eaglestone). Company.
·
14 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |3. Segment Information
Legacy Investments — Includes investment classes that we have placed into run-off including holdings in direct investments as well as investments in global capital markets and global real estate.
AIG | First Quarter 2019 Form 10-Q11
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |3. Segment Information
We evaluate segment performance based on adjusted revenues and adjusted pre-tax income (loss). Adjusted revenues and adjusted pre-tax income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG, respectively. Beginning inThese items generally fall into one or more of the first quarterfollowing broad categories: legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the underlying economics of 2019, on a prospective basis,transactions; and measures that we believe to be common to the changes in the fair value of equity securities are excluded from adjusted pre-tax income (loss). industry. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.
The following table presents AIG’s continuing operations by operating segment:
Three Months Ended March 31, | 2019 |
| 2018 | 2020 |
| 2019 | ||||||||||||
|
|
|
| Adjusted |
|
|
|
| Adjusted |
|
|
| Adjusted |
|
|
|
| Adjusted |
|
| Total |
| Pre-tax |
| Total |
| Pre-tax |
| Total |
| Pre-tax |
|
| Total |
| Pre-tax | |
(in millions) |
| Revenues |
| Income (Loss) |
| Revenues |
| Income (Loss) |
| Revenues |
| Income (Loss) |
|
| Revenues |
| Income (Loss) | |
General Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America | $ | 4,098 | $ | 934 |
| $ | 3,340 | $ | 320 | $ | 3,414 | $ | 409 |
| $ | 4,098 | $ | 934 |
International |
| 3,704 |
| 334 |
|
| 4,104 |
| 190 |
| 3,253 |
| 92 |
|
| 3,704 |
| 334 |
Total General Insurance |
| 7,802 |
| 1,268 |
|
| 7,444 |
| 510 |
| 6,667 |
| 501 |
|
| 7,802 |
| 1,268 |
Life and Retirement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Retirement |
| 1,351 |
| 508 |
|
| 1,361 |
| 499 |
| 1,370 |
| 306 |
|
| 1,351 |
| 508 |
Group Retirement |
| 709 |
| 232 |
|
| 761 |
| 282 |
| 694 |
| 143 |
|
| 709 |
| 232 |
Life Insurance |
| 1,073 |
| 116 |
|
| 1,061 |
| 52 |
| 1,091 |
| 55 |
|
| 1,073 |
| 116 |
Institutional Markets |
| 1,071 |
| 68 |
|
| 277 |
| 59 |
| 1,017 |
| 70 |
|
| 1,071 |
| 68 |
Total Life and Retirement |
| 4,204 |
| 924 |
|
| 3,460 |
| 892 |
| 4,172 |
| 574 |
|
| 4,204 |
| 924 |
Other Operations |
| 203 |
| (387) |
|
| 150 |
| (342) |
| 162 |
| (451) |
|
| 139 |
| (387) |
Legacy Portfolio |
| 706 |
| 112 |
|
| 836 |
| 145 |
| 264 |
| (368) |
|
| 706 |
| 112 |
AIG Consolidation and elimination |
| (161) |
| (70) |
|
| (62) |
| 11 |
| (145) |
| (84) |
|
| (97) |
| (70) |
Total AIG Consolidated adjusted revenues and adjusted pre-tax income |
| 12,754 |
| 1,847 |
|
| 11,828 |
| 1,216 |
| 11,120 |
| 172 |
|
| 12,754 |
| 1,847 |
Reconciling Items from adjusted pre-tax income to pre-tax income: |
|
|
|
|
|
|
|
|
| |||||||||
Changes in fair value of securities used to hedge guaranteed |
|
|
|
|
|
|
|
|
| |||||||||
living benefits |
| 105 |
| 96 |
|
| (77) |
| (77) | |||||||||
Changes in benefit reserves and DAC, VOBA and SIA related to |
|
|
|
|
|
|
|
|
| |||||||||
net realized capital gains |
| - |
| 99 |
|
| - |
| (31) | |||||||||
Reconciling items from adjusted pre-tax income to pre-tax income: |
|
|
|
|
|
|
|
|
| |||||||||
Changes in fair value of securities used to hedge guaranteed living benefits |
| 14 |
| (7) |
|
| 105 |
| 96 | |||||||||
Changes in benefit reserves and DAC, VOBA and SIA related to net realized |
|
|
|
|
|
|
|
|
| |||||||||
capital gains (losses) |
| - |
| (538) |
|
| - |
| 99 | |||||||||
Changes in the fair value of equity securities |
| 79 |
| 79 |
|
| - |
| - |
| (191) |
| (191) |
|
| 79 |
| 79 |
Professional fees related to regulatory or accounting changes |
| - |
| (13) |
|
| - |
| - | |||||||||
Other income (expense) - net |
| 7 |
| - |
|
| (11) |
| - |
| 9 |
| - |
|
| 7 |
| - |
Gain (Loss) on extinguishment of debt |
| - |
| 2 |
|
| - |
| (4) | |||||||||
Net realized capital losses* |
| (489) |
| (474) |
|
| (29) |
| (19) | |||||||||
Gain (loss) on extinguishment of debt |
| - |
| (17) |
|
| - |
| 2 | |||||||||
Net realized capital gains (losses)* |
| 3,485 |
| 3,502 |
|
| (489) |
| (474) | |||||||||
Income (loss) from divested businesses |
| - |
| 6 |
|
| - |
| 8 |
| - |
| (216) |
|
| - |
| 6 |
Non-operating litigation reserves and settlements |
| - |
| (1) |
|
| 1 |
| (13) |
| 6 |
| 6 |
|
| - |
| (1) |
(Unfavorable) favorable prior year development and related amortization |
|
|
|
|
|
|
|
|
| |||||||||
Favorable prior year development and related amortization |
|
|
|
|
|
|
|
|
| |||||||||
changes ceded under retroactive reinsurance agreements |
| - |
| 27 |
|
| - |
| (34) |
| - |
| 8 |
|
| - |
| 27 |
Net loss reserve discount benefit (charge) |
| - |
| (473) |
|
| - |
| 205 | |||||||||
Net loss reserve discount charge |
| - |
| (56) |
|
| - |
| (473) | |||||||||
Integration and transaction costs associated with acquired businesses |
| - |
| (7) |
|
| - |
| - |
| - |
| (2) |
|
| - |
| (7) |
Restructuring and other costs |
| - |
| (47) |
|
| - |
| (24) |
| - |
| (90) |
|
| - |
| (47) |
Revenues and Pre-tax income | $ | 12,456 | $ | 1,154 |
| $ | 11,712 | $ | 1,227 | $ | 14,443 | $ | 2,558 |
| $ | 12,456 | $ | 1,154 |
*Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication.
12AIG | First Quarter 20192020 Form 10-Q15
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Business CombinationHeld-For-Sale Classification
4. Held-For-Sale Classification
Held-For-Sale Classification
We report and classify a business as held-for-sale (Held-For-Sale Business) 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 Held-For-Sale Business Combinationis 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 Held-For-Sale Business are reported in Other assets and Other liabilities, respectively, in our Consolidated Balance Sheets beginning in the period in which the business is classified as held-for-sale.
At March 31, 2020, the following business was reported and classified as held-for-sale:
Fortitude Holdings
Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of March 31, 2020, the affiliated transactions included the cession of approximately $30.1 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $3.8 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. Fortitude Re has approximately $2.7 billion of total assets after elimination of intercompany balances, primarily managed by AIG, and is AIG’s main run-off reinsurer with its own dedicated management team. In the second quarter of 2018, the Company formed Fortitude Holdings as the holding company for Fortitude Re.
On July 18,November 13, 2018, weAIG completed the purchasesale of a 10019.9 percent votingownership interest in ValidusFortitude Holdings Ltd. (Validus)to TCG, an affiliate of Carlyle. Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of Fortitude Re and AIG had an 80.1 percent ownership interest in Fortitude Holdings. We received $381 million in cash and will receive up to $95 million of deferred compensation following December 31, 2023, which is subject to a purchase price adjustment wherein AIG will reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude. Any amount due to TCG in respect of this purchase price adjustment will be offset by the amount of the $95 million otherwise due from TCG to AIG. To the extent we do not receive all or a portion of the planned distributions by May 13, 2020, TCG will pay us up to an additional $100 million, which amount shall adjust in proportion with the amount of the dividend received by AIG. In connection with the 2018 Fortitude Sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment management fee payments within thirty-six months following the closing. We also will be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such investment commitment targets.
On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL, T&D and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a leading provider51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude Holdings. Upon closing of reinsurance, primary insurance, and asset management services, for $5.5 billionthe Majority Interest Fortitude Sale, AIG will have a 3.5 percent ownership interest in cash.
Fortitude Holdings. The purchase was accounted forprice under the acquisition method. Accordingly, the totalMajority Interest Fortitude Sale is subject to a post-closing purchase price was allocatedadjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to a maximum payment of $500 million. In connection with the estimated fair valuesMajority Interest Fortitude Sale agreement, AIG, Fortitude Holdings and TCG have agreed that, effective as of assets acquiredthe closing of the Majority Interest Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be assumed by Fortitude Holdings and liabilities assumed. This allocation resulted inAIG will be released therefrom, (ii) the purchase price exceedingadjustment that AIG had agreed to provide TCG in the fair value2018 Fortitude Sale will be terminated, and (iii) Carlyle will remain obligated to pay AIG $95 million of net assets acquired,deferred compensation at December 31, 2023 and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned distributions by May 13, 2020, which resultsamount shall adjust in proportion with the amount of the dividend received by AIG. We expect to contribute approximately $1.45 billion of the proceeds of the Majority Interest Fortitude Sale to certain of our insurance company subsidiaries for a differenceperiod of time following the closing of the transaction. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to consummate the Majority Interest Fortitude Sale.
16 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |4. Held-For-Sale Classification
We recorded a loss of $98 million in 2019 in respect of our interest in Fortitude Holdings, which was recorded as goodwill. Goodwill generated froma contra-asset within assets held for sale line below.
The transaction is expected to close in mid-2020, subject to required regulatory approvals and other customary closing conditions.
The following table summarizes the components of assets and liabilities held-for-sale on the Consolidated Balance Sheets after elimination of intercompany balances:
|
| March 31, |
|
| December 31, |
(in millions) |
| 2020 |
|
| 2019 |
Assets: |
|
|
|
|
|
Bonds available for sale | $ | 2,308 |
| $ | 2,187 |
Other bond securities |
| 13 |
|
| 13 |
Other invested assets |
| 58 |
|
| 45 |
Short-term investments |
| 63 |
|
| 107 |
Cash |
| 54 |
|
| 63 |
Accrued investment income |
| 20 |
|
| 19 |
Deferred income taxes |
| (11) |
|
| (22) |
Other assets |
| 152 |
|
| 106 |
Assets of business held for sale |
| 2,657 |
|
| 2,518 |
Less: Loss accrual |
| (98) |
|
| (98) |
Total assets held for sale | $ | 2,559 |
| $ | 2,420 |
Liabilities: |
|
|
|
|
|
Other liabilities | $ | 14 |
| $ | 15 |
Total liabilities held for sale | $ | 14 |
| $ | 15 |
The affiliated reinsurance transactions executed in the first quarter of 2018 with Fortitude Re resulted in prepaid insurance assets on the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax) and related deferred acquisition costs of $0.5 billion (after-tax) at inception of the contract. The prepaid insurance assets have been eliminated in AIG’s consolidated financial statements since the counterparties were wholly owned.
Upon closing of the Majority Interest Fortitude Sale, AIG will recognize a loss for the portion of the unamortized balance of these assets that are not recoverable, if any, when AIG is attributable to expected synergies from future growthno longer a controlling shareholder in Fortitude Holdings. As of March 31, 2020, the unamortized balances of the aforementioned prepaid insurance assets and potential future monetization opportunities. Goodwill related todeferred acquisition costs were $2.2 billion (after-tax) and $0.4 billion (after-tax), respectively. As of December 31, 2019, the purchaseunamortized balances of Validus assigned to our General Insurance operating segments was $1.8the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.3 billion (after-tax) and $0.4 billion (after-tax), respectively. The combined loss of $2.6 billion for North America and $157 million for International.
In addition, Validus participates in the market for insurance-linked securities (ILS) primarily through AlphaCat Managers, Ltd (AlphaCat Manager). AlphaCat Manager is an asset manager primarily for third party investors and in connection with the issuance of ILS invests in AlphaCat funds which are considered variable interest entities (VIEs). ILS are financial instruments for which the values are determined based on insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. We report the investment in AlphaCat funds, which is approximately $124 million atthree-month period ended March 31, 2019, in Other Invested Assets in2020 would be incremental to any gain or loss recognized on the Condensed Consolidated Balance Sheet.
Majority Interest Fortitude Sale. The following unaudited summarized pro forma consolidated income statement information assumes thatincremental gain or loss we will recognize on the acquisition of Validus occurred as of January 1, 2018. The pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations thatMajority Interest Fortitude Sale would have resulted had the acquisition been completedbe impacted, perhaps significantly, by market conditions existing at the beginning oftime the applicable period and may not be indicative of the results that will be attained in the future.Majority Interest Fortitude Sale closes.
| Three Months Ended March 31, | |||
(in millions) |
| 2019 |
| 2018* |
Total revenues | $ | 12,456 | $ | 12,242 |
Net income |
| 937 |
| 951 |
Net income attributable to AIG |
| 654 |
| 940 |
|
|
|
|
|
Income per common share attributable to AIG: |
|
|
|
|
Basic: |
|
|
|
|
Net income attributable to AIG |
| 0.75 |
| 1.04 |
Diluted: |
|
|
|
|
Net income attributable to AIG |
| 0.75 |
| 1.02 |
* Pro forma adjustments were made to Validus external reporting results prior to the acquisition date for the deconsolidation of certain asset management entities consistent with AIG’s post acquisition accounting, which had no impact on Net income attributable to Validus.
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.
AIG | First Quarter 2020 Form 10-Q 17
•
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
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.
AIG | First Quarter 2019 Form 10-Q13
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:
March 31, 2019 |
|
|
|
|
|
| Counterparty | Cash |
| |||||||||||||||
March 31, 2020 |
|
|
|
|
|
| Counterparty | Cash |
| |||||||||||||||
(in millions) |
| Level 1 |
| Level 2 |
| Level 3 |
| Netting(a) | Collateral |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Netting(a) | Collateral |
| Total | ||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | - | $ | 3,401 | $ | - | $ | - | $ | - | $ | 3,401 | $ | 239 | $ | 5,450 | $ | - | $ | - | $ | - | $ | 5,689 |
Obligations of states, municipalities and political subdivisions |
| - |
| 13,786 |
| 2,136 |
| - |
| - |
| 15,922 |
| - |
| 13,338 |
| 2,102 |
| - |
| - |
| 15,440 |
Non-U.S. governments |
| 15 |
| 15,256 |
| 3 |
| - |
| - |
| 15,274 |
| 48 |
| 14,119 |
| 6 |
| - |
| - |
| 14,173 |
Corporate debt |
| - |
| 137,141 |
| 1,532 |
| - |
| - |
| 138,673 |
| - |
| 143,107 |
| 1,215 |
| - |
| - |
| 144,322 |
RMBS |
| - |
| 19,959 |
| 14,045 |
| - |
| - |
| 34,004 |
| - |
| 19,170 |
| 11,687 |
| - |
| - |
| 30,857 |
CMBS |
| - |
| 12,269 |
| 892 |
| - |
| - |
| 13,161 |
| - |
| 13,080 |
| 1,146 |
| - |
| - |
| 14,226 |
CDO/ABS |
| - |
| 8,926 |
| 8,840 |
| - |
| - |
| 17,766 |
| - |
| 8,301 |
| 8,768 |
| - |
| - |
| 17,069 |
Total bonds available for sale |
| 15 |
| 210,738 |
| 27,448 |
| - |
| - |
| 238,201 |
| 287 |
| 216,565 |
| 24,924 |
| - |
| - |
| 241,776 |
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
| 84 |
| 2,696 |
| - |
| - |
| - |
| 2,780 |
| 6 |
| 2,051 |
| - |
| - |
| - |
| 2,057 |
Non-U.S. governments |
| - |
| 51 |
| - |
| - |
| - |
| 51 |
| - |
| - |
| - |
| - |
| - |
| - |
Corporate debt |
| - |
| 1,745 |
| - |
| - |
| - |
| 1,745 |
| - |
| 16 |
| - |
| - |
| - |
| 16 |
RMBS |
| - |
| 491 |
| 1,266 |
| - |
| - |
| 1,757 |
| - |
| 318 |
| 149 |
| - |
| - |
| 467 |
CMBS |
| - |
| 315 |
| 84 |
| - |
| - |
| 399 |
| - |
| 229 |
| 42 |
| - |
| - |
| 271 |
CDO/ABS |
| - |
| 530 |
| 4,249 |
| - |
| - |
| 4,779 |
| - |
| 164 |
| 2,378 |
| - |
| - |
| 2,542 |
Total other bond securities |
| 84 |
| 5,828 |
| 5,599 |
| - |
| - |
| 11,511 |
| 6 |
| 2,778 |
| 2,569 |
| - |
| - |
| 5,353 |
Equity securities |
| 804 |
| 11 |
| 26 |
| - |
| - |
| 841 |
| 582 |
| 23 |
| 19 |
| - |
| - |
| 624 |
Other invested assets(b) |
| - |
| 86 |
| 591 |
| - |
| - |
| 677 |
| - |
| 80 |
| 1,467 |
| - |
| - |
| 1,547 |
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| 4 |
| 2,660 |
| - |
| - |
| - |
| 2,664 |
| 2 |
| 6,621 |
| - |
| - |
| - |
| 6,623 |
Foreign exchange contracts |
| - |
| 1,106 |
| 1 |
| - |
| - |
| 1,107 |
| - |
| 2,337 |
| 1 |
| - |
| - |
| 2,338 |
Equity contracts |
| 55 |
| 330 |
| 103 |
| - |
| - |
| 488 |
| 87 |
| 1,003 |
| 150 |
| - |
| - |
| 1,240 |
Credit contracts |
| - |
| - |
| 1 |
| - |
| - |
| 1 |
| - |
| - |
| 133 |
| - |
| - |
| 133 |
Other contracts |
| - |
| - |
| 13 |
| - |
| - |
| 13 |
| - |
| - |
| 15 |
| - |
| - |
| 15 |
Counterparty netting and cash collateral |
| - |
| - |
| - |
| (1,647) |
| (1,734) |
| (3,381) |
| - |
| - |
| - |
| (4,645) |
| (4,840) |
| (9,485) |
Total derivative assets |
| 59 |
| 4,096 |
| 118 |
| (1,647) |
| (1,734) |
| 892 |
| 89 |
| 9,961 |
| 299 |
| (4,645) |
| (4,840) |
| 864 |
Short-term investments |
| 1,993 |
| 2,047 |
| - |
| - |
| - |
| 4,040 |
| 1,732 |
| 6,454 |
| - |
| - |
| - |
| 8,186 |
Other assets |
| 176 |
| 2,180 |
| 91 |
| - |
| - |
| 2,447 | ||||||||||||
Separate account assets |
| 84,260 |
| 4,558 |
| - |
| - |
| - |
| 88,818 |
| 74,591 |
| 4,245 |
| - |
| - |
| - |
| 78,836 |
Other assets |
| - |
| - |
| 59 |
| - |
| - |
| 59 | ||||||||||||
Total | $ | 87,215 | $ | 227,364 | $ | 33,841 | $ | (1,647) | $ | (1,734) | $ | 345,039 | $ | 77,463 | $ | 242,286 | $ | 29,369 | $ | (4,645) | $ | (4,840) | $ | 339,633 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | - | $ | - | $ | 4,878 | $ | - | $ | - | $ | 4,878 | $ | - | $ | - | $ | 8,153 | $ | - | $ | - | $ | 8,153 |
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| - |
| 1,905 |
| 15 |
| - |
| - |
| 1,920 |
| 2 |
| 4,224 |
| - |
| - |
| - |
| 4,226 |
Foreign exchange contracts |
| - |
| 850 |
| - |
| - |
| - |
| 850 |
| - |
| 1,028 |
| 4 |
| - |
| - |
| 1,032 |
Equity contracts |
| 12 |
| 32 |
| 7 |
| - |
| - |
| 51 |
| 8 |
| 62 |
| 7 |
| - |
| - |
| 77 |
Credit contracts |
| - |
| 17 |
| 223 |
| - |
| - |
| 240 |
| - |
| 24 |
| 57 |
| - |
| - |
| 81 |
Other contracts |
| - |
| - |
| 5 |
| - |
| - |
| 5 |
| - |
| - |
| 13 |
| - |
| - |
| 13 |
Counterparty netting and cash collateral |
| - |
| - |
| - |
| (1,647) |
| (188) |
| (1,835) |
| - |
| - |
| - |
| (4,645) |
| (147) |
| (4,792) |
Total derivative liabilities |
| 12 |
| 2,804 |
| 250 |
| (1,647) |
| (188) |
| 1,231 |
| 10 |
| 5,338 |
| 81 |
| (4,645) |
| (147) |
| 637 |
Other liabilities |
| - |
| - |
| - |
| - |
| - |
| - | ||||||||||||
Long-term debt |
| - |
| 2,263 |
| - |
| - |
| - |
| 2,263 |
| - |
| 2,276 |
| - |
| - |
| - |
| 2,276 |
Other liabilities |
| 105 |
| 85 |
| - |
| - |
| - |
| 190 | ||||||||||||
Total | $ | 117 | $ | 5,152 | $ | 5,128 | $ | (1,647) | $ | (188) | $ | 8,562 | $ | 10 | $ | 7,614 | $ | 8,234 | $ | (4,645) | $ | (147) | $ | 11,066 |
1418AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
December 31, 2018 |
|
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|
|
|
| Counterparty | Cash |
| |||||||||||||||
December 31, 2019 |
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|
|
|
| Counterparty | Cash |
| |||||||||||||||
(in millions) |
| Level 1 |
| Level 2 |
| Level 3 |
| Netting(a) |
| Collateral |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Netting(a) |
| Collateral |
| Total |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | 53 | $ | 3,207 | $ | - | $ | - | $ | - | $ | 3,260 | $ | 135 | $ | 5,245 | $ | - | $ | - | $ | - | $ | 5,380 |
Obligations of states, municipalities and political subdivisions |
| - |
| 14,001 |
| 2,000 |
| - |
| - |
| 16,001 |
| - |
| 13,197 |
| 2,121 |
| - |
| - |
| 15,318 |
Non-U.S. governments |
| 69 |
| 14,445 |
| 11 |
| - |
| - |
| 14,525 |
| 60 |
| 14,809 |
| - |
| - |
| - |
| 14,869 |
Corporate debt |
| - |
| 129,836 |
| 864 |
| - |
| - |
| 130,700 |
| - |
| 147,973 |
| 1,663 |
| - |
| - |
| 149,636 |
RMBS |
| - |
| 20,178 |
| 14,199 |
| - |
| - |
| 34,377 |
| - |
| 19,397 |
| 13,408 |
| - |
| - |
| 32,805 |
CMBS |
| - |
| 11,784 |
| 917 |
| - |
| - |
| 12,701 |
| - |
| 13,377 |
| 1,053 |
| - |
| - |
| 14,430 |
CDO/ABS |
| - |
| 8,725 |
| 9,102 |
| - |
| - |
| 17,827 |
| - |
| 10,962 |
| 7,686 |
| - |
| - |
| 18,648 |
Total bonds available for sale |
| 122 |
| 202,176 |
| 27,093 |
| - |
| - |
| 229,391 |
| 195 |
| 224,960 |
| 25,931 |
| - |
| - |
| 251,086 |
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
| 11 |
| 2,654 |
| - |
| - |
| - |
| 2,665 |
| - |
| 2,121 |
| - |
| - |
| - |
| 2,121 |
Non-U.S. governments |
| - |
| 45 |
| - |
| - |
| - |
| 45 |
| - |
| - |
| - |
| - |
| - |
| - |
Corporate debt |
| - |
| 1,671 |
| - |
| - |
| - |
| 1,671 |
| - |
| 18 |
| - |
| - |
| - |
| 18 |
RMBS |
| - |
| 424 |
| 1,290 |
| - |
| - |
| 1,714 |
| - |
| 346 |
| 143 |
| - |
| - |
| 489 |
CMBS |
| - |
| 311 |
| 77 |
| - |
| - |
| 388 |
| - |
| 272 |
| 50 |
| - |
| - |
| 322 |
CDO/ABS |
| - |
| 454 |
| 4,478 |
| - |
| - |
| 4,932 |
| - |
| 187 |
| 3,545 |
| - |
| - |
| 3,732 |
Total other bond securities |
| 11 |
| 5,559 |
| 5,845 |
| - |
| - |
| 11,415 |
| - |
| 2,944 |
| 3,738 |
| - |
| - |
| 6,682 |
Equity securities |
| 1,213 |
| 13 |
| 27 |
| - |
| - |
| 1,253 |
| 756 |
| 77 |
| 8 |
| - |
| - |
| 841 |
Other invested assets(b) |
| - |
| 341 |
| 587 |
| - |
| - |
| 928 |
| - |
| 86 |
| 1,192 |
| - |
| - |
| 1,278 |
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| 2 |
| 2,888 |
| - |
| - |
| - |
| 2,890 |
| 1 |
| 3,199 |
| - |
| - |
| - |
| 3,200 |
Foreign exchange contracts |
| - |
| 1,159 |
| 5 |
| - |
| - |
| 1,164 |
| - |
| 1,034 |
| 6 |
| - |
| - |
| 1,040 |
Equity contracts |
| 133 |
| 190 |
| 75 |
| - |
| - |
| 398 |
| 5 |
| 593 |
| 171 |
| - |
| - |
| 769 |
Credit contracts |
| - |
| - |
| 1 |
| - |
| - |
| 1 |
| - |
| - |
| 3 |
| - |
| - |
| 3 |
Other contracts |
| - |
| - |
| 15 |
| - |
| - |
| 15 |
| - |
| - |
| 14 |
| - |
| - |
| 14 |
Counterparty netting and cash collateral |
| - |
| - |
| - |
| (1,713) |
| (1,840) |
| (3,553) |
| - |
| - |
| - |
| (2,427) |
| (1,806) |
| (4,233) |
Total derivative assets |
| 135 |
| 4,237 |
| 96 |
| (1,713) |
| (1,840) |
| 915 |
| 6 |
| 4,826 |
| 194 |
| (2,427) |
| (1,806) |
| 793 |
Short-term investments |
| 2,416 |
| 599 |
| - |
| - |
| - |
| 3,015 |
| 2,299 |
| 3,044 |
| - |
| - |
| - |
| 5,343 |
Other assets |
| 57 |
| 2,212 |
| 89 |
| - |
| - |
| 2,358 | ||||||||||||
Separate account assets |
| 77,202 |
| 4,645 |
| - |
| - |
| - |
| 81,847 |
| 89,069 |
| 4,203 |
| - |
| - |
| - |
| 93,272 |
Other assets |
| - |
| - |
| 58 |
| - |
| - |
| 58 | ||||||||||||
Total | $ | 81,099 | $ | 217,570 | $ | 33,706 | $ | (1,713) | $ | (1,840) | $ | 328,822 | $ | 92,382 | $ | 242,352 | $ | 31,152 | $ | (2,427) | $ | (1,806) | $ | 361,653 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | - | $ | - | $ | 4,116 | $ | - | $ | - | $ | 4,116 | $ | - | $ | - | $ | 6,910 | $ | - | $ | - | $ | 6,910 |
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| 4 |
| 2,004 |
| 15 |
| - |
| - |
| 2,023 |
| 4 |
| 2,745 |
| - |
| - |
| - |
| 2,749 |
Foreign exchange contracts |
| - |
| 858 |
| - |
| - |
| - |
| 858 |
| - |
| 1,025 |
| - |
| - |
| - |
| 1,025 |
Equity contracts |
| 12 |
| 3 |
| - |
| - |
| - |
| 15 |
| 8 |
| 111 |
| 20 |
| - |
| - |
| 139 |
Credit contracts |
| - |
| 8 |
| 228 |
| - |
| - |
| 236 |
| - |
| 24 |
| 65 |
| - |
| - |
| 89 |
Other contracts |
| - |
| - |
| 6 |
| - |
| - |
| 6 |
| - |
| - |
| 7 |
| - |
| - |
| 7 |
Counterparty netting and cash collateral |
| - |
| - |
| - |
| (1,713) |
| (187) |
| (1,900) |
| - |
| - |
| - |
| (2,427) |
| (527) |
| (2,954) |
Total derivative liabilities |
| 16 |
| 2,873 |
| 249 |
| (1,713) |
| (187) |
| 1,238 |
| 12 |
| 3,905 |
| 92 |
| (2,427) |
| (527) |
| 1,055 |
Other liabilities |
| - |
| 45 |
| - |
| - |
| - |
| 45 | ||||||||||||
Long-term debt |
| - |
| 2,213 |
| - |
| - |
| - |
| 2,213 |
| - |
| 2,062 |
| - |
| - |
| - |
| 2,062 |
Other liabilities |
| 16 |
| 11 |
| - |
| - |
| - |
| 27 | ||||||||||||
Total | $ | 32 | $ | 5,097 | $ | 4,365 | $ | (1,713) | $ | (187) | $ | 7,594 | $ | 12 | $ | 6,012 | $ | 7,002 | $ | (2,427) | $ | (527) | $ | 10,072 |
(a)Represents netting of derivative exposures covered by qualifying master netting agreements.
(b)Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $5.1$5.0 billion and $5.0$5.5 billion as of March 31, 20192020 and December 31, 2018,2019, respectively.
AIG | First Quarter 20192020 Form 10-Q1519
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.
During the three-month periods ended March 31, 2019 and 2018, we transferred $62 million and $16 million, respectively, of securities issued by non-U.S. government entities from Level 1 to Level 2, because they are no longer considered actively traded. For similar reasons, during the three-month periods ended March 31, 2019 and 2018, we transferred $51 million and $191 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-month periods ended March 31, 2019 and 2018.
Changes in Level 3 Recurring Fair Value Measurements
The following tables present changes during the three-month periods ended March 31, 20192020 and 20182019 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 March 31, 20192020 and 2018:2019:
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| Changes in | ||||||||||||||||
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| Unrealized Gains | ||||||||||||||||
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| Net |
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| Changes in |
|
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| Net |
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| Changes in |
| (Losses) Included in |
|
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| Realized and |
|
|
| Purchases, |
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|
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| Unrealized Gains |
|
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| Realized and |
|
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|
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| Unrealized Gains |
| Other Comprehensive |
|
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| Unrealized |
|
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| Sales, |
|
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|
|
| (Losses) Included |
|
|
| Unrealized |
|
|
| Purchases, |
|
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|
|
|
|
|
|
| (Losses) Included |
| Income (Loss) for |
|
| Fair Value |
| Gains (Losses) |
| Other |
| Issuances and |
| Gross |
| Gross |
| Fair Value |
| in Income on |
| Fair Value | Gains (Losses) |
| Other |
| Sales, |
| Gross |
| Gross |
| Reclassification |
| Fair Value |
| in Income on |
| Recurring Level 3 | |
|
| Beginning |
| Included |
| Comprehensive |
| Settlements, |
| Transfers |
| Transfers |
| End |
| Instruments Held |
| Beginning |
| Included | Comprehensive |
| Issuances and | Transfers |
| of Held |
| End |
| Instruments Held |
| Instruments Held | ||||
(in millions) |
| of Period |
| in Income |
| Income (Loss) |
| Net |
| In |
| Out |
| of Period |
| at End of Period |
| of Period |
| in Income |
| Income (Loss) | Settlements, Net |
| In |
| Out |
| for Sale(a) |
| of Period |
| at End of Period |
| at End of Period | |
Three Months Ended March 31, 2019 |
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| ||||||||||||||||||||
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2020 |
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Assets: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
and political subdivisions | $ | 2,000 | $ | (1) | $ | 97 | $ | 24 | $ | 29 | $ | (13) | $ | 2,136 | $ | - | ||||||||||||||||||||
Obligations of states, |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
municipalities and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
political subdivisions | $ | 2,121 | $ | 5 | $ | (55) | $ | 137 | $ | 27 | $ | (133) | $ | - | $ | 2,102 | $ | - | $ | (51) | ||||||||||||||||
Non-U.S. governments |
| 11 |
| - |
| - |
| (4) |
| - |
| (4) |
| 3 |
| - |
| - |
| - |
| - |
| - |
| 6 |
| - |
| - |
| 6 |
| - |
| - |
Corporate debt |
| 864 |
| (3) |
| 38 |
| 34 |
| 654 |
| (55) |
| 1,532 |
| - |
| 1,663 |
| (67) |
| (81) |
| 7 |
| 103 |
| (410) |
| - |
| 1,215 |
| - |
| (29) |
RMBS |
| 14,199 |
| 227 |
| 24 |
| (412) |
| 23 |
| (16) |
| 14,045 |
| - |
| 13,408 |
| 132 |
| (1,623) |
| (223) |
| 19 |
| (26) |
| - |
| 11,687 |
| - |
| (1,505) |
CMBS |
| 917 |
| 1 |
| 17 |
| 146 |
| - |
| (189) |
| 892 |
| - |
| 1,053 |
| 7 |
| 19 |
| 44 |
| 23 |
| - |
| - |
| 1,146 |
| - |
| 21 |
CDO/ABS |
| 9,102 |
| 4 |
| 54 |
| (45) |
| 92 |
| (367) |
| 8,840 |
| - |
| 7,686 |
| 17 |
| (557) |
| 47 |
| 1,603 |
| (28) |
| - |
| 8,768 |
| - |
| (536) |
Total bonds available for sale |
| 27,093 |
| 228 |
| 230 |
| (257) |
| 798 |
| (644) |
| 27,448 |
| - | ||||||||||||||||||||
Total bonds available for sale(b) |
| 25,931 |
| 94 |
| (2,297) |
| 12 |
| 1,781 |
| (597) |
| - |
| 24,924 |
| - |
| (2,100) | ||||||||||||||||
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
RMBS |
| 1,290 |
| 17 |
| - |
| (41) |
| - |
| - |
| 1,266 |
| - |
| 143 |
| (14) |
| - |
| 20 |
| - |
| - |
| - |
| 149 |
| (14) |
| - |
CMBS |
| 77 |
| 4 |
| - |
| 3 |
| - |
| - |
| 84 |
| 3 |
| 50 |
| (7) |
| - |
| (1) |
| - |
| - |
| - |
| 42 |
| (8) |
| - |
CDO/ABS |
| 4,478 |
| 68 |
| - |
| (201) |
| - |
| (96) |
| 4,249 |
| 24 |
| 3,545 |
| (173) |
| - |
| (994) |
| - |
| - |
| - |
| 2,378 |
| (262) |
| - |
Total other bond securities |
| 5,845 |
| 89 |
| - |
| (239) |
| - |
| (96) |
| 5,599 |
| 27 |
| 3,738 |
| (194) |
| - |
| (975) |
| - |
| - |
| - |
| 2,569 |
| (284) |
| - |
Equity securities |
| 27 |
| - |
| - |
| - |
| - |
| (1) |
| 26 |
| - |
| 8 |
| (1) |
| 1 |
| 10 |
| 1 |
| - |
| - |
| 19 |
| - |
| - |
Mortgage and other loans receivable |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - | ||||||||||||||||||||
Mortgage and other loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
receivable |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - | ||||||||||||||||
Other invested assets |
| 587 |
| - |
| - |
| 4 |
| - |
| - |
| 591 |
| 2 |
| 1,192 |
| (4) |
| - |
| 129 |
| 150 |
| - |
| - |
| 1,467 |
| 14 |
| - |
Other assets |
| 58 |
| - |
| - |
| 1 |
| - |
| - |
| 59 |
| - |
| 89 |
| - |
| - |
| 5 |
| - |
| - |
| (3) |
| 91 |
| - |
| - |
Total | $ | 33,610 | $ | 317 | $ | 230 | $ | (491) | $ | 798 | $ | (741) | $ | 33,723 | $ | 29 | $ | 30,958 | $ | (105) | $ | (2,296) | $ | (819) | $ | 1,932 | $ | (597) | $ | (3) | $ | 29,070 | $ | (270) | $ | (2,100) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Gains |
|
|
|
| Net |
|
|
|
|
|
|
|
|
|
|
| Changes in |
|
|
| Net |
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in |
| (Losses) Included in |
|
|
|
| Realized and |
|
|
| Purchases, |
|
|
|
|
|
|
| Unrealized Gains |
|
|
| Realized and |
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Gains |
| Other Comprehensive |
|
|
|
| Unrealized |
|
|
| Sales, |
|
|
|
|
|
|
| (Losses) Included |
|
|
| Unrealized |
|
|
| Purchases, |
|
|
|
|
|
|
|
|
| (Losses) Included |
| Income (Loss) for |
|
| Fair Value |
| (Gains) Losses |
| Other |
| Issuances and |
| Gross |
| Gross |
| Fair Value |
| in Income on |
| Fair Value | (Gains) Losses |
| Other |
| Sales, |
| Gross |
| Gross |
| Reclassification |
| Fair Value |
| in Income on |
| Recurring Level 3 | |
|
| Beginning |
| Included |
| Comprehensive |
| Settlements, |
| Transfers |
| Transfers |
| End |
| Instruments Held |
| Beginning |
| Included | Comprehensive |
| Issuances and | Transfers |
| of Held |
| End |
| Instruments Held |
| Instruments Held | ||||
(in millions) |
| of Period |
| in Income |
| Income (Loss) |
| Net |
| In |
| Out |
| of Period |
| at End of Period |
| of Period |
| in Income |
| Income (Loss) | Settlements, Net |
| In |
| Out |
| for Sale(a) |
| of Period |
| at End of Period |
| at End of Period | |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | 4,116 | $ | 569 | $ | - | $ | 193 | $ | - | $ | - | $ | 4,878 | $ | (521) | $ | 6,910 | $ | 1,171 | $ | - | $ | 72 | $ | - | $ | - | $ | - | $ | 8,153 | $ | (884) | $ | - |
Derivative liabilities, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| 15 |
| 1 |
| - |
| (1) |
| - |
| - |
| 15 |
| (1) |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Foreign exchange contracts |
| (5) |
| (5) |
| - |
| 9 |
| - |
| - |
| (1) |
| (1) |
| (6) |
| 3 |
| - |
| 6 |
| - |
| - |
| - |
| 3 |
| 1 |
| - |
Equity contracts |
| (75) |
| (16) |
| - |
| (5) |
| - |
| - |
| (96) |
| 19 |
| (151) |
| (26) |
| - |
| 34 |
| - |
| - |
| - |
| (143) |
| (14) |
| - |
Credit contracts |
| 227 |
| (3) |
| - |
| (2) |
| - |
| - |
| 222 |
| 4 |
| 62 |
| (124) |
| - |
| (14) |
| - |
| - |
| - |
| (76) |
| 118 |
| - |
Other contracts |
| (9) |
| (17) |
| - |
| 18 |
| - |
| - |
| (8) |
| 17 |
| (7) |
| (10) |
| - |
| 15 |
| - |
| - |
| - |
| (2) |
| 10 |
| - |
Total derivative liabilities, net(a) |
| 153 |
| (40) |
| - |
| 19 |
| - |
| - |
| 132 |
| 38 | ||||||||||||||||||||
Total derivative liabilities, net(c) |
| (102) |
| (157) |
| - |
| 41 |
| - |
| - |
| - |
| (218) |
| 115 |
| - | ||||||||||||||||
Total | $ | 4,269 | $ | 529 | $ | - | $ | 212 | $ | - | $ | - | $ | 5,010 | $ | (483) | $ | 6,808 | $ | 1,014 | $ | - | $ | 113 | $ | - | $ | - | $ | - | $ | 7,935 | $ | (769) | $ | - |
1620AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
|
|
|
| Net |
|
|
|
|
|
|
|
|
|
|
| Changes in |
|
|
| Net |
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in |
|
|
|
| Realized and |
|
|
| Purchases, |
|
|
|
|
|
|
| Unrealized Gains |
|
|
| Realized and |
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Gains |
|
|
|
| Unrealized |
|
|
| Sales, |
|
|
|
|
|
|
| (Losses) Included |
|
|
| Unrealized |
|
|
| Purchases, |
|
|
|
|
|
|
|
|
| (Losses) Included |
|
| Fair Value |
| Gains (Losses) |
| Other |
| Issuances and |
| Gross |
| Gross |
| Fair Value |
| in Income on |
| Fair Value | Gains (Losses) |
| Other |
| Sales, |
| Gross |
| Gross |
| Reclassification |
| Fair Value |
| in Income on | |
|
| Beginning |
| Included |
| Comprehensive |
| Settlements, |
| Transfers |
| Transfers |
| End |
| Instruments Held |
| Beginning |
| Included | Comprehensive |
| Issuances and |
| Transfers |
| Transfers |
| of Held |
| End |
| Instruments Held | |
(in millions) |
| of Period |
| in Income |
| Income (Loss) |
| Net |
| In |
| Out |
| of Period |
| at End of Period |
| of Period |
| in Income |
| Income (Loss) | Settlements, Net |
| In |
| Out |
| for Sale(a) |
| of Period |
| at End of Period | |
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
municipalities and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
political subdivisions | $ | 2,404 | $ | 1 | $ | (75) | $ | (69) | $ | - | $ | - | $ | 2,261 | $ | - | ||||||||||||||||||
Obligations of states, municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
and political subdivisions | $ | 2,000 | $ | (1) | $ | 97 | $ | 24 | $ | 29 | $ | (13) | $ | - | $ | 2,136 | $ | - | ||||||||||||||||
Non-U.S. governments |
| 8 |
| (4) |
| 4 |
| 1 |
| - |
| - |
| 9 |
| - |
| 11 |
| - |
| - |
| (4) |
| - |
| (4) |
| - |
| 3 |
| - |
Corporate debt |
| 1,173 |
| (57) |
| 10 |
| 248 |
| 565 |
| (68) |
| 1,871 |
| - |
| 864 |
| (3) |
| 38 |
| 34 |
| 654 |
| (55) |
| - |
| 1,532 |
| - |
RMBS |
| 16,136 |
| 266 |
| 5 |
| (536) |
| - |
| (32) |
| 15,839 |
| - |
| 14,199 |
| 227 |
| 24 |
| (412) |
| 23 |
| (16) |
| - |
| 14,045 |
| - |
CMBS |
| 624 |
| 6 |
| (17) |
| (23) |
| - |
| (6) |
| 584 |
| - |
| 917 |
| 1 |
| 17 |
| 146 |
| - |
| (189) |
| - |
| 892 |
| - |
CDO/ABS |
| 8,651 |
| 8 |
| (88) |
| (710) |
| - |
| (15) |
| 7,846 |
| - |
| 9,102 |
| 4 |
| 54 |
| (45) |
| 92 |
| (367) |
| - |
| 8,840 |
| - |
Total bonds available for sale |
| 28,996 |
| 220 |
| (161) |
| (1,089) |
| 565 |
| (121) |
| 28,410 |
| - |
| 27,093 |
| 228 |
| 230 |
| (257) |
| 798 |
| (644) |
| - |
| 27,448 |
| - |
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| 18 |
| 1 |
| - |
| - |
| - |
| - |
| 19 |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
RMBS |
| 1,464 |
| 39 |
| - |
| (76) |
| - |
| - |
| 1,427 |
| 51 |
| 1,290 |
| 17 |
| - |
| (41) |
| - |
| - |
| - |
| 1,266 |
| - |
CMBS |
| 74 |
| (1) |
| - |
| (1) |
| 1 |
| - |
| 73 |
| (1) |
| 77 |
| 4 |
| - |
| 3 |
| - |
| - |
| - |
| 84 |
| 3 |
CDO/ABS |
| 4,956 |
| 89 |
| - |
| (260) |
| - |
| (9) |
| 4,776 |
| 8 |
| 4,478 |
| 68 |
| - |
| (201) |
| - |
| (96) |
| - |
| 4,249 |
| 24 |
Total other bond securities |
| 6,512 |
| 128 |
| - |
| (337) |
| 1 |
| (9) |
| 6,295 |
| 58 |
| 5,845 |
| 89 |
| - |
| (239) |
| - |
| (96) |
| - |
| 5,599 |
| 27 |
Equity securities |
| - |
| - |
| - |
| 3 |
| - |
| - |
| 3 |
| 2 |
| 27 |
| - |
| - |
| - |
| - |
| (1) |
| - |
| 26 |
| - |
Mortgage and other loans receivable |
| 5 |
| - |
| - |
| (5) |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Other invested assets |
| 250 |
| 23 |
| 1 |
| 18 |
| - |
| - |
| 292 |
| 30 |
| 587 |
| - |
| - |
| 4 |
| - |
| - |
| - |
| 591 |
| 2 |
Other assets |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 58 |
| - |
| - |
| 1 |
| - |
| - |
| - |
| 59 |
| - |
Total | $ | 35,763 | $ | 371 | $ | (160) | $ | (1,410) | $ | 566 | $ | (130) | $ | 35,000 | $ | 90 | $ | 33,610 | $ | 317 | $ | 230 | $ | (491) | $ | 798 | $ | (741) | $ | - | $ | 33,723 | $ | 29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net |
|
|
|
|
|
|
|
|
|
|
|
|
| Changes in |
|
|
|
| Net |
|
|
|
|
|
|
|
|
|
|
| Changes in |
|
|
| Realized and |
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Gains |
|
|
|
| Realized and |
|
|
| Purchases, |
|
|
|
|
|
|
| Unrealized Gains |
|
|
| Unrealized |
|
|
| Purchases, |
|
|
|
|
|
|
|
|
| (Losses) Included |
|
|
|
| Unrealized |
|
|
| Sales, |
|
|
|
|
|
|
| (Losses) Included |
| Fair Value |
| (Gains) Losses |
| Other |
| Sales, |
| Gross |
| Gross |
| Reclassification |
| Fair Value |
| in Income on |
|
| Fair Value |
| (Gains) Losses |
| Other |
| Issuances and |
| Gross |
| Gross |
| Fair Value |
| in Income on |
| Beginning |
| Included | Comprehensive |
| Issuances and |
| Transfers |
| Transfers |
| of Held |
| End |
| Instruments Held | |
|
| Beginning |
| Included |
| Comprehensive |
| Settlements, |
| Transfers |
| Transfers |
| End |
| Instruments Held | ||||||||||||||||||
(in millions) |
| of Period |
| in Income |
| Income (Loss) |
| Net |
| In |
| Out |
| of Period |
| at End of Period |
| of Period |
| in Income |
| Income (Loss) | Settlements, Net |
| In |
| Out |
| for Sale(a) |
| of Period |
| at End of Period | |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | 4,136 | $ | (506) | $ | - | $ | 66 | $ | - | $ | - | $ | 3,696 | $ | 604 | $ | 4,116 | $ | 569 | $ | - | $ | 193 | $ | - | $ | - | $ | - | $ | 4,878 | $ | (521) |
Derivative liabilities, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| 22 |
| (3) |
| - |
| (2) |
| - |
| - |
| 17 |
| 3 |
| 15 |
| 1 |
| - |
| (1) |
| - |
| - |
| - |
| 15 |
| (1) |
Foreign exchange contracts |
| - |
| (10) |
| - |
| 11 |
| - |
| - |
| 1 |
| 3 |
| (5) |
| (5) |
| - |
| 9 |
| - |
| - |
| - |
| (1) |
| (1) |
Equity contracts |
| (82) |
| 4 |
| - |
| - |
| - |
| - |
| (78) |
| (4) |
| (75) |
| (16) |
| - |
| (5) |
| - |
| - |
| - |
| (96) |
| 19 |
Credit contracts |
| 262 |
| (10) |
| - |
| (2) |
| - |
| - |
| 250 |
| 10 |
| 227 |
| (3) |
| - |
| (2) |
| - |
| - |
| - |
| 222 |
| 4 |
Other contracts |
| (15) |
| (17) |
| - |
| 20 |
| - |
| - |
| (12) |
| 17 |
| (9) |
| (17) |
| - |
| 18 |
| - |
| - |
| - |
| (8) |
| 17 |
Total derivative liabilities, net(a) |
| 187 |
| (36) |
| - |
| 27 |
| - |
| - |
| 178 |
| 29 | ||||||||||||||||||
Total derivative liabilities, net(c) |
| 153 |
| (40) |
| - |
| 19 |
| - |
| - |
| - |
| 132 |
| 38 | ||||||||||||||||
Total | $ | 4,323 | $ | (542) | $ | - | $ | 93 | $ | - | $ | - | $ | 3,874 | $ | 633 | $ | 4,269 | $ | 529 | $ | - | $ | 212 | $ | - | $ | - | $ | - | $ | 5,010 | $ | (483) |
(a)Reported in Other assets in the Condensed Consolidated Balance Sheets.
(b)As a result of the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020, credit losses are included in net realized and unrealized (gains) losses included in income.
(c)Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.
AIG | First Quarter 20192020 Form 10-Q1721
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 March 31, 2020 |
|
|
|
|
|
|
|
| ||||||||
Assets: |
|
|
|
|
|
|
|
| ||||||||
Bonds available for sale* | $ | 198 | $ | (104) | $ | - | $ | 94 | ||||||||
Other bond securities |
| (462) |
| 268 |
| - |
| (194) | ||||||||
Equity securities |
| - |
| (1) |
| - |
| (1) | ||||||||
Other invested assets |
| (4) |
| - |
| - |
| (4) | ||||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale | $ | 242 | $ | (14) | $ | - | $ | 228 | $ | 242 | $ | (14) | $ | - | $ | 228 |
Other bond securities |
| 87 |
| 2 |
| - |
| 89 |
| 87 |
| 2 |
| - |
| 89 |
Other invested assets |
| - |
| - |
| - |
| - | ||||||||
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
| ||||||||
Assets: |
|
|
|
|
|
|
|
| ||||||||
Bonds available for sale | $ | 282 | $ | (62) | $ | - | $ | 220 | ||||||||
Other bond securities |
| 23 |
| (4) |
| 109 |
| 128 | ||||||||
Equity securities |
| - |
| - |
| - |
| - | ||||||||
Other invested assets |
| 25 |
| - |
| (2) |
| 23 |
| - |
| - |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 March 31, 2020 |
|
|
|
|
|
|
|
| ||||||||
Liabilities: |
|
|
|
|
|
|
|
| ||||||||
Policyholder contract deposits | $ | - | $ | 1,171 | $ | - | $ | 1,171 | ||||||||
Derivative liabilities, net |
| - |
| (143) |
| (14) |
| (157) | ||||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | - | $ | 569 | $ | - | $ | 569 | $ | - | $ | 569 | $ | - | $ | 569 |
Derivative liabilities, net |
| - |
| (24) |
| (16) |
| (40) |
| - |
| (24) |
| (16) |
| (40) |
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
| ||||||||
Liabilities: |
|
|
|
|
|
|
|
| ||||||||
Policyholder contract deposits | $ | - | $ | (506) | $ | - | $ | (506) | ||||||||
Derivative liabilities, net |
| - |
| 1 |
| (37) |
| (36) |
*As a result of the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020, credit losses are included in net realized capital gains (losses).
1822AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for the three-month periods ended March 31, 20192020 and 20182019 related to Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets:
|
|
|
|
|
| Issuances |
| Purchases, Sales, |
|
|
|
|
| Issuances |
| Purchases, Sales, |
|
|
|
|
|
| and |
| Issuances and |
|
|
|
|
| and |
| Issuances and |
(in millions) |
| Purchases |
| Sales |
| Settlements(a) |
| Settlements, Net(a) |
| Purchases |
| Sales |
| Settlements(a) |
| Settlements, Net(a) |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
| ||||||||
Three Months Ended March 31, 2020 |
|
|
|
|
|
|
|
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities and political subdivisions | $ | 47 | $ | (15) | $ | (8) | $ | 24 | $ | 145 | $ | (2) | $ | (6) | $ | 137 |
Non-U.S. governments |
| - |
| - |
| (4) |
| (4) |
| - |
| - |
| - |
| - |
Corporate debt |
| 49 |
| - |
| (15) |
| 34 |
| 112 |
| (5) |
| (100) |
| 7 |
RMBS |
| 307 |
| (26) |
| (693) |
| (412) |
| 336 |
| - |
| (559) |
| (223) |
CMBS |
| 184 |
| - |
| (38) |
| 146 |
| 53 |
| (2) |
| (7) |
| 44 |
CDO/ABS |
| 198 |
| (156) |
| (87) |
| (45) |
| 225 |
| (22) |
| (156) |
| 47 |
Total bonds available for sale |
| 785 |
| (197) |
| (845) |
| (257) |
| 871 |
| (31) |
| (828) |
| 12 |
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
| - |
| - |
| (41) |
| (41) |
| 25 |
| - |
| (5) |
| 20 |
CMBS |
| 4 |
| - |
| (1) |
| 3 |
| - |
| - |
| (1) |
| (1) |
CDO/ABS |
| - |
| - |
| (201) |
| (201) |
| 35 |
| (579) |
| (450) |
| (994) |
Total other bond securities |
| 4 |
| - |
| (243) |
| (239) |
| 60 |
| (579) |
| (456) |
| (975) |
Equity securities |
| - |
| - |
| - |
| - |
| 10 |
| - |
| - |
| 10 |
Mortgage and other loans receivable |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Other invested assets |
| 4 |
| - |
| - |
| 4 |
| 174 |
| - |
| (45) |
| 129 |
Other assets |
| - |
| - |
| 1 |
| 1 |
| - |
| - |
| 5 |
| 5 |
Total assets | $ | 793 | $ | (197) | $ | (1,087) | $ | (491) | $ | 1,115 | $ | (610) | $ | (1,324) | $ | (819) |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | - | $ | 173 | $ | 20 | $ | 193 | $ | - | $ | 222 | $ | (150) | $ | 72 |
Derivative liabilities, net |
| (13) |
| - |
| 32 |
| 19 |
| (15) |
| 8 |
| 48 |
| 41 |
Total liabilities | $ | (13) | $ | 173 | $ | 52 | $ | 212 | $ | (15) | $ | 230 | $ | (102) | $ | 113 |
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
| ||||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities and political subdivisions | $ | 15 | $ | - | $ | (84) | $ | (69) | $ | 47 | $ | (15) | $ | (8) | $ | 24 |
Non-U.S. governments |
| 2 |
| - |
| (1) |
| 1 |
| - |
| - |
| (4) |
| (4) |
Corporate debt |
| 254 |
| (3) |
| (3) |
| 248 |
| 49 |
| - |
| (15) |
| 34 |
RMBS |
| 233 |
| (5) |
| (764) |
| (536) |
| 307 |
| (26) |
| (693) |
| (412) |
CMBS |
| 12 |
| - |
| (35) |
| (23) |
| 184 |
| - |
| (38) |
| 146 |
CDO/ABS |
| 495 |
| (851) |
| (354) |
| (710) |
| 198 |
| (156) |
| (87) |
| (45) |
Total bonds available for sale |
| 1,011 |
| (859) |
| (1,241) |
| (1,089) |
| 785 |
| (197) |
| (845) |
| (257) |
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| - |
| - |
| - |
| - | ||||||||
RMBS |
| 1 |
| (5) |
| (72) |
| (76) |
| - |
| - |
| (41) |
| (41) |
CMBS |
| - |
| - |
| (1) |
| (1) |
| 4 |
| - |
| (1) |
| 3 |
CDO/ABS |
| - |
| (4) |
| (256) |
| (260) |
| - |
| - |
| (201) |
| (201) |
Total other bond securities |
| 1 |
| (9) |
| (329) |
| (337) |
| 4 |
| - |
| (243) |
| (239) |
Equity securities |
| 3 |
| - |
| - |
| 3 |
| - |
| - |
| - |
| - |
Mortgage and other loans receivable |
| - |
| (5) |
| - |
| (5) |
| - |
| - |
| - |
| - |
Other invested assets |
| 22 |
| - |
| (4) |
| 18 |
| 4 |
| - |
| - |
| 4 |
Other assets |
| - |
| - |
| 1 |
| 1 | ||||||||
Total assets | $ | 1,037 | $ | (873) | $ | (1,574) | $ | (1,410) | $ | 793 | $ | (197) | $ | (1,087) | $ | (491) |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | - | $ | 112 | $ | (46) | $ | 66 | $ | - | $ | 173 | $ | 20 | $ | 193 |
Derivative liabilities, net |
| (7) |
| - |
| 34 |
| 27 |
| (13) |
| - |
| 32 |
| 19 |
Total liabilities | $ | (7) | $ | 112 | $ | (12) | $ | 93 | $ | (13) | $ | 173 | $ | 52 | $ | 212 |
(a)There were no0 issuances during the three-month periods ended March 31, 20192020 and 2018, respectively.2019.
AIG | First Quarter 20192020 Form 10-Q1923
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 March 31, 20192020 and 20182019 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).
Transfers of Level 3 Assets and Liabilities
We record transfers of assets and liabilities into or out of Level 3 classification at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table above excludes $55$(156) million and $24$(55) million of net lossesgains (losses) related to assets and liabilities transferred into Level 3 during the three-month periods ended March 31, 20192020 and 2018,2019, respectively, and includes $1$(55) million and $(1) million of net lossesgains (losses) related to assets and liabilities transferred out of Level 3 induring the three-month periodperiods ended March 31, 2019.2020 and 2019, respectively.
Transfers of Level 3 Assets
During the three-month periods ended March 31, 2020 and 2019, and 2018, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS and 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, CMBS and CDO and certain ABS into Level 3 assets were due to decreases indiminished market transparency and liquidity for individual security types.
During the three-month periods ended March 31, 2020 and 2019, and 2018, transfers out of Level 3 assets primarily included private placement and other corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. securities. Transfers of certain investments in municipal securities, corporate debt, RMBS, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.
Transfers of Level 3 Liabilities
There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three-month periods ended March 31, 20192020 and 2018.2019.
2024AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:
| Fair Value at |
|
|
| |
| March 31, | Valuation |
| Range | |
(in millions) | 2019 | Technique | Unobservable Input(b) | (Weighted Average) | |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
and political subdivisions | $ | 1,590 | Discounted cash flow | Yield | 3.59% - 4.58% (4.08%) |
|
|
|
|
|
|
Corporate debt |
| 530 | Discounted cash flow | Yield | 4.23% - 6.09% (5.16%) |
|
|
|
|
|
|
RMBS(a) |
| 13,243 | Discounted cash flow | Constant prepayment rate | 3.63% - 12.64% (8.13%) |
|
|
|
| Loss severity | 38.94% - 75.51% (57.22%) |
|
|
|
| Constant default rate | 2.17% - 7.14% (4.65%) |
|
|
|
| Yield | 2.96% - 5.07% (4.01%) |
|
|
|
|
|
|
CDO/ABS(a) |
| 4,554 | Discounted cash flow | Yield | 3.45% - 5.21% (4.33%) |
|
|
|
|
|
|
CMBS |
| 484 | Discounted cash flow | Yield | 2.81% - 5.81% (4.31%) |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives within |
|
|
|
|
|
Policyholder contract deposits: |
|
|
|
|
|
|
|
|
|
|
|
Guaranteed minimum withdrawal benefits (GMWB) |
| 2,023 | Discounted cash flow | Equity volatility | 5.85% - 46.25% |
|
|
|
| Base lapse rate | 0.16% - 12.60% |
|
|
|
| Dynamic lapse multiplier | 20.00% - 180.00% |
|
|
|
| Mortality multiplier(c) | 40.00% - 153.00% |
|
|
|
| Utilization | 90.00% - 100.00% |
|
|
|
| Equity / interest-rate correlation | 20.00% - 40.00% |
|
|
|
|
|
|
Index Annuities |
| 2,382 | Discounted cash flow | Lapse rate | 0.50% - 40.00% |
|
|
|
| Mortality multiplier(c) | 42.00% - 162.00% |
|
|
|
| Option Budget | 1.00% - 4.00% |
|
|
|
|
|
|
Indexed Life |
| 448 | Discounted cash flow | Base lapse rate | 0.00% - 13.00% |
|
|
|
| Mortality rate | 0.00% - 100.00% |
Fair Value at | |||||
March 31, | Valuation | Range | |||
(in millions) | 2020 | Technique | Unobservable Input(b) | (Weighted Average) | |
Assets: | |||||
Obligations of states, municipalities | |||||
and political subdivisions | $ | 1,616 | Discounted cash flow | Yield | 3.37% - 4.13% (3.75%) |
Corporate debt | 982 | Discounted cash flow | Yield | 2.11% - 6.18% (4.14%) | |
RMBS(a) | 10,762 | Discounted cash flow | Constant prepayment rate | 4.46% - 13.12% (8.79%) | |
Loss severity | 30.78% - 76.29% (53.53%) | ||||
Constant default rate | 1.41% - 5.86% (3.63%) | ||||
Yield | 4.01% - 6.89% (5.45%) | ||||
CDO/ABS(a) | 6,914 | Discounted cash flow | Yield | 3.93% - 7.94% (5.94%) | |
CMBS | 555 | Discounted cash flow | Yield | 1.06% - 6.94% (4.00%) | |
Liabilities: | |||||
Embedded derivatives within | |||||
Policyholder contract deposits: | |||||
Guaranteed minimum withdrawal benefits (GMWB) | 3,978 | Discounted cash flow | Equity volatility | 7.00% - 57.00% | |
Base lapse rate | 0.00% - 13.00% | ||||
Dynamic lapse multiplier | 50.00% - 143.00% | ||||
Mortality multiplier(c) | 38.00% - 147.00% | ||||
Utilization | 90.00% - 100.00% | ||||
Equity / interest rate correlation | 20.00% - 40.00% | ||||
NPA(d) | 1.31% - 2.80% | ||||
Index annuities | 3,719 | Discounted cash flow | Lapse rate | 0.31% - 50.00% | |
Mortality multiplier(c) | 24.00% - 180.00% | ||||
Option budget | 0.00% - 4.00% | ||||
NPA(d) | 1.31% - 2.80% | ||||
Indexed life | 434 | Discounted cash flow | Base lapse rate | 0.00% - 37.97% | |
Mortality rate | 0.00% - 100.00% | ||||
NPA(d) | 1.31% - 2.80% |
AIG | First Quarter 20192020 Form 10-Q2125
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value at |
|
|
|
| Fair Value at |
|
|
|
|
| December 31, | Valuation |
| Range |
| December 31, | Valuation |
| Range |
(in millions) |
| 2018 | Technique | Unobservable Input(b) | (Weighted Average) |
| 2019 | Technique | Unobservable Input(b) | (Weighted Average) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
|
|
|
|
|
and political subdivisions | $ | 1,473 | Discounted cash flow | Yield | 3.91% - 5.00% (4.46%) | $ | 1,633 | Discounted cash flow | Yield | 3.35% - 3.95% (3.65%) |
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| 445 | Discounted cash flow | Yield | 4.35% - 5.99% (5.17%) |
| 1,087 | Discounted cash flow | Yield | 3.48% - 6.22% (4.85%) |
|
|
|
|
|
|
|
|
|
|
|
RMBS(a) |
| 13,608 | Discounted cash flow | Constant prepayment rate | 4.58% - 14.00% (9.29%) |
| 11,746 | Discounted cash flow | Constant prepayment rate | 4.00% - 12.89% (8.44%) |
|
|
|
| Loss severity | 39.66% - 74.40% (57.03%) |
|
|
| Loss severity | 33.68% - 76.91% (55.29%) |
|
|
|
| Constant default rate | 2.46% - 7.39% (4.92%) |
|
|
| Constant default rate | 1.68% - 6.17% (3.93%) |
|
|
|
| Yield | 3.31% - 5.50% (4.40%) |
|
|
| Yield | 2.52% - 4.53% (3.52%) |
|
|
|
|
|
|
|
|
|
|
|
CDO/ABS(a) |
| 5,461 | Discounted cash flow | Yield | 3.65% - 5.10% (4.37%) |
| 6,025 | Discounted cash flow | Yield | 2.92% - 4.91% (3.91%) |
|
|
|
|
|
|
|
|
|
|
|
CMBS |
| 447 | Discounted cash flow | Yield | 3.29% - 6.07% (4.68%) |
| 476 | Discounted cash flow | Yield | 2.77% - 5.18% (3.97%) |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives within |
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB |
| 1,943 | Discounted cash flow | Equity volatility | 6.05% - 47.65% |
| 2,474 | Discounted cash flow | Equity volatility | 6.15% - 48.85% |
|
|
|
| Base lapse rate | 0.16% - 12.60% |
|
|
| Base lapse rate | 0.16% - 12.60% |
|
|
|
| Dynamic lapse multiplier | 20.00% - 180.00% |
|
|
| Dynamic lapse multiplier | 50.00% - 143.00% |
|
|
|
| Mortality multiplier(c) | 40.00% - 153.00% |
|
|
| Mortality multiplier(c) | 38.00% - 147.00% |
|
|
|
| Utilization | 90.00% - 100.00% |
|
|
| Utilization | 90.00% - 100.00% |
|
|
|
| Equity / interest-rate correlation | 20.00% - 40.00% |
|
|
| Equity / interest rate correlation | 20.00% - 40.00% |
|
|
|
|
|
|
|
|
| NPA(d) | 0.12% - 1.53% |
Index Annuities |
| 1,778 | Discounted cash flow | Lapse rate | 0.50% - 40.00% | |||||
|
|
|
|
|
| |||||
Index annuities |
| 3,895 | Discounted cash flow | Lapse rate | 0.31% - 50.00% | |||||
|
|
|
| Mortality multiplier(c) | 42.00% - 162.00% |
|
|
| Mortality multiplier(c) | 24.00% - 180.00% |
|
|
|
| Option Budget | 1.00% - 3.00% |
|
|
| Option budget | 1.00% - 4.00% |
|
|
|
|
|
|
|
|
| NPA(d) | 0.12% - 1.53% |
Indexed Life |
| 374 | Discounted cash flow | Base lapse rate | 0.00% - 13.00% | |||||
Indexed life |
| 510 | Discounted cash flow | Base lapse rate | 0.00% - 37.97% | |||||
|
|
|
| Mortality rate | 0.00% - 100.00% |
|
|
| Mortality rate | 0.00% - 100.00% |
|
|
|
| NPA(d) | 0.12% - 1.53% |
(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. The weighted averaging for fixed maturity securities is based on the estimated fair value of the securities.
(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.
(d)The non-performance risk adjustment (NPA) applied as a spread over risk-free curve for discounting.
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‑weightedvalue-weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these Level 3 assets and liabilities.
Sensitivity
26 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Changes inCondensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
Interrelationships between Unobservable Inputs
We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following paragraphs provide a general description of 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.
22AIG | First Quarter 2019 Form 10-Q
Fixed Maturity Securities
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 subdivisionsfixed maturity securities 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 valuedyield may be affected by third‑party valuation service providers areother factors including 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 prepaymentconstant default rates. In general, increases in CPR, loss severity, CDR and yield, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.
CMBS
The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS.investments, and conversely, decreases in the yield would increase the fair value of investments.
Embedded derivatives within Policyholder contract deposits
Embedded derivatives reported within Policyholder contract deposits include GMWB within variable annuity products and interest crediting rates based on market indices within index annuities, indexed life, and GICs.GICs as well as GMWB within variable annuity and certain index annuity products. For any given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives measured at fair value:
•Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments.payments. Therefore, the net change in the fair value of the liability may be either a decrease or an increase, depending on the relative changes in projected rider fees and projected benefit payments.
•Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB embedded derivatives. In general, a higher positive correlation assumes that equity markets and interest rates move in a more correlated fashion, which generally increases the fair value of the liability.
•Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value, as estimated by the company, is worth more than their underlying account value). Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. Increases in assumed lapse rates will generally decrease the fair value of the liability, as fewer policyholders would persist to collect guaranteed withdrawal amounts.
•Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement assumption. Increases in assumed mortality rates will decrease the fair value of the liability, while lower mortality rate assumptions will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.
AIG | First Quarter 2019 Form 10-Q23
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
•Utilization assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the age of the policyholder. Utilization assumptions are based on company experience, which includes partial withdrawal behavior. Increases in assumed utilization rates will generally increase the fair value of the liability.
•Option budget estimates the expected long-term cost of options used to hedge exposures associated with equity price changes. The level of option budgets determines future costs of the options, which impacts the growth in account value and the valuation of embedded derivatives.
AIG | First Quarter 2020 Form 10-Q 27
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
Investments in Certain Entities Carried at Fair Value Using Net Asset Value Per Share
The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share to measure fair value.
|
| March 31, 2019 |
| December 31, 2018 |
| March 31, 2020 |
| December 31, 2019 | ||||||||||||
|
|
| Fair Value |
|
|
| Fair Value |
|
|
|
| Fair Value |
|
|
| Fair Value |
|
| ||
|
|
| Using NAV |
|
|
| Using NAV |
|
|
|
| Using NAV |
|
|
| Using NAV |
|
| ||
|
|
| Per Share (or |
| Unfunded |
| Per Share (or |
| Unfunded |
|
| Per Share (or |
| Unfunded |
| Per Share (or |
| Unfunded | ||
(in millions) | Investment Category Includes |
| its equivalent) |
| Commitments |
| its equivalent) |
| Commitments | 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 | $ | 970 | $ | 1,378 |
| $ | 847 | $ | 1,327 | 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 | $ | 1,245 | $ | 1,454 |
| $ | 1,189 | $ | 1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Real Estate / Infrastructure | Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities |
| 232 |
| 179 |
|
| 190 |
| 83 | Investments in real estate properties and infrastructure positions, including power plants and other energy generating facilities |
| 412 |
| 451 |
| 400 |
| 290 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
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 |
| 130 |
| 116 |
|
| 126 |
| 127 | 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 |
| 130 |
| 142 |
| 111 |
| 155 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Growth Equity | Funds that make investments in established companies for the purpose of growing their businesses |
| 371 |
| 29 |
|
| 362 |
| 28 | Funds that make investments in established companies for the purpose of growing their businesses |
| 480 |
| 87 |
| 422 |
| 57 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Mezzanine | Funds that make investments in the junior debt and equity securities of leveraged companies |
| 218 |
| 97 |
|
| 211 |
| 75 | Funds that make investments in the junior debt and equity securities of leveraged companies |
| 377 |
| 339 |
| 325 |
| 414 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other | Includes distressed funds that invest in securities of companies that are in default or under bankruptcy protection, as well as funds that have multi-strategy, and other strategies |
| 623 |
| 285 |
|
| 514 |
| 307 | Includes distressed funds that invest in securities of companies that are in default or under bankruptcy protection, as well as funds that have multi-strategy, and other strategies |
| 769 |
| 135 |
| 773 |
| 206 | |
Total private equity funds | Total private equity funds |
| 2,544 |
| 2,084 |
|
| 2,250 |
| 1,947 | Total private equity funds |
| 3,413 |
| 2,608 |
| 3,220 |
| 2,665 | |
Hedge funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Event-driven | Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations |
| 815 |
| - |
|
| 787 |
| - | Securities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations |
| 361 |
| - |
| 727 |
| - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Long-short | Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk |
| 725 |
| - |
|
| 863 |
| - | Securities that the manager believes are undervalued, with corresponding short positions to hedge market risk |
| 408 |
| - |
| 539 |
| - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Macro | Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions |
| 820 |
| - |
|
| 887 |
| - | Investments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions |
| 697 |
| - |
| 894 |
| - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Distressed | Securities of companies that are in default, under bankruptcy protection or troubled |
| 18 |
| - |
|
| 21 |
| 8 | Securities of companies that are in default, under bankruptcy protection or troubled |
| - |
| - |
| 1 |
| - | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
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 |
| 160 |
| 1 |
|
| 158 |
| 1 | Includes investments held in funds that are less liquid, as well as other strategies which allow for broader allocation between public and private investments |
| 150 |
| 1 |
| 168 |
| 1 | |
Total hedge funds |
|
| 2,538 |
| 1 |
|
| 2,716 |
| 9 |
|
| 1,616 |
| 1 |
| 2,329 |
| 1 | |
Total |
| $ | 5,082 | $ | 2,085 |
| $ | 4,966 | $ | 1,956 |
| $ | 5,029 | $ | 2,609 |
| $ | 5,549 | $ | 2,666 |
24AIG | First Quarter 2019 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
Private equity fund investments included above are not redeemable, because distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year10-year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-yeartwo-year increments. At March 31, 2019, assuming average original expected lives of 10 years for the funds, 19 percent of the total fair value using net asset value per share (or its equivalent) presented above would have expected remaining lives of three years or less, 43 percent between four and six years and 38 percent between seven and 10 years.
The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (35 percent), quarterly (29 percent), semi-annually (10 percent) and annually (26 percent), withsubject to the redemption notices ranging from one day to 180 days. At March 31, 2019, investments representing approximately 56 percentperiod. The majority of the total fair value of theseour hedge fund investments had partial contractual redemption restrictions. These partial redemption restrictions are generally relatedredeemable monthly or quarterly.
28 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes 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-defined end dates. The majority of these restrictions are generally expected to be lifted by the end of 2019.Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
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:
Three Months Ended March 31, |
|
| Gain (Loss) |
|
| Gain (Loss) | ||||||
(in millions) |
|
|
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Bond and equity securities |
|
| $ | 355 | $ | 23 | ||||||
Bonds |
|
| $ | (60) | $ | 355 | ||||||
Alternative investments(a) |
|
|
| 230 |
| 128 |
|
|
| (139) |
| 230 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(b) |
|
|
| (60) |
| 52 |
|
|
| (203) |
| (60) |
Total gain |
|
| $ | 525 | $ | 203 | ||||||
Total gain (loss) |
|
| $ | (402) | $ | 525 |
(a)Includes certain hedge funds, private equity funds and other investment partnerships.
(b)Includes GIAs, notes, bonds and mortgages payable.
As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, we are required to record unrealized gains and losses attributable to the observable effect of changes in credit spreads on our liabilities for which the fair value option was elected in Other Comprehensive Income. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.
The following table presents the difference between fair valuesvalue and the aggregate contractual principal amountsamount of mortgage and other loans receivable and long-term debt for which the fair value option was elected:
| March 31, 2019 |
| December 31, 2018 | March 31, 2020 |
| December 31, 2019 | ||||||||||||||||||||
|
|
| 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 | ||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Long-term debt* | $ | 2,263 | $ | 1,685 | $ | 578 |
| $ | 2,213 | $ | 1,653 | $ | 560 | $ | 2,276 | $ | 1,543 | $ | 733 |
| $ | 2,062 | $ | 1,502 | $ | 560 |
*Includes GIAs, notes, bonds, loans and mortgages payable.
AIG | First Quarter 2019 Form 10-Q25
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS
The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:
|
|
|
| Assets at Fair Value |
| Impairment Charges | |||||||||
|
|
|
| Non-Recurring Basis |
| Three Months Ended March 31, | |||||||||
(in millions) |
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| 2020 |
| 2019 |
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
| $ | - | $ | - | $ | 97 | $ | 97 |
| $ | 11 | $ | 41 |
Other assets |
|
|
| - |
| - |
| - |
| - |
|
| 12 |
| 8 |
Total |
|
| $ | - | $ | - | $ | 97 | $ | 97 |
| $ | 23 | $ | 49 |
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
| $ | - | $ | - | $ | 329 | $ | 329 |
|
|
|
|
|
Other assets |
|
|
| - |
| - |
| 1 |
| 1 |
|
|
|
|
|
Total |
|
| $ | - | $ | - | $ | 330 | $ | 330 |
|
|
|
|
|
AIG | First Quarter 2020 Form 10-Q 29
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |5. Fair Value Measurements
|
|
|
| Assets at Fair Value |
| Impairment Charges | |||||||||
|
|
|
| Non-Recurring Basis |
| Three Months Ended March 31, | |||||||||
(in millions) |
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| 2019 |
| 2018 |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
| $ | - | $ | - | $ | 207 | $ | 207 |
| $ | 41 | $ | 28 |
Other assets |
|
|
| - |
| - |
| 1 |
| 1 |
|
| 8 |
| - |
Total |
|
| $ | - | $ | - | $ | 208 | $ | 208 |
| $ | 49 | $ | 28 |
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
| $ | - | $ | - | $ | 315 | $ | 315 |
|
|
|
|
|
Other assets |
|
|
| - |
| - |
| 11 |
| 11 |
|
|
|
|
|
Total |
|
| $ | - | $ | - | $ | 326 | $ | 326 |
|
|
|
|
|
FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE
The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:
| Estimated Fair Value |
| Carrying | |||||||
(in millions) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Value |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable | $ | - | $ | 107 | $ | 44,870 | $ | 44,977 | $ | 43,834 |
Other invested assets |
| - |
| 699 |
| 6 |
| 705 |
| 705 |
Short-term investments |
| - |
| 7,093 |
| - |
| 7,093 |
| 7,093 |
Cash |
| 2,565 |
| - |
| - |
| 2,565 |
| 2,565 |
Other assets |
| 348 |
| 15 |
| - |
| 363 |
| 363 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits associated |
|
|
|
|
|
|
|
|
|
|
with investment-type contracts |
| - |
| 337 |
| 119,312 |
| 119,649 |
| 122,616 |
Other liabilities |
| - |
| 1,606 |
| - |
| 1,606 |
| 1,606 |
Long-term debt |
| 1,044 |
| 24,384 |
| 8,432 |
| 33,860 |
| 33,513 |
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable | $ | - | $ | 105 | $ | 43,522 | $ | 43,627 | $ | 43,135 |
Other invested assets |
| - |
| 731 |
| 6 |
| 737 |
| 737 |
Short-term investments |
| - |
| 6,659 |
| - |
| 6,659 |
| 6,659 |
Cash |
| 2,873 |
| - |
| - |
| 2,873 |
| 2,873 |
Other assets |
| 308 |
| 35 |
| - |
| 343 |
| 343 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits associated |
|
|
|
|
|
|
|
|
|
|
with investment-type contracts |
| - |
| 339 |
| 121,035 |
| 121,374 |
| 120,602 |
Other liabilities |
| - |
| 1,154 |
| - |
| 1,154 |
| 1,154 |
Long-term debt |
| - |
| 22,822 |
| 8,775 |
| 31,597 |
| 32,327 |
| Estimated Fair Value |
| Carrying | |||||||
(in millions) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Value |
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable | $ | - | $ | 100 | $ | 47,508 | $ | 47,608 | $ | 46,844 |
Other invested assets |
| - |
| 772 |
| 6 |
| 778 |
| 778 |
Short-term investments |
| - |
| 11,587 |
| - |
| 11,587 |
| 11,587 |
Cash |
| 2,738 |
| - |
| - |
| 2,738 |
| 2,738 |
Other assets |
| 340 |
| 34 |
| - |
| 374 |
| 374 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits associated |
|
|
|
|
|
|
|
|
|
|
with investment-type contracts |
| - |
| 246 |
| 137,161 |
| 137,407 |
| 127,194 |
Other liabilities |
| 14 |
| 4,333 |
| - |
| 4,347 |
| 4,347 |
Long-term debt and debt of consolidated investment entities |
| - |
| 24,765 |
| 9,114 |
| 33,879 |
| 33,134 |
Separate account liabilities - investment contracts |
| - |
| 74,711 |
| - |
| 74,711 |
| 74,711 |
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable | $ | - | $ | 101 | $ | 48,904 | $ | 49,005 | $ | 46,984 |
Other invested assets |
| - |
| 735 |
| 6 |
| 741 |
| 742 |
Short-term investments |
| - |
| 7,887 |
| - |
| 7,887 |
| 7,887 |
Cash |
| 2,856 |
| - |
| - |
| 2,856 |
| 2,856 |
Other assets |
| 291 |
| 20 |
| - |
| 311 |
| 311 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits associated |
|
|
|
|
|
|
|
|
|
|
with investment-type contracts |
| - |
| 255 |
| 132,991 |
| 133,246 |
| 126,137 |
Other liabilities |
| 15 |
| 3,048 |
| - |
| 3,063 |
| 3,063 |
Long-term debt and debt of consolidated investment entities |
| - |
| 27,024 |
| 8,883 |
| 35,907 |
| 33,288 |
Separate account liabilities - investment contracts |
| - |
| 88,770 |
| - |
| 88,770 |
| 88,770 |
2630AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
6. Investments
Fixed Maturity Securities
Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
On January 1, 2020, AIG adopted the Financial Instruments Credit Losses Standard. Prior to the adoption of this standard, AIG did not record an allowance against the amortized cost basis of held to maturity securities. Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certain structured securities, recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income.
For structured securities that are not high credit quality, the structured securities yields are based on expected cash flows which take into account both expected credit losses and prepayments. An allowance for credit losses is not established upon initial recognition of the asset (unless the security is determined to be PCD which is discussed in more detail below). Subsequently, differences between actual and expected cash flows and changes in expected cash flows are recognized as adjustments to the allowance for credit losses. Changes that cannot be reflected as adjustments to the allowance for credit losses are accounted for as prospective adjustments to yield.
Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certain RMBS, CMBS and CDO/ABS, (collectively, structured securities), recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For structured securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes in expected undiscounted future cash flows. For purchased credit impaired (PCI) securities, at acquisition, the difference between the undiscounted expected future cash flows and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over the securities’ remaining lives on an effective level-yield basis. Subsequently, effective yields recognized on PCI securities are recalculated and adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to reasons other than interest rate changes.
AIG | First Quarter 2020 Form 10-Q 31
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Securities Available for Sale
The following table presents the amortized cost or cost and fair value of our available for sale securities:
|
|
|
|
|
|
|
|
|
| Other-Than- | ||||||||||
|
| Amortized |
| Gross |
| Gross |
|
|
| Temporary |
| Amortized |
| Allowance |
| Gross |
| Gross |
|
|
|
| Cost or |
| Unrealized |
| Unrealized |
| Fair |
| Impairments |
| Cost or |
| for Credit |
| Unrealized |
| Unrealized |
| Fair |
(in millions) |
| Cost |
| Gains |
| Losses |
| Value |
| in AOCI(a) |
| Cost |
| Losses(a) |
| Gains |
| Losses |
| Value |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
| ||||||||||
March 31, 2020 |
|
|
|
|
|
|
|
|
|
| ||||||||||
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | 3,267 | $ | 151 | $ | (17) | $ | 3,401 | $ | - | $ | 4,664 | $ | - | $ | 1,042 | $ | (17) | $ | 5,689 |
Obligations of states, municipalities and political subdivisions |
| 14,952 |
| 1,013 |
| (43) |
| 15,922 |
| - |
| 14,140 |
| - |
| 1,375 |
| (75) |
| 15,440 |
Non-U.S. governments |
| 14,799 |
| 600 |
| (125) |
| 15,274 |
| - |
| 13,737 |
| (7) |
| 676 |
| (233) |
| 14,173 |
Corporate debt |
| 133,768 |
| 6,314 |
| (1,409) |
| 138,673 |
| (24) |
| 140,356 |
| (167) |
| 9,073 |
| (4,940) |
| 144,322 |
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
| 31,324 |
| 2,871 |
| (191) |
| 34,004 |
| 1,171 |
| 29,433 |
| (37) |
| 2,069 |
| (608) |
| 30,857 |
CMBS |
| 12,895 |
| 355 |
| (89) |
| 13,161 |
| 31 |
| 13,988 |
| - |
| 530 |
| (292) |
| 14,226 |
CDO/ABS |
| 17,603 |
| 287 |
| (124) |
| 17,766 |
| 17 |
| 18,268 |
| - |
| 136 |
| (1,335) |
| 17,069 |
Total mortgage-backed, asset-backed and collateralized |
| 61,822 |
| 3,513 |
| (404) |
| 64,931 |
| 1,219 |
| 61,689 |
| (37) |
| 2,735 |
| (2,235) |
| 62,152 |
Total bonds available for sale(b) | $ | 228,608 | $ | 11,591 | $ | (1,998) | $ | 238,201 | $ | 1,195 | ||||||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
| ||||||||||
Total bonds available for sale(c) | $ | 234,586 | $ | (211) | $ | 14,901 | $ | (7,500) | $ | 241,776 | ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
| Other-Than- | ||||||||||
|
| Amortized |
| Gross |
| Gross |
|
|
| Temporary | ||||||||||
|
| Cost or |
| Unrealized |
| Unrealized |
| Fair |
| Impairments | ||||||||||
(in millions) |
| Cost |
| Gains |
| Losses |
| Value |
| in AOCI(b) | ||||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
| ||||||||||
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | 3,170 | $ | 132 | $ | (42) | $ | 3,260 | $ | - | $ | 5,108 | $ | 316 | $ | (44) | $ | 5,380 | $ | - |
Obligations of states, municipalities and political subdivisions |
| 15,421 |
| 701 |
| (121) |
| 16,001 |
| 4 |
| 13,960 |
| 1,390 |
| (32) |
| 15,318 |
| - |
Non-U.S. governments |
| 14,376 |
| 451 |
| (302) |
| 14,525 |
| - |
| 14,042 |
| 884 |
| (57) |
| 14,869 |
| (18) |
Corporate debt |
| 130,436 |
| 3,911 |
| (3,647) |
| 130,700 |
| 4 |
| 138,046 |
| 12,090 |
| (500) |
| 149,636 |
| 7 |
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
| 31,940 |
| 2,754 |
| (317) |
| 34,377 |
| 1,155 |
| 29,802 |
| 3,067 |
| (64) |
| 32,805 |
| 1,149 |
CMBS |
| 12,673 |
| 242 |
| (214) |
| 12,701 |
| 31 |
| 13,879 |
| 576 |
| (25) |
| 14,430 |
| 34 |
CDO/ABS |
| 17,764 |
| 228 |
| (165) |
| 17,827 |
| 17 |
| 18,393 |
| 348 |
| (93) |
| 18,648 |
| 14 |
Total mortgage-backed, asset-backed and collateralized |
| 62,377 |
| 3,224 |
| (696) |
| 64,905 |
| 1,203 |
| 62,074 |
| 3,991 |
| (182) |
| 65,883 |
| 1,197 |
Total bonds available for sale(b) | $ | 225,780 | $ | 8,419 | $ | (4,808) | $ | 229,391 | $ | 1,211 | ||||||||||
Total bonds available for sale(c) | $ | 233,230 | $ | 18,671 | $ | (815) | $ | 251,086 | $ | 1,186 |
(a)Represents the allowance for credit losses that has been recognized. Changes in the allowance for credit losses are recorded through the statements of income and are not recognized in other comprehensive income.
(b)Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income (loss). Amount includes unrealized gains and losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.
(b) (c)At March 31, 20192020 and December 31, 2018,2019, bonds available for sale held by us that were below investment grade or not rated totaled $29.1$25.1 billion and $28.8$27.8 billion, respectively.
32AIG | First Quarter 20192020 Form 10-Q27
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Securities Available for Sale in a Loss Position for Which No Allowance for Credit Loss Has Been Recorded
The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position for which no allowance for credit loss has been recorded:
| Less than 12 Months |
| 12 Months or More |
| Total | |||||||||
|
|
|
| Gross |
|
|
|
| Gross |
|
|
|
| Gross |
|
| Fair |
| Unrealized |
|
| Fair |
| Unrealized |
|
| Fair |
| Unrealized |
(in millions) |
| Value |
| Losses |
|
| Value |
| Losses |
|
| Value |
| Losses |
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | 249 | $ | 17 |
| $ | 4 | $ | - |
| $ | 253 | $ | 17 |
Obligations of states, municipalities and political |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions |
| 1,274 |
| 63 |
|
| 181 |
| 12 |
|
| 1,455 |
| 75 |
Non-U.S. governments |
| 2,277 |
| 156 |
|
| 197 |
| 62 |
|
| 2,474 |
| 218 |
Corporate debt |
| 45,529 |
| 4,213 |
|
| 1,171 |
| 485 |
|
| 46,700 |
| 4,698 |
RMBS |
| 5,743 |
| 346 |
|
| 504 |
| 39 |
|
| 6,247 |
| 385 |
CMBS |
| 4,653 |
| 282 |
|
| 104 |
| 10 |
|
| 4,757 |
| 292 |
CDO/ABS |
| 11,229 |
| 950 |
|
| 2,734 |
| 385 |
|
| 13,963 |
| 1,335 |
Total bonds available for sale | $ | 70,954 | $ | 6,027 |
| $ | 4,895 | $ | 993 |
| $ | 75,849 | $ | 7,020 |
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 | Less than 12 Months |
| 12 Months or More |
| Total | ||||||||||||||||||
|
|
|
| Gross |
|
|
| Gross |
|
|
|
| Gross |
|
|
| Gross |
|
|
|
| Gross |
|
|
|
| Gross | |
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
| Fair |
| Unrealized |
|
| Fair |
| Unrealized | |
(in millions) |
| Value |
| Losses |
| Value |
| Losses |
|
| Value |
| Losses |
| Value |
| Losses |
|
| Value |
| Losses |
|
| Value |
| Losses | |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. government and government sponsored entities | $ | 508 | $ | 10 |
| $ | 356 | $ | 7 |
| $ | 864 | $ | 17 | $ | 1,461 | $ | 44 |
| $ | 63 | $ | - |
| $ | 1,524 | $ | 44 |
Obligations of states, municipalities and political |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
subdivisions |
| 331 |
| 8 |
| 935 |
| 35 |
|
| 1,266 |
| 43 |
| 672 |
| 21 |
|
| 246 |
| 11 | �� |
| 918 |
| 32 | |
Non-U.S. governments |
| 2,642 |
| 52 |
| 1,635 |
| 73 |
|
| 4,277 |
| 125 |
| 1,105 |
| 12 |
|
| 343 |
| 45 |
|
| 1,448 |
| 57 | |
Corporate debt |
| 16,010 |
| 520 |
| 21,874 |
| 889 |
|
| 37,884 |
| 1,409 |
| 11,868 |
| 319 |
|
| 2,405 |
| 181 |
|
| 14,273 |
| 500 | |
RMBS |
| 4,715 |
| 73 |
| 3,800 |
| 118 |
|
| 8,515 |
| 191 |
| 3,428 |
| 28 |
|
| 1,367 |
| 36 |
|
| 4,795 |
| 64 | |
CMBS |
| 1,524 |
| 20 |
| 2,796 |
| 69 |
|
| 4,320 |
| 89 |
| 1,877 |
| 16 |
|
| 367 |
| 9 |
|
| 2,244 |
| 25 | |
CDO/ABS |
| 7,121 |
| 99 |
| 1,554 |
| 25 |
|
| 8,675 |
| 124 |
| 3,920 |
| 53 |
|
| 2,571 |
| 40 |
|
| 6,491 |
| 93 | |
Total bonds available for sale | $ | 32,851 | $ | 782 |
| $ | 32,950 | $ | 1,216 |
| $ | 65,801 | $ | 1,998 | $ | 24,331 | $ | 493 |
| $ | 7,362 | $ | 322 |
| $ | 31,693 | $ | 815 |
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
U.S. government and government sponsored entities | $ | 574 | $ | 13 |
| $ | 873 | $ | 29 |
| $ | 1,447 | $ | 42 | ||||||||||||||
Obligations of states, municipalities and political |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
subdivisions |
| 1,965 |
| 51 |
| 1,530 |
| 70 |
|
| 3,495 |
| 121 | |||||||||||||||
Non-U.S. governments |
| 3,851 |
| 149 |
| 2,422 |
| 153 |
|
| 6,273 |
| 302 | |||||||||||||||
Corporate debt |
| 47,364 |
| 2,181 |
| 20,056 |
| 1,466 |
|
| 67,420 |
| 3,647 | |||||||||||||||
RMBS |
| 5,231 |
| 94 |
| 5,641 |
| 223 |
|
| 10,872 |
| 317 | |||||||||||||||
CMBS |
| 2,646 |
| 47 |
| 4,264 |
| 167 |
|
| 6,910 |
| 214 | |||||||||||||||
CDO/ABS |
| 9,169 |
| 144 |
| 1,324 |
| 21 |
|
| 10,493 |
| 165 | |||||||||||||||
Total bonds available for sale | $ | 70,800 | $ | 2,679 |
| $ | 36,110 | $ | 2,129 |
| $ | 106,910 | $ | 4,808 |
At March 31, 2020, we held 14,067 individual fixed maturity securities that were in an unrealized loss position and for which no allowance for credit losses has been recorded (including 1,041 individual fixed maturity securities that were in a continuous unrealized loss position for 12 months or more). At December 31, 2019, we held 10,3885,695 individual fixed maturity securities that were in an unrealized loss position, of which 4,6561,254 individual fixed maturity securities were in a continuous unrealized loss position for 12 months or more. We did not recognize the unrealized losses in earnings on these fixed maturity securities at March 31, 20192020 because it was determined that such losses were due to non-credit factors. Additionally, we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, liquidity position, expected defaults, on underlying collateral, review of relevant industry analyst reports and sector analysis, forecasts and other available market data.
28AIG | First Quarter 20192020 Form 10-Q33
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Contractual Maturities of Fixed Maturity Securities Available for Sale
The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:
| Total Fixed Maturity Securities | ||||||||||||
| Total Fixed Maturity Securities |
| Fixed Maturity Securities in a Loss | Available for Sale | |||||||||
| Available for Sale |
| Position Available for Sale |
| Amortized Cost, |
|
| ||||||
(in millions) |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| Net of Allowance |
| Fair Value | |
March 31, 2019 |
|
|
|
|
|
|
|
| |||||
March 31, 2020 |
|
|
|
| |||||||||
Due in one year or less | $ | 10,113 | $ | 10,263 |
| $ | 2,009 | $ | 1,978 | $ | 10,370 | $ | 10,517 |
Due after one year through five years |
| 46,478 |
| 47,484 |
| 11,419 |
| 11,088 |
| 42,552 |
| 42,479 | |
Due after five years through ten years |
| 44,185 |
| 45,355 |
| 15,183 |
| 14,787 |
| 41,923 |
| 41,993 | |
Due after ten years |
| 66,010 |
| 70,168 |
| 17,274 |
| 16,438 |
| 77,878 |
| 84,635 | |
Mortgage-backed, asset-backed and collateralized |
| 61,822 |
| 64,931 |
| 21,914 |
| 21,510 |
| 61,652 |
| 62,152 | |
Total | $ | 228,608 | $ | 238,201 |
| $ | 67,799 | $ | 65,801 | $ | 234,375 | $ | 241,776 |
December 31, 2018 |
|
|
|
|
|
|
|
| |||||
Due in one year or less | $ | 9,539 | $ | 9,674 |
| $ | 2,322 | $ | 2,294 | ||||
Due after one year through five years |
| 47,400 |
| 47,905 |
| 17,382 |
| 16,844 | |||||
Due after five years through ten years |
| 42,363 |
| 42,045 |
| 27,724 |
| 26,517 | |||||
Due after ten years |
| 64,101 |
| 64,862 |
| 35,319 |
| 32,980 | |||||
Mortgage-backed, asset-backed and collateralized |
| 62,377 |
| 64,905 |
| 28,971 |
| 28,275 | |||||
Total | $ | 225,780 | $ | 229,391 |
| $ | 111,718 | $ | 106,910 |
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:
Three Months Ended March 31, |
|
|
|
|
| 2019 |
| 2018 |
|
|
|
|
| 2020 |
| 2019 | ||||||||
|
|
|
|
|
| Gross |
| Gross |
| Gross |
| Gross |
|
|
|
|
| Gross |
| Gross |
| Gross |
| Gross |
|
|
|
|
| Realized |
|
|
|
| Realized | ||||||||||||||
(in millions) |
|
|
|
|
| Gains |
| Losses |
| Gains |
| Losses |
|
|
|
|
| Gains |
| Losses |
| Gains |
| Losses |
Fixed maturity securities |
|
|
|
| $ | 93 | $ | 124 | $ | 70 | $ | 60 |
|
|
|
| $ | 380 | $ | 166 | $ | 93 | $ | 124 |
Equity securities |
|
|
|
|
| - |
| - |
| 16 |
| - | ||||||||||||
Total |
|
|
|
| $ | 93 | $ | 124 | $ | 86 | $ | 60 |
For the three-month periods ended March 31, 20192020 and 2018,2019, the aggregate fair value of available for sale securities sold was $6.4$7.2 billion and $5.5$6.4 billion, respectively, which resulted in net realized capital gains (losses) of $(31)$214 million and $26$(31) million, respectively.
AIG | First Quarter 2019 Form 10-Q29
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Other Securities Measured at Fair Value
The following table presents the fair value of otherfixed maturity securities measured at fair value based on our election of the fair value option:option and equity securities measured at fair value:
|
| March 31, 2020 |
|
|
| December 31, 2019 |
| ||
|
| Fair | Percent |
|
|
| Fair | Percent |
|
(in millions) |
| Value | of Total |
|
|
| Value | of Total |
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | 2,057 | 34 | % |
| $ | 2,121 | 28 | % |
Corporate debt |
| 16 | - |
|
|
| 18 | - |
|
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
RMBS |
| 467 | 8 |
|
|
| 489 | 7 |
|
CMBS |
| 271 | 5 |
|
|
| 322 | 4 |
|
CDO/ABS and other collateralized |
| 2,542 | 43 |
|
|
| 3,732 | 50 |
|
Total mortgage-backed, asset-backed and collateralized |
| 3,280 | 56 |
|
|
| 4,543 | 61 |
|
Total fixed maturity securities |
| 5,353 | 90 |
|
|
| 6,682 | 89 |
|
Equity securities |
| 624 | 10 |
|
|
| 841 | 11 |
|
Total | $ | 5,977 | 100 | % |
| $ | 7,523 | 100 | % |
|
| March 31, 2019 |
|
|
| December 31, 2018 |
| ||
|
| Fair | Percent |
|
|
| Fair | Percent |
|
(in millions) |
| Value | of Total |
|
|
| Value | of Total |
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | 2,780 | 23 | % |
| $ | 2,665 | 21 | % |
Non-U.S. governments |
| 51 | - |
|
|
| 45 | - |
|
Corporate debt |
| 1,745 | 14 |
|
|
| 1,671 | 13 |
|
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
RMBS |
| 1,757 | 14 |
|
|
| 1,714 | 14 |
|
CMBS |
| 399 | 3 |
|
|
| 388 | 3 |
|
CDO/ABS and other collateralized* |
| 4,779 | 39 |
|
|
| 4,932 | 39 |
|
Total mortgage-backed, asset-backed and collateralized |
| 6,935 | 56 |
|
|
| 7,034 | 56 |
|
Total fixed maturity securities |
| 11,511 | 93 |
|
|
| 11,415 | 90 |
|
Equity securities |
| 841 | 7 |
|
|
| 1,253 | 10 |
|
Total | $ | 12,352 | 100 | % |
| $ | 12,668 | 100 | % |
34 AIG | First Quarter 2020 Form 10-Q
* Includes $164 million and $178 million of U.S. government agency-backed ABS at March 31, 2019 and December 31, 2018, respectively.TABLE OF CONTENTS
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Other Invested Assets
The following table summarizes the carrying amounts of other invested assets:
|
| March 31, |
| December 31, |
| March 31, |
| December 31, |
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Alternative investments(a) (b) | $ | 8,711 | $ | 8,966 | $ | 8,158 | $ | 8,845 |
Investment real estate(c) |
| 9,204 |
| 8,935 |
| 8,348 |
| 8,491 |
All other investments |
| 1,428 |
| 1,440 |
| 1,460 |
| 1,456 |
Total | $ | 19,343 | $ | 19,341 | $ | 17,966 | $ | 18,792 |
(a)At March 31, 2020, included hedge funds of $2.2 billion, private equity funds of $5.6 billion and affordable housing partnerships of $282 million. At December 31, 2019, included hedge funds of $3.9$3.3 billion, private equity funds of $4.4$5.2 billion and affordable housing partnerships of $392$331 million. At December 31, 2018, included hedge funds of $4.2 billion, private equity funds of $4.3 billion, and affordable housing partnerships of $438 million.
(b)At March 31, 2019,2020, approximately 7278 percent of our hedge fund portfolio is available for redemption in 2019.2020. The remaining 2822 percent will be available for redemption between 20202021 and 2027.
(c)Net of accumulated depreciation of $633$720 million and $598$703 million at March 31, 20192020 and December 31, 2018,2019, respectively.
The following table presents the components of Net investment income:
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
Available for sale fixed maturity securities, including short-term investments |
|
| $ | 2,653 | $ | 2,610 |
|
| $ | 2,609 | $ | 2,653 |
Other fixed maturity securities |
|
|
| 327 |
| (21) |
|
|
| (60) |
| 327 |
Equity securities |
|
|
| 79 |
| (32) |
|
|
| (191) |
| 79 |
Interest on mortgage and other loans |
|
|
| 498 |
| 450 |
|
|
| 513 |
| 498 |
Alternative investments |
|
|
| 419 |
| 337 |
|
|
| (59) |
| 419 |
Real estate |
|
|
| 69 |
| 31 |
|
|
| 59 |
| 69 |
Other investments |
|
|
| (52) |
| 10 |
|
|
| (215) |
| (52) |
Total investment income |
|
|
| 3,993 |
| 3,385 |
|
|
| 2,656 |
| 3,993 |
Investment expenses |
|
|
| 114 |
| 124 |
|
|
| 148 |
| 114 |
Net investment income |
|
| $ | 3,879 | $ | 3,261 |
|
| $ | 2,508 | $ | 3,879 |
(a)Included in the three-month periods ended March, 31 2020 and 2019 is income of $169 million and $28 million, respectively, for fixed maturity securities measured at fair value through income that economically hedge liabilities as described in (c) below.
(b)Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds are recorded as of the balance sheet date. Private equity funds are generally reported on a one-quarter lag.
(c)Included in the three-month periods ended March, 31 2020 and 2019 are losses of $202 million and $15 million, respectively, related to liabilities measured at fair value that are economically hedged with fixed maturity securities as described in (a) above.
Net Realized Capital Gains and Losses
Net realized capital gains and losses are determined by specific identification. The net realized capital gains and losses are generated primarily from the following sources:
Sales or full redemptions of available for sale fixed maturity securities, real estate and other alternative investments.
Reductions to the amortized cost basis of available for sale fixed maturity securities that have been written down due to our intent to sell them or it being more likely than not that we will be required to sell them.
Changes in the allowance for credit losses on bonds available for sale, mortgage and other loans receivable, and loans commitments.
Changes in fair value of derivatives except for those instruments that are designated as hedging instruments when the change in the fair value of the hedged item is not reported in Net realized capital gains (losses).
Foreign exchange gains and losses resulting from foreign currency transactions.
30AIG | First Quarter 20192020 Form 10-Q35
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Net Realized Capital Gains and Losses
The following table presents the components of Net realized capital gains (losses):
Three Months Ended March 31, |
|
|
|
|
|
(in millions) |
| 2019 |
| 2018 |
|
Sales of fixed maturity securities | $ | (31) | $ | 10 |
|
Sales of equity securities |
| - |
| 16 |
|
Other-than-temporary impairments: |
|
|
|
|
|
Change in intent |
| (3) |
| (49) |
|
Foreign currency declines |
| (6) |
| (6) |
|
Issuer-specific credit events |
| (71) |
| (32) |
|
Adverse projected cash flows |
| (3) |
| - |
|
Provision for loan losses |
| (24) |
| (24) |
|
Foreign exchange transactions |
| (37) |
| 53 |
|
Variable annuity embedded derivatives, net of related hedges |
| (261) |
| 147 |
|
All other derivatives and hedge accounting |
| (72) |
| (225) |
|
Other |
| 62 |
| 91 |
|
Net realized capital losses | $ | (446) | $ | (19) |
|
Three Months Ended March 31, |
|
|
|
|
|
(in millions) |
| 2020 |
| 2019 |
|
Sales of fixed maturity securities | $ | 214 | $ | (31) |
|
Other-than-temporary impairments |
| - |
| (83) |
|
Change in intent* |
| - |
| - |
|
Change in allowance for credit losses on fixed maturity securities |
| (198) |
| - |
|
Change in allowance for credit losses on loans |
| (38) |
| (24) |
|
Foreign exchange transactions |
| (254) |
| (37) |
|
Variable annuity embedded derivatives, net of related hedges |
| 2,192 |
| (261) |
|
All other derivatives and hedge accounting |
| 1,559 |
| (72) |
|
Other |
| 44 |
| 62 |
|
Net realized capital gains (losses) | $ | 3,519 | $ | (446) |
|
*For the three months ended March 31, 2019, the change in intent was included in Other-than-temporary impairments.
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 March 31, |
|
|
|
|
|
|
|
|
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Increase (decrease) in unrealized appreciation (depreciation) of investments: |
|
|
|
|
|
|
|
|
Fixed maturity securities | $ | 5,982 | $ | (4,969) | $ | (10,455) | $ | 5,982 |
Other investments |
| (69) |
| (25) |
| - |
| (69) |
Total increase (decrease) in unrealized appreciation (depreciation) of investments | $ | 5,913 | $ | (4,994) | $ | (10,455) | $ | 5,913 |
The following table summarizes the unrealized gains and losses recognized in Net Investment Income during the reporting period on equity securities still held at the reporting date:
|
|
|
| Other Invested |
|
|
|
|
| Other Invested |
|
|
(in millions) |
| Equities |
| Assets |
| Total |
| Equities |
| Assets |
| Total |
Three Months Ended March 31, 2020 |
|
|
|
|
|
| ||||||
Net gains and losses recognized during the period on equity securities | $ | (191) | $ | (129) | $ | (320) | ||||||
Less: Net gains and losses recognized during the period on equity securities sold |
|
|
|
|
|
| ||||||
during the period |
| 12 |
| 2 |
| 14 | ||||||
Unrealized gains and losses recognized during the reporting period on equity |
|
|
|
|
|
| ||||||
securities still held at the reporting date | $ | (203) | $ | (131) | $ | (334) | ||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Net gains and losses recognized during the period on equity securities | $ | 79 | $ | 239 | $ | 318 | $ | 79 | $ | 239 | $ | 318 |
Less: Net gains and losses recognized during the period on equity securities sold |
|
|
|
|
|
|
|
|
|
|
|
|
during the period |
| 19 |
| 10 |
| 29 |
| 19 |
| 10 |
| 29 |
Unrealized gains and losses recognized during the reporting period on equity |
|
|
|
|
|
|
|
|
|
|
|
|
securities still held at the reporting date | $ | 60 | $ | 229 | $ | 289 | $ | 60 | $ | 229 | $ | 289 |
Three Months Ended March 31, 2018 |
|
|
|
|
|
| ||||||
Net gains and losses recognized during the period on equity securities | $ | (31) | $ | 192 | $ | 161 | ||||||
Less: Net gains and losses recognized during the period on equity securities sold |
|
|
|
|
|
| ||||||
during the period |
| (8) |
| (1) |
| (9) | ||||||
Unrealized gains and losses recognized during the reporting period on equity |
|
|
|
|
|
| ||||||
securities still held at the reporting date | $ | (23) | $ | 193 | $ | 170 |
36AIG | First Quarter 20192020 Form 10-Q31
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Evaluating Investments for Other-Than-Temporary ImpairmentsAN ALLOWANCE FOR CREDIT LOSSES/OTHER-than-TEMPORARY IMPAIRMENTS
For a discussion of our policy for evaluating investments for other-than-temporary impairments see Note 6Fixed Maturity Securities
Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. No allowance is established in these situations. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing.
For fixed maturity securities for which a decline in the fair value below the amortized cost is due to credit related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to realized capital losses. The allowance for credit losses is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit related factors is presented in unrealized appreciation (depreciation) of fixed maturity securities on which an allowance for credit losses were recognized (a separate component of accumulated other comprehensive income). Accrued interest is excluded from the measurement of the allowance for credit losses.
When estimating future cash flows for structured fixed maturity securities (e.g., RMBS, CMBS, CDO, ABS) management considers the historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and the priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by asset class:
Current delinquency rates;
Expected default rates and the timing of such defaults;
Loss severity and the timing of any recovery; and
Expected prepayment speeds.
When estimating future cash flows for corporate, municipal and sovereign fixed maturity securities determined to be credit impaired, management considers:
Expected default rates and the timing of such defaults;
Loss severity and the timing of any recovery; and
Scenarios specific to the issuer and the security, which may also include estimates of outcomes of corporate restructurings, political and macroeconomic factors, stability and financial strength of the issuer, the value of any secondary sources of repayment and the disposition of assets.
We consider severe price declines in our assessment of potential credit impairments. We may also modify our model inputs when we determine that price movements in certain sectors are indicative of factors not captured by the cash flow models.
Credit losses are reassessed each period. The allowance for credit losses and the corresponding charge to realized capital losses can be reversed if conditions change, however, the allowance for credit losses will never be reduced below zero. When we determine that all or a portion of a fixed maturity security is uncollectable, the uncollectable amortized cost amount is written off with a corresponding reduction to the allowance for credit losses. If we collect cash flows that were previously written off the recovery is recognized by decreasing realized capital losses.
Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
If we intend to sell a fixed maturity security or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing.
AIG | First Quarter 2020 Form 10-Q 37
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
For fixed maturity securities for which a credit impairment has occurred, the amortized cost is written down to the estimated recoverable value with a corresponding charge to realized capital losses. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not related to a credit impairment is presented in unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were recognized (a separate component of accumulated other comprehensive income).
We consider severe price declines in our assessment of potential credit impairments. We may also modify our model inputs when we determine that price movements in certain sectors are indicative of factors not captured by the 2018 Annual Report.cash flow models.
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 prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining expected holding period of the security.
Credit Impairments
The following table presents a rollforward of the changes in allowance for credit losses on available for sale fixed maturity securities by major investment category:
Three Months Ended March 31, 2020 |
|
|
| Non- |
|
|
(in millions) | Structured | Structured |
| Total | ||
Balance, beginning of year * | $ | 7 | $ | - | $ | 7 |
Additions: |
|
|
|
|
|
|
Securities for which allowance for credit losses were not previously recorded |
| 24 |
| 174 |
| 198 |
Purchases of available for sale debt securities accounted for as |
|
|
|
|
|
|
purchased credit deteriorated assets |
| 6 |
| - |
| 6 |
Reductions: |
|
|
|
|
|
|
Securities sold during the period |
| - |
| - |
| - |
Intent to sell security or more likely than not will be required to sell the security |
|
|
|
|
|
|
before recovery of its amortized cost basis |
| - |
| - |
| - |
Additional increases or decreases to the allowance for credit losses on securities |
|
|
|
|
|
|
that had an allowance recorded in a previous period, for which there was no intent |
|
|
|
|
|
|
to sell before recovery amortized cost basis |
| - |
| - |
| - |
Write-offs charged against the allowance |
| - |
| - |
| - |
Recoveries of amounts previously written off |
| - |
| - |
| - |
Other |
| - |
| - |
| - |
Balance, end of period | $ | 37 | $ | 174 | $ | 211 |
* The beginning balance incorporates the Day 1 gross up on PCD assets held as of January 1, 2020.
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 March 31, |
|
|
|
|
|
| ||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
| ||||||
(in millions) |
|
|
| 2019 |
| 2018 |
|
|
|
|
|
|
Balance, beginning of year |
|
| $ | - | $ | 526 |
|
|
|
| $ | - |
Increases due to: |
|
|
|
|
|
|
|
|
|
|
|
|
Credit impairments on new securities subject to impairment losses |
|
|
| 68 |
| 14 |
|
|
|
|
| 68 |
Additional credit impairments on previously impaired securities |
|
|
| 6 |
| 17 |
|
|
|
|
| 6 |
Reductions due to: |
|
|
|
|
|
|
|
|
|
|
|
|
Credit impaired securities fully disposed for which there was no |
|
|
|
|
|
|
|
|
|
|
|
|
prior intent or requirement to sell |
|
|
| (21) |
| (51) |
|
|
|
|
| (21) |
Accretion on securities previously impaired due to credit* |
|
|
| (53) |
| (148) |
|
|
|
|
| - |
Balance, end of period |
|
| $ | - | $ | 358 |
|
|
|
| $ | 53 |
*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.
38 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Purchased Credit Deteriorated/Impaired (PCI) Securities
Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
We purchase certain RMBS securities that have experienced more-than-insignificant deterioration in credit quality since origination. Subsequent to the adoption of the Financial Instruments Credit Losses Standard these are referred to as PCD assets. At the time of purchase an allowance is recognized for these PCD assets by adding it to the purchase price to arrive at the initial amortized cost. There is no credit loss expense recognized upon acquisition of a PCD asset. When determining the initial allowance for credit losses, management considers the historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and the priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs:
Current delinquency rates;
Expected default rates and the timing of such defaults;
Loss severity and the timing of any recovery; and
Expected prepayment speeds.
Subsequent to the acquisition date, the PCD assets follow the same accounting as other structured securities that are not high credit quality.
During the three-month period ended March 31, 2020, we purchased certain securities which had more than insignificant credit deterioration since their origination. These PCD securities are held in the portfolio of bonds available for sale in their natural classes at March 31, 2020.
The following table presents a reconciliation of the purchase price to the unpaid principal balance at the acquisition date of the PCD securities that were purchased with credit deterioration during the three-month period ended March 31, 2020:
(in millions) | March 31, 2020 | |
Unpaid principal balance | $ | 187 |
Allowance for expected credit losses at acquisition |
| (6) |
Purchase (discount) premium |
| (48) |
Purchase price | $ | 133 |
Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determine whether it is probable at acquisition that we will not collect all contractually required payments for these PCIpurchased credit impaired (PCI) securities, including both principal and interest. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security is determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is accreted into Net investment income over their remaining lives on an effective yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.
On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.
AIG | First Quarter 2020 Form 10-Q 39
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
The following tables present information on our PCI securities, which are included in bonds available for sale:sale as of December 31, 2019:
(in millions) | At Date of Acquisition | At Date of Acquisition | ||
Contractually required payments (principal and interest) | $ | 36,385 | $ | 35,139 |
Cash flows expected to be collected* |
| 29,862 |
| 28,720 |
Recorded investment in acquired securities |
| 20,156 |
| 19,382 |
*Represents undiscounted expected cash flows, including both principal and interest.
(in millions) |
| December 31, 2019 | ||
Outstanding principal balance |
|
| $ | 10,476 |
Amortized cost |
|
|
| 6,970 |
Fair value |
|
|
| 8,664 |
32AIG | First Quarter 2019 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
(in millions) | March 31, 2019 | December 31, 2018 | ||
Outstanding principal balance | $ | 12,063 | $ | 12,495 |
Amortized cost |
| 8,307 |
| 8,646 |
Fair value |
| 9,973 |
| 10,280 |
The following table presents activity for the accretable yield on PCI securities:
Three Months Ended March 31, |
|
|
|
| ||||
Three Months Ended March 31, 2019 |
|
|
|
| ||||
(in millions) |
| 2019 |
| 2018 |
|
|
|
|
Balance, beginning of year | $ | 7,210 | $ | 7,501 |
|
| $ | 7,210 |
Newly purchased PCI securities |
| 12 |
| 23 |
|
|
| 12 |
Accretion |
| (172) |
| (187) |
|
|
| (172) |
Effect of changes in interest rate indices |
| (134) |
| 206 |
|
|
| (134) |
Net reclassification from (to) non-accretable difference, including effects of prepayments |
| (115) |
| 58 |
|
|
| (115) |
Activities related to businesses reclassified to held for sale |
|
|
| - | ||||
Balance, end of period | $ | 6,801 | $ | 7,601 |
|
| $ | 6,801 |
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) |
| March 31, 2019 |
| December 31, 2018 |
| March 31, 2020 |
| December 31, 2019 |
Fixed maturity securities available for sale | $ | 1,503 | $ | 1,050 | $ | 2,759 | $ | 3,030 |
Other bond securities, at fair value | $ | 184 | $ | 122 |
At March 31, 20192020 and December 31, 2018,2019, amounts borrowed under repurchase and securities lending agreements totaled $1.7$2.9billion and $1.2$3.1billion, respectively.
40AIG | First Quarter 20192020 Form 10-Q33
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 | ||
March 31, 2019 |
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| ||||||||||||
March 31, 2020 |
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Bonds available for sale: |
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Non-U.S. governments | $ | 41 | $ | - | $ | - | $ | - | $ | - | $ | 41 | ||||||||||||
Corporate debt |
| 46 |
| 7 |
| - |
| - |
| - |
| 53 | ||||||||||||
Other bond securities: |
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|
|
|
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|
| ||||||||||||
U.S. government and government sponsored entities |
| 86 |
| - |
| - |
| - |
| - |
| 86 | ||||||||||||
Non-U.S. governments |
| - |
| 3 |
| - |
| - |
| - |
| 3 | $ | 4 | $ | 22 | $ | - | $ | - | $ | - | $ | 26 |
Corporate debt |
| - |
| 63 |
| 32 |
| - |
| - |
| 95 |
| 19 |
| 104 |
| - |
| - |
| - |
| 123 |
Total | $ | 173 | $ | 73 | $ | 32 | $ | - | $ | - | $ | 278 | $ | 23 | $ | 126 | $ | - | $ | - | $ | - | $ | 149 |
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December 31, 2018 |
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December 31, 2019 |
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Bonds available for sale: |
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Non-U.S. governments | $ | 25 | $ | 35 | $ | - | $ | - | $ | - | $ | 60 | $ | 2 | $ | 71 | $ | - | $ | - | $ | - | $ | 73 |
Corporate debt |
| 51 |
| 55 |
| - |
| - |
| - |
| 106 |
| 22 |
| 55 |
| 82 |
| - |
| - |
| 159 |
Other bond securities: |
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| ||||||||||||
U.S. government and government sponsored entities |
| 11 |
| - |
| - |
| - |
| - |
| 11 | ||||||||||||
Non-U.S. governments |
| - |
| 3 |
| - |
| - |
| - |
| 3 | ||||||||||||
Corporate debt |
| 17 |
| 38 |
| 53 |
| - |
| - |
| 108 | ||||||||||||
Total | $ | 104 | $ | 131 | $ | 53 | $ | - | $ | - | $ | 288 | $ | 24 | $ | 126 | $ | 82 | $ | - | $ | - | $ | 232 |
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 |
March 31, 2019 |
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| ||||||||||||
March 31, 2020 |
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Bonds available for sale: |
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Obligations of states, municipalities and political |
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subdivisions | $ | - | $ | 77 | $ | 55 | $ | - | $ | - | $ | 132 | $ | - | $ | 234 | $ | 136 | $ | - | $ | - | $ | 370 |
Non-U.S. governments |
| - |
| 19 |
| 23 |
| - |
| - |
| 42 |
| - |
| - |
| 85 |
| - |
| - |
| 85 |
Corporate debt |
| - |
| 276 |
| 528 |
| 431 |
| - |
| 1,235 |
| - |
| 1,083 |
| 740 |
| - |
| - |
| 1,823 |
RMBS |
| - |
| - |
| - |
| 332 |
| - |
| 332 | ||||||||||||
Total | $ | - | $ | 372 | $ | 606 | $ | 431 | $ | - | $ | 1,409 | $ | - | $ | 1,317 | $ | 961 | $ | 332 | $ | - | $ | 2,610 |
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December 31, 2018 |
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December 31, 2019 |
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Bonds available for sale: |
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Obligations of states, municipalities and political |
|
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subdivisions | $ | - | $ | 50 | $ | 130 | $ | - | $ | - | $ | 180 | $ | - | $ | - | $ | 386 | $ | - | $ | - | $ | 386 |
Non-U.S. governments |
| - |
| 21 |
| 8 |
| - |
| - |
| 29 |
| - |
| - |
| - |
| - |
| - |
| - |
Corporate debt |
| - |
| 330 |
| 345 |
| - |
| - |
| 675 |
| - |
| 1,071 |
| 947 |
| - |
| - |
| 2,018 |
RMBS |
| - |
| - |
| - |
| 394 |
| - |
| 394 | ||||||||||||
Total | $ | - | $ | 401 | $ | 483 | $ | - | $ | - | $ | 884 | $ | - | $ | 1,071 | $ | 1,333 | $ | 394 | $ | - | $ | 2,798 |
34AIG | First Quarter 2019 Form 10-Q
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) |
| March 31, 2019 |
| December 31, 2018 |
| March 31, 2020 |
| December 31, 2019 |
Securities collateral pledged to us | $ | 1,374 | $ | 426 | $ | 3,935 | $ | 2,567 |
Amount sold or repledged by us |
| 121 |
| 106 |
| - |
| 121 |
At March 31, 20192020 and December 31, 2018,2019, amounts loaned under reverse repurchase agreements totaled $1.4$3.9 billion and $426 million,$2.6 billion, respectively.
We do not currently offset any secured financing transactions. All such transactions are collateralized and margined daily consistent with market standards and subject to enforceable master netting arrangements with rights of set off.
AIG | First Quarter 2020 Form 10-Q 41
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Insurance – Statutory and Other Deposits
The total carrying value of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, was $8.2 billion and $7.9$8.7 billion at both March 31, 20192020 and December 31, 2018, respectively.2019.
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 $185$201 million and $202$194 million of stock in FHLBs at March 31, 20192020 and December 31, 2018,2019, respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with borrowings and funding agreements from FHLBs, with a fair value of $4.6$5.8 billion and $2.1$2.2 billion, respectively, at March 31, 20192020 and $4.2$4.3 billion and $2.1$1.8 billion, respectively, at December 31, 2018.2019.
Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations was approximately $1.6$1.6 billion and $1.5 billion at both March 31, 20192020 and December 31, 2018,2019, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
Investments held in escrow accounts or otherwise subject to restriction as to their use were $262$430 million and $273$330 million, comprised of bonds available for sale and short term investments at March 31, 20192020 and December 31, 2018,2019, respectively.
7. Lending Activities
Mortgage and other loans receivable include commercial mortgages, residential mortgages, life insurance policy loans, commercial loans, and other loans and notes receivable. Commercial mortgages, residential mortgages, commercial loans, and other loans and notes receivable are carried at unpaid principal balances less allowance for credit losses and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.
Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to earnings using the interest method. Premiums and discounts on purchased residential mortgages are also amortized to income as an adjustment to earnings using the interest method.
Life insurance policy loans are carried at unpaid principal balances. There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy.
Interest income is not accrued when payment of contractual principal and interest is not expected. Any cash received on impaired loans is generally recorded as a reduction of the current carrying amount of the loan. Accrual of interest income is generally resumed when delinquent contractual principal and interest is repaid or when a portion of the delinquent contractual payments are made and the ongoing required contractual payments have been made for an appropriate period. As of March 31, 2020, $4 million and $304 million of residential mortgage loans and commercial mortgage loans, respectively, were placed on nonaccrual status.
Accrued interest is presented separately and is included in Other assets on the Condensed Consolidated Balance Sheets. As of March 31, 2020, accrued interest receivable was $18 million and $130 million associated with residential mortgage loans and commercial mortgage loans, respectively.
A significant majority of commercial mortgages in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.
42AIG | First Quarter 20192020 Form 10-Q35
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |7. Lending Activities
7. Lending Activities
The following table presents the composition of Mortgage and other loans receivable, net:
| March 31, |
| December 31, | March 31, |
| December 31, | ||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Commercial mortgages* | $ | 33,665 | $ | 32,882 | ||||
Commercial mortgages(a) | $ | 36,291 | $ | 36,170 | ||||
Residential mortgages |
| 6,500 |
| 6,532 |
| 6,718 |
| 6,683 |
Life insurance policy loans |
| 2,124 |
| 2,147 |
| 2,061 |
| 2,065 |
Commercial loans, other loans and notes receivable |
| 1,967 |
| 1,971 |
| 2,561 |
| 2,504 |
Total mortgage and other loans receivable |
| 44,256 |
| 43,532 |
| 47,631 |
| 47,422 |
Allowance for credit losses |
| (422) |
| (397) |
| (787) |
| (438) |
Mortgage and other loans receivable, net | $ | 43,834 | $ | 43,135 | $ | 46,844 | $ | 46,984 |
* (a)Commercial mortgages primarily represent loans for apartments, offices and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 23 percent and 1011 percent, respectively, at March 31, 2019,2020 and 2223 percent and 1110 percent, respectively, at December 31, 2018)2019).
(b)Does not include $58 million of expected credit loss liability at March 31, 2020 in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.
Nonperforming loans are generally those loans where payment of contractual principal or interest is more than 90 days past due. Nonperforming loans were not significant for all periods presented.
Credit Quality of Commercial Mortgages
The following table presents debt service coverage ratios(a) for commercial mortgages by year of vintage:
March 31, 2020 |
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|
|
(in millions) |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior |
| Total |
>1.2X | $ | 701 | $ | 5,557 | $ | 5,963 | $ | 4,309 | $ | 5,165 | $ | 10,745 | $ | 32,440 |
1.00 - 1.20X |
| 115 |
| 255 |
| 505 |
| 338 |
| 162 |
| 2,072 |
| 3,447 |
<1.00X |
| - |
| 74 |
| - |
| - |
| - |
| 330 |
| 404 |
Total commercial mortgages | $ | 816 | $ | 5,886 | $ | 6,468 | $ | 4,647 | $ | 5,327 | $ | 13,147 | $ | 36,291 |
The following table presents loan-to-value ratios(b) for commercial mortgages by year of vintage:
March 31, 2020 |
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|
(in millions) |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior |
| Total |
Less than 65% | $ | 567 | $ | 4,567 | $ | 4,508 | $ | 3,584 | $ | 4,032 | $ | 10,745 | $ | 28,003 |
65% to 75% |
| 249 |
| 1,319 |
| 1,960 |
| 924 |
| 1,104 |
| 2,221 |
| 7,777 |
76% to 80% |
| - |
| - |
| - |
| - |
| 191 |
| 5 |
| 196 |
Greater than 80% |
| - |
| - |
| - |
| 139 |
| - |
| 176 |
| 315 |
Total commercial mortgages | $ | 816 | $ | 5,886 | $ | 6,468 | $ | 4,647 | $ | 5,327 | $ | 13,147 | $ | 36,291 |
The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:
| Debt Service Coverage Ratios(a) | |||||||||||||||
December 31, 2019 | 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 |
March 31, 2019 |
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| ||||||||
Loan-to-Value Ratios(b) |
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|
Less than 65% | $ | 20,054 | $ | 2,274 | $ | 247 | $ | 22,575 | $ | 23,013 | $ | 2,440 | $ | 245 | $ | 25,698 |
65% to 75% |
| 9,266 |
| 297 |
| 203 |
| 9,766 |
| 9,007 |
| 899 |
| 40 |
| 9,946 |
76% to 80% |
| 838 |
| 20 |
| 20 |
| 878 |
| 200 |
| 6 |
| - |
| 206 |
Greater than 80% |
| 244 |
| 96 |
| 106 |
| 446 |
| 184 |
| 2 |
| 134 |
| 320 |
Total commercial mortgages | $ | 30,402 | $ | 2,687 | $ | 576 | $ | 33,665 | $ | 32,404 | $ | 3,347 | $ | 419 | $ | 36,170 |
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December 31, 2018 |
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Loan-to-Value Ratios(b) |
|
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| ||||||||
Less than 65% | $ | 19,204 | $ | 2,543 | $ | 250 | $ | 21,997 | ||||||||
65% to 75% |
| 9,060 |
| 300 |
| 203 |
| 9,563 | ||||||||
76% to 80% |
| 476 |
| 20 |
| 15 |
| 511 | ||||||||
Greater than 80% |
| 596 |
| 103 |
| 112 |
| 811 | ||||||||
Total commercial mortgages | $ | 29,336 | $ | 2,966 | $ | 580 | $ | 32,882 |
(a)The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio was 1.9X for2.0X at both periods ended March 31, 20192020 and December 31, 2018.2019. The debt service coverage ratios have been updated within the last three months.
(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 5856 percent forat both periods ended March 31, 2019,2020 and December 31, 2018.2019. The loan-to-value ratios have been updated within the last three months.
36AIG | First Quarter 20192020 Form 10-Q43
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |7. Lending Activities
The following table presents the credit quality performance indicators for commercial mortgages:
| Number |
|
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|
|
|
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|
|
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|
|
|
| Percent |
|
| of |
| Class |
|
| of |
| |||||||||||
(dollars in millions) | Loans |
| Apartments |
| Offices |
| Retail | Industrial |
| Hotel |
| Others |
| Total(c) | Total $ |
| ||
March 31, 2019 |
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|
Credit Quality Performance |
|
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Indicator: |
|
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|
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|
|
|
In good standing | 762 |
| $ | 12,061 | $ | 9,797 | $ | 5,613 | $ | 2,989 | $ | 2,511 | $ | 584 | $ | 33,555 | 100 | % |
Restructured(a) | 2 |
|
| - |
| 94 |
| - |
| - |
| 16 |
| - |
| 110 | - |
|
90 days or less delinquent | - |
|
| - |
| - |
| - |
| - |
| - |
| - |
| - | - |
|
>90 days delinquent or in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
process of foreclosure | - |
|
| - |
| - |
| - |
| - |
| - |
| - |
| - | - |
|
Total(b) | 764 |
| $ | 12,061 | $ | 9,891 | $ | 5,613 | $ | 2,989 | $ | 2,527 | $ | 584 | $ | 33,665 | 100 | % |
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific |
|
| $ | - | $ | 2 | $ | - | $ | - | $ | 1 | $ | - | $ | 3 | - | % |
General |
|
|
| 126 |
| 104 |
| 51 |
| 12 |
| 20 |
| 7 |
| 320 | 1 |
|
Total allowance for credit losses |
|
| $ | 126 | $ | 106 | $ | 51 | $ | 12 | $ | 21 | $ | 7 | $ | 323 | 1 | % |
December 31, 2018 |
|
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|
|
|
|
Credit Quality Performance |
|
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|
|
|
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|
|
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|
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|
|
|
Indicator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing | 762 |
| $ | 11,190 | $ | 9,774 | $ | 5,645 | $ | 3,074 | $ | 2,507 | $ | 580 | $ | 32,770 | 100 | % |
Restructured(a) | 2 |
|
| - |
| 96 |
| - |
| - |
| 16 |
| - |
| 112 | - |
|
90 days or less delinquent | - |
|
| - |
| - |
| - |
| - |
| - |
| - |
| - | - |
|
>90 days delinquent or in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
process of foreclosure | - |
|
| - |
| - |
| - |
| - |
| - |
| - |
| - | - |
|
Total(b) | 764 |
| $ | 11,190 | $ | 9,870 | $ | 5,645 | $ | 3,074 | $ | 2,523 | $ | 580 | $ | 32,882 | 100 | % |
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific |
|
| $ | - | $ | 2 | $ | - | $ | - | $ | 1 | $ | - | $ | 3 | - | % |
General |
|
|
| 122 |
| 104 |
| 51 |
| 13 |
| 19 |
| 6 |
| 315 | 1 |
|
Total allowance for credit losses |
|
| $ | 122 | $ | 106 | $ | 51 | $ | 13 | $ | 20 | $ | 6 | $ | 318 | 1 | % |
| Number |
|
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|
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|
|
|
| Percent |
|
| of |
| Class |
|
| of |
| |||||||||||
(dollars in millions) | Loans |
| Apartments |
| Offices |
| Retail | Industrial |
| Hotel |
| Others |
| Total(c) | Total $ |
| ||
March 31, 2020 |
|
|
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|
|
|
|
|
|
Credit Quality Performance |
|
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|
|
|
|
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|
|
|
|
|
|
Indicator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing | 718 |
| $ | 14,153 | $ | 10,478 | $ | 5,221 | $ | 3,574 | $ | 2,156 | $ | 438 | $ | 36,020 | 99 | % |
Restructured(a) | 5 |
|
| - |
| 87 |
| 25 |
| - |
| 101 |
| - |
| 213 | 1 |
|
90 days or less delinquent | 1 |
|
| 1 |
| - |
| - |
| - |
| - |
| - |
| 1 | - |
|
>90 days delinquent or in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
process of foreclosure | 2 |
|
| - |
| 57 |
| - |
| - |
| - |
| - |
| 57 | - |
|
Total(b) | 726 |
| $ | 14,154 | $ | 10,622 | $ | 5,246 | $ | 3,574 | $ | 2,257 | $ | 438 | $ | 36,291 | 100 | % |
Allowance for credit losses |
|
| $ | 161 | $ | 315 | $ | 115 | $ | 66 | $ | 24 | $ | 8 | $ | 689 | 2 | % |
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing | 736 |
| $ | 13,698 | $ | 10,553 | $ | 5,332 | $ | 3,663 | $ | 2,211 | $ | 522 | $ | 35,979 | 99 | % |
Restructured(a) | 3 |
|
| - |
| 89 |
| - |
| - |
| 101 |
| - |
| 190 | 1 |
|
90 days or less delinquent | 1 |
|
| 1 |
| - |
| - |
| - |
| - |
| - |
| 1 | - |
|
>90 days delinquent or in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
process of foreclosure | - |
|
| - |
| - |
| - |
| - |
| - |
| - |
| - | - |
|
Total(b) | 740 |
| $ | 13,699 | $ | 10,642 | $ | 5,332 | $ | 3,663 | $ | 2,312 | $ | 522 | $ | 36,170 | 100 | % |
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific |
|
| $ | - | $ | 2 | $ | 1 | $ | - | $ | 6 | $ | - | $ | 9 | - | % |
General |
|
|
| 81 |
| 153 |
| 44 |
| 30 |
| 14 |
| 5 |
| 327 | 1 |
|
Total allowance for credit losses |
|
| $ | 81 | $ | 155 | $ | 45 | $ | 30 | $ | 20 | $ | 5 | $ | 336 | 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 78 to the Consolidated Financial Statements in the 20182019 Annual Report.
(b)Does not reflect allowance for credit losses.
(c)Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.
The following table presents credit quality performance indicators for residential mortgages by year of vintage:
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior |
| Total |
FICO*: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
780 and greater | $ | 116 | $ | 973 | $ | 638 | $ | 984 | $ | 996 | $ | 969 | $ | 4,676 |
720 - 779 |
| 128 |
| 496 |
| 190 |
| 265 |
| 282 |
| 285 |
| 1,646 |
660 - 719 |
| 6 |
| 77 |
| 43 |
| 55 |
| 65 |
| 85 |
| 331 |
600 - 659 |
| 1 |
| 8 |
| 7 |
| 8 |
| 7 |
| 16 |
| 47 |
Less than 600 |
| - |
| 1 |
| 1 |
| 2 |
| 3 |
| 11 |
| 18 |
Total residential mortgages | $ | 251 | $ | 1,555 | $ | 879 | $ | 1,314 | $ | 1,353 | $ | 1,366 | $ | 6,718 |
*Fair Isaac Corporation (FICO) is the credit quality indicator used to evaluate consumer credit risk for residential mortgage loan borrowers and have been updated within the last three months
Methodology Used to Estimate the Allowance for Credit Losses
ForSubsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
At the time of origination or purchase, an allowance for credit losses is established for mortgage and other loan receivables and is updated each reporting period. Changes in the allowance for credit losses are recorded in realized capital losses. This allowance reflects the risk of loss, even when that risk is remote, and reflects losses expected over the remaining contractual life of the loan. The allowance for credit losses considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions. We revert to historical information when we determine that we can no longer reliably forecast future economic assumptions.
44 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |7. Lending Activities
The allowances for the commercial mortgage loans and residential mortgage loans are estimated utilizing a discussionProbability of Default /Loss Given Default model. Loss rate factors are determined based on historical data and adjusted for current and forecasted information. The loss rates are applied based on individual loan attributes and considering such data points as Loan-to-Value, FICO scores, and debt service coverage.
The estimate of credit losses also reflects management’s assumptions on certain macroeconomic factors that include, but are not limited to, gross domestic product growth, employment, inflation, housing price index, interest rates and credit spreads.
Accrued interest is excluded from the measurement of the allowance for credit losses and accrued interest is reversed through interest income once a loan is placed on nonaccrual.
When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount of the loan is charged off against the allowance.
We also have off-balance sheet commitments related to our accounting policycommercial mortgage loans. The liability for evaluating expected credit losses related to these commercial mortgage loan commitments is reported in Other liabilities in the Condensed Consolidated Balance Sheets. When a commitment is funded, we record a loan receivable and reclassify the liability for expected credit losses related to the commitment into loan allowance for expected credit losses. Other changes in the liability for expected credit losses on loan commitments are recorded in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income.
Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020
Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan’s effective interest rate, ii) the loan’s observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent. Impairment of commercial mortgages is typically determined using the fair value of collateral while impairment of other loans is typically determined using the present value of cash flows or the loan’s observable market price. An allowance is typically established for impairment seeNote 7 to the Consolidated Financial Statements indifference between the 2018 Annual Report.impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on statistical models primarily driven by past-due status, debt service coverage, loan-to-value ratio, property type and location, loan term, profile of the borrower and of the major property tenants, and loan seasoning. When all or a portion of a loan is deemed uncollectable, the uncollectable portion of the carrying amount of the loan is charged off against the allowance.
The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable:receivable(a):
Three Months Ended March 31, |
|
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
| $ | 318 | $ | 79 | $ | 397 |
| $ | 247 | $ | 75 | $ | 322 |
|
|
| $ | 336 | $ | 102 | $ | 438 |
| $ | 318 |
| $ | 79 | $ | 397 |
Initial allowance upon CECL adoption |
|
|
|
| 311 |
| 7 |
| 318 |
|
| - |
|
| - |
| - | |||||||||||||||||||
Loans charged off |
|
|
|
|
|
|
| - |
| - |
| - |
|
| - |
| - |
| - |
|
|
|
| - |
| - |
| - |
|
| - |
|
| - |
| - |
Recoveries of loans previously charged off | Recoveries of loans previously charged off |
|
|
|
|
|
| - |
| - |
| - |
|
| - |
| - |
| - | Recoveries of loans previously charged off |
|
|
| - |
| - |
| - |
|
| - |
|
| - |
| - |
Net charge-offs |
|
|
|
|
|
|
| - |
| - |
| - |
|
| - |
| - |
| - |
|
|
|
| - |
| - |
| - |
|
| - |
|
| - |
| - |
Provision for loan losses |
|
|
|
|
|
|
| 5 |
| 20 |
| 25 |
|
| 27 |
| (2) |
| 25 |
|
|
|
| 42 |
| (11) |
| 31 |
|
| 5 |
|
| 20 |
| 25 |
Other |
|
|
|
|
|
|
| - |
| - |
| - |
|
| - |
| - |
| - | |||||||||||||||||
Allowance, end of period |
|
|
|
|
|
| $ | 323 * | $ | 99 | $ | 422 |
| $ | 274 * | $ | 73 | $ | 347 |
|
|
| $ | 689 | $ | 98 | $ | 787 |
| $ | 323 | (b) | $ | 99 | $ | 422 |
*(a)Does not include $58 million of expected credit loss liability at March 31, 2020 in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.
(b)The March 31, 2019 total allowance was calculated prior to the adoption of ASC 326 on January 1, 2020. Of the total allowance, $3$3 million and $23 million relaterelates to individually assessed credit losses on $148 million and $82 million of commercial mortgages at 2019.
As a result of the COVID-19 crisis, including the significant global economic slowdown and general market decline, our expectations and models used to estimate the allowance for losses on commercial and residential mortgage loans have been updated to reflect the current economic environment. The full impact of COVID-19 on real estate valuations remains uncertain and we will continue to review our valuations as further information becomes available.
During the three month period ended March 31, 2019 and 2018, respectively.
AIG | First Quarter 2019 Form 10-Q37
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |7. Lending Activities
2020, loans with a carrying value of $25 million were modified in troubled debt restructurings. There were no loans modified in troubled debt restructurings during the three-month periodsperiod ended March 31, 2019, and March 31, 2018. 2019.
AIG | First Quarter 2020 Form 10-Q 45
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |8. Variable Interest Entities
8. Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of business and consolidate the VIEs when we determine we are the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and our involvement with the entity. When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the entity was designed to expose the variable interest holders to.
The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of our decision-making ability and our ability to influence activities that significantly affect the economic performance of the VIE.
Balance Sheet Classification and Exposure to Loss
The following table presents the total assets and total liabilities associated with our variable interests in consolidated VIEs, as classified in the Condensed Consolidated Balance Sheets:
|
| Real Estate and |
|
|
| Affordable |
|
|
|
| ||||||||||
|
| Investment |
| Securitization |
| Housing |
|
|
|
| ||||||||||
(in millions) |
| Real Estate and Investment Entities(d) |
| Securitization Vehicles(e) |
| Affordable Housing Partnerships |
| Other |
| Total |
| Entities(d) |
| Vehicles(e) |
| Partnerships |
| Other |
| Total |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
| ||||||||||
March 31, 2020 |
|
|
|
|
|
|
|
|
|
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale | $ | - | $ | 8,285 | $ | - | $ | - | $ | 8,285 | $ | 256 | $ | 6,255 | $ | - | $ | - | $ | 6,511 |
Other bond securities |
| - |
| 3,802 |
| - |
| 2 |
| 3,804 |
| - |
| 2,266 |
| - |
| 1 |
| 2,267 |
Mortgage and other loans receivable |
| - |
| 3,593 |
| - |
| - |
| 3,593 |
| - |
| 4,025 |
| - |
| - |
| 4,025 |
Other invested assets |
| 5,438 |
| - |
| 3,650 |
| 25 |
| 9,113 |
| 5,180 |
| - |
| 3,635 |
| 42 |
| 8,857 |
Other(a) |
| 603 |
| 2,064 |
| 459 |
| 72 |
| 3,198 |
| 500 |
| 1,915 |
| 483 |
| 42 |
| 2,940 |
Total assets(b) | $ | 6,041 | $ | 17,744 | $ | 4,109 | $ | 99 | $ | 27,993 | $ | 5,936 | $ | 14,461 | $ | 4,118 | $ | 85 | $ | 24,600 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt | $ | 2,593 | $ | 3,764 | $ | 2,152 | $ | 5 | $ | 8,514 | $ | 2,794 | $ | 4,515 | $ | 2,201 | $ | 4 | $ | 9,514 |
Other(c) |
| 227 |
| 546 |
| 207 |
| 23 |
| 1,003 |
| 184 |
| 193 |
| 195 |
| 23 |
| 595 |
Total liabilities | $ | 2,820 | $ | 4,310 | $ | 2,359 | $ | 28 | $ | 9,517 | $ | 2,978 | $ | 4,708 | $ | 2,396 | $ | 27 | $ | 10,109 |
December 31, 2018 |
|
|
|
|
|
|
|
|
|
| ||||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale | $ | - | $ | 7,662 | $ | - | $ | - | $ | 7,662 | $ | 177 | $ | 7,239 | $ | - | $ | - | $ | 7,416 |
Other bond securities |
| - |
| 3,923 |
| - |
| 2 |
| 3,925 |
| - |
| 3,324 |
| - |
| 1 |
| 3,325 |
Mortgage and other loans receivable |
| - |
| 3,693 |
| - |
| - |
| 3,693 |
| - |
| 3,860 |
| - |
| - |
| 3,860 |
Other invested assets |
| 5,212 |
| - |
| 3,142 |
| 24 |
| 8,378 |
| 5,231 |
| - |
| 3,464 |
| 42 |
| 8,737 |
Other(a) |
| 580 |
| 1,581 |
| 394 |
| 70 |
| 2,625 |
| 615 |
| 1,996 |
| 469 |
| 42 |
| 3,122 |
Total assets(b) | $ | 5,792 | $ | 16,859 | $ | 3,536 | $ | 96 | $ | 26,283 | $ | 6,023 | $ | 16,419 | $ | 3,933 | $ | 85 | $ | 26,460 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt | $ | 2,577 | $ | 3,154 | $ | 1,834 | $ | 4 | $ | 7,569 | $ | 2,810 | $ | 4,356 | $ | 2,074 | $ | 4 | $ | 9,244 |
Other(c) |
| 227 |
| 165 |
| 159 |
| 24 |
| 575 |
| 236 |
| 359 |
| 195 |
| 24 |
| 814 |
Total liabilities | $ | 2,804 | $ | 3,319 | $ | 1,993 | $ | 28 | $ | 8,144 | $ | 3,046 | $ | 4,715 | $ | 2,269 | $ | 28 | $ | 10,058 |
(a)Comprised primarily of Short-term investments and Other assets at March 31, 20192020 and December 31, 2018.2019.
(b)The assets of each VIE can be used only to settle specific obligations of that VIE.
(c)Comprised primarily of Other liabilities at March 31, 20192020 and December 31, 2018.2019.
(d)At March 31, 20192020 and December 31, 2018,2019, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $2.9$2.4 billion and $1.4$2.6 billion, respectively.
(e)At March 31, 20192020 and December 31, 2018, $16.9 billion and $16.0 billion, respectively, of2019, the company had contributed total assets of $13.7 billion and $15.6 billion, respectively, into consolidated securitization vehicles were owed to AIG Parent or its subsidiaries.vehicles.
3846AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |8. Variable Interest Entities
We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to us, except in limited circumstances when we have provided a guarantee to the VIE’s interest holders.
The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:
|
|
| Maximum Exposure to Loss |
|
| Maximum Exposure to Loss | ||||||||||||
|
| Total VIE |
| On-Balance |
| Off-Balance |
|
|
|
| Total VIE |
| On-Balance |
| Off-Balance |
|
|
|
(in millions) |
| Assets |
| Sheet(b) |
| Sheet |
|
| Total |
| Assets |
| Sheet(b) |
| Sheet |
|
| Total |
March 31, 2019 |
|
|
|
|
|
|
|
|
| |||||||||
March 31, 2020 |
|
|
|
|
|
|
|
|
| |||||||||
Real estate and investment entities(a) | $ | 264,238 | $ | 6,492 | $ | 3,190 |
| $ | 9,682 | $ | 288,131 | $ | 5,810 | $ | 3,546 |
| $ | 9,356 |
Affordable housing partnerships |
| 3,650 |
| 544 |
| - |
|
| 544 |
| 3,064 |
| 397 |
| - |
|
| 397 |
Other |
| 5,365 |
| 327 |
| - | (c) |
| 327 |
| 5,514 |
| 358 |
| 561 | (c) |
| 919 |
Total | $ | 273,253 | $ | 7,363 | $ | 3,190 |
| $ | 10,553 | $ | 296,709 | $ | 6,565 | $ | 4,107 |
| $ | 10,672 |
December 31, 2018 |
|
|
|
|
|
|
|
|
| |||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
| |||||||||
Real estate and investment entities(a) | $ | 309,598 | $ | 6,820 | $ | 2,501 |
| $ | 9,321 | $ | 283,349 | $ | 6,519 | $ | 3,286 |
| $ | 9,805 |
Affordable housing partnerships |
| 4,116 |
| 607 |
| - |
|
| 607 |
| 3,351 |
| 453 |
| - |
|
| 453 |
Other |
| 2,813 |
| 284 |
| 1,222 | (c) |
| 1,506 |
| 5,320 |
| 310 |
| 561 | (c) |
| 871 |
Total | $ | 316,527 | $ | 7,711 | $ | 3,723 |
| $ | 11,434 | $ | 292,020 | $ | 7,282 | $ | 3,847 |
| $ | 11,129 |
(a)Comprised primarily of hedge funds and private equity funds.
(b)At March 31, 20192020 and December 31, 2018, $7.02019, $6.4 billion and $7.4$7.0 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.
(c)These amounts represent our estimate of the maximum exposure to loss under certain insurance policies issued to VIEs if a hypothetical loss occurred to the extent of the full amount of the insured value. Our insurance policies cover defined risks and our estimate of liability is included in our insurance reserves on the balance sheet.
For additional information on VIEs seeNote 1011 to the Consolidated Financial Statements in the 20182019 Annual Report.
We use derivatives and other financial instruments as part of our financial risk management programs and as part of our investment operations.
For a discussion of our accounting policies and procedures regarding derivatives and hedge accounting see Note 1112 to the Consolidated Financial Statements in the 20182019 Annual Report.
Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associated with embedded derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding medium‑medium- and long‑termlong-term notes as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally foreign exchange forwards and options)swaps) are used to economically mitigate risk associated with non‑U.S.non-U.S. dollar denominated debt, net capital exposures, foreign currency transactions, and foreign currency transactions.denominated investments. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities.liabilities and economically hedge certain investments. We use credit derivatives to manage our credit exposures. The derivatives are effective economic hedges of the exposures that they are meant to offset.
In addition to hedging activities, we also enter into derivative instruments with respect to investment operations, which may include, among other things, CDSscredit default swaps (CDSs) and purchases of investments with embedded derivatives, such as equity‑linkedequity-linked notes and convertible bonds.bonds.
AIG | First Quarter 20192020 Form 10-Q3947
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |9. Derivatives and Hedge Accounting
The following table presents the notional amounts of our derivatives and the fair value of derivative assets and liabilities in the Condensed Consolidated Balance Sheets:
| March 31, 2019 |
| December 31, 2018 | March 31, 2020 |
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| 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 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
| |||
hedging instruments:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest rate contracts | $ | - | $ | - |
| $ | 830 | $ | 14 |
| $ | 10 | $ | - |
| $ | 866 | $ | 19 | $ | 735 | $ | 18 |
| $ | 316 | $ | 11 |
| $ | 495 | $ | 3 |
| $ | 410 | $ | 7 |
Foreign exchange contracts |
| 5,749 |
| 371 |
| 2,954 |
| 150 |
| 6,357 |
| 363 |
|
| 2,536 |
| 147 |
| 7,592 |
| 843 |
|
| 1,929 |
| 88 |
| 4,328 |
| 342 |
|
| 5,230 |
| 162 | |||
Derivatives not designated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
as hedging instruments:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest rate contracts |
| 50,037 |
| 2,664 |
| 28,818 |
| 1,906 |
| 42,821 |
| 2,890 |
|
| 27,329 |
| 2,004 |
| 50,409 |
| 6,605 |
|
| 36,573 |
| 4,215 |
| 52,437 |
| 3,197 |
|
| 35,231 |
| 2,742 | |||
Foreign exchange contracts |
| 13,113 |
| 736 |
| 4,108 |
| 700 |
| 11,134 |
| 801 |
|
| 5,434 |
| 711 |
| 12,350 |
| 1,495 |
|
| 8,818 |
| 944 |
| 8,133 |
| 698 |
|
| 12,093 |
| 863 | |||
Equity contracts |
| 14,356 |
| 488 |
| 3,938 |
| 51 |
| 17,807 |
| 398 |
|
| 2,399 |
| 15 |
| 22,291 |
| 1,240 |
|
| 4,313 |
| 77 |
| 18,533 |
| 769 |
|
| 7,539 |
| 139 | |||
Credit contracts(b) |
| 3 |
| 1 |
| 1,441 |
| 240 |
| 8 |
| 1 |
|
| 1,406 |
| 236 |
| 7,617 |
| 133 |
|
| 923 |
| 81 |
| 8,457 |
| 3 |
|
| 923 |
| 89 | |||
Other contracts(c) |
| 39,096 |
| 13 |
| 57 |
| 5 |
| 39,070 |
| 15 |
|
| 58 |
| 6 |
| 41,563 |
| 15 |
|
| 56 |
| 13 |
| 40,582 |
| 14 |
|
| 56 |
| 7 | |||
Total derivatives, gross | $ | 122,354 | $ | 4,273 |
| $ | 42,146 | $ | 3,066 |
| $ | 117,207 | $ | 4,468 |
| $ | 40,028 | $ | 3,138 | $ | 142,557 | $ | 10,349 |
| $ | 52,928 | $ | 5,429 |
| $ | 132,965 | $ | 5,026 |
| $ | 61,482 | $ | 4,009 |
Counterparty netting(d) |
|
|
| (1,647) |
|
|
| (1,647) |
|
|
| (1,713) |
|
|
|
| (1,713) |
|
|
| (4,645) |
|
|
|
| (4,645) |
|
|
| (2,427) |
|
|
|
| (2,427) | |||
Cash collateral(e) |
|
|
| (1,734) |
|
|
| (188) |
|
|
| (1,840) |
|
|
|
| (187) |
|
|
| (4,840) |
|
|
|
| (147) |
|
|
| (1,806) |
|
|
|
| (527) | |||
Total derivatives on condensed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
consolidated balance sheets(f) |
|
| $ | 892 |
|
| $ | 1,231 |
|
| $ | 915 |
|
|
| $ | 1,238 |
|
| $ | 864 |
|
|
| $ | 637 |
|
| $ | 793 |
|
|
| $ | 1,055 |
(a)Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(b) (b)As of March 31, 20192020 and December 31, 2018,2019, included CDSs on super senior multi-sector CDOs with a net notional amount of $580$146 million and $592$152 million (fair value liability of $217$56 million and $224$48 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio. As of March 31, 2019 and December 31, 2018, 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 Assetsassets and Liabilities,liabilities, respectively. Fair value of assets related to bifurcated embedded derivatives was zero at both March 31, 20192020 and December 31, 2018.2019. Fair value of liabilities related to bifurcated embedded derivatives was $4.9$8.2 billion and $4.1$6.9 billion, respectively, at March 31, 20192020 and December 31, 2018.2019. 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‑termlong-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‑termlong-term debt ratings, as an alternative to posting collateral and subject to certain conditions, we may assign the transaction to an obligor with higher debt ratings or arrange for a substitute guarantee of our obligations by an obligor with higher debt ratings or take other similar action. The actual amount of collateral required to be posted to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade.
Collateral posted by us to third parties for derivative transactions was $1.7$1.9 billion at both March 31, 20192020 and $2.2 billion at December 31, 2018.2019. 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 $1.9$5.5 billion and $2.1$2.2 billion at March 31, 20192020 and December 31, 2018,2019, 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.
4048AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |9. Derivatives and Hedge Accounting
Offsetting
We have elected to present all derivative receivables and derivative payables, and the related cash collateral received and paid, on a net basis on our Condensed Consolidated Balance Sheets when a legally enforceable ISDA Master Agreement exists between us and our derivative counterparty. An ISDA Master Agreement is an agreement governing multiple derivative transactions between two counterparties. The ISDA Master Agreement generally provides for the net settlement of all, or a specified group, of these derivative transactions, as well as transferred collateral, through a single payment, and in a single currency, as applicable. The net settlement provisions apply in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions governed by the ISDA Master Agreement.
Hedge Accounting
We designated certain derivatives entered into with third parties as fair value hedges of available for sale investment securities held by our insurance subsidiaries. The fair value hedges include foreign currency forwards and cross currency swaps designated as hedges of the change in fair value of foreign currency denominated available for sale securities attributable to changes in foreign exchange rates. We also designated certain interest rate swaps entered into with third parties as fair value hedges of fixed rate GICs attributable to changes in benchmark interest rates.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-month periods ended March 31, 20192020 and 2018,2019, we recognized gains (losses) of $64$99 million and $(120)$64 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.
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: |
|
| Gains/(Losses) Recognized in Earnings for: |
|
| ||||||||||
| Hedging | Excluded | Hedged |
|
| Hedging | Excluded | Hedged |
|
| ||||||
(in millions) | Derivatives(a) | Components(b) | Items | Net Impact | Derivatives(a) | Components(b) | Items | Net Impact | ||||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
| ||||||||
Three Months Ended March 31, 2020 |
|
|
|
|
|
|
|
| ||||||||
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest credited to policyholder account balances |
| 5 |
| - |
| (5) |
| - | $ | 17 | $ | - | $ | (17) | $ | - |
Net investment income |
| (1) |
| - |
| 1 |
| - |
| (3) |
| - |
| 3 |
| - |
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
| (8) |
| (14) |
| 8 |
| (14) |
| 305 |
| 281 |
| (305) |
| 281 |
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
| ||||||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
| ||||||||
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) | $ | (8) | $ | - | $ | 9 | $ | 1 | ||||||||
Interest credited to policyholder account balances |
| - |
| - |
| - |
| - | $ | 5 | $ | - | $ | (5) | $ | - |
Net investment income |
| - |
| - |
| - |
| - |
| (1) |
| - |
| 1 |
| - |
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
| (8) |
| (33) |
| 8 |
| (33) |
| (8) |
| (14) |
| 8 |
| (14) |
(a)Gains and losses on derivative instruments designated and qualifying in fair value hedges that are included in the assessment of hedge effectiveness.
(b)Gains and losses on derivative instruments designated and qualifying in fair value hedges that are excluded from the assessment of hedge effectiveness and recognized in earnings on a mark-to-market basis.
AIG | First Quarter 20192020 Form 10-Q4149
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |9. Derivatives and Hedge Accounting
Derivatives Not Designated as Hedging Instruments
The following table presents the effect of derivative instruments not designated as hedging instruments in the Condensed Consolidated Statements of Income:
|
|
| Gains (Losses) |
|
| Gains (Losses) | ||||||
Three Months Ended March 31, |
|
| Recognized in Earnings |
|
| Recognized in Earnings | ||||||
(in millions) |
|
|
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
By Derivative Type: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
| $ | 359 | $ | (398) |
|
| $ | 2,573 | $ | 359 |
Foreign exchange contracts |
|
|
| (28) |
| (139) |
|
|
| 1,025 |
| (28) |
Equity contracts |
|
|
| (208) |
| (73) |
|
|
| 1,103 |
| (208) |
Credit contracts |
|
|
| (8) |
| 11 |
|
|
| 122 |
| (8) |
Other contracts |
|
|
| 16 |
| 17 |
|
|
| 10 |
| 16 |
Embedded derivatives |
|
|
| (449) |
| 591 |
|
|
| (1,052) |
| (449) |
Total |
|
| $ | (318) | $ | 9 |
|
| $ | 3,781 | $ | (318) |
By Classification: |
|
|
|
|
|
|
|
|
|
|
|
|
Policy fees |
|
| $ | 17 | $ | 17 |
|
| $ | 15 | $ | 17 |
Net investment income |
|
|
| (5) |
| (4) |
|
|
| (2) |
| (5) |
Net realized capital losses |
|
|
| (334) |
| (13) | ||||||
Other income |
|
|
| - |
| 12 | ||||||
Net realized capital gains (losses) |
|
|
| 3,752 |
| (334) | ||||||
Policyholder benefits and claims incurred |
|
|
| 4 |
| (3) |
|
|
| 16 |
| 4 |
Total |
|
| $ | (318) | $ | 9 |
|
| $ | 3,781 | $ | (318) |
Credit Risk-Related Contingent FeaturesCREDIT RISK-RELATED CONTINGENT FEATURES
We estimate that at March 31, 2019,2020, based on our outstanding financial derivative transactions, a downgrade of our long-term senior debt ratings to BBB or BBB– by Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc., and/or a downgrade to Baa2 or Baa3 by Moody’s Investors’ Service, Inc. would permit counterparties to make additional collateral calls and permit certain counterparties to elect early termination of contracts, resulting in corresponding collateral postings and termination payments in the total amount of up to approximately $63$44 million. The aggregate fair value of our derivatives that were in a net liability position and that contain such credit risk-related contingencies which can be triggered below our long-term senior debt ratings of BBB+ or Baa1 was approximately $436$257 million and $423$336 million at March 31, 20192020 and December 31, 2018,2019, respectively. The aggregate fair value of assets posted as collateral under these contracts at March 31, 20192020 and December 31, 2018,2019, was approximately $480$399 million and $453$381 million, respectively.
Hybrid Securities with Embedded Credit Derivatives
We invest in hybrid securities (such as credit‑linkedcredit-linked notes) with the intent of generating income, and not specifically to acquire exposure to embedded derivative risk. As is the case with our other investments in RMBS, CMBS, CDOs and ABS, our investments in these hybrid securities are exposed to losses only up to the amount of our initial investment in the hybrid security. Other than our initial investment in the hybrid securities, we have no further obligation to make payments on the embedded credit derivatives in the related hybrid securities.
We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fair value, with changes in fair value recognized in Net investment income and Other income. Our investments in these hybrid securities are reported as Other bond securities in the Condensed Consolidated Balance Sheets. The fair values of these hybrid securities were $3.8$2.3 billion and $3.9$3.3 billion at March 31, 20192020 and December 31, 2018,2019, respectively. These securities have par amounts of $8.3$5.3 billion and $8.5$7.4 billion at March 31, 20192020 and December 31, 2018,2019, respectively, and have remaining stated maturity dates that extend to 2052.
4250AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. Insurance Liabilities
10. Insurance Liabilities
Liability for Unpaid Losses and Loss Adjustment Expenses (Loss Reserves)
Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported (IBNR) and loss adjustment expenses, (LAE), less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income, except to the extent such adjustment impacts a deferred gain under a retroactive reinsurance agreement, in which case the ceded portion would be amortized into pre-tax income in subsequent periods. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown and general market decline, the full impact of COVID-19 and how it may ultimately impact the results of our insurance operations remains uncertain. In addition, in response to the crisis, new governmental, legislative and regulatory initiatives have been put in place and continue to be developed that could result in additional restrictions and requirements relating to our policies that may have a negative impact on our business operations. However, we have recorded our estimate of the ultimate liability for claims that have occurred as of the balance sheet date associated with COVID-19 which reflects our expectations given the current facts and circumstances. We will continue to monitor and review the impact. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.
Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.7$12.3 billion and $12.3$12.2 billion at March 31, 20192020 and December 31, 2018,2019, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. Thus, these recoverable amounts represent a credit exposure to us. At both March 31, 20192020 and December 31, 2018,2019, we held collateral of approximately $9.0$8.9 billion, and $9.2 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements. Allowance for credit losses for the unsecured portion of these recoverable amounts was $14 million at March 31, 2020.
AIG | First Quarter 2020 Form 10-Q 51
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. Insurance Liabilities
The following table presents the roll-forward of activity in Loss Reserves:
| Three Months Ended | Three Months Ended | ||||||
| March 31, | March 31, | ||||||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Liability for unpaid loss and loss adjustment expenses, beginning of period | $ | 83,639 | $ | 78,393 | $ | 78,328 | $ | 83,639 |
Reinsurance recoverable |
| (31,690) |
| (26,708) |
| (31,069) |
| (31,690) |
Initial allowance upon CECL adoption |
| 164 |
| - | ||||
Net Liability for unpaid loss and loss adjustment expenses, beginning of period |
| 51,949 |
| 51,685 |
| 47,423 |
| 51,949 |
Losses and loss adjustment expenses incurred: |
|
|
|
|
|
|
|
|
Current year |
| 4,805 |
| 4,698 |
| 4,111 |
| 4,297 |
Prior years, excluding discount and amortization of deferred gain |
| (15) |
| (40) |
| (1) |
| (15) |
Prior years, discount charge (benefit) |
| 497 |
| (205) |
| 76 |
| 497 |
Prior years, amortization of deferred gain on retroactive reinsurance(a) |
| (86) |
| (39) |
| (75) |
| (86) |
Total losses and loss adjustment expenses incurred |
| 5,201 |
| 4,414 |
| 4,111 |
| 4,693 |
Losses and loss adjustment expenses paid: |
|
|
|
|
|
|
|
|
Current year |
| (344) |
| (610) |
| (342) |
| (317) |
Prior years |
| (6,120) |
| (4,779) |
| (4,351) |
| (5,639) |
Total losses and loss adjustment expenses paid |
| (6,464) |
| (5,389) |
| (4,693) |
| (5,956) |
Other changes: |
|
|
|
|
|
|
|
|
Foreign exchange effect |
| 216 |
| 274 |
| (230) |
| 216 |
Allowance for credit losses |
| - |
| - | ||||
Retroactive reinsurance adjustment (net of discount)(b) |
| (190) |
| (97) |
| 22 |
| (190) |
Total other changes |
| 26 |
| 177 |
| (208) |
| 26 |
Liability for unpaid loss and loss adjustment expenses, end of period: |
|
|
|
|
|
|
|
|
Net liability for unpaid losses and loss adjustment expenses |
| 50,712 |
| 50,887 |
| 46,633 |
| 50,712 |
Reinsurance recoverable |
| 31,784 |
| 27,211 |
| 31,114 |
| 31,784 |
Total | $ | 82,496 | $ | 78,098 | $ | 77,747 | $ | 82,496 |
(a)Includes $9$8 million and $5$9 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the three-month periods ended March 31, 2019 and 2018, respectively.
(b) Includes change in discount on retroactive reinsurance of $(307) million and $128 million for the three-month periods ended March 31, 2019 and 2018, respectively.
AIG | First Quarter 2019 Form 10-Q43
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. Insurance Liabilities
On January 20, 2017, we entered into an adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire), covering U.S. asbestos exposures for the three-month periods ended March 31, 2020 and 2019, respectively.
(b)Includes benefit (charge) from change in discount on retroactive reinsurance in the amount of $72 million and $307 million for the three-month periods ended March 31, 2020 and 2019, respectively.
On January 20, 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the paid losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion. We account for this transaction as retroactive reinsurance. We paid total consideration, including interest, of $10.2 billion. The consideration was placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire has provided a parental guarantee to secure the obligations of NICO under the agreement. The total paid claims subject to the agreement as of March 31, 20192020 were below the attachment point.
52 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. Insurance Liabilities
Discounting of Loss Reserves
At March 31, 2020 and December 31, 2019, the loss reserves reflect a net loss reserve discount of $1.9$1.6 billion and $1.5 billion, respectively, including tabular and non-tabular calculations based upon the following assumptions:
The discount for asbestos reserves has been fully amortized.
The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the mortality rate used in the 2007 U.S. Life Table.
The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and follows the statutory regulations (prescribed or permitted) for each state. For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns. For the Pennsylvania companies, the statute specifies discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.
In 2013 and in 2014, our Pennsylvania regulatorand Delaware regulators, respectively, approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania-domiciled and Delaware domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios. In 2020, these regulators also approved that the discount rate will be updated on an annual basis, with the next update being performed in the fourth quarter of 2020.
TheAt March 31, 2020 and December 31, 2019, the discount consists of $603$593 million and $582 million of tabular discount, respectively, and $1.3 billion$972 million and $967 million of non-tabular discount for workers’ compensation, as of March 31, 2019.respectively. During the three-month periods ended March 31, 2020 and 2019, and 2018, the benefit/benefit (charge) from changes in discount of $(473)$(56) million and $205$(473) million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Condensed Consolidated StatementStatements of Income.
The following table presents the components of the loss reserve discount discussed above:
| March 31, 2019 |
| December 31, 2018 | March 31, 2020 |
| December 31, 2019 | ||||||||||||||||||||
| North |
|
|
|
|
| North |
|
|
|
| North |
|
|
|
|
| North |
|
|
|
| ||||
| America |
|
|
|
|
| America |
|
|
|
| America |
|
|
|
|
| America |
|
|
|
| ||||
| Commercial |
| Legacy |
|
|
| Commercial |
| Legacy |
|
| Commercial |
| Legacy |
|
|
| Commercial |
| Legacy |
|
| ||||
(in millions) | Insurance |
| Portfolio |
| Total |
| Insurance |
| Portfolio |
| Total | Insurance |
| Portfolio |
| Total |
| Insurance |
| Portfolio |
| Total | ||||
U.S. workers' compensation | $ | 2,387 | $ | 894 | $ | 3,281 |
| $ | 2,782 | $ | 973 | $ | 3,755 | $ | 2,087 | $ | 657 | $ | 2,744 |
| $ | 2,134 | $ | 666 | $ | 2,800 |
Retroactive reinsurance |
| (1,412) |
| - |
| (1,412) |
|
| (1,720) |
| - |
| (1,720) |
| (1,179) |
| - |
| (1,179) |
|
| (1,251) |
| - |
| (1,251) |
Total reserve discount* | $ | 975 | $ | 894 | $ | 1,869 |
| $ | 1,062 | $ | 973 | $ | 2,035 | $ | 908 | $ | 657 | $ | 1,565 |
| $ | 883 | $ | 666 | $ | 1,549 |
*Excludes $198$170 million and $163$172 million of discount related to certain long tail liabilities in the United KingdomUK at March 31, 20192020 and December 31, 2018,2019, respectively.
44AIG | First Quarter 2019 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |10. Insurance Liabilities
The following tables presenttable presents the net loss reserve discount benefit (charge):
Three Months Ended March 31, | 2019 |
| 2018 | 2020 |
| 2019 | ||||||||||||||||||||
| North |
|
|
|
| North |
|
|
| North |
|
|
|
| North |
|
|
| ||||||||
| America |
|
|
|
| America |
|
|
| America |
|
|
|
| America |
|
|
| ||||||||
| Commercial | Legacy |
|
|
| Commercial | Legacy |
|
| Commercial | Legacy |
|
|
| Commercial | Legacy |
|
| ||||||||
(in millions) | Insurance | Portfolio |
| Total |
| Insurance | Portfolio |
| Total | Insurance | Portfolio |
| Total |
| Insurance | Portfolio |
| Total | ||||||||
Current accident year | $ | 24 | $ | - | $ | 24 |
| $ | 19 | $ | - | $ | 19 | $ | 20 | $ | - | $ | 20 |
| $ | 24 | $ | - | $ | 24 |
Accretion and other adjustments to prior year discount |
| (251) |
| (13) |
| (264) |
|
| 45 |
| (18) |
| 27 |
| (67) |
| (9) |
| (76) |
|
| (251) |
| (13) |
| (264) |
Effect of interest rate changes |
| (167) |
| (66) |
| (233) |
|
| 123 |
| 36 |
| 159 |
| - |
| - |
| - |
|
| (167) |
| (66) |
| (233) |
Net reserve discount benefit (charge) |
| (394) |
| (79) |
| (473) |
|
| 187 |
| 18 |
| 205 |
| (47) |
| (9) |
| (56) |
|
| (394) |
| (79) |
| (473) |
Change in discount on loss reserves ceded under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retroactive reinsurance |
| 307 |
| - |
| 307 |
|
| (128) |
| - |
| (128) |
| 72 |
| - |
| 72 |
|
| 307 |
| - |
| 307 |
Net change in total reserve discount(a) | $ | (87) | $ | (79) | $ | (166) |
| $ | 59 | $ | 18 | $ | 77 | |||||||||||||
Net change in total reserve discount* | $ | 25 | $ | (9) | $ | 16 |
| $ | (87) | $ | (79) | $ | (166) |
(a) *Excludes $35$(2) million and $(5)$35 million discount related to certain long tail liabilities in the United KingdomUK for the three-month periods ended March 31, 2020 and 2019, and 2018, respectively.
AIG | First Quarter 2020 Form 10-Q 53
During the three-month period ended March 31, 2019, effective interest rates declined due to a decrease in the forward yield curve component of the discount rates. This decrease reflects a decline in U.S. Treasury rates. The decrease together with certain changes in payout pattern assumptions resulted in a decrease in the loss reserve discount by $233 million in the first quarter of 2019.
During the three-month period ended March 31, 2018, effective interest rates increased due to an increase in the forward yield curve component of the discount rates. This increase reflects an incline in U.S. Treasury rates. The increase together with certain changes in payout pattern assumptions resulted in an increase in the loss reserve discount by $159 million in the first quarter of 2018.
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.Overview
In the normal course of business, AIG and our subsidiaries are like others in the insurance and financial services industries in general, subject to regulatory and government investigations and actions, and litigation and other forms of dispute resolution in a large number of proceedings pending in various domestic and foreign jurisdictions. Certain of these matters involve potentially significant risk of loss due to potential for significant jury awards and settlements, punitive damages or other penalties. Many of these matters are also highly complex and may seek recovery on behalf of a class or similarly large number of plaintiffs. It is therefore inherently difficult to predict the size or scope of potential future losses arising from these matters. In our insurance and reinsurance operations, litigation and arbitration concerning the scope of coverage under insurance and reinsurance contracts, and litigation and arbitration in which our subsidiaries defend or indemnify their insureds under insurance contracts, are generally considered in the establishment of our loss reserves. Separate and apart from the foregoing matters involving insurance and reinsurance coverage, AIG, our subsidiaries and their respective officers and directors are subject to a variety of additional types of legal proceedings brought by holders of AIG securities, customers, employees and others, alleging, among other things, breach of contractual or fiduciary duties, bad faith, indemnification and violations of federal and state statutes and regulations. With respect to these other categories of matters not arising out of claims for insurance or reinsurance coverage, we establish reserves for loss contingencies when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. In many instances, we are unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from legal proceedings may exceed the amount of liabilities that we have recorded in our financial statements covering these matters. While such potential future charges could be material, based on information currently known to management, management does not believe, other than as may be discussed below, that any such charges are likely to have a material adverse effect on our financial position or results of operation.
AIG | First Quarter 2019 Form 10-Q45
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |11. Contingencies, Commitments and Guarantees
Additionally, from time to time, various regulatory and governmental agencies review the transactions and practices of AIG and our subsidiaries in connection with industry-wide and other inquiries into, among other matters, the business practices of current and former operating insurance subsidiaries. Such investigations, inquiries or examinations could develop into administrative, civil or criminal proceedings or enforcement actions, in which remedies could include fines, penalties, restitution or alterations in our business practices, and could result in additional expenses, limitations on certain business activities and reputational damage. For example, among other matters, we are currently responding to governmental investigations and examinations pertaining to certain sales and compensation practices and payments and related disclosures in connection with financial planning services and the sale and distribution of related products, including 403(b) and similar retirement plans, by the Individual and Group Retirement business segments. We have cooperated, and will continue to cooperate, in producing documents and other information in responsewith respect to such requests.these matters.
Tax Litigation
We are party to pending tax litigation before the Southern District of New York. For additional information see Note 15 to the Condensed Consolidated Financial Statements.
In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $7.3$6.9 billion at March 31, 2019.2020.
54 AIG | First Quarter 2020 Form 10-Q
Guarantees
SubsidiariesITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |11. Contingencies, Commitments and Guarantees
Guarantees
Subsidiaries
We have issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIG Financial Products Corp. and related subsidiaries (collectively AIGFP) and of AIG Markets, Inc. (AIG Markets) arising from transactions entered into by AIG Markets.
In connection with AIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at March 31, 20192020 was $82$79 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of scheduled payments to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor’s rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay without reimbursement.
AIG Parent files a consolidated federal income tax return with certain subsidiaries and acts as an agent for the consolidated tax group when making payments to the Internal Revenue Service (IRS). AIG Parent and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated federal income taxes. Under an Amended and Restated Tax Payment Allocation Agreement dated June 6, 2011 between AIG Parent and one of its Bermuda-domiciled insurance subsidiaries, AIG Life of Bermuda, Ltd. (AIGB), AIG Parent has agreed to indemnify AIGB for any tax liability (including interest and penalties) resulting from adjustments made by the IRS or other appropriate authorities to taxable income, special deductions or credits in connection with investments made by AIGB in certain affiliated entities.
Asset Dispositions
We are subject to financial guarantees and indemnity arrangements in connection with the completed sales of businesses pursuant to our asset disposition plan. The various arrangements may be triggered by, among other things, declines in asset values, the occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or are not applicable.
We are unable to develop a reasonable estimate of the maximum potential payout under certain of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments related to completed sales under these arrangements, and no material liabilities related to these arrangements have been recorded in the Condensed Consolidated Balance Sheets.
46AIG | First Quarter 2019 Form 10-Q
Other
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |11. Contingencies, Commitments and Guarantees
Other
·For additional discussion on commitments and guarantees associated with VIEs see Note 8.8 herein.
·For additional disclosures about derivatives see Note 9.9 herein.
AIG | First Quarter 2020 Form 10-Q 55
·For additional disclosures about guarantees of outstanding debt of AIG Life Holdings, Inc. (AIGLH), see Note 16.
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |12. Equity
12. Equity
Shares Outstanding
Preferred Stock
On March 14, 2019, we issued 20,000 shares of 5.85% Series A 5.85% Non-Cumulative Perpetual Preferred Stock (Series A Preferred Stock) (equivalent to 20,000,000 Depositary Shares, each representing a 1/1,000th interest in a share of Series A Preferred Stock), $5.00 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, we received net proceeds of approximately $485 million.
We may redeem the Series A Preferred Stock at our option, (a) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Rating Agency Event,” at a redemption price equal to $25,500 per share of the Series A Preferred Stock (equivalent to $25.50 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date), or (b) (i) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Regulatory Capital Event,” or (ii) in whole or in part, from time to time, on or after March 15, 2024, in each case, at a redemption price equal to $25,000 per share of the Series A Preferred Stock (equivalent to $25.00 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date).
A “Rating Agency Event” is generally defined to mean that any nationally recognized statistical rating organization within the meaning of Section 3(a)(62) of the Securities Exchange Act of 1934, as amended (the Exchange Act) that then publishes a rating for us amends, clarifies or changes the criteria it uses to assign equity credit to securities such as the Series A Preferred Stock, which amendment, clarification or change results in the shortening of the length of time the Series A Preferred Stock is assigned a particular level of equity credit by that rating agency as compared to the length of time it would have been assigned that level of equity credit by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock, or the lowering of the equity credit (including up to a lesser amount) assigned to the Series A Preferred Stock by that rating agency as compared to the equity credit assigned by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock. A “Regulatory Capital Event” is generally defined to mean our good faith determination that as a result of a change in law, rule or regulation, or a proposed change or an official judicial or administrative pronouncement, there is more than an insubstantial risk that the full liquidation preference of the Series A Preferred Stock would not qualify as capital (or a substantially similar concept) for purposes of any group capital standard to which we are or will be subject.
Holders of the Series A Preferred Stock will be entitled to receive dividend payments only when, as and if declared by our board of directors (or a duly authorized committee of the board). Dividends will be payable from the original date of issue at a rate of 5.85% per annum, payable quarterly, in arrears, on the fifteenth day of March, June, September and December of each year, beginning on June 15, 2019. Dividends on the Series A Preferred Stock will be non-cumulative.
On February 12, 2020, our Board of Directors declared a cash dividend of $365.625 per share on AIG’s Series A Preferred Stock. Holders of Depositary Shares each representing a 1/1,000th interest in a share of Series A Preferred Stock received $0.365625 per Depositary Share. The dividend was paid on March 16, 2020 to holders of record at the close of business on February 28, 2020.
In the event of any liquidation, dissolution or winding-up of the affairs of AIG, whether voluntary or involuntary, before any distribution or payment out of our assets may be made to or set aside for the holders of any junior stock, holders of the Series A Preferred Stock will be entitled to receive out of our assets legally available for distribution to our stockholders, an amount equal to $25,000 per share of Series A Preferred Stock (equivalent to $25.00 per Depositary Share), together with an amount equal to all declared and unpaid dividends (if any), but no amount in respect of any undeclared dividends prior to such payment date. Distributions will be made only to the extent of our assets that are available for distribution to stockholders (i.e., after satisfaction of all our liabilities to creditors, if any).
The Series A Preferred Stock does not have voting rights, except in limited circumstances, including in the case of certain dividend non-payments.
56AIG | First Quarter 20192020 Form 10-Q47
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |12. Equity
Common Stock
The following table presents a rollforward of outstanding shares:
Three Months Ended March 31, 2019 | Common | Treasury | Common Stock | |||
Three Months Ended March 31, 2020 | Common | Treasury | Common Stock | |||
| Stock Issued | Stock | Outstanding | Stock Issued | Stock | Outstanding |
Shares, beginning of year | 1,906,671,492 | (1,040,062,063) | 866,609,429 | 1,906,671,492 | (1,036,672,461) | 869,999,031 |
Shares issued | - | 3,127,472 | 3,127,472 | - | 3,452,529 | |
Shares repurchased | - | - | - | (12,160,952) | ||
Shares, end of period | 1,906,671,492 | (1,036,934,591) | 869,736,901 | 1,906,671,492 | (1,045,380,884) | 861,290,608 |
Dividends are payable on AIG Common Stock only when, as and if declared by our Board of Directors in its discretion, from funds legally available for this purpose. In considering whether to pay a dividend on or purchase shares of AIG Common Stock, our Board of Directors considers a number of factors, including, but not limited to: the capital resources available to support our insurance operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, regulatory standards for capital and capital distributions, and such other factors as our Board of Directors may deem relevant. The payment of dividends is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which no dividends may be declared or paid on any AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.
The following table presents declaration date, record date, payment date and dividends paid per common share on AIG Common Stock:
| |||||
|
|
|
| ||
|
|
|
| ||
|
|
|
|
|
|
|
|
| Dividends Paid |
Declaration Date | Record Date | Payment Date |
|
| Per Common Share |
February 12, 2020 | March 16, 2020 | March 30, 2020 |
| $ | 0.32 |
February 13, 2019 | March 15, 2019 | March 29, 2019 |
|
| 0.32 |
For a discussion of restrictions on payments of dividends to AIG Parent by its subsidiaries seeNote 1920 to the Consolidated Financial Statements in the 20182019 Annual Report.
Repurchase of AIG Common Stock
The following table presents repurchases of AIG Common Stock and warrants to purchase shares of AIG Common Stock:
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Aggregate repurchases of common stock | $ | - | $ | 298 | $ | 500 | $ | - |
Total number of common shares repurchased |
| - |
| 5 |
| 12 |
| - |
Aggregate repurchases of warrants | $ | - | $ | 2 | $ | - | $ | - |
Total number of warrants repurchased* |
| - |
| - | ||||
Total number of warrants repurchased |
| - |
| - |
* For the three-month periods ended March 31, 2018, we repurchased 97,553 warrants to purchase shares of AIG Common Stock. For the three-month periods ended March 31, 2019, we did not repurchase any warrants to purchase shares of AIG Common Stock..
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase of approximately $1.5 billion to its previous share repurchase authorization. As of March 31, 2019, $2.02020, $1.5 billion remained under our share repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including(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.
In the first quarter of 2020, we executed an accelerated stock repurchase (ASR) agreement with a third-party financial institution. The total number of shares of AIG Common Stock repurchased in the three months ended March 31, 2020, and the aggregate purchase price of those shares, reflect our payment of $500 million in the aggregate under the ASR agreement and the receipt of approximately 12 million shares of AIG Common Stock in the aggregate.
48AIG | First Quarter 20192020 Form 10-Q57
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |12. Equity
We did not repurchase any shares of AIG Common Stock during the three months ended March 31, 2019. The timing of any future repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors. The repurchase of AIG Common Stock is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which AIG may not (other than in limited circumstances) purchase, redeem or otherwise acquire AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.
Accumulated Other Comprehensive IncomeINCOME (LOSS)
The following table presents a rollforward of Accumulated other comprehensive income (loss):
|
| Unrealized Appreciation |
|
|
|
|
|
|
| Fair Value of |
|
|
|
| (Depreciation) of Fixed |
| Unrealized |
|
|
|
|
| Liabilities Under |
|
|
|
| Maturity Securities on |
| Appreciation |
| Foreign |
| Retirement |
| Fair Value Option |
|
|
|
| Which Allowance |
| (Depreciation) |
| Currency |
| Plan |
| Attributable to |
|
|
|
| for Credit Losses |
| of All Other |
| Translation |
| Liabilities |
| Changes in |
|
|
(in millions) |
| Were Taken |
| Investments |
| Adjustments |
| Adjustment |
| Own Credit Risk |
| Total |
Balance, December 31, 2019, net of tax | $ | - | $ | 8,722 | $ | (2,625) | $ | (1,122) | $ | 7 | $ | 4,982 |
Change in unrealized depreciation of investments |
| (484) |
| (9,971) |
| - |
| - |
| - |
| (10,455) |
Change in deferred policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
adjustment and other(a) |
| 30 |
| 1,377 |
| - |
| - |
| - |
| 1,407 |
Change in future policy benefits |
| - |
| 1,672 |
| - |
| - |
| - |
| 1,672 |
Change in foreign currency translation adjustments |
| - |
| - |
| (69) |
| - |
| - |
| (69) |
Change in net actuarial loss |
| - |
| - |
| - |
| 4 |
| - |
| 4 |
Change in prior service credit |
| - |
| - |
| - |
| (1) |
| - |
| (1) |
Change in deferred tax asset (liability) |
| 95 |
| 1,380 |
| (16) |
| (10) |
| - |
| 1,449 |
Change in fair value of liabilities under fair value |
|
|
|
|
|
|
|
|
|
|
|
|
option attributable to changes in own credit risk |
| - |
| - |
| - |
| - |
| 3 |
| 3 |
Total other comprehensive loss |
| (359) |
| (5,542) |
| (85) |
| (7) |
| 3 |
| (5,990) |
Noncontrolling interests |
| - |
| (10) |
| (4) |
| - |
| - |
| (14) |
Balance, March 31, 2020, net of tax | $ | (359) | $ | 3,190 | $ | (2,706) | $ | (1,129) | $ | 10 | $ | (994) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Appreciation |
|
|
|
|
|
|
| Fair Value of |
|
|
|
| (Depreciation) of Fixed |
| Unrealized |
|
|
|
|
| Liabilities Under |
|
|
|
| Maturity Securities on |
| Appreciation |
| Foreign |
| Retirement |
| Fair Value Option |
|
|
|
| Which Other-Than- |
| (Depreciation) |
| Currency |
| Plan |
| Attributable to |
|
|
|
| Temporary Credit |
| of All Other |
| Translation |
| Liabilities |
| Changes in |
|
|
(in millions) |
| Impairments Were Taken |
| Investments |
| Adjustments |
| Adjustment |
| Own Credit Risk |
| Total |
Balance, December 31, 2018, net of tax | $ | (38) | $ | 2,426 | $ | (2,725) | $ | (1,086) | $ | 10 | $ | (1,413) |
Change in unrealized appreciation of investments |
| 849 |
| 5,064 |
| - |
| - |
| - |
| 5,913 |
Change in deferred policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
adjustment and other |
| (8) |
| (856) |
| - |
| - |
| - |
| (864) |
Change in future policy benefits |
| - |
| (1,068) |
| - |
| - |
| - |
| (1,068) |
Change in foreign currency translation adjustments |
| - |
| - |
| 188 |
| - |
| - |
| 188 |
Change in net actuarial loss |
| - |
| - |
| - |
| 1 |
| - |
| 1 |
Change in prior service credit |
| - |
| - |
| - |
| (1) |
| - |
| (1) |
Change in deferred tax liability |
| (165) |
| (432) |
| (24) |
| (1) |
| - |
| (622) |
Change in fair value of liabilities under fair value |
|
|
|
|
|
|
|
|
|
|
|
|
option attributable to changes in own credit risk |
| - |
| - |
| - |
| - |
| - |
| - |
Total other comprehensive income (loss) |
| 676 |
| 2,708 |
| 164 |
| (1) |
| - |
| 3,547 |
Noncontrolling interests |
| - |
| 5 |
| 1 |
| - |
| - |
| 6 |
Balance, March 31, 2019, net of tax | $ | 638 | $ | 5,129 | $ | (2,562) | $ | (1,087) | $ | 10 | $ | 2,128 |
(a)Includes net unrealized gains and losses attributable to businesses held for sale at March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017, net of tax | $ | 793 | $ | 7,693 | $ | (2,090) | $ | (931) | $ | - | $ | 5,465 |
Cumulative effect of change in accounting |
|
|
|
|
|
|
|
|
|
|
|
|
principles |
| 169 |
| (285) |
| (284) |
| (183) |
| 7 |
| (576) |
Change in unrealized depreciation of investments |
| (240) |
| (4,754) |
| - |
| - |
| - |
| (4,994) |
Change in deferred policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
adjustment and other |
| 30 |
| 634 |
| - |
| - |
| - |
| 664 |
Change in future policy benefits |
| - |
| 741 |
| - |
| - |
| - |
| 741 |
Change in foreign currency translation adjustments |
| - |
| - |
| 172 |
| - |
| - |
| 172 |
Change in net actuarial loss |
| - |
| - |
| - |
| 16 |
| - |
| 16 |
Change in prior service credit |
| - |
| - |
| - |
| (4) |
| - |
| (4) |
Change in deferred tax asset (liability) |
| 60 |
| 671 |
| (14) |
| 17 |
| - |
| 734 |
Change in fair value of liabilities under fair value |
|
|
|
|
|
|
|
|
|
|
|
|
option attributable to changes in own credit risk |
| - |
| - |
| - |
| - |
| 2 |
| 2 |
Total other comprehensive income (loss) |
| (150) |
| (2,708) |
| 158 |
| 29 |
| 2 |
| (2,669) |
Noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
Balance, March 31, 2018, net of tax | $ | 812 | $ | 4,700 | $ | (2,216) | $ | (1,085) | $ | 9 | $ | 2,220 |
58AIG | First Quarter 20192020 Form 10-Q49
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |12. Equity
The following table presents the other comprehensive income (loss) reclassification adjustments for the three-month periods ended March 31, 2020 and 2019, and 2018, respectively:
|
| Unrealized Appreciation |
|
|
|
|
|
|
| Fair Value of |
|
|
|
| (Depreciation) of Fixed |
| Unrealized |
|
|
|
|
| Liabilities Under |
|
|
|
| Maturity Securities on |
| Appreciation |
| Foreign |
| Retirement |
| Fair Value Option |
|
|
|
| Which Allowance |
| (Depreciation) |
| Currency |
| Plan |
| Attributable to |
|
|
|
| for Credit Losses |
| of All Other |
| Translation |
| Liabilities |
| Changes in |
|
|
(in millions) |
| Were Taken |
| Investments |
| Adjustments |
| Adjustment |
| Own Credit Risk |
| Total |
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change arising during period | $ | (454) | $ | (6,708) | $ | (69) | $ | (7) | $ | 3 | $ | (7,235) |
Less: Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
included in net income |
| - |
| 214 |
| - |
| (10) |
| - |
| 204 |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense (benefit) |
| (454) |
| (6,922) |
| (69) |
| 3 |
| 3 |
| (7,439) |
Less: Income tax expense (benefit) |
| (95) |
| (1,380) |
| 16 |
| 10 |
| - |
| (1,449) |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense (benefit) | $ | (359) | $ | (5,542) | $ | (85) | $ | (7) | $ | 3 | $ | (5,990) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Appreciation |
|
|
|
|
|
|
| Fair Value of |
|
|
|
| (Depreciation) of Fixed |
| Unrealized |
|
|
|
|
| Liabilities Under |
|
|
|
| Maturity Securities on |
| Appreciation |
| Foreign |
| Retirement |
| Fair Value Option |
|
|
|
| Which Other-Than- |
| (Depreciation) |
| Currency |
| Plan |
| Attributable to |
|
|
|
| Temporary Credit |
| of All Other |
| Translation |
| Liabilities |
| Changes in |
|
|
(in millions) |
| Impairments Were Taken |
| Investments |
| Adjustments |
| Adjustment |
| Own Credit Risk |
| Total |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change arising during period | $ | 841 | $ | 3,109 | $ | 188 | $ | (5) | $ | - | $ | 4,133 |
Less: Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
included in net income |
| - |
| (31) |
| - |
| (5) |
| - |
| (36) |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense |
| 841 |
| 3,140 |
| 188 |
| - |
| - |
| 4,169 |
Less: Income tax expense |
| 165 |
| 432 |
| 24 |
| 1 |
| - |
| 622 |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense | $ | 676 | $ | 2,708 | $ | 164 | $ | (1) | $ | - | $ | 3,547 |
AIG | First Quarter 2020 Form 10-Q 59
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |12. Equity
|
| Unrealized Appreciation |
|
|
|
|
|
|
| Fair Value of |
|
|
|
| (Depreciation) of Fixed |
| Unrealized |
|
|
|
|
| Liabilities Under |
|
|
|
| Maturity Securities on |
| Appreciation |
| Foreign |
| Retirement |
| Fair Value Option |
|
|
|
| Which Other-Than- |
| (Depreciation) |
| Currency |
| Plan |
| Attributable to |
|
|
|
| Temporary Credit |
| of All Other |
| Translation |
| Liabilities |
| Changes in |
|
|
(in millions) |
| Impairments Were Taken |
| Investments |
| Adjustments |
| Adjustment |
| Own Credit Risk |
| Total |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change arising during period | $ | 841 | $ | 3,109 | $ | 188 | $ | (5) | $ | - | $ | 4,133 |
Less: Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
included in net income |
| - |
| (31) |
| - |
| (5) |
| - |
| (36) |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense |
| 841 |
| 3,140 |
| 188 |
| - |
| - |
| 4,169 |
Less: Income tax expense |
| 165 |
| 432 |
| 24 |
| 1 |
| - |
| 622 |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense | $ | 676 | $ | 2,708 | $ | 164 | $ | (1) | $ | - | $ | 3,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change arising during period | $ | (208) | $ | (3,386) | $ | 172 | $ | 3 | $ | 2 | $ | (3,417) |
Less: Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
included in net income |
| 2 |
| (7) |
| - |
| (9) |
| - |
| (14) |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense (benefit) |
| (210) |
| (3,379) |
| 172 |
| 12 |
| 2 |
| (3,403) |
Less: Income tax expense (benefit) |
| (60) |
| (671) |
| 14 |
| (17) |
| - |
| (734) |
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense (benefit) | $ | (150) | $ | (2,708) | $ | 158 | $ | 29 | $ | 2 | $ | (2,669) |
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 |
| Amount Reclassified |
| ||||||||||||
| from Accumulated Other |
| from Accumulated Other |
| ||||||||||||
| Comprehensive Income |
| Comprehensive Income |
| ||||||||||||
| Three Months Ended March 31, | Affected Line Item in the | Three Months Ended March 31, | Affected Line Item in the | ||||||||||||
(in millions) |
|
| 2019 |
|
| 2018 |
| Condensed Consolidated Statements of Income |
|
| 2020 |
|
| 2019 |
| Condensed Consolidated Statements of Income |
Unrealized appreciation (depreciation) of fixed maturity securities on which allowance for credit losses were taken |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
| |||||||||
Investments |
| $ | - |
| $ | - |
| Other realized capital gains | ||||||||
Total |
|
| - |
|
| - |
|
| ||||||||
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Investments |
| $ | - |
| $ | 2 |
| Other realized capital gains |
|
| - |
|
| - |
| Other realized capital gains |
Total |
|
| - |
|
| 2 |
|
|
|
| - |
|
| - |
|
|
Unrealized appreciation (depreciation) of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
all other investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investments |
|
| (31) |
| 24 |
| Other realized capital gains |
|
| 214 |
|
| (31) |
| Other realized capital gains | |
Deferred acquisition costs adjustment |
|
| - |
|
| (31) |
| Amortization of deferred policy acquisition costs | ||||||||
Future policy benefits |
|
| - |
|
| - |
| Policyholder benefits and losses incurred | ||||||||
Total |
|
| (31) |
|
| (7) |
|
|
|
| 214 |
|
| (31) |
|
|
Change in retirement plan liabilities adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior-service credit |
|
| - |
|
| - |
| * |
|
| - |
|
| - |
| * |
Actuarial losses |
|
| (5) |
|
| (9) |
| * |
|
| (10) |
|
| (5) |
| * |
Total |
|
| (5) |
|
| (9) |
|
|
|
| (10) |
|
| (5) |
|
|
Total reclassifications for the period |
| $ | (36) |
| $ | (14) |
|
|
| $ | 204 |
| $ | (36) |
|
|
*These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. SeeFor additional information see Note 14 herein.
5060AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |13. Earnings Per Common Share (EPS)
13. Earnings Per Common Share (EPS)
The basic EPS computation is based on the weighted average number of common shares outstanding, adjusted to reflect all stock dividends and stock splits. The diluted EPS computation is based on those shares used in the basic EPS computation plus common shares that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding and adjusted to reflect all stock dividends and stock splits.
The following table presents the computation of basic and diluted EPS:
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
(dollars in millions, except per share data) |
| 2019 |
| 2018 | ||||
(dollars in millions, except per common share data) |
| 2020 |
| 2019 | ||||
Numerator for EPS: |
|
|
|
|
|
|
|
|
Income from continuing operations | $ | 937 | $ | 950 | $ | 1,654 | $ | 937 |
Less: Net income from continuing operations attributable to noncontrolling interests |
| 283 |
| 11 | ||||
Less: Net income (loss) from continuing operations attributable to noncontrolling interests |
| (95) |
| 283 | ||||
Less: Preferred stock dividends |
| 7 |
| - | ||||
Income attributable to AIG common shareholders from continuing operations |
| 654 |
| 939 |
| 1,742 |
| 654 |
Loss from discontinued operations, net of income tax expense |
| - |
| (1) | ||||
Income from discontinued operations, net of income tax expense |
| - |
| - | ||||
Net income attributable to AIG common shareholders | $ | 654 | $ | 938 | $ | 1,742 | $ | 654 |
Denominator for EPS: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
| 875,383,084 |
| 907,951,597 | ||||
Dilutive shares |
| 2,129,160 |
| 17,314,980 | ||||
Weighted average shares outstanding — diluted(a) |
| 877,512,244 |
| 925,266,577 | ||||
Income per common share attributable to AIG: |
|
|
|
| ||||
Weighted average common shares outstanding — basic |
| 874,213,630 |
| 875,383,084 | ||||
Dilutive common shares |
| 4,652,583 |
| 2,129,160 | ||||
Weighted average common shares outstanding — diluted(a) |
| 878,866,213 |
| 877,512,244 | ||||
Income per common share attributable to AIG common shareholders: |
|
|
|
| ||||
Basic: |
|
|
|
|
|
|
|
|
Income from continuing operations | $ | 0.75 | $ | 1.03 | $ | 1.99 | $ | 0.75 |
Income from discontinued operations | $ | - | $ | - | $ | - | $ | - |
Net income attributable to AIG | $ | 0.75 | $ | 1.03 | ||||
Income attributable to AIG common shareholders | $ | 1.99 | $ | 0.75 | ||||
Diluted: |
|
|
|
|
|
|
|
|
Income from continuing operations | $ | 0.75 | $ | 1.01 | $ | 1.98 | $ | 0.75 |
Income from discontinued operations | $ | - | $ | - | $ | - | $ | - |
Net income attributable to AIG | $ | 0.75 | $ | 1.01 | ||||
Income attributable to AIG common shareholders | $ | 1.98 | $ | 0.75 |
(a)Dilutive common shares included our share‑basedshare-based employee compensation plans and a weighted average portion of the 10-year warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011. The number of common shares excluded from diluted shares outstanding was 64.367.2 million and 0.764.3 million for the three-month periods ended March 31, 20192020 and 2018,2019, respectively, because the effect of including those common shares in the calculation would have been anti-dilutive.
For information about our repurchases of AIG Common Stock see Note 12 herein.
AIG | First Quarter 20192020 Form 10-Q5161
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |14. Employee Benefits
14. Employee Benefits
We sponsor various defined benefit pension plans, post-retirement medical and life insurance plans for eligible employees and retirees in the U.S. and certain non-U.S. countries.
The following table presents the components of net periodic benefit cost (credit) with respect to pensionspension benefits:
| Pension | |||||
|
| U.S. |
| Non-U.S. |
|
|
(in millions) |
| Plans |
| Plans |
| Total |
Three Months Ended March 31, 2020 |
|
|
|
|
|
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
Service cost | $ | 1 | $ | 5 | $ | 6 |
Interest cost |
| 34 |
| 3 |
| 37 |
Expected return on assets |
| (60) |
| (5) |
| (65) |
Amortization of net loss |
| 8 |
| 2 |
| 10 |
Net periodic benefit cost (credit) |
| (17) |
| 5 |
| (12) |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
Service cost | $ | 2 | $ | 6 | $ | 8 |
Interest cost |
| 44 |
| 4 |
| 48 |
Expected return on assets |
| (57) |
| (5) |
| (62) |
Amortization of net loss |
| 8 |
| 1 |
| 9 |
Net periodic benefit cost (credit) |
| (3) |
| 6 |
| 3 |
Settlement (credit) charges |
| - |
| (4) |
| (4) |
Net benefit cost (credit) | $ | (3) | $ | 2 | $ | (1) |
The service cost for our U.S. defined benefit plans only reflect administrative fees as the plans are frozen and otherno longer accrue benefits. We recognized net expense of $2 million for our U.S. and non-U.S. 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 March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost | $ | 2 | $ | 6 | $ | 8 |
| $ | - | $ | - | $ | - |
Interest cost |
| 44 |
| 4 |
| 48 |
|
| 2 |
| - |
| 2 |
Expected return on assets |
| (57) |
| (5) |
| (62) |
|
| - |
| - |
| - |
Amortization of prior service cost |
| - |
| - |
| - |
|
| - |
| - |
| - |
Amortization of net loss |
| 8 |
| 1 |
| 9 |
|
| - |
| - |
| - |
Net periodic benefit cost (credit) |
| (3) |
| 6 |
| 3 |
|
| 2 |
| - |
| 2 |
Settlement gain |
| - |
| (4) |
| (4) |
|
| - |
| - |
| - |
Net benefit cost (credit) | $ | (3) | $ | 2 | $ | (1) |
| $ | 2 | $ | - | $ | 2 |
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost | $ | 2 | $ | 6 | $ | 8 |
| $ | - | $ | - | $ | - |
Interest cost |
| 41 |
| 4 |
| 45 |
|
| 2 |
| - |
| 2 |
Expected return on assets |
| (71) |
| (7) |
| (78) |
|
| - |
| - |
| - |
Amortization of prior service cost |
| - |
| 1 |
| 1 |
|
| - |
| - |
| - |
Amortization of net loss |
| 7 |
| 2 |
| 9 |
|
| - |
| - |
| - |
Net periodic benefit cost (credit) |
| (21) |
| 6 |
| (15) |
|
| 2 |
| - |
| 2 |
Settlement gain |
| - |
| - |
| - |
|
| - |
| - |
| - |
Net benefit cost (credit) | $ | (21) | $ | 6 | $ | (15) |
| $ | 2 | $ | - | $ | 2 |
Forbenefit plans for the three-month period ended March 31, 2019, we did not make any contributions to the U.S. AIG Retirement Plan.
5262AIG | First Quarter 20192020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Income Taxes
RECENT U.S. Tax Reform Overviewlaw changes
On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.
The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and, while certain formal guidance was issued byWhile the U.S. tax authority,authorities issued formal guidance, including recently issued proposed and final regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and additionalsubject to substantial uncertainties. Additional guidance is expected later in 2019.future periods. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 crisis. AIG does not expect the tax provisions of the CARES Act to have a material impact on AIG’s U.S. federal tax liabilities.
RECLASSIFICATION OF CERTAIN TAX EFFECTS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME
We use an item-by-item approach to release the stranded or disproportionate income tax effects in AOCI related to our available-for-sale securities. Under this approach, a portion of the disproportionate tax effects is assigned to each individual security lot at the date the amount becomes lodged. When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.
Interim Tax Calculation Method
We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions, and are recorded in the period in which the change occurs. While certain impacts of the Tax Act are included in our annual effective tax rate, we continue to refine our calculations as additional information becomes available, which may result in changes to the estimated annual effective tax rate. As of March 31, 2020, the annual effective tax rate includes the tax effects of actual and projected COVID-19 related losses and market developments.
Interim Tax Expense (Benefit)
For the three-month period ended March 31, 2019,2020, the effective tax rate on income from continuing operations was 18.8 percent. 35.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges associated with the establishment of U.S. federal valuation allowance related to certain tax attribute carryforwards, accrual of interest associated with IRS and other tax authority matters, the effect of foreign operations, state and local income taxes, excess tax charges related to share based compensation payments recorded through the income statement, and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.
AIG | First Quarter 2020 Form 10-Q 63
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Income Taxes
For the three-month period ended March 31, 2019, the effective tax rate on income from continuing operations was 18.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and valuation allowance activity related to certain foreign subsidiaries, partially offset by tax charges associated with the effect of foreign operations, state and local income taxes, a net tax charge related to the accrual of IRS interest, excess tax charges related to share based compensation payments recorded through the income statement, and non-deductible transfer pricing charges, and U.S. tax imposed on GILTI earned by certain foreign subsidiaries.charges. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.
For the three-month period ended March 31, 2018, the effective tax rate on income from continuing operations was 22.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, tax on GILTI earned by certain foreign subsidiaries, valuation allowance activity related to certain foreign subsidiaries and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement.
As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings. For the three-month period ended March 31, 2019,2020, we consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
AIG | First Quarter 2019 Form 10-Q53
TABLE OF CONTENTS Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown and general market decline, we continue to monitor and review the impact on our reinvestment considerations, including regulatory oversight in the relevant jurisdictions.
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Income Taxes
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;asset, including forecasts of future income for each of our businesses and actual and planned business and operational changes;
•the carryforward periodperiods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and
•prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.
In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by our net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we are able to utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables usconcurrently.
Recent events, including the COVID-19 crisis, multiple reductions in target interest rates by the Board of Governors of the Federal Reserve System, and significant market volatility, impacted actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax planning strategies. In order to realizedemonstrate the predictability and sufficiency of future taxable income necessary to support the realizability of the net operating losses and foreign tax credit carryforwards, we have considered forecasts of future income for each of our businesses, including assumptions about future macro-economic and AIG-specific conditions and events, and any impact these conditions and events may have on our prudent and feasible tax planning strategies. We also subjected the forecasts to a variety of stresses of key assumptions and evaluated the effect on tax attribute utilization.
64 AIG | First Quarter 2020 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Income Taxes
The carryforward periods of our foreign tax credit carryforwards range from tax years 2020 through 2023. Carryforward periods for our net operating losses extend from 2028 forward. However, utilization of a portion of our net operating losses is limited under separate return limitation year (SRLY) rules. Based on first quarter of 2020 events and our analysis of their potential impact on utilization of our tax attributes, we concluded that a valuation allowance should be established on a portion of our foreign tax credit carryforwards and SRLY net operating losses that are no longer more-likely-than-not to be realized. To the extent that the valuation allowance is attributed to changes in forecast of current year taxable income, the impact is included in our estimated annualized effective tax rate. The valuation allowance related to changes in forecasts of income in future periods as well as other items not related to the current year was recorded discretely in the first quarter of 2020. Accordingly, as of March 31, 2020, we have recorded a $274 million valuation allowance through continuing operations.
Notwithstanding the recent events, our forecasts of future taxable income, including prudent and feasible tax planning strategies, resulted in sufficient income to achieve realization of the U.S. federal net operating loss carryforwards prior to expiration. As of March 31, 2019,2020, based on all available evidence, it is more likely than not that the U.S. federal 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, impact of settlements with taxing authorities, and any changes to interpretations and assumptions related to the impact of the Tax Act could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Additionally, estimates of future taxable income, including prudent and feasible tax planning strategies, may be further impacted by market developments arising from the COVID-19 crisis and uncertainty regarding its outcome. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.
For the three-month period ended March 31, 2019,2020, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a decrease to the deferred tax asset related to net unrealized tax capital losses. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery. As of March 31, 2019,2020, based on all available evidence, we concluded that no valuation allowance is required. For the three-month period ended March 31, 2019, we released $290million of valuation allowance associated with the unrealized tax lossesnecessary in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income.portfolio.
For the three-month period ended March 31, 2019,2020, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Non-Life Companies’non-life companies’ available for sale securities portfolio, resulting in an increase to thea deferred tax liabilityasset related to net unrealized tax capital gains.losses. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery. As of March 31, 2019,2020, based on all available evidence, we continueconcluded that a valuation allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be in an overall unrealized tax gain position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.
realized. For the three-month period ended March 31, 2019,2020, we established $115 million of valuation allowance associated with the unrealized tax losses in the U.S. non-life companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income.
For the three-month period ended March 31, 2020, we recognized a net decreaseincrease of $38$9 million, in our deferred tax asset valuation allowance associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to changes in projections and current year activity.
54AIG | First Quarter 2019 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Income Taxes
Tax Examinations and Litigation
On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.
In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. In 2019, we agreed with the IRS to execute an agreement for the tax years at issue in which AIG would waive restrictions on the assessment of additional tax related to the settlement of the underlying issues in those tax years. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.
AIG | First Quarter 2020 Form 10-Q 65
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |15. Income Taxes
Accounting for Uncertainty in Income Taxes
At both March 31, 20192020 and December 31, 2018,2019, our unrecognized tax benefits, excluding interest and penalties, were $4.7$4.8 billion. At March 31, 20192020 and December 31, 2018,2019, 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 $45$44 million and $38$43 million, respectively. Accordingly, at both March 31, 20192020 and December 31, 2018,2019, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7$4.7 billion.
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At March 31, 20192020 and December 31, 2018,2019, we had accrued liabilities of $2.3$2.5 billion and $2.2$2.4 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the three-month periods ended March 31, 20192020 and 2018, 2019, we accrued expense (benefit) of $58$49 million and $54$58 million, respectively, for the payment of interest and penalties.
We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9$3.6 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.
AIG | First Quarter 2019 Form 10-Q55
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |16. Information Provided in Connection with Outstanding Debt
16.Information Provided in Connection with Outstanding Debt
The following Condensed Consolidating Financial Statements reflect the results of Validus Holdings, Ltd. and AIG Life Holdings, Inc. (AIGLH), each a holding company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of the senior notes of Validus and all outstanding debt of AIGLH.
Condensed Consolidating Balance Sheets
|
| American |
|
|
|
|
|
|
|
|
|
|
|
| International |
| Validus |
|
|
|
|
| Reclassifications |
|
|
|
| Group, Inc. |
| Holdings, |
|
|
| Other |
| and | Consolidated | |
(in millions) | (As Guarantor) |
| Ltd. |
| AIGLH |
| Subsidiaries |
| Eliminations |
| AIG | |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments(a) | $ | 2,051 | $ | 2 | $ | - | $ | 11,306 | $ | (2,226) | $ | 11,133 |
Other investments(b) |
| 3,750 |
| - |
| - |
| 309,980 |
| - |
| 313,730 |
Total investments |
| 5,801 |
| 2 |
| - |
| 321,286 |
| (2,226) |
| 324,863 |
Cash |
| 2 |
| 1 |
| 3 |
| 2,559 |
| - |
| 2,565 |
Loans to subsidiaries(c) |
| 35,221 |
| - |
| - |
| 608 |
| (35,829) |
| - |
Investment in consolidated subsidiaries(c) |
| 36,737 |
| 4,282 |
| 29,312 |
| - |
| (70,331) |
| - |
Other assets, including deferred income taxes(d) |
| 15,707 |
| 1,796 |
| 126 |
| 170,000 |
| (2,135) |
| 185,494 |
Total assets | $ | 93,468 | $ | 6,081 | $ | 29,441 | $ | 494,453 | $ | (110,521) | $ | 512,922 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities | $ | - | $ | - | $ | - | $ | 298,689 | $ | - | $ | 298,689 |
Long-term debt |
| 22,993 |
| 357 |
| 643 |
| 11,783 |
| - |
| 35,776 |
Other liabilities, including intercompany balances(b) |
| 9,080 |
| 221 |
| 133 |
| 111,293 |
| (4,363) |
| 116,364 |
Loans from subsidiaries(c) |
| 608 |
| - |
| - |
| 35,222 |
| (35,830) |
| - |
Total liabilities |
| 32,681 |
| 578 |
| 776 |
| 456,987 |
| (40,193) |
| 450,829 |
Total AIG shareholders’ equity |
| 60,787 |
| 5,503 |
| 28,665 |
| 36,160 |
| (70,328) |
| 60,787 |
Non-redeemable noncontrolling interests |
| - |
| - |
| - |
| 1,306 |
| - |
| 1,306 |
Total equity |
| 60,787 |
| 5,503 |
| 28,665 |
| 37,466 |
| (70,328) |
| 62,093 |
Total liabilities and equity | $ | 93,468 | $ | 6,081 | $ | 29,441 | $ | 494,453 | $ | (110,521) | $ | 512,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments(a) | $ | 1,141 | $ | 2 | $ | - | $ | 10,329 | $ | (1,798) | $ | 9,674 |
Other investments(b) |
| 3,377 |
| - |
| - |
| 301,158 |
| - |
| 304,535 |
Total investments |
| 4,518 |
| 2 |
| - |
| 311,487 |
| (1,798) |
| 314,209 |
Cash |
| 2 |
| 9 |
| 9 |
| 2,853 |
| - |
| 2,873 |
Loans to subsidiaries(c) |
| 34,963 |
| - |
| - |
| 615 |
| (35,578) |
| - |
Investment in consolidated subsidiaries(c) |
| 33,300 |
| 4,029 |
| 26,321 |
| - |
| (63,650) |
| - |
Other assets, including deferred income taxes(d) |
| 15,389 |
| 1,798 |
| 124 |
| 159,430 |
| (1,839) |
| 174,902 |
Total assets | $ | 88,172 | $ | 5,838 | $ | 26,454 | $ | 474,385 | $ | (102,865) | $ | 491,984 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities | $ | - | $ | - | $ | - | $ | 293,652 | $ | - | $ | 293,652 |
Long-term debt |
| 22,422 |
| 359 |
| 643 |
| 11,116 |
| - |
| 34,540 |
Other liabilities, including intercompany balances(b) |
| 8,774 |
| 228 |
| 144 |
| 100,974 |
| (3,637) |
| 106,483 |
Loans from subsidiaries(c) |
| 615 |
| - |
| - |
| 34,963 |
| (35,578) |
| - |
Total liabilities |
| 31,811 |
| 587 |
| 787 |
| 440,705 |
| (39,215) |
| 434,675 |
Total AIG shareholders’ equity |
| 56,361 |
| 5,251 |
| 25,667 |
| 32,732 |
| (63,650) |
| 56,361 |
Non-redeemable noncontrolling interests |
| - |
| - |
| - |
| 948 |
| - |
| 948 |
Total equity |
| 56,361 |
| 5,251 |
| 25,667 |
| 33,680 |
| (63,650) |
| 57,309 |
Total liabilities and equity | $ | 88,172 | $ | 5,838 | $ | 26,454 | $ | 474,385 | $ | (102,865) | $ | 491,984 |
(a) At March 31, 2019, includes restricted cash of $8 million and $243 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $124 million and $18 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.
(b) Includes intercompany derivative positions, which are reported at fair value before credit valuation adjustment.
(c) Eliminated in consolidation.
(d) At March 31, 2019, includes restricted cash of $1 million and $362 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $1 million and $342 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.
56AIG | First Quarter 2019 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |16. Information Provided in Connection with Outstanding Debt
Condensed Consolidating Statements of Income
|
| American |
|
|
|
|
|
|
|
|
|
|
|
| International |
| Validus |
|
|
|
|
| Reclassifications |
|
|
|
| Group, Inc. |
| Holdings, |
|
|
| Other |
| and |
| Consolidated |
(in millions) |
| (As Guarantor) |
| Ltd. |
| AIGLH |
| Subsidiaries |
| Eliminations |
| AIG |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
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|
|
Revenues: |
|
|
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|
|
|
|
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|
|
|
Equity in earnings of consolidated subsidiaries* | $ | 708 | $ | 207 | $ | 700 | $ | - | $ | (1,615) | $ | - |
Other income |
| 287 |
| 1 |
| - |
| 12,208 |
| (40) |
| 12,456 |
Total revenues |
| 995 |
| 208 |
| 700 |
| 12,208 |
| (1,655) |
| 12,456 |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| 246 |
| - |
| 13 |
| 94 |
| (4) |
| 349 |
Loss on extinguishment of debt |
| - |
| 4 |
| - |
| (6) |
| - |
| (2) |
Other expenses |
| 188 |
| 1 |
| - |
| 10,804 |
| (38) |
| 10,955 |
Total expenses |
| 434 |
| 5 |
| 13 |
| 10,892 |
| (42) |
| 11,302 |
Income (loss) from continuing operations before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
expense (benefit) |
| 561 |
| 203 |
| 687 |
| 1,316 |
| (1,613) |
| 1,154 |
Income tax expense (benefit) |
| (94) |
| - |
| (1) |
| 312 |
| - |
| 217 |
Income (loss) from continuing operations |
| 655 |
| 203 |
| 688 |
| 1,004 |
| (1,613) |
| 937 |
Income (loss) from discontinued operations, net of income taxes |
| (1) |
| - |
| - |
| 1 |
| - |
| - |
Net income (loss) |
| 654 |
| 203 |
| 688 |
| 1,005 |
| (1,613) |
| 937 |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| 283 |
| - |
| 283 |
Net income (loss) attributable to AIG | $ | 654 | $ | 203 | $ | 688 | $ | 722 | $ | (1,613) | $ | 654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of consolidated subsidiaries* | $ | 1,033 | $ | - | $ | 722 | $ | - | $ | (1,755) | $ | - |
Other income |
| 258 |
| - |
| - |
| 11,512 |
| (58) |
| 11,712 |
Total revenues |
| 1,291 |
| - |
| 722 |
| 11,512 |
| (1,813) |
| 11,712 |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| 220 |
| - |
| 12 |
| 48 |
| (3) |
| 277 |
Loss on extinguishment of debt |
| - |
| - |
| - |
| 4 |
| - |
| 4 |
Other expenses |
| 152 |
| - |
| 1 |
| 10,106 |
| (55) |
| 10,204 |
Total expenses |
| 372 |
| - |
| 13 |
| 10,158 |
| (58) |
| 10,485 |
Income (loss) from continuing operations before income tax |
|
|
|
|
|
|
|
|
|
|
|
|
expense (benefit) |
| 919 |
| - |
| 709 |
| 1,354 |
| (1,755) |
| 1,227 |
Income tax expense (benefit) |
| (19) |
| - |
| 3 |
| 293 |
| - |
| 277 |
Income (loss) from continuing operations |
| 938 |
| - |
| 706 |
| 1,061 |
| (1,755) |
| 950 |
Loss from discontinued operations, net of income taxes |
| - |
| - |
| - |
| (1) |
| - |
| (1) |
Net income (loss) |
| 938 |
| - |
| 706 |
| 1,060 |
| (1,755) |
| 949 |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| 11 |
| - |
| 11 |
Net income (loss) attributable to AIG | $ | 938 | $ | - | $ | 706 | $ | 1,049 | $ | (1,755) | $ | 938 |
* Eliminated in consolidation.
AIG | First Quarter 2019 Form 10-Q57
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |16. Information Provided in Connection with Outstanding Debt
Condensed Consolidating Statements of Comprehensive Income
|
| American |
|
|
|
|
|
|
|
|
|
|
|
| International |
| Validus |
|
|
|
|
| Reclassifications |
|
|
|
| Group, Inc. |
| Holdings, |
|
|
| Other |
| and |
| Consolidated |
(in millions) | (As Guarantor) |
| Ltd. |
| AIGLH |
| Subsidiaries |
| Eliminations |
| AIG | |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 654 | $ | 203 | $ | 688 | $ | 1,005 | $ | (1,613) | $ | 937 |
Other comprehensive income (loss) |
| 3,541 |
| 1 |
| 5,308 |
| 9,175 |
| (14,478) |
| 3,547 |
Comprehensive income (loss) |
| 4,195 |
| 204 |
| 5,996 |
| 10,180 |
| (16,091) |
| 4,484 |
Total comprehensive income attributable to noncontrolling interests |
| - |
| - |
| - |
| 289 |
| - |
| 289 |
Comprehensive income (loss) attributable to AIG | $ | 4,195 | $ | 204 | $ | 5,996 | $ | 9,891 | $ | (16,091) | $ | 4,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) | $ | 938 | $ | - | $ | 706 | $ | 1,060 | $ | (1,755) | $ | 949 |
Other comprehensive income (loss) |
| (2,669) |
| - |
| 4,950 |
| 14,655 |
| (19,605) |
| (2,669) |
Comprehensive income (loss) |
| (1,731) |
| - |
| 5,656 |
| 15,715 |
| (21,360) |
| (1,720) |
Total comprehensive income attributable to noncontrolling interests |
| - |
| - |
| - |
| 11 |
| - |
| 11 |
Comprehensive income (loss) attributable to AIG | $ | (1,731) | $ | - | $ | 5,656 | $ | 15,704 | $ | (21,360) | $ | (1,731) |
58AIG | First Quarter 2019 Form 10-Q
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |16. Information Provided in Connection with Outstanding Debt
Condensed Consolidating Statements of Cash Flows
|
| American |
|
|
|
|
|
|
|
|
|
|
|
| International |
| Validus |
|
|
|
| Reclassifications |
|
| |
|
| Group, Inc. |
| Holdings, |
|
|
| Other |
| and |
| Consolidated |
(in millions) | (As Guarantor) |
| Ltd. |
| AIGLH |
| Subsidiaries |
| Eliminations |
| AIG | |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities | $ | 318 | $ | (8) | $ | 480 | $ | (665) | $ | (1,101) | $ | (976) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of investments |
| 864 |
| - |
| - |
| 13,840 |
| (364) |
| 14,340 |
Sales of divested businesses, net |
| - |
| - |
| - |
| - |
| - |
| - |
Purchase of investments |
| (675) |
| - |
| - |
| (14,804) |
| 364 |
| (15,115) |
Loans to subsidiaries - net |
| (10) |
| - |
| - |
| 10 |
| - |
| - |
Contributions from (to) subsidiaries - net |
| (319) |
| - |
| - |
| - |
| 319 |
| - |
Acquisition of businesses, net of cash and |
|
|
|
|
|
|
|
|
|
|
|
|
restricted cash acquired |
| - |
| - |
| - |
| - |
| - |
| - |
Net change in short-term investments |
| (1,020) |
| - |
| - |
| (201) |
| - |
| (1,221) |
Other, net |
| (20) |
| - |
| - |
| 37 |
| - |
| 17 |
Net cash (used in) provided by investing activities |
| (1,180) |
| - |
| - |
| (1,118) |
| 319 |
| (1,979) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt |
| 596 |
| - |
| - |
| 853 |
| - |
| 1,449 |
Repayments of long-term debt |
| - |
| - |
| - |
| (589) |
| - |
| (589) |
Issuance of preferred stock |
| 485 |
| - |
| - |
| - |
| - |
| 485 |
Purchase of common stock |
| - |
| - |
| - |
| - |
| - |
| - |
Intercompany loans - net |
| (10) |
| - |
| - |
| 10 |
| - |
| - |
Cash dividends paid |
| (278) |
| - |
| (486) |
| (615) |
| 1,101 |
| (278) |
Other, net |
| (47) |
| - |
| - |
| 2,063 |
| (319) |
| 1,697 |
Net cash (used in) provided by financing activities |
| 746 |
| - |
| (486) |
| 1,722 |
| 782 |
| 2,764 |
Effect of exchange rate changes on cash and |
|
|
|
|
|
|
|
|
|
|
|
|
restricted cash |
| - |
| - |
| - |
| 12 |
| - |
| 12 |
Change in cash and restricted cash |
| (116) |
| (8) |
| (6) |
| (49) |
| - |
| (179) |
Cash and restricted cash at beginning of year |
| 127 |
| 9 |
| 9 |
| 3,213 |
| - |
| 3,358 |
Cash and restricted cash at end of period | $ | 11 | $ | 1 | $ | 3 | $ | 3,164 | $ | - | $ | 3,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities | $ | 9 | $ | - | $ | 362 | $ | (501) | $ | (808) | $ | (938) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of investments |
| 1,322 |
| - |
| - |
| 15,830 |
| (2,681) |
| 14,471 |
Sales of divested businesses, net |
| - |
| - |
| - |
| 6 |
| - |
| 6 |
Purchase of investments |
| (39) |
| - |
| - |
| (15,405) |
| 2,681 |
| (12,763) |
Loans to subsidiaries - net |
| 422 |
| - |
| - |
| (60) |
| (362) |
| - |
Contributions from (to) subsidiaries - net |
| 153 |
| - |
| - |
| - |
| (153) |
| - |
Net change in short-term investments |
| (2,460) |
| - |
| - |
| (580) |
| - |
| (3,040) |
Other, net |
| (79) |
| - |
| - |
| (567) |
| - |
| (646) |
Net cash (used in) investing activities |
| (681) |
| - |
| - |
| (776) |
| (515) |
| (1,972) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt |
| 2,472 |
| - |
| - |
| 567 |
| - |
| 3,039 |
Repayments of long-term debt |
| (1,107) |
| - |
| - |
| (220) |
| - |
| (1,327) |
Purchase of common stock |
| (298) |
| - |
| - |
| - |
| - |
| (298) |
Intercompany loans - net |
| 60 |
| - |
| - |
| (422) |
| 362 |
| - |
Cash dividends paid |
| (289) |
| - |
| (377) |
| (431) |
| 808 |
| (289) |
Other, net |
| (154) |
| - |
| - |
| 1,362 |
| 153 |
| 1,361 |
Net cash (used in) provided by financing activities |
| 684 |
| - |
| (377) |
| 856 |
| 1,323 |
| 2,486 |
Effect of exchange rate changes on cash and |
|
|
|
|
|
|
|
|
|
|
|
|
restricted cash |
| - |
| - |
| - |
| 58 |
| - |
| 58 |
Change in cash and restricted cash |
| 12 |
| - |
| (15) |
| (363) |
| - |
| (366) |
Cash and restricted cash at beginning of year |
| 8 |
| - |
| 20 |
| 2,709 |
| - |
| 2,737 |
Cash and restricted cash at end of period | $ | 20 | $ | - | $ | 5 | $ | 2,346 | $ | - | $ | 2,371 |
AIG | First Quarter 2019 Form 10-Q59
ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |16. Information Provided in Connection with Outstanding Debt
Supplementary Disclosure of Condensed Consolidating Cash Flow Information
|
| American |
|
|
|
|
|
|
|
|
|
|
|
| International |
| Validus |
|
|
|
| Reclassifications |
|
| |
|
| Group, Inc. |
| Holdings, |
|
|
| Other |
| and |
| Consolidated |
(in millions) | (As Guarantor) |
| Ltd. |
| AIGLH |
| Subsidiaries |
| Eliminations |
| AIG | |
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash | $ | 2 | $ | 1 | $ | 3 | $ | 2,559 | $ | - | $ | 2,565 |
Restricted cash included in Short-term investments |
| 8 |
| - |
| - |
| 243 |
| - |
| 251 |
Restricted cash included in Other assets |
| 1 |
| - |
| - |
| 362 |
| - |
| 363 |
Total cash and restricted cash shown in the Condensed |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statements of Cash Flows | $ | 11 | $ | 1 | $ | 3 | $ | 3,164 | $ | - | $ | 3,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (paid) received during the 2019 period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Third party | $ | (225) | $ | (11) | $ | (23) | $ | (56) | $ | - | $ | (315) |
Intercompany |
| (1) |
| - |
| - |
| 1 |
| - |
| - |
Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax authorities | $ | (4) | $ | - | $ | - | $ | (46) | $ | - | $ | (50) |
Intercompany |
| 194 |
| - |
| - |
| (194) |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash | $ | 4 | $ | - | $ | 5 | $ | 2,094 | $ | - | $ | 2,103 |
Restricted cash included in Short-term investments |
| 15 |
| - |
| - |
| 32 |
| - |
| 47 |
Restricted cash included in Other assets |
| 1 |
| - |
| - |
| 220 |
| - |
| 221 |
Total cash and restricted cash shown in the Condensed |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidating Statements of Cash Flows | $ | 20 | $ | - | $ | 5 | $ | 2,346 | $ | - | $ | 2,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (paid) received during the 2018 period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Third party | $ | (260) | $ | - | $ | - | $ | (97) | $ | - | $ | (357) |
Intercompany |
| - |
| - |
| - |
| - |
| - |
| - |
Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax authorities | $ | (9) | $ | - | $ | - | $ | (19) | $ | - | $ | (28) |
Intercompany |
| 403 |
| - |
| - |
| (403) |
| - |
| - |
American International Group, Inc. (As Guarantor) Supplementary Disclosure of Non-Cash Activities:
Three Months Ended March 31, |
|
|
|
|
(in millions) |
| 2019 |
| 2018 |
Intercompany non-cash financing and investing activities: |
|
|
|
|
Capital contributions | $ | - | $ | 2,339 |
Dividends received in the form of securities |
| 486 |
| 60 |
Return of capital |
| - |
| 2,706 |
On May 6, 2019,4, 2020, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 201929, 2020 to shareholders of record on June 14,15, 2020. On May 4, 2020, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on June 15, 2020 to holders of record on May 29, 2020.
LLOYD’S SYNDICATE 2019
On May 4, 2020, AIG announced the launch of Lloyd’s Syndicate 2019. This Syndicate will exclusively reinsure risks from AIG’s Private Client Group. Syndicate 2019 is managed by Talbot Underwriting Limited, the managing agency AIG acquired in 2018 as part of the Validus transaction.
6066AIG | First Quarter 20192020 Form 10-Q
ITEM 2 |Management’sDiscussion 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(MD&A), we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.
American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 20182019 (the 20182019 Annual Report) to assist readers seeking additional information related to a particular subject.
In this Quarterly Report on Form 10-Q, unless otherwise mentioned or unless the context indicates otherwise, we use the terms “AIG,” the “Company,” “we,” “us” and “our” to refer to American International Group, Inc., a Delaware corporation, and its consolidated subsidiaries. We use the term “AIG Parent” to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and statements that may constitute “forward‑looking“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of which, by their nature, are inherently uncertain and outside ourAIG’s control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal” or “estimate.” These projections, goals, assumptions and statements may relate to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational, business or regulatory changes, the effect of catastrophes and macroeconomic events, such as COVID-19, anticipated sales,dispositions, monetization and/or acquisitions of businesses or assets, or successful integration of acquired businesses, management succession and retention plans, exposure to risk, trends in operations and financial results.
AIG | First Quarter 2020 Form 10-Q 67
It is possible that ourAIG’s actual results and financial condition will differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements. Factors that could cause ourAIG’s actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:
changes in market and industry
AIG’s ability to consummate the sale of its controlling interest in Fortitude Holdings and AIG’s ability to successfully
|
changes to the valuation of AIG’s investments; AIG’s ability to successfully dispose of, monetize and/or acquire businesses or assets or successfully integrate acquired businesses; changes in judgments concerning the recognition of deferred tax assets and the effectiveness of our risk management policies and procedures, including with respect to our business continuity and disaster recovery plans; and
–Part I, Item 2. MD&A of this Quarterly Report on Form 10-Q; and –Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the |
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.
68AIG | First Quarter 20192020 Form 10-Q61
INDEX TO ITEM 2 | ||
| ||
Page | ||
Liquidity and Capital Resources of AIG Parent and Subsidiaries | ||
62AIG | First Quarter 20192020 Form 10-Q69
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“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‑GAAPnon-GAAP financial measures we present may not be comparable to similarly‑namedsimilarly-named measures reported by other companies.
Book value per common share, excluding accumulated other comprehensive income (AOCI), and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share)are used to show the amount of our net worth on a per-common share basis. We believe these measures are useful to investors because they eliminate items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency translation adjustments and U.S. tax attribute deferred tax assets. These measures also eliminate the asymmetrical impact resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the DTA utilized is included in these book value per common share metrics. Book value per common share, excluding AOCI, is derived by dividing total AIG common shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI and DTA (Adjusted Common Shareholders’ Equity), by total common shares outstanding. The reconciliation to book value per common share, the most comparable GAAP measure, is presented in the Executive Summary section of this MD&A.
Return on common equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted return on common equity) is used to show the rate of return on common shareholders’ equity. We believe this measure is useful to investors because it eliminates items that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency translation adjustments and U.S. tax attribute deferred tax assets. This measure also eliminates the asymmetrical impact resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the DTA utilized is included in Adjusted return on common equity. Adjusted return on common equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted Common Shareholders’ Equity. The reconciliation to return on common equity, the most comparable GAAP measure, is presented in the Executive Summary section of this MD&A.
Adjusted after-tax income attributable to AIG common shareholders is derived by excluding the tax effected adjusted pre-tax income (APTI) adjustments described below, dividends on preferred stock, and the following tax items from net income attributable to AIG:
·deferred income tax valuation allowance releases and charges;
·changes in uncertain tax positions and other tax items related to legacy matters having no relevance to our current businesses or operating performance; and
·net tax charge related to the enactment of the Tax Cuts and Jobs Act (Tax Act);
and by excluding the net realized capital gains (losses) from noncontrolling interests.
We use the following operating performance measures because we believe they enhance the understanding of the underlying profitability of continuing operations and trends of our business segments. We believe they also allow for more meaningful comparisons with our insurance competitors. When we use these measures, reconciliations to the most comparable GAAP measure are provided on a consolidated basis in the Consolidated Results of Operations section of this MD&A.
Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.
70AIG | First Quarter 20192020 Form 10-Q63
Adjusted pre-tax incomeis derived by excluding the items set forth below from income from continuing operations before income tax. This definition is consistent across our segments. These items generally fall into one or more of the following broad categories: legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the underlying economics of transactions; and measures that we believe to be common to the industry. APTI is a GAAP measure for our segments. Excluded items include the following:
|
|
·General Insurance
–Ratios:We, along with most property and casualty insurance companies, use the loss ratio, the expense ratio and the combined ratio as measures of underwriting performance. These ratios are relative measurements that describe, for every $100 of net premiums earned, the amount of losses and loss adjustment expenses (which for General Insurance excludes net loss reserve discount), and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100 indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. Our ratios are calculated using the relevant segment information calculated under GAAP, and thus may not be comparable to similar ratios calculated for regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and associated ratios.
–Accident year loss and combined ratios, as adjusted:both the accident year loss and combined ratios, as adjusted, exclude catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events,catastrophe losses, such as terrorism and civil disorders that exceed the $10 million threshold. We believe that as adjusted ratios are meaningful measures of our underwriting results on an ongoing basis as they exclude catastrophes and the impact of reserve discounting which are outside of management’s control. We also exclude prior year development to provide transparency related to current accident year results.results.
·Life and Retirement
–Premiums and deposits:includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and life‑contingentlife-contingent payout annuities, as well as deposits received on universal life, investment‑typeinvestment-type annuity contracts, Federal Home Loan Bank (FHLB) funding agreements and mutual funds.
Results from discontinued operations are excluded from all of these measures.
64AIG | First Quarter 20192020 Form 10-Q71
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: |
impairment charges, including
|
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.
The following accounting estimates have been updated from the descriptions in the 2019 Annual Report on account of the new accounting standard the Financial Instruments Credit Losses Standard that we adopted on January 1, 2020 that changes how we account for current expected credit losses.
Reinsurance RECOVERABLE
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves. Similarly, Other assets include reinsurance recoverable for contracts which are accounted for as deposits.
72 AIG | First Quarter 2020 Form 10-Q
We assess the collectability of reinsurance recoverable balances, at minimum on an annual basis, through either historical trends of disputes and credit events or financial analysis of the credit quality of the reinsurer. We record adjustments to reflect the results of these assessments through an allowance for credit losses and disputes on uncollectable reinsurance that reduces the carrying amount of reinsurance and other assets on the balance sheet (collectively, the reinsurance recoverable balances). This estimate requires significant judgment for which key considerations include:
paid and unpaid amounts recoverable;
whether the balance is in dispute or subject to legal collection;
the relative financial health of the reinsurer as determined by the Obligor Risk Ratings (ORRs) we assign to each reinsurer based upon our financial reviews; insurers that are financially troubled (i.e., in run-off, have voluntarily or involuntarily been placed in receivership, are insolvent, are in the process of liquidation or otherwise subject to formal or informal regulatory restriction) are assigned ORRs that will generate significant allowance; and
whether collateral and collateral arrangements exist.
An estimate of the reinsurance recoverable’s lifetime expected credit losses is established utilizing a probability of default and loss given default method, which reflects the reinsurer’s ORR rating. The allowance for credit losses excludes disputed amounts. An allowance for disputes is established for a reinsurance recoverable using the losses incurred model for contingencies.
At March 31, 2020, the allowance for credit losses and disputes on reinsurance recoverable was $362 million, or less than one percent of the consolidated reinsurance recoverable.
Impairment Charges
Impairments of Investments
Available for sale securities
If we intend to sell a fixed maturity security, or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. No allowance is established in these situations. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing.
For fixed maturity securities for which a decline in the fair value below the amortized cost is due to credit related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to realized capital losses. The allowance for credit losses is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit related factors is presented in unrealized appreciation (depreciation) of fixed maturity securities on which an allowance for credit losses were recognized (a separate component of accumulated other comprehensive income).
Commercial and residential mortgage loans
At the time of origination or purchase, an allowance for credit losses is established for mortgage and other loan receivables and is updated each reporting period. Changes in the allowance for credit losses are recorded in realized capital losses. This allowance reflects the risk of loss, even when that risk is remote, and reflects losses expected over the remaining contractual life of the loan. The allowance for credit losses considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions. We revert to historical information when we determine that we can no longer reliably forecast future economic assumptions.
The allowances for the commercial mortgage loans and residential mortgage loans are estimated utilizing a Probability of Default /Loss Given Default model. Loss rate factors are determined based on historical data and adjusted for current and forecasted information. The loss rates are applied based on individual loan attributes and considering such data points as Loan-to-Value, FICO scores, and debt service coverage.
The estimate of credit losses also reflects management’s assumptions on certain macroeconomic factors that include, but are not limited to, gross domestic product growth, employment, inflation, housing price index, interest rates and credit spreads.
AIG | First Quarter 2020 Form 10-Q 73
Goodwill Impairment
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. At both March 31, 2020 and December 31, 2019, our goodwill balance was $4.0 billion. The operating segments with goodwill are our General Insurance business – North America and International operating segments, our Life and Retirement business – Life Insurance operating segment, Legacy Portfolio and Other Operations.
Goodwill is tested for impairment annually or more frequently if circumstances indicate an impairment may have occurred. The date of our annual goodwill Impairment testing is July 1. In 2019, for substantially all of the reporting units we performed quantitative assessments that supported a conclusion that the fair value of all of the reporting units tested exceeded their book value. To determine fair value, we primarily use a discounted expected future cash flow analysis that estimates and discounts projected future distributable earnings. Such analysis is principally based on our business projections that inherently include judgments regarding business trends.
COVID-19 has caused significant market volatility impacting our actual and projected results along with a decline in our stock price. During the quarter ended March 31, 2020, we performed an updated quantitative and qualitative assessment that continues to support a conclusion that fair values of all of our reporting units exceeded their book value. As this is an evolving crisis, we expect to continue to monitor developments and perform updated analyses as necessary.
For a complete discussion of goodwill impairment see Part I, Item 1A. Risk Factors – Estimates and Assumptions and Note 13 to the Consolidated Financial Statements in the 2019 Annual Report and in Part II, Item 1A. Risk Factors.
Income Taxes
Recoverability of Net Deferred Tax Asset
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.
We consider a number of factors to reliably estimate future taxable income so we can determine the extent of our ability to realize net operating losses, foreign tax credits, realized capital loss and other carryforwards. These factors include forecasts of future income for each of our businesses and actual and planned business and operational changes, both of which include assumptions about future macroeconomic and AIG specific conditions and events. We subject the forecasts to stresses of key assumptions and evaluate the effect on tax attribute utilization. We also apply stresses to our assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. We have also considered the impact of the Tax Act on our forecasts of taxable income, made certain assumptions related to interpretation of relevant new rules, and incorporated guidance issued by the U.S. tax authority. Our analysis also reflects the effect of slower utilization of our tax credits due to a reduction in the U.S. statutory tax rate as a result of the Tax Act.
Recent events, including the COVID-19 crisis, multiple reductions in target interest rates by the Board of Governors of the Federal Reserve System, and significant market volatility, impacted actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax planning strategies. In order to demonstrate the predictability and sufficiency of future taxable income necessary to support the realizability of the net operating losses and foreign tax credit carryforwards, we have considered forecasts of future income for each of our businesses, including assumptions about future macro-economic and AIG-specific conditions and events, and any impact these conditions and events may have on our prudent and feasible tax planning strategies. We also subjected the forecasts to a variety of stresses of key assumptions and evaluate the effect on tax attribute utilization.
The carryforward periods of our foreign tax credit carryforwards range from tax years 2020 through 2023. Carryforward periods for our net operating losses extend from 2028 forward. However, utilization of a portion of our net operating losses is limited under separate return limitation year (SRLY) rules. Based on the events that transpired in the first quarter of 2020 and our analysis of their potential impact on utilization of our tax attributes, we concluded that valuation allowance should be established on a portion of our foreign tax credit carryforwards and SRLY net operating losses that are no longer more-likely-than-not to be realized, all of which was allocated to continuing operations.
74 AIG | First Quarter 2020 Form 10-Q
Notwithstanding the recent events, our forecasts of future taxable income, including prudent and feasible tax planning strategies, resulted in sufficient income to achieve realization of the U.S. federal net operating loss carryforward prior to expiration.
For the three-month period ended March 31, 2020, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a deferred tax asset related to net unrealized tax capital losses. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery. As of March 31, 2020, based on all available evidence, we concluded that no valuation allowance is necessary in the U.S. Life Insurance Companies’ available for sale securities portfolio.
For the three-month period ended March 31, 2020, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. non-life companies’ available for sale securities portfolio, resulting in a deferred tax asset related to net unrealized tax capital losses. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery. As of March 31, 2020, based on all available evidence, we concluded that a valuation allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized. For the three-month period ended March 31, 2020, we established valuation allowance associated with the unrealized tax losses in the U.S. non-life companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income.
For a complete discussion of our critical accounting estimates, see Part II, Item 7. MD&A — Critical Accounting Estimates in the 20182019 Annual Report.
Executive Summary
Overview
This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with the 20182019 Annual Report,, in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.
Beginning in the first quarter of 2019, on a prospective basis, the changes in the fair value of equity securities are excluded from adjusted pre-tax income (loss).
AIG | First Quarter 20192020 Form 10-Q6575
Our Core businesses include General Insurance, Life and Retirement and Other Operations. General Insurance consists of two operating segments – North America and International. Life and Retirement consists of four operating segments – Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s technology-driven subsidiary, is reported within Other Operations. At the end of March 2020, AIG decided to place Blackboard into run-off. We also report a Legacy Portfolio consisting of our run-off insurance lines and legacy investments that we consider non-core. Effective February 2018, our Bermuda-domiciled composite reinsurer, Fortitude Reinsurance Company Ltd (Fortitude Re.)Re) is included in our Legacy Portfolio. In November 2019, we announced the sale of a controlling financial interest in Fortitude Holdings, the holding company for Fortitude Re (Majority Interest Fortitude Sale). Upon closing of the Majority Interest Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude Holdings. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to consummate the Majority Interest Fortitude sale.
Consistent with how we manage our business, our General Insurance North America operating segment primarily includes insurance businesses in the United States, Canada and Bermuda. Our General Insurance International operating segment includes regional insurance businesses in Japan, the United Kingdom,UK, Europe, the Asia Pacific, region, Latin America Puerto Rico, Australia, theand Caribbean, Middle East and Africa.Africa, and China. General Insurance results are presented before consideration of internal reinsurance agreements.
For further discussion on our business segments see Note 3 to the Condensed Consolidated Financial Statements.
Business Segments
General Insurance General Insurance is a leading provider of insurance products and services for commercial and personal insurance customers. It includes one of the world’s most far-reaching property casualty networks. General Insurance offers a broad range of products to customers through a diversified, multichannel distribution network. Customers value General Insurance’s strong capital position, extensive risk management and claims experience and its ability to be a market leader in critical lines of the insurance business.
| Life and Retirement Life and Retirement is a unique franchise that brings together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. It holds long-standing, leading market positions in many of the markets it serves in the U.S. With its strong capital position, customer-focused service, breadth of product expertise and deep distribution relationships across multiple channels, Life and Retirement is well positioned to serve growing market needs. | ||||
General Insurance includes the following major operating companies: National Union Fire Insurance Company of Pittsburgh, Pa. (National Union); American Home Assurance Company (American Home); Lexington Insurance Company (Lexington); AIG General Insurance Company, Ltd. (AIG Sonpo); AIG Asia Pacific Insurance, Pte, Ltd.; AIG Europe S.A.; American International Group UK Ltd.; Validus Reinsurance, Ltd. (Validus); Talbot Holdings Ltd.; Western World Insurance Group, Inc. and Glatfelter Insurance | Life and Retirement includes the following major operating companies: American General Life Insurance Company (American General Life); The Variable Annuity Life Insurance Company (VALIC); The United States Life Insurance Company in the City of New York (U.S. Life); Laya Healthcare Limited and AIG Life Limited. | ||||
Other Operations Other Operationsconsists of businesses and items not attributed to our General Insurance and Life and Retirement segments or our Legacy Portfolio. It includes AIG Parent; Blackboard; deferred tax assets related to tax attributes; corporate expenses and intercompany eliminations. At the end of March 2020, AIG decided to place Blackboard into run-off. | Legacy Portfolio Legacy Portfolio includes Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, Fortitude Re, our Bermuda-domiciled composite reinsurer, is included in our Legacy Portfolio. On November 25, 2019, we announced an agreement to sell a controlling financial interest in Fortitude Group Holdings, LLC (Fortitude Holdings), the reinsurer of the majority of AIG’s Legacy Portfolio, which we anticipate closing in mid-2020, subject to regulatory approvals. | ||||
6676AIG | First Quarter 20192020 Form 10-Q
Net Income Attributable To AIG Common Shareholders Three Months Ended March 31, (in millions) | ||
2020 and 2019
lower net loss reserve discount charge; and the impact of noncontrolling interest attributed to Fortitude Re results as discussed in Consolidated Results of Operations. This increase was partially offset by: lower investment returns due to losses in
| ||
| ||
higher catastrophe losses primarily due to the impact of COVID-19 and natural catastrophe losses; higher variable annuity amortization of DAC and SIA due to significantly weaker equity market performance; and asset impairment charges as a result of Blackboard being placed into run-off. For further discussion see Consolidated Results of Operations. |
Adjusted Pre-Tax Income (Loss)* Three Months Ended March 31, (in millions) | ||
2020 and 2019 Comparison Adjusted pre-tax income decreased primarily due to: lower investment returns due to losses in our hedge funds due to significant global declines in equity markets in the first quarter of 2020, and losses in our fixed maturity securities for which the fair value option was elected due to a significant widening of credit spreads in the quarter. This compares to the same period in the prior year where
higher variable annuity amortization of | ||
*Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
AIG | First Quarter 20192020 Form 10-Q6777
General Operating and Other Expenses Three Months Ended March 31, (in millions) | |
2020 and 2019 General operating and other expenses
|
Return on Common Equity | Adjusted Return on Common Equity* | |
*Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
Book Value Per Common Share | Adjusted Book Value Per Common | |
*Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
6878AIG | First Quarter 20192020 Form 10-Q
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 quarter of 2019,2020, characterized by factors such as the impact of COVID-19 and the related governmental and societal responses, historically low interest rates, uncertainties in the annuity marketplace resulting from legislative and regulatory initiatives aimed at re-evaluating the standard of care for sales of investment products and services, slowing growth in China and Euro-Zone economies,global economic contraction, global trade tensions and the UK’s pending withdrawal from its membership in the European Union (the EU) (commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of exchange rates among the euro,Euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.
Impact of COVID-19
We are continually assessing the impact on our business, operations and investments of COVID-19 and the resulting ongoing and severe economic and societal disruption. Adverse impacts to the global economy resulting from the crisis, including a global economic contraction, disruptions in financial markets, increased market volatility and declines in equity and other asset prices have had and may continue to have negative effects on our investments, our access to liquidity, our ability to generate new sales and the costs associated with claims. In addition, in response to the crisis, new governmental, legislative and regulatory initiatives have been put in place and continue to be developed that could result in additional restrictions and requirements relating to our policies that may have a negative impact on our business operations and capital.
General Insurance offers numerous products for which we are monitoring claims activity and assessing adverse impact on future sales in relation to the COVID-19 crisis. General Insurance had $419 million of pre-tax catastrophe losses, net of reinsurance, in the first quarter of 2020. This included $272 million of estimated COVID-19 losses related to travel, contingency, commercial property, trade credit, workers’ compensation and Validus Re. The remainder of the catastrophe losses were primarily weather-related. We are continually reassessing our exposures in light of unfolding developments in the U.S. and globally and evaluating coverage by our reinsurance arrangements.
In our Life & Retirement business, the most significant impacts relating to COVID-19 have been the impact of interest rate and equity market levels on spread and fee income, deferred acquisition cost amortization and reserving requirements. We are actively monitoring our claims activity and the potential direct and indirect impacts that COVID-19 may have across our portfolio of Life & Retirement businesses.
We have a diverse investment portfolio with material exposures to various forms of credit risk. Because of the far reaching economic impacts of COVID-19, it is likely that there will be continued impact on the value of the portfolio however at this point in time, uncertainty surrounding the duration and severity of the downturn make the short-term or long-term financial impact of the crisis difficult to quantify.
For additional information please see Part II, Item 1A. Risk Factors — COVID-19 is adversely affecting, and is expected to continue to adversely affect, our business, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope and duration of the crisis and actions taken by governmental and regulatory authorities in response thereto.
Impact of Changes in the Interest Rate Environment
InterestWhile many benchmark U.S. interest rates had risen to recent period highs in 2018, more recent concerns about global trade and potential weakness in U.S. economic expansion led to declining interest rates in 2019 have remained low by historical standards, notwithstanding that2019. In the first quarter of 2020, interest rates rosedeclined further in 2018,response to COVID-19 with key benchmark rates in the U.S. and in many developed markets close to historic lows and, in some cases have risen close to highs of the preceding five to ten years. In early 2019, the Federal Open Market Committee of the Federal Reserve System indicated that it expects the pace of rate increases to slow.international jurisdictions, negative. The low interest rate environment negatively affects sales of interest rate sensitive products in our industry and may negatively impactimpacts 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. AsOn the other hand, if rates rise, some of these impacts may abate while there may be different impacts, some of which are highlighted below. We actively manage our exposure to the interest rate environment through portfolio selection and asset-liability management, including spread management strategies for our investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index annuities.
Additionally, sustained low interest rates may result in higher pension expense due to the impact on discounting of projected benefit cash flows for our pension plans may resultflows.
The severe market impacts in higher pension expense.the first quarter of 2020 have, however, resulted in an increase in credit spreads that partially offset the decrease in benchmark rates.
AIG | First Quarter 2020 Form 10-Q 79
Annuity Sales and Surrenders
The sustained low interest rate environment has a significant impact on the annuity industry. Low long-term interest rates put pressure on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits on certain existing fixed rate products. However, our disciplined rate setting has helped to mitigate some of the pressure on investment spreads. Rapidly rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Customers are, however, currently buying fixed annuities with surrender charge periods, of four to seven yearsgenerally in the three-to-five year range, in pursuit of higher returns, which may help mitigate increased early surrenders in a rising rate environment. In addition, older contracts that have higher minimum interest rates and continue to be attractive to the contract holders have driven better than expected persistency in Fixed Annuities,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 Annuitiesfixed annuities as contracts with lower minimum interest rates come out of the surrender charge period in a more attractive rate environment. Low interest rates have also driven growth in our fixed index annuity products, which provide additional interest crediting, tied to favorable performance in certain equity market indices and the availability of guaranteed living benefits. Changes in interest rates significantly impact the valuation of our liabilities for annuities with guaranteed income features and the value of the related hedging portfolio.
Reinvestment and Spread Management
We actively monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. We also frequently review our interest rate assumptions and actively manage the crediting rates used for new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in light of the interest rate environment. A low interest rate environment puts margin pressure on pricing of new business and on existing products, due to the challenge of investing new money or recurring premiums and deposits, and reinvesting investment portfolio cash flows, in the low interest rate environment. In addition, there is investment risk associated with future premium receipts from certain in‑forcein-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‑liabilityasset-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,
AIG | First Quarter 2019 Form 10-Q69
ITEM 2 |Executive Summary
and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-established intervals. As interest rates rise, we may need to raise crediting rates on in-force business for competitive and other reasons potentially reducing the impact of investing in a higher interest rate environment.
Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 6367 percent were crediting at the contractual minimum guaranteed interest rate at March 31, 2019.2020. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 65 percent and 6661 percent at March 31, 20192020 and December 31, 2018,2019, respectively. These businesses continue to focus on pricing discipline and strategies to manage the minimum guaranteed interest crediting rates offered on new sales in the context of regulatory requirements and competitive positioning. In the core universal life business in our Life Insurance business, 6573 percent of the account values were crediting at the contractual minimum guaranteed interest rate at March 31, 2019.2020.
80 AIG | First Quarter 2020 Form 10-Q
The following table presents fixed annuity and universal life account values of our Individual Retirement, Group Retirement and Life Insurance operating segments by contractual minimum guaranteed interest rate and current crediting rates:
| Current Crediting Rates | Current Crediting Rates | ||||||||||||||||
March 31, 2019 |
|
| 1-50 Basis | More than 50 |
|
|
| |||||||||||
March 31, 2020 |
|
| 1-50 Basis | More than 50 |
|
|
| |||||||||||
Contractual Minimum Guaranteed | At Contractual | Points Above | Basis Points |
|
|
| At Contractual | Points Above | Basis Points |
|
|
| ||||||
Interest Rate | Minimum | Minimum | Above Minimum |
|
|
| Minimum | Minimum | Above Minimum |
|
|
| ||||||
(in millions) | Guarantee | Guarantee | Guarantee |
| Total |
| Guarantee | Guarantee | Guarantee |
| Total |
| ||||||
Individual Retirement* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<=1% | $ | 1,002 | $ | 4,285 | $ | 20,198 | $ | 25,485 |
| $ | 7,199 | $ | 2,072 | $ | 19,415 | $ | 28,686 |
|
> 1% - 2% |
| 6,884 |
| 183 |
| 1,768 |
| 8,835 |
|
| 5,294 |
| 66 |
| 1,786 |
| 7,146 |
|
> 2% - 3% |
| 12,251 |
| 265 |
| 74 |
| 12,590 |
|
| 11,501 |
| 229 |
| 55 |
| 11,785 |
|
> 3% - 4% |
| 9,505 |
| 42 |
| 7 |
| 9,554 |
|
| 8,962 |
| 41 |
| 6 |
| 9,009 |
|
> 4% - 5% |
| 532 |
| - |
| 4 |
| 536 |
|
| 513 |
| - |
| 4 |
| 517 |
|
> 5% - 5.5% |
| 34 |
| - |
| 5 |
| 39 |
|
| 34 |
| - |
| 5 |
| 39 |
|
Total Individual Retirement | $ | 30,208 | $ | 4,775 | $ | 22,056 | $ | 57,039 |
| $ | 33,503 | $ | 2,408 | $ | 21,271 | $ | 57,182 |
|
Group Retirement* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% | $ | 1,533 | $ | 2,686 | $ | 3,202 | $ | 7,421 |
| $ | 1,718 | $ | 2,734 | $ | 4,379 | $ | 8,831 |
|
> 1% - 2% |
| 5,449 |
| 876 |
| 1,142 |
| 7,467 |
|
| 5,646 |
| 800 |
| 373 |
| 6,819 |
|
> 2% - 3% |
| 14,954 |
| 3 |
| - |
| 14,957 |
|
| 14,685 |
| 5 |
| - |
| 14,690 |
|
> 3% - 4% |
| 830 |
| - |
| - |
| 830 |
|
| 781 |
| - |
| - |
| 781 |
|
> 4% - 5% |
| 7,078 |
| - |
| - |
| 7,078 |
|
| 7,030 |
| - |
| - |
| 7,030 |
|
> 5% - 5.5% |
| 174 |
| - |
| - |
| 174 |
|
| 169 |
| - |
| - |
| 169 |
|
Total Group Retirement | $ | 30,018 | $ | 3,565 | $ | 4,344 | $ | 37,927 |
| $ | 30,029 | $ | 3,539 | $ | 4,752 | $ | 38,320 |
|
Universal life insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% | $ | - | $ | - | $ | - | $ | - |
| $ | - | $ | - | $ | - | $ | - |
|
> 1% - 2% |
| 93 |
| 24 |
| 365 |
| 482 |
|
| 121 |
| - |
| 370 |
| 491 |
|
> 2% - 3% |
| 277 |
| 578 |
| 1,081 |
| 1,936 |
|
| 593 |
| 531 |
| 800 |
| 1,924 |
|
> 3% - 4% |
| 1,544 |
| 491 |
| 7 |
| 2,042 |
|
| 1,680 |
| 207 |
| 130 |
| 2,017 |
|
> 4% - 5% |
| 2,988 |
| 227 |
| - |
| 3,215 |
|
| 3,086 |
| - |
| 37 |
| 3,123 |
|
> 5% - 5.5% |
| 264 |
| - |
| - |
| 264 |
|
| 203 |
| - |
| - |
| 203 |
|
Total universal life insurance | $ | 5,166 | $ | 1,320 | $ | 1,453 | $ | 7,939 |
| $ | 5,683 | $ | 738 | $ | 1,337 | $ | 7,758 |
|
Total | $ | 65,392 | $ | 9,660 | $ | 27,853 | $ | 102,905 |
| $ | 69,215 | $ | 6,685 | $ | 27,360 | $ | 103,260 |
|
Percentage of total |
| 64 | % | 9 | % | 27 | % | 100 | % |
| 67 | % | 6 | % | 27 | % | 100 | % |
*Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.
General Insurance
The impact of low interest rates on our General Insurance segment is primarily on our long-tail Casualty line of business. We currently expect limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities. Sustained low interest rates would potentially impact new and renewal business for the long-tail Casualty line as we may not be able to adjust our future pricing consistent with our profitability objectives to fully offset the impact of investing at lower rates. However, we will continue to maintain pricing discipline and risk selection.
70AIG | First Quarter 2019 Form 10-Q
ITEM 2 |Executive Summary
In addition, for our General Insurance segment and General Insurance Run-Off Lines reported within the Legacy Portfolio, sustained low interest rates may unfavorably affect the net loss reserve discount for workers’ compensation, and to a lesser extent could favorably impact assumptions about future medical costs, the combined net effect of which could result in higher net loss reserves.
AIG | First Quarter 2020 Form 10-Q 81
Standard of Care Developments
The SEC, federalIn our Life and state lawmakersRetirement business, we and state insurance regulators continue their efforts at evaluating what is an appropriate regulatory framework around a standard of care for the sale of investment productsour distributors are subject to laws and services. For example, on April 18, 2018, the SEC proposed a package of rulemakings and interpretations designed to addressregulations regarding the standard of care issuesapplicable to sales of our products and the transparencyprovision of retail investors’ relationships with investment advisorsadvice to our customers. In recent years, many of these laws and broker-dealers. Additionally, on July 18, 2018, the New York State Department of Financial Services adopted a best interest standard of care regulation applicable to annuity and life transactions through issuance of the First Amendment to Insurance Regulation 187 – Suitability and Best Interests in Life Insurance and Annuity Transactions (Regulation 187). The compliance date for Regulation 187 is August 1, 2019 for annuity products and February 1, 2020 for life products. As amended, Regulation 187 requires producers to act in their client’s best interest when making point-of-sale and in-force recommendations, and provide in writing the basis for the recommendation, as well as the facts and analysis to support the recommendation. The amended regulation also imposes additional duties on life insurance companies in relation to these transactions, such as requiring insurers to establish and maintain procedures designed to prevent financial exploitation and abuse. We will implement and enhance processes and procedures, where needed, to comply with this regulation. Other states, such as Nevada, Maryland and New Jersey,regulations have also proposed similar standard of care regulations applicable to insurance producers and/been revised or insurance companies.reexamined while others have been newly adopted. We continue to closely follow these proposalslegislative and other relevant federalregulatory activities. For additional information regarding these legislative and state-level regulatory activities, see Item 1. Business – Regulation – U.S. Regulation – Standard of Care Developments in the 2019 Annual Report. Changes in standard of care requirements or new standards issued by governmental authorities, such as the Department of Labor, the SEC, the National Association of Insurance Commissioners (NAIC) or state regulators and/or legislators, may affect our businesses, results of operations and legislative developments in this area.financial condition. While we cannot predict the long-term impact of these legislative and regulatory developments on our Life and Retirement businesses, we believe our diverse product offerings and distribution relationships position us to compete effectively in this evolving marketplace.
Impact of Currency Volatility
Currency volatility remains acute. Such volatility affected line item components of income for those businesses with substantial international operations. In particular, growth trends in net premiums written reported in U.S. dollars can differ significantly from those measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and expenses are similarly affected.
These currencies may continue to fluctuate, in either direction, especially as a result of the UK’s announced exit from the EU, and such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item comparability.
General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our businesses:
Three Months Ended March 31, |
|
|
| Percentage |
|
|
|
| Percentage |
| ||
Rate for 1 USD |
| 2019 | 2018 |
| Change |
|
| 2020 | 2019 |
| Change |
|
Currency: |
|
|
|
|
|
|
|
|
|
|
| |
GBP |
| 0.78 | 0.73 |
| 7 | % |
| 0.77 | 0.78 |
| (2) | % |
EUR |
| 0.88 | 0.82 |
| 7 | % |
| 0.91 | 0.88 |
| 3 | % |
JPY |
| 110.50 | 110.62 |
| - | % |
| 109.45 | 110.50 |
| (1) | % |
Unless otherwise noted, references to the effects of foreign exchange in the General Insurance discussion of results of operations are with respect to movements in the Major Currencies included in the preceding table.
Other Industry Developments
On September 7, 2017, the UK Ministry of Justice announced a proposal to increase the Ogden rate from negative 0.75 percent to between zero and one percent. Following this announcement, on December 20, 2018 the UK Parliament passed the Civil Liability Act 2018 which implements a new framework for determining the Ogden rate and requires the UK Ministry of Justice to start a review of the Ogden rate within 90 days of its commencement and review periodically thereafter. The Ministry of Justice concluded a public call for evidence on January 30, 2019 prior to beginning its first review. We will continue to monitorOn July 15, 2019, the progressUK Ministry of potential changes toJustice announced a change in the Ogden rate.rate from negative 0.75 percent to negative 0.25 percent with an effective date of August 5, 2019.
82AIG | First Quarter 20192020 Form 10-Q71
The following section provides a comparative discussion of our Consolidated Results of Operations on a reported basis for the three monththree-month periods ended March 31, 20192020 and 2018.2019. 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&AandPart II, Item 7. MD&A — Critical Accounting Estimates in the 20182019 Annual Report.
The following table presents our consolidated results of operations and other key financial metrics:
Three Months Ended March 31, |
|
| Percentage |
|
|
|
|
|
| Percentage |
| |||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums | $ | 8,070 | $ | 7,275 |
| 11 | % | $ | 7,443 | $ | 8,070 |
| (8) | % |
Policy fees |
| 735 |
| 764 |
| (4) |
|
| 755 |
| 735 |
| 3 |
|
Net investment income |
| 3,879 |
| 3,261 |
| 19 |
|
| 2,508 |
| 3,879 |
| (35) |
|
Net realized capital losses |
| (446) |
| (19) |
| NM |
| |||||||
Net realized capital gains (losses) |
| 3,519 |
| (446) |
| NM |
| |||||||
Other income |
| 218 |
| 431 |
| (49) |
|
| 218 |
| 218 |
| - |
|
Total revenues |
| 12,456 |
| 11,712 |
| 6 |
|
| 14,443 |
| 12,456 |
| 16 |
|
Benefits, losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
| 6,679 |
| 5,667 |
| 18 |
|
| 6,325 |
| 6,679 |
| (5) |
|
Interest credited to policyholder account balances |
| 940 |
| 916 |
| 3 |
|
| 957 |
| 940 |
| 2 |
|
Amortization of deferred policy acquisition costs |
| 1,289 |
| 1,358 |
| (5) |
|
| 1,862 |
| 1,289 |
| 44 |
|
General operating and other expenses |
| 2,053 |
| 2,271 |
| (10) |
|
| 2,153 |
| 2,053 |
| 5 |
|
Interest expense |
| 349 |
| 277 |
| 26 |
|
| 355 |
| 349 |
| 2 |
|
(Gain) loss on extinguishment of debt |
| (2) |
| 4 |
| NM |
|
| 17 |
| (2) |
| NM |
|
Net gain on sale of divested businesses |
| (6) |
| (8) |
| 25 |
| |||||||
Net (gain) loss on sale or disposal of divested businesses |
| 216 |
| (6) |
| NM |
| |||||||
Total benefits, losses and expenses |
| 11,302 |
| 10,485 |
| 8 |
|
| 11,885 |
| 11,302 |
| 5 |
|
Income from continuing operations before |
|
|
|
|
|
|
| |||||||
income tax expense |
| 1,154 |
| 1,227 |
| (6) |
| |||||||
Income tax expense |
| 217 |
| 277 |
| (22) |
| |||||||
Income from continuing operations |
| 937 |
| 950 |
| (1) |
| |||||||
Loss from discontinued operations, |
|
|
|
|
|
|
| |||||||
net of income tax expense |
| - |
| (1) |
| NM |
| |||||||
Net income |
| 937 |
| 949 |
| (1) |
| |||||||
Income (loss) from continuing operations before |
|
|
|
|
|
|
| |||||||
income tax expense (benefit) |
| 2,558 |
| 1,154 |
| 122 |
| |||||||
Income tax expense (benefit) |
| 904 |
| 217 |
| 317 |
| |||||||
Income (loss) from continuing operations |
| 1,654 |
| 937 |
| 77 |
| |||||||
Income (loss) from discontinued operations, |
|
|
|
|
|
|
| |||||||
net of income taxes |
| - |
| - |
| NM |
| |||||||
Net income (loss) |
| 1,654 |
| 937 |
| 77 |
| |||||||
Less: Net income (loss) attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| 283 |
| 11 |
| NM |
|
| (95) |
| 283 |
| NM |
|
Net income attributable to AIG | $ | 654 | $ | 938 |
| (30) | % | |||||||
Net income (loss) attributable to AIG |
| 1,749 |
| 654 |
| 167 |
| |||||||
Less: Dividends on preferred stock |
| 7 |
| - |
| NM |
| |||||||
Net income (loss) attributable to AIG common |
|
|
|
|
|
|
| |||||||
shareholders | $ | 1,742 | $ | 654 |
| 166 | % |
|
|
|
|
|
|
|
| March 31, |
|
| December 31, |
|
|
|
|
|
|
|
| March 31, |
| December 31, |
| |||
(in millions, except per share data) |
|
|
|
|
|
|
|
| 2019 |
|
| 2018 |
| |||||||||||||
(in millions, except per common share data) |
|
|
|
|
|
|
|
| 2020 |
| 2019 |
| ||||||||||||||
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets |
|
|
|
|
|
|
| $ | 512,922 |
| $ | 491,984 |
|
|
|
|
|
|
|
| $ | 510,477 |
| $ | 525,064 |
|
Long-term debt |
|
|
|
|
|
|
|
| 35,776 |
|
| 34,540 |
| |||||||||||||
Long-term debt and debt of consolidated investment entities | Long-term debt and debt of consolidated investment entities |
|
|
|
|
|
| 35,410 |
| 35,350 |
| |||||||||||||||
Total AIG shareholders’ equity |
|
|
|
|
|
|
|
| 60,787 |
|
| 56,361 |
|
|
|
|
|
|
|
|
| 60,173 |
| 65,675 |
| |
Book value per common share |
|
|
|
|
|
|
|
| 69.33 |
|
| 65.04 |
|
|
|
|
|
|
|
|
| 69.30 |
| 74.93 |
| |
Book value per common share, excluding AOCI |
|
|
|
|
|
|
|
| 66.89 |
|
| 66.67 |
|
|
|
|
|
|
|
|
| 70.45 |
| 69.20 |
| |
Adjusted book value per common share |
|
|
|
|
|
|
|
| 55.47 |
|
| 54.95 |
|
|
|
|
|
|
|
|
| 60.55 |
| 58.89 |
|
72AIG | First Quarter 20192020 Form 10-Q83
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. Non-GAAP Measures.
|
|
|
|
|
| March 31, |
| December 31, |
| March 31, |
| December 31, | |
(in millions, except per share data) |
|
|
|
|
| 2019 |
| 2018 | |||||
(in millions, except per common share data) |
| 2020 |
| 2019 | |||||||||
Total AIG shareholders' equity |
|
|
|
| $ | 60,787 | $ | 56,361 | $ | 60,173 | $ | 65,675 | |
Preferred equity |
|
|
|
|
| 485 |
| - |
| 485 |
| 485 | |
Total AIG common shareholders' equity |
|
|
|
|
| 60,302 |
| 56,361 |
| 59,688 |
| 65,190 | |
Accumulated other comprehensive income (loss) |
|
|
|
|
| 2,128 |
| (1,413) |
| (994) |
| 4,982 | |
Total AIG common shareholders' equity, excluding AOCI |
|
|
|
|
| 58,174 |
| 57,774 |
| 60,682 |
| 60,208 | |
Deferred tax assets |
|
|
|
|
| 9,926 |
| 10,153 |
| 8,535 |
| 8,977 | |
Adjusted common shareholders' equity |
|
|
|
| $ | 48,248 | $ | 47,621 | $ | 52,147 | $ | 51,231 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total common shares outstanding |
|
|
|
|
| 869,736,901 |
| 866,609,429 |
| 861,290,608 |
| 869,999,031 | |
Book value per common share |
|
|
|
| $ | 69.33 | $ | 65.04 | $ | 69.30 | $ | 74.93 | |
Book value per common share, excluding AOCI |
|
|
|
|
| 66.89 |
| 66.67 |
| 70.45 |
| 69.20 | |
Adjusted book value per common share |
|
|
|
|
| 55.47 |
| 54.95 |
| 60.55 |
| 58.89 |
The following table presents a reconciliation of Return on common equity to Adjusted return on common equity, which is a non-GAAP measure. For additional information see Use of Non‑GAAP Measures. Non-GAAP Measures.
| Three Months Ended |
| Year Ended |
| Three Months Ended |
| Year Ended |
| |||||||||||
| March 31, |
| December 31, |
| March 31, |
| December 31, |
| |||||||||||
(dollars in millions) |
| 2019 |
|
| 2018 |
| 2018 |
|
| 2020 |
| 2019 |
| 2019 |
| ||||
Actual or annualized net income (loss) attributable to AIG | $ | 2,616 |
| $ | 3,752 |
| $ | (6) |
| ||||||||||
Actual or annualized adjusted after-tax income attributable to AIG |
| 5,552 |
|
| 3,852 |
|
| 1,064 |
| ||||||||||
Actual or annualized net income attributable to AIG common shareholders | $ | 6,968 |
| $ | 2,616 |
| $ | 3,326 |
| ||||||||||
Actual or annualized adjusted after-tax income attributable to AIG common shareholders |
| 396 |
| 5,552 |
| 4,084 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Average AIG common shareholders' equity | $ | 58,332 |
| $ | 63,982 |
| $ | 60,819 |
| $ | 62,439 |
| $ | 58,332 |
| $ | 62,205 |
| |
Average AOCI |
| 358 |
|
| 3,843 |
|
| 1,193 |
|
| 1,994 |
| 358 |
| 3,261 |
| |||
Average AIG common shareholders' equity, excluding average AOCI |
| 57,974 |
|
| 60,139 |
|
| 59,626 |
|
| 60,445 |
| 57,974 |
| 58,944 |
| |||
Average DTA |
| 10,040 |
|
| 10,353 |
|
| 10,133 |
|
| 8,756 |
| 10,040 |
| 9,605 |
| |||
Average adjusted AIG common shareholders' equity | $ | 47,934 |
| $ | 49,786 |
| $ | 49,493 |
| $ | 51,689 |
| $ | 47,934 |
| $ | 49,339 |
| |
Return on common equity |
| 4.5 | % |
| 5.9 | % |
|
| 0.0 | % |
| 11.2 | % |
| 4.5 | % |
| 5.3 | % |
Adjusted return on common equity |
| 11.6 | % |
| 7.7 | % |
|
| 2.1 | % |
| 0.8 | % |
| 11.6 | % |
| 8.3 | % |
84AIG | First Quarter 20192020 Form 10-Q73
The following table presents a reconciliation of pre-tax income/net income (loss) attributable to AIG to adjusted pre-tax income/adjusted after-tax income attributable to AIG:
Three Months Ended March 31, | 2019 |
| 2018 | ||||||||||||||
|
|
|
| Total Tax |
|
|
|
|
|
|
|
| Total Tax |
|
|
|
|
|
|
|
| (Benefit) | Noncontrolling |
| After |
|
|
|
| (Benefit) | Noncontrolling |
| After | ||
(in millions, except per share data) |
| Pre-tax |
| Charge |
| Interest(b) |
| Tax |
|
| Pre-tax |
| Charge |
| Interest |
| Tax |
Pre-tax income/net income, including |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests | $ | 1,154 | $ | 217 | $ | - | $ | 937 |
| $ | 1,227 | $ | 277 | $ | - | $ | 949 |
Noncontrolling interest |
|
|
|
|
| (283) |
| (283) |
|
|
|
|
|
| (11) |
| (11) |
Pre-tax income/net income attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to AIG | $ | 1,154 | $ | 217 | $ | (283) | $ | 654 |
| $ | 1,227 | $ | 277 | $ | (11) | $ | 938 |
Changes in uncertain tax positions and other tax adjustments |
|
|
| 12 |
| - |
| (12) |
|
|
|
| 4 |
| - |
| (4) |
Deferred income tax valuation allowance (releases) charges |
|
|
| 38 |
| - |
| (38) |
|
|
|
| (30) |
| - |
| 30 |
Changes in fair value of securities used to hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
guaranteed living benefits |
| (96) |
| (20) |
| - |
| (76) |
|
| 77 |
| 16 |
| - |
| 61 |
Changes in benefit reserves and DAC, VOBA and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIA related to net realized capital gains (losses) |
| (99) |
| (21) |
| - |
| (78) |
|
| 31 |
| 6 |
| - |
| 25 |
Changes in the fair value of equity securities |
| (79) |
| (17) |
| - |
| (62) |
|
| - |
| - |
| - |
| - |
Unfavorable (favorable) prior year development and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related amortization changes ceded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under retroactive reinsurance agreements |
| (27) |
| (5) |
| - |
| (22) |
|
| 34 |
| 7 |
| - |
| 27 |
(Gain) loss on extinguishment of debt |
| (2) |
| (1) |
| - |
| (1) |
|
| 4 |
| 1 |
| - |
| 3 |
Net realized capital (gains) losses(a) |
| 474 |
| 109 |
| - |
| 365 |
|
| 19 |
| (1) |
| - |
| 20 |
Loss from discontinued operations |
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
| 1 |
Income from divested businesses |
| (6) |
| (1) |
| - |
| (5) |
|
| (8) |
| (2) |
| - |
| (6) |
Non-operating litigation reserves and settlements |
| 1 |
| 1 |
| - |
| - |
|
| 13 |
| 3 |
| - |
| 10 |
Net loss reserve discount (benefit) charge |
| 473 |
| 99 |
| - |
| 374 |
|
| (205) |
| (43) |
| - |
| (162) |
Integration and transaction costs associated with acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
businesses |
| 7 |
| 2 |
| - |
| 5 |
|
| - |
| - |
| - |
| - |
Restructuring and other costs |
| 47 |
| 10 |
| - |
| 37 |
|
| 24 |
| 5 |
| - |
| 19 |
Noncontrolling interest primarily related to net realized capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) of Fortitude Holdings' standalone results(b) |
|
|
|
|
| 247 |
| 247 |
|
|
|
|
|
| 1 |
| 1 |
Adjusted pre-tax income/Adjusted after-tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income | $ | 1,847 | $ | 423 | $ | (36) | $ | 1,388 |
| $ | 1,216 | $ | 243 | $ | (10) | $ | 963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
|
|
|
|
| 877.5 |
|
|
|
|
|
|
|
| 925.3 |
Income per common share attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to AIG (diluted) |
|
|
|
|
|
| $ | 0.75 |
|
|
|
|
|
|
| $ | 1.01 |
Adjusted after-tax income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to AIG (diluted) |
|
|
|
|
|
| $ | 1.58 |
|
|
|
|
|
|
| $ | 1.04 |
Three Months Ended March 31, | 2020 |
| 2019 | ||||||||||||||
|
|
| Total Tax | Non- |
|
|
|
|
| Total Tax | Non- |
|
| ||||
|
|
| (Benefit) | controlling |
| After |
|
|
| (Benefit) | controlling |
| After | ||||
(in millions, except per common share data) | Pre-tax | Charge | Interests(b) |
| Tax |
| Pre-tax | Charge | Interests(b) |
| Tax | ||||||
Pre-tax income/net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including noncontrolling interests | $ | 2,558 | $ | 904 | $ | - | $ | 1,654 |
| $ | 1,154 | $ | 217 | $ | - | $ | 937 |
Noncontrolling interests |
|
|
|
|
| 95 |
| 95 |
|
|
|
|
|
| (283) |
| (283) |
Pre-tax income/net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to AIG | $ | 2,558 | $ | 904 | $ | 95 | $ | 1,749 |
| $ | 1,154 | $ | 217 | $ | (283) | $ | 654 |
Dividends on preferred stock |
|
|
|
|
|
|
| 7 |
|
|
|
|
|
|
|
| - |
Net income attributable to AIG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common shareholders |
|
|
|
|
|
| $ | 1,742 |
|
|
|
|
|
|
| $ | 654 |
Changes in uncertain tax positions and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other tax adjustments |
|
|
| (5) |
| - |
| 5 |
|
|
|
| 12 |
| - |
| (12) |
Deferred income tax valuation allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(releases) charges |
|
|
| (283) |
| - |
| 283 |
|
|
|
| 38 |
| - |
| (38) |
Changes in fair value of securities used to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedge guaranteed living benefits |
| 7 |
| 2 |
| - |
| 5 |
|
| (96) |
| (20) |
| - |
| (76) |
Changes in benefit reserves and DAC, VOBA and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIA related to net realized capital gains (losses) |
| 538 |
| 113 |
| - |
| 425 |
|
| (99) |
| (21) |
| - |
| (78) |
Changes in the fair value of equity securities |
| 191 |
| 40 |
| - |
| 151 |
|
| (79) |
| (17) |
| - |
| (62) |
Favorable prior year development and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related amortization changes ceded under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retroactive reinsurance agreements |
| (8) |
| (2) |
| - |
| (6) |
|
| (27) |
| (5) |
| - |
| (22) |
(Gain) loss on extinguishment of debt |
| 17 |
| 4 |
| - |
| 13 |
|
| (2) |
| (1) |
| - |
| (1) |
Net realized capital (gains) losses(a) |
| (3,502) |
| (767) |
| - |
| (2,735) |
|
| 474 |
| 109 |
| - |
| 365 |
(Income) loss from divested businesses |
| 216 |
| 45 |
| - |
| 171 |
|
| (6) |
| (1) |
| - |
| (5) |
Non-operating litigation reserves and settlements |
| (6) |
| (1) |
| - |
| (5) |
|
| 1 |
| 1 |
| - |
| - |
Net loss reserve discount (benefit) charge |
| 56 |
| 12 |
| - |
| 44 |
|
| 473 |
| 99 |
| - |
| 374 |
Integration and transaction costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
associated with acquired businesses |
| 2 |
| - |
| - |
| 2 |
|
| 7 |
| 2 |
| - |
| 5 |
Restructuring and other costs |
| 90 |
| 19 |
| - |
| 71 |
| �� | 47 |
| 10 |
| - |
| 37 |
Professional fees related to regulatory or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting changes |
| 13 |
| 3 |
| - |
| 10 |
|
| - |
| - |
| - |
| - |
Noncontrolling interests primarily related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net realized capital gains (losses) of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fortitude Holdings' standalone results(b) |
|
|
|
|
| (77) |
| (77) |
|
|
|
|
|
| 247 |
| 247 |
Adjusted pre-tax income/Adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after-tax income (loss) attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG common shareholders | $ | 172 | $ | 84 | $ | 18 | $ | 99 |
| $ | 1,847 | $ | 423 | $ | (36) | $ | 1,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
|
|
|
|
| 878.9 |
|
|
|
|
|
|
|
| 877.5 |
Income (loss) per common share attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to AIG common shareholders (diluted) |
|
|
|
|
|
| $ | 1.98 |
|
|
|
|
|
|
| $ | 0.75 |
Adjusted after-tax income per common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share attributable to AIG common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders (diluted) |
|
|
|
|
|
| $ | 0.11 |
|
|
|
|
|
|
| $ | 1.58 |
(a)Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication.
AIG | First Quarter 2020 Form 10-Q 85
(b)Noncontrolling interests is primarily due to the 19.9 percent investment in Fortitude Holdings by an affiliate of The Carlyle Group L.P. (Carlyle), which occurred in the fourth quarter of 2018. Carlyle is allocated 19.9 percent of Fortitude Holdings’ standalone financial results. Fortitude Holdings’ results are mostly eliminated in AIG’s consolidated income from continuing operations given that its results arise from intercompany transactions. Noncontrolling interests is calculated based on the standalone financial results of Fortitude Holdings. The most significant component of Fortitude Holdings’ standalone results concerns gains related tois the change in fair value of the embedded derivatives which moved materiallychanges with movements in the quarter due to lowerinterest rates and tightening credit spreads, and which areis recorded in net realized capital gains and losses of Fortitude Holdings. In accordance with AIG's adjusted after-tax income definition, realized capital gains and losses are excluded from noncontrolling interests.
Fortitude Holdings’ summarized financial information (standalone results) is presented below:
Three Months Ended March 31, 2019 |
| Fortitude |
| AIG Noncontrolling |
(in millions) |
| Holdings |
| Interest |
Revenues | $ | 606 | $ | 121 |
Expenses |
| 472 |
| 94 |
Adjusted pre-tax income |
| 134 |
| 27 |
Taxes on adjusted pre-tax income |
| 28 |
| 6 |
Adjusted after-tax income, excluding realized capital gains |
| 106 |
| 21 |
|
|
|
|
|
Net realized capital gains |
| 1,573 |
| 313 |
Taxes on realized capital gains |
| 330 |
| 66 |
After-tax net realized capital gains |
| 1,243 |
| 247 |
Net income | $ | 1,349 | $ | 268 |
| 2020 |
| 2019 | ||||||
Three Months Ended March 31, |
| Fortitude | AIG Noncontrolling |
|
| Fortitude |
| AIG Noncontrolling | |
(in millions) |
| Holdings |
| Interest |
|
| Holdings |
| Interest |
Revenues | $ | 230 | $ | 46 |
| $ | 606 | $ | 121 |
Expenses |
| 458 |
| 91 |
|
| 472 |
| 94 |
Adjusted pre-tax income (loss) |
| (228) |
| (45) |
|
| 134 |
| 27 |
Taxes on adjusted pre-tax income (loss) |
| (48) |
| (10) |
|
| 28 |
| 6 |
Adjusted after-tax income (loss), excluding realized capital gains (losses) |
| (180) |
| (35) |
|
| 106 |
| 21 |
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
| (489) |
| (97) |
|
| 1,573 |
| 313 |
Taxes on realized capital gains (losses) |
| (103) |
| (20) |
|
| 330 |
| 66 |
After-tax net realized capital gains (losses) |
| (386) |
| (77) |
|
| 1,243 |
| 247 |
Net income (loss) | $ | (566) | $ | (112) |
| $ | 1,349 | $ | 268 |
74AIG | First Quarter 2019 Form 10-Q
first QUARTERquarter pre-tax income Comparison for 2020 and 2019
Pre-tax income increased in the first quarter of 2020 compared to the first quarter of 2019 and 2018primarily due to:
DecreaseNet realized capital gains in pre-tax incomethe first quarter of 2020 compared to net realized capital losses in the first quarter of 2019 compared to the first quarter of 2018 is the result of:
Increases due to:
•improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses in General Insurance;
•higher investment returns in our hedge fund portfolio and equity securities due to robust equity market returns in the first quarter of 2019 and an increase in income from fixed maturity securities for which the fair value option was elected, compared to the same period in the prior year where returns were lower as a result of an increase in rates and widening spreads that occurred, as well as negative performance of our fair value option equity securities portfolio; and
•lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs, partially offset by the increase in expenses caused by the acquisitions of Validus and Glatfelter in the third and fourth quarters of 2018, respectively.
These increases were more than offset by:
•higher net realized capital losses due to –Life and Retirement guaranteed living benefits, net of hedges, which reflected net realized capital gains in the first quarter of 2020 compared to net realized capital losses in the first quarter of 2019, compared to net realized capital gains in the first quarter of 2018, primarily due to changes in the movement in the non-performance or “own credit” risk adjustment (NPA), which is not hedged as part of our economic hedging program (see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results), partially offset from;
–net realized capital gains in fixed income securities duethe first quarter of 2020 on foreign exchange hedges compared to credit spreads tightening; and
•a net loss reserve discount chargerealized capital losses in the first quarter of 2019 compareddue to a loss reserve discount benefitthe U.S. dollar appreciating against the euro and the British pound; and
–net realized capital gains in the first quarter of 2018.2020 on interest rate hedges compared to net realized capital losses in the first quarter of 2019 due to the decline in interest rates.
lower net loss reserve discount charge.
This increase was partially offset by:
lower investment returns due to losses in our hedge funds and fair value option equity security holdings due to significant global declines in equity markets in the first quarter of 2020, and losses from fixed maturity securities for which the fair value option was elected due to a significant widening of credit spreads in the current quarter. This compares to the same period in the prior year where we experienced gains in our hedge funds and fair value option equity security holdings as a result of robust returns in equity markets and gains in our fixed maturity securities for which the fair value option was elected due to a drop in rates and narrowing of credit spreads; and
higher catastrophe losses primarily due to the impact of COVID-19 and natural catastrophe losses;
higher variable annuity amortization of DAC and SIA due to significantly weaker equity market performance; and
asset impairment charges as a result of Blackboard being placed into run-off.
86 AIG | First Quarter 2020 Form 10-Q
RECENT U.S. Tax Reform Overviewlaw changes
On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry. Changes specific to the insurance industry include the calculation of insurance tax reserves and related transition adjustments, amortization of specified policy acquisition expenses, treatment of separate account dividends received deductions and computation of pro-ration adjustments. Provisions of the Tax Act with broader application include reductions or elimination of deductions for certain items, e.g., reductions to corporate dividends received deductions, disallowance of entertainment expenses and limitations on the deduction of certain executive compensation costs. These provisions, generally, result in an increase in AIG’s taxable income.
Act. The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties in the interpretation of BEAT and GILTI and, while certain formal guidance was issued byWhile the U.S. tax authority,authorities issued formal guidance, including recently issued proposed and final regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and additionalsubject to substantial uncertainties. Additional guidance is expected later in 2019.future periods. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.
Repatriation Assumptions
As a resultOn March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the Tax Act,COVID-19 crisis. AIG does not expect the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, foreign earnings not taxed as parttax provisions of the one-time deemed repatriation (or otherwise taxed currently under the GILTI or subpart F regimes) will generally be exempt fromCARES Act to have a material impact on AIG’s U.S. federal tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings. liabilities.
Repatriation Assumptions
For 2019,2020, we consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested. Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown and general market decline, we continue to monitor and review the impact on our reinvestment considerations, including regulatory oversight in the relevant jurisdictions.
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
AIG | First Quarter 2019 Form 10-Q75
cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions and are recorded in the period in which the change occurs. While certain impacts of the Tax Act are included in our annual effective tax rate, we continue to refine our calculations as additional information becomes available, which may result in changes to the estimated annual effective tax rate. As of March 31, 2020, the annual effective tax rate includes the tax effects of actual and projected COVID-19 related losses and market developments.
Income Tax expense analysis
For the three-month period ended March 31, 2019,2020, the effective tax rate on income from continuing operations was 18.8 percent. 35.3 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges associated with the establishment of U.S. federal valuation allowance related to a portion of our foreign tax credit and separate return limitation year (SRLY) net operating loss carryforwards, accrual of interest associated with IRS and other tax authority matters, the effect of foreign operations, state and local income taxes, excess tax charges related to share based compensation payments recorded through the income statement, and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.
For the three-month period ended March 31, 2019, the effective tax rate on income from continuing operations was 18.8 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and valuation allowance activity related to certain foreign subsidiaries, partially offset by tax charges associated with the effect of foreign operations, state and local income taxes, a net tax charge related to the accrual of IRS interest, excess tax charges related to share based compensation payments recorded through the income statement, and non-deductible transfer pricing charges, and U.S. tax imposed on GILTI earned by certain foreign subsidiaries.charges. The effect of foreign operations is primarily related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, other foreign taxes, and foreign income subject to U.S. taxation.
AIG | First Quarter 2020 Form 10-Q 87
For the three-month period ended March 31, 2018, the effective tax rate on income from continuing operations was 22.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, tax on GILTI earned by certain foreign subsidiaries, valuation allowance activity related to certain foreign subsidiaries and non-deductible transfer pricing charges, partially offset by tax benefits associated with tax exempt income, reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities and excess tax deductions related to share based compensation payments recorded through the income statement.
Our business operations consist of General Insurance, Life and Retirement, Other Operations, and a Legacy Portfolio.
General Insurance consists of two operating segments: North America and International. Life and Retirement consists of four operating segments: GroupIndividual Retirement, IndividualGroup Retirement, Life Insurance and Institutional Markets. Other Operations consists of businesses and items not allocated to our other businesses, which are primarily AIG Parent and Blackboard. At the end of March 2020, AIG decided to place Blackboard into run-off. Our Legacy Portfolio consists of our Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, Fortitude Re is included in our Legacy Portfolio.
The following table summarizes Adjusted pre-tax income (loss) from our business segment operations. See alsoNote 3 to the Condensed Consolidated Financial Statements. Statements.
Three Months Ended March 31, |
|
|
|
| ||||||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||
Core business: |
|
|
|
|
|
|
|
| ||
General Insurance |
|
|
|
|
|
|
|
| ||
North America |
| $ | 934 | $ | 320 |
| $ | 409 | $ | 934 |
International |
|
| 334 |
| 190 |
| 92 |
| 334 | |
General Insurance |
|
| 1,268 |
| 510 |
|
| 501 |
| 1,268 |
Life and Retirement |
|
|
|
|
|
|
|
|
|
|
Individual Retirement |
|
| 508 |
| 499 |
|
| 306 |
| 508 |
Group Retirement |
|
| 232 |
| 282 |
|
| 143 |
| 232 |
Life Insurance |
|
| 116 |
| 52 |
|
| 55 |
| 116 |
Institutional Markets |
|
| 68 |
| 59 |
|
| 70 |
| 68 |
Life and Retirement |
|
| 924 |
| 892 |
|
| 574 |
| 924 |
Other Operations |
|
| (387) |
| (342) |
|
| (451) |
| (387) |
Consolidations, eliminations and other adjustments |
|
| (70) |
| 11 |
|
| (84) |
| (70) |
Total Core |
|
| 1,735 |
| 1,071 |
|
| 540 |
| 1,735 |
Legacy Portfolio |
|
| 112 |
| 145 |
|
| (368) |
| 112 |
Adjusted pre-tax income (loss) |
| $ | 1,847 | $ | 1,216 | |||||
Adjusted pre-tax income |
| $ | 172 | $ | 1,847 |
7688AIG | First Quarter 20192020 Form 10-Q
General Insurance |
General Insurance is managed by our geographic markets of North America and International. Our global presence is reflected in our multinational capabilities to provide our Commercial Lines and Personal Insurance products within these geographic markets.
PRODUCTS AND DISTRIBUTION | ||||||
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, Property:Products include commercial and industrial property insurance products and services that cover exposures to man-made and natural disasters, including business interruption. Special Risks:Products include aerospace, political risk, trade credit, portfolio solutions, energy-related property insurance products, surety, marine and crop insurance. Personal Lines:Products include personal auto and property in selected markets and insurance for high net worth individuals offered through AIG Private Client Group Accident & Health:Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations, as well as a broad range of travel insurance products and services for leisure and business travelers. | ||||||
General Insurance products in North America and International markets are distributed through various channels, including captive and independent agents, brokers, affinity partners, airlines and travel agents, and retailers. Our distribution network is aided by our competitive position to write multiple-national and cross-border risks in both Commercial Lines and Personal Insurance. | ||||||
BUSINESSSTRATEGY
Profitable Growth:Deploy capital efficiently to act opportunistically and optimize diversity within the portfolio to grow in profitable lines, geographies and customer segments. Look to inorganic growth opportunities in profitable markets and segments to expand our capabilities and footprint.
Reinsurance Optimization: Strategically partner with reinsurers to reduce exposure to losses arising from frequency of large catastrophic events and the severity from individual risk losses. We strive to optimize our reinsurance program to manage volatility and protect the balance sheet from tail events and unpredictable net losses in support of our profitable growth objectives.
Underwriting Excellence: Empower and increase accountability of the underwriter and continue to integrate underwriting, claims and actuarial to enable better decision making. Focus on enhancing risk selection, driving consistent underwriting best practices and building robust monitoring standards to improve underwriting results.
AIG | First Quarter 20192020 Form 10-Q7789
COMPETITION and challenges
Operatingin ahighly competitive industry,General Insurance competesagainst several hundred companies,specialtyinsurance organizations, mutual companies and other underwriting organizations in theU.S. In internationalmarkets, we compete forbusiness with theforeigninsurance 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. General Insurance seeks to distinguish itself in theinsurance 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.expertise.
Our challenges include:
•long-tail Commercial Lines exposures that create added challenges to pricing and risk management;
•over capacityover-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.catastrophes, including public health events, such as the COVID-19 crisis.
OUTLOOK—INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our operating segments:
The impact of COVID-19 is evolving rapidly and will depend upon the scope and duration of the crisis as well as the actions taken by governments, regulators and other third parties in response, all of which are highly uncertain at this time. The results for the first quarter of 2020 include COVID-19 related impacts to both our estimate for catastrophe losses as well as our investment returns, most prominently in our alternative investment portfolio. The impact of COVID-19 on our earned premium was not material this quarter given the timing of the significant global economic slowdown. The recessionary impact of COVID-19 could adversely affect our clients, particularly in certain industry segments where demand is likely to drop significantly. The impact of COVID-19 on our business will depend on how long the government-mandated safety precautions, including “stay at home” orders, are in place and how quickly and in what manner economic activity rebounds. Certain government-mandated safety precautions, such as the “stay at home” orders could benefit our claims experience as certain loss events may become less likely as economic and social activity are suppressed. The regulatory approach to the crisis and impact on the insurance industry is also developing, which adds to the uncertainty we are facing.
General Insurance – North America
Commercial Lines over recent years has experienced challenging market conditions, with widespread excess capacity increasing competition and suppressing rates across multiple classes of business. However, in more recent periods we are seeing growing market support for rate increases in certainchallenged segments where major carriers are reducing their risk appetite and market capacity is contracting as a result. We are seeing rate increases across U.S. liabilityFinancial Lines and Liability segments (outside of workers’ compensation), with increasing traction in excess casualty, D&Oa common driver being higher industry-wide claims severity trends, as well as within our Property and commercial auto, where rates are supported by a trend of higher loss cost inflation. On the shorter tailed lines, the market is supporting higher rates for accounts which suffered losses from major catastrophe events in 2017 and 2018. Specialty portfolios.We continue to achieve positive rate increases across a number of lines and classes of business as a result of our disciplined underwriting strategy and focus on risk selection. Despite the higher rates, our retention of business remains consistent with historical levels and in certain instances has increased. These retention rates are often coupled with a reduction in our limits due to our exposure management strategy. Further, we continue to achieve growth in several of our Commercial Lines high margin businesses, although these market segments remain highly competitive.
Personal Insurance growth prospects are supported by the need for full life cycle products and coverage, increases in personal wealth accumulation, and awareness of insurance protection and risk management. We compete in the high net worth market, accident and health insurance, travel insurance, and warranty services and will continue to expand our innovative products and services to distribution partners and clients.
General Insurance – International
We believe our global presence provides Commercial Lines and Personal Insurance a distinct competitive advantage, as the demand for multinational cross-border coverage and services increases due to the growing number of international customers, while giving us the ability to respond quickly to local market conditions and build client relationships.
90 AIG | First Quarter 2020 Form 10-Q
The Commercial Lines market continues to be highly competitive, due to increased market capacity and ample availability of capital. Despite this, we continue to grow our most profitable segments and diversify our portfolio across all regions by expanding into new product lines (e.g., cyber), new client segments (e.g., middle market) and new distribution channels (e.g., digital and national brokers) while remaining a market leader in key developed and developing markets. Overall, Commercial lines are showing positive rate increases in selective products and markets where market events or withdrawal of capability have favorably impacted pricing. We are maintaining our underwriting discipline, reducing gross and net limits, increasing use of reinsurance to reduce volatility, as well as continuing our risk selection strategy to improve profitability.
Personal Insurance focuses on individual customers, as well as group and corporate clients. Although market competition within Personal Insurance has increased, we continue to benefit from the underwriting quality, portfolio diversity, and generally low volatility of the short-tailed risk in these business lines.
78AIG | First Quarter 2019 Form 10-Q
TABLE OF CONTENTSlines, although some product classes are exposed to catastrophe losses.
ITEM 2 | Business Segment Operations| General Insurance
General INSURANCE RESULTS
Three Months Ended March 31, |
|
|
|
|
| Percentage |
|
(in millions) |
| 2019 |
| 2018 |
| Change |
|
Underwriting results: |
|
|
|
|
|
|
|
Net premiums written | $ | 6,033 | $ | 6,171 |
| (2) | % |
Decrease in unearned premiums |
| 680 |
| 512 |
| 33 |
|
Net premiums earned |
| 6,713 |
| 6,683 |
| - |
|
Losses and loss adjustment expenses incurred(a) |
| 4,233 |
| 4,488 |
| (6) |
|
Acquisition expenses: |
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
| 1,159 |
| 1,066 |
| 9 |
|
Other acquisition expenses |
| 303 |
| 385 |
| (21) |
|
Total acquisition expenses |
| 1,462 |
| 1,451 |
| 1 |
|
General operating expenses |
| 839 |
| 995 |
| (16) |
|
Underwriting income (loss) |
| 179 |
| (251) |
| NM |
|
Net investment income |
| 1,089 |
| 761 |
| 43 |
|
Adjusted pre-tax income (loss) | $ | 1,268 | $ | 510 |
| 149 | % |
Loss ratio(a) |
| 63.1 |
| 67.2 |
| (4.1) |
|
Acquisition ratio |
| 21.8 |
| 21.7 |
| 0.1 |
|
General operating expense ratio |
| 12.5 |
| 14.9 |
| (2.4) |
|
Expense ratio |
| 34.3 |
| 36.6 |
| (2.3) |
|
Combined ratio(a) |
| 97.4 |
| 103.8 |
| (6.4) |
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
|
|
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
Catastrophe losses and reinstatement premiums |
| (2.7) |
| (5.7) |
| 3.0 |
|
Prior year development, net of (additional) return premium on loss sensitive business |
| 1.0 |
| 1.6 |
| (0.6) |
|
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other |
| 0.4 |
| - |
| 0.4 |
|
Accident year loss ratio, as adjusted |
| 61.8 |
| 63.1 |
| (1.3) |
|
Accident year combined ratio, as adjusted |
| 96.1 |
| 99.7 |
| (3.6) |
|
Three Months Ended March 31, |
|
|
|
|
|
| Percentage |
|
(in millions) |
|
| 2020 |
| 2019 |
| Change |
|
Underwriting results: |
|
|
|
|
|
|
|
|
Net premiums written |
| $ | 5,921 | $ | 6,033 |
| (2) | % |
Decrease in unearned premiums |
|
| 158 |
| 680 |
| (77) |
|
Net premiums earned |
|
| 6,079 |
| 6,713 |
| (9) |
|
Losses and loss adjustment expenses incurred(a) |
|
| 4,059 |
| 4,233 |
| (4) |
|
Acquisition expenses: |
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
| 986 |
| 1,159 |
| (15) |
|
Other acquisition expenses |
|
| 345 |
| 303 |
| 14 |
|
Total acquisition expenses |
|
| 1,331 |
| 1,462 |
| (9) |
|
General operating expenses |
|
| 776 |
| 839 |
| (8) |
|
Underwriting income (loss) |
|
| (87) |
| 179 |
| NM |
|
Net investment income |
|
| 588 |
| 1,089 |
| (46) |
|
Adjusted pre-tax income |
| $ | 501 | $ | 1,268 |
| (60) | % |
Loss ratio(a) |
|
| 66.8 |
| 63.1 |
| 3.7 |
|
Acquisition ratio |
|
| 21.9 |
| 21.8 |
| 0.1 |
|
General operating expense ratio |
|
| 12.8 |
| 12.5 |
| 0.3 |
|
Expense ratio |
|
| 34.7 |
| 34.3 |
| 0.4 |
|
Combined ratio(a) |
|
| 101.5 |
| 97.4 |
| 4.1 |
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
|
|
|
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
|
Catastrophe losses and reinstatement premiums |
|
| (6.9) |
| (2.7) |
| (4.2) |
|
Prior year development, net of (additional) return premium on loss sensitive business |
|
| 0.9 |
| 1.0 |
| (0.1) |
|
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other |
|
| - |
| 0.4 |
| NM |
|
Accident year loss ratio, as adjusted |
|
| 60.8 |
| 61.8 |
| (1.0) |
|
Accident year combined ratio, as adjusted |
|
| 95.5 |
| 96.1 |
| (0.6) |
|
(a)Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
The following table presents General Insurance net premiums written by operating segment, showing change on both reported and constant dollar basis:
Three Months Ended March 31, |
|
| Percentage Change in |
|
|
|
|
| Percentage Change in | |||||||||
(in millions) |
| 2019 |
| 2018 |
| U.S. dollars |
| Original Currency |
|
| 2020 |
| 2019 |
| U.S. dollars |
| Original Currency |
|
North America | $ | 2,578 | $ | 2,039 |
| 26 | % | 26 | % | $ | 2,770 | $ | 2,578 |
| 7 | % | 8 | % |
International |
| 3,455 |
| 4,132 |
| (16) |
| (13) |
|
| 3,151 |
| 3,455 |
| (9) |
| (8) |
|
Total net premiums written | $ | 6,033 | $ | 6,171 |
| (2) | % | - | % | $ | 5,921 | $ | 6,033 |
| (2) | % | (2) | % |
(a)The three-month period ended March 31, 2019 includes Validus Net premiums written for North America and International of $1.1 billion and $171 million, respectively.
(b)The three-month period ended March 31, 2019 includes Glatfelter Net premiums written for North America of $76 million.
(c)As a result of the merger of AIUI Japan and Fuji Fire and Marine Insurance Company (Fuji), Fuji’s fiscal reporting period was conformed to that of AIUI Japan (Japan Merger Impact). Therefore, the three-month period ended March 31, 2018 included approximately $300 million for two additional months of Net premiums written.
AIG | First Quarter 20192020 Form 10-Q7991
The following tables present General Insurance accident year catastrophes by geography(a) and number of events:
Catastrophes(b)
| # of |
|
| North |
|
|
|
| # of |
|
| North |
|
|
|
|
(in millions) | Events |
|
| America |
| International |
| Total | Events |
|
| America |
| International |
| Total |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
| ||||||||
Flooding | 1 |
| $ | - | $ | 10 | $ | 10 | ||||||||
Windstorms and hailstorms | 3 |
|
| 153 |
| 2 |
| 155 | ||||||||
Tropical cyclone | 1 |
|
| 5 |
| 5 |
| 10 | ||||||||
Total catastrophe-related charges | 5 |
| $ | 158 | $ | 17 | $ | 175 | ||||||||
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
| ||||||||
Three Months Ended March 31, 2020 |
|
|
|
|
|
|
| |||||||||
Flooding and rainstorms | 2 |
| $ | 17 | $ | 10 | $ | 27 | ||||||||
Windstorms and hailstorms | 4 |
| $ | 274 | $ | 19 | $ | 293 | 4 |
|
| 49 |
| 45 |
| 94 |
Earthquakes | 1 |
|
| 25 |
| 58 |
| 83 | 2 |
|
| 16 |
| 10 |
| 26 |
COVID-19 | N/A | (c) |
| 123 |
| 149 |
| 272 | ||||||||
Total catastrophe-related charges | 5 |
| $ | 299 | $ | 77 | $ | 376 | 8 |
| $ | 205 | $ | 214 | $ | 419 |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
| ||||||||
Flooding and rainstorms | 1 |
| $ | - | $ | 10 | $ | 10 | ||||||||
Windstorms and hailstorms | 4 |
|
| 158 |
| 7 |
| 165 | ||||||||
Total catastrophe-related charges | 5 |
| $ | 158 | $ | 17 | $ | 175 |
(a)Geography: North America primarily includes insurance businesses in the United States, Canada and Bermuda. International includes regional insurance businesses in Japan, the United Kingdom,UK, Europe, the Asia Pacific, region, Latin America Puerto Rico, Australia, theand Caribbean, Middle East and Africa. GeographyAfrica, and China. General Insurance results are presented before consideration of internal reinsurance agreements.
(b)Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events,catastrophe losses, such as terrorism and civil disorders that exceed the $10 million threshold.
(c)As COVID-19 continues to evolve and affects many lines of business, the number of events is yet to be determined.
North america Results
Three Months Ended March 31, |
|
|
|
|
| Percentage |
|
(in millions) |
| 2019 |
| 2018 |
| Change |
|
Underwriting results: |
|
|
|
|
|
|
|
Net premiums written | $ | 2,578 | $ | 2,039 |
| 26 | % |
Decrease in unearned premiums |
| 575 |
| 653 |
| (12) |
|
Net premiums earned |
| 3,153 |
| 2,692 |
| 17 |
|
Losses and loss adjustment expenses incurred(a) |
| 2,189 |
| 2,153 |
| 2 |
|
Acquisition expenses: |
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
| 508 |
| 358 |
| 42 |
|
Other acquisition expenses |
| 106 |
| 154 |
| (31) |
|
Total acquisition expenses |
| 614 |
| 512 |
| 20 |
|
General operating expenses |
| 361 |
| 355 |
| 2 |
|
Underwriting loss |
| (11) |
| (328) |
| 97 |
|
Net investment income |
| 945 |
| 648 |
| 46 |
|
Adjusted pre-tax income | $ | 934 | $ | 320 |
| 192 | % |
Loss ratio(a) |
| 69.4 |
| 80.0 |
| (10.6) |
|
Acquisition ratio |
| 19.5 |
| 19.0 |
| 0.5 |
|
General operating expense ratio |
| 11.4 |
| 13.2 |
| (1.8) |
|
Expense ratio |
| 30.9 |
| 32.2 |
| (1.3) |
|
Combined ratio(a) |
| 100.3 |
| 112.2 |
| (11.9) |
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
| |
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
Catastrophe losses and reinstatement premiums |
| (5.1) |
| (11.1) |
| 6.0 |
|
Prior year development, net of (additional) return premium on loss sensitive business |
| 1.8 |
| 2.8 |
| (1.0) |
|
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other |
| 1.0 |
| - |
| 1.0 |
|
Accident year loss ratio, as adjusted |
| 67.1 |
| 71.7 |
| (4.6) |
|
Accident year combined ratio, as adjusted |
| 98.0 |
| 103.9 |
| (5.9) |
|
Three Months Ended March 31, |
|
|
|
|
| Percentage |
|
(in millions) |
| 2020 |
| 2019 |
| Change |
|
Underwriting results: |
|
|
|
|
|
|
|
Net premiums written | $ | 2,770 | $ | 2,578 |
| 7 | % |
Decrease in unearned premiums |
| 149 |
| 575 |
| (74) |
|
Net premiums earned |
| 2,919 |
| 3,153 |
| (7) |
|
Losses and loss adjustment expenses incurred(a) |
| 2,108 |
| 2,189 |
| (4) |
|
Acquisition expenses: |
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
| 444 |
| 508 |
| (13) |
|
Other acquisition expenses |
| 127 |
| 106 |
| 20 |
|
Total acquisition expenses |
| 571 |
| 614 |
| (7) |
|
General operating expenses |
| 326 |
| 361 |
| (10) |
|
Underwriting loss |
| (86) |
| (11) |
| NM |
|
Net investment income |
| 495 |
| 945 |
| (48) |
|
Adjusted pre-tax income | $ | 409 | $ | 934 |
| (56) | % |
Loss ratio(a) |
| 72.2 |
| 69.4 |
| 2.8 |
|
Acquisition ratio |
| 19.6 |
| 19.5 |
| 0.1 |
|
General operating expense ratio |
| 11.2 |
| 11.4 |
| (0.2) |
|
Expense ratio |
| 30.8 |
| 30.9 |
| (0.1) |
|
Combined ratio(a) |
| 103.0 |
| 100.3 |
| 2.7 |
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
| |
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
Catastrophe losses and reinstatement premiums |
| (7.0) |
| (5.1) |
| (1.9) |
|
Prior year development, net of (additional) return premium on loss sensitive business |
| 0.2 |
| 1.8 |
| (1.6) |
|
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other |
| - |
| 1.0 |
| NM |
|
Accident year loss ratio, as adjusted |
| 65.4 |
| 67.1 |
| (1.7) |
|
Accident year combined ratio, as adjusted |
| 96.2 |
| 98.0 |
| (1.8) |
|
(a)Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
8092AIG | First Quarter 20192020 Form 10-Q
Business and Financial Highlights
The North America General Insurance business is focused on makingcontinues to make progress towards improved underwriting results and efficiencies. This includesin strengthening our talent base; ongoing investment in pricingunderwriting, actively managing our portfolio to improve business mix and monitoring tools; continuous review ofarticulating our revised risk appetite combined with enhanced focusto the marketplace. We are leading the industry across a number of lines in terms of driving rate momentum to improve rate adequacy while simultaneously increasing the level of business retained. As we see increasing disruption in the marketplace, we are well placed to capitalize on portfolio managementopportunities, including within our excess and individualsurplus business strategy;which is seeing an increase in submission flow and increased use of reinsurance.achieving significant rate change.
Adjusted pre-tax income increaseddecreased in the three-month period ended March 31, 2019first quarter of 2020 compared to the same period in the prior year primarily due to higherlower net investment income, reflecting higher income on alternative investments, lower catastrophe losses primarily due to the impact of COVID-19 and lower favorable prior year loss reserve development,partially offset by improvements in the inclusioncore business as evidenced by the lower current accident year loss ratio, as adjusted and lower general operating expense reflecting ongoing expense discipline.
Net premiums written increased in the first quarter of 2020 compared to the Validus acquisition.same period in the prior year primarily due to business growth and strong Commercial lines rate increases despite late quarter reduction in premiums due to the impact of COVID-19, partially offset by underwriting actions taken through 2019.
For a discussion of 20192020 reinsurance programs see Part II, Item 7 Management's Discussion and Analysis of Financial Condition Results of OperationMD&A - Enterprise Risk Management in our 20182019 Annual Report.
North America Adjusted Pre-Tax Income Three Months Ended March 31, (in millions) | |
2020 and 2019 Adjusted pre-tax income
|
| |
These decreases were partially offset by:
|
AIG | First Quarter 2019 Form 10-Q81
| |
lower general operating expense reflecting ongoing expense discipline. |
AIG | First Quarter 2020 Form 10-Q 93
North America Net Premiums Written Three Months Ended March 31, (in millions) | |
2020 and 2019 Comparison Net premiums written increased primarily due to: growth in our assumed reinsurance business, Retail and Wholesale Property as well as strong Commercial lines rate increases. This increase was partially offset by: lower production primarily due to underwriting actions taken through 2019. |
North America Combined Ratios Three Months Ended March 31, | |
2020 and 2019 Comparison The increase in the combined ratio reflected an increase in the loss ratio slightly offset by a The increase in the loss ratio reflected: lower favorable prior year loss reserve development; and higher catastrophe losses primarily due to the impact of COVID-19. These increases in the loss ratio were partially offset by a lower accident year loss ratio, as adjusted primarily driven by improved business mix, The decrease in the
discipline. |
International Results
Three Months Ended March 31, |
|
|
|
|
| Percentage |
|
(in millions) |
| 2019 |
| 2018 |
| Change |
|
Underwriting results: |
|
|
|
|
|
|
|
Net premiums written | $ | 3,455 | $ | 4,132 |
| (16) | % |
(Increase) decrease in unearned premiums |
| 105 |
| (141) |
| NM |
|
Net premiums earned |
| 3,560 |
| 3,991 |
| (11) |
|
Losses and loss adjustment expenses incurred |
| 2,044 |
| 2,335 |
| (12) |
|
Acquisition expenses: |
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
| 651 |
| 708 |
| (8) |
|
Other acquisition expenses |
| 197 |
| 231 |
| (15) |
|
Total acquisition expenses |
| 848 |
| 939 |
| (10) |
|
General operating expenses |
| 478 |
| 640 |
| (25) |
|
Underwriting income(a) |
| 190 |
| 77 |
| 147 |
|
Net investment income |
| 144 |
| 113 |
| 27 |
|
Adjusted pre-tax income | $ | 334 | $ | 190 |
| 76 | % |
Loss ratio |
| 57.4 |
| 58.5 |
| (1.1) |
|
Acquisition ratio |
| 23.8 |
| 23.5 |
| 0.3 |
|
General operating expense ratio |
| 13.4 |
| 16.0 |
| (2.6) |
|
Expense ratio |
| 37.2 |
| 39.5 |
| (2.3) |
|
Combined ratio |
| 94.6 |
| 98.0 |
| (3.4) |
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
| |
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
Catastrophe losses and reinstatement premiums |
| (0.5) |
| (1.9) |
| 1.4 |
|
Prior year development, net of (additional) return premium on loss sensitive business |
| 0.4 |
| 0.7 |
| (0.3) |
|
Adjustment for ceded premiums under reinsurance contracts related to prior accident years |
| - |
| - |
| NM |
|
Accident year loss ratio, as adjusted |
| 57.3 |
| 57.3 |
| (0.0) |
|
Accident year combined ratio, as adjusted |
| 94.5 |
| 96.8 |
| (2.3) |
|
(a) As result of the Japan Merger Impact, the three-month period ended March 31, 2018 includes two additional months of operating earnings increasing Net premiums written, Net premiums earned, Losses and loss adjustment expenses incurred, and Adjusted pre-tax income by approximately $300 million, $300 million, $200 million and $15 million, respectively.
8294AIG | First Quarter 20192020 Form 10-Q
International Results
Three Months Ended March 31, |
|
|
|
|
| Percentage |
|
(in millions) |
| 2020 |
| 2019 |
| Change |
|
Underwriting results: |
|
|
|
|
|
|
|
Net premiums written | $ | 3,151 | $ | 3,455 |
| (9) | % |
Decrease in unearned premiums |
| 9 |
| 105 |
| (91) |
|
Net premiums earned |
| 3,160 |
| 3,560 |
| (11) |
|
Losses and loss adjustment expenses incurred |
| 1,951 |
| 2,044 |
| (5) |
|
Acquisition expenses: |
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
| 542 |
| 651 |
| (17) |
|
Other acquisition expenses |
| 218 |
| 197 |
| 11 |
|
Total acquisition expenses |
| 760 |
| 848 |
| (10) |
|
General operating expenses |
| 450 |
| 478 |
| (6) |
|
Underwriting income (loss) |
| (1) |
| 190 |
| NM |
|
Net investment income |
| 93 |
| 144 |
| (35) |
|
Adjusted pre-tax income | $ | 92 | $ | 334 |
| (72) | % |
Loss ratio |
| 61.7 |
| 57.4 |
| 4.3 |
|
Acquisition ratio |
| 24.1 |
| 23.8 |
| 0.3 |
|
General operating expense ratio |
| 14.2 |
| 13.4 |
| 0.8 |
|
Expense ratio |
| 38.3 |
| 37.2 |
| 1.1 |
|
Combined ratio |
| 100.0 |
| 94.6 |
| 5.4 |
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
| |
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
Catastrophe losses and reinstatement premiums |
| (6.7) |
| (0.5) |
| (6.2) |
|
Prior year development, net of (additional) return premium on loss sensitive business |
| 1.4 |
| 0.4 |
| 1.0 |
|
Adjustment for ceded premiums under reinsurance contracts related to prior accident years |
| - |
| - |
| NM |
|
Accident year loss ratio, as adjusted |
| 56.4 |
| 57.3 |
| (0.9) |
|
Accident year combined ratio, as adjusted |
| 94.7 |
| 94.5 |
| 0.2 |
|
Business and Financial Highlights
The International General Insurance business is focused on underwriting profits and improved efficiency, further improving underwriting margins, and growing profitably in segments and geographies that support our growth strategy.
Adjusted pre-tax income increaseddecreased in the first quarter of 20192020 compared to the same period in the prior year primarily due to higher catastrophe losses (due to the combination of COVID-19 and natural catastrophe losses), as well as lower net investment income partially offset by more favorable prior year loss development. The accident year loss ratio, as adjusted continued to improve reflecting the better premium rate environment, underwriting improvements and better risk selection.
Net premiums written, excluding the impact of foreign exchange, decreased in the first quarter of 2020 compared to the same period in the prior year primarily due to lower General operating expenses, inclusion of the Validus acquisition and lower catastrophe losses.
Net premiums written, excluding the impact of foreign exchange, decreasedproduction primarily due to the Japan Merger Impact, higher cededunderwriting actions taken through 2019 as well as lower premiums and lower Accident & Healthfrom run-off business, in Asia Pacific, partially offset by inclusionpremium rate increases.
For a discussion of the Validus acquisition.2020 reinsurance programs see Part II, Item 7 MD&A - Enterprise Risk Management in our 2019 Annual Report.
AIG | First Quarter 2020 Form 10-Q 95
International Adjusted Pre-Tax Three Months Ended March 31, (in millions) | |
2020 and 2019 Adjusted pre-tax Income
lower
|
AIG | First Quarter 2019 Form 10-Q83
International Net Premiums Written Three Months Ended March 31, (in millions) | |
2020 and 2019 Net premiums written, excluding the impact of foreign exchange, decreased due to:
|
96 AIG | First Quarter 2020 Form 10-Q
International Combined Ratios Three Months Ended March 31, | ||
2020 and 2019 The
higher catastrophe losses (due to the combination of COVID-19 and natural catastrophe losses); partially offset by lower accident year loss ratio as adjusted reflecting premium rate increases, and benefits from underwriting actions. The increase in the expense ratio reflected a higher general operating expense ratio driven by lower premiums. | ||
84AIG | First Quarter 20192020 Form 10-Q97
Life and Retirement |
PRODUCTS AND DISTRIBUTION | |
Variable Annuities:Products include variable annuities that offer a combination of growth potential, death benefit features and income protection features. Variable annuities are distributed primarily through banks, wirehouses, and regional and independent broker-dealers. Index Annuities:Products include fixed index annuities that provide growth potential based in part on the performance of a market Fixed Annuities:Products include single premium fixed annuities, immediate annuities and deferred income annuities. Certain fixed deferred annuity products offer optional income protection features. The Retail Mutual Funds:Includes our mutual fund | |
Group Retirement:Productsand services consist of group mutual funds, group annuities, individual annuity and investment products, and financial planning and advisory services, and plan administrative and compliance services. In March 2019, the products and services marketed by The Variable Annuity Life Insurance Company AIG Retirement Services career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services. | |
Life Insurance: In the U.S., products primarily include term life and universal life insurance distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing. International operations include the distribution of life and health products in the UK and Ireland. | |
Institutional Markets: Products primarily include stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs). Institutional Markets products are primarily distributed through specialized marketing and consulting firms and structured settlement brokers. |
98AIG | First Quarter 20192020 Form 10-Q85
Federal Home Loan Bank (FHLB)FHLB Funding Agreementsare issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments. Funding agreements are issued by our U.S. Life and Retirement companies to FHLBs in their respective districts at fixed or floating rates over specified periods, which can be prepaid at our discretion. Proceeds are generally invested in fixed income securities and other suitable investments to generate spreads.spread income. These investment contracts do not have mortality or morbidity risk and are similar to GICs.
BUSINESSSTRATEGY
Deliver client-centric solutions through our unique franchiseby bringing together a broad portfolio of life insurance,, retirement and institutional products offered through an extensive, multichannel distribution network. Life and Retirement focuses on ease of doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.
Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and digital capabilities while using data and analytics in an innovative manner to improve customer experience.
Individual Retirementwillcontinuetocapitalizeonthe opportunitytomeetconsumerdemandforguaranteedincomebymaintaininginnovativevariableandindexannuityproducts,whilealsomanagingriskfrom guaranteefeaturesthroughrisk-mitigatingproductdesign andwell-developedeconomichedgingcapabilities. Ourfixed annuity productsprovidediversityinourannuityproductsuiteby
| Group Retirementcontinuestoenhanceitstechnology platform toimprovethecustomerexperience forplansponsorsandindividualparticipants.AIG Retirement Services’ (formerly VALIC)self-service tools paired with its career financial advisors provide acompellingserviceplatform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their need for income in retirement. | ||||
Life Insurance in the U.S. will continue to position itself for growth and changing market dynamics while continuing to execute strategies to enhance returns. Our focus is on materializing success from a multi-year effort of building state-of-the-art platforms and underwriting innovations, which are expected to bring process improvements and cost efficiencies. In the UK, AIG Life Insurance will continue to focus on growing the business organically and through potential acquisition opportunities. | Institutional Marketscontinues to grow its assets under management across multiple product lines, including stable value wrap, GICs and pension risk transfer annuities. Our growth strategy is opportunistic and allows us to pursue select transactions that meet our risk-adjusted return requirements. | ||||
Enhance Operational Effectiveness by simplifyingprocesses and operating environments toincrease competitiveness,improveserviceandproduct capabilitiesand product capabilities and facilitatedeliveryofour targetcustomerexperience.Wecontinuetoinvest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. Webelieve that simplifying our operating models will enhance productivity and support further profitable growth.
Manage our Balance Sheet through a rigorous approach to our products and portfolio. We match our product design and high quality investments with our asset and liability exposures to maximize our ability to meet cash and liquidity needs under various operating scenarios.
Deliver Value Creation and Manage Capital by striving to deliversolidearnings throughdisciplined pricing, sustainableunderwritingimprovements, expense reductions,efficiency, and diversification of risk, while optimizing capital allocation and efficiency within insurance entitiestoenhancereturn on common equity.
86AIG | First Quarter 20192020 Form 10-Q99
COMPETITION and challenges
Life and Retirement operates in the highly competitive insurance and financial services industry in the U.S. and select international markets, competing against various financial services companies, including banks and other life insurance and mutual fund companies.Competition is primarily based on product pricing and design, distribution, financial strength, customer service and ease of doing business.
Our business remains competitive due to itslong-standingmarket leadingpositions,innovativeproducts,distributionrelationships across multiple channels, customer-focused service and strong financial ratings.
Our primary challenges include:
·a sustained low interest rate environment, which makes it difficult to profitably price new products and puts margin pressure on existing business due to lower reinvestment yields;
·increased competition in our primary markets, including aggressive pricing of annuities by private equity-backed annuity writers, increased competition and consolidation of employer groups in the group retirement planning market, and peerscompetitors with different profitability targets in the pension risk transfer space;space as well as other product lines;
·increasingly complex new and proposed regulatory requirements, which have affected industry growth;growth and costs; and
·upgrading our technology and underwriting processes while managing general operating expenses.
OUTLOOK—INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our specific operating segments:
The impact of COVID-19 is evolving rapidly and will depend upon the scope and duration of the crisis as well as the actions taken by governments, regulators and other third parties in response, all of which are highly uncertain at this time. The results for the first quarter of 2020 include COVID-19 related market impacts increasing Variable Annuity DAC/SIA amortization and reserves due to the equity market decline as well as our investment returns, primarily due to lower yield enhancements from losses on securities for which the fair value option was elected. The impact of COVID-19 on our premiums and deposits as well as claims incurred was not material this quarter primarily due to the timing of the COVID-19 outbreak in the U.S., late in the first quarter. The regulatory approach to the crisis and impact on the insurance industry is an unknown factor which adds more uncertainty.
Individual Retirement
Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income securities are leadingAmericans to seek additional financial security as they approach retirement.The strong demand for individual variableindex and fixed indexdeferred annuities with guaranteed income features has attracted increased competitionin this product space.In response to the continued lowinterest rate environment,which has added pressure toprofit margins, we have developed guaranteed income benefits for both variable, fixed index, and fixed indexdeferred annuities with margins that are less sensitive to the level of interest rates.
Changes in the interestcapital markets (interest rate environment, equity markets, volatility) can have a significant impact on sales, surrender rates, investment returns, guaranteed income features, and spreads in the annuity industry.
Group Retirement
Group Retirement competes in the defined contribution market under the AIG Retirement Services brand. AIG Retirement Services is a leadingretirementplan provider in theU.S. forK-12schoolsand schooldistricts, highereducation, healthcare, government andother not-for-profit institutions.The defined contribution market is a highly efficient and competitive market that requires supportforbothplansponsors and individualparticipants.Tomeetthischallenge,AIG Retirement Services isinvestingin aclient-focusedtechnologyplatformtosupportimproved complianceand self-service functionality.AIG Retirement Services’ model pairs self-servicetools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.
Changes in the interestcapital markets (interest rate environment, equity markets, volatility) can have a significant impact on investment returns, guaranteed income features, and spreads, and a moderate impact on sales and surrender rates.
100AIG | First Quarter 20192020 Form 10-Q87
Life Insurance
Consumers have a significant need for life insurance, whether it is used for income replacement for their surviving family, estate planning or wealth transfer. Additionally, consumers use life insurance to provide living benefits in case of chronic, critical or terminal illnesses, and to supplement retirement income.
In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio will continue to promote products with lower long-duration interest rate risk and mitigate exposure to products that have long-duration interest rate risk through sales levels and hedging strategies.
As life insurance ownership remains at historical lows in the U.S. and the UK, efforts to expand the reach and increase the affordability of life insurance are critical. The industry is investing in consumer-centric efforts to reduce traditional barriers to securing life protection by simplifying the sales and service experience. Digitally enabled processes and tools provide a fast, friendly and simple path to life insurance protection.
Institutional Markets
Institutional Markets serves a variety of needs for corporate clients. Demand is driven by a number of factors including the macroeconomic and regulatory environment. We expect to see continued growth in the pension risk transfer market as corporate plan sponsors look to transfer asset or liability, longevity, administrative and operational risks associated with their defined benefit plans.
Changes in the interest rate environment can have a significant impact on investment returns and net investment spreads, as well as reduce the tax efficiency associated with institutional life insurance products, dampening organic growth opportunities.
For additional discussion of the impact of market interest rate movement on our Life and Retirement business see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Impact of Changes in the Interest Rate Environment.
life and retirement RESULTS
Three Months Ended March 31, |
|
| Percentage |
|
| Percentage |
| |||||||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums | $ | 1,229 | $ | 446 |
| 176 | % | $ | 1,223 | $ | 1,229 |
| - | % |
Policy fees |
| 707 |
| 734 |
| (4) |
|
| 726 |
| 707 |
| 3 |
|
Net investment income |
| 2,042 |
| 2,046 |
| - |
|
| 2,003 |
| 2,042 |
| (2) |
|
Other income |
| 226 |
| 234 |
| (3) |
| |||||||
Advisory fee and other income |
| 220 |
| 226 |
| (3) |
| |||||||
Total adjusted revenues |
| 4,204 |
| 3,460 |
| 22 |
|
| 4,172 |
| 4,204 |
| (1) |
|
Benefits and expenses: |
|
|
|
|
|
|
| |||||||
Benefits, losses and expenses: |
|
|
|
|
|
|
| |||||||
Policyholder benefits and losses incurred |
| 1,566 |
| 830 |
| 89 |
|
| 1,720 |
| 1,566 |
| 10 |
|
Interest credited to policyholder account balances |
| 887 |
| 854 |
| 4 |
|
| 897 |
| 887 |
| 1 |
|
Amortization of deferred policy acquisition costs |
| 200 |
| 246 |
| (19) |
|
| 318 |
| 200 |
| 59 |
|
General operating and other expenses* |
| 587 |
| 600 |
| (2) |
|
| 622 |
| 587 |
| 6 |
|
Interest expense |
| 40 |
| 38 |
| 5 |
|
| 41 |
| 40 |
| 3 |
|
Total operating expenses |
| 3,280 |
| 2,568 |
| 28 |
| |||||||
Total benefits, losses and expenses |
| 3,598 |
| 3,280 |
| 10 |
| |||||||
Adjusted pre-tax income | $ | 924 | $ | 892 |
| 4 | % | $ | 574 | $ | 924 |
| (38) | % |
*Includes general operating expenses, non-deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.
Our insurance companies generate significant revenues from investment activities. As a result, the operating segments in Life and Retirement are subject to variances in net investment income on the asset portfolios that support insurance liabilities and surplus.
For additional information on our investment strategy, asset-liability management process and invested asset composition see Investments.
88AIG | First Quarter 20192020 Form 10-Q101
Individual Retirement Results
Three Months Ended March 31, |
|
| Percentage |
|
|
|
|
|
| Percentage |
| |||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums | $ | 11 | $ | 12 |
| (8) | % | $ | 41 | $ | 11 |
| 273 | % |
Policy fees |
| 193 |
| 204 |
| (5) |
|
| 207 |
| 193 |
| 7 |
|
Net investment income |
| 999 |
| 984 |
| 2 |
|
| 975 |
| 999 |
| (2) |
|
Advisory fee and other income |
| 148 |
| 161 |
| (8) |
|
| 147 |
| 148 |
| (1) |
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
| 31 |
| 47 |
| (34) |
|
| 138 |
| 31 |
| 345 |
|
Interest credited to policyholder account balances |
| 424 |
| 412 |
| 3 |
|
| 444 |
| 424 |
| 5 |
|
Amortization of deferred policy acquisition costs |
| 120 |
| 134 |
| (10) |
|
| 221 |
| 120 |
| 84 |
|
Non deferrable insurance commissions |
| 77 |
| 81 |
| (5) |
|
| 79 |
| 77 |
| 3 |
|
Advisory fee expenses |
| 54 |
| 54 |
| - |
|
| 52 |
| 54 |
| (4) |
|
General operating expenses |
| 118 |
| 115 |
| 3 |
|
| 110 |
| 118 |
| (7) |
|
Interest expense |
| 19 |
| 19 |
| - |
|
| 20 |
| 19 |
| 5 |
|
Adjusted pre-tax income | $ | 508 | $ | 499 |
| 2 | % | $ | 306 | $ | 508 |
| (40) | % |
Fixed Annuities base net investment spread: |
|
|
|
|
|
|
| |||||||
Fixed annuities base net investment spread: |
|
|
|
|
|
|
| |||||||
Base yield |
| 4.68 | % | 4.60 | % | 8 | bps |
| 4.36 | % | 4.68 | % | (32) | bps |
Cost of funds |
| 2.71 |
| 2.65 |
| 6 |
|
| 2.61 |
| 2.71 |
| (10) |
|
Fixed Annuities base net investment spread |
| 1.97 | % | 1.95 | % | 2 | bps | |||||||
Fixed annuities base net investment spread |
| 1.75 | % | 1.97 | % | (22) | bps |
Business and Financial Highlights
The market environment continues to reflect uncertainties in the annuity business resulting from a sustained low interest rate environment.environment as well as the COVID-19 crisis. Interest rates declined significantly in the first quarter of 20192020 and remained low relative toare at historical levels. Excluding prior year deposits from FHLB funding agreements, premiumslows. Premiums and deposits increaseddecreased in the first quarter of 20192020 compared to the same period in the prior year. Net flows increaseddecreased in the first quarter of 20192020 compared to the same period in the prior year primarily due to higher deposits driven by increasedlower sales in Fixed and Index Annuities, sales, offset by lower sales for the Variable Annuities and Retail Mutual Funds.Funds, as well as higher surrenders and withdrawals partially offset by higher Variable Annuity sales.
Adjusted pre-tax income increased duedecreased in the first quarter of 2020 compared to lowerthe same period in the prior year, primarily driven by increases in Variable Annuity DAC/SIA amortization and reserves from higherdue to the equity market performance,decline, lower Fixed Annuity DAC amortization and reservesyield enhancements from policyholders reaching the end of the surrender charge period, higher base investment spread income primarily due to growth in Index Annuity assets from increased sales, and higher gainslosses on securities for which the fair value option was elected, due to tightening spreadslower base investment yield and lower rates.hedge fund returns. Partially offsetting these increasesdecreases were lower returns on alternative investments, lower feehigher private equity income and advisory fees, net of expenses, primarily driven by lower Variable Annuity AUM due to the equity market decline at the end of 2018, as well as prior year non-recurring payments on structured securities, and higher Index Annuity DAC amortization and reserves mostly driven by sales growth.growth in invested assets.
102AIG | First Quarter 20192020 Form 10-Q89
Individual Retirement Adjusted Pre-Tax Income Three Months Ended March 31, (in millions) | |
2020 and 2019 Adjusted pre-tax income
decrease in net investment income Partially offsetting these decreases were: Higher gains on alternative investments due to higher
|
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 slightly increased in the first quarter of 2019three-month period ended March 31, 2020 compared to the same period in the prior year.year.
Premiums and deposits is a non‑GAAPnon-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts,FHLB funding agreements and mutual funds under administration.
Net flows for annuity products in Individual Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreements were excluded from net flows of Individual Retirement, as net flows from these funding agreements are not considered part of the metric to measure Individual Retirement’s core recurring performance.
The following table presents a reconciliation of Individual Retirement GAAP premiums to premiums and deposits:
Three Months Ended March 31, |
|
| ||||||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Premiums | $ | 11 | $ | 12 | $ | 41 | $ | 11 |
Deposits |
| 4,175 |
| 4,347 |
| 3,078 |
| 4,175 |
Other |
| - |
| (1) |
| (3) |
| - |
Premiums and deposits | $ | 4,186 | $ | 4,358 | $ | 3,116 | $ | 4,186 |
90AIG | First Quarter 20192020 Form 10-Q103
The following table presents surrenders as a percentage of average reserves:
Three Months Ended March 31, | 2019 |
| 2018 |
| 2020 |
| 2019 |
|
Surrenders as a percentage of average reserves |
|
|
|
|
|
|
|
|
Fixed Annuities | 8.1 | % | 7.4 | % | ||||
Variable and Index Annuities | 6.0 |
| 6.4 |
| ||||
Fixed annuities | 6.7 | % | 8.1 | % | ||||
Variable and index annuities | 6.4 |
| 6.0 |
|
The following table presents reserves for Fixed Annuitiesfixed annuities and Variablevariable and Index Annuitiesindex annuities by surrender charge category:category:
| March 31, 2019 |
| December 31, 2018 | March 31, 2020 |
| December 31, 2019 | |||||||||||||
|
|
|
| Variable |
|
|
|
| Variable |
|
|
|
| Variable |
|
|
|
| Variable |
|
| Fixed |
| and Index |
|
| Fixed |
| and Index |
|
| Fixed |
| and Index |
|
| Fixed |
| and Index |
(in millions) |
| Annuities |
| Annuities |
|
| Annuities |
| Annuities |
|
| Annuities |
| Annuities |
|
| Annuities |
| Annuities |
No surrender charge | $ | 29,340 | $ | 21,488 |
| $ | 30,036 | $ | 19,036 |
| $ | 27,385 | $ | 21,455 |
| $ | 27,804 | $ | 24,393 |
Greater than 0% - 2% |
| 972 |
| 7,172 |
|
| 1,037 |
| 6,229 |
|
| 2,488 |
| 8,652 |
|
| 2,059 |
| 9,397 |
Greater than 2% - 4% |
| 2,859 |
| 12,154 |
|
| 2,429 |
| 9,781 |
|
| 2,893 |
| 13,630 |
|
| 3,209 |
| 15,296 |
Greater than 4% |
| 16,083 |
| 32,662 |
|
| 15,217 |
| 33,244 |
|
| 16,316 |
| 32,876 |
|
| 16,453 |
| 31,833 |
Non-surrenderable |
| 1,643 |
| 486 |
|
| 1,608 |
| 474 |
|
| 1,696 |
| 535 |
|
| 1,664 |
| 525 |
Total reserves | $ | 50,897 | $ | 73,962 |
| $ | 50,327 | $ | 68,764 |
| $ | 50,778 | $ | 77,148 |
| $ | 51,189 | $ | 81,444 |
Individual Retirement annuities are typically subject to a four- to seven-year surrender charge period, depending on the product. For Fixed Annuities,fixed annuities, the proportion of reserves subject to surrender charge at March 31, 2019 has increased2020 was flat compared to December 31, 2018 due to improved net flows driven by higher Fixed Annuity sales, combined with fewer policyholders reaching the end of the surrender charge period in 2019 compared to 2018.2019. The increasedecrease in reserves with no surrender charge for Variablevariable and Index Annuities index annuities at March 31, 20192020 compared to December 31, 20182019 is principally due to normal aging of business.lower equity markets that resulted in a decline in variable annuities separate account reserves.
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 March 31, (in millions) | |
2020 and 2019
Variable and Index Annuities premiums and deposits increased primarily due to higher variable annuity sales driven by higher broker dealer and bank distribution sales
|
104AIG | First Quarter 20192020 Form 10-Q91
Group Retirement Results
Three Months Ended March 31, |
|
| Percentage |
|
|
| Percentage |
| ||||||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums | $ | 4 | $ | 6 |
| (33) | % | $ | 6 | $ | 4 |
| 50 | % |
Policy fees |
| 100 |
| 112 |
| (11) |
|
| 109 |
| 100 |
| 9 |
|
Net investment income |
| 541 |
| 582 |
| (7) |
|
| 517 |
| 541 |
| (4) |
|
Advisory fee and other income |
| 64 |
| 61 |
| 5 |
|
| 62 |
| 64 |
| (3) |
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
| 10 |
| 16 |
| (38) |
|
| 33 |
| 10 |
| 230 |
|
Interest credited to policyholder account balances |
| 282 |
| 275 |
| 3 |
|
| 281 |
| 282 |
| - |
|
Amortization of deferred policy acquisition costs |
| 12 |
| 25 |
| (52) |
|
| 35 |
| 12 |
| 192 |
|
Non deferrable insurance commissions |
| 28 |
| 29 |
| (3) |
|
| 28 |
| 28 |
| - |
|
Advisory fee expenses |
| 23 |
| 22 |
| 5 |
|
| 24 |
| 23 |
| 4 |
|
General operating expenses |
| 111 |
| 102 |
| 9 |
|
| 139 |
| 111 |
| 25 |
|
Interest expense |
| 11 |
| 10 |
| 10 |
|
| 11 |
| 11 |
| - |
|
Adjusted pre-tax income | $ | 232 | $ | 282 |
| (18) | % | $ | 143 | $ | 232 |
| (38) | % |
Base net investment spread: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base yield |
| 4.59 | % | 4.53 | % | 6 | bps |
| 4.39 | % | 4.59 | % | (20) | bps |
Cost of funds |
| 2.76 |
| 2.72 |
| 4 |
|
| 2.69 |
| 2.76 |
| (7) |
|
Base net investment spread |
| 1.83 | % | 1.81 | % | 2 | bps |
| 1.70 | % | 1.83 | % | (13) | bps |
Business and Financial Highlights
Group Retirement is focused on implementing initiatives to grow its business. However, external factors, including increased competition and the consolidation of healthcare providers and other employers in target markets, continue to impact Group Retirement’s customer retention. Excluding deposits from FHLB funding agreement, premiumsPremiums and deposits increaseddecreased in the first quarter of 20192020 compared to the same period in 2018.2019. Net flows deterioratedremained negative but improved in the first quarter of 20192020 compared to the same period of 2018 and continued to be negative primarily2019 due to higherlower surrenders partially offset by increasedlower premiums and deposits.
Adjusted pre-tax income decreased in the first quarter of 20192020 compared to the same period in 20182019 primarily from lower net investment income due to prior year receipt of non-recurring payments on structured securities and lower alternative investment returns, lower fee income and higher general operating expenses. Partially offsetting these decreases were lower variable annuity DAC amortization and reserves due to higherweaker equity market performance.
Group Retirementperformance, higher general operating expenses, lower gains on securities for which the fair value option was elected, and lower gains on base net investment spread in the first quarter of 2019 increased compared to the same period in the prior year primarily due to lower reinvestment yields. Partially offsetting these decreases were higher accretion income.investment returns in our alternative investment portfolio including higher private equity returns and higher policy fee income driven by growth of assets.
92AIG | First Quarter 20192020 Form 10-Q105
Group Retirement Adjusted Pre-Tax Income Three Months Ended March 31, (in millions) | |
2020 and 2019 Adjusted pre-tax income decreased primarily due to:
higher general operating expenses primarily due to increased legal expenses and continued investment in people and technology; lower net investment income, primarily from lower gains on securities for which the fair value option was elected and lower hedge fund returns due to widening spreads partially offset by higher gains on alternative investment portfolio driven by higher private equity returns and higher gain on calls; and decrease in base net investment spread primarily due to lower reinvestment yields and lower accretion; Partially offsetting these decreases were: higher policy fee income net of expenses primarily driven by growth of assets. |
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 first quarter of 2019,2020, which primarily representrepresents immediate annuities, decreasedincreased compared to the same period in the prior year.2019. Overall, premiums isare not a significant driver of the Group Retirement results.
Premiums and deposits is a non‑GAAPnon-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration. Premiums and deposits included FHLB funding agreement in 2018.
Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreement was excluded from net flows of Group Retirement in 2018, as net flows from this funding agreement is not considered part of the metric to measure Group Retirement’s core recurring performance.
The following table presents a reconciliation of Group Retirement GAAP premiums to premiums and deposits:
Three Months Ended March 31, |
| |||
(in millions) |
| 2019 |
| 2018 |
Premiums | $ | 4 | $ | 6 |
Deposits |
| 2,059 |
| 2,066 |
Premiums and deposits | $ | 2,063 | $ | 2,072 |
Three Months Ended March 31, |
|
|
|
|
(in millions) |
| 2020 |
| 2019 |
Premiums | $ | 6 | $ | 4 |
Deposits |
| 1,849 |
| 2,059 |
Premiums and deposits | $ | 1,855 | $ | 2,063 |
AIG | First Quarter 2019 Form 10-Q93
ITEM 2 |Business Segment Operations | Life and Retirement
The following table presents Group Retirement surrenders as a percentage of average reserves and mutual funds under administration:
Three Months Ended March 31, | 2020 |
| 2019 |
|
Surrenders as a percentage of average reserves and mutual funds | 9.4 | % | 11.8 | % |
Three Months Ended March 31, | 2019 |
| 2018 |
|
Surrenders as a percentage of average reserves and mutual funds | 11.8 | % | 10.2 | % |
106 AIG | First Quarter 2020 Form 10-Q
The following table presents reserves for Group Retirement annuities by surrender charge category:
|
| March 31, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
|
(in millions) |
| 2019 | (a) |
| 2018 | (a) |
| 2020 | (a) |
| 2019 | (a) |
No surrender charge(b) | $ | 68,942 |
| $ | 65,500 |
| $ | 65,519 |
| $ | 71,912 |
|
Greater than 0% - 2% |
| 1,086 |
|
| 650 |
|
| 578 |
| 1,140 |
| |
Greater than 2% - 4% |
| 898 |
|
| 1,115 |
|
| 501 |
| 672 |
| |
Greater than 4% |
| 5,893 |
|
| 5,868 |
|
| 5,950 |
| 6,038 |
| |
Non-surrenderable |
| 613 |
|
| 612 |
|
| 615 |
| 614 |
| |
Total reserves | $ | 77,432 |
| $ | 73,745 |
| $ | 73,163 |
| $ | 80,376 |
|
(a)Excludes mutual fund assets under administration of $19.5$17.8 billion and $17.9$21.7 billion at March 31, 20192020 and December 31, 2018,2019, respectively.
(b)Group Retirement amounts in this category include General Accountgeneral account reserves of approximately $6.2 billion and $6.3 billion, at both March 31, 20192020 and December 31, 2018, respectively,2019, which are subject to 20 percent annual withdrawal limitations at the participant level and General Accountgeneral account reserves of $4.8$5.6 billion and $4.7$5.4 billion at March 31, 20192020 and December 31, 2018,2019, respectively, which are subject to 20 percent annual withdrawal limitations at the plan level.
Group Retirement annuities are typically subject to a five- to seven-year surrender charge period, depending on the product. At March 31,, 2019, 2020, Group Retirement annuity reserves increaseddecreased compared to the same period in the prior yearDecember 31, 2019 primarily due to higherweaker equity market performance. The surrender rate in the first quarter of 2019 increased2020 decreased due to fewer large plan surrenders compared to the same period in the prior year primarily due to higher surrenders, including approximately $566 million of large plan surrenders.year.
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 March 31, (in millions) | |
2020 and 2019 Net flows |
94AIG | First Quarter 20192020 Form 10-Q107
Life Insurance Results
Three Months Ended March 31, |
|
| Percentage |
|
|
|
|
|
| Percentage |
| |||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums | $ | 395 | $ | 379 |
| 4 | % | $ | 419 | $ | 395 |
| 6 | % |
Policy fees |
| 373 |
| 377 |
| (1) |
|
| 370 |
| 373 |
| (1) |
|
Net investment income |
| 291 |
| 293 |
| (1) |
|
| 291 |
| 291 |
| - |
|
Other income |
| 14 |
| 12 |
| 17 |
|
| 11 |
| 14 |
| (21) |
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
| 638 |
| 646 |
| (1) |
|
| 709 |
| 638 |
| 11 |
|
Interest credited to policyholder account balances |
| 92 |
| 95 |
| (3) |
|
| 92 |
| 92 |
| - |
|
Amortization of deferred policy acquisition costs |
| 67 |
| 86 |
| (22) |
|
| 61 |
| 67 |
| (9) |
|
Non deferrable insurance commissions |
| 12 |
| 22 |
| (45) |
|
| 27 |
| 12 |
| 125 |
|
General operating expenses |
| 141 |
| 154 |
| (8) |
|
| 140 |
| 141 |
| (1) |
|
Interest expense |
| 7 |
| 6 |
| 17 |
|
| 7 |
| 7 |
| - |
|
Adjusted pre-tax income | $ | 116 | $ | 52 |
| 123 | % | $ | 55 | $ | 116 |
| (53) | % |
Business and Financial Highlights
Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns.Results for the first quarter of 2019 reflect growth in term and international life and health premiums primarily due to the acquisition of Ellipse in the UK, offset by lower group benefit premiums. Adjusted pre-tax income increaseddecreased in the first quarter of 20192020 compared to the same period in the prior year primarily due to favorablehigher mortality experience, lower group benefits general operating expenses and commissions,insurance reserves, and prior year favorable reserve and reinsurance refinements.
Life Insurance Adjusted Pre-Tax Income Three Months Ended March 31, (in millions) | |
2020 and 2019 Adjusted pre-tax income
|
108AIG | First Quarter 20192020 Form 10-Q95
Life Insurance GAAP Premiums and Premiums and Deposits
Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life and international life and health and group benefits.health. Premiums, excluding the effect of foreign exchange, increased in the first quarter of 20192020 compared to the same period in the prior year. Premiums and deposits for Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.
The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:
Three Months Ended March 31, |
|
|
|
|
| |||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Premiums | $ | 395 | $ | 379 | $ | 419 | $ | 395 |
Deposits |
| 406 |
| 412 |
| 402 |
| 406 |
Other |
| 194 |
| 178 |
| 194 |
| 194 |
Premiums and deposits | $ | 995 | $ | 969 | $ | 1,015 | $ | 995 |
A discussion of the significant variances in premiums and deposits follows:
Life Insurance Premiums and Deposits Three Months Ended March 31, (in millions) | |
2020 and 2019 Premiums and deposits, excluding the effect of foreign exchange, increased primarily due to |
96AIG | First Quarter 20192020 Form 10-Q109
Institutional markets Results
Three Months Ended March 31, |
|
| Percentage |
|
|
|
|
|
| Percentage |
| |||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums | $ | 819 | $ | 49 |
| NM | % | $ | 757 | $ | 819 |
| (8) | % |
Policy fees |
| 41 |
| 41 |
| - |
|
| 40 |
| 41 |
| (2) |
|
Net investment income |
| 211 |
| 187 |
| 13 |
|
| 220 |
| 211 |
| 4 |
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
| 887 |
| 121 |
| NM |
|
| 840 |
| 887 |
| (5) |
|
Interest credited to policyholder account balances |
| 89 |
| 72 |
| 24 |
|
| 80 |
| 89 |
| (10) |
|
Amortization of deferred policy acquisition costs |
| 1 |
| 1 |
| - |
|
| 1 |
| 1 |
| - |
|
Non deferrable insurance commissions |
| 8 |
| 7 |
| 14 |
|
| 7 |
| 8 |
| (13) |
|
General operating expenses |
| 15 |
| 14 |
| 7 |
|
| 16 |
| 15 |
| 7 |
|
Interest expense |
| 3 |
| 3 |
| - |
|
| 3 |
| 3 |
| - |
|
Adjusted pre-tax income | $ | 68 | $ | 59 |
| 15 | % | $ | 70 | $ | 68 |
| 3 | % |
Business and Financial Highlights
Institutional Markets continued to opportunistically grow its assets under management,portfolio, which drove the increase in net investment spread over recent years.income. Product distribution continues to be strong and the business is focused on maintaining pricing discipline to achieve attractive risk adjusted returns.discipline.
Institutional Markets Adjusted Pre-Tax Income Three Months Ended March 31, (in millions) | |
2020 and 2019
Adjusted pre-tax income increased primarily due to:
decrease in interest crediting results from impact of lower interest rates on floating-rate GICs and
|
110AIG | First Quarter 20192020 Form 10-Q97
Institutional markets GAAP Premiums and Premiums and Deposits
Premiums for Institutional Markets primarily represent amounts received on pension risk transfer or structured settlement annuities with life contingencies. Premiums increaseddecreased in the first quarter of 20192020 compared to the same period in the prior year primarily driven by the pension risk transfer business written in the first quarter of 2019.2019.
Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct premiums as well as deposits received on investment-type annuity contracts, including GICs. Deposits also include FHLB funding agreements.
The following table presents a reconciliation of Institutional Markets GAAP premiums to premiums and deposits:
Three Months Ended March 31, |
|
|
|
|
| |||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Premiums | $ | 819 | $ | 49 | $ | 757 | $ | 819 |
Deposits |
| 286 |
| 1,408 |
| 152 |
| 286 |
Other |
| 7 |
| 6 |
| 8 |
| 7 |
Premiums and deposits | $ | 1,112 | $ | 1,463 | $ | 917 | $ | 1,112 |
A discussion of the significant variances in premiums and deposits follows:
Institutional Markets Premiums and Deposits Three Months Ended March 31, (in | |
2020 and 2019 Premiums and deposits decreased |
98AIG | First Quarter 20192020 Form 10-Q111
Other Operations
The following table presents Other Operations results:
Three Months Ended March 31, |
|
| Percentage |
| |||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
Adjusted pre-tax income (loss) by activities: |
|
|
|
|
|
|
|
Parent and Other: |
|
|
|
|
|
|
|
Corporate general operating expenses | $ | (183) | $ | (153) |
| (20) | % |
Interest expense |
| (303) |
| (238) |
| (27) |
|
All other income (expense), net |
| 99 |
| 49 |
| 102 |
|
Total Parent and Other |
| (387) |
| (342) |
| (13) |
|
Consolidation, eliminations and other adjustments |
| (70) |
| 11 |
| NM |
|
Adjusted pre-tax loss | $ | (457) | $ | (331) |
| (38) | % |
2019 and 2018 Comparison
consists of income from assets held by AIG Parent and other corporate subsidiaries, general operating expenses not attributable to AIG reporting segments, certain compensation expenses attributable to Other adjusted pre-tax loss increased comparedOperations and reporting segments, amortization of value of distribution network acquired related to the same period in prior year due to higherValidus and Glatfelter acquisitions, and interest expense driven byattributable to AIG long-term debt issuances totaling $2.5 billion atas well as debt associated with consolidated investment entities. Other Operations also includes Blackboard – a subsidiary focused on delivering commercial insurance solutions using digital technology, data analytics and automation. At the end of the first quarterMarch 2020, AIG decided to place Blackboard into run-off.
Other Operations Results
Three Months Ended March 31, |
|
|
|
|
| Percentage |
|
(in millions) |
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
Premiums | $ | 15 | $ | 12 |
| 25 | % |
Net investment income: |
|
|
|
|
|
|
|
Interest and dividends - available for sale securities |
| 26 |
| 27 |
| (4) |
|
Interest and dividends - fair value option securities |
| (8) |
| 4 |
| NM |
|
Other investment income - consolidated investment entities |
| 94 |
| 53 |
| 77 |
|
Other investment income |
| 16 |
| 19 |
| (16) |
|
Total net investment income |
| 128 |
| 103 |
| 24 |
|
Other income |
| 19 |
| 24 |
| (21) |
|
Total adjusted revenues |
| 162 |
| 139 |
| 17 |
|
Benefits, losses and expenses: |
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
| 11 |
| 4 |
| 175 |
|
Acquisition expenses - amortization of deferred policy acquisition costs |
| 4 |
| 5 |
| (20) |
|
General operating expenses |
| 280 |
| 214 |
| 31 |
|
Interest expense: |
|
|
|
|
|
|
|
Interest - corporate |
| 259 |
| 260 |
| - |
|
Interest - other (primarily consolidated investment entities)* |
| 59 |
| 43 |
| 37 |
|
Total interest expense |
| 318 |
| 303 |
| 5 |
|
Total benefits, losses and expenses |
| 613 |
| 526 |
| 17 |
|
Adjusted pre-tax loss before consolidation and eliminations |
| (451) |
| (387) |
| (17) |
|
Consolidation, eliminations and other adjustments |
| (84) |
| (70) |
| (20) |
|
Adjusted pre-tax loss | $ | (535) | $ | (457) |
| (17) | % |
|
|
|
|
|
|
|
|
Adjusted pre-tax loss by activities: |
|
|
|
|
|
|
|
Corporate (Parent and Service Companies): |
|
|
|
|
|
|
|
General operating expenses | $ | (244) | $ | (181) |
| (35) | % |
Interest expense |
| (259) |
| (260) |
| - |
|
All other income (expense), net |
| 20 |
| 41 |
| (51) |
|
Total Corporate (Parent and Service Companies) |
| (483) |
| (400) |
| (21) |
|
Consolidated investment portfolio |
| 48 |
| 22 |
| 118 |
|
Blackboard |
| (16) |
| (9) |
| (78) |
|
Consolidation, eliminations and other adjustments: |
|
|
|
|
|
|
|
Consolidation, eliminations and other adjustments - consolidated investment entities |
| (104) |
| (92) |
| (13) |
|
Consolidation, eliminations and other adjustments - other |
| 20 |
| 22 |
| (9) |
|
Total consolidation, eliminations and other adjustments |
| (84) |
| (70) |
| (20) |
|
Adjusted pre-tax loss | $ | (535) | $ | (457) |
| (17) | % |
*Interest expense-other primarily represents interest expense on consolidated investment entities of 2018, partially offset by higher income from investments.$46 million and $31 million in 2020 and 2019, respectively, and costs of derivatives used to economically hedge foreign denominated debt of $12 million and $9 million in 2020 and 2019, respectively.
112AIG | First Quarter 20192020 Form 10-Q99
Legacy Portfolio2020 and 2019 Comparison
Adjusted pre-tax loss increased primarily due to:
higher corporate general operating expenses due to higher compensation and technology costs; and
higher interest expenses driven by debt associated with consolidated investment entities.
The increase in adjusted pre-tax loss was partially offset by:
higher net investment income associated with consolidated investment entities.
AIG | First Quarter 2020 Form 10-Q 113
Legacy Portfolio
Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our Bermuda-domiciled composite reinsurer, Fortitude Re, is included in our Legacy Portfolio.
·Legacy Life and Retirement Run-Off Lines - – Reserves consist of certain structured settlements, pension risk transfer annuities and single premium immediate annuities written prior to April 2012. Also includes exposures to whole life, long-term care and exited accident & health product lines.
·Legacy General Insurance Run-Off Lines - – Reserves consist of excess workers’ compensation, environmental exposures and exposures to other products within General Insurance that are no longer actively marketed. Also includes the remaining reserves in Eaglestone Reinsurance Company (Eaglestone). Company.
·Legacy Investments – Includes investment classes that we have placed into run-off including holdings in direct investments as well as investments in global capital markets and global real estate.
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 efficiencyefficiency.
•Commutations of assumed reinsurance and direct policy buy-backsbuy-backs.
•EnhanceEnhanced insured policyholder options and claims resolution strategiesstrategies.
•Enhanced asset liability management and expense managementmanagement.
For Legacy investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while sourcing for our insurance companies attractive assets for their portfolios.
SALE OF NON-CONTROLLING INTEREST IN FORTITUDE HOLDINGS
Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of March 31, 2019,2020, the affiliated transactions included the cession of approximately $31$30.1 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $4$3.8 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. Fortitude Re has approximately $2.7 billion of total assets after elimination of intercompany balances, primarily managed by AIG, and is AIG’s main run-off reinsurer with its own dedicated management team. In the second quarter of 2018, we formed Fortitude Holdings to act as a holding company for Fortitude Re.
On November 13, 2018, weAIG completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG,TC Group Cayman Investments Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P.Carlyle. Upon completion of the 2018 Fortitude Sale, Fortitude Holdings ownsowned 100 percent of the outstanding common shares of Fortitude Re and AIG hashad an 80.1 percent ownership interest in Fortitude Holdings. AIG received $381 million in cash and will receive up to $95 million of deferred compensation following December 31, 2023, which is subject to a purchase price adjustment wherein AIG will reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude. Any amount due to TCG in respect of this purchase price adjustment will be offset by the amount of the $95 million otherwise due from TCG to AIG. To the extent AIG does not receive all or a portion of the planned distributions by May 13, 2020, TCG will pay us up to an additional $100 million, which amount shall adjust in proportion with the amount of the dividend received by AIG. In connection with the 2018 Fortitude Sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment management fee payments within thirty-six months following the closing. AIG also will be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such investment commitment targets.
On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL, an investment fund advised by an affiliate of Carlyle (Carlyle FRL), T&D United Capital Co., Ltd. (T&D) and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude Holdings. Upon closing of the Majority Interest Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude Holdings.
114 AIG | First Quarter 2020 Form 10-Q
The purchase price under the Majority Interest Fortitude Sale is subject to a post-closing purchase price adjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to a maximum payment of $500 million. In connection with the Majority Interest Fortitude Sale agreement, AIG, Fortitude Holdings and TCG have agreed that, effective as of the closing of the Majority Interest Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be assumed by Fortitude Holdings and AIG will be released therefrom, (ii) the purchase price adjustment that AIG had agreed to provide TCG in the 2018 Fortitude Sale will be terminated, and (iii) Carlyle will remain obligated to pay AIG $95 million of deferred compensation at December 31, 2023 and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned distributions by May 13, 2020, which amount shall adjust in proportion with the amount of the dividend received by AIG. We expect to contribute approximately $1.45 billion of the proceeds of the Majority Interest Fortitude Sale to certain of our insurance company subsidiaries for a period of time following the closing of the transaction. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to consummate the Majority Interest Fortitude Sale.
The affiliated reinsurance transactions executed in the first quarter of 2018 with Fortitude Re resulted in prepaid insurance assets on the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax). These and related deferred acquisition costs of $0.5 billion (after-tax) at inception of the contract. The prepaid insurance assets have been eliminated in AIG’s consolidated financial statements since the counterparties were wholly owned. In
Upon closing of the event of a sale of a controlling interest inMajority Interest Fortitude Holdings, our Legacy Portfolio maySale, AIG will recognize a loss for the portion of the unamortized balance of these assets and related deferred acquisition costs of $0.5 billion (after-tax) that are not recoverable, if any, in the period in which our interestwhen we are no longer a controlling shareholder in Fortitude Holdings becomes non-controlling.Holdings. As of March 31, 2020, the unamortized balances of the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.2 billion (after-tax) and $0.4 billion (after-tax), respectively. This combined loss of $2.6 billion would be incremental to any gain or loss recognized on the sale of our controlling interest inMajority Interest Fortitude Holdings.Sale. The incremental gain or loss we will recognize on the Majority Interest Fortitude Sale would be impacted, perhaps significantly, by market conditions existing at the time the Majority Interest Fortitude Sale closes.
LEGACY PORTFOLIO RESULTS
Three Months Ended March 31, |
|
|
|
|
| Percentage |
|
(in millions) |
| 2020 |
| 2019 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
Premiums | $ | 124 | $ | 118 |
| 5 | % |
Policy fees |
| 29 |
| 30 |
| (3) |
|
Net investment income |
| 127 |
| 575 |
| (78) |
|
Other income (loss) |
| (16) |
| (17) |
| 6 |
|
Total adjusted revenues |
| 264 |
| 706 |
| (63) |
|
Benefits, losses and expenses: |
|
|
|
|
|
|
|
Policyholder benefits and losses and loss adjustment |
|
|
|
|
|
|
|
expenses incurred |
| 507 |
| 432 |
| 17 |
|
Interest credited to policyholder account balances |
| 51 |
| 54 |
| (6) |
|
Amortization of deferred policy acquisition costs |
| 18 |
| 18 |
| - |
|
General operating and other expenses |
| 52 |
| 85 |
| (39) |
|
Interest expense |
| 4 |
| 5 |
| (20) |
|
Total benefits, losses and expenses |
| 632 |
| 594 |
| 6 |
|
Adjusted pre-tax income (loss) | $ | (368) | $ | 112 |
| NM | % |
Adjusted pre-tax income (loss) by type: |
|
|
|
|
|
|
|
General Insurance Run-Off Lines | $ | 36 | $ | 15 |
| 140 | % |
Life and Retirement Run-Off Lines |
| (133) |
| 87 |
| NM |
|
Legacy Investments |
| (271) |
| 10 |
| NM |
|
Adjusted pre-tax income (loss) | $ | (368) | $ | 112 |
| NM | % |
|
|
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
|
(in millions) |
|
|
| 2020 |
| 2019 |
|
Selected Balance Sheet Data |
|
|
|
|
|
|
|
Legacy Investments, net of related debt |
|
| $ | 1,352 | $ | 2,002 |
|
Legacy General Insurance run-off reserves |
|
|
| 5,147 |
| 5,409 |
|
Legacy Life and Retirement run-off reserves |
|
|
| 37,817 |
| 38,728 |
|
100AIG | First Quarter 20192020 Form 10-Q115
LEGACY PORTFOLIO RESULTS
Three Months Ended March 31, |
|
| Percentage |
| |||
(in millions) |
| 2019 |
| 2018 |
| Change |
|
Revenues: |
|
|
|
|
|
|
|
Premiums | $ | 118 | $ | 141 |
| (16) | % |
Policy fees |
| 30 |
| 30 |
| - |
|
Net investment income |
| 575 |
| 565 |
| 2 |
|
Other income (loss) |
| (17) |
| 100 |
| NM |
|
Total adjusted revenues |
| 706 |
| 836 |
| (16) |
|
Benefits and expenses: |
|
|
|
|
|
|
|
Policyholder benefits and losses and loss adjustment |
|
|
|
|
|
|
|
expenses incurred |
| 432 |
| 506 |
| (15) |
|
Interest credited to policyholder account balances |
| 54 |
| 59 |
| (8) |
|
Amortization of deferred policy acquisition costs |
| 18 |
| 18 |
| - |
|
General operating and other expenses |
| 85 |
| 100 |
| (15) |
|
Interest expense |
| 5 |
| 8 |
| (38) |
|
Total benefits and expenses |
| 594 |
| 691 |
| (14) |
|
Adjusted pre-tax income | $ | 112 | $ | 145 |
| (23) | % |
Adjusted pre-tax income by type: |
|
|
|
|
|
|
|
General Insurance Run-Off Lines | $ | 15 | $ | 62 |
| (76) | % |
Life and Retirement Run-Off Lines |
| 87 |
| 28 |
| 211 |
|
Legacy Investments |
| 10 |
| 55 |
| (82) |
|
Adjusted pre-tax income | $ | 112 | $ | 145 |
| (23) | % |
Selected Balance Sheet Data |
|
|
|
|
|
|
|
Legacy Investments, net of related debt | $ | 2,548 | $ | 2,779 |
| (8) | % |
Legacy General Insurance run-off reserves |
| 5,432 |
| 5,926 |
| (8) |
|
Legacy Life and Retirement run-off reserves |
| 37,262 |
| 37,793 |
| (1) |
|
Business and Financial Highlights
Legacy insurance lines, including those ceded to Fortitude Re, continue to run-off as anticipated for Legacy General Insurance and Legacy Life and Retirement Run-Off Lines. Legacy investments have been reduced significantly over the last several years declining from $6.7 billion at December 31, 2016 to $2.5$1.4 billion at March 31, 2019.2020. The remaining Legacy investments primarily include structured credit junior notes for which we have elected the fair value option and real estate investments.
Legacy Portfolio Adjusted Pre-Tax Income Three Months Ended March 31, (in millions) | |
2020 and 2019 Adjusted pre-tax income decreased due to:
Lower Legacy Life and Retirement earnings due to lower net investment income, primarily from lower returns from hedge funds and lower
These decreases were partially offset by higher Legacy |
116AIG | First Quarter 20192020 Form 10-Q101
Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are drivenunit by the respective operating segmentstargeting an asset allocation mix that provides diversification from an asset class, sector, issuer, and AIG Parent.geographic perspective. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products.surplus. The majority of assets backing our insurance liabilities consist of fixed maturity securities.
The impact of COVID-19 is evolving rapidly and will depend upon the scope and duration of the crisis as well as the actions taken by governments, regulators and other third parties in response, all of which are highly uncertain at this time. Adverse changes and developments affecting the global economy, including a significant global economic slowdown, stock market declines and increased financial market volatility may have near-term and long-term negative effects on our overall investment portfolio. Within our diversified investment portfolio, there may be exposures to certain segments of the economy significantly affected by the crisis, which could result in the recognition of credit losses and increases in our allowance for credit losses if businesses remain closed and the impact of the crisis on the global economy worsens.
Investment Highlights in the |
Implemented CECL (Current Expected Credit Losses), the new credit loss accounting standard, in the first quarter of 2020. |
Investment strategies are based onassessed at the business segment level and involve considerations that include the local and general market conditions, liability duration and cash flow characteristics,management, risk appetite and volatility constraints, rating agency and regulatory capital considerations, and tax and legal investment limitations, tax optimization and diversification.limitations.
Some of our key investment strategies are as follows:
•Fixed maturity securities held by the U.S. insurance companies included in General Insurance 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 General Insurance companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.
•Our fundamental strategy across all of our investmentthe portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liabilityseek investments with similar characteristics to the associated insurance liabilities to the extent practicable. AIG embeds Environmental, Social and Governance (ESG) considerations in its fundamental investment analysis of the companies or projects we invest in to ensure that they have sustainable earnings over the full term of our investment. AIG considers internal and external factors and evaluates changes in consumer behavior, industry trends related to ESG factors as well as the ability of the management of companies to respond appropriately to these changes in order to maintain their competitive advantage.
•We seek to originate investments that offer enhanced yield through illiquidity premiums, such as private placements and commercial mortgage loans, which also add portfolio diversification. These assets typically afford credit protections through covenants, ability to customize structures that meet our insurance liability needs, and deeper due diligence given information access.
Given our global presence, we have access to assets that provide diversification from local markets. To the extent we purchase these investments, we generally hedge the currency risk using derivatives, which could provide opportunities to earn higher risk adjusted returns compared to risk assets in the functional currency.
AIG | First Quarter 2020 Form 10-Q 117
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-gradeinvestment 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.
Attribution of Net Investment Income to Operating Segments
Net investment income is attributed to our businesses based on internal models consistent withWithin the nature of the underlying businesses.
For General Insurance — North America and International and Legacy General Insurance Run-Off Lines, we estimate investable funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the General Insurance companies to segments is calculated based on these estimated investable funds, consistent with the approximate duration of the liabilities and the required economic capital allocation for each segment
102AIG | First Quarter 2019 Form 10-Q
ITEM 2 | Investments
For Life and Retirement — Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets and Legacy Life and Retirement Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life and Retirement companies. All invested assets ofU.S., the Life and Retirement companies in excess of liabilitiesand General Insurance investments are allocatedgenerally split between reserve backing and surplus portfolios.
–Insurance reserves are backed by mainly investment grade fixed maturity securities that meet our duration, current risk-return, tax, liquidity, credit quality and diversification objectives. We assess asset classes based on estimatestheir fundamental risk, including credit (public and private), commercial mortgages and residential mortgages regardless of required economic capital allocation for each segment.whether such investments are bonds, loans, or structured products.
–Surplus investments seek to enhance portfolio returns and are generally comprised of a mix of fixed maturity investment grade and below investment grade securities and various alternative asset classes, including private equity, real estate equity, and hedge funds. Over the past few years, hedge fund investments have been reduced with more emphasis given to private equity, real estate and private credit.
Outside of the U.S., fixed maturity securities held by insurance companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.
Asset Liability MeasurementManagement
For the General Insurance companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, theThe investment strategy within the General Insurance companies focuses on growth of surplus, maintenance of sufficient liquidity for unanticipated insurance claims, and preservation of capital, subject to liability and other business considerations.
Thecapital. General Insurance companies investinvests primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest inagencies; structured securities collateralized by, among other assets, residential and commercial real estateestate; and commercial mortgage loans. Fixed maturity securities of the General Insurance companies’ North America operations have an average duration of 3.2 years. Fixed maturity securities of the General Insurance companies’ international operations have an average duration of 3.6 years.
While invested assets backing reserves of the General Insurance companies are primarily invested in conventional liquid fixed maturity securities, we have continued to allocate a portion of our investment activity intoto asset classes that offer higher yields through structural and illiquidity premiums, particularly in the domesticour North America 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. Thisrates and inflation. We seek to diversify the portfolio across asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expectclasses, sectors, and issuers to continue to pursue this investment strategy to meet the General Insurance companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.mitigate idiosyncratic portfolio risks.
In addition, a portion of the surplus of General Insurance is invested in a diversified portfolio of alternative investments which seeksthat seek to balance liquidity, volatility and growth.growth of surplus. There is a higher allocation to equity-oriented investments in General Insurance surplus relative to other AIG portfolios given the underlying inflation risks inherent in that business. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio.
Fixed maturity securities of the General Insurance companies’ domestic operations, with an average duration of 3.8 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 General 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 and Retirement companies is to maximizeprovide net investment income to back liabilities that result in stable distributable earnings and enhance portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑asset liability management, capital, and available investment opportunities.regulatory constraints.
The Life and Retirement companies use asset‑liabilityasset-liability management as a primary tool to monitor and manage risk in their businesses. The Life and Retirement companies' fundamental investment strategy is tocompanies maintain a diversified, high to mediumhigh- to-medium quality portfolio of fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans that, to the extent practicable, complementsmatch the duration characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates.the liabilities. 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 varies between distinct portfolios. The interest rate environment has a direct impact on the asset liability management profile of the businesses, and others are longer in duration. Anan extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio. A further lengthening of the portfolio will be assessed in the context of available market opportunities as longer duration markets may not provide similar diversification benefits as shorter duration markets.
TheFixed maturity securities of the Life and Retirement companies’ domestic operations have an average duration of 8.1 years. We seek to diversify the portfolio across asset classes, sectors, and issuers to mitigate idiosyncratic portfolio risks.
In addition, the Life and Retirement 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 and Retirement companies seek to enhance surplus portfolio returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields. While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life and Retirement companies, we have reduced 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 and Retirement 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.
118AIG | First Quarter 20192020 Form 10-Q103
Fixed maturity securities held in the Life and Retirement companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 18.2 years.
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the National Association of Insurance Companies (NAIC)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 CompaniesAIG subsidiaries fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies.
For a full description of the composite AIG credit ratings see– Credit Ratings.
The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:
March 31, 2019 |
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March 31, 2020 |
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(in millions) |
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| Total |
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| Total |
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| Total |
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| Below |
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| Total |
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| Below |
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| Investment |
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| Investment |
|
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|
| Investment |
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| 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 | $ | 88,283 | $ | 71,515 | $ | 159,798 |
| $ | 6,629 | $ | 6,466 | $ | 2,009 | $ | 306 | $ | 15,410 | $ | 175,208 | $ | 94,702 | $ | 71,537 | $ | 166,239 |
| $ | 7,429 | $ | 6,746 | $ | 1,067 | $ | 167 | $ | 15,409 | $ | 181,648 |
Mortgage-backed, asset-backed and collateralized |
| 63,068 |
| 3,566 |
| 66,634 |
|
| 599 |
| 424 |
| 59 |
| 3,973 |
| 5,055 |
| 71,689 |
| 59,303 |
| 3,631 |
| 62,934 |
|
| 278 |
| 87 |
| 98 |
| 2,036 |
| 2,499 |
| 65,433 |
Total* | $ | 151,351 | $ | 75,081 | $ | 226,432 |
| $ | 7,228 | $ | 6,890 | $ | 2,068 | $ | 4,279 | $ | 20,465 | $ | 246,897 | $ | 154,005 | $ | 75,168 | $ | 229,173 |
| $ | 7,707 | $ | 6,833 | $ | 1,165 | $ | 2,203 | $ | 17,908 | $ | 247,081 |
*Excludes $2.8 billion$48 million 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.available.
The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:
March 31, 2019 |
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March 31, 2020 |
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(in millions) |
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| Total |
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| Total |
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| Total |
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| Below |
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| Total |
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| Below |
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|
| Investment |
|
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| CCC and |
| Investment |
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|
| Investment |
|
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|
|
|
| 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 | $ | 87,876 | $ | 72,441 | $ | 160,317 |
| $ | 6,334 | $ | 7,074 | $ | 1,483 | $ | 14,891 | $ | 175,208 | $ | 95,866 | $ | 69,736 | $ | 165,602 |
| $ | 7,391 | $ | 6,734 | $ | 1,921 | $ | 16,046 | $ | 181,648 |
Mortgage-backed, asset-backed and collateralized |
| 50,059 |
| 4,395 |
| 54,454 |
|
| 977 |
| 711 |
| 15,547 |
| 17,235 |
| 71,689 |
| 50,075 |
| 4,240 |
| 54,315 |
|
| 642 |
| 358 |
| 10,118 |
| 11,118 |
| 65,433 |
Total* | $ | 137,935 | $ | 76,836 | $ | 214,771 |
| $ | 7,311 | $ | 7,785 | $ | 17,030 | $ | 32,126 | $ | 246,897 | $ | 145,941 | $ | 73,976 | $ | 219,917 |
| $ | 8,033 | $ | 7,092 | $ | 12,039 | $ | 27,164 | $ | 247,081 |
*Excludes $2.8 billion$48 million 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 filingavailable.
At March 31, 2019,2020, approximately 89 percent of our fixed maturity securities were held by our domestic entities. Approximately 1617 percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 1512 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 March 31, 2019,2020, approximately 25 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 76 percent were below investment grade or not rated. Approximately 29 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.
104AIG | First Quarter 20192020 Form 10-Q119
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(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 |
| Available for Sale |
| Other |
| Total |
| ||||||||||||||||||||||||
| March 31, |
| December 31, |
| March 31, |
| December 31, |
| March 31, |
| December 31, |
| March 31, |
| December 31, |
| March 31, |
| December 31, |
| March 31, |
| December 31, |
| ||||||||||||
(in millions) |
| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
|
| 2019 |
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| 2018 |
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| 2020 |
|
| 2019 |
|
| 2020 |
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| 2019 |
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| 2020 |
|
| 2019 |
|
Rating: |
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| |
Other fixed maturity |
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| |
securities |
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|
| |
AAA | $ | 11,303 |
| $ | 11,170 |
| $ | 2,713 |
| $ | 2,619 |
| $ | 14,016 |
| $ | 13,789 |
| $ | 11,814 |
| $ | 11,821 |
| $ | 2,057 |
| $ | 2,121 |
| $ | 13,871 |
| $ | 13,942 |
|
AA |
| 28,959 |
|
| 27,766 |
|
| 130 |
|
| 106 |
|
| 29,089 |
|
| 27,872 |
|
| 31,032 |
|
| 31,141 |
|
| - |
|
| - |
|
| 31,032 |
|
| 31,141 |
|
A |
| 43,846 |
|
| 40,142 |
|
| 1,424 |
|
| 1,356 |
|
| 45,270 |
|
| 41,498 |
|
| 50,954 |
|
| 49,437 |
|
| 11 |
|
| 11 |
|
| 50,965 |
|
| 49,448 |
|
BBB |
| 72,395 |
|
| 69,564 |
|
| 303 |
|
| 300 |
|
| 72,698 |
|
| 69,864 |
|
| 69,736 |
|
| 75,598 |
|
| - |
|
| - |
|
| 69,736 |
|
| 75,598 |
|
Below investment grade |
| 15,372 |
|
| 14,511 |
|
| 6 |
|
| - |
|
| 15,378 |
|
| 14,511 |
|
| 15,079 |
|
| 15,905 |
|
| 5 |
|
| 7 |
|
| 15,084 |
|
| 15,912 |
|
Non-rated |
| 1,395 |
|
| 1,333 |
|
| - |
|
| - |
|
| 1,395 |
|
| 1,333 |
|
| 1,009 |
|
| 1,301 |
|
| - |
|
| - |
|
| 1,009 |
|
| 1,301 |
|
Total | $ | 173,270 |
| $ | 164,486 |
| $ | 4,576 |
| $ | 4,381 |
| $ | 177,846 |
| $ | 168,867 |
| $ | 179,624 |
| $ | 185,203 |
| $ | 2,073 |
| $ | 2,139 |
| $ | 181,697 |
| $ | 187,342 |
|
Mortgage-backed, asset- |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed and collateralized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA | $ | 28,564 |
| $ | 28,859 |
| $ | 545 |
| $ | 481 |
| $ | 29,109 |
| $ | 29,340 |
| $ | 29,164 |
| $ | 29,419 |
| $ | 345 |
| $ | 365 |
| $ | 29,509 |
| $ | 29,784 |
|
AA |
| 12,909 |
|
| 12,019 |
|
| 885 |
|
| 911 |
|
| 13,794 |
|
| 12,930 |
|
| 14,006 |
|
| 14,816 |
|
| 177 |
|
| 201 |
|
| 14,183 |
|
| 15,017 |
|
A |
| 6,927 |
|
| 6,964 |
|
| 288 |
|
| 290 |
|
| 7,215 |
|
| 7,254 |
|
| 6,246 |
|
| 6,861 |
|
| 137 |
|
| 165 |
|
| 6,383 |
|
| 7,026 |
|
BBB |
| 4,230 |
|
| 4,058 |
|
| 165 |
|
| 152 |
|
| 4,395 |
|
| 4,210 |
|
| 3,724 |
|
| 4,154 |
|
| 515 |
|
| 98 |
|
| 4,239 |
|
| 4,252 |
|
Below investment grade |
| 12,266 |
|
| 12,923 |
|
| 4,947 |
|
| 5,096 |
|
| 17,213 |
|
| 18,019 |
|
| 8,969 |
|
| 10,575 |
|
| 2,102 |
|
| 3,630 |
|
| 11,071 |
|
| 14,205 |
|
Non-rated |
| 35 |
|
| 82 |
|
| 105 |
|
| 104 |
|
| 140 |
|
| 186 |
|
| 43 |
|
| 58 |
|
| 4 |
|
| 84 |
|
| 47 |
|
| 142 |
|
Total | $ | 64,931 |
| $ | 64,905 |
| $ | 6,935 |
| $ | 7,034 |
| $ | 71,866 |
| $ | 71,939 |
| $ | 62,152 |
| $ | 65,883 |
| $ | 3,280 |
| $ | 4,543 |
| $ | 65,432 |
| $ | 70,426 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA | $ | 39,867 |
| $ | 40,029 |
| $ | 3,258 |
| $ | 3,100 |
| $ | 43,125 |
| $ | 43,129 |
| $ | 40,978 |
| $ | 41,240 |
| $ | 2,402 |
| $ | 2,486 |
| $ | 43,380 |
| $ | 43,726 |
|
AA |
| 41,868 |
|
| 39,785 |
|
| 1,015 |
|
| 1,017 |
|
| 42,883 |
|
| 40,802 |
|
| 45,038 |
|
| 45,957 |
|
| 177 |
|
| 201 |
|
| 45,215 |
|
| 46,158 |
|
A |
| 50,773 |
|
| 47,106 |
|
| 1,712 |
|
| 1,646 |
|
| 52,485 |
|
| 48,752 |
|
| 57,200 |
|
| 56,298 |
|
| 148 |
|
| 176 |
|
| 57,348 |
|
| 56,474 |
|
BBB |
| 76,625 |
|
| 73,622 |
|
| 468 |
|
| 452 |
|
| 77,093 |
|
| 74,074 |
|
| 73,460 |
|
| 79,752 |
|
| 515 |
|
| 98 |
|
| 73,975 |
|
| 79,850 |
|
Below investment grade |
| 27,638 |
|
| 27,434 |
|
| 4,953 |
|
| 5,096 |
|
| 32,591 |
|
| 32,530 |
|
| 24,048 |
|
| 26,480 |
|
| 2,107 |
|
| 3,637 |
|
| 26,155 |
|
| 30,117 |
|
Non-rated |
| 1,430 |
|
| 1,415 |
|
| 105 |
|
| 104 |
|
| 1,535 |
|
| 1,519 |
|
| 1,052 |
|
| 1,359 |
|
| 4 |
|
| 84 |
|
| 1,056 |
|
| 1,443 |
|
Total | $ | 238,201 |
| $ | 229,391 |
| $ | 11,511 |
| $ | 11,415 |
| $ | 249,712 |
| $ | 240,806 |
| $ | 241,776 |
| $ | 251,086 |
| $ | 5,353 |
| $ | 6,682 |
| $ | 247,129 |
| $ | 257,768 |
|
120AIG | First Quarter 20192020 Form 10-Q105
Available‑for‑Sale Investments
Available-for-Sale Investments
The following table presents the fair value of our available‑for‑saleavailable-for-sale securities:
|
|
|
|
|
|
| Fair Value at |
| Fair Value at |
|
|
|
|
|
|
| Fair Value at |
| Fair Value at | |
|
|
|
|
|
|
| March 31, |
| December 31, |
|
|
|
|
|
|
| March 31, |
| December 31, | |
(in millions) |
|
|
|
|
|
|
| 2019 |
| 2018 |
|
|
|
|
|
|
| 2020 |
| 2019 |
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. government and government sponsored entities |
|
|
|
|
| $ | 3,401 | $ | 3,260 |
|
|
|
|
|
| $ | 5,689 | $ | 5,380 | |
Obligations of states, municipalities and political subdivisions |
|
|
|
|
|
| 15,922 |
| 16,001 |
|
|
|
|
|
|
| 15,440 |
| 15,318 | |
Non-U.S. governments |
|
|
|
|
|
| 15,274 |
| 14,525 |
|
|
|
|
|
|
| 14,173 |
| 14,869 | |
Corporate debt |
|
|
|
|
|
| 138,673 |
| 130,700 |
|
|
|
|
|
|
| 144,322 |
| 149,636 | |
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
RMBS |
|
|
|
|
|
| 34,004 |
| 34,377 |
|
|
|
|
|
|
| 30,857 |
| 32,805 | |
CMBS |
|
|
|
|
|
| 13,161 |
| 12,701 |
|
|
|
|
|
|
| 14,226 |
| 14,430 | |
CDO/ABS |
|
|
|
|
|
| 17,766 |
| 17,827 |
|
|
|
|
|
|
| 17,069 |
| 18,648 | |
Total mortgage-backed, asset-backed and collateralized |
|
|
|
|
|
| 64,931 |
| 64,905 |
|
|
|
|
|
|
| 62,152 |
| 65,883 | |
Total bonds available for sale* |
|
|
|
|
| $ | 238,201 | $ | 229,391 |
|
|
|
|
|
| $ | 241,776 | $ | 251,086 |
*At March 31, 20192020 and December 31, 2018,2019, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $29.1$25.1 billion and $28.8$27.8 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity securities:
| March 31, |
| December 31, | March 31, |
| December 31, | ||||
(in millions) |
| 2019 |
|
| 2018 |
| 2020 |
|
| 2019 |
Japan | $ | 1,687 |
| $ | 1,645 | $ | 1,666 |
| $ | 1,651 |
Canada |
| 1,067 |
|
| 1,038 |
| 971 |
|
| 989 |
France |
| 923 |
|
| 905 |
| 880 |
|
| 1,013 |
United Kingdom |
| 602 |
|
| 638 | |||||
Germany |
| 837 |
|
| 783 |
| 552 |
|
| 593 |
United Kingdom |
| 811 |
|
| 794 | |||||
Indonesia |
| 516 |
|
| 589 | |||||
United Arab Emirates |
| 491 |
|
| 454 |
| 439 |
|
| 494 |
Netherlands |
| 485 |
|
| 518 | |||||
Indonesia |
| 475 |
|
| 453 | |||||
Israel |
| 438 |
|
| 399 | |||||
Norway |
| 408 |
|
| 380 |
| 393 |
|
| 410 |
Singapore |
| 399 |
|
| 373 | |||||
Panama |
| 334 |
|
| 348 | |||||
Other |
| 7,742 |
|
| 7,227 |
| 7,382 |
|
| 7,745 |
Total | $ | 15,325 |
| $ | 14,570 | $ | 14,173 |
| $ | 14,869 |
106AIG | First Quarter 20192020 Form 10-Q121
The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:
| March 31, 2020 |
|
| |||||||||
|
|
|
|
|
| Non- |
|
|
|
| December 31, | |
|
|
|
| Financial |
| Financial |
| Structured |
|
|
| 2019 |
(in millions) |
| Sovereign |
| Institution |
| Corporates |
| Products |
| Total |
| Total |
Euro-Zone countries: |
|
|
|
|
|
|
|
|
|
|
|
|
France | $ | 880 | $ | 1,742 | $ | 1,442 | $ | - | $ | 4,064 | $ | 4,304 |
Germany |
| 552 |
| 159 |
| 2,512 |
| - |
| 3,223 |
| 3,329 |
Netherlands |
| 304 |
| 935 |
| 1,077 |
| 89 |
| 2,405 |
| 2,626 |
Ireland |
| 62 |
| 154 |
| 395 |
| 1,263 |
| 1,874 |
| 2,132 |
Belgium |
| 179 |
| 119 |
| 898 |
| - |
| 1,196 |
| 1,254 |
Spain |
| 40 |
| 270 |
| 763 |
| - |
| 1,073 |
| 1,122 |
Luxembourg |
| - |
| 240 |
| 340 |
| - |
| 580 |
| 381 |
Italy |
| 3 |
| 99 |
| 361 |
| - |
| 463 |
| 482 |
Finland |
| 88 |
| 43 |
| 40 |
| - |
| 171 |
| 192 |
Austria |
| 160 |
| 3 |
| - |
| - |
| 163 |
| 164 |
Other - EuroZone |
| 486 |
| 71 |
| 210 |
| - |
| 767 |
| 826 |
Total Euro-Zone | $ | 2,754 | $ | 3,835 | $ | 8,038 | $ | 1,352 | $ | 15,979 | $ | 16,812 |
Remainder of Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom | $ | 602 | $ | 3,650 | $ | 7,975 | $ | 2,313 | $ | 14,540 | $ | 15,798 |
Switzerland |
| 30 |
| 1,061 |
| 647 |
| - |
| 1,738 |
| 1,879 |
Sweden |
| 129 |
| 290 |
| 116 |
| - |
| 535 |
| 582 |
Norway |
| 393 |
| 45 |
| 69 |
| - |
| 507 |
| 549 |
Russian Federation |
| 187 |
| 41 |
| 204 |
| - |
| 432 |
| 425 |
Other - Remainder of Europe |
| 57 |
| 28 |
| 110 |
| - |
| 195 |
| 262 |
Total - Remainder of Europe | $ | 1,398 | $ | 5,115 | $ | 9,121 | $ | 2,313 | $ | 17,947 | $ | 19,495 |
Total | $ | 4,152 | $ | 8,950 | $ | 17,159 | $ | 3,665 | $ | 33,926 | $ | 36,307 |
| March 31, 2019 |
|
| |||||||||
|
|
|
|
|
| Non- |
|
|
|
| December 31, | |
|
|
|
| Financial |
| Financial |
| Structured |
|
|
| 2018 |
(in millions) |
| Sovereign |
| Institution |
| Corporates |
| Products |
| Total |
| Total |
Euro-Zone countries: |
|
|
|
|
|
|
|
|
|
|
|
|
France | $ | 923 | $ | 1,707 | $ | 1,833 | $ | - | $ | 4,463 | $ | 4,442 |
Germany |
| 837 |
| 169 |
| 2,478 |
| - |
| 3,484 |
| 3,246 |
Netherlands |
| 485 |
| 950 |
| 1,100 |
| 99 |
| 2,634 |
| 2,571 |
Ireland |
| 65 |
| 17 |
| 450 |
| 928 |
| 1,460 |
| 1,494 |
Belgium |
| 243 |
| 124 |
| 808 |
| - |
| 1,175 |
| 1,175 |
Spain |
| 42 |
| 232 |
| 834 |
| - |
| 1,108 |
| 1,068 |
Italy |
| 1 |
| 90 |
| 392 |
| - |
| 483 |
| 507 |
Luxembourg |
| - |
| 27 |
| 352 |
| 4 |
| 383 |
| 377 |
Finland |
| 117 |
| 50 |
| 65 |
| - |
| 232 |
| 228 |
Austria |
| 164 |
| 9 |
| 5 |
| - |
| 178 |
| 156 |
Other - EuroZone |
| 579 |
| 77 |
| 230 |
| - |
| 886 |
| 929 |
Total Euro-Zone | $ | 3,456 | $ | 3,452 | $ | 8,547 | $ | 1,031 | $ | 16,486 | $ | 16,193 |
Remainder of Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom | $ | 811 | $ | 3,835 | $ | 8,682 | $ | 3,145 | $ | 16,473 | $ | 16,139 |
Switzerland |
| 31 |
| 1,173 |
| 865 |
| - |
| 2,069 |
| 2,010 |
Sweden |
| 149 |
| 377 |
| 120 |
| - |
| 646 |
| 639 |
Norway |
| 408 |
| 39 |
| 149 |
| - |
| 596 |
| 566 |
Russian Federation |
| 114 |
| 28 |
| 153 |
| - |
| 295 |
| 240 |
Other - Remainder of Europe |
| 132 |
| 56 |
| 142 |
| - |
| 330 |
| 271 |
Total - Remainder of Europe | $ | 1,645 | $ | 5,508 | $ | 10,111 | $ | 3,145 | $ | 20,409 | $ | 19,865 |
Total | $ | 5,101 | $ | 8,960 | $ | 18,658 | $ | 4,176 | $ | 36,895 | $ | 36,058 |
122 AIG | First Quarter 2020 Form 10-Q
Investments in Municipal Bonds
At March 31, 2019, 2020, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-exempt bonds with 91 percent of the portfolio rated A or higher.
AIG | First Quarter 2019 Form 10-Q107
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:
| March 31, 2019 |
|
| March 31, 2020 |
|
| ||||||||||||||
|
| State |
| Local |
|
|
| Total | December 31, |
| State |
| Local |
|
|
| Total | December 31, | ||
|
| General |
| General |
|
|
| Fair |
| 2018 |
| General |
| General |
|
|
| Fair |
| 2019 |
(in millions) |
| Obligation |
| Obligation |
| Revenue |
| Value |
| Total Fair Value |
| Obligation |
| Obligation |
| Revenue |
| Value |
| Total Fair Value |
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | $ | 18 | $ | 419 | $ | 2,633 | $ | 3,070 | $ | 3,134 | $ | 6 | $ | 381 | $ | 2,684 | $ | 3,071 | $ | 3,059 |
California |
| 695 |
| 396 |
| 1,909 |
| 3,000 |
| 2,813 |
| 732 |
| 383 |
| 1,937 |
| 3,052 |
| 2,928 |
Texas |
| 152 |
| 568 |
| 898 |
| 1,618 |
| 1,692 |
| 96 |
| 529 |
| 865 |
| 1,490 |
| 1,512 |
Illinois |
| 53 |
| 148 |
| 856 |
| 1,057 |
| 979 |
| 84 |
| 143 |
| 853 |
| 1,080 |
| 1,072 |
Massachusetts |
| 379 |
| - |
| 374 |
| 753 |
| 811 |
| 431 |
| - |
| 327 |
| 758 |
| 745 |
Ohio |
| 47 |
| 1 |
| 433 |
| 481 |
| 482 | ||||||||||
Georgia |
| 107 |
| 71 |
| 276 |
| 454 |
| 459 | ||||||||||
Virginia |
| 8 |
| 2 |
| 501 |
| 511 |
| 541 |
| 9 |
| - |
| 418 |
| 427 |
| 493 |
Washington |
| 168 |
| - |
| 247 |
| 415 |
| 405 | ||||||||||
Florida |
| 50 |
| - |
| 455 |
| 505 |
| 542 |
| 10 |
| - |
| 399 |
| 409 |
| 355 |
Ohio |
| 64 |
| 5 |
| 425 |
| 494 |
| 485 | ||||||||||
Washington |
| 190 |
| - |
| 261 |
| 451 |
| 473 | ||||||||||
Georgia |
| 104 |
| 87 |
| 257 |
| 448 |
| 445 | ||||||||||
Washington D.C. |
| 11 |
| - |
| 323 |
| 334 |
| 340 | ||||||||||
Pennsylvania |
| 126 |
| 13 |
| 193 |
| 332 |
| 353 |
| 106 |
| 1 |
| 297 |
| 404 |
| 395 |
Maryland |
| 104 |
| 93 |
| 80 |
| 277 |
| 332 | ||||||||||
Washington, D.C. |
| 11 |
| - |
| 296 |
| 307 |
| 316 | ||||||||||
Missouri |
| - |
| - |
| 280 |
| 280 |
| 277 | ||||||||||
All other states(a) |
| 373 |
| 277 |
| 2,422 |
| 3,072 |
| 3,061 |
| 382 |
| 280 |
| 2,150 |
| 2,812 |
| 2,820 |
Total(b)(c) | $ | 2,327 | $ | 2,008 | $ | 11,587 | $ | 15,922 | $ | 16,001 | $ | 2,189 | $ | 1,789 | $ | 11,462 | $ | 15,440 | $ | 15,318 |
(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 $373$447 million of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale corporate debt securities:
|
| Fair Value at |
| Fair Value at |
| Fair Value at |
| Fair Value at |
Industry Category |
| March 31, |
| December 31, |
| March 31, |
| December 31, |
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Financial institutions: |
|
|
|
|
|
|
|
|
Money Center/Global Bank Groups | $ | 10,175 | $ | 9,602 | $ | 9,924 | $ | 10,701 |
Regional banks — other |
| 675 |
| 630 |
| 650 |
| 659 |
Life insurance |
| 3,286 |
| 3,201 |
| 2,919 |
| 3,166 |
Securities firms and other finance companies |
| 401 |
| 389 |
| 254 |
| 334 |
Insurance non-life |
| 5,007 |
| 4,648 |
| 5,413 |
| 5,492 |
Regional banks — North America |
| 6,836 |
| 6,263 |
| 6,662 |
| 6,825 |
Other financial institutions |
| 11,301 |
| 9,966 |
| 13,017 |
| 13,608 |
Utilities |
| 17,984 |
| 17,542 |
| 19,256 |
| 19,424 |
Communications |
| 9,469 |
| 9,249 |
| 9,918 |
| 9,939 |
Consumer noncyclical |
| 17,797 |
| 16,410 |
| 20,305 |
| 19,997 |
Capital goods |
| 7,614 |
| 7,237 |
| 7,752 |
| 8,006 |
Energy |
| 13,006 |
| 12,350 |
| 10,696 |
| 13,379 |
Consumer cyclical |
| 9,965 |
| 9,498 |
| 10,543 |
| 10,989 |
Basic |
| 5,465 |
| 5,271 |
| 5,230 |
| 5,617 |
Other |
| 19,692 |
| 18,444 |
| 21,783 |
| 21,500 |
Total* | $ | 138,673 | $ | 130,700 | $ | 144,322 | $ | 149,636 |
*At both March 31, 20192020 and December 31, 2018,2019, respectively, approximately 90 and 89 percent of these investments were rated investment grade.
AIG | First Quarter 2020 Form 10-Q 123
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.5were 4.4 percent and 5.45.3 percent at March 31, 20192020 and December 31, 2018,2019, respectively. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.
108AIG | First Quarter 2019 Form 10-Q
ITEM 2 | Investments
Investments in RMBS
The following table presents AIG’s RMBS available for sale securities:
|
|
|
|
|
|
|
|
|
|
| Fair Value at |
| Fair Value at |
|
|
|
|
|
|
|
|
|
| Fair Value at |
| Fair Value at |
|
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
(in millions) |
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
|
|
|
|
|
|
|
|
|
| 2020 |
| 2019 |
Agency RMBS |
|
|
|
|
|
|
|
|
| $ | 15,273 | $ | 14,695 |
|
|
|
|
|
|
|
|
| $ | 15,811 | $ | 15,721 |
Alt-A RMBS |
|
|
|
|
|
|
|
|
|
| 9,524 |
| 9,780 |
|
|
|
|
|
|
|
|
|
| 7,123 |
| 8,484 |
Subprime RMBS |
|
|
|
|
|
|
|
|
|
| 2,855 |
| 2,982 |
|
|
|
|
|
|
|
|
|
| 2,403 |
| 2,654 |
Prime non-agency |
|
|
|
|
|
|
|
|
|
| 5,652 |
| 6,211 |
|
|
|
|
|
|
|
|
|
| 4,082 |
| 4,451 |
Other housing related |
|
|
|
|
|
|
|
|
|
| 700 |
| 709 |
|
|
|
|
|
|
|
|
|
| 1,438 |
| 1,495 |
Total RMBS(a)(b) |
|
|
|
|
|
|
|
|
| $ | 34,004 | $ | 34,377 |
|
|
|
|
|
|
|
|
| $ | 30,857 | $ | 32,805 |
(a)Includes approximately $10.0$7.3 billion and $10.3$8.7 billion at March 31, 2019,2020 and December 31, 2018,2019, 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 sixfive years at March 31, 20192020 and sevensix years at December 31 2018.2019.
Our underwriting practices for investing in RMBS, other asset‑backedasset-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 |
|
|
|
|
|
|
|
|
|
|
|
| Fair Value at |
| Fair Value at | ||||
|
|
|
|
|
|
|
|
|
| March 31, |
| December 31, |
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||||||||||
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
|
|
|
|
|
|
|
|
|
|
|
| 2020 |
| 2019 | ||||
CMBS (traditional) |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 10,358 | $ | 9,975 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 10,999 | $ | 11,250 |
Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,123 |
| 2,047 |
|
|
|
|
|
|
|
|
|
|
|
|
| 2,210 |
| 2,051 | |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 680 |
| 679 |
|
|
|
|
|
|
|
|
|
|
|
|
| 1,017 |
| 1,129 | |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 13,161 | $ | 12,701 |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 14,226 | $ | 14,430 |
The fair value of CMBS holdings remained stable during the first quarter of 2019.2020. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.
Investments in ABS/CDOs
The following table presents our ABS/CDO available for sale securities by collateral type:
|
|
|
|
|
|
|
|
|
| Fair value at |
| Fair value at |
|
|
|
|
|
|
|
|
| Fair value at |
| Fair value at |
|
|
|
|
|
|
| March 31, |
| December 31, |
|
|
|
|
|
| March 31, |
| December 31, | ||||||
(in millions) |
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
|
|
|
|
|
|
|
|
| 2020 |
| 2019 |
Collateral Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans (CLO) |
|
|
|
|
|
|
|
| $ | 8,450 | $ | 8,164 | ||||||||||||
ABS |
|
|
|
|
|
|
|
| $ | 8,620 | $ | 9,274 | ||||||||||||
Bank loans (collateralized loan obligation) |
|
|
|
|
|
|
|
|
| 8,418 |
| 9,330 | ||||||||||||
Other |
|
|
|
|
|
|
|
|
| 53 |
| 56 |
|
|
|
|
|
|
|
|
| 31 |
| 44 |
Total |
|
|
|
|
|
|
|
| $ | 8,503 | $ | 8,220 |
|
|
|
|
|
|
|
| $ | 17,069 | $ | 18,648 |
124AIG | First Quarter 20192020 Form 10-Q109
Commercial Mortgage Loans
At March 31, 2019,2020, we had direct commercial mortgage loan exposure of $33.7$36.3 billion. All commercial mortgage loans were current or performing according to their restructured terms.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
| Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Percent |
|
| of |
| Class |
|
| of |
| |||||||||||
(dollars in millions) | Loans |
| Apartments |
| Offices |
| Retail | Industrial | Hotel |
| Others |
| Total | Total |
| |||
March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | 103 |
| $ | 2,475 | $ | 4,321 | $ | 525 | $ | 386 | $ | 100 | $ | - | $ | 7,807 | 23 | % |
California | 76 |
|
| 489 |
| 1,284 |
| 280 |
| 532 |
| 828 |
| 48 |
| 3,461 | 10 |
|
Texas | 50 |
|
| 344 |
| 1,180 |
| 183 |
| 102 |
| 125 |
| 6 |
| 1,940 | 6 |
|
New Jersey | 46 |
|
| 1,130 |
| 45 |
| 407 |
| 41 |
| 28 |
| 33 |
| 1,684 | 5 |
|
Florida | 88 |
|
| 400 |
| 159 |
| 586 |
| 223 |
| 218 |
| 35 |
| 1,621 | 5 |
|
Massachusetts | 14 |
|
| 647 |
| 242 |
| 549 |
| 26 |
| - |
| - |
| 1,464 | 4 |
|
Illinois | 18 |
|
| 456 |
| 444 |
| 10 |
| 19 |
| - |
| 22 |
| 951 | 3 |
|
Washington D.C. | 12 |
|
| 401 |
| 309 |
| - |
| - |
| 18 |
| - |
| 728 | 2 |
|
Pennsylvania | 25 |
|
| 81 |
| 21 |
| 553 |
| 47 |
| 25 |
| - |
| 727 | 2 |
|
Ohio | 26 |
|
| 178 |
| 10 |
| 197 |
| 246 |
| - |
| 4 |
| 635 | 2 |
|
Other states | 225 |
|
| 1,926 |
| 785 |
| 1,312 |
| 764 |
| 458 |
| 72 |
| 5,317 | 16 |
|
Foreign | 81 |
|
| 3,534 |
| 1,091 |
| 1,011 |
| 603 |
| 727 |
| 364 |
| 7,330 | 22 |
|
Total* | 764 |
| $ | 12,061 | $ | 9,891 | $ | 5,613 | $ | 2,989 | $ | 2,527 | $ | 584 | $ | 33,665 | 100 | % |
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | 98 |
| $ | 2,009 | $ | 4,082 | $ | 512 | $ | 393 | $ | 100 | $ | - | $ | 7,096 | 22 | % |
California | 78 |
|
| 490 |
| 1,308 |
| 283 |
| 535 |
| 831 |
| 48 |
| 3,495 | 11 |
|
Texas | 53 |
|
| 344 |
| 1,256 |
| 185 |
| 102 |
| 125 |
| 5 |
| 2,017 | 6 |
|
New Jersey | 45 |
|
| 1,049 |
| 45 |
| 422 |
| 41 |
| 28 |
| 33 |
| 1,618 | 5 |
|
Florida | 87 |
|
| 358 |
| 159 |
| 589 |
| 224 |
| 218 |
| 35 |
| 1,583 | 5 |
|
Massachusetts | 14 |
|
| 635 |
| 243 |
| 549 |
| 26 |
| - |
| - |
| 1,453 | 4 |
|
Illinois | 18 |
|
| 456 |
| 444 |
| 11 |
| 19 |
| - |
| 22 |
| 952 | 3 |
|
Pennsylvania | 25 |
|
| 80 |
| 21 |
| 567 |
| 47 |
| 25 |
| - |
| 740 | 2 |
|
Washington D.C. | 12 |
|
| 401 |
| 311 |
| - |
| - |
| 19 |
| - |
| 731 | 2 |
|
Ohio | 27 |
|
| 179 |
| 10 |
| 199 |
| 235 |
| - |
| 5 |
| 628 | 2 |
|
Other states | 228 |
|
| 1,869 |
| 790 |
| 1,326 |
| 773 |
| 460 |
| 73 |
| 5,291 | 16 |
|
Foreign | 79 |
|
| 3,320 |
| 1,201 |
| 1,002 |
| 679 |
| 717 |
| 359 |
| 7,278 | 22 |
|
Total* | 764 |
| $ | 11,190 | $ | 9,870 | $ | 5,645 | $ | 3,074 | $ | 2,523 | $ | 580 | $ | 32,882 | 100 | % |
| Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Percent |
|
| of |
| Class |
|
| of |
| |||||||||||
(dollars in millions) | Loans |
| Apartments |
| Offices |
| Retail | Industrial | Hotel |
| Others |
| Total | Total |
| |||
March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | 101 |
| $ | 2,509 | $ | 4,979 | $ | 458 | $ | 375 | $ | 98 | $ | - | $ | 8,419 | 23 | % |
California | 72 |
|
| 849 |
| 1,341 |
| 246 |
| 551 |
| 805 |
| 33 |
| 3,825 | 11 |
|
New Jersey | 47 |
|
| 1,671 |
| 32 |
| 413 |
| 81 |
| 27 |
| 32 |
| 2,256 | 6 |
|
Texas | 52 |
|
| 563 |
| 1,161 |
| 173 |
| 139 |
| 145 |
| - |
| 2,181 | 6 |
|
Florida | 71 |
|
| 447 |
| 157 |
| 503 |
| 218 |
| 217 |
| - |
| 1,542 | 4 |
|
Massachusetts | 13 |
|
| 539 |
| 243 |
| 547 |
| 25 |
| - |
| - |
| 1,354 | 4 |
|
Illinois | 19 |
|
| 505 |
| 440 |
| 10 |
| 18 |
| - |
| 22 |
| 995 | 3 |
|
Washington, D.C. | 14 |
|
| 503 |
| 299 |
| - |
| - |
| 18 |
| - |
| 820 | 2 |
|
Pennsylvania | 21 |
|
| 80 |
| 17 |
| 522 |
| 46 |
| 24 |
| - |
| 689 | 2 |
|
Ohio | 24 |
|
| 173 |
| 10 |
| 187 |
| 267 |
| - |
| - |
| 637 | 2 |
|
Other states | 203 |
|
| 2,133 |
| 735 |
| 1,254 |
| 725 |
| 400 |
| 8 |
| 5,255 | 14 |
|
Foreign | 89 |
|
| 4,182 |
| 1,208 |
| 933 |
| 1,129 |
| 523 |
| 343 |
| 8,318 | 23 |
|
Total* | 726 |
| $ | 14,154 | $ | 10,622 | $ | 5,246 | $ | 3,574 | $ | 2,257 | $ | 438 | $ | 36,291 | 100 | % |
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | 99 |
| $ | 2,377 | $ | 4,913 | $ | 457 | $ | 376 | $ | 98 | $ | - | $ | 8,221 | 23 | % |
California | 74 |
|
| 736 |
| 1,341 |
| 249 |
| 572 |
| 817 |
| 41 |
| 3,756 | 10 |
|
New Jersey | 48 |
|
| 1,635 |
| 44 |
| 370 |
| 81 |
| 27 |
| 33 |
| 2,190 | 6 |
|
Texas | 52 |
|
| 501 |
| 1,163 |
| 174 |
| 141 |
| 145 |
| - |
| 2,124 | 6 |
|
Florida | 74 |
|
| 393 |
| 234 |
| 544 |
| 218 |
| 217 |
| 10 |
| 1,616 | 3 |
|
Massachusetts | 13 |
|
| 540 |
| 245 |
| 549 |
| 25 |
| - |
| - |
| 1,359 | 4 |
|
Illinois | 19 |
|
| 505 |
| 441 |
| 10 |
| 18 |
| - |
| 22 |
| 996 | 3 |
|
Washington, D.C. | 13 |
|
| 447 |
| 302 |
| - |
| - |
| 18 |
| - |
| 767 | 2 |
|
Pennsylvania | 23 |
|
| 81 |
| 20 |
| 528 |
| 46 |
| 25 |
| - |
| 700 | 2 |
|
Ohio | 25 |
|
| 174 |
| 10 |
| 188 |
| 269 |
| - |
| 5 |
| 646 | 2 |
|
Other states | 215 |
|
| 2,073 |
| 740 |
| 1,276 |
| 740 |
| 401 |
| 44 |
| 5,274 | 15 |
|
Foreign | 85 |
|
| 4,237 |
| 1,189 |
| 987 |
| 1,177 |
| 564 |
| 367 |
| 8,521 | 24 |
|
Total* | 740 |
| $ | 13,699 | $ | 10,642 | $ | 5,332 | $ | 3,663 | $ | 2,312 | $ | 522 | $ | 36,170 | 100 | % |
*Does not reflect allowance for credit losses.
For additional discussion on commercial mortgage loans see Note 78 to the Consolidated Financial Statements in the 20182019 Annual Report.
110AIG | First Quarter 20192020 Form 10-Q125
Credit Impairments
The following table presents impairments by investment type:
Three Months Ended March 31, |
|
|
|
|
|
|
| ||
(in millions) |
|
|
|
|
|
| 2019 |
| 2018 |
Other-than-temporary Impairments: |
|
|
|
|
|
|
|
|
|
Fixed maturity securities, available for sale |
|
|
|
|
| $ | 83 | $ | 87 |
Other impairments: |
|
|
|
|
|
|
|
|
|
Real estate |
|
|
|
|
|
| 20 |
| 10 |
Total |
|
|
|
|
| $ | 103 | $ | 97 |
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analysesa rollforward of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by investment type and impairment type:
|
|
|
|
|
| Other Fixed |
|
| ||
(in millions) | RMBS | CDO/ABS | CMBS | Maturity |
| Total | ||||
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
Impairment Type: |
|
|
|
|
|
|
|
|
|
|
Change in intent | $ | - | $ | - | $ | - | $ | 3 | $ | 3 |
Foreign currency declines |
| - |
| - |
| - |
| 6 |
| 6 |
Issuer-specific credit events |
| 6 |
| 1 |
| 6 |
| 58 |
| 71 |
Adverse projected cash flows |
| 3 |
| - |
| - |
| - |
| 3 |
Total | $ | 9 | $ | 1 | $ | 6 | $ | 67 | $ | 83 |
Three Months Ended March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
Impairment Type: |
|
|
|
|
|
|
|
|
|
|
Change in intent | $ | - | $ | - | $ | - | $ | 49 | $ | 49 |
Foreign currency declines |
| - |
| - |
| - |
| 6 |
| 6 |
Issuer-specific credit events |
| 15 |
| 2 |
| 6 |
| 9 |
| 32 |
Adverse projected cash flows |
| - |
| - |
| - |
| - |
| - |
Total | $ | 15 | $ | 2 | $ | 6 | $ | 64 | $ | 87 |
We recorded other-than-temporary impairment charges in the three months ended March 31, 2019 and 2018 related to:
·issuer-specific credit events;
·securities that we intend to sell or for which it is more likely than not that we will be required to sell;
·declines due to foreign exchange rates;
·adverse changes in estimated cash flowsallowance for credit losses on certain structured securities; and
·securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related,by major investment category:
Three Months Ended March 31, 2020 |
|
|
| Non- |
|
|
(in millions) | Structured | Structured |
| Total | ||
Balance, beginning of year * | $ | 7 | $ | - | $ | 7 |
Additions: |
|
|
|
|
|
|
Securities for which allowance for credit losses were not previously recorded |
| 24 |
| 174 |
| 198 |
Purchases of available for sale debt securities accounted for as |
|
|
|
|
|
|
purchased credit deteriorated assets |
| 6 |
| - |
| 6 |
Reductions: |
|
|
|
|
|
|
Securities sold during the period |
| - |
| - |
| - |
Intent to sell security or more likely than not will be required to sell the security |
|
|
|
|
|
|
before recovery of its amortized cost basis |
| - |
| - |
| - |
Additional increases or decreases to the allowance for credit losses on securities |
|
|
|
|
|
|
that had an allowance recorded in a previous period, for which there was no intent |
|
|
|
|
|
|
to sell before recovery amortized cost basis |
| - |
| - |
| - |
Write-offs charged against the allowance |
| - |
| - |
| - |
Recoveries of amounts previously written off |
| - |
| - |
| - |
Other |
| - |
| - |
| - |
Balance, end of period | $ | 37 | $ | 174 | $ | 211 |
*The beginning balance incorporates the Day 1 gross up on PCD assets held as of January 1, 2020.
Prior to January 1, 2020, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining liferecorded other-than-temporary impairment charges of the security. The accretion that was recognized for these securities in earnings was $53 million and $148$83 million in the three-month periods ended March 31, 2019 and 2018, respectively.first quarter of 2019.
For a discussion of our other-than-temporary impairmentallowance for credit losses on available for sale securities accounting policy seeNote 6 to the Condensed Consolidated Financial Statements in the 2018 Annual Report. Statements.
126AIG | First Quarter 20192020 Form 10-Q111
The following table shows the aging of the pre-tax unrealized losses of fixed maturity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:
March 31, 2019 | Less Than or Equal |
|
| Greater Than 20% |
|
| Greater Than 50% |
|
|
| ||||||||||||||||||||||||||||||||||||
March 31, 2020 | March 31, 2020 | 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 | $ | 19,705 | $ | 296 | 2,837 |
| $ | 60 | $ | 15 | 3 |
| $ | 7 | $ | 6 | 2 |
| $ | 19,772 | $ | 317 | 2,842 | $ | 58,241 | $ | 3,302 | 8,143 |
| $ | 3,291 | $ | 911 | 388 |
| $ | 42 | $ | 23 | 6 |
| $ | 61,574 | $ | 4,236 | 8,537 |
7-11 months |
| 6,367 |
| 155 | 851 |
|
| - |
| - | - |
|
| - |
| - | - |
|
| 6,367 |
| 155 | 851 |
| 1,033 |
| 74 | 186 |
|
| 87 |
| 27 | 17 |
|
| 11 |
| 6 | 1 |
|
| 1,131 |
| 107 | 204 |
12 months or more |
| 31,763 |
| 1,008 | 3,894 |
|
| 45 |
| 13 | 13 |
|
| 17 |
| 11 | 5 |
|
| 31,825 |
| 1,032 | 3,912 |
| 3,901 |
| 395 | 617 |
|
| 833 |
| 226 | 103 |
|
| 111 |
| 64 | 12 |
|
| 4,845 |
| 685 | 732 |
Total | $ | 57,835 | $ | 1,459 | 7,582 |
| $ | 105 | $ | 28 | 16 |
| $ | 24 | $ | 17 | 7 |
| $ | 57,964 | $ | 1,504 | 7,605 | $ | 63,175 | $ | 3,771 | 8,946 |
| $ | 4,211 | $ | 1,164 | 508 |
| $ | 164 | $ | 93 | 19 |
| $ | 67,550 | $ | 5,028 | 9,473 |
Below investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
grade bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
0-6 months | $ | 6,643 | $ | 121 | 1,867 |
| $ | 446 | $ | 158 | 32 |
| $ | 8 | $ | 6 | 11 |
| $ | 7,097 | $ | 285 | 1,910 | $ | 15,999 | $ | 1,262 | 4,491 |
| $ | 1,558 | $ | 487 | 491 |
| $ | 411 | $ | 242 | 90 |
| $ | 17,968 | $ | 1,991 | 5,072 |
7-11 months |
| 347 |
| 13 | 119 |
|
| 50 |
| 12 | 10 |
|
| - |
| - | - |
|
| 397 |
| 25 | 129 |
| 94 |
| 11 | 70 |
|
| 98 |
| 33 | 54 |
|
| 20 |
| 15 | 13 |
|
| 212 |
| 59 | 137 |
12 months or more |
| 2,088 |
| 115 | 709 |
|
| 229 |
| 53 | 24 |
|
| 24 |
| 16 | 11 |
|
| 2,341 |
| 184 | 744 |
| 582 |
| 52 | 219 |
|
| 607 |
| 198 | 104 |
|
| 289 |
| 172 | 48 |
|
| 1,478 |
| 422 | 371 |
Total | $ | 9,078 | $ | 249 | 2,695 |
| $ | 725 | $ | 223 | 66 |
| $ | 32 | $ | 22 | 22 |
| $ | 9,835 | $ | 494 | 2,783 | $ | 16,675 | $ | 1,325 | 4,780 |
| $ | 2,263 | $ | 718 | 649 |
| $ | 720 | $ | 429 | 151 |
| $ | 19,658 | $ | 2,472 | 5,580 |
Total bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
0-6 months | $ | 26,348 | $ | 417 | 4,704 |
| $ | 506 | $ | 173 | 35 |
| $ | 15 | $ | 12 | 13 |
| $ | 26,869 | $ | 602 | 4,752 | $ | 74,240 | $ | 4,564 | 12,634 |
| $ | 4,849 | $ | 1,398 | 879 |
| $ | 453 | $ | 265 | 96 |
| $ | 79,542 | $ | 6,227 | 13,609 |
7-11 months |
| 6,714 |
| 168 | 970 |
|
| 50 |
| 12 | 10 |
|
| - |
| - | - |
|
| 6,764 |
| 180 | 980 |
| 1,127 |
| 85 | 256 |
|
| 185 |
| 60 | 71 |
|
| 31 |
| 21 | 14 |
|
| 1,343 |
| 166 | 341 |
12 months or more |
| 33,851 |
| 1,123 | 4,603 |
|
| 274 |
| 66 | 37 |
|
| 41 |
| 27 | 16 |
|
| 34,166 |
| 1,216 | 4,656 |
| 4,483 |
| 447 | 836 |
|
| 1,440 |
| 424 | 207 |
|
| 400 |
| 236 | 60 |
|
| 6,323 |
| 1,107 | 1,103 |
Total(e) | $ | 66,913 | $ | 1,708 | 10,277 |
| $ | 830 | $ | 251 | 82 |
| $ | 56 | $ | 39 | 29 |
| $ | 67,799 | $ | 1,998 | 10,388 | $ | 79,850 | $ | 5,096 | 13,726 |
| $ | 6,474 | $ | 1,882 | 1,157 |
| $ | 884 | $ | 522 | 170 |
| $ | 87,208 | $ | 7,500 | 15,053 |
(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 March 31, 2019.2020.
(c)For bonds, represents amortized cost.cost net of allowance.
(d)The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.
(e)Item count is by CUSIP by subsidiary.
The allowance for credit losses was $13 million for investment grade bonds, and $198 million for below investment grade bonds as of March 31, 2020.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in the first quarter of 2020 was primarily attributable to decreases in the fair value of fixed maturity securities. For the first quarter of 2020, net unrealized gains related to fixed maturity securities decreased by $10.5 billion due primarily to a significant widening of credit spreads.
The change in net unrealized gains and losses on investments in the first quarter of 2019 was primarily attributable to increases in the fair value of fixed maturity securities. For the first quarter of 2019, net unrealized gains related to fixed maturity securities increased by $6.0 billion due primarily to a decrease in rates and a narrowing of credit spreads.
The change in net unrealized gains and losses on investments in the first quarter of 2018 was primarily attributable to decreases in the fair value of fixed maturity securities. For the first quarter of 2018, net unrealized losses related to fixed maturity securities decreased by $5.0 billion due primarily to an increase in rates and a widening of credit spreads.
For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.Statements.
112AIG | First Quarter 20192020 Form 10-Q127
Net Realized Capital Gains and Losses
The following table presents the components of Net realized capital gains (losses):
Three Months Ended March 31, |
|
|
|
|
|
(in millions) |
| 2019 |
| 2018 |
|
Sales of fixed maturity securities | $ | (31) | $ | 10 |
|
Sales of equity securities |
| - |
| 16 |
|
Other-than-temporary impairments: |
|
|
|
|
|
Change in intent |
| (3) |
| (49) |
|
Foreign currency declines |
| (6) |
| (6) |
|
Issuer-specific credit events |
| (71) |
| (32) |
|
Adverse projected cash flows |
| (3) |
| - |
|
Provision for loan losses |
| (24) |
| (24) |
|
Foreign exchange transactions |
| (37) |
| 53 |
|
Variable annuity embedded derivatives, net of related hedges |
| (261) |
| 147 |
|
All other derivatives and hedge accounting |
| (72) |
| (225) |
|
Other |
| 62 |
| 91 |
|
Net realized capital losses | $ | (446) | $ | (19) |
|
Three Months Ended March 31, |
|
|
|
|
|
(in millions) |
| 2020 |
| 2019 |
|
Sales of fixed maturity securities | $ | 214 | $ | (31) |
|
Other-than-temporary impairments |
| - |
| (83) |
|
Change in intent* |
| - |
| - |
|
Change in allowance for credit losses on fixed maturity securities |
| (198) |
| - |
|
Change in allowance for credit losses on loans |
| (38) |
| (24) |
|
Foreign exchange transactions |
| (254) |
| (37) |
|
Variable annuity embedded derivatives, net of related hedges |
| 2,192 |
| (261) |
|
All other derivatives and hedge accounting |
| 1,559 |
| (72) |
|
Other |
| 44 |
| 62 |
|
Net realized capital gains (losses) | $ | 3,519 | $ | (446) |
|
Higher net*For the three months ended March 31, 2019, the change in intent was included in Other-than-temporary impairments.
Net realized capital gains in the first quarter of 2020 compared to losses in the same period in the prior year due to derivative gains versus derivative losses in the prior year and gains on sales of securities versus losses in the prior period.
Net realized capital losses in the first quarter of 2019 compared to the same period in the prior year due primarily to higher derivative losses and other-than-temporary impairment charges.
Net realized capital losses in the first quarter of 2018 were primarily related to other-than-temporary impairment charges and derivative losses, which were higher than the gains on sales of securities and foreign exchange gains.
Variable annuity embedded derivatives, net of related hedges, reflected gains in the first quarter of 2020 compared to losses in the first quarter of 2019 compared to gains in the same period in the prior year primarily due to changes in the non-performance or “own credit” risk adjustment used in the valuation of the variable annuities with guaranteed minimum withdrawal benefits (GMWB) embedded derivative, which are not hedged as part of our economic hedging programprogram.
For additional discussion of market risk management related to these product features see MD&A – Enterprise Risk Management – Insurance Risks – Life and Retirement CompaniesCompanies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs in the 20182019 Annual Report. For more information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.
For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.
128AIG | First Quarter 20192020 Form 10-Q113
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:business*:
| March 31, 2019 |
| December 31, 2018 | March 31, 2020 |
| December 31, 2019 | ||||||||||||||||||||
| Net liability for | Reinsurance | Gross liability |
| Net liability for | Reinsurance | Gross liability | Net liability for | Reinsurance | Gross liability |
| Net liability for | Reinsurance | Gross liability | ||||||||||||
| unpaid losses | recoverable on | for unpaid |
| unpaid losses | recoverable on | for unpaid | unpaid losses | recoverable on | for unpaid |
| unpaid losses | recoverable on | for unpaid | ||||||||||||
| and loss | unpaid losses and | losses and |
| and loss | unpaid losses and | losses and | and loss | unpaid losses and | losses and |
| and loss | unpaid losses and | losses and | ||||||||||||
| adjustment | loss adjustment | loss adjustment |
| adjustment | loss adjustment | loss adjustment | adjustment | loss adjustment | loss adjustment |
| adjustment | loss adjustment | loss adjustment | ||||||||||||
(in millions) | expenses | expenses | expenses |
| expenses | expenses | expenses | expenses | expenses | expenses |
| expenses | expenses | expenses | ||||||||||||
General Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Workers' Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(net of discount) | $ | 4,507 | $ | 5,648 | $ | 10,155 |
| $ | 4,772 | $ | 5,318 | $ | 10,090 | $ | 4,187 | $ | 5,539 | $ | 9,726 |
| $ | 4,330 | $ | 5,494 | $ | 9,824 |
U.S. Excess Casualty |
| 4,604 |
| 4,596 |
| 9,200 |
| 4,715 |
| 4,576 |
| 9,291 |
| 4,185 |
| 5,411 |
| 9,596 |
| 4,285 |
| 5,073 |
| 9,358 | ||
U.S. Other Casualty |
| 4,457 |
| 4,641 |
| 9,098 |
| 4,288 |
| 4,661 |
| 8,949 |
| 4,174 |
| 4,643 |
| 8,817 |
| 4,064 |
| 4,695 |
| 8,759 | ||
U.S. Financial Lines |
| 5,225 |
| 1,971 |
| 7,196 |
| 5,315 |
| 1,960 |
| 7,275 |
| 4,938 |
| 2,241 |
| 7,179 |
| 5,154 |
| 2,221 |
| 7,375 | ||
U.S. Property and Special risks |
| 5,961 |
| 2,738 |
| 8,699 |
| 6,534 |
| 2,748 |
| 9,282 |
| 5,404 |
| 2,602 |
| 8,006 |
| 4,950 |
| 2,807 |
| 7,757 | ||
U.S. Personal Insurance |
| 1,498 |
| 1,005 |
| 2,503 |
| 1,706 |
| 1,001 |
| 2,707 |
| 1,238 |
| 984 |
| 2,222 |
| 1,287 |
| 988 |
| 2,275 | ||
UK/Europe Casualty and Financial Lines |
| 7,119 |
| 1,715 |
| 8,834 |
| 7,022 |
| 1,789 |
| 8,811 |
| 6,064 |
| 934 |
| 6,998 |
| 6,234 |
| 1,268 |
| 7,502 | ||
UK/Europe Property and Special risks |
| 2,955 |
| 1,227 |
| 4,182 |
| 2,988 |
| 1,251 |
| 4,239 |
| 2,672 |
| 1,186 |
| 3,858 |
| 2,573 |
| 1,191 |
| 3,764 | ||
UK/Europe and Japan Personal Insurance |
| 2,019 |
| 532 |
| 2,551 |
| 2,264 |
| 553 |
| 2,817 |
| 1,990 |
| 552 |
| 2,542 |
| 1,962 |
| 519 |
| 2,481 | ||
Other product lines |
| 6,131 |
| 2,451 |
| 8,582 |
| 6,105 |
| 2,522 |
| 8,627 |
| 5,738 |
| 2,305 |
| 8,043 |
| 6,238 |
| 2,053 |
| 8,291 | ||
Unallocated loss adjustment expenses |
| 1,894 |
| 1,301 |
| 3,195 |
| 1,834 |
| 1,307 |
| 3,141 |
| 1,805 |
| 884 |
| 2,689 |
| 1,824 |
| 882 |
| 2,706 | ||
Total General Insurance |
| 46,370 |
| 27,825 |
| 74,195 |
| 47,543 |
| 27,686 |
| 75,229 |
| 42,395 |
| 27,281 |
| 69,676 |
| 42,901 |
| 27,191 |
| 70,092 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Legacy Portfolio - Run-off Lines: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
U.S. Run-off Long Tail Insurance lines |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Legacy Portfolio - Run-Off Lines: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
U.S. Run-Off Long Tail Insurance Lines |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
(net of discount) |
| 3,823 |
| 3,657 |
| 7,480 |
| 3,862 |
| 3,689 |
| 7,551 |
| 3,701 |
| 3,546 |
| 7,247 |
| 3,769 |
| 3,587 |
| 7,356 | ||
Other run-off product lines |
| 98 |
| 66 |
| 164 |
|
| 104 |
| 66 |
| 170 |
| 130 |
| 66 |
| 196 |
|
| 164 |
| 66 |
| 230 |
Unallocated loss adjustment expenses |
| 383 |
| 115 |
| 498 |
| 397 |
| 115 |
| 512 |
| 358 |
| 114 |
| 472 |
| 377 |
| 115 |
| 492 | ||
Total Legacy Portfolio - Run-off Lines |
| 4,304 |
| 3,838 |
| 8,142 |
|
| 4,363 |
| 3,870 |
| 8,233 | |||||||||||||
Total Legacy Portfolio - Run-Off Lines |
| 4,189 |
| 3,726 |
| 7,915 |
|
| 4,310 |
| 3,768 |
| 8,078 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operations (Blackboard) |
| 38 |
| 121 |
| 159 |
|
| 43 |
| 134 |
| 177 |
| 49 |
| 107 |
| 156 |
|
| 48 |
| 110 |
| 158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | $ | 50,712 | $ | 31,784 | $ | 82,496 |
| $ | 51,949 | $ | 31,690 | $ | 83,639 | $ | 46,633 | $ | 31,114 | $ | 77,747 |
| $ | 47,259 | $ | 31,069 | $ | 78,328 |
*Includes loss reserve discount of $1.9$1.6 billion and $2.0$1.5 billion as of March 31, 20192020 and December 31, 2018,2019 respectively. For discussion of loss reserve discount see Note 10 to the Condensed Consolidated Financial Statements.
PRIOR YEAR DEVELOPMENTPrior Year Development
The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:
Three Months Ended March 31, |
|
|
|
| ||||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
General Insurance: |
|
|
|
|
|
|
|
|
North America* | $ | (60) | $ | (78) | $ | (13) | $ | (60) |
International |
| (12) |
| (30) |
| (47) |
| (12) |
Total General Insurance | $ | (72) | $ | (108) | $ | (60) | $ | (72) |
Legacy Portfolio - Run-off Lines |
| (2) |
| (2) | ||||
Other Operations |
| - |
| - | ||||
Legacy Portfolio - Run-Off Lines |
| - |
| (2) | ||||
Total prior year (favorable) unfavorable development | $ | (74) | $ | (110) | $ | (60) | $ | (74) |
*Includes the amortization attributed to the deferred gain at inception from the NICONational Indemnity Company (NICO) adverse development reinsurance agreement of $58$53 million and $62$58 million for the three monthsthree-month periods ended March 31, 20192020 and 2018,2019, respectively. Consistent with our definition of APTI, the amount excludes the portion of (favorable)/unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreements of $1$6 million and $9$1 million for the three monthsthree-month periods ended March 31, 2020 and 2019, and 2018, respectively, andrespectively. The related changes in amortization of the deferred gain ofwere $22 million and $28 million for the three-month periods ended March 31, 2020 and $(23) million over those same periods.2019, respectively.
114AIG | First Quarter 20192020 Form 10-Q129
Net Loss Development
In the first quarterthree-month period ended March 31, 2020, we recognized favorable prior year loss reserve development of $60 million.
The key components of this development were as follows:
North America
amortization of the deferred gain from the adverse development reinsurance agreement with NICO; and
adverse development in Personal Insurance.
International
favorable development in International Casualty recoveries.
In the three-month period ended March 31, 2019, we recognized favorable prior year loss reserve development of $74 million. For The key components of this development were as follows:
North America the favorable development was primarily driven by
amortization of the deferred gain from the adverse development reinsurance agreement with NICO, NICO;
favorable development in U.S. Property and Special Risks driven by favorable catastrophe activity, offset by activity; and
adverse development in Excess Casualty. For
International the
favorable development was driven byin Europe and Japan Personal Insurance and Europe Property and Special Risks offset by Risks; and
adverse development in Europe Casualty and Financial Lines.
In the first quarter of 2018, we recognized favorable prior year loss reserve development of $110 million. For North America, the favorable development was primarily driven by amortization of the deferred gain from the adverse development reinsurance agreement with NICO. For International, the favorable development was driven by Europe and Japan Personal Insurance.
The following tables summarize incurred (favorable) unfavorable prior year development net of reinsurance, by segment and major lines of business, and by accident year groupings:
Three Months Ended March 31, 2019 |
|
|
|
|
|
| ||||||
Three Months Ended March 31, 2020 |
|
|
|
|
|
| ||||||
(in millions) |
| Total |
| 2018 |
| 2017 & Prior |
| Total |
| 2019 |
| 2018 & Prior |
General Insurance North America: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Workers' Compensation | $ | (19) | $ | 2 | $ | (21) | $ | (28) | $ | 2 | $ | (30) |
U.S. Excess casualty |
| 17 |
| - |
| 17 |
| (13) |
| - |
| (13) |
U.S. Other casualty |
| (9) |
| - |
| (9) |
| (11) |
| - |
| (11) |
U.S. Financial lines |
| (10) |
| - |
| (10) |
| (8) |
| - |
| (8) |
U.S. Property and special risks |
| (46) |
| 6 |
| (52) | ||||||
U.S. Property and Special Risks |
| (2) |
| (5) |
| 3 | ||||||
U.S. Personal insurance |
| 9 |
| (12) |
| 21 |
| 40 |
| 47 |
| (7) |
Other product lines |
| (2) |
| - |
| (2) |
| 9 |
| (14) |
| 23 |
Total General Insurance North America | $ | (60) | $ | (4) | $ | (56) | $ | (13) | $ | 30 | $ | (43) |
General Insurance International: |
|
|
|
|
|
|
|
|
|
|
|
|
UK/Europe casualty and financial lines | $ | 51 | $ | 3 | $ | 48 | $ | - | $ | - | $ | - |
UK/Europe property and special risks |
| (33) |
| (2) |
| (31) | ||||||
UK/Europe property and Special Risks |
| (9) |
| (13) |
| 4 | ||||||
UK/Europe and Japan Personal insurance |
| (44) |
| (43) |
| (1) |
| (12) |
| (12) |
| - |
Other product lines |
| 14 |
| (32) |
| 46 |
| (26) |
| 4 |
| (30) |
Total General Insurance International | $ | (12) | $ | (74) | $ | 62 | $ | (47) | $ | (21) | $ | (26) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Portfolio - Run-off Lines |
| (2) |
| 2 |
| (4) | ||||||
Legacy Portfolio - Run-Off Lines |
| - |
| - |
| - | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prior year (favorable) unfavorable development | $ | (74) | $ | (76) | $ | 2 | $ | (60) | $ | 9 | $ | (69) |
|
|
|
|
|
|
| ||||||
Three Months Ended March 31, 2018 |
|
|
|
|
|
| ||||||
(in millions) |
| Total |
| 2017 |
| 2016 & Prior | ||||||
General Insurance North America: |
|
|
|
|
|
| ||||||
U.S. Workers' Compensation | $ | (20) | $ | - | $ | (20) | ||||||
U.S. Excess casualty |
| (15) |
| - |
| (15) | ||||||
U.S. Other casualty |
| (17) |
| (1) |
| (16) | ||||||
U.S. Financial lines |
| (12) |
| (2) |
| (10) | ||||||
U.S. Property and special risks |
| (69) |
| (63) |
| (6) | ||||||
U.S. Personal insurance |
| 57 |
| 56 |
| 1 | ||||||
Other product lines |
| (2) |
| 1 |
| (3) | ||||||
Total General Insurance North America | $ | (78) | $ | (9) | $ | (69) | ||||||
General Insurance International: |
|
|
|
|
|
| ||||||
UK/Europe casualty and financial lines | $ | 1 | $ | 1 | $ | - | ||||||
UK/Europe property and special risks |
| 3 |
| (3) |
| 6 | ||||||
UK/Europe and Japan Personal insurance |
| (40) |
| (15) |
| (25) | ||||||
Other product lines |
| 6 |
| 12 |
| (6) | ||||||
Total General Insurance International | $ | (30) | $ | (5) | $ | (25) | ||||||
|
|
|
|
|
|
| ||||||
Legacy Portfolio - Run-off Lines |
| (2) |
| (3) |
| 1 | ||||||
|
|
|
|
|
|
| ||||||
Total prior year (favorable) unfavorable development | $ | (110) | $ | (17) | $ | (93) |
130AIG | First Quarter 20192020 Form 10-Q115
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
(in millions) |
| Total |
| 2018 |
| 2017 & Prior |
General Insurance North America: |
|
|
|
|
|
|
U.S. Workers' Compensation | $ | (19) | $ | 2 | $ | (21) |
U.S. Excess casualty |
| 17 |
| - |
| 17 |
U.S. Other casualty |
| (9) |
| - |
| (9) |
U.S. Financial lines |
| (10) |
| - |
| (10) |
U.S. Property and Special Risks |
| (46) |
| 6 |
| (52) |
U.S. Personal insurance |
| 9 |
| (12) |
| 21 |
Other product lines |
| (2) |
| - |
| (2) |
Total General Insurance North America | $ | (60) | $ | (4) | $ | (56) |
General Insurance International: |
|
|
|
|
|
|
UK/Europe casualty and financial lines | $ | 51 | $ | 3 | $ | 48 |
UK/Europe property and Special Risks |
| (33) |
| (2) |
| (31) |
UK/Europe and Japan Personal insurance |
| (44) |
| (43) |
| (1) |
Other product lines |
| 14 |
| (32) |
| 46 |
Total General Insurance International | $ | (12) | $ | (74) | $ | 62 |
|
|
|
|
|
|
|
Legacy Portfolio - Run-off Lines |
| (2) |
| 2 |
| (4) |
|
|
|
|
|
|
|
Total prior year (favorable) unfavorable development | $ | (74) | $ | (76) | $ | 2 |
We note that for certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to us.
Significant Reinsurance Agreements
In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. We account for this transaction as retroactive reinsurance. This transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred and amortized into income over the settlement period. NICO created a collateral trust account as security for their claim payment obligations to us, into which they deposited the consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO’s obligations under the agreement.
For a description of AIG’s catastrophe reinsurance protection for 2019,2020, see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – General Insurance Companies’ Key Risks – Natural Catastrophe Risk in our 20182019 Annual Report.
AIG | First Quarter 2020 Form 10-Q 131
The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of March 31, 20192020 and as of December 31, 2018,2019, showing the effect of discounting of loss reserves and amortization of the deferred gain.
|
| March 31, |
| December 31, |
| March 31, |
| December 31, |
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Gross Covered Losses |
|
|
|
|
|
|
|
|
Covered reserves before discount | $ | 22,071 | $ | 23,033 | $ | 18,473 | $ | 19,064 |
Inception to date losses paid |
| 20,295 |
| 19,331 |
| 23,552 |
| 22,954 |
Attachment point |
| (25,000) |
| (25,000) |
| (25,000) |
| (25,000) |
Covered losses above attachment point | $ | 17,366 | $ | 17,364 | $ | 17,025 | $ | 17,018 |
|
|
|
|
|
|
|
|
|
Deferred Gain Development |
|
|
|
|
|
|
|
|
Covered losses above attachment ceded to NICO (80%) | $ | 13,893 | $ | 13,891 | $ | 13,620 | $ | 13,614 |
Consideration paid including interest |
| (10,188) |
| (10,188) |
| (10,188) |
| (10,188) |
Pre-tax deferred gain before discount and amortization |
| 3,705 |
| 3,703 |
| 3,432 |
| 3,426 |
Discount on ceded losses(a) |
| (1,412) |
| (1,719) |
| (1,179) |
| (1,251) |
Pre-tax deferred gain before amortization |
| 2,293 |
| 1,984 |
| 2,253 |
| 2,175 |
Inception to date amortization of deferred gain at inception |
| (519) |
| (461) |
| (746) |
| (693) |
Inception to date amortization attributed to changes in deferred gain(b) |
| (161) |
| (141) |
| (115) |
| (101) |
Deferred gain liability reflected in AIG's balance sheet | $ | 1,613 | $ | 1,382 | $ | 1,392 | $ | 1,381 |
(a)For the period from inception to March 31, 2019,2020, the accretion of discount and a reduction in effective interest rates was offset by changes in estimates of the amount and timing of future recoveries under the adverse development reinsurance agreement.
(b)Excluded from our definition of APTI.
The following table presents the rollforward of activity in the deferred gain from the adverse development reinsurance agreement:
Three Months Ended March 31, |
|
|
|
| ||||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Balance at beginning of year, net of discount | $ | 1,382 | $ | 1,167 | $ | 1,381 | $ | 1,382 |
Unfavorable prior year reserve development ceded to NICO(a) |
| 2 |
| 8 | ||||
(Favorable) unfavorable prior year reserve development ceded to NICO(a) |
| 6 |
| 2 | ||||
Amortization attributed to deferred gain at inception(b) |
| (58) |
| (62) |
| (53) |
| (58) |
Amortization attributed to changes in deferred gain(c) |
| (20) |
| 28 |
| (14) |
| (20) |
Changes in discount on ceded loss reserves |
| 307 |
| (128) |
| 72 |
| 307 |
Balance at end of period, net of discount | $ | 1,613 | $ | 1,013 | $ | 1,392 | $ | 1,613 |
(a)Prior year reserve development ceded to NICO under the retroactive reinsurance agreement is deferred under U.S. GAAP.
(b)Represents amortization of the deferred gain recognized in APTI.
(c)Excluded from APTI and included in U.S. GAAP.
116AIG | First Quarter 2019 Form 10-Q
ITEM 2 |Insurance Reserves
The lines of business subject to this agreement have been the source of the majority of the prior year adverse development charges over the past several years. The agreement is expected to result in lower capital charges for reserve risks at our U.S. insurance subsidiaries. In addition, we would expect future net investment income to decline as a result of lower invested assets.
For a summary of significant reinsurers see Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – General Insurance Companies Key Insurance RisksReinsurance Activities – Reinsurance Recoverable in our 20182019 Annual Report.
LIFE AND ANNUITY reserves and dac
The following section provides discussion of life and annuity reserves and deferred policy acquisition costs.
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.
132 AIG | First Quarter 2020 Form 10-Q
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 seeEnterprise Risk Management – Insurance Risks – Life and Retirement CompaniesCompanies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programsin our 20182019 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 additionala different spread (the NPA spread) to the swap curve used to discount projected benefit cash flows.
Because the discount rate includes the NPA spread and other explicit risk margins, the U.S. GAAP valuation is generally less sensitive to movements in interest rates and other market factors, and to changes from actuarial assumption updates, than the economic hedge target.
For more information on our valuation methodology for embedded derivatives within policyholder contract deposits seeNote 5 to the Condensed Consolidated Financial Statements. Statements.
The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life and Retirement companies have cash and invested assets available to cover future claims payable under these guarantees. The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
•Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
•Realized volatility versus implied volatility;
•Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder behavior; and
•Risk exposures that we have elected not to explicitly or fully hedge.
AIG | First Quarter 2019 Form 10-Q117
ITEM 2 |Insurance Reserves
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:
|
|
|
|
| March 31, |
| December 31, |
|
|
| March 31, |
| December 31, | |||||
(in millions) |
|
|
|
|
| 2019 |
| 2018 |
|
|
|
|
| 2020 |
| 2019 | ||
Reconciliation of embedded derivatives and economic hedge target: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Embedded derivative liability |
|
|
|
| $ | 2,023 | $ | 1,943 |
|
|
|
| $ | 3,978 | $ | 2,474 | ||
Exclude non-performance risk adjustment |
|
|
|
|
| (2,439) |
| (2,615) |
|
|
|
|
| (6,719) |
| (2,504) | ||
Embedded derivative liability, excluding NPA |
|
|
|
|
| 4,462 |
| 4,558 |
|
|
|
|
| 10,697 |
| 4,978 | ||
Adjustments for risk margins and differences in valuation |
|
|
|
|
| (2,485) |
| (2,377) |
|
|
|
|
| (6,346) |
| (2,394) | ||
Economic hedge target liability |
|
|
|
| $ | 1,977 | $ | 2,181 |
|
|
|
| $ | 4,351 | $ | 2,584 |
Impact on Pre-tax Income (Loss)
The impact on our pre-tax income (loss) of the variable annuity guaranteed living benefits and related hedging results includes changes in the fair value of the GMWB embedded derivatives, and changes in the fair value of related derivative hedging instruments, both of which are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income from changes in the fair value of fixed maturity securities used in the hedging program, are excluded from adjusted pre-tax income of Individual Retirement and Group Retirement.
AIG | First Quarter 2020 Form 10-Q 133
The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to the differences in valuation between the economic hedge target, the U.S. GAAP embedded derivatives and the fair value of the hedging portfolio, as discussed above. When corporate credit spreads widen, the change in the NPA spread generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA spread generally increases the fair value of the embedded derivative liabilities, resulting in a loss. In addition to changes driven by credit market-related movements in the NPA spread, the NPA balance also reflects changes in business activity and in the net amount at risk from the underlying guaranteed living benefits.
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 March 31, |
|
|
|
| ||||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Change in fair value of embedded derivatives, excluding NPA | $ | 215 | $ | 551 | $ | (5,601) | $ | 215 |
Change in fair value of variable annuity hedging portfolio: |
|
|
|
|
|
|
|
|
Fixed maturity securities |
| 96 |
| (77) | ||||
Fixed maturity securities* |
| 7 |
| 96 | ||||
Interest rate derivative contracts |
| 293 |
| (406) |
| 2,194 |
| 293 |
Equity derivative contracts |
| (593) |
| 74 |
| 1,384 |
| (593) |
Change in fair value of variable annuity hedging portfolio |
| (204) |
| (409) |
| 3,585 |
| (204) |
Change in fair value of embedded derivatives excluding NPA, net of hedging portfolio |
| 11 |
| 142 |
| (2,016) |
| 11 |
Change in fair value of embedded derivatives due to NPA spread |
| (163) |
| 72 |
| 2,646 |
| (163) |
Change in fair value of embedded derivatives due to change in NPA volume |
| (13) |
| (144) |
| 1,569 |
| (13) |
Total change due to NPA |
| (176) |
| (72) |
| 4,215 |
| (176) |
Net impact on pre-tax income (loss) | $ | (165) | $ | 70 | $ | 2,199 | $ | (165) |
|
|
|
|
|
|
|
|
|
By Consolidated Income Statement line |
|
|
|
|
|
|
|
|
Net investment income | $ | 96 | $ | (77) | $ | 7 | $ | 96 |
Net realized capital gains (losses) |
| (261) |
| 147 |
| 2,192 |
| (261) |
Net impact on pre-tax income (loss) | $ | (165) | $ | 70 | $ | 2,199 | $ | (165) |
*Beginning in July 2019, the fixed maturity securities portfolio used in the hedging program was rebalanced to reposition the portfolio from a duration, sector, and issuer perspective. As part of this rebalancing, fixed maturity securities where we elected the fair value option were sold. Later in the quarter, as new fixed maturity securities were purchased, they were classified as available for sale. The change in fair value of available-for-sale fixed maturity securities and recognized as a component of other comprehensive income was reduced $13 million for the three-month period ended March 31, 2020.
The net impact on pre-tax income of $2.2 billion from the GMWB embedded derivatives and related hedges in the three-month period ended March 31, 2020 (excluding related DAC amortization) was driven by widening of credits spreads on the economic hedge target as well as the NPA spread, impact of lower interest rates that resulted in NPA volume gains from higher expected GMWB payments, offset by the impact of lower interest rates on the change in the fair value of embedded derivatives excluding NPA, net of the hedging portfolio. In the first quarter of 2019, (excluding related DAC amortization)the net impact on pre-tax loss of $165 million was primarily driven by losses from credit spread tightening and lower equity volatility on the economic hedge target and the impact of tighter credit spreads on the NPA spread. The net impact on pre-tax income from the GMWB and related hedges in the first quarter of 2018 (excluding related DAC amortization) was primarily driven by gains from the impact of widening credit spreads on the NPA spread, higher interest rates and equity market volatility, partially offset by the impact on NPA volume of lower expected GMWB payments, which was driven by higher interest rates.
118AIG | First Quarter 2019 Form 10-Q
ITEM 2 |Insurance Reserves
The change in the fair value of the GMWB embedded derivatives, excluding NPA, in the first quarter of 2020 reflected losses from decreases in interest rates and updatelower equity markets, offset by widening of actuarial assumptions,crediting spreads. The change in the fair value of the GMWB embedded derivatives, excluding NPA, in the first quarter of 2019 reflected gains from higher equity markets, offset by losses from decreases in interest rates, tightening of credit spreads, and lower equity volatility. The change in the fair value of embedded derivatives, excluding NPA, in the first quarter of 2018 reflected gains from equity market volatility and reductions in risk margins due to higher interest rates, partially offset by losses from the related hedging portfolio.
Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a U.S. GAAP basis, due to the NPA and other risk margins used for U.S. GAAP valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio. On an economic basis, the changes in the fair value of the hedge portfolio were partially offset by the decreaseincrease in the economic hedge target, as discussed below. In the first quarter of 2020, we estimated a net mark to market gain of approximately $2 billion from our hedging activities related to our economic hedge target primarily driven by widening credit spreads. In the first quarter of 2019, we estimated a net mark to market gain of approximately $160 million from our hedging activities related to our economic hedge target primarily driven by a modeling refinement to our economic projections.
Change in Economic Hedge Target
The decreaseincrease in the economic hedge target liability in the first quarter of 20192020 was primarily due to higherlower interest rates, lower equity markets, offset by lower interest rates and tightening ofwidening credit spreads.
134 AIG | First Quarter 2020 Form 10-Q
Change in Fair Value of the Hedging Portfolio
The changes in the fair value of the economic hedge target and, to a lesser extent, the embedded derivative valuation under U.S. GAAP, were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:
•Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in gains driven by lower interest rates in the first quarters of 2020 and 2019.
Changes in the fair value of equity derivative contracts, which included futures and options, resulted in gains in the first quarter of 2020 versus losses in the first quarter of 2019, which varied based on the relative change in equity market returns in the respective periods.
Changes in the fair value of fixed maturity securities, primarily corporate bonds, 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. Beginning in July 2019, the change in the fair value of available-for-sale hedging bonds is reported as a component of comprehensive income in the Condensed Consolidated Statements of Comprehensive Income (Loss). Prior to July 2019, the change in the fair value of the hedging bonds, which was excluded from the adjusted pre-tax income of the Individual Retirement and Group Retirement segments, was reported in net investment income on the Consolidated Statements of Income (Loss). The change in the fair value of the corporate bond hedging program in the first quarter of 2020 reflected gains due to decreases in interest rates offset by widening credit spreads. The change in the fair value of the corporate bond hedging program in the first quarter of 2019 reflected gains due to decreases in interest rates, and tightening of credit spreads. The change in the fair value of the corporate bond hedging program in the first quarter of 2018 reflected losses due to increases in interest rates and widening of credit spreads, The change in the fair value of the hedging bonds, which is excluded from the adjusted pre-tax income of the Individual Retirement and Group Retirement segments, is reported in net investment income on the Consolidated Statements of Income (Loss).
•Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in gains driven by lower interest rates in the first quarter of 2019 compared to losses in the first quarter of 2018 which was driven by higher interest rates. DAC
•The change in the fair value of equity derivative contracts, which included futures and options, reflected losses in the first quarter of 2019 compared to gains in the same period in the prior year, which varied based on the relative change in equity market returns in the respective periods.
DAC
The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and Retirement companies, excluding DAC of the Legacy Portfolio:
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Balance, beginning of year | $ | 9,133 | $ | 7,637 | $ | 7,901 | $ | 9,046 |
Initial allowance upon CECL adoption |
| 15 |
| - | ||||
Acquisition costs deferred |
| 336 |
| 249 |
| 260 |
| 323 |
Amortization expense: |
|
|
|
|
|
|
|
|
Related to realized capital gains and losses |
| 93 |
| (27) |
| (535) |
| 93 |
All other operating amortization |
| (200) |
| (246) |
| (318) |
| (200) |
Increase (decrease) in DAC due to foreign exchange |
| 7 |
| 12 |
| (32) |
| 7 |
Change related to unrealized depreciation (appreciation) of investments |
| (781) |
| 564 |
| 1,195 |
| (781) |
Balance, end of period* | $ | 8,588 | $ | 8,189 | $ | 8,486 | $ | 8,488 |
*DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.6$9.3 billion and $8.9$9.6 billion at March 31, 2020 and 2019, and 2018, respectively.
AIG | First Quarter 2019 Form 10-Q119
ITEM 2 |Insurance Reserves
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC and Reserves for universal life and investment-type products (collectively, investment-oriented products) are adjusted at each balance sheet date to reflect the change in DAC, unearned revenue, and benefit reserves with an offset to Other comprehensive income (OCI) as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow Investment-Oriented Adjustments). Similarly, for long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities (shadow Loss Adjustments) with an offset to OCI to be recorded.
Shadow adjustments to DAC and unearned revenue generally move in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio, reducing the reported DAC and unearned revenue balance when market interest rates decline. Conversely, shadow adjustments to benefit reserves generally move in the same direction as the change in unrealized appreciation of the available for sale securities portfolio, increasing reported future policy benefit liabilities balance when market interest rates decline.
Market interest rates decreasedconditions in the first quarter of 2019, which resulted in a $5.22020 drove an $8.4 billion increasedecrease in the unrealized appreciation of fixed maturity securities held to support businesses in the Life and Retirement companies at March 31, 20192020 compared to December 31, 2018.2019. At March 31, 2019,2020, the shadow Investment-Oriented Adjustments reflected decreasesincreases in DAC and unearned revenues and an increasedecreases in future policy benefit liabilities compared to December 31, 2018,2019, while the shadow Loss Adjustments reflected an increasea decrease in future policy benefit liabilities.
AIG | First Quarter 2020 Form 10-Q 135
Reserves
Reserves
The following table presents a rollforward of insurance reserves by operating segments for Life and Retirement, including future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration:
Three Months Ended March 31, |
|
| ||||||
(in millions) |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Individual Retirement |
|
|
|
|
|
|
|
|
Balance at beginning of period, gross | $ | 132,729 | $ | 138,571 | $ | 144,928 | $ | 132,729 |
Premiums and deposits |
| 4,186 |
| 4,358 |
| 3,116 |
| 4,186 |
Surrenders and withdrawals |
| (3,222) |
| (3,130) |
| (3,887) |
| (3,222) |
Death and other contract benefits |
| (831) |
| (900) |
| (823) |
| (831) |
Subtotal |
| 133 |
| 328 |
| (1,594) |
| 133 |
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
policy fees |
| 5,763 |
| (1,938) |
| (7,419) |
| 5,763 |
Cost of funds* |
| 403 |
| 378 |
| 412 |
| 403 |
Other reserve changes |
| 55 |
| (95) |
| (268) |
| 55 |
Balance at end of period |
| 139,083 |
| 137,244 |
| 136,059 |
| 139,083 |
Reinsurance ceded |
| (316) |
| (324) |
| (313) |
| (316) |
Total Individual Retirement insurance reserves and mutual fund assets | $ | 138,767 | $ | 136,920 | $ | 135,746 | $ | 138,767 |
Group Retirement |
|
|
|
|
|
|
|
|
Balance at beginning of period, gross | $ | 91,685 | $ | 97,306 | $ | 102,049 | $ | 91,685 |
Premiums and deposits |
| 2,063 |
| 2,072 |
| 1,855 |
| 2,063 |
Surrenders and withdrawals |
| (2,781) |
| (2,467) |
| (2,260) |
| (2,781) |
Death and other contract benefits |
| (157) |
| (151) |
| (182) |
| (157) |
Subtotal |
| (875) |
| (546) |
| (587) |
| (875) |
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
policy fees |
| 5,807 |
| (270) |
| (10,705) |
| 5,807 |
Cost of funds* |
| 278 |
| 270 |
| 278 |
| 278 |
Other reserve changes |
| 11 |
| (6) |
| (88) |
| 11 |
Balance at end of period |
| 96,906 |
| 96,754 |
| 90,947 |
| 96,906 |
Total Group Retirement insurance reserves and mutual fund assets | $ | 96,906 | $ | 96,754 | $ | 90,947 | $ | 96,906 |
Life Insurance |
|
|
|
| ||||
Balance at beginning of period, gross | $ | 22,096 | $ | 19,719 | ||||
Premiums and deposits |
| 926 |
| 908 | ||||
Surrenders and withdrawals |
| (147) |
| (173) | ||||
Death and other contract benefits |
| (137) |
| (143) | ||||
Subtotal |
| 642 |
| 592 | ||||
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
| ||||
policy fees |
| (383) |
| (262) | ||||
Cost of funds* |
| 92 |
| 93 | ||||
Other reserve changes |
| (1,191) |
| 69 | ||||
Balance at end of period |
| 21,256 |
| 20,211 | ||||
Reinsurance ceded |
| (1,160) |
| (1,238) | ||||
Total Life Insurance reserves | $ | 20,096 | $ | 18,973 |
120136AIG | First Quarter 20192020 Form 10-Q
Life Insurance |
|
|
|
| ||||
Balance at beginning of period, gross | $ | 19,719 | $ | 19,424 | ||||
Premiums and deposits |
| 908 |
| 884 | ||||
Surrenders and withdrawals |
| (173) |
| (174) | ||||
Death and other contract benefits |
| (143) |
| (96) | ||||
Subtotal |
| 592 |
| 614 | ||||
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
| ||||
policy fees |
| (262) |
| (247) | ||||
Cost of funds* |
| 93 |
| 95 | ||||
Other reserve changes |
| 69 |
| (180) | ||||
Balance at end of period |
| 20,211 |
| 19,706 | ||||
Reinsurance ceded |
| (1,238) |
| (1,061) | ||||
Total Life Insurance reserves | $ | 18,973 | $ | 18,645 | ||||
Institutional Markets |
|
|
|
|
|
|
|
|
Balance at beginning of period, gross | $ | 19,839 | $ | 18,580 | $ | 21,588 | $ | 19,839 |
Premiums and deposits |
| 1,112 |
| 1,463 |
| 917 |
| 1,112 |
Surrenders and withdrawals |
| (246) |
| (522) |
| (105) |
| (246) |
Death and other contract benefits |
| (158) |
| (107) |
| (294) |
| (158) |
Subtotal |
| 708 |
| 834 |
| 518 |
| 708 |
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
policy fees |
| 205 |
| 61 |
| 93 |
| 205 |
Cost of funds* |
| 89 |
| 72 |
| 80 |
| 89 |
Other reserve changes |
| (8) |
| 32 |
| 17 |
| (8) |
Balance at end of period |
| 20,833 |
| 19,579 |
| 22,296 |
| 20,833 |
Reinsurance ceded |
| (43) |
| (3) |
| (45) |
| (43) |
Total Institutional Markets reserves | $ | 20,790 | $ | 19,576 | $ | 22,251 | $ | 20,790 |
Total insurance reserves and mutual fund assets |
|
|
|
|
|
|
|
|
Balance at beginning of period, gross | $ | 263,972 | $ | 273,881 | $ | 290,661 | $ | 263,972 |
Premiums and deposits |
| 8,269 |
| 8,777 |
| 6,814 |
| 8,269 |
Surrenders and withdrawals |
| (6,422) |
| (6,293) |
| (6,399) |
| (6,422) |
Death and other contract benefits |
| (1,289) |
| (1,254) |
| (1,436) |
| (1,289) |
Subtotal |
| 558 |
| 1,230 |
| (1,021) |
| 558 |
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
policy fees |
| 11,513 |
| (2,394) |
| (18,414) |
| 11,513 |
Cost of funds* |
| 863 |
| 815 |
| 862 |
| 863 |
Other reserve changes |
| 127 |
| (249) |
| (1,530) |
| 127 |
Balance at end of period |
| 277,033 |
| 273,283 |
| 270,558 |
| 277,033 |
Reinsurance ceded |
| (1,597) |
| (1,388) |
| (1,518) |
| (1,597) |
Total insurance reserves and mutual fund assets | $ | 275,436 | $ | 271,895 | $ | 269,040 | $ | 275,436 |
*Excludes amortization of deferred sales inducements.
Insurance reserves of Life and Retirement, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration, were comprised of the following balances:
|
|
|
| March 31, |
| December 31, |
|
|
| March 31, |
| December 31, |
(in millions) |
|
|
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
Future policy benefits |
|
| $ | 15,620 | $ | 14,739 |
|
| $ | 18,015 | $ | 17,963 |
Policyholder contract deposits |
|
|
| 140,919 |
| 137,718 |
|
|
| 149,876 |
| 147,545 |
Other policy funds |
|
|
| 261 |
| 295 |
|
|
| 277 |
| 271 |
Separate account liabilities |
|
|
| 86,851 |
| 79,960 |
|
|
| 76,786 |
| 91,222 |
Total insurance reserves* |
|
|
| 243,651 |
| 232,712 |
|
|
| 244,954 |
| 257,001 |
Mutual fund assets |
|
|
| 33,382 |
| 31,260 |
|
|
| 25,604 |
| 33,660 |
Total insurance reserves and mutual fund assets |
|
| $ | 277,033 | $ | 263,972 |
|
| $ | 270,558 | $ | 290,661 |
*Excludes reserves related to the Legacy Portfolio.
AIG | First Quarter 20192020 Form 10-Q121137
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We endeavor to manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by our Treasury group with oversight by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity at both AIG Parent and its subsidiaries to meet our financial obligations for a minimum of six months under a liquidity stress scenario.
See Part II Item 7. MD&A — Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement and Enterprise Risk Management — Liquidity Risk Management in the 20182019 Annual Report for additional information.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is derived from the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy at AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, issuing preferred stock, paying dividends to our shareholders and AIG Common Stock, par value $2.50 per share (AIG Common Stock) and/or warrant repurchases.
122138AIG | First Quarter 20192020 Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES Sources AIG Parent Funding from During the first quarter of AIG Parent also received a net amount of
On March 20, 2020, AIG Parent borrowed $1.3 billion under its $4.5 billion committed, revolving syndicated credit facility. |
Uses Debt Reduction In March
We also made other repurchases of and repayments on debt instruments of approximately Dividend We paid a cash dividend of $365.625 per share on AIG’s Series A 5.85% Non-Cumulative Perpetual Preferred Stock (Series A Preferred Stock) during the first quarter of 2020 totaling $7 million. We paid a cash dividend of $0.32 per share on AIG Common Stock during the first quarter of Repurchase of Common Stock We repurchased approximately 12 million shares of AIG
|
* In April 2019, we received $75 million in additional dividends in the form of cash from our General Insurance companies. These dividends had been declared during the first quarter of 2019.
AIG | First Quarter 20192020 Form 10-Q123139
Analysis of Sources and Uses of Cash
The following table presents selected data from AIG's Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||
Sources: |
|
|
|
|
|
|
|
|
|
| ||
Changes in policyholder contract balances |
|
| $ | 1,434 | $ | 2,909 |
| $ | 642 | $ | 1,434 | |
Issuance of long-term debt |
|
|
| 1,449 |
| 3,039 | ||||||
Issuance of Preferred Stock |
|
|
| 485 |
| - | ||||||
Issuance of long-term debt and debt of consolidated investment entities |
| 673 |
| 1,449 | ||||||||
Borrowings under syndicated credit facility |
| 1,300 |
| - | ||||||||
Issuance of preferred stock, net of issuance costs |
| - |
| 485 | ||||||||
Net cash provided by other financing activities |
|
|
| 263 |
| - |
| - |
| 263 | ||
Total sources |
|
|
| 3,631 |
| 5,948 |
| 2,615 |
| 3,631 | ||
Uses: |
|
|
|
|
|
|
|
|
|
| ||
Net cash used in operating activities |
|
|
| (976) |
| (938) |
| (14) |
| (976) | ||
Net cash used in other investing activities |
|
|
| (1,979) |
| (1,972) |
| (633) |
| (1,979) | ||
Repayments of long-term debt |
|
|
| (589) |
| (1,327) | ||||||
Purchases of AIG Common Stock |
|
|
| - |
| (298) | ||||||
Dividends paid |
|
|
| (278) |
| (289) | ||||||
Net cash used in other financing activities |
|
|
| - |
| (1,548) | ||||||
Repayments of long-term debt and debt of consolidated investment entities |
| (884) |
| (589) | ||||||||
Purchase of common stock |
| (500) |
| - | ||||||||
Dividends paid on preferred stock |
| (7) |
| - | ||||||||
Dividends paid on common stock |
| (276) |
| (278) | ||||||||
Net cash provided by (used in) other financing activities |
| (288) |
| - | ||||||||
Total uses |
|
|
| (3,822) |
| (6,372) |
| (2,602) |
| (3,822) | ||
Effect of exchange rate changes on cash and restricted cash |
|
|
| 12 |
| 58 |
| 10 |
| 12 | ||
Increase (decrease) in cash and restricted cash |
|
| $ | (179) | $ | (366) |
| $ | 23 | $ | (179) |
The following table presents a summary of AIG’s Condensed Consolidated Statement of Cash Flows:
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
|
|
| 2019 |
| 2018 |
| 2020 |
| 2019 |
Summary: |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
| $ | (976) | $ | (938) | $ | (14) | $ | (976) |
Net cash provided by (used in) investing activities |
|
|
|
| (1,979) |
| (1,972) |
| (633) |
| (1,979) |
Net cash provided by (used in) financing activities |
|
|
|
| 2,764 |
| 2,486 |
| 660 |
| 2,764 |
Effect of exchange rate changes on cash and restricted cash |
|
|
|
| 12 |
| 58 |
| 10 |
| 12 |
Increase (decrease) in cash and restricted cash |
|
|
|
| (179) |
| (366) | ||||
Net Increase (decrease) in cash and restricted cash |
| 23 |
| (179) | |||||||
Cash and restricted cash at beginning of year |
|
|
|
| 3,358 |
| 2,737 |
| 3,287 |
| 3,358 |
Change in cash of businesses held for sale |
|
|
|
| - |
| - |
| 9 |
| - |
Cash and restricted cash at end of period |
|
|
| $ | 3,179 | $ | 2,371 | $ | 3,319 | $ | 3,179 |
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 $323 million in the first quarter of 2020 compared to $315 million in the first quarter of 2019 compared to $3572019. Excluding interest payments, AIG had operating cash inflows of $309 million in the first quarter of 2018. Excluding interest payments, AIG had2020 compared to operating cash outflows of $661 million in the first quarter of 2019 compared to operating cash outflows of $581 million in the first quarter of 2018.2019.
Investing Cash Flow Activities
Net cash used in investing activities in the first quarter of 20192020 was $2.0 billion$633 million compared to net cash used in investing cash outflowsactivities of $2.0 billion in the first quarter of 2018.2019.
124140AIG | First Quarter 20192020 Form 10-Q
Financing Cash Flow Activities
Net cash provided by financing activities in the first quarter of 2020 reflected:
•approximately $1.3 billion inflow from AIG’s committed, revolving syndicated credit facility;
•approximately $276 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock;
•approximately $7 million to pay a dividend of $365.625 per share on AIG’s Series A Preferred Stock;
•$500 million to repurchase approximately 12 million shares of AIG Common Stock; and
•approximately $211 million in net outflows from the issuance and repayment of long-term debt and debt of consolidated investment entities.
Net cash provided by financing activities in the first quarter of 2019 reflected:
•approximately $278 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock;
•approximately $860 million in net inflows from the issuance and repayment of long-term debt;debt and debt of consolidated investment entities; and
•approximately $485 million inflow from the issuance of preferred stock.AIG’s Series A Preferred Stock.
Net cash provided by financing activities in the first quarter of 2018 reflected:
•approximately $289 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock;
•approximately $298 million to repurchase approximately 5 million shares of AIG Common Stock; and
•approximately $1.7 billion in net inflows from the issuance and repayment of long-term debt.
Liquidity and Capital Resources of AIG Parent and Subsidiaries
AIG Parent
As of March 31, 2019,2020, AIG Parent had approximately $9.7$10.7 billion in liquidity sources. AIG Parent’s liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.securities and also include a committed, revolving syndicated credit facility. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized through sales or repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent liquidity is monitored through the use of various internal liquidity risk measures. AIG Parent’s primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries and credit facilities. AIG Parent’s primary uses of liquidity are for debt service, capital and liability management, and operating expenses.
We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt and preferred equity markets from time to time to meet funding requirements as needed.
We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or AIG Common Stock repurchase authorizations or deploy such capital towards liability management.
In the normal course, it is expected that a portion of the capital released by our insurance operations, by our other operations or through the utilization of AIG’s deferred tax assets may be available to support our business strategies, for distribution to shareholders or for liability management.
In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: AIG’s business and strategic plans, expectations for capital generation and utilization, AIG’s funding capacity and capital resources in comparison to internal benchmarks, as well as rating agency expectations, regulatory standards and internal stress tests for capital.
AIG | First Quarter 2020 Form 10-Q 141
The following table presents AIG Parent's liquidity sources:
| As of | As of | As of | As of | ||||
(In millions) | March 31, 2019 | December 31, 2018 | ||||||
(in millions) | March 31, 2020 | December 31, 2019 | ||||||
Cash and short-term investments(a) | $ | 1,619 | $ | 626 | $ | 5,112 | $ | 2,804 |
Unencumbered fixed maturity securities(b) |
| 3,547 |
| 3,168 |
| 2,376 |
| 4,777 |
Total AIG Parent liquidity |
| 5,166 |
| 3,794 |
| 7,488 |
| 7,581 |
Available capacity under committed, syndicated credit facility(c) |
| 4,500 |
| 4,500 |
| 3,200 |
| 4,500 |
Total AIG Parent liquidity sources | $ | 9,666 | $ | 8,294 | $ | 10,688 | $ | 12,081 |
(a)Cash and short-term investments include reverse repurchase agreements totaling $884 million$3.0 billion and $22 million$2.1 billion as of March 31, 20192020 and December 31, 2018,2019, respectively.
(b)Unencumbered securities consist of publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
(c)For additional information relating to this committed, syndicated credit facility see Credit Facilities below.
AIG | First Quarter 2019 Form 10-Q125
ITEM 2 |Liquidity and Capital Resources
Insurance Companies
We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our insurance companies’ liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our material insurance companies’ liquidity is monitored through various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment purchases and collateral requirements.
Our General Insurance companies may require additional funding to meet capital or liquidity needs under certain circumstances. Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non‑renewalsnon-renewals or cancellations by policyholders and adversely affect a subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.
For a discussion regarding risks associated with COVID-19, seePart II Item 1A –Risk Factors – COVID-19 is adversely affecting, and is expected to continue to adversely affect, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope and duration of the crisis and actions taken by governmental and regulatory authorities in response thereto.
Management believes that because of the size and liquidity of our Life and Retirement companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life and Retirement companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, in times of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life and Retirement companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity position and facilitate their ability to maintain a fully invested asset portfolio.
Certain of our U.S. insurance companies are members of the Federal Home Loan Banks (FHLBs)FHLBs in their respective districts. Borrowings from FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. General Insurance companies had no outstanding borrowings from FHLBs at both March 31, 20192020 and aggregate outstanding borrowings of approximately $115 million at December 31, 2018.2019. Our U.S. Life and Retirement companies had no outstanding borrowings in the form of cash advances from FHLBs at both March 31, 2019$3.6 billion and December 31, 2018, respectively. In addition, $3.4$3.5 billion waswhich were due to FHLBs in thetheir respective districts of our U.S. Life and Retirement companies at both March 31, 20192020 and December 31, 2018,2019, respectively, under funding agreements issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments, which were reported in Policyholder contract deposits. Proceeds from funding agreements are generally invested in fixed income securities and other investments intended to generate spread income. These investment contracts do not have mortality or morbidity risk and are similar to GICs. In addition, our U.S. Life and Retirement companies had no outstanding borrowings in the form of cash advances from FHLBs at both March 31, 2020 and December 31, 2019.
Certain of our U.S. Life and Retirement companies have programs, which began in 2012, that lend securities from their investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life and Retirement companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of the loaned securities. Cash collateral received is invested in short-term investments or partially used for short-term liquidity purposes.
142 AIG | First Quarter 2020 Form 10-Q
Additionally, the aggregate amount of securities that a Life and Retirement company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. Our U.S. Life and Retirement companies had $1.4$2.6 billion and $884 million$2.8 billion of securities subject to these agreements at March 31, 20192020 and December 31, 2018,2019, respectively, and $1.4$2.9 billion and $904 million of liabilities to borrowers for collateral received at both March 31, 20192020 and December 31, 2018,2019, respectively.
AIG generally manages capital between AIG Parent and our insurance companies through internal, Board-approved policies and limits, as well as management standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to or from our subsidiaries.
In February 2018, AIG Parent entered into a CMA with Fortitude Re. Among other things, the CMA provides that AIG Parent will maintain available statutory capital and surplus in each of Fortitude Re’s long term business fund and general business account at or above a stress threshold percentage of its projected enhanced capital requirement in respect of the applicable fund, as defined under Bermuda law. As of March 31, 2019,2020, the stress threshold percentage under this CMA was 125 percent.
AIG Parent and/or certain subsidiaries are parties to several letter of credit agreements with various financial institutions, which issue letters of credit from time to time in support of our insurance companies. These letters of credit are subject to reimbursement by AIG Parent and/or certain subsidiaries in the event of a drawdown by our insurance companies. Letters of credit issued in support of the General Insurance companies totaled approximately $3.5$3.0 billion at March 31, 2019.2020. Letters of credit issued in support of the Life and Retirement companies totaled approximately $859$852 million at March 31, 2019.2020. Letters of credit issued in support of Fortitude Re totaled $550 million at March 31, 2019.
126AIG | First Quarter 2019 Form 10-Q
TABLE OF CONTENTS2020.
ITEM 2 |Liquidity and Capital Resources
In the first quarter of 2019, 2020, our General Insurance companies collectively paid a total of approximately $522$240 million in dividends in the form of cash and fixed maturity securities to AIG Parent. The fixed maturity securities primarily included U.S. agency mortgage-backed securities, municipal bonds and certain other highly rated securities.treasuries.
In the first quarter of 2019, 2020, our Life and Retirement companies collectively paid a total of approximately $504$157 million in dividends and loan repayments in the form of cash to AIG Parent.
Tax Matters
If the settlement agreements in principle are concluded in our ongoing dispute related to the disallowance of foreign tax credits associated with cross border financing transactions, we will be required to make a payment to the U.S. Treasury. Although we can provide no assurance regarding whether the non-binding settlements will be finalized, the amount we currently expect to pay based on current proposed settlement terms is approximately $1.7 billion, including obligations of AIG Parent and subsidiaries. This amount is net of payments previously made with respect to cross border financing transactions involving matters dating back to 1997 and other matters largely related to the same tax years. There remains uncertainty with regard to whether the settlements in principle will ultimately be approved by the relevant authorities as well as the amount and timing of any potential payments,payment(s) or prepayment(s), one or more of which are not likely tocould be made before sometime inas early as the third quarter of 2020. AIG has waived assessment on certain amounts and the IRS will seek payment through a Notice and Demand for Payment once their administrative steps are completed.
For additional information regarding this matter see Note 15 to the Condensed Consolidated Financial Statements.
We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.
To further increase AIG Parent liquidity, on March 20, 2020, we borrowed $1.3 billion under the Facility. As of March 31, 2019,2020, a total of $4.5$3.2 billion remains available under the Facility. Our ability to utilize the Facility is not contingent on our credit ratings. However, our ability to utilize the Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Facility would restrict our access to the Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to utilize the Facility from time to time, and may use the proceeds for general corporate purposes.
AIG | First Quarter 20192020 Form 10-Q127143
Contractual Obligations
The following table summarizes contractual obligations in total, and by remaining maturity:
March 31, 2019 |
|
| Payments due by Period | |||||||||||||||||||||
March 31, 2020 |
|
| Payments due by Period | |||||||||||||||||||||
|
| Total | Remainder of |
| 2020 - |
| 2022 - |
|
|
|
|
| Total | Remainder of |
| 2021 - |
| 2023 - |
|
|
|
| ||
(in millions) |
| Payments |
| 2019 |
| 2021 |
| 2023 |
| 2024 |
| Thereafter |
| Payments |
| 2020 |
| 2022 |
| 2024 |
| 2025 |
| Thereafter |
Insurance operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves(a) | $ | 85,777 | $ | 16,539 | $ | 24,013 | $ | 12,553 | $ | 4,000 | $ | 28,672 | $ | 80,491 | $ | 16,073 | $ | 22,020 | $ | 11,578 | $ | 3,758 | $ | 27,062 |
Insurance and investment contract liabilities |
| 254,813 |
| 12,430 |
| 32,400 |
| 28,779 |
| 13,793 |
| 167,411 |
| 278,559 |
| 14,343 |
| 32,084 |
| 30,227 |
| 13,733 |
| 188,172 |
Borrowings |
| 1,338 |
| - |
| 338 |
| - |
| - |
| 1,000 |
| 1,344 |
| 121 |
| 228 |
| - |
| - |
| 995 |
Syndicated credit facility |
| - |
| - |
| - |
| - |
| - |
| - | ||||||||||||
Interest payments on borrowings |
| 828 |
| 26 |
| 99 |
| 99 |
| 50 |
| 554 |
| 778 |
| 25 |
| 99 |
| 99 |
| 50 |
| 505 |
Other long-term obligations |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Total | $ | 342,756 | $ | 28,995 | $ | 56,850 | $ | 41,431 | $ | 17,843 | $ | 197,637 | $ | 361,172 | $ | 30,562 | $ | 54,431 | $ | 41,904 | $ | 17,541 | $ | 216,734 |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and investment contract liabilities |
| - |
| - |
| - |
| - |
| - |
| - | ||||||||||||
Borrowings | $ | 25,256 | $ | 1,252 | $ | 3,040 | $ | 3,268 | $ | 1,130 | $ | 16,566 | $ | 23,879 | $ | 1,384 | $ | 3,216 | $ | 2,824 | $ | 1,931 | $ | 14,524 |
Syndicated credit facility |
| 1,300 |
| 1,300 |
| - |
| - |
| - |
| - | ||||||||||||
Interest payments on borrowings |
| 15,228 |
| 804 |
| 1,999 |
| 1,732 |
| 779 |
| 9,914 |
| 13,585 |
| 780 |
| 1,796 |
| 1,582 |
| 731 |
| 8,696 |
Other long-term obligations |
| 387 |
| 112 |
| 173 |
| 79 |
| - |
| 23 |
| 420 |
| 112 |
| 200 |
| 96 |
| - |
| 12 |
Total | $ | 40,871 | $ | 2,168 | $ | 5,212 | $ | 5,079 | $ | 1,909 | $ | 26,503 | $ | 39,184 | $ | 3,576 | $ | 5,212 | $ | 4,502 | $ | 2,662 | $ | 23,232 |
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves(a) | $ | 85,777 | $ | 16,539 | $ | 24,013 | $ | 12,553 | $ | 4,000 | $ | 28,672 | $ | 80,491 | $ | 16,073 | $ | 22,020 | $ | 11,578 | $ | 3,758 | $ | 27,062 |
Insurance and investment contract liabilities |
| 254,813 |
| 12,430 |
| 32,400 |
| 28,779 |
| 13,793 |
| 167,411 |
| 278,559 |
| 14,343 |
| 32,084 |
| 30,227 |
| 13,733 |
| 188,172 |
Borrowings |
| 26,594 |
| 1,252 |
| 3,378 |
| 3,268 |
| 1,130 |
| 17,566 |
| 25,223 |
| 1,505 |
| 3,444 |
| 2,824 |
| 1,931 |
| 15,519 |
Syndicated credit facility |
| 1,300 |
| 1,300 |
| - |
| - |
| - |
| - | ||||||||||||
Interest payments on borrowings |
| 16,056 |
| 830 |
| 2,098 |
| 1,831 |
| 829 |
| 10,468 |
| 14,363 |
| 805 |
| 1,895 |
| 1,681 |
| 781 |
| 9,201 |
Other long-term obligations(b) |
| 387 |
| 112 |
| 173 |
| 79 |
| - |
| 23 |
| 420 |
| 112 |
| 200 |
| 96 |
| - |
| 12 |
Total(c) | $ | 383,627 | $ | 31,163 | $ | 62,062 | $ | 46,510 | $ | 19,752 | $ | 224,140 | $ | 400,356 | $ | 34,138 | $ | 59,643 | $ | 46,406 | $ | 20,203 | $ | 239,966 |
(a)Represents loss reserves, undiscounted loss reserves.and gross of reinsurance.
(b)Primarily includes contracts to purchase future services and other capital expenditures.
(c)Does not reflect unrecognized tax benefits of $4.7$4.8 billion. See Note 15 to the Condensed Consolidated Financial Statements for additional information.
Loss Reserves
Loss reserves relate to our General Insurance companies and represent estimates of future loss and loss adjustment expense payments based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our General Insurance companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.
We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.
We believe that our Life and Retirement companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life and Retirement companies maintain significant levels of 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
144 AIG | First Quarter 2020 Form 10-Q
insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.
128AIG | First Quarter 2019 Form 10-Q
Borrowings
Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt or preferred stock issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.
Off-Balance Sheet Arrangements and Commercial Commitments
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:
March 31, 2019 |
|
|
| Amount of Commitment Expiring | ||||||||||||||||||||
March 31, 2020 |
|
|
| Amount of Commitment Expiring | ||||||||||||||||||||
|
| Total Amounts |
| Remainder |
| 2020 - |
| 2022 - |
|
|
|
|
| Total Amounts |
| Remainder |
| 2021 - |
| 2023 - |
|
|
|
|
(in millions) |
| Committed |
| of 2019 |
| 2021 |
| 2023 |
| 2024 |
| Thereafter |
| Committed |
| of 2020 |
| 2022 |
| 2024 |
| 2025 |
| Thereafter |
Insurance operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit | $ | 194 | $ | 183 | $ | - | $ | - | $ | - | $ | 11 | $ | 163 | $ | 144 | $ | 8 | $ | - | $ | - | $ | 11 |
Guarantees of indebtedness |
| 88 |
| 88 |
| - |
| - |
| - |
| - |
| 59 |
| 55 |
| 4 |
| - |
| - |
| - |
All other guarantees(a) |
| 65 |
| - |
| 30 |
| 28 |
| 7 |
| - |
| 23 |
| 4 |
| 19 |
| - |
| - |
| - |
Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commitments(b) |
| 7,146 |
| 2,772 |
| 2,616 |
| 1,467 |
| 248 |
| 43 |
| 6,482 |
| 2,221 |
| 3,332 |
| 890 |
| 35 |
| 4 |
Commitments to extend credit |
| 2,921 |
| 1,194 |
| 673 |
| 998 |
| - |
| 56 |
| 3,257 |
| 717 |
| 1,589 |
| 657 |
| 148 |
| 146 |
Letters of credit |
| 5 |
| 5 |
| - |
| - |
| - |
| - |
| 2 |
| 2 |
| - |
| - |
| - |
| - |
Other commercial commitments |
| 11 |
| 3 |
| 5 |
| 3 |
| - |
| - | ||||||||||||
Total(c) | $ | 10,419 | $ | 4,242 | $ | 3,319 | $ | 2,493 | $ | 255 | $ | 110 | $ | 9,997 | $ | 3,146 | $ | 4,957 | $ | 1,550 | $ | 183 | $ | 161 |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | - | $ | 74 | $ | 74 | $ | - | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit |
| 82 |
| 82 |
| - |
| - |
| - |
| - |
| 80 |
| 80 |
| - |
| - |
| - |
| - |
All other guarantees |
| - |
| - |
| - |
| - |
| - |
| - |
| 403 |
| 403 |
| - |
| - |
| - |
| - |
Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commitments(b) |
| 140 |
| 38 |
| 39 |
| 31 |
| 1 |
| 31 |
| 393 |
| 88 |
| 164 |
| 117 |
| - |
| 24 |
Commitments to extend credit |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Letters of credit |
| 14 |
| 14 |
| - |
| - |
| - |
| - |
| 11 |
| 11 |
| - |
| - |
| - |
| - |
Total(c)(e) | $ | 310 | $ | 134 | $ | 39 | $ | 31 | $ | 1 | $ | 105 | $ | 961 | $ | 582 | $ | 164 | $ | 117 | $ | - | $ | 98 |
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity facilities(d) | $ | 74 | $ | - | $ | - | $ | - | $ | - | $ | 74 | $ | 74 | $ | - | $ | - | $ | - | $ | - | $ | 74 |
Standby letters of credit |
| 276 |
| 265 |
| - |
| - |
| - |
| 11 |
| 243 |
| 224 |
| 8 |
| - |
| - |
| 11 |
Guarantees of indebtedness |
| 88 |
| 88 |
| - |
| - |
| - |
| - |
| 59 |
| 55 |
| 4 |
| - |
| - |
| - |
All other guarantees(a) |
| 65 |
| - |
| 30 |
| 28 |
| 7 |
| - |
| 426 |
| 407 |
| 19 |
| - |
| - |
| - |
Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commitments(b) |
| 7,286 |
| 2,810 |
| 2,655 |
| 1,498 |
| 249 |
| 74 |
| 6,875 |
| 2,309 |
| 3,496 |
| 1,007 |
| 35 |
| 28 |
Commitments to extend credit |
| 2,921 |
| 1,194 |
| 673 |
| 998 |
| - |
| 56 |
| 3,257 |
| 717 |
| 1,589 |
| 657 |
| 148 |
| 146 |
Letters of credit |
| 19 |
| 19 |
| - |
| - |
| - |
| - |
| 13 |
| 13 |
| - |
| - |
| - |
| - |
Other commercial commitments |
| 11 |
| 3 |
| 5 |
| 3 |
| - |
| - | ||||||||||||
Total(c)(e) | $ | 10,729 | $ | 4,376 | $ | 3,358 | $ | 2,524 | $ | 256 | $ | 215 | $ | 10,958 | $ | 3,728 | $ | 5,121 | $ | 1,667 | $ | 183 | $ | 259 |
(a)Excludes potential amounts for indemnification obligations included in asset sales agreements. For further information on indemnification obligations see Note 11 to the Condensed Consolidated Financial Statements.
(b)Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.
AIG | First Quarter 2020 Form 10-Q 145
(c)Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.
(d)Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e)Excludes commitments with respect to pension plans. The remaining annual pension contribution for 20192020 is expected to be approximately $47 million for U.S. and non-U.S. plans.
AIG | First Quarter 2019 Form 10-Q129
ITEM 2 |Liquidity and Capital Resources
Arrangements with Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE when we are the primary beneficiary of the entity.
For a further discussion of our involvement with VIEs see Note 8 to the Condensed Consolidated Financial Statements.
Indemnification Agreements
We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations.
For additional information regarding our indemnification agreements see Note 11 to the Condensed Consolidated Financial Statements.Statements.
We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.
Debt
The following table provides the rollforward of AIG’s total debt outstanding:
|
| Balance at |
|
|
| Maturities |
| Effect of |
|
|
|
| Balance at |
| Balance at |
|
|
| Maturities |
| Effect of |
|
|
|
| Balance at |
Three Months Ended March 31, 2019 |
| December 31, |
|
|
| and |
| Foreign |
| Other |
| March 31, | ||||||||||||||
Three Months Ended March 31, |
| December 31, |
|
|
| and |
| Foreign |
| Other |
| March 31, | ||||||||||||||
(in millions) |
| 2018 |
| Issuances | Repayments |
| Exchange |
| Changes |
|
| 2019 |
| 2019 |
| Issuances | Repayments |
| Exchange |
| Changes |
|
| 2020 | ||
Debt issued or guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG general borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable | $ | 20,853 | $ | 596 | $ | - | $ | (30) | $ | 8 |
| $ | 21,427 | $ | 20,467 | $ | - | $ | (350) | $ | (79) | $ | 10 |
| $ | 20,048 |
Junior subordinated debt |
| 1,548 |
| - |
| - |
| (3) |
| - |
|
| 1,545 |
| 1,542 |
| - |
| - |
| (8) |
| - |
|
| 1,534 |
AIG Japan Holdings Kabushiki Kaisha |
| 331 |
| - |
| - |
| 7 |
| - |
|
| 338 |
| 344 |
| - |
| - |
| 5 |
| - |
|
| 349 |
Validus notes and bonds payable |
| 359 |
| - |
| - |
| - |
| (2) |
|
| 357 | |||||||||||||
AIGLH notes and bonds payable |
| 282 |
| - |
| - |
| - |
| - |
|
| 282 |
| 282 |
| - |
| - |
| - |
| - |
|
| 282 |
AIGLH junior subordinated debt |
| 361 |
| - |
| - |
| - |
| - |
|
| 361 |
| 361 |
| - |
| - |
| - |
| - |
|
| 361 |
Validus notes and bonds payable |
| 353 |
| - |
| - |
| - |
| (1) |
|
| 352 | |||||||||||||
Total AIG general borrowings |
| 23,734 |
| 596 |
| - |
| (26) |
| 6 |
|
| 24,310 |
| 23,349 |
| - |
| (350) |
| (82) |
| 9 |
|
| 22,926 |
AIG borrowings supported by assets:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series AIGFP matched notes and bonds payable |
| 21 |
| - |
| - |
| - |
| - |
|
| 21 |
| 21 |
| - |
| - |
| - |
| - |
|
| 21 |
GIAs, at fair value |
| 2,164 |
| 37 |
| (61) |
| - |
| 72 | (b) |
| 2,212 |
| 2,003 |
| 34 |
| (31) |
| - |
| 209 | (b) |
| 2,215 |
Notes and bonds payable, at fair value |
| 49 |
| - |
| (2) |
| - |
| 4 | (b) |
| 51 |
| 59 |
| - |
| (2) |
| - |
| 4 | (b) |
| 61 |
Total AIG borrowings supported by assets |
| 2,234 |
| 37 |
| (63) |
| - |
| 76 |
|
| 2,284 |
| 2,083 |
| 34 |
| (33) |
| - |
| 213 |
|
| 2,297 |
Total debt issued or guaranteed by AIG |
| 25,968 |
| 633 |
| (63) |
| (26) |
| 82 |
|
| 26,594 |
| 25,432 |
| 34 |
| (383) |
| (82) |
| 222 |
|
| 25,223 |
Debt not guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Other subsidiaries' notes, bonds, loans and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgages payable(c) |
| 168 |
| - |
| (116) |
| - |
| - |
|
| 52 | |||||||||||||
Debt of consolidated investments(d) |
| 8,404 |
| 816 |
| (418) |
| 6 |
| 322 | (e) |
| 9,130 | |||||||||||||
Total debt not guaranteed by AIG |
| 8,572 |
| 816 |
| (534) |
| 6 |
| 322 |
|
| 9,182 | |||||||||||||
mortgages payable - not guaranteed by AIG |
| 47 |
| 4 |
| (6) |
| - |
| - |
|
| 45 | |||||||||||||
Total long-term debt |
| 25,479 |
| 38 |
| (389) |
| (82) |
| 222 |
|
| 25,268 | |||||||||||||
Syndicated credit facility(c) |
| - |
| 1,300 |
| - |
| - |
| - |
|
| 1,300 | |||||||||||||
Debt of consolidated investment entities - not |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
guaranteed by AIG(d) |
| 9,871 |
| 635 |
| (521) |
| (27) |
| 184 | (e) |
| 10,142 | |||||||||||||
Total debt | $ | 34,540 | $ | 1,449 | $ | (597) | $ | (20) | $ | 404 |
| $ | 35,776 | $ | 35,350 | $ | 1,973 | $ | (910) | $ | (109) | $ | 406 |
| $ | 36,710 |
(a)AIG Parent guarantees all such debt, except for Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $1.5 billion at both March 31, 20192020 and December 31, 2018.2019. 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 termSyndicated credit facility is reported in natureOther liabilities in the Condensed Consolidated Balance Sheets.
146 AIG | First Quarter 2020 Form 10-Q
ITEM 2 |Liquidity and related activity is presented net of issuances and maturities and repayments.Capital Resources
(d)At March 31, 2019,2020, includes debt of consolidated investment vehiclesentities related to real estate investments of $3.1 billion, affordable housing partnership investments of $2.2 billion and other securitization vehicles of $3.8$4.8 billion. At December 31, 2018,2019, includes debt of consolidated investment vehiclesentities related to real estate investments of $3.7$3.2 billion, affordable housing partnership investments of $1.8$2.1 billion and other securitization vehicles of $2.9$4.6 billion.
(e)Includes the effect of consolidating previously unconsolidated partnerships.
130AIG | First Quarter 2019 Form 10-Q
ITEM 2 |Liquidity and Capital Resources
TOTAL DEBT OUTSTANDING
(in millions)
Debt Maturities
The following table summarizes maturing long-term debt and syndicated credit facility at March 31, 20192020 of AIG (excluding $9.1 billion of borrowings of consolidated investments) for the next four quarters:
|
| Second |
| Third |
| Fourth |
| First |
|
|
| Second |
| Third |
| Fourth |
| First |
|
|
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
|
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
|
|
(in millions) |
| 2019 |
| 2019 |
| 2019 |
| 2020 |
| Total |
| 2020 |
| 2020 |
| 2020 |
| 2021 |
| Total |
AIG general borrowings | $ | - | $ | 1,000 | $ | - | $ | - | $ | 1,000 | $ | 121 | $ | 638 | $ | 708 | $ | 1,499 | $ | 2,966 |
AIG borrowings supported by assets |
| 19 |
| 138 |
| 95 |
| 2 |
| 254 |
| 8 |
| 27 |
| 3 |
| 2 |
| 40 |
Other subsidiaries' notes, bonds, loans and |
|
|
|
|
|
|
|
|
|
| ||||||||||
mortgages payable |
| - |
| - |
| 1 |
| - |
| 1 | ||||||||||
Other subsidiaries' notes, bonds, loans and mortgages payable |
| 40 |
| - |
| - |
| - |
| 40 | ||||||||||
Syndicated credit facility |
| 1,300 |
| - |
| - |
| - |
| 1,300 | ||||||||||
Total | $ | 19 | $ | 1,138 | $ | 96 | $ | 2 | $ | 1,255 | $ | 1,469 | $ | 665 | $ | 711 | $ | 1,501 | $ | 4,346 |
AIG | First Quarter 20192020 Form 10-Q131147
The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting valuation adjustments and fair value adjustments, when applicable), excluding $9.1 billion in borrowings of debt of consolidated investments: and syndicated credit facility:
March 31, 2020 |
|
|
| Remainder | Year Ending | ||||||||||||
(in millions) |
|
| Total |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 | Thereafter | |
Debt issued or guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG general borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
| $ | 20,048 | $ | 1,346 | $ | 1,499 | $ | 1,511 | $ | 1,553 | $ | 998 | $ | 1,258 | $ | 11,883 |
Junior subordinated debt |
|
| 1,534 |
| - |
| - |
| - |
| - |
| - |
| - |
| 1,534 |
AIG Japan Holdings Kabushiki Kaisha |
|
| 349 |
| 121 |
| 228 |
| - |
| - |
| - |
| - |
| - |
AIGLH notes and bonds payable |
|
| 282 |
| - |
| - |
| - |
| - |
| - |
| - |
| 282 |
AIGLH junior subordinated debt |
|
| 361 |
| - |
| - |
| - |
| - |
| - |
| - |
| 361 |
Validus notes and bonds payable |
|
| 352 |
| - |
| - |
| - |
| - |
| - |
| - |
| 352 |
Total AIG general borrowings |
|
| 22,926 |
| 1,467 |
| 1,727 |
| 1,511 |
| 1,553 |
| 998 |
| 1,258 |
| 14,412 |
AIG borrowings supported by assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series AIGFP matched notes and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds payable |
|
| 21 |
| - |
| - |
| - |
| - |
| - |
| - |
| 21 |
GIAs, at fair value |
|
| 2,215 |
| 38 |
| 154 |
| 52 |
| 126 |
| 147 |
| 673 |
| 1,025 |
Notes and bonds payable, at fair value |
|
| 61 |
| - |
| - |
| - |
| - |
| - |
| - |
| 61 |
Total AIG borrowings supported by assets |
| 2,297 |
| 38 |
| 154 |
| 52 |
| 126 |
| 147 |
| 673 |
| 1,107 | |
Total debt issued or guaranteed by AIG |
|
| 25,223 |
| 1,505 |
| 1,881 |
| 1,563 |
| 1,679 |
| 1,145 |
| 1,931 |
| 15,519 |
Debt not guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other subsidiaries notes, bonds, loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and mortgages payable |
|
| 45 |
| 40 |
| 2 |
| 1 |
| 1 |
| 1 |
| - |
| - |
Total debt not guaranteed by AIG |
| 45 |
| 40 |
| 2 |
| 1 |
| 1 |
| 1 |
| - |
| - | |
Syndicated credit facility |
|
| 1,300 |
| 1,300 |
| - |
| - |
| - |
| - |
| - |
| - |
Total |
| $ | 26,568 | $ | 2,845 | $ | 1,883 | $ | 1,564 | $ | 1,680 | $ | 1,146 | $ | 1,931 | $ | 15,519 |
March 31, 2019 |
|
|
| Remainder | Year Ending | ||||||||||||
(in millions) |
|
| Total |
| of 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 | Thereafter | |
Debt issued or guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG general borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
| $ | 21,427 | $ | 1,000 | $ | 1,345 | $ | 1,497 | $ | 1,509 | $ | 1,594 | $ | 997 | $ | 13,485 |
Junior subordinated debt |
|
| 1,545 |
| - |
| - |
| - |
| - |
| - |
| - |
| 1,545 |
AIG Japan Holdings Kabushiki Kaisha |
|
| 338 |
| - |
| 117 |
| 221 |
| - |
| - |
| - |
| - |
Validus notes and bonds payable |
|
| 357 |
| - |
| - |
| - |
| - |
| - |
| - |
| 357 |
AIGLH notes and bonds payable |
|
| 282 |
| - |
| - |
| - |
| - |
| - |
| - |
| 282 |
AIGLH junior subordinated debt |
|
| 361 |
| - |
| - |
| - |
| - |
| - |
| - |
| 361 |
Total AIG general borrowings |
|
| 24,310 |
| 1,000 |
| 1,462 |
| 1,718 |
| 1,509 |
| 1,594 |
| 997 |
| 16,030 |
AIG borrowings supported by assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series AIGFP matched notes and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds payable |
|
| 21 |
| - |
| - |
| - |
| - |
| - |
| - |
| 21 |
GIAs, at fair value |
|
| 2,212 |
| 252 |
| 39 |
| 159 |
| 48 |
| 117 |
| 133 |
| 1,464 |
Notes and bonds payable, at fair value |
|
| 51 |
| - |
| - |
| - |
| - |
| - |
| - |
| 51 |
Total AIG borrowings supported by assets |
| 2,284 |
| 252 |
| 39 |
| 159 |
| 48 |
| 117 |
| 133 |
| 1,536 | |
Total debt issued or guaranteed by AIG |
|
| 26,594 |
| 1,252 |
| 1,501 |
| 1,877 |
| 1,557 |
| 1,711 |
| 1,130 |
| 17,566 |
Debt not guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other subsidiaries notes, bonds, loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and mortgages payable |
|
| 52 |
| 1 |
| 1 |
| 42 |
| 1 |
| 1 |
| 6 |
| - |
Total debt not guaranteed by AIG |
| 52 |
| 1 |
| 1 |
| 42 |
| 1 |
| 1 |
| 6 |
| - | |
Total |
| $ | 26,646 | $ | 1,253 | $ | 1,502 | $ | 1,919 | $ | 1,558 | $ | 1,712 | $ | 1,136 | $ | 17,566 |
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 May 1, 2019.the date of this filing. Figures in parentheses indicate the relative ranking of the ratings within the agency’s rating categories; that ranking refers only to the major rating category and not to the modifiers assigned by the rating agencies.
Short-Term Debt | Senior Long-Term Debt | |||||
Moody’s | S&P | Moody’s(a) | S&P(b) | Fitch(c) | ||
American International Group, Inc. | P-2 (2nd of 3) | A-2 (2nd of 8) | Baa 1 (4th of 9) | BBB+ (4th of 9) | BBB+ (4th of 9) | |
Stable Outlook | Stable Outlook |
|
| |||
AIG Financial Products Corp.(d) | P-2 | A-2 | Baa 1 | BBB+ |
| |
Stable Outlook | Stable Outlook |
|
(a)Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.
(b)S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(c)Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d)AIG guarantees all obligations of AIG Financial Products Corp.
These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.
We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.
In the event of a downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate such transactions early.
132148AIG | First Quarter 20192020 Form 10-Q
The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade.
For a discussion of the effects of downgrades in our credit ratings see Note 9 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 20182019 Annual Report. Report.
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 May 1, 2019.the date of this filing.
A.M. Best | S&P | Fitch | Moody’s | |
National Union Fire Insurance Company of Pittsburgh, Pa. | A | A+ | A | A2 |
Lexington Insurance Company | A | A+ | A | A2 |
American Home Assurance Company (U.S.) | A | A+ | A | A2 |
American General Life Insurance Company | A | A+ | A+ | A2 |
The Variable Annuity Life Insurance Company | A | A+ | A+ | A2 |
United States Life Insurance Company in the City of New York | A | A+ | A+ | A2 |
AIG Europe S.A. | NR | A+ | NR | A2 |
American International Group UK Ltd. | A | A+ | NR | A2 |
AIG General Insurance Co. Ltd. | NR | A+ | NR | NR |
Validus Reinsurance, Ltd. | A | A |
| A2 |
These financial strength ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances.
For a discussion of the effects of downgrades in our financial strength ratings see Note 9 to the Condensed Consolidated Financial Statements herein in this Quarterly Report on Form 10-Q and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 20182019 Annual Report. Report.
For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources see Part I, Item 1. Business — Regulation and Part I, Item 1A. Risk Factors — Regulation in our 20182019 Annual Report, and Regulatory Environment below in this Quarterly Report on Form 10-Q.
Dividends
Dividends and Repurchases of AIG Common Stock
On February 13, 2019,12, 2020, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 29, 201930, 2020 to shareholders of record on March 15, 2019.16, 2020. On May 6, 2019,4, 2020, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 201929, 2020 to shareholders of record on June 14, 2019. 15, 2020.
On February 12, 2020, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on March 16, 2020 to holders of record on February 28, 2020. On May 4, 2020, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on June 15, 2020 to holders of record on May 29, 2020.
The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, as discussed further in Note 12 to the Condensed Consolidated Financial Statements.
Repurchases of AIG Common Stock
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of approximately $1.5 billion. As of May 6, 2019, $2.04, 2020, $1.5 billion remained under the authorization.
During the first quarter of 2020, we repurchased approximately 12 million shares of AIG Common Stock for an aggregate purchase price of $500 million under ASR agreement executed in February 2020 with a third-party financial institution.
AIG | First Quarter 2020 Form 10-Q 149
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, as discussed further in Note 12 to the Condensed Consolidated Financial Statements.
Dividend Restrictions
We did not repurchase any shares of AIG Common Stock during the three months ended March 31, 2019.
Restrictions on dividends from subsidiaries
Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities.
For a discussion of restrictions on payments of dividends by our subsidiaries see Note 1920 to the Consolidated Financial Statements in the 20182019 Annual Report.
AIG | First Quarter 2019 Form 10-Q133
ITEM 2 | 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
Overview
We have an integrated process for managing risks throughout our organization in accordance with our firm‑widefirm-wide risk appetite. Our Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department supervises and integrates the risk management functions in each of our business units, providing senior management with a consolidated view of AIG’s major risk positions. Within each business unit, senior leaders and executives approve risk‑takingrisk-taking policies and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management by embedding risk management in our key day-to-day business processes and in identifying, assessing, quantifying, managing, monitoring, reporting, and mitigating the risks taken by our businesses and AIG overall. Nevertheless, our risk management efforts may not always be successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition may occur.occur.
AIG employs a Three Lines of Defense model. AIG’s business leaders assume full accountability for the risks and controls in their operating units, and ERM performs a review, challenge and oversight function. The third line consists of our Internal Audit Group that provides independent assurance for AIG’s Board.
For a further discussion of AIG’s risk management program see Part II, Item 7. MD&A ─ Enterprise Risk Management in the 20182019 Annual Report.
As of March 31, 2019,2020, there have been no material changes in our economic exposure to market risk from December 31, 2018,2019, a description of which may be found in our Annual Report on Form 10-K, for the year ended December 31, 2018,2019, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” filed with the Securities and Exchange Commission. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K on how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.
150 AIG | First Quarter 2020 Form 10-Q
OverviewRegulatory Environment
Overview
Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance, securities, derivatives, investment advisory and thrift regulators in the United States and abroad. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years.
Our insurance subsidiaries are subject to regulation and supervision by the states and jurisdictions in which they do business. We expect that the domestic and international regulations applicable to us and our regulated entities will continue to evolve for the foreseeable future.
In particular, significant legislative and regulatory activity has occurred at both the U.S. federal and state levels, as well as globally, in response to COVID-19 and its impact on insurance consumers. For example, legislative and regulatory measures are currently being contemplated at the federal level and in a number of U.S. states, including New York, to expand coverages beyond our policy language, in some cases with retroactive effect. Many states have issued regulations or guidance requiring insurers to offer accommodations to policyholders adversely impacted by COVID-19, including requirements to defer payment of, or refund, premiums, postpone policy lapses, and have sought information and data from insurers on a number of topics, including operational preparedness, policyholder data, and other matters. A number of states have also passed legislation or issued other guidance that creates a presumption of coverage under workers’ compensation insurance for certain people impacted by COVID-19. In most cases, the presumption applies to first responders and medical professionals, with efforts underway in some states to further expand the scope of the presumption. Members of the U.S. Congress have held discussions and sought information with respect to business interruption, travel and other insurance lines impacted by the COVID-19 crisis and have floated a number of potential loss-sharing programs, some of which contemplate participation by insurers. In the EU and UK, insurance regulators have issued recommendations or requirements for insurance groups subject to their jurisdiction to temporarily suspend discretionary dividend payments and share buybacks for the benefit of shareholders, and variable remuneration policies such as cash bonuses. We cannot predict what form legal and regulatory responses to concerns about COVID-19 and related public health issues will take, or how such responses will impact our business. We continue to actively monitor these developments and to cooperate fully with all government authorities as they develop their responses.
In addition to the information set forth in this Quarterly Report on Form 10-Q, our regulatory status is also discussed in Part II, Item 1A. Risk Factors —COVID-19 is adversely affecting, and is expected to continue to adversely affect, our business, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope and duration of the crisis and actions taken by governmental and regulatory authorities in response thereto, and Part I, Item 1. Business – Regulation, Part I, Item 1A. Risk Factors – Regulation and Note 1920 to the Consolidated Financial Statements in the 20182019 Annual Report.
134AIG | First Quarter 20192020 Form 10-Q151
Glossary
Accident yearThe 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 adjustedThe 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 premiumrepresents a premium on an insurance policy over and above the initial premium imposed at the beginning of the policy. An additional premium may be assessed if the insured’s risk is found to have increased significantly.
Adjusted revenuesexclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.
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 accumulated other comprehensive income (AOCI) and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and are used to show the amount of our net worth on a per-shareper-common share basis. Book value per common share, excluding AOCI, is derived by dividing total AIG common shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI and DTA (Adjusted Common Shareholders’ Equity), by total common shares outstanding.
Casualty insurance Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured, and the legal liability imposed on the insured as a result.
Combined ratio Sum of the loss ratio and the acquisition and general operating expense ratios.
CSACredit SupportAnnexA 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.
DACDeferred Policy Acquisition Costs Deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business.
152AIG | First Quarter 20192020 Form 10-Q135
DAC Related to Unrealized Appreciation (Depreciation) of Investments An adjustment to DAC and Reserves for investment-oriented products, equal to the change in DAC and Unearned Revenue amortization that would have been recorded if fixed maturity securities available for sale and also, prior to 2018, equity securities at fair value had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. An adjustment to benefit reserves for investment-oriented products is also recognized to reflect the application of the benefit ratio to the accumulated assessments that would have been recorded if fixed maturity securities available for sale and also, prior to 2018, equity securities at fair value had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (collectively referred to as “shadow Investment-Oriented Adjustments”).
For long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves).
Deferred Gain on Retroactive 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.
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/GIAGuaranteed 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.
IBNRIncurred 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 directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster’s fees and the portion of general expenses allocated to claim settlement costs.
Loan-to-Value Ratio Principal amount of loan amount divided by appraised value of collateral securing the loan.
Loss Ratio Losses and loss adjustment expenses incurred divided by net premiums earned.
Loss reserve developmentThe increase or decrease in incurred losses and loss adjustment expenses related to prior yearsas a result of the re-estimation of loss reserves at successive valuation dates for a given group of claims.
Loss reservesLiability 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.
Loan-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 and man-made lossesare generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events,catastrophe losses, such as terrorism and civil disorders that exceed the $10 million threshold.
Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period.
136AIG | First Quarter 2019 Form 10-Q
Glossary
Noncontrolling interestinterests The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.
Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost of issuing a policy, establishing the required records, sending premium notices and other related expenses.
Pool A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each member in accordance with its pool participation percentage.
AIG | First Quarter 2020 Form 10-Q 153
Premiums and deposits – Life and Retirement include includes direct and assumed amounts received and earned on traditional life insurance policies, and group benefit policies and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, FHLB funding agreements and mutual funds.
Prior year development See Loss reserve development.
RBCRisk-Based Capital A formula designed to measure the adequacy of an insurer’s statutory surplus compared to the risks inherent in its business.
Reinstatement premiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.
ReinsuranceThe practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.
Retroactive Reinsurance SeeSee Deferred Gain on Retroactive Reinsurance.
Return on common equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted Returnreturn on common equity)is a non-GAAP measure and is used to show the rate of return on common shareholders’ equity. Adjusted Returnreturn on common equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted Common Shareholders’ Equity.
Return premium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or an overpayment of an advance premium.
Salvage The amount that can be recovered by an insurer for the sale of damaged goods for which a policyholder has been indemnified (and to which title was transferred).
SIASales 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 IILegislation in the European Union which reforms the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. The Solvency II Directive (2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.
Subrogation The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party’s insurer.
Surrender charge A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or for the cancellation of the agreement.
Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement mutual fund assets under administration.
Unearned premium 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 businesses.
154AIG | First Quarter 20192020 Form 10-Q137
A&HAccident and Health Insurance | GMWBGuaranteed Minimum Withdrawal Benefits |
ABSAsset-Backed Securities | ISDAInternational Swaps and Derivatives Association, Inc. |
| Moody'sMoody's Investors’ Service Inc. |
| NAICNational Association of Insurance Commissioners |
| NMNot Meaningful |
|
|
|
|
EGPsEstimated gross profits | OTTIOther-Than-Temporary Impairment |
FASBFinancial Accounting Standards Board | RMBSResidential Mortgage-Backed Securities |
FRBNYFederal Reserve Bank of New York | S&P Standard & Poor’s Financial Services LLC |
GAAPAccounting principles generally accepted in the United | SECSecurities and Exchange Commission |
States of America | URRUnearned revenue reserve |
GMDBGuaranteed Minimum Death Benefits |
|
VIEVariable Interest Entity | |
138AIG | First Quarter 20192020 Form 10-Q155
ITEM 3 |Quantitative and Qualitative Disclosures About Market Risk
Included in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – Enterprise Risk Management.
ITEM 4 |Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation which excluded the impact of the acquisitions of Validus Holdings and Glatfelter Insurance Group (collectively, the Acquired Businesses), was carried out by AIG management, with the participation of AIG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of March 31, 2019.2020. Based on this evaluation, AIG’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.2020.
Changes in Internal Control Over Financial Reporting
We continue to integrate the internal controls of the Acquired Businesses. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f)) that have occurred during the quarter ended March 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
156AIG | First Quarter 20192020 Form 10-Q139
Part II – Other Information
For a discussion of legal proceedings see Note 11 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.
ITEM 1A |Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the following risk factor, as well as the other risk factors discussed in Part I, Item 1A. Risk Factors in our 20182019 Annual Report.
COVID-19 is adversely affecting, and is expected to continue to adversely affect, our business, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope and duration of the crisis and actions taken by governmental and regulatory authorities in response thereto.
The COVID-19 crisis, and the governmental responses thereto, are causing ongoing and severe economic and societal disruption accompanied by significant market volatility. We are continually assessing its impact and, due to the evolving and uncertain nature of the COVID-19 crisis, cannot estimate its ultimate impact on our business, financial condition and results of operations or the full extent to which the crisis has caused or will cause certain risks to our business, including those discussed in our Form 10-K for the fiscal year ended December 31, 2019 (“2019 10-K”), to be heightened or realized.
Adverse changes and developments affecting the global economy, including the significant global economic slowdown, recent economic downturn, stock market decline and increased financial market volatility, individually and in the aggregate, have had and may continue to have near-term negative effects on our overall investment portfolio. Within our investment portfolio, there is concentrated exposure to certain segments of the economy, including real estate and real estate-related securities, which exposes us to negative impacts from the deferral of mortgage payments, renegotiated commercial mortgage loans or outright mortgage defaults, as well as significant exposures to certain industries negatively impacted by the recent economic downturn, such as energy and utilities and global financial institutions. Moreover, continued low interest rates or a continued or increased slowdown in the U.S. or global economy may adversely affect the values of, and cash flows derived from, the investment assets we hold. These circumstances may also lead to increased defaults or distressed situations among the investments in our investment portfolio. Market volatility may also create dislocations or decreases in observable market activity or availability of information used in the valuation of our assets and liabilities, which could negatively impair the estimates and assumptions used to run our business or result in greater variability and subjectivity in our investment decisions.
Furthermore, market disruptions and uncertainty may negatively affect our credit ratings or our ability to generate or access liquidity we may need to operate our business and meet our obligations, including to pay interest on our debt, discharge or refinance our maturing debt obligations, meet capital needs of our subsidiaries, and to satisfy our regulatory capital and liquidity ratios. If the economic downturn persists, an increased number of clients and policyholders may face difficulty paying insurance premiums (and global regulators may seek to implement premium relief measures as a result), especially as certain industries, such as travel and hospitality, are dislocated, which could impair our cash flows. As a holding company, AIG Parent depends on dividends, distributions and other payments from its subsidiaries for its liquidity needs; these subsidiaries’ ability to pay dividends, make distributions or otherwise generate parent liquidity may, depending on the duration and severity of the COVID-19 crisis, be reduced to the extent they are unable to generate sufficient distributable income or in the event regulators restrict dividends or other payments from subsidiaries to parent companies. We also depend on access to capital markets and other financing sources, including our $4.5 billion revolving syndicated credit facility, and access to these funding sources may become restricted or unavailable, and the terms on which additional financing is available may be adversely affected or limited, if the COVID-19 crisis continues to impair the global economy.
AIG | First Quarter 2020 Form 10-Q 157
Our insurance businesses have and may continue to experience increased claim volume under both our Life and Retirement Insurance products, which are offered primarily in the U.S., the jurisdiction that currently has the highest number of COVID-19 cases and deaths worldwide, and our General Insurance policies, which are offered both in the U.S. and internationally, including commercial property (business interruption), travel, trade credit, accident and health, workers’ compensation, directors and officers, event cancellation and liability insurance. Beginning in March 2020, COVID-19 adversely affected our premium volumes in some of our insurance lines, and we expect our premium volumes in some of our insurance lines to be more significantly adversely affected in the second quarter of 2020 and possibly for the remainder of 2020 and beyond, if economic contraction continues. Demand for certain insurance product lines, such as travel insurance, has and may continue to decrease and our policies with premium adjustment features tied to exposure levels, as is the case in certain specialty and casualty lines, may be triggered. We may also experience changes to underwriting guidelines and/or higher expenses associated with our insurance businesses, including higher legal costs as a result of potential coverage disputes. While we seek to mitigate our exposure through reinsurance, the availability of reinsurance relief will typically depend on several factors including the timing and nature of how individual claims manifest, which may not be immediately known. Furthermore, due to the scope and uncertain duration of the COVID-19 crisis, reinsurance may not be available or, if available, may be more difficult or costly to obtain in general or for certain types of coverage, such as natural catastrophes, going forward. Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may also result in policyholders seeking sources of liquidity such as policy loans and withdrawals at rates greater than expected. If policyholder behavior, including lapse and surrender rates significantly exceed vary our expectations, it could have a material adverse effect on our business, requiring our subsidiaries to accelerate the amortization of deferred policy acquisition costs and record additional liabilities for future policy benefits.
Government officials have recommended or mandated precautions to mitigate the spread of COVID-19, including prohibitions on congregating in heavily populated areas, stay-at-home orders and similar measures. As a result, we have implemented work-from-home business continuity plans for non-essential staff globally. Our results may be adversely impacted by these and other actions taken to contain or reduce the impact of COVID-19, and the extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted. Moreover, an extended remote work environment may put significant stress on our business continuity plans and prove them to be less effective than expected. Our business operations may also be significantly disrupted if our critical workforce, key vendors, third-party suppliers or counterparties we transact business with, are unable to work effectively, including because of illness, quarantines, government actions in response to COVID-19 or other reasons, or if the technology on which our remote business operations rely, some of which is developed and maintained by third parties, is materially disrupted or becomes unavailable. Certain pre-existing operational risks may be exacerbated, notably with respect to potential phishing or other cybersecurity-related attacks, privacy risk incidents, fraud, increased reliance on technology, operational resilience and risks related to the operations and resiliency of our vendors, third-party suppliers and counterparties. Further, significant disruption to our businesses could adversely affect the timing or terms of, or our ability to execute, key business strategies, transactions and initiatives, such as AIG 200, resulting in higher costs or reduced savings or lower profit than was expected.
In addition, COVID-19 has given rise to global regulatory initiatives intended to encourage or require insurers to implement actions intended to assist policyholders adversely impacted by COVID-19 (in some cases with retroactive effect), including lapse or payment moratoriums, premium refunds, contributions to relief funds and similar measures. The initiatives could impair our cash flows and, without regulatory relief, could reduce our subsidiaries’ capital ratios. In addition, in certain jurisdictions legislative initiatives have emerged threatening to require insurers to provide insurance coverage beyond the scope of the original contract by re-writing contracts on a retroactive basis, including with respect to the availability of business interruption coverage in commercial property policies, or creating insurance solutions prospectively. Such initiatives could result in requirements or restrictions that negatively impact our business operations or require us to pay beyond the provisions of original insurance policies and assumed reinsurance contracts.
Due to the evolving and uncertain nature of the COVID-19 crisis, we cannot estimate its ultimate impact at this time. Depending on the scope and duration of the COVID-19 crisis, the events described above may have an adverse effect, which could be material, on our business, results of operations and financial condition. In addition, we could experience other potential impacts as a result of COVID-19, including, but not limited to, potential impairment charges to the carrying amounts of goodwill, deferred tax assets, and increased reserve builds to levels that are difficult to accurately estimate. Further, new and potentially unforeseen risks beyond those described above and in our 2019 10-K may arise as a result of the COVID-19 crisis and the actions taken by governmental and regulatory authorities to mitigate its impact. Even after the crisis subsides, it is possible that the U.S. and other major economies will experience a prolonged recession, in which event our businesses, results of operations and financial condition could be materially and adversely affected.
158 AIG | First Quarter 2020 Form 10-Q
ITEM 2 |Unregistered Sales of Equity Securities and Use of ProceedsProceeds
| 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) |
| ||
January 1 – 31 | - | $ | - | - |
| $ | 2,000 |
|
February 1 – 29 | 7,658,643 |
| 41.12 | 7,658,643 |
|
| 1,685 |
|
March 1 – 31 | 4,502,309 |
| 41.12 | 4,502,309 |
|
| 1,500 |
|
Total | 12,160,952 | $ | 41.12 | 12,160,952 |
| $ | 1,500 |
|
On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of $1.5 billion.
During the three-month period endedfirst quarter of 2020, we repurchased approximately 12 million shares of AIG Common Stock for an aggregate purchase price of $500 million under an accelerated stock repurchase (ASR) agreement executed in February 2020 with a third-party financial institution.
As of March 31, 2019, we2020, approximately $1.5 billion remained under the authorization. We did not repurchase any shares of AIG Common Stock or any warrants to purchase shares of AIG Common Stock under this authorization.
As of March 31, 2019, approximately $2.0 billion remained under the authorization. We did not repurchase any shares of AIG Common Stock from April 1, 20192020 to May 6, 2019.4, 2020. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors. The repurchase of AIG Common Stock and warrants to purchase shares of AIG Common Stock is also subject to the terms of AIG’s outstanding Series A 5.85% Non-Cumulative Preferred Stock (Series A Preferred Stock), pursuant to which AIG may not (other than in limited circumstances) purchase, redeem or otherwise acquire AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.
ITEM 4 |Mine Safety Disclosures
140AIG | First Quarter 20192020 Form 10-Q159
Exhibit | Description | Location | |
| (1) | Incorporated by reference to Exhibit | |
| |||
| |||
| |||
|
|
| |
31 |
| ||
| Filed herewith. | ||
32 | Filed herewith. | ||
101 | Interactive data files pursuant to Rule 405 of Regulation | Filed herewith. | |
104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | Filed herewith. |
* This exhibit is a management contract or 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.
160AIG | First Quarter 20192020 Form 10-Q141
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN INTERNATIONAL GROUP, INC. | |
(Registrant) | |
/S/ MARK D. LYONS | |
Mark D. Lyons | |
Executive Vice President and | |
Chief Financial Officer | |
(Principal Financial Officer) | |
/S/ | |
| |
Senior Vice President | |
Deputy Chief Financial Officer and | |
Chief Accounting Officer | |
(Principal Accounting Officer) | |
Dated: May 7, 20195, 2020
142AIG | First Quarter 20192020 Form 10-Q161